May 13, 2008 - 10QSB: Optional form for quarterly and transition reports of small business issuers

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB


þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-29185

SAVE THE WORLD AIR, INC.

(Exact name of registrant as specified in its charter)


Nevada		52-2088326
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

235 Tennant Avenue

Morgan Hill, California 95037

(Address, including zip code, of principal executive offices)

(408) 778-0101

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value.

Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the Registrant’s Common Stock outstanding as of May 7, 2008 was 56,109,125 shares.

Transitional Small Business Disclosure Format (Check one): Yes o No þ

Table of Contents

SAVE THE WORLD AIR, INC.

FORM 10-QSB

INDEX


	Page
PART I		3

ITEM 1. Financial Statements		3
Condensed consolidated balance sheets		3-4
Condensed consolidated statements of operations (unaudited)		5
Condensed consolidated statement of changes in stockholders’ deficiency (unaudited)		6-32
Condensed consolidated statements of cash flows (unaudited)		33-34
Notes to condensed consolidated financial statements (unaudited)		35
ITEM 2. Management’s Discussion and Analysis or Plan of Operations		52
ITEM 3. Controls and Procedures		62

PART II		64

ITEM 1. Legal Proceedings		64
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		64
ITEM 3. Defaults Upon Senior Securities		66
ITEM 4. Submission of Matters to a Vote of Security Holders		66
ITEM 5. Other Information		66
ITEM 6. Exhibits		66

SIGNATURES		67

EXHIBIT INDEX		68

EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I

Item 1. Financial Statements

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2008 (UNAUDITED) AND DECEMBER 31, 2007


	March 31, 2008			December 31,
	(unaudited)			2007

ASSETS

Current assets
Cash		$	143,127		$	47,660
Accounts receivable, net of allowance for doubtful accounts of $1,380 and $0, respectively			-			1,380
Inventory			30,256			30,256
Other current assets			22,700			20,552

Total current assets			196,083			99,848

Equipment, net			163,599			201,058

Other assets			4,500			4,500

Total assets		$	364,182		$	305,406

See notes to condensed consolidated financial statements.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2008 (UNAUDITED) AND DECEMBER 31, 2007


	March 31, 2008			December 31,
	(unaudited)			2007

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

Current liabilities

Accounts payable-related parties	$	344,587		$	323,413
Accounts payable-other		929,632			716,986
Accrued expenses		685,748			742,719
Accrued research and development fees		38,347			53,347
Accrued professional fees		270,113			747,261
Loan payable-related party		84,817			83,596
Loan payable-other		—			20,334
Convertible debentures, net-related parties		315,419			227,136
Convertible debentures, net-others		414,483			1,078,408
Convertible debentures, net-other-default		—			671,992

Total current liabilities		3,083,146			4,665,192

Commitments and contingencies

Stockholders’ deficiency
Common stock, $.001 par value: 200,000,000 shares authorized, 54,751,117 and 46,470,413 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively		54,752			46,471
Common stock to be issued		459,105			4,000
Additional paid-in capital		35,741,366			32,280,083
Deficit accumulated during the development stage		(38,974,187	)		(36,690,340	)


Total stockholders’ deficiency		(2,718,964	)		(4,359,786	)

Total liabilities and stockholders’ deficiency	$	364,182		$	305,406

See notes to condensed consolidated financial statements.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2008 AND 2007 AND FOR THE PERIOD

FEBRUARY 18, 1998 (DATE OF INCEPTION) TO MARCH 31, 2008


							Cumulative
	March 31,			March 31,			since
	2008			2007			inception

Net sales	$	—		$	22,000		$	69,000
Cost of goods sold		—			5,360			24,120

Gross profit		—			—			44,880
Operating expenses		760,142			1,279,775			27,619,463

Research and development expenses		259,670			340,452			5,065,9000

Non-cash patent settlement cost		—			—			1,610,066

Loss before other income(expense)		(1,019,812	)		(1,603,587	)		(34,250,549	)

Other income(expense)
Other income		200			87			3,709
Interest income		354			17			16,696
Interest expense		(1,254,906	)		(309,878	)		(5,747,286	)
Loss on sale of equipment		(9,683	)		—			(9,683	)
Settlement of litigation and debt		—			—			1,017,208

Loss before provision for income taxes		(2,283,847	)		(1,913,361	)		(38,969,905	)

Provision for income taxes		—			800			4,282

Net loss	$	(2,283,847	)	$	(1,914,161	)	$	(38,974,187	)

Net loss per common share, basic and diluted	$	(0.05	)	$	(0.05	)

Weighted average common shares outstanding, basic and diluted		49,551,981			39,012,446

See notes to condensed consolidated financial statements

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per			Common Stock			Common Stock		Additional Paid-in		Deferred		During the Development			Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage			Deficiency

Balance, February 18, 1998 (date of inception)				—	$	—	$	—	$	—	$	—	$	—		$	—
Issuance of common stock on April 18, 1998		.0015 — .01		10,030,000		10,030		—		14,270		—		—			24,300
Net loss				—		—		—		—		—		(21,307	)		(21,307	)
Balance, December 31, 1998				10,030,000	$	10,030	$	—		14,270	$	—	$	(21,307	)	$	2,993
Issuance of common stock on May 18, 1999		1.00 — 6.40		198,003		198		—		516,738		—		—			516,936
Issuance of common stock for ZEFS on September 14, 1999		.001		5,000,000		5,000		—		—		—		—			5,000
Stock issued for professional services on May 18, 1999		0.88		69,122		69		—		49,444		—		—			49,513
Net 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		—		—			20,600
Stock issued for consulting services on February 8, 2000		1.03		100,000		100		—		102,900		—		—			103,000
Stock issued for professional services on April 18, 2000		3.38		27,000		27		—		91,233		—		—			91,260
Stock issued for directors fees on April 18, 2000		3.38		50,000		50		—		168,950		—		—			169,000
Stock issued for professional services on May 19, 2000		4.06		5,000		5		—		20,295		—		—			20,300
Stock issued for directors fees on June 20, 2000		4.44		6,000		6		—		26,634		—		—			26,640
Stock issued for professional services on June 20, 2000		4.44		1,633		2		—		7,249		—		—			7,251

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Stock issued for professional services on June 26, 2000		5.31		1,257		1		—		6,674		—		—		6,675
Stock issued for employee compensation on June 26, 2000		5.31		22,000		22		—		116,798		—		—		116,820
Stock issued for consulting services on June 26, 2000		5.31		9,833		10		—		52,203		—		—		52,213
Stock issued for promotional services on July 28, 2000		4.88		9,675		9		—		47,205		—		—		47,214
Stock issued for consulting services on July 28, 2000		4.88		9,833		10		—		47,975		—		—		47,985
Stock issued for consulting services on August 4, 2000		2.13		35,033		35		—		74,585		—		—		74,620
Stock issued for promotional services on August 16, 2000		2.25		25,000		25		—		56,225		—		—		56,250
Stock issued for consulting services on September 5, 2000		2.25		12,833		13		—		28,861		—		—		28,874

Stock issued for consulting services on September 10, 2000	1.50	9,833	10	—	14,740	—	—	14,750
Stock issued for consulting services on November 2, 2000	0.88	9,833	10	—	8,643	—	—	8,653
Stock issued for consulting services on November 4, 2000	0.88	9,833	10	—	8,643	—	—	8,653

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

																Deficit Accumulated
	Price per		Common Stock						Common Stock		Additional Paid-in			Deferred		During the Development			Total Stockholders’
	Share		Shares			Amount			to be Issued		Capital			Compensation		Stage			Deficiency

Stock issued for consulting services on December 20, 2000		0.50		19,082			19			—		9,522			—		—			9,541
Stock issued for filing services on December 20, 2000		0.50		5,172			5			—		2,581			—		—			2,586
Stock issued for professional services on December 26, 2000		0.38		12,960			13			—		4,912			—		—			4,925
Other stock issuance on August 24, 2000		2.13		2,000			2			—		4,258			—		—			4,260
Common 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			—		—			3,048

Stock issued for consulting services on February 1, 2001	0.33	9,833	10	—	3,235	—	—	3,245

Stock issued for consulting services on March 1, 2001	0.28	9,833	10	—	2,743	—	—	2,753

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Stock issued for legal services on March 13, 2001		0.32		150,000		150		—		47,850		—		—		48,000
Stock issued for consulting services on April 3, 2001		0.25		9,833		10		—		2,448		—		—		2,458
Stock issued for legal services on April 4, 2001		0.25		30,918		31		—		7,699		—		—		7,730
Stock issued for professional services on April 4, 2001		0.25		7,040		7		—		1,753		—		—		1,760
Stock issued for consulting services on April 5, 2001		0.25		132,600		132		—		33,018		—		—		33,150
Stock issued for filing fees on April 30, 2001		1.65		1,233		1		—		2,033		—		—		2,034
Stock issued for filing fees on September 19, 2001		0.85		2,678		2		—		2,274		—		—		2,276
Stock issued for professional services on September 28, 2001		0.62		150,000		150		—		92,850		—		—		93,000
Stock issued for directors services on October 5, 2001		0.60		100,000		100		—		59,900		—		—		60,000
Stock issued for legal services on October 17, 2001		0.60		11,111		11		—		6,655		—		—		6,666

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Stock issued for consulting services on October 18, 2001		0.95		400,000		400		—		379,600		—		—		380,000
Stock issued for consulting services on October 19, 2001		1.25		150,000		150		—		187,350		—		—		187,500
Stock issued for exhibit fees on October 22, 2001		1.35		5,000		6		—		6,745		—		—		6,751
Stock issued for directors		0.95		1,000,000		1,000		—		949,000		—		—		950,000
Stock issued for consulting services on November 7, 2001		0.85		20,000		20		—		16,980		—		—		17,000

Stock issued for consulting services on November 20, 2001	0.98	43,000	43	—	42,097	—		—	42,140
Stock issued for consulting services on November 27, 2001	0.98	10,000	10	—	9,790	—		—	9,800
Stock issued for consulting services on November 28, 2001	0.98	187,000	187	—	183,073	—		—	183,260
Intrinsic value of options issued to employees		—	—	—	2,600,000	(2,600,000	)	—	—
Fair value of options issued to non-employees for services		—	—	—	142,318	—		—	142,318

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

															Deficit Accumulated
	Price per		Common Stock				Common Stock			Additional Paid-in		Deferred			During the Development			Total Stockholders’
	Share		Shares		Amount		to be Issued			Capital		Compensation			Stage			Deficiency

Amortization of deferred compensation				—		—		—			—		191,667			—			191,667
Net 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		—			—			860,000
Common stock paid for, but not issued (2,305,000 shares)		0.15-0.25		—		—		389,875			—		—			—			389,875
Fair value of options issued to non-employees for services				—		—		—			54,909		(54,909	)		—			—
Amortization of deferred compensation				—		—		—			—		891,182			—			891,182
Net 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		—			—			167,500
Stock issued for cash on April 4, 2003		0.25		900,000		900		—			224,062		—			—			224,962
Stock issued for cash on April 8, 2003		0.25		100,000		100		—			24,900		—			—			25,000
Stock issued for cash on May 8, 2003		0.25		1,150,000		1,150		—			286,330		—			—			287,480
Stock issued for cash on June 16, 2003		0.25		475,000		475		—			118,275		—			—			118,750

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Stock issued for cash on June 16, 2003		0.25		475,000		475		—		118,275		—		—		118,750
Stock issued for legal services on June 27, 2003		0.55		83,414		83		—		45,794		—		—		45,877
Debt converted to stock on June 27, 2003		0.25		2,000,000		2,000		—		498,000		—		—		500,000
Stock and warrants issued for cash on July 11, 2003		0.25		519,000		519		—		129,231		—		—		129,750
Stock and warrants issued for cash on September 29, 2003		0.25		1,775,000		1,775		—		441,976		—		—		443,751
Stock and warrants issued for cash on October 21, 2003		0.25		1,845,000		1,845		—		459,405		—		—		461,250
Stock and warrants issued for cash on October 28, 2003		0.25		1,570,000		1,570		—		390,930		—		—		392,500
Stock and warrants issued for cash on November 19, 2003		0.25		500,000		500		—		124,500		—		—		125,000

Finders’ fees related to stock issuances		—		—		43,875		(312,582	)		—			—			(268,707	)
Common stock paid for, but not issued (25,000 shares)	0.25	—		—		6,250		—			—			—			6,250
Amortization of deferred comp		—		—		—		—			863,727			—			863,727
Net 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	)

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

														Deficit Accumulated
	Price per		Common Stock				Common Stock			Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued			Capital		Compensation		Stage		Deficiency

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		—		—		75,000
Stock issued for finders fees on March 31, 2004		0.15		82,500		82		—			12,293		—		—		12,375
Stock issued for finders fees on March 31, 2004		0.25		406,060		407		—			101,199		—		—		101,606
Stock issued for services on April 2, 2004		1.53		65,000		65		—			99,385		—		—		99,450
Debt converted to stock on April 2, 2004		1.53		60,000		60		—			91,740		—		—		91,800
Stock issued upon exercise of warrants on May 21, 2004		0.20		950,000		950		—			189,050		—		—		190,000
Stock issued for directors services on June 8, 2004		1.70		600,000		600		—			1,019,400		—		—		1,020,000
Stock issued for cash on August 25, 2004		1.00		550,000		550		—			549,450		—		—		550,000
Stock issued upon exercise of options on August 30, 2004		0.40		4,000		4		—			1,596		—		—		1,600
Stock issued for cash on September 8, 2004		1.00		25,000		25		—			24,975		—		—		25,000
Stock issued for consulting services on September 15, 2004		1.31		50,000		49		—			65,451		—		—		65,500

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Stock issued for patent settlement on September 22, 2004		1.24		20,000		20		—		24,780		—		—		24,800
Stock issued for research and development on October 6, 2004		1.40		65,000		65		—		90,935		—		—		91,000
Stock issued for cash on October 6, 2004		1.00		25,000		25		—		24,975		—		—		25,000
Stock issued for cash on October 15, 2004		1.00		150,000		150		—		149,850		—		—		150,000
Stock issued upon exercise of stock options on October 21, 2004		0.40		6,500		6		—		2,594		—		—		2,600
Stock issued for cash on November 3, 2004		1.00		25,000		25		—		24,975		—		—		25,000
Stock issued for cash on November 18, 2004		1.00		172,500		173		—		172,327		—		—		172,500
Stock issued for cash on December 9, 2004		1.00		75,000		75		—		74,925		—		—		75,000
Stock issued for cash on December 23, 2004		1.00		250,000		250		—		249,750		—		—		250,000

Finders fees related to stock issuances			—				—				—				—				(88,384	)			—				—				(88,384	)
Common stock paid for, but not issued (119,000 shares)			—				—				—				119,000				—				—				—				119,000

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

Deficit

Accumulated

Price per

Common Stock

Common

Stock

Additional

Paid-in

Deferred

During the

Development

Total Stockholders’

Amount

to be Issued

Capital

Compensation

Stage

Deficiency

Intrinsic value of options issued to employees

—

248,891

(248,891

)

—

Fair value of options issued to non-employees for services	—	—		—		—			55,381		(55,381	)		—			—
Fair value of warrants issued for settlement costs	—	—		—					1,585,266		—			—			1,585,266
Fair value of warrants issued to non-employees for services	—	—		—		—			28,872		—			—			28,872
Amortization of deferred compensation	—	—		—		—			—		936,537			—			936,537
Net 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		—			—			—

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Stock issued for cash on January 20, 2005		1.00		25,000		25		—		24,975		—		—		25,000
Stock issued upon exercise of warrants on January 31, 2005		0.40		500		1		—		199		—		—		200

Stock issued for cash on February 17, 2005		1.00	325,000		325		—	324,675	—	—	325,000
Stock issued for cash on March 31, 2005		1.00	215,000		215		—	214,785	—	—	215,000
Stock issued for cash on May 17, 2005		1.00	5,000		5		—	4,995	—	—	5,000
Stock issued for cash on June 7, 2005		1.00	300,000		300		—	299,700	—	—	300,000
Stock issued for cash on August 5, 2005		1.00	480,500		480		—	480,020	—	—	480,500
Stock issued for cash on August 9, 2005		1.00	100,000		100		—	99,900	—	—	100,000
Stock issued for cash on October 27, 2005		1.00	80,000		80		—	79,920	—	—	80,000
Common stock cancelled on December 7, 2005	Various		(8,047,403	)	(8,047	)	—	8,047	—	—	—
Stock to be issued for settlement of payables on December 21, 2005	—		—		—		57,092	—	—	—	—

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

															Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in			Deferred			During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital			Compensation			Stage		Deficiency

Stock to be issued for settlement of payables on December 31, 2005		—		—		—		555,429		—			—			—		555,429
Finders 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			—			—		31,500
Fair value of warrants issued for settlement costs		—		—		—		—		4,957			—			—		4,957
Fair value of warrants issued to non-employees for services		—		—		—		—		13,505			—			—		13,505
Amortization of deferred compensation		—		—		—		—		—			177,631			—		177,631
Warrants issued with convertible notes		—		—		—		—		696,413			—			—		696,413
Intrinsic value of beneficial conversion associated with convertible notes		—		—		—		—		756,768			—			—		756,768

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

Deficit

Accumulated

Price per

Common Stock

Common

Stock

Additional

Paid-in

Deferred

During the

Development

Total Stockholders’

Amount

to be Issued

Capital

Compensation

Stage

Deficiency

Stock issued for cash on April 24, 2006

1.56

473,000

473

—

737,408

—

737,881

Stock issued upon exercise of warrants on April 26, 2006	0.50	125,000	125	—	62,375	—	—	62,500
Stock issued upon exercise of warrants on April 26, 2006	1.50	100,000	100	—	149,900	—	—	150,000
Common stock issued for convertible debt on April 26, 2006	0.70	35,714	36	—	24,964	—	—	25,000
Stock issued upon exercise of warrants on May 6, 2006	0.50	200,000	200	—	99,800	—	—	100,000
Stock issued upon exercise of warrants on May 15, 2006	1.50	25,000	25	—	37,475	—	—	37,500
Stock issued upon exercise of warrants on May 15, 2006	0.50	50,000	50	—	24,950	—	—	25,000
Stock issued for cash on June 7, 2006	1.89	873,018	872	—	1,649,136	—	—	1,650,008

Common stock issued for convertible debt on June 7, 2006			0.70				1,535,716				1,536				—				1,073,464				—				—				1,075,000
Stock issued upon exercise of warrants on June 8, 2006			0.50				900,000				900				—				449,100				—				—				450,000

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Stock issued upon exercise of warrants on June 9, 2006		0.50		9,000		9		—		4,491		—		—		4,500
Stock issued upon exercise of warrants on June 23, 2006		0.50		150,000		150		—		74,850		—		—		75,000
Stock issued upon exercise of warrants on June 23, 2006		1.50		15,000		15		—		22,485		—		—		22,500
Common stock issued for convertible debt on June 30, 2006		0.70		219,104		219		—		153,155		—		—		153,374
Common stock issued for convertible debt on July 11, 2006		0.70		14,603		15		—		10,207		—		—		10,222
Common stock issued for convertible debt on August 7, 2006		0.70		1,540,160		1,540		—		1,076,572		—		—		1,078,112

Common stock issued upon exercise of warrants on August 7, 2006

1.50

175,000

175

—

262,325

—

262,500

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Common stock issued upon exercise of warrants on August 21, 2006		1.50		50,000		50		—		74,950		—		—		75,000
Common stock issued for cash on August 22, 2006		1.00		14,519		15		—		14,504		—		—		14,519
Common stock issued upon exercise of warrants on August 23, 2006		1.00		3,683		4		—		3679		—		—		3,683
Common stock issued upon exercise of warrants on August 28, 2006		1.50		5,000		5		—		7,495		—		—		7,500
Common stock issued for convertible debt on September 13, 2006		0.70		4,286		4		—		2,996		—		—		3,000
Common stock issued upon exercise of warrants on September 13, 2006		0.50		150,000		150		—		74,850		—		—		75,000

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Common stock issued for convertible debt on October 16, 2006		0.70		66,654		67		—		46,591		—		—		46,658
Common stock issued upon exercise of warrants on November 3, 2006		0.50		210,000		210		—		104,790		—		—		105,000
Common stock issued for put on equity line of credit on November 7, 2006		1.22		94,4700		94		—		115,368		—		—		115,462
Common stock issued for put on equity line of credit on November 14, 2006		1.14		7,300		7		—		8,349		—		—		8,356
Common stock issued for put on equity line of credit on November 27, 2006		0.83		27,500		28		—		22,913		—		—		22,941
Common stock issued for put on equity line of credit on November 28, 2006		0.82		36,500		36		—		30,059		—		—		30,095
Common stock issued for put on equity line of credit on December 6, 2006		0.78		73,863		74		—		57,244		—		—		57,318

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Common stock issued for put on equity line of credit on December 26, 2006		0.55		18,800		19		—		10,377		—		—		10,396
Common stock issued for put on equity line of credit on December 31, 2006		0.59		229,050		229		—		135,300		—		—		135,529
Common stock paid for, but not issued		—		—		—		60,000		—		—		—		60,000
Fair value of options issued to employees and officers		—		—		—		—		2,253,263		—		—		2,253,263

Fair value of warrants issued for services			—				—				—				—				401,130				—				—				401,130
Write off of deferred compensation			—				—				—				—				(142,187	)			142,187				—				—

Warrants issued for consulting			—				—				—				—				62,497				—				—				62,497
Warrants issued with convertible notes			—				—				—				—				408,596				—				—				408,596

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

														Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in			Deferred		During the Development			Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital			Compensation		Stage			Deficiency

Intrinsic value of beneficial conversion associated with convertible notes		—		—		—		—		851,100			—		—			851,100
Finders 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				40,081,757	$	40,082	$	60,000	$	29,430,821		$	—	$	(30,427,597	)	$	(896,694	)
Common stock issued for put on equity line of credit on January 11, 2007		0.63		63,000		63		—		39,659			—		—			39,722
Common stock issued for put on equity line of credit on January 22, 2007		0.73		58,150		58		—		42,246			—		—			42,304

Common stock issued for put on equity line of credit on February 9, 2007

0.73

35,800

—

26,009

—

26,045

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Common stock issued for put on equity line of credit on February 16, 2007		0.70		162,000		162		—		112,979		—		—		113,141
Common stock issued for put on equity line of credit on February 26, 2007		0.66		71,000		71		—		46,761		—		—		46,832
Common stock issued for put on equity line of credit on March 5, 2007		0.66		42,600		43		—		28,056		—		—		28,099
Common stock issued for put on equity line of credit on March 12, 2007		0.67		92,900		93		—		62,085		—		—		62,178
Common stock issued for put on equity line of credit on March 19, 2007		0.64		47,500		48		—		30,362		—		—		30,410
Common stock issued for put on equity line of credit on March 26, 2007		0.63		7,500		7		—		4,722		—		—		4,729
Common stock issued for put on equity line of credit on March 31, 2007		0.61		25,500		25		—		15,558		—		—		15,583

Fees paid on equity line of credit			—				—				—				—				(32,723	)			—				—			(32,723	)
Warrants issued with convertible notes			—				—				—				—				291,936				—				—			291,936

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Common stock issued for put on equity line of credit on April 9, 2007		0.63		56,300		56		—		35,441		—		—		35,497
Common stock issued for put on equity line of credit on April 17, 2007		0.56		73,835		74		—		41,466		—		—		41,540
Common stock issued for put on equity line of credit on April 24, 2007		0.56		122,857		123		—		68,996		—		—		69,119
Common stock issued for put on equity line of credit on May 1, 2007		0.55		226,081		226		—		124,774		—		—		125,000
Common stock issued for put on equity line of credit on May 8, 2007		0.66		29,400		29		—		19,363		—		—		19,392

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Common stock issued for put on equity line of credit on May 15, 2007		0.43		403,502		404		—		171,811		—		—		172,215
Common stock issued for put on equity line of credit on May 22, 2007		0.39		119,800		120		—		46,362		—		—		46,482
Common stock issued for put on equity line of credit on May 30, 2007		0.33		80,996		81		—		26,631		—		—		26,712
Common stock issued for put on equity line of credit on June 6, 2007		0.32		54,700		55		—		17,454		—		—		17,509

Common stock issued for put on equity line of credit on June 15, 2007	0.27	94,500	95	—	25,571		—	—	25,666
Common stock issued for put on equity line of credit on June 21, 2007	0.31	12,500	12	—	3,868		—	—	3,880
Fees paid on equity line of credit	—	—	—	—	(46,641	)	—	—	(46,641	)

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

														Deficit Accumulated
	Price per		Common Stock				Common Stock			Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued			Capital		Compensation		Stage		Deficiency

Warrants issued with convertible notes		—		—		—		—			260,718		—		—		260,718
Fair value of options issued to an officer		—		—		—		—			8,898		—		—		8,898
Common stock issued, previously paid for		—		2,597,524		2,597		(60,000	)		57,403		—		—		—
Fair value of options issued to officers		—		—		—		—			20,574		—		—		20,574
Warrants issued with convertible notes		—		—		—		—			267,930		—		—		267,930
Common stock issued for convertible debt on October 5, 2007		0.53		51,887		52		—			27,448		—		—		27,500

Common stock issued for convertible debt on November 12, 2007

0.37

255,081

255

—

94,125

—

94,380

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Common stock issued for convertible debt on November 12, 2007		0.53		51,887		52		—		27,448		—		—		27,500
Common stock issued for convertible debt on November 14, 2007		0.34		80,882		81		—		27,419		—		—		27,500
Common stock issued for convertible debt on November 14, 2007		0.37		95,227		95		—		35,105		—		—		35,200
Common stock issued for convertible debt on November 15, 2007		0.37		163,514		164		—		60,336		—		—		60,500
Common stock issued for convertible debt on November 16, 2007		0.37		71,351		71		—		26,329		—		—		26,400
Common stock issued for convertible debt on November 16, 2007		0.34		80,882		81		—		27,419		—		—		27,500
Warrants issued with convertible notes		—		—		—		—		158,652		—		—		158,652

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development			Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage			Deficiency

Common stock to be issued for consulting services		—		—		—		4,000		—		—		—			4,000
Common stock issued for convertible debt on December 28, 2007		0.17		1,060,000		1,060		—		198,940		—		—			200,000
Fair value of options issued to an officer		—		—		—		—		21,818		—		—			21,818
Net loss for year ended December 31, 2007		—		—		—		—		—		—		(6,262,743	)		(6,262,743	)
Balance, December 31, 2007				46,470,413	$	46,471	$	4,000	$	32,280,083	$	—	$	(36,690,340	)	$	(4,359,786	)

Fair value of warrants issued with convertible notes	—	—	—	—	116,913	—	—	116,913
Common stock issued for convertible debt on January 31, 2008	0.37	118,918	119	—	43,881	—	—	44,000
Common stock issued for convertible debt on January 31, 2008	0.39	279,232	279	—	108,621	—	—	108,900
Common stock issued for convertible debt on March 10, 2008	0.39	442,820	443	—	172,257	—	—	172,700

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

Deficit

Accumulated

Price per

Common Stock

Common

Stock

Additional

Paid-in

Deferred

During the

Development

Total Stockholders’

Amount

to be Issued

Capital

Compensation

Stage

Deficiency

Common stock issued for convertible debt on March 10, 2008

0.38

5,450,848

5,451

—

2,039,243

—

2,044,694

Common stock issued on March 10, 2008 for settlement of loan on January 31, 2008	0.37	80,000	80	—		29,603	—	—	29,683
Common stock issued on March 10, 2008 for settlement of payable on January 31, 2008	0.38	1,891,048	1,891	—		707,443	—	—	709,334
Common stock issued on March 10, 2008 for settlement of consulting services on December 13, 2007	0.40	10,000	10	(4,000	)	3,990	—	—	—
Common stock issued on March 10, 2008 for settlement of payable on February 1, 2008	0.37	7,838	8	—		2,892	—	—	2,900
Common stock to be issued for settlement of payable	—	—	—	25,375		—	—	—	25,375
Common stock to be issued upon exercise of warrants on March 18, 2008	—	—	—	3,000		—	—	—	3,000

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development		Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage		Deficiency

Common stock to be issued upon exercise of warrants on March 19, 2008		—		—		—		50,000		—		—		—		50,000
Common stock to be issued upon exercise of warrants on March 20, 2008		—		—		—		50,000		—		—		—		50,000
Common stock to be issued upon exercise of warrants on March 21, 2008		—		—		—		50,000		—		—		—		50,000
Common stock to be issued upon exercise of warrants on March 26, 2008		—		—		—		15,130		—		—		—		15,130
Common stock to be issued upon exercise of warrants on March 27, 2008		—		—		—		2,700		—		—		—		2,700

Common stock to be issued for notes converted on March 10, 2008			—				—				—				11,000				—				—				—				11,000
Common stock to be issued for notes converted on March 17, 2008			—				—				—				82,500				—				—				—				82,500

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008

													Deficit Accumulated
	Price per		Common Stock				Common Stock		Additional Paid-in		Deferred		During the Development			Total Stockholders’
	Share		Shares		Amount		to be Issued		Capital		Compensation		Stage			Deficiency

Common stock to be issued for notes converted on March 20, 2008		—		—		—		158,400		—		—		—			158,400
Common stock to be issued for notes converted on March 21, 2008		—		—		—		11,000		—		—		—			11,000
Fair value of options issued to an officer		—		—		—		—		21,818		—		—			21,818
Fair value of warrants issued with convertible notes		—		—		—		—		96,883		—		—			96,883
Intrinsic value of beneficial conversion associated with convertible notes		—		—		—		—		117,739		—		—			117,739
Net loss for the three months ended March 31, 2008 2008		—		—		—		—		—		—		(2,283,847	)		(2,283,847	)
Balance, March 31, 2008				54,751,117	$	54,752	$	459,105	$	35,741,366	$	—	$	(38,974,187	)	$	(2,718,964	)

See notes to condensed financial statements.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2008 AND 2007 AND FOR THE PERIOD

FEBRUARY 18, 1998 (DATE OF INCEPTION) TO MARCH 31, 2008

							Cumulative
	March 31,			March 31,			since
	2008			2007			inception
Cash flows from operating activities
Net loss	$	(2,283,847	)	$	(1,914,161	)	$	(38,974,187	)
Adjustments to reconcile net loss to net cash used in operating activities:
Write off of intangible assets		—			—			505,000
Settlement of litigation and debt		—			—			(1,017,208	)
Stock based compensation expense		21,818			16,302			2,943,890
Issuance of common stock for services		501,037			—			5,173,139
Legal and interest expense converted into common stock		928,237			—			928,237
Issuance of common stock for payment of loan		20,000			—			20,000
Issuance of options for legal settlement		—			—			31,500
Issuance of warrants for legal settlement		—			—			4,957
Issuance of warrants for financing fees		—			47,104			82,444
Patent acquisition cost		—			—			1,610,066
Amortization of issuance costs and original issue debt		471,643			217,695			4,844,544
Amortization of deferred compensation		—			—			3,060,744
Loss on sale of equipment		9,683			—			9,683
Depreciation		10,299			53,832			365,898
Bad debt		1,380			—			1,380
Changes in operating assets and liabilities:
Accounts receivable		—			—			(1,380	)
Inventory		—			(4,409)			(30,256	)
Prepaid expenses and other		(2,148	)		(12,911)			(22,700	)
Other assets		—			—			(4,500	)
Accounts payable and accrued expenses		(315,299	)		276,023			3,108,476
Net cash used in operating activities		(637,197	)		(1,320,525	)		(17,360,273	)

Cash flows from investing activities
Purchase of property and equipment		—			(38,937	)		(553,107	)
Proceeds from sale of equipment		17,477			—			17,477
Net cash used in investing activities		17,477			(38,937	)		(535,630	)

Cash flows from financing activities
Net proceeds under equity line of credit		—			376,320			1,262,386
Increase (decrease) in payables to related parties and shareholder		(19,113	)		—			596,267
Increase in convertible notes		89,470			—			163,962
Advances from founding executive officer		—			—			517,208
Net proceeds from issuance of convertible notes and warrants		474,000			850,000			5,299,678
Repayment of convertible notes					(18,750)			(226,250	)
Net proceeds from issuance of common stock and common stock issuable		170,830			—			10,425,779
Net cash provided by financing activities		715,187			1,207,570			18,039,030
Net increase (decrease) in cash		95,467			(151,892)			143,127
Cash, beginning of period		47,660			244,228			—
Cash, end of period	$	143,127		$	92,336		$	143,127

See notes to condensed consolidated financial statements.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) — Continued

THREE MONTHS ENDED MARCH 31, 2008 AND 2007 AND FOR THE PERIOD FROM

INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008


	March 31, 2008			March 31, 2007			Cumulative since inception

Supplemental disclosures of cash flow information
Cash paid during the period for
Interest		$	499		$	3,079		$	135,543
Income taxes		$	—		$	800		$	4,282

Non-cash investing and financing activities

Acquisition of intangible asset through advance from related party and issuance of common stock	$	—	$	—	$	505,000
Deferred compensation for stock options issued for services		—		—		3,202,931
Purchase of property and equipment financed by advance from related party		—		—		3,550
Conversion of related party debt to equity		---		—		515,000
Issuance of common stock in settlement of payable		---		—		113,981
Cancellation of stock		—		—		8,047
Conversion of accounts payable and accrued expenses to common stock issued		—		—		612,521
Conversion of related party debt to convertible debentures		—		—		45,000
Conversion of convertible debentures to common stock		1,951,212		—		4,924,626
Write off of deferred compensation		—		—		142,187
Non-cash equity-warrant valuation and intrinsic value of beneficial conversion associated with convertible notes		331,535		566,248		4,297,960

See notes to condensed consolidated financial statements.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

1. Organization and basis of presentation

Basis of presentation

The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management of Save the World Air, Inc. (the Company), contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position at March 31, 2008, the results of operations and cash flows for the three months ended March 31, 2008 and 2007. The balance sheet as of December 31, 2007 is derived from the Company’s audited financial statements.

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these condensed consolidated financial statements are adequate to make the information presented therein not misleading. For further information, refer to the condensed consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. The condensed consolidated results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2008.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company had a net loss of $2,283,847 and a negative cash flow from operations of $637,197 for the three months ended March 31, 2008, and had a working capital deficiency of $2,887,063 and a stockholders’ deficiency of $2,718,964 at March 31, 2008. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Description of business

Save the World Air, Inc. (the "Company") is a green technology company that leverages a suite of patented, patent-pending and licensed intellectual properties related to the treatment of fuels. These technologies utilize either magnetic or uniform electrical fields to alter physical characteristics of fuels and are designed to create a cleaner combustion. Cleaner combustion has been shown to improve performance, enhance fuel economy and/or reduce harmful emissions in laboratory testing.

The Company was incorporated in Nevada on February 18, 1998 under the name Mandalay Capital Corp. The Company changed its name to Save the World Air, Inc. on February 11, 1999 following the purchase of the worldwide exclusive manufacturing, marketing and distribution rights for the ZEFS technology.

During the past several years, the Company has been acquiring new technologies, developing prototype products using the Company’s technologies and conducting scientific tests regarding the technologies and prototype products. The Company‘s ECO ChargR™ and MAG ChargR™ products, use fixed magnetic fields to alter some physical properties of fuel, by incorporating our patented and patent-pending ZEFS, MK IV technologies. When fitted to an internal combustion engine, these products are expected to increase power and improve mileage and may also reduce carbon monoxide, hydrocarbons and nitrous oxide emissions and to. The Company also has developed certain products incorporating its CAT-MATE technology, although at this time the Company does not intend to devote significant effort to the commercialization of products incorporating the CAT-MATE technology.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

The Company has entered into two License Agreements with Temple University, one covering Temple University’s current patent application concerning certain electric field effects on gasoline, kerosene and diesel fuel particle size distribution, and the other covering Temple University’s current patent application concerning electric field effects on crude oil and edible oil viscosity, and any and all United States and foreign patents issuing in respect of the technologies described in such applications. Initially, the License Agreements are exclusive and the territory licensed to the Company is worldwide. Pursuant to the License Agreements, the Company will pay to Temple University (i) license fees in the aggregate amount of $250,000, payable in three installments of $100,000, the first installment of which was paid in March 2007, and $75,000 on each of February 2, 2008, which has not been paid, and February 2, 2009, respectively; and (ii) annual maintenance fees of $125,000 annually commencing January 1, 2008, which has not been paid. In addition, each License Agreement separately provides that the Company will pay royalties to Temple University on net sales of products incorporating the technology licensed under that License Agreement in an amount equal to 7% of the first $20 million of net sales, 6% of the next $20 million of net sales and 5% of net sales in excess of $40 million. Sales under the two License Agreements are not aggregated for purposes of calculating the royalties payable to Temple University. In addition, the Company has agreed to bear all costs of obtaining and maintaining patents in any jurisdiction where the Company directs Temple University to pursue a patent for either of the licensed technologies. Should the Company not wish to pursue a patent in a particular jurisdiction, that jurisdiction would not be included in the territory licensed to the Company.

The Company is in default in connection with its payment obligations under the License Agreements. Nonetheless, the Company has not received any written notice from Temple University of a material breach relating to required payments under the License Agreements. Any such notice must provide the Company with 60 days’ notice to cure the material breach. Should the Company receive such notice, the Company’s failure to cure could result in a termination of the License Agreements. Under the License Agreements the Company must pay a penalty equal to 1% per month of the amounts due and unpaid under the License Agreements.

The Company has also entered into a research and development agreement (R&D Agreement) with Temple University to conduct further research on the ELEKTRA technology. Under the R&D Agreement Temple University will conduct a 24-month research project towards expanding the scope of, and developing products utilizing, the technologies covered under the License Agreements, including design and manufacture of prototypes utilizing electric fields to improve diesel, gasoline and kerosene fuel injection in engines using such fuels and a device utilizing a magnetic field to reduce crude oil viscosity for crude oil (paraffin and mixed base) and edible oil flow in pipelines. Pursuant to the R&D Agreement, the Company will make payments to Temple University in the aggregate amount of $500,000, payable in eight non-refundable installments commencing with $123,750, which was paid in March 2007, and seven payments of $53,750 every three months thereafter until paid in full. The payments of $53,750 due in June, September, December 2007 and March 2008 have not been paid. The Company is in default under the R&D Agreement, however, the Company has not received any notice of default from Temple University. If the research project yields results within the scope of the technologies licensed pursuant to the License Agreements, those results will be deemed included as rights licensed to the Company pursuant to the License Agreements. If the research project yields results outside of the scope of the technologies covered by the License Agreements, the Company has a six-month right of first negotiation to enter into a new worldwide, exclusive license agreement with Temple University for the intellectual property covered by those results.

The accompanying condensed consolidated financial statements of Save the World Air, Inc. and Subsidiary include the accounts of Save the World Air, Inc. and its wholly-owned subsidiary STWA Asia Pte. Limited, incorporated on January 17, 2006. As of March 31, 2008, the subsidiary held $2,244 in cash and had operating expenses of $4,210. Inter-company transactions and balances have been eliminated in consolidation

2. Development stage enterprise

The Company is a development stage enterprise as defined by Statement of Financial Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development Stage Enterprises.” All losses accumulated since the inception of the Company have been considered as part of the Company’s development stage activities.

The Company’s focus is on product development and marketing of proprietary devices that are designed to reduce harmful emissions, and improve fuel efficiency and engine performance on equipment and vehicles driven by internal combustion engines and has not yet generated meaningful revenues. The technologies are called “ZEFS”, “MK IV”, “ELEKTRA” and “CAT-MATE”. The Company is currently marketing its ECO and MAG ChargR products incorporating ZEFS and MK IV technologies in the United States and certain countries in Asia; and the Company is in the early stages of developing ELEKTRA products. Expenses have been funded primarily through the sale of company stock, convertible notes and the exercise of warrants.

The Company has taken actions to secure the intellectual property rights to the ZEFS, MK IV and CAT-MATE devices and is the worldwide exclusive licensee for patent pending technologies associated with the development of ELEKTRA.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED

3. Significant Accounting Policies

Revenue Recognition

The Company has adopted Staff Accounting Bulletin 104, “Revenue Recognition” and therefore recognizes revenue based upon meeting four criteria:

	•	Persuasive evidence of an arrangement exists;

	•	Delivery has Delivery has occurred or services rendered;

	•	The seller’s price to the buyer is fixed or determinable; and

	•	Collectability is reasonably assured.

The Company contract manufactures fixed magnetic field products and sells them to various original equipment manufacturers in the motor vehicle and small utility motor markets. The Company negotiates an initial contract with the customer fixing the terms of the sale and then receives a letter of credit or full payment in advance of shipment. Upon shipment, the Company recognizes the revenue associated with the sale of the products to the customer.

Inventories

Inventories are valued at the lower of cost (first-in, first-out) or market and consist of finished goods.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain significant estimates were made in connection with preparing the Company’s financial statements. Actual results could differ from those estimates.

Stock-based compensation

On January 1, 2006, the Company adopted Statements of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s financial statements as of and for the three months ended March 31, 2008 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for employee and directors for the three months ended March 31, 2008 and 2007 was $21,818 and $16,302 respectively.

Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25. Under the intrinsic value method, the Company recognized share-based compensation equal to the award’s intrinsic value at the time of grant over the requisite service periods using the straight-line method. Forfeitures were recognized as incurred.

The Company’s determination of fair value of share-based payment awards to employees and directors on the date of grant using the Black-Scholes model, which is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors

The Company accounts for stock option and warrant grants issued to non-employees for goods and services using the guidance of SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18: “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” whereby the fair value of such option and warrant grants is determined using the Black-Scholes option pricing model at the earlier of the date at which the non-employee’s performance is completed or a performance commitment is reached.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

4. Recent Accounting Pronouncements

Adopted Statements

Statement No. 157

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a formal framework for measuring fair value under Generally Accepted Accounting Principles (“GAAP”). SFAS No. 157 defines and codifies the many definitions of fair value included among various other authoritative literature, clarifies and, in some instances, expands on the guidance for implementing fair value measurements, and increases the level of disclosure required for fair value measurements. Although SFAS No. 157 applies to and amends the provisions of existing FASB and American Institute of Certified Public Accountants (“AICPA”) pronouncements, it does not, of itself, require any new fair value measurements, nor does it establish valuation standards. SFAS No. 157 applies to all other accounting pronouncements requiring or permitting fair value measurements, except for: SFAS No. 123R, share-based payment and related pronouncements, the practicability exceptions to fair value determinations allowed by various other authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with software revenue recognition. SFAS No. 157 was effective January 1, 2008.

Statement No. 159

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. SFAS No. 159 also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157 and SFAS No. 107. SFAS No. 159 was effective January 1, 2008.

The above statements were adopted without effect in the reporting period.

Recently Issued

SFAS No. 141 (R) and SFAS No. 160

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS No. 160, Non-controlling Interests in Condensed consolidated Financial Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the condensed consolidated financial statement. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our financial statements, if any, upon adoption of SFAS No. 141 (R) or SFAS No. 160.

FAS No. 161

In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. FAS 161 is effective for the Company in fiscal 2010.

Management does not believe that there are any recently-issued, but not yet effective accounting pronouncements, which could have a material effect on the accompanying condensed consolidated financial statements.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

5. Net loss per share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. In computing diluted earnings per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. For the three months ended March 31, 2008 and 2007, the dilutive impact of outstanding stock options of 2,515,396 and 4,019,559 respectively, and outstanding warrants of 15,608,024 and 21,409,812 have been excluded because their impact on the loss per share is anti-dilutive.

6. Certain relationships and related transactions

Loans from related parties

In May of 2007, a former officer and director of the Company loaned $31,404 to pay a Company obligation and in August 2007, the same party loaned $50,000 to the Company so that it could pay certain operating expenses. These amounts are unsecured, bear interest at 6% per annum and are due on demand. At March 31, 2008, the balance of these loans including interest was $84,817.

Lease agreement with related party

During 2003, the Company entered into a sublease agreement with Scottish Glen Golf Company, Inc. (SGGC) to lease office space in North Hollywood, California for its principal executive offices. Bruce McKinnon, the former Chief Executive Officer and former Director of the Company, is a beneficial owner of the lessor.

In August 2005, the Company amended this sublease agreement. The original lease term was from November 1, 2003 through October 16, 2005 and carried an option to renew for two additional years with a 10 percent increase in the rental rate. Monthly rent under this lease is $3,740 per month under this lease. The Company exercised its option to renew the lease through October 15, 2007.

In January 2006, the Company further amended this sublease agreement, as a result of taking more space and obtaining expanded support services. The term of the sublease was amended to July 31, 2007 and carries an option to renew for two additional years with a 10 percent increase in the rental rate. Monthly rent is $6,208 per month under this amended sublease agreement. Additionally, the Company began leasing two additional office spaces for $964 per month beginning July 2006 on a month-to-month basis. The Company did not exercise its option to renew this sublease.

On July 12, 2007, SGGC presented to the Company a Three-Day Notice to Pay or Quit, demanding payment of unpaid rent, additional rent and penalties. On July 19, 2007, SGGC sued the Company in Los Angeles Superior Court, alleging unlawful detainer by the Company of its then-leased corporate offices at 5125 Lankershim Boulevard, North Hollywood, California, and failure to pay past due rent and penalties in the aggregate amount of $104,413. The Company vacated the premised on July 25, 2007. (See Note 12–Commitments and contingencies-Legal matters, Litigation Involving Sublessor of Former Corporate Offices).

Effective April 30, 2008 the Company and Scottish Glen Golf Company, Inc., dba KZG settled their pending litigation for $51,000 for which the Company has accrued at March 31, 2008. (See Note 13, “Subsequent Events”).

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

Investments from related parties

In June 2007, the Company received $100,000 proceeds for investment in the Spring Offering, from an investor who is more than a 5% beneficial owner of STWA. (See Note 8-Convertible notes and warrants).

In December 2007, the Company received $200,000 proceeds for investment in the Fall Offering from a Director who is more than a 5% beneficial owner of STWA. (See Note 8-Convertible notes and warrants).

Accounts Payable to related parties

As of March 31, 2008, the Company had accounts payable to related parties in the amount of $344,587, which was composed of $208,875 in unpaid Directors Fees, $32,643 in unreimbursed expenses incurred by Officers and Directors and $103,069 accrual for past due rent and contested penalties payable to a company beneficially owned by a former Chief Executive Officer and Director. (See Note 12, Litigation Matters and Leases).

Marketing and promotional services agreement with related party

In July 2006, the Company entered into an agreement with SS Sales and Marketing Group (“SS Sales”), to provide exclusive marketing and promotional services in the western United States and western Canada (the “Territory”) for the Company’s products. SS Sales will also provide advice, assistance and information on marketing the Company’s products in the automotive after-market, and will seek to recruit and establish a market with distributors, wholesalers and others. SS Sales will be paid a commission equal to 5% of the gross amount actually collected on contracts the Company entered into during the term of the agreement for existing or future customers introduced by SS Sales in the Territory. The agreement has a term of five years unless sooner terminated by either party on 30 days’ notice. In the event of termination, SS Sales will be entitled to receive all commissions payable through the date of termination. No amount was due or paid under this agreement as of March 31, 2008. SS Sales is owned by Nathan Shelton, who has served as one of the directors of the Company since February 12, 2007.

7. Equity arrangement

In September 2006, the Company entered into what is sometimes termed an equity arrangement with an investment banking firm. Under the arrangement the Company may sell (put) shares of common stock from time to time over a 36-month period, at a purchase price calculated at 97% of the lowest best closing bid for the Company’s common stock for the five trading days following the put notice. The Company may draw up to $10,000,000. Because the price of the common stock fluctuates and the number of shares of common stock that the Company may issue when the Company exercises the put will vary, the Company does not know how many shares, if any, will actually issue under the put. On October 6, 2006, the Company filed a Registration Statement which was effective October 30, 2006 which registered and made available 7,000,000 shares of common stock for possible future draws under the arrangement.

As of March 31, 2008 the Company has drawn down $1,372,150 ($1,262,378 net of closing costs) of this commitment and issued 2,367,905 shares of common stock, leaving 4,632,095 shares of common stock still available under the equity arrangement.

8. Convertible Debentures

Morale Orchards, LLC

On December 5, 2006, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with Morale, pursuant to which Morale purchased from the Company two (2) Convertible Promissory Notes, one dated December 5, 2006 (the “2006 Morale Note”), in the principal face amount of $612,500, and another, dated January 10, 2007 (the “2007 Morale Note”), also in the principal face amount of $612,500 (collectively, the “Morale Notes”), and two (2) warrants, one accompanying the 2006 Morale Note, and the other accompanying the 2007 Morale Note. Each warrant provides Morale the right to purchase shares of common stock of the Company. The aggregate purchase price for the Morale Notes and Morale Warrants was $1,000,000, of which $500,000 was paid by Morale and received by the Company on or about December 5, 2006, and of which $500,000 was paid by Morale and received by the Company on or about January 10, 2007;

The 2006 Morale Note is convertible at the rate of $0.85 per share into 720,588 shares of the Company’s common stock, and the 2007 Morale Note is convertible at the rate of $0.70 per share into 875,000 shares of the Company’s common stock;

The 2006 Morale Warrant is exercisable at $0.85 per share for 360,294 shares of the Company’s common stock, and the 2007 Morale Warrant is exercisable at $.70 per share for 437,500 shares of the Company’s common stock;

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

The Note Purchase Agreement provides, in pertinent part, that in the event the Company has not repaid each of the Morale Notes in full by the anniversary date of their issuances, the principal balances of each note shall be increased by ten percent (10%) and the Company shall pay interest at two and one-half percent (2½%) per month, compounded daily, for each month until each of the Morale Notes is paid in full.

Morale has piggy-back registration rights pursuant to which Morale may require the Company to include the shares of the Company’s common stock issuable upon conversion of the Morale Notes and exercise of the Morale Warrants in certain future registration statements the Company may elect to file.

The aggregate value of the Morale Warrants issued in connection with the January 10, 2007 purchase were valued at $118,955 using the Black-Scholes option valuation model with the following assumptions; risk-free interest rate of 4.68%; dividend yield of 0%; volatility factors of the expected market price of common stock of 245%; and an expected life of five years (statutory term) and vest over 180 days. The Company also determined that the notes contained a beneficial conversion feature of $231,455. The value of the Morale Warrants of $118,955, the conversion option of $231,455 and the transaction fees of $112,500 are considered as debt discount and are being amortized over the life of the Note

As of January 31, 2008, both the 2006 and 2007 Morale Notes were in default, and neither of the Morale Notes nor the Morale Warrants have been converted into shares of common stock of the Company. The amount due and owing as of January 31, 2008, under the 2006 Morale Note is $689,327. The amount due and owing as of January 31, 2008, under the 2007 Morale Note is $672,885.

The Company borrowed the principal sum of $20,000 from Morale on October 30, 2007, at an interest rate of ten percent (10%) per annum. Principal and accrued interest under the Morale Note is due on demand, and no payments there under have been made by the Company.

Morale is beneficially owned by Jacqueline Alexander, who is the wife of Leodis Matthews, who through his law firm, the Matthews Law Firm, serves as outside legal counsel to the Company. The Company is indebted to the Matthews Law Firm for unpaid legal fees and costs through January 31, 2008, in the aggregate amount of $472,762.

The Company, Morale and the Matthews Law Firm now desire to modify the terms and provisions of, and to provide for the satisfaction of the Company’s obligations under, the Morale Notes, the Additional Morale Note and the Matthews Law Firm Debt, pursuant to the terms and conditions set forth in this Modification and Satisfaction Agreement.

The Company, Morale and the Matthew Law Firm agreed to the following:

1. Waiver of Interest.

(i)	Morale agrees to forgive and waive any and all accrued interest on the Morale Notes from and after January 31, 2008;

(ii)	Morale agrees to forgive and waive any and all accrued interest due on the Additional Morale Note from the date of its issuance; and the Matthews Law Firm agrees to forgive any and all interest which may have accrued on the Matthews Law Firm Debt.

2. Cancellation of Notes, Debt and Obligations. Upon the execution of this Modification and Satisfaction Agreement, the 2006 Morale Note, the 2007 Morale Note, the Additional Morale Note, the Unpaid 2006 Morale Note Debt, the Unpaid 2007 Morale Note Debt, the Unpaid Additional Morale Note Debt and the Matthews Law Firm Debt, shall all be cancelled, be deemed satisfied in full and be of no further force or effect, effective January 31, 2008.

3. No Registration Rights. Upon execution hereof, the Morale Registration Rights shall be cancelled and be of no further force or effect.

4. Issuance of Shares. In consideration of this Modification and Satisfaction Agreement, including the waivers and cancellations as set forth in paragraphs 1 and 2, above, upon execution hereof, and concurrently with the waivers and cancellations provided hereunder, the Company shall issue a total of 7,421,896 shares of its common stock to Morale and the Matthews Law Firm, allocable as follows: (i) 2,759,308 shares shall be issued to Morale arising out of and in exchange for cancellation of the 2006 Morale Note and the Unpaid 2006 Morale Note Debt; (ii) 2,691,540 shares shall be issued to Morale arising out of and in exchange for cancellation of the 2007 Morale Note and the Unpaid 2007 Morale Note Debt; (iii) 80,000 shares shall be issued to Morale arising out of and in exchange for cancellation of the Additional Morale Note and the Unpaid Additional Morale Note Debt; and (iv) 1,891,048 shares shall be issued to the Matthews Law Firm arising out of and in exchange for cancellation of the Matthews Law Firm Debt. The Company shall not be required to, and shall not, file a Registration Statement with the Securities and Exchange Commission or any state securities agency to register or qualify the shares of common stock of the Company issuable to Morale and the Matthews Law Firm hereunder, and all such shares when issued shall be deemed restrictive securities and bear appropriate legends.

5. Morale Warrants. The terms and conditions of the Morale Warrants, to the extent not expressly amended in this Modification and Satisfaction Agreement, shall remain in full force and effect.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

On March 10, 2008, 80,000 shares of the Company’s common stock were issued to Morale Orchards, LLP, in cancellation of a note payable in the amount of $20,000 as part of the Modification Agreement entered into on January 31, 2008 between the Company and Morale Orchards, LLP and Matthews & Partners.

On March 10, 2008, 5,450,848 shares of the Company’s common stock were issued to Morale Orchards, LLP, in conversion of the Convertible Notes issued December 5, 2006 and January 10, 2007 in the amount of $1,362,712 as part of the Modification Agreement entered into on January 31, 2008 between the Company and Morale Orchards, LLP and Matthews & Partners.

On March 10, 2008, 1,891,048 shares of the Company’s common stock were issued to Leodis C. Matthews, APC, in exchange for accrued professional fees in the amount of $472,762 as part of the Modification Agreement entered into on January 31, 2008 between the Company and Morale Orchards, LLP and Matthews & Partners.

As a result of the debt cancelled and shares of common stock issued in connection with the Modification Agreement, the Company incurred additional non-cash interest expense of $691,665 and non-cash legal expense of $236,572 which was recorded in the first quarter of 2008.

2007 PIPE Offering. During the year ended December 31, 2007, the Company conducted an offering (the “2007 PIPE Offering”), through Spencer Clarke LLC, as exclusive placement agent, of up to $2,000,000 principal amount of its 10% convertible notes (the “2007 PIPE Notes”). Interest on the 2007 PIPE Notes, at a rate of 10% per annum, is payable quarterly. The Notes are due nine months from date of issuance. The 2007 PIPE Notes are convertible into shares of common stock at an initial conversion price of $0.70 per share (the “Conversion Shares”). There is no reset to the conversion price for any beneficial conversion feature.

The Company has the right to redeem any or all of the outstanding 2007 PIPE Notes in its sole discretion anytime after the termination of the 2007 PIPE Offering and prior to the maturity date of the 2007 PIPE Notes. The redemption price shall be the face amount of the redeemed 2007 PIPE Notes plus accrued and unpaid interest thereon. Subject to the following sentence, at any time prior to the maturity date of the 2007 PIPE Notes, for each additional $1,000,000 of gross proceeds raised from one or more offerings of the Company’s equity or quasi-equity securities, the Company shall redeem 2007 PIPE Notes with a minimum face value of $500,000 together with accrued and unpaid interest, until the entire outstanding 2007 PIPE Note is redeemed. Certain financings that the Company may conduct outside of North America are exempt from this provision to redeem the 2007 PIPE Notes in whole or in part.

Investors in the 2007 PIPE Offering also received a warrant (the “2007 PIPE Warrant”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 150% of the number of shares of common stock into which the 2007 PIPE Notes are convertible (the “Warrant Shares”). The 2007 PIPE Warrant will be exercisable on a cash basis only and will have registration rights. The 2007 PIPE Warrant is exercisable at an initial price of $1.00 per share, and is exercisable immediately upon issuance and for a period of three years from the date of issuance.

Promptly, but no later than 90 days following the closing date of the 2007 PIPE Offering, the Company is required to file a Registration Statement with the SEC to register the Conversion Shares and the Warrant Shares. The Company shall use its best efforts to ensure that such Registration Statement is declared effective within 120 days after filing

Pursuant to the terms of the PIPE Notes, if a Registration Statement is not filed on the 91st day following the closing date, (i) the interest rate on the PIPE Notes increased from 10% to 18% per annum until the event of default is cured and (ii) the holders of the PIPE Notes became entitled to receive additional warrants in an amount equal to 25% of the PIPE Warrants originally issued, for each 60-day period that the Company remains in default.

During the year ended December 31, 2007, the Company issued $400,000 of the PIPE Notes which could be converted into 571,429 shares of the Company’s common stock and 2007 PIPE Warrants to purchase 857,144 shares of the Company’s common stock. These warrants expire March 1, March 30 and April 2, 2010 and are exercisable at a price of $1.00 per share. The Company had related transaction fees of $48,000, resulting in net proceeds to the Company of $352,000. In addition to the transaction fees, warrants to purchase 57,143 shares of the Company’s common stock were issued to Spencer Clarke LLC, the Company’s exclusive placement agent for the 2007 PIPE Offering. These warrants expire March 1, March 30 and April 2, 2012 and are exercisable at a price of $0.70 per share.

The aggregate value of the 2007 PIPE Warrants issued in connection with this offering and the warrants issued to the placement agent were valued at $256,533 using the Black-Scholes option valuation model with the following assumptions: risk-free interest rate of 4.40% to 5.16%; dividend yield of 0%; volatility factors of the expected market price of common stock of 100.28% to 114.98%; and an expected life of two years (statutory term). The Company also determined that the notes contained a beneficial conversion feature of $62,857.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

The Company was unable to meet its obligations to file the Registration Statement required under the terms of the 2007 PIPE Offering in a timely manner. In early July 2007, the Company began discussions with Spencer Clarke, acting on behalf of the holders of the PIPE Notes and PIPE Warrants, for an extension of time to file the Registration Statement. Notwithstanding such discussions, Spencer Clarke issued a Notice of Default dated August 1, 2007 (the "Notice") to the Company for its failure to file the Registration Statement in a timely manner.

On August 29, 2007, the Company entered into a Modification Agreement with the 2007 PIPE note holders. The Modification Agreement was entered into as a result of negotiations between the Company and Spencer Clarke, LLC ("Spencer Clarke"), the Company's exclusive placement agent for the 2007 PIPE Offering, after the Company failed to file with the Securities and Exchange Commission (the "SEC") in a timely manner a Registration Statement to register the shares of the Company's common stock into which the PIPE Notes are convertible and for which the PIPE Warrants may be exercised.

Pursuant to the Modification Agreement, the parties have agreed as follows:

●	Promptly, but no later than November 30, 2007 (instead of on or before July 2, 2007), the Company shall file the Registration Statement with the SEC to register the Conversion Shares and the Warrant Shares.

●	Effective August 1, 2007, the interest rate on the PIPE Notes shall be increased from 10% per annum to 18% per annum until such time as the Registration Statement is declared effective by the SEC.

●	The price at which the PIPE Notes may be converted into Conversion Shares (the "Conversion Price") shall be reduced from $0.70 to $0.45 per share.

●	Each Investor shall receive, for no additional consideration, additional warrants ("Additional Warrants") in an amount equal to an additional 50% of the PIPE Warrants originally issued pursuant to the terms of the 2007 PIPE Offering. These Additional Warrants total 428,575 and shall have the same registration rights as are described in the Private Placement Memorandum dated January 12, 2007 (the "Offering Memorandum") used in connection with the 2007 PIPE Offering applicable to the PIPE Warrants; shall be exercisable immediately upon issuance; shall remain exercisable for a period of five years from the date of the Modification Agreement, on a cash basis only, at an initial exercise price of $0.45 per share; and shall, in all other respects, have the same terms and conditions, and be in the same form, as the PIPE Warrants.

●	If the Company does not file the Registration Statement with the SEC by November 30, 2007, each Investor shall receive, for no additional consideration, warrants ("Delay Warrants") in an amount equal to an additional 50% of the PIPE Warrants originally issued pursuant to the terms of the Offering Memorandum. The Delay Warrants shall have the same registration rights as are described in the Offering Memorandum applicable to the PIPE Warrants; shall be exercisable immediately upon issuance; shall remain exercisable for a period of five years from the date of this Agreement, on a cash basis only, at an initial exercise price of $0.45 per share; and shall, in all other respects, have the same terms and conditions, and be in the same form, as the PIPE Warrants.

The terms and conditions of the Offering Memorandum, the PIPE Notes and the PIPE Warrants, to the extent not expressly amended in the Modification Agreement, remain in full force and effect. The issuance of the Additional Warrants (“Delay Warrants”), if any, and the reduction of the Conversion Price of the PIPE Notes, has the potential to dilute the percentage ownership interest of the Company's existing shareholders.

The aggregate value of the 2007 PIPE Warrants issued in connection with this Modification Agreement were valued at $138,107 using the Black-Scholes valuation model with the following assumptions: risk-free interest rate of 4.43%; dividend yield of 0%; volatility factors of the expected market price of common stock of 113.55%; and an expected life of two years (statutory term).

On November 30, 2007, the Company and the Investors entered into the Second Modification Agreement and pursuant to this agreement have agreed as follows:

●	The Investors have agreed to forgive all accrued interest on their PIPE Notes, from the date of issuance thereof through December 14, 2007.

●	On December 14, 2007, the Company agreed to pay all Investors 50% of the principal amount of their original PIPE Notes which equals a total cash repayment of $200,000. Additionally, in repayment of the other 50% of the principal amount of the original PIPE Notes, the Company, on December 14, 2007, agreed to issue to Investors a total of 1,060,000 shares of the Company’s common stock (the “Conversion Shares”).

●	Concurrently with the cash payment and the issuance of the Conversion Shares as noted in paragraph 2 above, the Investors agreed to deliver to the Company the original of the PIPE Notes, which will be marked and deemed cancelled and of no further force or effect.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ETERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

●	In further consideration of the above terms and conditions, the Investors have agreed that the Company shall not be required to, and shall not, file a Registration Statement with the Securities and Exchange Commission or any state securities agency to register or qualify the PIPE Notes, the Conversion Shares, the PIPE Warrants, or any shares issuable pursuant to the PIPE Warrants (the Warrant Shares”). The Conversion Shares and Warrant Shares when issued will be deemed restricted securities and bear appropriate legends.

●	The terms and conditions of the PIPE Warrants, to the extent not expressly amended in the Second Modification Agreement, shall remain in full force and effect in furtherance of the terms and conditions set forth in the Modification Agreement.

Payment of $200,000 was made by the Company in accordance with the Second Modification Agreement, the Original Notes were surrendered by the Investors and 1,060,000 shares of common stock were issued to the Investors on December 27, 2007. Included in interest expense is the excess of the cost to settle the obligation over the carrying value at the settlement date totaling $222,368.

The aggregate value of the 2007 PIPE warrants in connection with the Second Modification Agreement were valued at $116,913 using the Black-Scholes valuation model with the following assumptions: risk-free interest rate of 4.39%; dividend yield of 0%; volatility factors of the expected market price of common stock of 116.75%; and an expected life of five years (statutory term). The Company recorded and issued these warrants in January 2008.

2007 Spring Offering. From June 13, 2007 through June 26, 2007, the Company conducted a private offering (the “Spring 2007 Offering”) of up to $550,000 aggregate face amount of its convertible notes (the “Spring 2007 Notes”) with a small number of accredited investors. Of this amount, $451,000 aggregate face amount of the Spring 2007 Notes were sold for an aggregate purchase price of $410,000 net proceeds. Therefore, while the stated interest rate on the Spring 2007 Notes is 0%, the implied interest rate on the Spring 2007 Notes is 10%. The Spring 2007 Notes mature on the first anniversary of their date of issuance. The Spring 2007 Notes are convertible, at the option of the noteholders, into shares of common stock of the Company (the “Conversion Shares”) at an initial conversion price equal to the average of the closing bid price of the Company’s common stock for the five trading days preceding the closing dates of the Spring 2007 Offering (the “Conversion Prices”). On the first closing, 1,002,941 Conversion Shares are issuable at Conversion Price of $0.34 per share. On the second closing, 207,548 conversion shares are issuable at a conversion price of $0.53 per share. The per share price of the Company’s common stock on the Pink Sheets during this period ranged from a low bid price (intraday) of $0.35 to a high bid price (intraday) of $0.59.

Each of the investors in the Spring 2007 Offering also received a warrant (the “Spring 2007 Warrants”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 50% of the number of shares of common stock into which the Spring 2007 Notes are convertible (the “Warrant Shares”). Each Spring 2007 Warrant is exercisable on a cash basis only at an initial price of $0.50 per share, and is exercisable immediately upon issuance and for a period of two years from the date of issuance. A total of 605,242 Warrant Shares were issued. Investors converted $110,000 of the Convertible Notes into 265,538 shares of the Company’s common stock during October and November 2007.

The aggregate value of the Spring 2007 Offering Warrants issued in connection with the June 13, 2007 closing were valued at $59, 296 using the Black-Scholes option valuation model with the following assumptions; risk-free interest rate of 5.11%; dividend yield of 0%; volatility factors of the expected market price of common stock of 113.56%; and an expected life of two years (statutory term) and vest immediately upon issuance. The Company also determined that the notes contained a beneficial conversion feature of $119,472. The value of the Spring 2007 Offering Warrants of $59,296, the conversion option of $119,472, and the transaction fees of $31,000 are considered as debt discount and are being amortized over the life of the Note.

The aggregate value of the Spring 2007 Offering Warrants issued in connection with the June 26, 2007 closing were valued at $19, 580 using the Black-Scholes option valuation model with the following assumptions; risk-free interest rate of 5.11%; dividend yield of 0%; volatility factors of the expected market price of common stock of 117.65%; and an expected life of two years (statutory term) and vest immediately upon issuance. The Company also determined that the notes contained a beneficial conversion feature of $21,655. The value of the Spring 2007 Offering Warrants of $19,580, the conversion option of $21,655 and the transaction fees of $112,500 are considered as debt discount and are being amortized over the life of the Note.

2007 Summer Offering. From August 8, 2007 through September 27, 2007, the Company conducted a private offering (the "Summer 2007 Offering") of up to $330,000 aggregate face amount of its convertible notes (the "Summer 2007 Notes") with a small number of accredited investors. Of this amount, $309,980 aggregate face amount of the Summer 2007 Notes were sold for an aggregate purchase price of $281,800 net proceeds. While the stated interest rate on the Summer 2007 Notes is 0%, the implied interest rate on the Summer 2007 Notes is 10%. The Summer 2007 Notes mature on the first anniversary of their date of issuance. The Summer 2007 Notes are convertible, at the option of the noteholder, into shares of common stock of the Company (the "Conversion Shares") at a conversion price equal to the average of the closing bid price of the Company's common stock for the five trading days preceding the closing date of the Summer 2007 Offering (the "Conversion Prices"). Up to 837,784 Conversion Shares are issuable at a Conversion Price of $0.37 per share.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ETERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

Each of the investors in the Summer 2007 Offering also received a warrant (the "Summer 2007 Warrants"), entitling the holder to purchase a number of shares of the Company's common stock equal to 50% of the number of shares of common stock into which the Summer 2007 Notes are convertible (the "Warrant Shares"). Each Summer 2007 Warrant is exercisable on a cash basis only at a price of $0.50 per share, and is exercisable for a period of two years from the date of issuance. A total of 418,892 Warrant Shares were issued. In November 2007, Investors converted $216,480 of the Convertible Notes into 585,173 shares of the Company’s common stock and in January 2008, Investors converted $44,000 of the Convertible Notes into 118,918 shares of the Company’s common stock.

The aggregate value of the Summer 2007 Offering Warrants issued in connection with the September 28, 2007 closing were valued at $60,678 using the Black-Scholes option valuation model with the following assumptions; risk-free interest rate of 4.87%; dividend yield of 0%; volatility factors of the expected market price of common stock of 124.83%; and an expected life of two years (statutory term) and vest immediately upon issuance. The Company also determined that the notes contained a beneficial conversion feature of $69,055. The value of the Summer 2007 Offering Warrants of $60,678, the conversion option of $69,055 and the transaction fees of $28,180 are considered as debt discount and are being amortized over the life of the Note.

2007 Fall Offering. From November 14, 2007 through December 17, 2007, the Company conducted a private offering (the "Fall 2007 Offering") of up to $1,100,000 aggregate face amount of its convertible notes (the "Fall 2007 Notes") with a small number of accredited investors. Of this amount, $622,600 aggregate face amount of the Fall 2007 Notes were sold for an aggregate purchase price of $566,000 net proceeds. While the stated interest rate on the Fall 2007 Notes is 0%, the implied interest rate on the Fall 2007 Notes is 10%. The Fall 2007 Notes mature on the first anniversary of their date of issuance. The Fall 2007 Notes are convertible, at the option of the noteholder, into shares of common stock of the Company (the "Conversion Shares") at a conversion price equal to the average of the closing bid price of the Company's common stock for the five trading days preceding the closing date of the Fall 2007 Offering (the "Conversion Prices"). Up to 1,596,410 Conversion Shares are issuable at a Conversion Price of $0.39 per share.

Each of the investors in the Fall 2007 Offering also received a warrant (the "Fall 2007 Warrants"), entitling the holder to purchase a number of shares of the Company's common stock equal to 50% of the number of shares of common stock into which the (Fall 2007 Notes) are convertible (the "Warrant Shares"). Each Fall 2007 Warrant is exercisable on a cash basis only at a price of $0.50 per share, and is exercisable for a period of two years from the date of issuance. Up to 796,205 Warrant Shares are initially issuable on exercise of the Fall 2007 Warrants. In January, February and March, 2008, investors converted $292,600 of the Convertible Notes into 750,258 shares of the Company’s common stock.

The aggregate value of the Fall 2007 Offering Warrants issued in connection with the December 17, 2007 closing were valued at $95,290 using the Black-Scholes option valuation model with the following assumptions; risk-free interest rate of 5.11%; dividend yield of 0%; volatility factors of the expected market price of common stock of 137.25%; and an expected life of two years (statutory term) and vest immediately upon issuance. The Company also determined that the notes contained a beneficial conversion feature of $63,362. The value of the Fall 2007 Offering Warrants of $95,290, the conversion option of $63,362, and the transaction fees of $56,600 are considered as debt discount and are being amortized over the life of the Note.

On March 10, 2008, 442,820 shares of the Company’s common stock were issued to noteholders in the 2007 Fall Offering who converted and cancelled Convertible Notes in the amount of $172,700 at a conversion price of $0.39 per share.

2008 Winter Offering. From December 27, 2007 to February 29, 2008 the Company conducted an offering (the “2008 Winter Offering”) of up to $1,000,000 aggregate face amount of its convertible notes (the “ 2008 Winter Notes”) with a small number of accredited investors. Of this amount, $521,400 aggregate face amount of the 2008 Winter Notes were sold for an aggregate purchase price of $474,000 net proceeds. Therefore, while the stated interest rate on the 2008 Winter Notes is 0%, the implied interest rate on the 2008 Winter Notes is 10%. The 2008 Winter Notes mature on the first anniversary of their date of issuance. The 2008 Winter Notes are convertible, at the option of the noteholder, into shares of common stock of the Company (the “Conversion Shares”) at a conversion price equal to the average of the closing bid price of the Company’s common stock for the five trading days preceding the closing date of the 2008 Winter Offering (the “Conversion Price”). Up to $1,042,800 Conversion Shares are issuable at a Conversion Price of $0.50 per share.

Each of the investors in the 2008 Winter Offering received, for no additional consideration, a warrant (the “ 2008 Winter Warrants”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 50% of the number of shares of common stock into which the ( 2008 Winter Notes) are convertible (the “2008 Warrant Shares”) Each 2008 Winter Warrant is exercisable on a cash basis only at a Price of $0.50 per share, and is exercisable for a period of two years from the date of issuance. Up to 521,400 2008 Warrant Shares are initially issuable on exercise of the 2008 Winter Warrants. In March 2008, Investors converted $251,900 of the Convertible Notes into 503,800 shares of the Company’s common stock.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ETERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

9. Capital stock

As of March 31, 2008, the Company has authorized 200,000,000 shares of its common stock, of which 54,751,117 shares were issued and outstanding.

In September 2006, the Company entered into what is sometimes termed an equity arrangement with an investment banking firm. Under the arrangement the Company may sell (put) shares of common stock from time to time over a 36-month period, at a purchase price calculated at 97% of the lowest best closing bid for the Company’s common stock for the five trading days following the put notice for cash. The Company may draw up to $10,000,000. Because the price of the common stock fluctuates, the number of shares of common stock that the Company may issue when the Company exercises the put rights will vary, the Company does not know how many shares will actually be issued under the put. On October 6, 2006, the Company filed a Registration Statement which was effective October 30, 2006 which registered and made available 7,000,000 shares of common stock for possible future draws under the line of credit.

During the year ended December 31, 2007 the Company drew down $ 992,055 ($912,683 net of closing costs) and issued 1,880,421 shares of common stock. As of March 31, 2008 the Company has drawn down $1,372,150 ($1,262,378) net of closing costs) of this commitment and issued 2,367,905 shares at an average price of $0.58 per share, leaving 4,632,095 shares available under the equity line of credit.

In August 2007, the Company issued 2,597,524 shares in connection with the exercise of options that were originally granted to the late Edward L. Masry.

During the year ended December 31, 2007, the Company issued 1,910,711 shares of common stock in exchange for conversion of $526,480 of Convertible Notes

During the three months ended March 31, 2008, the Company issued 7,421,896 shares of common stock in exchange for $1,855,474 conversion of Convertible Notes and settlement of debt in accordance with the Morale Orchards-Matthews Modification Agreement. The Company incurred and recorded additional non-cash interest and legal expense in the amount of $928,237.

During the three months ended March 31, 2008, the Company issued 840,970 shares of common stock in exchange for conversion of $325,600 of other Convertible Notes.

During the three months ended March 31, 2008, the Company issued 17,838 shares of common stock in exchange for consulting servicesin the amount of $$6,900.

During the three months ended March 31, 2008, the Company received notice of conversion of $262,900 convertible notes into 532,006 shares of common stock. As of March 31, 2008, these shares are reflected as common stock to be issued and were subsequently issued in April 2008

During the three months ended March 31, 2008, the Company entered an agreement to issued 84,583 shares of common stock for settlement of $25,375 in payables. As of March 31, 2008, these shares are reflected as common stock to be issued, and were subsequently issued in April 2008.

During the three months ended March 31, 2008, the Company received $170,830 for exercise of warrants to purchase 341,660 shares of common stock. As of March 31, 2008, these shares are reflected as common stock to be issued, and were subsequently issued in April 2008.

10. Stock options and warrants

The Company currently issues stock options to employees, directors and consultants under the 2004 Stock Plan (the “Plan”). As of December 31, 2005, the Company could issue options under the Plan to acquire up to 5,000,000 shares of common stock. In February 2006, the board approved an amendment to the Plan, increasing the authorized shares by 2,000,000 shares to 7,000,000 shares. At March 31, 2008, 4,734,604 shares of common stock were available to be granted under the Plan. Prior to 2004, the Company granted to officers of the Company outside the Plan options to purchase 3,250,000 options outside the Plan to officers of the Company of which 250,000 are still outstanding

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ETERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

Employee options vest according to the terms of the specific grant and expire from 5 to 10 years from date of grant. Non-employee option grants to date are vested upon issuance. The weighted-average, remaining contractual life of employee options outstanding at March 31, 2008 and December 31, 2007 was 7.1 years and 7.1 years, respectively. Stock option activity for the three months ended March 31, 2008 and the year ended December 31, 2007 was as follows, which includes 250,000 options granted outside the Plan:

	Weighted Avg.			Weighted Avg.
	Options			Exercise Price
Options, January 1, 2004		13,250,000			0.11
Options granted		1,172,652			1.03
Options exercised		—			—
Options cancelled		—			—

Options, December 31, 2004		14,422,652			0.18
Options granted		2,085,909			0.92
Options exercised		—			—
Options cancelled		(10,000,000	)		0.10

Options, December 31, 2005		6,508,561			0.53
Options granted		1,313,605			1.21
Options exercised		(2,860,000	)		0.10
Options forfeited		(962,607	)		0.84
Options cancelled		—			—

Options, December 31, 2006		3,999,559			0.99
Options granted		238,679			0.55
Options exercised		—			—
Options forfeited		(49,793)			1.96
Options cancelled		—			—

Options, December 31, 2007		4,188,445		$	0.95
Options granted (unaudited)		—			—
Options exercised (unaudited)		—			—
Options forfeited (unaudited)		(1,673,049	)		1.01
Options cancelled (unaudited)		—			—

Options, March 31, 2008 (unaudited)		2,515,396		$	0.92

During the three months ended March 31, 2008, no options were granted.

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
As of March 31, 2008:
Outstanding		2,515,396	$	0.92		7.10
Expected to Vest		2,515,396	$	0.92		7.10
Exercisable		2,326,717	$	0.96		6.88

As of March 31, 2008, the exercise price of all options outstanding exceeds the market price of the Company’s stock, and therefore there was no intrinsic value. Future compensation expense on the options which were not exercisable at March 31, 2008 is $27,271

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ETERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

Black-Scholes value of employee options

During the three month period ended March 31, 2008, the Company valued employee options for pro-forma purposes at the grant date using the Black-Scholes pricing model with the following average assumptions:

Expected life (years) 5.5

Risk free interest rate 4.42%

Volatility 124.57%

Expected dividend yield 0.0%

Stock-based compensation during the three month period ended March 31, 2008 was $21,818, compared to $16,302 for the three month period ended March 31, 2007.

Warrants

The following table summarizes certain information about the Company’s stock purchase warrants.

	Warrants			Weighted Avg. Exercise Price
Warrants outstanding, January 1, 2004		14,252,414			0.48
Warrants granted		2,372,500			1.27
Warrants exercised		(960,500	)		0.20
Warrants cancelled		—			—
Warrants outstanding, December 31, 2004		15,664,414			0.62
Warrants granted		5,198,574			1.16
Warrants exercised		(50,500	)		0.99
Warrants cancelled		(20,000	)		1.50
Warrants outstanding, December 31, 2005		20,792,488			0.75
Warrants granted		3,624,894			1.28
Warrants exercised		(2,328,452	)		0.68
Warrants cancelled		(1,191,619	)		1.46
Warrants outstanding, December 31, 2006		20,897,311		$	0.81
Warrants granted		3,602,701			0.64
Warrants exercised		—			—
Warrants cancelled		(6,580,984	)		1.06
Warrants outstanding, December 31, 2007		17,919,028		$	0.67
Warrants granted		949,975			0.48
Warrants exercised		(341,660	)		0.50
Warrants cancelled		(2,919,319	)		0.71
Warrants outstanding, March 31, 2008		15,608,024		$	0.65

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ETERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

11. Research and development

The Company has a research and development facility in Morgan Hill, California. The Company has expanded the research and development to include application of the ZEFS, MK IV, CAT-MATE and ELECTRA technologies for diesel engines, motorbikes, boats, generators, lawnmowers and other small engines. The Company has purchased test vehicles, test engines and testing equipment. The Company has completed testing on products incorporating its ZEFS, MK IV and CAT-MATE technologies for multiple automobiles, trucks motorcycles, off-road vehicles and stationary engines. The Company has entered into a Research & Development Agreement with Temple University in connection with the ELECTRA technology. The Company spent $259,670 and $340,452 for the three months ended March 31, 2008 and 2007, respectively.

12. Commitments and contingencies

Patent Infringement Claims by Jeffrey A. Muller

In April 2005, Jeffrey A. Muller, the Company’s former sole director and executive officer, filed a complaint against the Company in the Federal District Court for the Central District of California, seeking declaratory and injunctive relief and alleging unfair competition in connection with a claimed prior patent interest in the ZEFS device and stock option rights. In seeking declaratory relief, Mr. Muller is seeking to have the patent rights in the ZEFS device that were previously transferred to the Company by Mr. Muller’s bankruptcy trustee declared null and void.

This lawsuit brought by Mr. Muller arose out of the same claims that were the subject of litigation in the Federal District Court for the Southern District of New York, in which the Court entered judgment against Mr. Muller. Those claims are pending further proceedings. While the Company believes that the Company has valid claims and defenses, there can be no assurance that an adverse result or outcome on the pending motions or a trial of this case would not have a material adverse effect on the Company’s financial position or cash flow.

Employment agreement

Effective July 18, 2007, the Company entered into an employment agreement with Mr. Charles R. Blum to serve as the Company’s President and Chief Executive Officer. Pursuant to the Employment Agreement, Mr. Blum’s employment is for a one-year term, subject to automatic one-year extensions and provides for annual base compensation of $200,000 per year, subject to periodic review and adjustment. In addition, Mr. Blum will receive an automobile allowance of $900 per month and four weeks of paid vacation annually. Also, Mr. Blum is entitled to participate in all employee benefit plans that the Company makes available to the Company’s employees generally; provided that if Mr. Blum elects not to participate in the Company’s group medical insurance plan, Mr. Blum will be reimbursed in an amount equal to the lesser of (i) the premium the Company would have paid to include Mr. Blum as a participant in that group health insurance plan and (ii) the sums paid by Mr. Blum in connection with maintaining Mr. Blum’s private health insurance. The Company will also reimburse Mr. Blum the reasonable costs paid by Mr. Blum for maintaining DSL Internet access and other direct costs of maintaining an office at Mr. Blum’s home, but only until such time as the Company shall provide Mr. Blum with an office at a location reasonably acceptable to Mr. Blum.

Minimum guaranteed compensation payments under Mr. Blum’s employment agreement amounts to approximately $121,000 for the year 2008.:

As of December 31:

Year
2008	$	121,000
2009	$	0
Total	$	121,000

During the quarter ended March 31, 2008, approximately $50,000 was paid for employment agreement.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ETERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

Consulting agreements

On January 4, 2007, the Company entered into a Consulting Agreement (the “Consulting Agreement”) with Spencer Clarke LLC (“Spencer Clarke”) pursuant to which Spencer Clarke has agreed that for a twelve-month period beginning January 4, 2007, Spencer Clarke will provide the Company with financial consulting services (including but not limited to executive search, strategic partnerships, research on new markets, strategic visibility, etc) to help further develop the Company’s strategic business plan.

For Spencer Clarke’s services the Company has agreed to pay Spencer Clarke a nonrefundable fee of $20,000 per month, payable in advance. The first payment, in the amount of $60,000 and covering three months, was due by the Company on March 1, 2007. No payments have been made under this agreement. The Company will also reimburse Spencer Clarke for expenses it incurs in connection with the performance of its services under the Consulting Agreement, provided that expenses in excess of $2,000 require the Company’s prior approval before such expenses may be incurred by Spencer Clarke.

On December 13, 2007, the Company entered into an agreement with a consultant to provide financial and marketing services. Compensation is to be paid on an hourly rate, half in cash and half in the Company’s common stock to be issued on the first day of the second month after services are provided.

On December 13, 2007, the Company entered into an agreement with a consultant to provide coordination services with various governmental agencies, in California for a fee of $2,500 plus 10,000 shares of the Company’s common stock.

Leases

In September 2005, the Company entered into a lease for a testing facility located in Morgan Hill, California. The term of the lease was from September 1, 2005 through August 31, 2007 and carried an option to renew for two additional years at the then prevailing market rate. The rent was $2,240 per month under this lease. The lease was amended in February 2006 for additional space. The rent under the amended lease was $4,160 per month. The Company renewed this lease on August 9, 2007 for an additional two-year term. The rent is $4,640 per month for the first six months of the new term of the lease and $5,480 per month for the remaining eighteen months of the new term of the lease.

Total rent expense under this lease for the three-month periods ended March 31, 2008 and 2007, is $14,760 and $12,480, respectively. The following is a schedule by years of future minimum rental payments required under the non-cancellable operating lease as of March 31, 2008.

2008	$	64,080
2009		43,840
Total	$	107,920

13. Subsequent events

In April 2008, the Company received $161,495 for exercise of warrants to purchase 322,990 shares of common stock.

In April 2008, the Company received notice of conversion of $77,000 convertible notes into 176,769 shares of common stock.

SAVE THE WORLD AIR, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ETERPRISE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)

Effective April 30, 2008 the Company and Scottish Glen Golf Company, Inc., dba KZG settled their pending litigation relating to the Company’s prior offices. In the interest of avoiding further litigation costs and expenses, the Company and SGGC executed a “Settlement and Mutual Release Agreement effective April 30, 2008. The Company will pay SGGC the sum of $75,000, execution of which is stayed pending the following terms:

a. Company shall pay to SGGC the sum of $51,000 in two installments, without interest, as follows;

(1) $34,000 due on or before June 2, 2008 and

(2) $17,000 due on or before July 17, 2008

The above payments shall be payable to SCOTTICH GLEN GOLF COMPANY, INC. dba KZG and wired transferred to the latter.

In the event any payment listed above is not paid when due, then the total sum of $75,000 shall immediately be due and owing, less any payments actually made pursuant to the Agreement and SGGC shall be entitled to file the Stipulated Judgment

The Settlement and Mutual Release Agreement also provides for mutual general releases.

Upon full and complete execution of all duties and obligations by Company under the terms of this Agreement, and provided Paragraph c. above has not occurred, SGGC shall cause the Complaint to be dismissed, with prejudice, as to all causes of action and as to all parties. The Company has recorded the accrued liability of $51,000 at March 31, 2008.

Item 2. Management’s Discussion and Analysis or Plan of Operations

This Quarterly Report on Form 10-QSB contains forward-looking statements. These forward-looking statements include predictions regarding our future:

	•	revenues and profits;

	•	customers;

	•	research and development expenses and efforts;

	•	scientific 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

You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “expects,” “anticipates,” “believes,” “estimates,” “continues,” or the negative of such terms, or other comparable terminology.

Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the heading “Risk Factors” in our Annual Report on Form 10-KSB for the year ended December 31, 2007. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.

Overview

The following discussion and analysis of our condensed consolidated financial condition and condensed consolidated results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-QSB and the condensed consolidated financial statements and notes thereto contained in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.

We are a green technology company that leverages a suite of patented, patent-pending and licensed intellectual properties related to the treatment of fuels. Technologies patented by, or licensed to, us utilize either magnetic or uniform electrical fields to alter physical characteristics of fuels and are designed to create a cleaner combustion. Cleaner combustion has been shown to improve performance, enhance fuel economy and/or reduce harmful emissions in laboratory testing.

Our ECO ChargR™ and MAG ChargR™ products use fixed magnetic fields to alter some physical properties of fuel, by incorporating our patented and patent-pending ZEFS and MK IV technologies. We differentiate ECO ChargR and MAG ChargR products based on their differing attributes and marketing focus. ECO ChargR products are primarily designed to reduce harmful emissions and MAG ChargR products are primarily designed to enhance performance and fuel economy. Our ECO ChargR product is intended to reduce exhaust emissions in vehicle and small utility motors. ECO ChargR will be marketed primarily to original equipment manufacturers (“OEMs”) as well as to pilot and government-mandated emissions programs. Our MAG ChargR product is intended to increase power and improve mileage. MAG ChargR will be marketed primarily to the specialty consumer accessories market for many types of vehicles, including but not limited to cars, trucks, motorcycles, scooters, all terrain vehicles (“ATVs”), snowmobiles, personal watercraft and small utility motors. On the other hand, because our ECO ChargR and MAG ChargR products are customized to specific brands, models and engine sizes, these products ultimately will require hundreds of individually developed parts, which can be expensive and time-consuming to produce. See “Our Technologies and Products” below.

Our first revenues have come from initial sales in Asia for our ECO ChargR product in the motorcycle industry. We plan on commencing sales of ECO ChargR to customers in the United States in the motorcycle industry in second quarter of 2008. We also plan on commencing initial sales of our MAG ChargR product in Asia and the United States in the automobile and motorcycle industry in the second quarter of 2008. See “Recent Developments” and “Sales and Marketing” below.

We have obtained a license from Temple University for their patent-pending uniform electric field technology, tentatively called ELEKTRA™. The ELEKTRA technology consists of passing fuel through a specific strong electrical field. Although ELEKTRA has a similar effect on fuels as our ZEFS and MK IV technologies, ELEKTRA incorporates a uniform electrical field principle. Based on our early research and product development, we believe that ELEKTRA carries certain advantages over our ZEFS and MK IV technologies, primarily not requiring as many variations for products incorporating the ELEKTRA technology compared to products incorporating the ZEFS or MK IV technologies. Preliminary testing conducted in Europe by an outside research and development facility indicates that ELEKTRA causes a significant change in some of the physical characteristics of the fuel, resulting in better atomization of the fuel and improved combustion.

We have also entered into a research and development agreement with Temple University to conduct further research on the ELEKTRA technology and magnetic technologies in general. Together with Temple University, we have developed prototype products using the ELEKTRA technology and we are continuing testing, and research and development. We are in the early stages of developing ELEKTRA products that, based on the previously mentioned preliminary testing, is intended to improve fuel economy and change fuel viscosity, and may improve performance and reduce emissions, depending upon the specific application. We are also working with Temple and several domestic and international corporations investigating applications of this technology to the transportation industry, oil refineries and pipelines, and OEMs. See “Our Technologies and Products” below.

We operate in a highly competitive industry. Many of our activities may be subject to governmental regulation. We have taken aggressive steps to protect our intellectual property.

There are significant risks associated with our business, our company and our stock.

We are a development stage company that generated its first initial revenues in the fourth quarter of 2006. Our expenses to date have been funded primarily through the sale of stock and convertible debt, as well as proceeds from the exercise of stock purchase warrants. We raised capital in 2007 and will need to raise substantial additional capital in 2008, and possibly beyond, to fund our sales and marketing efforts, continuing research and development, and certain other expenses, until our revenue base grows sufficiently.

Our company was incorporated on February 18, 1998, as a Nevada corporation, under the name Mandalay Capital Corporation. We changed our name to Save the World Air, Inc. on February 11, 1999, following the acquisition of marketing and manufacturing rights of the ZEFS technologies. Our mailing address is 235 Tennant Avenue, Morgan Hill, California 95037. Our telephone number is (408)-778-0101. Our corporate website is www.stwa.com. Information contained on the website is not deemed part of this Annual Report.

Our common stock is quoted on the Over-the-Counter Bulletin Board under the symbol “ZERO.OB”.

Results of Operations

Revenues were $0 for the three months ended March 31, 2008, compared to $22,000 for the three months ended March 31, 2007. Cost of goods sold were $0 for the three months ended March 31, 2008, compared to $5,360 for the three months ended March 31, 2007.

Operating expenses were $760,142 for the three months ended March 31, 2008, compared to $1,279,775 for the three months ended March 31, 2007, a decrease of $519,633. This decrease is attributable to a decrease in cash expenses of $719,567 offset by an increase in non-cash expenses of $199,934. The decrease in cash expenses is attributable to decreases in consulting and professional fees ($279,647), salaries and benefits ($220,287), office and other expenses ($112,588), travel expenses (75,556), exhibits and trade shows ($24,562), and corporate expenses (6,927). The non-cash increase is attributable to an increase in non-cash legal fees ($236,572), revaluation of options and warrants given to employees and consultant ($5,516), bad debt ($1,380) offset by a decrease in depreciation ($43,534).

Research and development expenses were $259,670 for the three months ended March 31, 2008, compared to $340,452 for the three months ended March 31, 2007, a decrease of $80,782. This decrease is attributable to decreases in product testing, research and supplies ($90,309), consulting fees ($16,097), travel expenses ($7,626) and were offset by an increase in contract fees ($33,250).

Other expense for the three months ended March 31, 2008 were $1,264,035, compared to $309,774 for the three months ended March 31, 2007, an increase of $954,261. This increase is attributable to an increase in non-cash interest expense ($985,908), decrease in cash interest expense ($40,880), increase in loss on sale of equipment ($9,683) and increase in other income ($450).

We had a net loss of $2,283,847, or $0.05 per share, for the three months ended March 31, 2008, compared to a net loss of $1,914,161, or $0.05 per share, for the three months ended March 31, 2007. We expect to incur additional net loss in the fiscal year ending December 31, 2008, primarily attributable to continued operating and marketing-related expenditures without the benefit of any significant revenue for the remainder of the year.

Liquidity and Capital Resources

General

We have incurred negative cash flow from operations in the developmental stage since our inception in 1998. As of March 31, 2008, we have been funded primarily through the sale of convertible notes and issuance of our stock upon exercise of warrants.

The condensed consolidated financial statements accompanying this Quarterly Report have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the accompanying condensed consolidated financial statements, we had a net loss of $2,283,847 and a negative cash flow from operations of $637,197 for the three months ended March 31, 2008, and a stockholders’ deficiency of $2,718,964 as of March 31, 2008, and a net loss of $6,262,743and a negative cash flow from operations of $3,172,816 for the year ending December 31, 2007, and a stockholders’ deficiency of $4,359,786 as of December 31, 2007. These factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional funds, generate revenue and implement our business plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Our current liabilities greatly exceed our assets and we are unable to meet our obligations as they become due. We face significant challenges in generating revenue and maintaining adequate working capital during the remainder of 2008 as a result of several factors. Among other things, to date our distributors, primarily located in Asia, have placed fewer orders than we had expected them to place under the terms of our distribution agreements with them. This resulted in our having less revenue and therefore less working capital available for the further development of our business at a time when the operating costs of our business have been increasing. We will require significant additional outside capital during 2008 in order to meet all of our obligations, produce products for sale and ship such products

Details of Recent Financing Transactions

Equity Arrangement

Morale Orchards, LLC

Morale is beneficially owned by Jacqueline Alexander, who, is the wife of Leodis Matthews, who, through his law firm, the Matthews Law Firm, serves as outside legal counsel to the Company. The Company is indebted to the Matthews Law Firm for unpaid legal fees and costs through January 31, 2008, in the aggregate amount of $472,762.

The Company, Morale and the Matthew Law Firm agreed to the following:

1. Waiver of Interest.

(i)	Morale agrees to forgive and waive any and all accrued interest on the Morale Notes from and after January 31, 2008;

(ii)	Morale agrees to forgive and waive any and all accrued interest due on the Additional Morale Note from the date of its issuance; and the Matthews Law Firm agrees to forgive any and all interest which may have accrued on the Matthews Law Firm Debt.

3. No Registration Rights. Upon execution hereof, the Morale Registration Rights shall be cancelled and be of no further force or effect.

5. Morale Warrants. The terms and conditions of the Morale Warrants, to the extent not expressly amended in this Modification and Satisfaction Agreement, shall remain in full force and effect.

On March 10, 2008, 5,450,848 shares of the Company’s common stock were issued to Morale Orchards, LLP, in conversion and cancellation of the Convertible Notes issued December 5, 2006 and January 10, 2007 in the amount of $1,362,712 as part of the Modification Agreement entered into on January 31, 2008 between the Company and Morale Orchards, LLP and Matthews & Partners.

On March 10, 2008, 1,891,048 shares of the Company’s common stock were issued to Leodis C. Matthews, APC, in cancellation of accrued professional fees in the amount of $472,762 as part of the Modification Agreement entered into on January 31, 2008 between the Company and Morale Orchards, LLP and Matthews & Partners.

As a result of the debt cancelled and shares of common stock issued in connection with the Modification Agreement, the Company incurred non-cash interest expense of $691,665 and non-cash legal expense of $236,572 which was recorded in the first quarter of 2008.

During the year ended December 31, 2007, the Company issued $400,000 of the PIPE Notes which could be converted into 571,429 shares of the Company’s common stock and 2007 PIPE Warrants to purchase 857,144 shares of the Company’s common stock. These warrants expire March 1, March 30 and April 2, 2010 and are exercisable at a price of $1.00 per share. The Company had related transaction fees of $48,000, resulting in net proceeds to the Company of $352,000. In addition to the transaction fees, warrants to purchase 57,143 shares of the Company’s common stock were issued to Spencer Clarke LLC, the Company’s exclusive placement agent for the 2007 PIPE Offering. These warrants expire March 1, March 30 and April 2, 2010 and are exercisable at a price of $0.70 per share.

Pursuant to the Modification Agreement, the parties have agreed as follows:

●	Promptly, but no later than November 30, 2007 (instead of on or before July 2, 2007), the Company shall file the Registration Statement with the SEC to register the Conversion Shares and the Warrant Shares.

●	Effective August 1, 2007, the interest rate on the PIPE Notes shall be increased from 10% per annum to 18% per annum until such time as the Registration Statement is declared effective by the SEC.

●	The price at which the PIPE Notes may be converted into Conversion Shares (the "Conversion Price") shall be reduced from $0.70 to $0.45 per share.

●	Each Investor shall receive, for no additional consideration, additional warrants ("Additional Warrants") in an amount equal to an additional 50% of the PIPE Warrants originally issued pursuant to the terms of the 2007 PIPE Offering. These Additional Warrants total 428,575 and shall have the same registration rights as are described in the Private Placement Memorandum dated January 12, 2007 (the "Offering Memorandum") used in connection with the 2007 PIPE Offering applicable to the PIPE Warrants; shall be exercisable immediately upon issuance; shall remain exercisable for a period of five years from the date of the Modification Agreement, on a cash basis only, at an initial exercise price of $0.45 per share; and shall, in all other respects, have the same terms and conditions, and be in the same form, as the PIPE Warrants.

●	If the Company does not file the Registration Statement with the SEC by November 30, 2007, each Investor shall receive, for no additional consideration, warrants ("Delay Warrants") in an amount equal to an additional 50% of the PIPE Warrants originally issued pursuant to the terms of the Offering Memorandum. The Delay Warrants shall have the same registration rights as are described in the Offering Memorandum applicable to the PIPE Warrants; shall be exercisable immediately upon issuance; shall remain exercisable for a period of five years from the date of this Agreement, on a cash basis only, at an initial exercise price of $0.45 per share; and shall, in all other respects, have the same terms and conditions, and be in the same form, as the PIPE Warrants.

The aggregate value of the 2007 PIPE Warrants issued in connection with this Modification Agreement were valued at $138,107 using the Black-Scholes option valuation model with the following assumptions: risk-free interest rate of 4.43%; dividend yield of 0%; volatility factors of the expected market price of common stock of 113.55%; and an expected life of two years (statutory term).

On November 30, 2007, the Company and the Investors entered into the Second Modification Agreement and pursuant to this agreement have agreed as follows:

●	The Investors have agreed to forgive all accrued interest on their PIPE Notes, from the date of issuance thereof through December 14, 2007.

●	On December 14, 2007, the Company agreed to pay all Investors 50% of the principal amount of their original PIPE Notes which equals a total cash repayment of $200,000. Additionally, in repayment of the other 50% of the principal amount of the original PIPE Notes, the Company, on December 14, 2007, agreed to issue to Investors a total of 1,060,000 shares of the Company’s common stock (the “Conversion Shares”).

●	Concurrently with the cash payment and the issuance of the Conversion Shares as noted in paragraph 2 above, the Investors agreed to deliver to the Company the original of the PIPE Notes, which will be marked and deemed cancelled and of no further force or effect.

●	In further consideration of the above terms and conditions, the Investors have agreed that the Company shall not be required to, and shall not, file a Registration Statement with the Securities and Exchange Commission or any state securities agency to register or qualify the PIPE Notes, the Conversion Shares, the PIPE Warrants, or any shares issuable pursuant to the PIPE Warrants (the Warrant Shares”). The Conversion Shares and Warrant Shares when issued will be deemed restricted securities and bear appropriate legends.

●	The terms and conditions of the PIPE Warrants, to the extent not expressly amended in the Second Modification Agreement, shall remain in full force and effect in furtherance of the terms and conditions set forth in the Modification Agreement.

With the exception of some of the proceeds of the 2008 Winter Offering, the net proceeds of all of the offerings discussed above are largely exhausted and we have cash on hand to meet expenses only for a short period of time. In order to fund our capital needs for the foreseeable future, including the operations of our business, and the repayment of our outstanding 2007 Spring Notes, which are due in June 2008, our outstanding 2007 Summer Notes which are due in September 2008, out outstanding 2007 Fall Notes which are due in December 2008 and out 2008 Winter Notes which are due in February 2009, we must raise substantial additional funds. In addition to the funds required to continue to operate our business, and retire outstanding notes, we will require additional funds in connection with the license and research and development agreements with Temple University, costs associated with product development and commercialization of the ELEKTRA technology, costs to manufacture and ship our products, costs to design and implement an effective system of internal controls and disclosure controls and procedures, costs of maintaining our status as a public company by filing periodic reports with the SEC, and costs required to protect our intellectual property. In addition, as discussed below, we have substantial contractual commitments, including without limitation salaries to our executive officers pursuant to employment agreements, certain severance payments to a former officers and consulting fees, during the remainder of 2008 and beyond.

In light of the Company’s financial commitments over the next several months and its liquidity constraints, have implemented cost reduction measures in all areas of operations, including but not limited to personnel lay-offs and/or reductions in work, reductions in marketing and advertising, deferral of placing orders to manufacturers of our ECO ChargR and MAG ChargR products for sale to our existing distributors, reductions in research and development and product development of ELEKTRA products, and reductions of certain other expenses. We intend to review these measures on an ongoing basis and make additional decisions as may be required.

We my continue to use our equity arrangement for some of our additional requirements for 2008. However, the equity arrangement will not be sufficient to meet all of our current liabilities and other obligations in 2008. Among other things, the thin trading of our common stock may limit our ability to use the equity arrangement without adversely affecting the price of our common stock. Therefore, in addition to the recently-completed 2007 Winter Offering, the Company is actively pursuing additional financing alternatives, but no commitments have been received and, accordingly, no assurance can be given that any financing will be available or, if available, that it will be on terms that are satisfactory to the Company. At present, we have relatively few financing options available to us.

Contractual Obligations

The following table discloses our contractual commitments for future periods. Long-term commitments are comprised operating leases and minimum guaranteed compensation payments under employment and other agreements. See Note 12 to Notes to Condensed consolidated Financial Statements.

Year ending December 31,	Operating Leases(1)		Guaranteed Payments
2008	$	64,080	$	231,933	(2)
2009	$	43,840	$	200,000	(3)
2010	$	0	$	125,000	(4)
	$	107,920	$	556,933

(1) Consists of rent for our Morgan Hill Facility expiring on August 31, 2009. (For description of this property, see Part 1, Item 2, “Property”).

(2) Consists of an aggregate $70,683 in total compensation, including base salary and certain contractually-provided benefits, to one executive officer, pursuant to employment agreement that expire on July 25, 2008; $161,250 in licensing and maintenance fees to Temple University.

(3) Consists of license and maintenance fees due to Temple University;

(4) Consists of maintenance fees due to Temple University.

License agreements with Temple University

We have entered into two license agreements with Temple University, one covering Temple University’s current patent application concerning certain electric field effects on gasoline, kerosene and diesel fuel particle size distribution, and the other covering Temple University’s current patent application concerning electric field effects on crude oil and edible oil viscosity, and any and all United States and foreign patents issuing in respect of the technologies described in such applications (individually, a “License Agreement” and collectively, the “License Agreements”). Initially, the License Agreements are exclusive and the territory licensed to the Company is worldwide. Pursuant to the License Agreements, the Company will pay to Temple University (i) license fees in the aggregate amount of $250,000, payable in three installments of $100,000, the first installment of which was paid in March 2007, and $75,000 on each of February 2, 2008, which has not been paid, and February 2, 2009, respectively; and (ii) annual maintenance fees of $125,000 annually commencing January 1, 2008, which has not been paid. In addition, each License Agreement separately provides that the Company will pay royalties to Temple University on net sales of products incorporating the technology licensed under that License Agreement in an amount equal to 7% of the first $20 million of net sales, 6% of the next $20 million of net sales and 5% of net sales in excess of $40 million. Sales under the two License Agreements are not aggregated for purposes of calculating the royalties payable to Temple University. In addition, the Company has agreed to bear all costs of obtaining and maintaining patents in any jurisdiction where the Company directs Temple University to pursue a patent for either of the licensed technologies. Should the Company not wish to pursue a patent in a particular jurisdiction, that jurisdiction would not be included in the territory licensed to the Company.

Research and development agreement with Temple University

We have also entered into a research and development agreement (“R&D Agreement”) with Temple University to conduct further research on the ELEKTRA technology. Under the R&D Agreement Temple University will conduct a 24-month research project towards expanding the scope of, and developing products utilizing, the technologies covered under the License Agreements, including design and manufacture of prototypes utilizing electric fields to improve diesel, gasoline and kerosene fuel injection in engines using such fuels and a device utilizing a magnetic field to reduce crude oil viscosity for crude oil (paraffin and mixed base) and edible oil flow in pipelines. Pursuant to the R&D Agreement, we will make payments to Temple University in the aggregate amount of $500,000, payable in eight non-refundable installments commencing with $123,750, which was paid in March 2007, and seven payments of $53,750 every three months thereafter until paid in full. The payments of $53,750 due in June, September and December 2007 have not been paid. The Company is in default under the R&D Agreement, however, the Company has not received any notice of default from Temple University. If the research project yields results within the scope of the technologies licensed pursuant to the License Agreements, those results will be deemed included as rights licensed to the Company pursuant to the License Agreements. If the research project yields results outside of the scope of the technologies covered by the License Agreements, the Company has a six-month right of first negotiation to enter into a new worldwide, exclusive license agreement with Temple University for the intellectual property covered by those results.

Critical Accounting Policies and Estimates

Our discussion and analysis of our condensed consolidated financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on an on-going basis, our estimates and judgments, including those related to the useful life of the assets. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the condensed consolidated results that we report in our financial statements. The SEC considers an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of a company’s financial condition and results of operations and those that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of estimation.. For a more detailed discussion of the accounting policies of the Company, see Note 3 of Notes to the condensed consolidated financial statements.

We believe the following critical accounting policies, among others, require significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain significant estimates were made in connection with preparing our condensed consolidated financial statements as described in Note 1 to Notes to condensed consolidated financial statements. Actual results could differ from those estimates

Revenue Recognition

The Company has adopted Staff Accounting Bulletin 104, “Revenue Recognition” and therefore recognizes revenue based upon meeting four criteria:

	•	Persuasive evidence of an arrangement exists;

	•	Delivery has occurred or services rendered;

	•	The seller’s price to the buyer is fixed or determinable; and

	•	Collectability is reasonably assured.

Long-lived assets

The Company accounts for the impairment and disposition of long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with SFAS No. 144, long-lived assets to be held are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying values of long-lived assets to determine whether or not impairment to such value has occurred. No impairments were recorded for the three months ended March 31, 2008. The Company recorded an impairment of approximately $505,000 during the period from inception (February 18, 1998) through March 31, 2008.

Stock-Based Compensation

On January 1, 2006, the Company adopted Statements of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123R supersedes the Company’s previous accounting under APB 25 for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s financial statements as of and for the year ended December 31, 2007 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Stock-based compensation expense recognized under SFAS 123R for employee and directors for the year ended March 31, 2008 was $21,818.

The Company has elected to adopt the detailed method provided in SFAS 123R for calculating the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.

The Company accounts for stock option and warrant grants issued to non-employees for goods and services using the guidance of SFAS 123 and Emerging Issues Task Force (“EITF”) No. 96-18: “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” whereby the fair value of such option and warrant grants is determined using the Black-Scholes model at the earlier of the date at which the non-employee’s performance is completed or a performance commitment is reached.

Recent Accounting Pronouncements

Adopted Statements

Statement No. 157

Accountants (“AICPA”) pronouncements, it does not, of itself, require any new fair value measurements, nor does it establish valuation standards. SFAS No. 157 applies to all other accounting pronouncements requiring or permitting fair value measurements, except for: SFAS No. 123R, share-based payment and related pronouncements, the practicability exceptions to fair value determinations allowed by various other authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with software revenue recognition. SFAS No. 157 was effective January 1, 2008.

Statement No. 159

The above statements were adopted without effect in the reporting period.

Recently Issued

SFAS No. 141 (R) and SFAS No. 160

FAS No. 161

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-KSB. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) are not adequate to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Management’s Annual Report on Internal Control over Financial Reporting.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitation, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as required in Rule 13a-15(b). In December 2006 our Controller retired and in January 2007 our Chief Financial Officer retired, although our former Controller still provides certain financial consulting services for us. We have hired an Interim Chief Financial Officer and a full-time Controller. We have retained a consulting firm and are conducting an evaluation to design and implement adequate systems of accounting and financial statement disclosure controls. We expect to complete this review during 2008 to comply with the requirements of the SEC. We believe that the ultimate success of our plan to improve our internal control over financial reporting will require a combination of additional financial resources, outside consulting services, legal advice, additional personnel, further reallocation of responsibility among various persons, and substantial additional training of those of our officers, personnel and others, including certain of our directors such as our Chairman of the Board and committee chairs, who are charged with implementing and/or carrying out our plan. It should also be noted that the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Our annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting and management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only Management’s report in this annual report.

Other than as described above, there were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

In April 2005, Jeffrey A. Muller, the Company’s former sole director and executive officer, filed a complaint against us in the Federal District Court for the Central District of California, seeking declaratory and injunctive relief and alleging unfair competition in connection with a claimed prior patent interest in the ZEFS device and stock option rights. In seeking declaratory relief, Mr. Muller is seeking to have the patent rights in the ZEFS device that were previously transferred to us by Mr. Muller’s bankruptcy trustee declared null and void.

This lawsuit brought by Mr. Muller arose out of the same claims that were the subject of litigation in the Federal District Court for the Southern District of New York, in which the Court entered judgment against Mr. Muller. Those claims are pending further proceedings. While we believe that we have valid claims and defenses, there can be no assurance that an adverse result or outcome on the pending motions or a trial of this case would not have a material adverse effect on our financial position or cash flow.

Litigation Involving Scottish Glen Golf Company

We are involved in litigation with Scottish Glen Golf Company, Inc. (SGGC) doing business as KZ Golf, Inc., the Company’s previous landlord on claims in the aggregate amount of $104,413. STWA does not dispute the fact that certain amounts of unpaid past rent are due but does dispute that it owes the aggregate of $104,413 demanded by SGGC; more than half of which are purported “late fees” which was assessed at the rate of $100 per day. It is the company’s position that the late fees are void and unenforceable and that STWA is entitled to a set-off for office space that reverted back to SGGC.

While the Company believes that it has valid claims and defenses, given the inherent uncertainties of litigation, the Company cannot predict the outcome of this matter. Accordingly, there can be no assurance that an adverse result or outcome of this matter would not have a material adverse effect on the Company’s financial position or cash flow. The Company believes that these claims arose from acts of a related party involving a former officer and director and his wife as a beneficial owners of SGGC.

Effective April 30, 2008, the Company and SGGC settled the pending litigation. In the interest of avoiding further litigation costs and expenses, the Company and SGGC executed a “Settlement and Mutual Release Agreement.” (See Item 5 “Other Information.”)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Morale Orchards Transaction

On December 5, 2006, we entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with Morale Orchards, LLC (“Morale”). The Note Purchase Agreement provides that Morale will purchase the Company’s one-year Convertible Promissory Notes in the aggregate face amount of $1,225,000 (the “Morale Notes”), and five-year Warrants (the “Morale Warrants”) to purchase shares of our Common Stock at prices ranging from $0.70 to $0.85 per share. The aggregate purchase price for the Morale Notes and Morale Warrants is $1,000,000. Therefore, while the stated interest on the Morale Notes is 0%, the actual interest rate is 22.5% because the Morale Notes are being purchased at a discount from their face amount.

Pursuant to the terms of the Note Purchase Agreement, Morale purchased one Morale Note in the principal amount of $612,500 on December 5, 2006, for which it paid $500,000 and purchased the other Morale Note in the principal amount of $612,500 on January 10, 2007, for which it paid $500,000. The December 5, 2006 Note is convertible into 720,588 shares of our common stock and 360,294 Warrants to purchase our common stock were issued. The January 10, 2007 Note is convertible into 875,000 shares of our common stock and 437,500 Warrants to purchase our common stock were issued. (See “Details of Recent Financing Transactions”).

On January 31, 2008, a Modification and Satisfaction Agreement was entered into between the Company, Morale Orchards, LLP and Matthews & Partners. (See “Details of Recent Financing Transactions”).

2007 PIPE Offering.

From January 13 through April 27, 2007, the Company conducted an offering (the “2007 PIPE Offering”), through Spencer Clarke, as exclusive placement agent. The Company raised $400,000 gross proceeds and $352,000 net proceeds. Interest on the 2007 PIPE Notes, at a rate of 10% per annum, is payable quarterly. The Notes are due nine months from date of issuance. The Notes are convertible into 571,429 shares of the Company’ Common Stock and investors received warrants entitling the holders to purchase up to 857,144 shares of the Company’s Common Stock.

The terms of the 2007 PIPE Offering were modified on August 29, 2007 and again on December 17, 2007. See (“Details of Recent Financing Transactions”)

2007 Spring Offering.

From June 13, 2007 through June 26, 2007, the Company conducted a private offering (the “2007 Spring Offering”) and issued Convertible Notes in the aggregate face amount of $451,000. These notes were sold for an aggregate purchase price of $410,000. The Notes are convertible into 1,210,489 shares of the Company’s common stock and in addition, investors received warrants entitling the holders to purchase up to 605,242 shares of the Company’s common stock. (See “Details of Recent Financial Transactions”)

2007 Summer Offering.

From August 8, 2007 through September 27, 2007, the Company conducted a private offering (the "2007 Summer Offering") and issued Convertible Notes in the aggregate face amount $309,980. These Notes were sold for an aggregate purchase price of $281,800. The Notes are convertible into 837,784 shares of Company’s common stock and in addition, investors received warrants entitling the holders to purchase up to 418,892 shares of the Company’s common stock. (See “Details of Recent Financial Transactions”).

2007 Fall Offering.

From November 14, 2007 through December 17, 2007 the Company conducted a private offering (the “2007 Fall Offering”) and issued Convertible Notes in the aggregate face amount of $622,600. These Notes were sold for an aggregate purchase price of $566,000. The Notes are convertible into 1,596,410 shares of the Company’s common stock and in addition, investors received warrants entitling the holders to purchase up to 798,205 shares of the Company’s common stock. (See “Details of Recent Financing Transactions”).

2007 Winter Offering

From December 27, 2008 through February 29, 2008, the Company conducted a private offering (the “2008 Winter Offering”) and issued Convertible Notes in the aggregate face amount of $521,400. These Notes were sold for an aggregate purchase price of $474,000 net proceeds. The Notes are convertible into 1,042,800 shares of the Company’s common stock and in addition, investors received warrants entitling the holders to purchase up to 521,400 shares of the Company’s common stock. (See “Details of Recent Financing Transactions”).

The sales of the securities described above were made in reliance on the exemptions from registration set forth in Section 4(2) of the Securities Act of 1933, as amended (the “Act”), or Regulations D or S promulgated thereunder.

Other Issuances.

In September 2006, the Company entered into what is sometimes termed an equity arrangement with an investment banking firm. Under the arrangement the Company may sell (put) shares of common stock from time to time over a 36-month period, at a purchase price calculated at 97% of the lowest best closing bid for the Company’s common stock for the five trading days following the put notice for cash. The Company may draw up to $10,000,000. Because the price of the common stock fluctuates, the number of shares of common stock that the Company may issue when the Company exercises the put rights will vary, the Company does not know how many shares will actually be issued under the put. On October 6, 2006, the Company filed a Registration Statement which was effective October 30, 2006 which registered and made available 7,000,000 shares of common stock for possible future draws under the line of credit.

In August 2007, the Company issued 2,597,524 shares in connection with the exercise of options that were originally granted to the late Edward L. Masry.

During the year ended December 31, 2007, the Company issued 1,910,711 shares of common stock in exchange for conversion of $526,480 of Convertible Notes

During the three months ended March 31, 2008, the Company issued 5,450,848 shares of common stock in exchange for conversion of $1,362,712 of Morale Orchards, LLC Convertible Notes in accordance with the Morale Orchards-Matthews Modification Agreement. The Company incurred and recorded non-cash interest expense in the amount of $681,982.

During the three months ended March 31, 2008, the Company issued 1,891,048 shares of common stock in exchange for settlement of debt, loans and services in the amount of $472,762 in accordance with the Morale Orchards-Matthews Modification Agreement. The Company incurred and recorded non-cash legal expense in the amount of $236,572.

During the three months ended March 31, 2008, the Company issued 80,000 shares of common stock in exchange for settlement of debt in the amount of $20,000 in accordance with the Morale Orchards-Matthews Modification Agreement. The Company incurred and recorded non-cash interest expense in the amount of $9,683.

During the three months ended March 31, 2008, the Company issued 840,970 shares of common stock in exchange for conversion of $325,600 of other Convertible Notes.

During the three months ended March 31, 2008, the Company issued 17,838 shares of common stock in exchange for consulting services in the amount of $6,900.

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

On February 21, 2008, Joseph Helleis resigned as a Director of the Company. Cecil B. Kyte was appointed Chairman of the Audit Committee and Nathan Shelton was appointed to serve on the Audit Committee to replace Mr. Helleis.

In April 2008, the Company received $161,495 for exercise of warrants to purchase 322,990 shares of common stock.

In April 2008, the Company received notice of conversion of $77,000 convertible notes into 176,769 shares of common stock.

a. Company shall pay to SGGC the sum of $51,000 in two installments, without interest, as follows;

(1) $34,000 due on or before June 2, 2008 and

(2) $17,000 due on or before July 17, 2008

The above payments shall be payable to SCOTTICH GLEN GOLF COMPANY, INC. dba KZG and wired transferred to the latter.

The Settlement and Mutual Release Agreement also provides for mutual general releases.

Item 6. Exhibits

Exhibit No.		Description

	31.1	Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e)

	31.2	Certification of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C. Section 1350

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

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.

	SAVE THE WORLD AIR, INC.

Date: May 13, 2008	By:	/s/ EUGENE E. EICHLER
		Eugene E. Eichler
		Interim Chief Financial Officer

EXHIBIT INDEX

Exhibit No.		Description


	31.1	Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e)

	31.2	Certification of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C. Section 1350

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

	†	Management contract or compensatory plan or arrangement.

Form: 10QSB

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