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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-KSB

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

For the fiscal year ended December 31, 2004.

or

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

For the transition period from            to

Commission File Number 0-29185

Save the World Air, Inc.

(Exact name of registrant as specified in its charter)
     
Nevada   52-2088326
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

5125 Lankershim Boulevard
North Hollywood, California 91601

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

(818) 487-8000
(Registrant’s telephone number, including area code)

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

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

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

     Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

     Registrant’s revenues for its most recent fiscal year: None.

     The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant was approximately $ 33,155,221 as of March 31, 2005, based upon the average of the high and low prices on the Pink Sheets reported for such date. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.

     The number of shares of the Registrant’s Common Stock outstanding as of March 31, 2005 was 38,450,321 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its 2004 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Form 10-KSB.

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

 
 

 


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SAVE THE WORLD AIR, INC.
FORM 10-KSB

INDEX

             
        Page
  PART I        
  Business     1  
  Properties     11  
  Legal Proceedings     12  
  Submission of Matters to a Vote of Security Holders     13  
  PART II        
  Market for Common Equity and Related Stockholder Matters     14  
  Management’s Discussion and Analysis or Plan of Operation     15  
  Financial Statements     19  
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     48  
  Controls and Procedures     48  
  Other Information     48  
  PART III        
  Directors and Executive Officers of Registrant     49  
  Executive Compensation     49  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     49  
  Certain Relationships and Related Transactions     49  
  Exhibits     49  
  Principal Accountant Fees and Services     51  
SIGNATURES     52  
  Exhibit 10.2
  Exhibit 10.14
  Exhibit 10.16
  Exhibit 10.18
  Exhibit 10.19
  Exhibit 10.20
  Exhibit 10.21
  Exhibit 10.22
  Exhibit 10.23
  Exhibit 10.24
  Exhibit 10.25
  Exhibit 10.27
  Exhibit 10.28
  Exhibit 10.29
  Exhibit 10.30
  Exhibit 10.31
  Exhibit 10.32
  Exhibit 10.33
  Exhibit 10.34
  Exhibit 10.35
  Exhibit 14.1
  Exhibit 14.2
  Exhibit 23.1
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1

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PART I

Forward-Looking Statements

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

  •   revenues and profits;
 
  •   customers;
 
  •   research and development expenses and efforts;
 
  •   scientific test results;
 
  •   sales and marketing expenses and efforts;
 
  •   liquidity and sufficiency of existing cash;
 
  •   technology and products;
 
  •   the outcome of pending or threatened litigation; and
 
  •   the effect of recent accounting pronouncements on our financial condition and results of operations.

          You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “expects,” “anticipates,” “believes,” “estimates,”, “continues,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

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

Item 1. Business

General

           Overview

          We are a development stage company that has not yet generated revenues. The company’s focus is on research and development of proprietary devices that are designed to reduce harmful emissions, and improve fuel efficiency and engine performance on equipment and vehicles driven by internal combustion engines. Our prototype devices are called “ZEFS” (Zero Emission Fuel-Savings Device) and “CAT-MATE.” We have devoted the bulk of our efforts to the completion of the design, the development of our production models and the promotion of our products in the market place worldwide. Expenses have been funded through the sale of company stock. We have taken actions to secure our intellectual property rights to the ZEFS and CAT-MATE devices. In addition, we have initiated marketing efforts to international governmental entities in cooperation with the United Nations Environmental Programme (UNEP) and various original equipment manufacturers (OEMs), to eventually sell or license our ZEFS and CAT-MATE products and technology.

          We anticipate that these efforts will continue during 2005 and that we will begin selling our devices by late 2005. We do not envision generating significant revenue in 2005. We will need to raise additional capital during 2005 to fund our research and development efforts and other expenses.

          Our company was incorporated on February 18, 1998, as a Nevada corporation under the name Mandalay Capital Corporation. We changed our name to Save the World Air, Inc. on February 11, 1999 following the acquisition of marketing and manufacturing rights of the ZEFS device. We acquired the worldwide manufacturing and marketing rights to the ZEFS device from its inventors. During the past three years, we have been acquiring new technologies, developing products using our technologies and conducting scientific tests regarding our technologies and prototype products. In late 2003, the Company acquired worldwide intellectual property and patent rights to technologies which reduce carbon monoxide, hydrocarbon and nitrous oxide emissions in two- and four-stroke motorcycles, fuel-injection engines, generators and small engines. The Company has developed prototype products and named them “CAT-MATE.”

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          Our mailing address and executive offices are located at 5125 Lankershim Boulevard, North Hollywood, California, 91601. Our telephone number is (818) 487-8000. Our corporate website is www.savetheworldair.com. Information contained on the website is not deemed part of this Annual Report.

Background

          Our principal business focus currently rests with development and planned distribution of devices designed to solve the complex problems caused by pollution from automobile and other equipment driven by internal combustion engines and to improve the performance of those engines. We have designed and tested multiple versions of the ZEFS and CAT-MATE devices for use on carbureted and fuel injection gasoline engines and are currently in the process of adapting this technology to work on engines that use diesel fuels.

          The incomplete and inefficient burning of fossil fuel in an automobile engine and other equipment driven by internal combustion engines results in unburned gases, such as hydrocarbons and carbon monoxide being expelled as harmful emission as a by-product from the engine’s exhaust. These emissions from automobile engines have contributed to significant air pollution and depletion of the ozone layer that protects the world’s atmosphere from harmful ultraviolet radiation. As a result, the world has experienced significant deterioration to its air quality since the beginning of the 20th century and, because of the added use of internal combustion engines, the problem has gotten progressively worse with each passing year. Forecasts published by the World Resources Institute indicate that this trend will continue to accelerate. By the year 2010, the number of automobiles in operation worldwide are expected to exceed 800 million.

           ZEFS devices work to enhance the atomization of the fuel by affecting the viscosity of that fuel. The effect is achieved by the use of specific and complex magnetic flux orientations that have the ability to influence fuel at the molecular level.

          These devices alter the fuel atomization process by changing the size of the molecular structure of the fuel. The devices create a more efficient burn rate, thus lowering the production of carbon monoxide, hydrocarbons and nitrous oxide. ZEFS devices are easily fitted to the base plates of carburetors and fuel injection systems; the devices are compact, there are no moving parts.

           CAT-MATE devices function together with a catalytic converter and are configured in the exhaust system. The Cat-Mate is fundamentally a device that greatly enhances the efficiency of catalytic converters in particular applications where use of other emission control devices is not feasible.

          Specifically, CAT-MATE is designed for use on two- and four-stroke motorcycles, off-road and marine vehicles, generators, lawn mowers, on stationary implements and on “carbureted” and fuel injection motor vehicles.

          Testing by the Company’s R&D as well as by independent sources has demonstrated the use of ZEFS and CAT-MATE products generate significant reductions in hydrocarbon, nitrous oxide and carbon monoxide emissions and, in most cases, improves gas consumption and mileage performance.

Our Business Strategy

      Governmental Mandates to Reduce Air Pollution

          Governments internationally recognize the serious effects caused by air pollution and have enacted legislation to mandate that automobile manufacturers be required to reduce exhaust emissions caused by their products. The approach used by auto makers to address this mandate has thus far generally taken the form of installing catalytic converters, which work on the principle of super heating gases within the exhaust manifold after the damaging gases have been created through internal combustion. We anticipate that further government mandates may pressure automobile manufacturers to adopt better solutions to reducing emissions.

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      Technology Transfer

          We are actively continuing our research on the ZEFS and CAT-MATE devices for use on gasoline-powered engines and have taken steps to finalize the development of versions of the device to fit on carbureted, center point, and multi-port fuel injection systems. We have used these prototype devices as demonstration units, during presentations, before manufacturers. It is our long-term objective to facilitate the adoption of this technology by engine, carburetor, muffler and exhaust manufacturers.

          We adopted this strategy of technology transfer because automobile and engine manufacturers will require time to fully inspect, test and integrate the ZEFS and CAT-MATE devices into their new designs, as well as to adapt them to their legacy vehicles. Since the ZEFS technology is presently protected by international patent, and we have patent applications on file for the CAT-MATE technology, we view technology transfer strategy as the most viable option to gain widespread adoption of the technology by manufacturers, without compromising our ownership of the technology. We intend to assist these manufacturers with the full integration of our technology, by not only supporting the required engineering and system integration efforts, but also by reducing costs associated with such process so that they may not pose an unnecessary time constraint to the endeavor.

          We have successfully developed multiple ZEFS and CAT-MATE devices for use on one-, two- and four-barrel carbureted engines and created production CAD drawings for these devices and produced multiple samples using cast aluminum housings. We have also created several prototype devices for use on fuel injection engines. Extensive R&D testing of our carbureted and fuel injection ZEFS and CAT-MATE devices has been positive.

          Because of the complexity and enormity of the task of designing variants of ZEFS and CAT-MATE devices to fit every make and model, we intend to rely on the cooperation of manufacturers to support this function, including engineering, marketing, and installation of the devices. Additionally, we are cognizant that in order to preserve the integrity of the warranties provided by manufacturers, they must be involved in the process of designing and installing the ZEFS and CAT-MATE devices on legacy vehicles. We envision that a cooperative venture between manufacturers and us will result in the most optimal mechanism for the installation of ZEFS and CAT-MATE devices on the greatest percentage of vehicles possible, through agreements between the company, manufacturers and their dealerships.

          We are also engaged in the development of ZEFS and CAT-MATE devices for use on diesel engines, such as those used on trucks, buses, heavy equipment and generators. Because these types of vehicles use engines provided from Cummins, Caterpillar, or Detroit Diesel almost exclusively, the number of ZEFS and CAT-MATE variants needed to service these fleets is considerably less than the number required to satisfy the automobile market. This fact alone makes entry into the diesel engine market extremely attractive for our business, offering a large number of potential customers with a minimum of expense for research and development of product variants.

           Research and Development

          We have a research and development facility in Queensland, Australia. We have expanded research and development to include applications of the ZEFS and CAT-MATE technology to diesel engines, motorbikes, boats, generators, lawnmowers and other small engines. We have purchased test vehicles, test engines and testing equipment. We have completed testing on ZEFS and CAT-MATE devices for multiple automobiles, trucks, motorcycles, off-road vehicles and stationary engines, the results of which have been provided to RAND Corporation (RAND) for evaluation. During 2004, RAND expanded its role with us and now oversees our research and development facility in Australia. We also use third party research and development facilities in Los Angeles and San Jose, California for the development of our ZEFS and CAT-MATE devices. We spent approximately $629,000 in fiscal year 2003 and $1,873,000 in fiscal 2004 on research and development. Please see Item 6, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Results of Operations” and Note 8 to Notes to Financial Statements for a more complete understanding of our research and development expense in 2004.

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           Independent Laboratory and Scientific Testing

          We have performed independent laboratory testing of the ZEFS and CAT-MATE devices in order to gain better market acceptance by manufacturers and governmental regulatory officials. Research and testing using government standard test equipment in the United States has demonstrated that the ZEFS and CAT-MATE devices may lead to reduced engine emissions, such as carbon monoxide, mitrous oxide and hydrocarbons, and improve gas consumption and mileage performance.

          In December 2002, we retained RAND to study the validity and market potential of our technology. RAND determined then that sufficient theoretical basis exists to warrant entry into a comprehensive product-testing program. As a result, in May 2003, we entered into an arrangement in which RAND would coordinate and supervise both a theoretical scientific study of the concepts underlying the ZEFS device as well as an empirical study.

           In tests conducted at the Northern California Diagnostics Laboratory in Napa, California, the ZEFS device reduced carbon monoxide, hydrocarbons, and nitrous oxide fume levels and increased gas mileage for the test vehicle. In tests conducted at Automotive Testing and Development Services, Inc. in Ontario, California, the ZEFS and CAT-MATE devices reduced carbon monoxide, hydrocarbons, and nitrous oxide fume levels and increased mileage performance for the test vehicles.

          Motorcycle and Generator tests of our CAT-MATE conducted by Hong Kong Exhaust Emissions Laboratory (HKEEL) showed that CAT-MATE devices reduce emissions of carbon monoxide, nitrous oxide and hydrocarbons. The test results were certified by United Kingdom’s Vehicle Certification Agency (VCA) on January 20, 2005.

Marketing

          In October 2004, we commenced marketing efforts for our emission control and performance-enhancing ZEFS and CAT-MATE technologies. We are focused on selling or licensing our technologies and devices domestically and internationally to automobile, carburetor, fuel-injection, diesel, exhaust and muffler original equipment manufacturers (OEMs) and the after-market. We have presented our ZEFS and CAT-MATE technologies to OEMs in the United States and Asia. We intend to pursue this market sector and create strategic alliances and partnerships during 2005.

          Harmful exhaust emissions from automobiles and motorcycles in developing countries is at the highest levels because of the continued widespread use of older model automobiles and motorcycles with either no or malfunctioning catalytic converters.

          We work with governments worldwide at all levels, together with industry, to capitalize on our technology to achieve what we know to be common global environmental objectives. In November 2004, management met with UNEP in New York to enlist its aid with this objective. By UNEP invitation, we participated in a UNEP-sponsored meeting in Bali , Indonesia in December 2004, which resulted in the initiation of informal negotiations with United Nations and government officials to explore the possibility of pilot programs using our technology in Indonesia, Kenya , Mexico, Thailand, Brazil and Sri Lanka.

          We have also since participated in a United Nations sponsored Summit in Lake Toba, North Sumatra, Indonesia in March 2005. This resulted in an announcement by the Lake Toba Summit Chair, Nico Barito, endorsed by HRH Sri Sultan Hamengkubowono X of Yogyakarta and the Governor of North Sumatra, Razil Nurdin, of two pilot programs intended to minimize carbon monoxide emissions, hydrocarbons and nitrous oxide, by installing our devices on 10,000 student motorcycles at universities in Yogyakarta and Medan in Indonesia.

Competition

          The automotive and motor engine industry is highly competitive. We have many competitors in the United States and throughout the world developing technologies to make engines more environmentally friendly and fuel efficient. Many of our competitors have greater financial, research, marketing and staff resources than we do. For instance, automobile manufacturers have already developed catalytic converters on automobiles, in order to reduce emissions. While we believe that our technology has greater benefits, it may be unable to gain market acceptance. Further, research and development throughout the world is constantly uncovering new technologies. Although we are

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unaware of any, there can be no assurance that no existing or future technology is currently or will be superior to the ZEFS and CAT-MATE devices.

Government Regulation

          Our research and development activities are not subject to any governmental regulations that would have a significant impact on our business to date and we believe that we are in compliance with all applicable regulations that apply to our business as it is presently conducted. Depending upon whether we manufacture or license our devices in the future and in which countries such devices are manufactured or sold, we may be subject to regulations, including environmental regulations at such time.

Intellectual Property

          In December 1998, the Company acquired all of the marketing and manufacturing rights to the ZEFS technology from the purported inventor of the technology in exchange for 5,000,000 shares of our common stock, $500,000 and $10 royalty for each unit sold. In November 2002, under our settlement with the bankruptcy trustee for the estate of the inventor and his wife, the trustee transferred all ownership and legal rights to the international patent application for the ZEFS device to us. In exchange for these rights, we gave the bankruptcy trustee an option to purchase 500,000 shares of our common stock at $1.00 share and $0.20 royalty on each device we sell. See “Part I, Item 3. Legal Proceedings” and Note 1 to Notes to Financial Statements” below.

          In May 2002, we settled a dispute with Kevin “Pro” Hart, who claimed proprietary rights to the ZEFS technology. He assigned to us all his rights to the ZEFS technology in exchange for an option to purchase 500,000 shares of our common stock at $1.00 share and a $0.20 royalty on each device we sell. Mr. Hart currently serves as a member of our Advisory Board. See “Advisory Board” below.

          The CAT-MATE technology was created by Adrian Menzell, a member of our research team in Australia. On August 20, 2003, Mr. Menzell filed preliminary Australian patent application #2004900192 for the CAT-FLAP. This technology was enhanced and on June 4, 2004, Mr. Menzell filed preliminary Australian patent application #2004903000 for the CAT-MATE. On September 1, 2003, we had entered into an Assignment Agreement with Mr. Menzell, pursuant to which this technology was assigned to us in exchange for 20,000 shares of our common stock and a royalty of $.25 for each CAT-MATE device sold. On June 26, 2004, we received a deed of assignment from Mr. Menzell and each pending patent application was transferred to our name.

           ZEFS Patent Applications

          We obtained the patent application for the ZEFS MK1 device [PCT/AU1/00585] originally filed in Australia on May 19, 2000. The International Filing Application for our ZEFS MK1 technology was filed on May 21, 2001 (Official No. 10/275946) [PCT/AU1/00585] and modified as ZEFS MK2 on July 9, 2003. On November 4, 2003 we filed for our ZEFS MK3 (#2003906094). The United States Patent and Trademark Office issued a Notice of Allowance of Patent dated January 24, 2005. The duration of the patent is 20 years from the date the original application was filed. Prior to the issuance of such patent, we relied solely on trade secrets, proprietary know-how and technological innovation to develop our technology and the designs and specifications for the ZEFS technology. Overall, we have applied for a patent on an international basis in approximately 64 countries worldwide.

           ZEFS MK1—Device For Saving Fuel and Reducing Emissions . Thi s fuel saving device has a disk like nonmagnetic body provided with a central opening and a number of permanent magnets having opposed polarities positioned about the central opening to provide multidirectional magnetic fields. The device is positioned in a fuel air mixture to reduce emissions.

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          The following table summarizes the status of the ZEFS MK1 patent application in the following countries:

                 
Country   Number   Filing Date   Status
Australia
  2001 258057     May 21, 2001   Under examination Deadline 14 June 2005
Bosnia & Heregovina
  BAP 021290A   May 21, 2001   Short Term Patent Grant Requested
Brazil
  0.111.365-8     May 21, 2001   Examination requested 5 September 2003
Bulgaria
  107391     May 21, 2003   Awaiting examination
Canada
  2409195     May 21, 2001   Examination to be requested by 21 May 2006
China
  01809802.9     May 21, 2001   Under examination Deadline 27 Feb 2005
Columbia
  02.115.018     May 21, 2001   Examination requested 23 July 2004
Croatia
  P20020982A     May 21, 2001   Awaiting examination
Czech Republic
  PV 2002-4092   May 21, 2001   Examination requested 23 July 2004
Eurasian(1)
  200201237     May 21, 2001   Under examination
Europe(2)
  019331222.2     May 21, 2001   Awaiting examination
Georgia (3)
  4098/01-2002     May 21, 2001   Under examination
Hong Kong
  04100327.0     May 21, 2001   Automatic grant upon grant by China
Hungary
  P 03 01796     May 21, 2001   Awaiting examination
India (3)
  IN/PCT/2002/01523   May 21, 2001   Awaiting examination
Indonesia
  WO0200202844   May 21, 2001   Examination requested November 2003
Israel
  152902     May 21, 2001   Under examination
Japan
  586731/2001     May 21, 2001   Must request Examination by May 21, 2008
Mexico
  PA/A/2002/11365   May 21, 2001   Awaiting examination
Morocco
  PV/26.964   May 21, 2001   Granted
New Zealand
  523113     May 21, 2001   Granted
Norway
  20025531     May 21, 2003   Awaiting examination
Poland
  P 358837     May 21, 2001   Awaiting examination
Serbia/Montenegro
  P-870/02     May 21, 2001   Examination requested December 2002
Sri Lanka (3)
  12918     May 21, 2001   Awaiting examination
Singapore
  200206064.7     May 21, 2001   Grant fees paid-awaiting grant
South Africa
  2002/10013     May 21, 2001   Granted
South Korea
  2002 7015531     May 21, 2001   Must request Examination by May 21, 2006
Trinidad & Tobago
  TT/A2002/00213   May 21, 2001   Under examination
Ukraine (3)
  20021210144     May 21, 2001   Examination requested October 2003
United States (3)
  10/275946     May 21, 2001   Notice of Allowance issued January 24, 2005
Vietnam
  1-2002-01168     May 21, 2001   Under examination


(1)   Eurasian patent application covers the countries of Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, the Russian Federation, Tajikistan, Ukraine and Turkmenistan.
 
(2)   Europe patent application covers the countries of Austria, Belgium, Switzerland, Lichtenstein, Cyprus, Germany, Denmark, Spain, Finland, France, Great Britain, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Sweden, Turkey, Lithuania, Latvia, Slovenia, Romania and Macedonia.
 
(3)   In the process of being assigned to the Company.

           ZEFS MK2—Device for Saving Fuel and Reducing Emissions . This fuel saving device similar to that of the MK1 except that a central magnet can be provided in the opening and the peripheral magnets extend only partially through the depth of the body and stop short of the top wall to provide the option of moving the magnetic field further away from the base of the carburetor to increase the area of magnetic influence between the point of fuel atomization and the point of cessation of magnetic influence.

          The priority date is July 19, 2003 from Australian patent application 2003903626.

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          The following table summarizes the status of the ZEFS MK2 patent application in the following countries:

                 
Country   Number   Filing Date   Status
Taiwan
  92134811     July 19, 2003   Under examination
 
International
  PCT/AU2004/000950   July 15, 2004   Clear International Search Report Issued. Request for International Preliminary Examination due Feb 15, 2005

          One hundred twenty five countries are covered by the PCT. National Patent Applications are due by January 15, 2006.

           ZEFS MK3—Emission Control Devices. This emission control device is particularly suited for fuel injection systems which has an elongate body formed with one or more channels and a number of permanent magnets is positioned in the channels. The device sits on a fuel rail.

          The priority date is November 4, 2003 from Australia patent application 2003906094.

          The following table summarizes the status of the ZEFS MK3 patent application in the following countries:

                 
Country   Number   Filing Date   Status
Thailand
  095155     November 3, 2004   Awaiting Examination
 
International
  PCT/AU2004/001518   November 4, 2004   Awaiting International Search Report

          Approximately 125 countries are covered by the PCT. National Patent Applications are due by May 4, 2006

           CAT-MATE Patent Applications

           CAT-FLAP (Afterburner) –Improvements in or Relating to Emission Control Systems . A catalytic converter is provided in an engine exhaust flow to reduce emissions. A valve is provided downstream from the catalytic converter. The valve is in a closed position when the exhaust flow volume is low to keep the hot exhaust gas around the catalytic converter to keep the catalytic converter within its operational temperatures. When the exhaust flow volume is high (e.g. the engine is revving) the catalyst is kept at its operational temperature by normal gas flow and valve is opened to not impede exhaust flow. A simple hinge flap is one method by which this can be achieved.

          The priority date is January 6, 2004 from Australian patent application 2004900192.

          Approximately 125 countries are covered by the PCT. National Patent Applications are due by July 8, 2006.

           CAT-MATE—Inline Exhaust Device to Improve Efficiency of a Catalytic Converter . A set of rings is placed downstream from the catalytic converter to re-radiate heat to the catalytic converter to keep the converter working at a warmer temperature and therefore greater efficiency.

          The priority date is June 4, 2004 from Australian patent application 2004903000.

          This invention was incorporated into the specifications filed pursuant to the CAT-FLAP invention.

          We have entered into agreements with certain employees and consultants, which limit access to, and disclosure or use of, our technology. There can be no assurance, however, that the steps we have taken to deter misappropriation of our intellectual property or third party development of our technology and/or processes will be adequate, that others will not independently develop similar technologies and/or processes or that secrecy will not be breached. In addition, although management believes that our technology has been independently developed and does not infringe on the proprietary rights of others, there can be no assurance that our technology does not and will not so infringe or that third parties will not assert infringement claims against us in the future. Management believes that the steps they have taken to date will provide some degree of protection, however, no assurance can be given that this will be the case.

Employees

          As of December 31, 2004, we had four full-time employees, including two members of senior management, and five part-time employees. As of such date, we also utilized the services of three full-time consultants in our R&D facility in Australia and three additional part-time consultants to assist us with various matters, including marketing. In order to maintain salaries at a minimum without

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compromise to the company’s functional capacity, we adopted the practice of engaging consultants for services needed not on a “full-time” basis. We intend to hire additional personnel to provide services when they are needed on a full-time basis. We recognize that our efficiency largely depends, in part, on our ability to hire and retain additional qualified personnel as and when needed and we have adopted procedures to assure our ability to do so.

Executive Officers

          The following table sets forth certain information regarding our executive officers as of December 31, 2004:

             
Name   Age   Position
Edward L. Masry, Esq.
    72     Chairman of the Board and Chief Executive Officer
Eugene E. Eichler, CPA
    78     President, Chief Financial Officer and Treasurer
Bruce H. McKinnon
    63     Chief Operating Officer and Executive Vice President of Business Development
Nathan Shelton
    55     Vice President of Marketing and Distribution
Erin Brockovich
    44     Vice President of Environmental Affairs
Janice Holder
    59     Corporate Secretary

           Edward L. Masry, Esq. has served as our Chairman of the Board and Chief Executive Officer since October 2001 and served as our President from October 2001 until March 2004. Mr. Masry has been a member of the law firm of Masry & Vititoe since 1986 and was Mayor of Thousand Oaks City and currently a member of the City Council. From 1960 to 1986, he was a partner of various law firms. Mr. Masry was corporate director of Merlin Olsen Porsche Audi from 1970 to 1988 and corporate director of Gabriel Olsen Volkswagen from 1969 to 1973. Mr. Masry received a J.D. from Loyola Law School, Los Angeles.

           Eugene E. Eichler, CPA , has served as our President since March 2004, our Chief Operating Officer and Chief Financial Officer and Treasurer since October 2001 and as a director since May 2002. Mr. Eichler was the Chief Financial Officer and Firm Administrator of the law firm Masry & Vititoe from 1982 to October 2001. From 1974 to 1982, Mr. Eichler provided financial consulting services to Foundation for HMO’s, Acne Care Medical Clinics and Earth Foods, Inc. From 1960 to 1974, Mr. Eichler headed financial consulting services for Milburn Industries and Brown, Eichler & Company. From 1953 to 1960, he held the position of Chief Budgets and Forecasts at North American Aviation. From 1951 to 1953, Mr. Eichler held various audit positions at the Atomic Energy Commission. Mr. Eichler received a B.A. from University of Montana.

           Bruce H. McKinnon has served as a director since May 2002, our Executive Vice-President of Business Development since December 2003 and our Chief Operating Officer since March 2004. Mr. McKinnon served as Chief Executive Officer and President of KZ Golf, Inc., an international golf equipment company, from 1994 to 2004. From 1990 to 1994, he was President and Chief Executive Officer of TTL Corporation and Novaterra, Inc., environmental remediation and technology corporations. Prior to 1990, Mr. McKinnon was an owner, Chairman and Chief Executive Officer of several international trading and manufacturing corporations.

           Nathan Shelton has served as our Vice President of Marketing and Distribution since 2003. From 2002 until present, he operates his own consulting firm. He was the Chief Executive Officer and Chief Marketing Officer at K&N Engineering from 1984 to 2002 and was also Chairman of the Specialty Equipment Market Association, a trade association of automotive after market manufacturers and distributors.

           Erin Brockovich served on our Board of Advisors from 2002 until August 2004, when she was appointed Vice President, Environmental Affairs. Since 1992, Ms. Brockovich has also served as Director of Environmental Research with the law firm of Masry and Vititoe and her exploits were the basis of the movie, “Erin Brockovich”. Ms. Brockovich is an environmental activist and a research expert with respect to complex environmental matters and has received multiple awards and honors for her work with the environment. She has written a book with Marc Eliot entitled, “Take It From Me, Life’s a Struggle But You Can Win” and lectures around the world on environmental matters.

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           Janice Holder has served as our Corporate Secretary since October 2001. From 1964 through 1984, Ms. Holder managed various medical facilities in Orange County. Since 1984, she has been the Office Manager for the Law Offices of Masry & Vititoe.

          On September 1, 2004, the Company entered into an employment agreement with Erin Brockovich, pursuant to which she serves as our Vice President of Environmental Affairs. The initial term of the agreement expires on September 30, 2005 and renews automatically for additional one-year terms unless either party has given notice of non-extension prior to the end of a term. The agreement provides for a base compensation of $60,000, which amount is reviewable by the Board of Directors in subsequent years of the term. Ms. Brockovich is eligible to participate in the Company’s incentive and benefit plans, including eligibility to receive grants of stock options under the 2004 Plan.

          If Ms. Brockovich’s employment is terminated by us without cause or as a result of her disability or death, she, or her estate as the case may be, will be entitled to receive an amount equal to the base compensation paid to her for the remainder of the term, except that in the case of a change of control of the Company, the payment shall be the base compensation in effect immediately prior to the date of termination, for a period of one year beginning on the date of termination. If Ms. Brockovich’s employment is terminated by us for cause or by her for any reason, she will be entitled to receive all accrued and unpaid base salary and vacation compensation earned through the date of termination. The agreement also contains standard confidentiality and non-solicitation provisions.

Advisory Board

          Our Advisory Board provides specific expertise in areas of research and development relevant to our business and meets with our management personnel from time to time to discuss our present and long-term research and development activities. Advisory Board members include:

           Sir Jack Brabham , Triple Formula One World Champion and Twice Formula One World Constructors Champion, is an expert in the areas of racing car design.

           Kevin “Pro” Hart , is a famous Australian artist and inventor of the “ZEFS” device.

           Jack Reader, Ph.D ., Director, BIFS Technologies Corporation. Mr. Reader is a systems engineer and an expert in business management and energy conservation.

           Bobby Unser, Jr ., Founder, Unser Driving, Inc. Mr. Unser is an expert in motor racing and stunt driving.

Risk Factors

      We expect to incur future losses and may not be able to achieve profitability.

          We have not yet generated any revenue from operations and, accordingly, we have incurred net losses every year since our inception in 1998. Although we expect to generate revenue eventually from sales of our ZEFS and CAT-MATE devices, we anticipate net losses and negative cash flow to continue for the foreseeable future until such time as our products are brought to market. As planned, we have significantly expanded our research and development efforts during the past year. Consequently, we will need to generate significant additional revenue to fund our operations. This has put a proportionate corresponding demand on capital. Our ability to achieve profitability is entirely dependent upon our research and development efforts to deliver a viable product and the company’s ability to successfully bring it to market. Although our management is optimistic that we will succeed with marketing the ZEFS and CAT-MATE devices we cannot be certain as to timing or whether we will generate sufficient revenue to be able to operate profitably. If we cannot achieve or sustain profitability, we may not be able to fund our expected cash needs or continue our operations.

      We will need additional capital to meet our operating needs, and we cannot be sure that additional financing will be available.

          As of December 31, 2004 and thereafter, our expenses ran, and are expected to continue to run, at a “burn rate” of approximately $200,000 per month. Our capital resources, as of April 2005, will be sufficient to fund operations only through the second quarter of 2005, and we will require additional capital in order to operate beyond this date. In order to fund our capital needs for the foreseeable future, we began a private offering in July 2004 for the sale of our common stock for a maximum of $10,000,000. This offering is ongoing as of the date of the filing of this Annual Report. Management cannot predict with certainty that the offering will be sufficiently successful to provide adequate funds to complete the research and development process or to profitably bring our devices to market. Moreover, additional capital may not be available on favorable terms to us, or at all. If we cannot obtain needed capital, our research and development, and marketing plans, business and financial condition and our ability to reduce losses and generate profits are likely to be materially and adversely affected.

As a company in the development stage and with an unproven business strategy, our limited history of operations makes evaluation of our business and prospects difficult.

          Our business prospects are difficult to predict because of our limited operating history, early stage of development and unproven business strategy. Since our incorporation in 1998, we have been and continue to be involved in development of products using our technology, establishing manufacturing and marketing of these products to consumers and industry partners.

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Although we believe our technology and products in development have significant profit potential, we may not attain profitable operations and our management may not succeed in realizing our business objectives.

      If we are not able to devote adequate resources to product development and commercialization, we may not be able to develop our products.

          Our business strategy is to develop, manufacture and market ZEFS and CAT-MATE products using our technology. We believe that our revenue growth and profitability, if any, will substantially depend upon our ability to:

  •   raise additional needed capital for research and development;
 
  •   complete development of our products in development; and
 
  •   successfully introduce and commercialize our new products.

          Certain of our products are still under various stages of development. Because we have limited resources to devote to product development and commercialization, any delay in the development of one product or reallocation of resources to product development efforts that prove unsuccessful may delay or jeopardize the development of other product candidates. Although our management believes that it can finance our product development through private placements and other capital sources, if we do not develop new products and bring them to market, our ability to generate revenues will be adversely affected.

      The commercial viability of the ZEFS and CAT-MATE devices are unproven and we may not be able to attract customers.

          To the best of our knowledge, no consumer or automobile manufacturer has used the ZEFS or CAT-MATE devices to reduce motor vehicle emissions to date. Accordingly, the commercial viability of our devices are not known at this time. If commercial opportunities are not realized from the use of the ZEFS and CAT-MATE devices, our ability to generate revenue would be adversely affected.

      If our products and services do not gain market acceptance, it is unlikely that we will become profitable.

          The market for products that reduce harmful motor vehicle emissions is evolving and we have many successful competitors. Automobile manufacturers have historically used various technologies, including catalytic converters, to reduce exhaust emissions caused by their products. At this time, our technology is unproven, and the use of our technology by others is limited. The commercial success of our products will depend upon the adoption of our technology by auto manufacturers and consumers as an approach to reduce motor vehicle emissions. Market acceptance will depend on many factors, including:

  •   the willingness and ability of consumers and industry partners to adopt new technologies;
 
  •   the willingness of governments to mandate reduction of motor vehicle emissions;
 
  •   our ability to convince potential industry partners and consumers that our technology is an attractive alternative to other technologies for reduction of motor vehicle emissions;
 
  •   our ability to manufacture products and provide services in sufficient quantities with acceptable quality and at an acceptable cost; and
 
  •   our ability to place and service sufficient quantities of our products.

          If our products do not achieve a significant level of market acceptance, demand for our products will not develop as expected and it is unlikely that we will become profitable.

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      Any revenues that we may earn in the future are unpredictable, and our operating results are likely to fluctuate from quarter to quarter.

          We believe that our future operating results will fluctuate due to a variety of factors, including:

  •   delays in product development;
  •   market acceptance of our new products;
 
  •   changes in the demand for, and pricing, of our products;
 
  •   competition and pricing pressure from competitive products;
 
  •   manufacturing delays; and
 
  •   expenses related to, and the results of, proceedings relating to our intellectual property.

          A large portion of our expenses, including expenses for our facilities, equipment and personnel, is relatively fixed and not subject to significant reduction. In addition, we expect our operating expenses will continue to increase significantly in 2005 as we further increase our research and development, production and marketing activities. Although we expect to generate revenues from sales of our products in the future, revenues may decline or not grow as anticipated and our operating results could be substantially harmed for a particular fiscal period. Moreover, our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price most likely would decline.

      If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to achieve profitability.

          Our future success is substantially dependent on the efforts of our senior management, particularly Edward L. Masry, Eugene Eichler and Bruce McKinnon. The loss of the services of members of our senior management may significantly delay or prevent the achievement of product development and other business objectives. Because of the scientific nature of our business, we depend substantially on our ability to attract and retain qualified marketing, scientific and technical personnel. There is intense competition among specialized automotive companies for qualified personnel in the areas of our activities. If we lose the services of, or do not successfully recruit key marketing, scientific and technical personnel, the growth of our business could be substantially impaired. We do not maintain key man insurance for any of these individuals.

      We may face costly intellectual property disputes.

          Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology and either to operate without infringing the proprietary rights of others or to obtain rights to technology owned by third parties. Our pending patent applications, specifically patent rights of the ZEFS and CAT-MATE devices, may not result in the issuance of any patents or any issued patents that will offer protection against competitors with similar technology. Patents we receive may be challenged, invalidated or circumvented in the future or the rights created by those patents may not provide a competitive advantage. We also rely on trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

      Our common stock is subject to penny stock regulation, which may make it more difficult for us to raise capital.

          Our common stock is considered penny stock under SEC regulations. It is subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. For example, broker-dealers must make a suitability determination for the purchaser, receive the purchaser’s written consent to the transaction prior to sale, and make special disclosures regarding sales commissions, current stock price quotations, recent price information and information on the limited market in penny stock. Because of these additional obligations, some broker-dealers may not effect transactions in penny stocks, which may adversely affect the liquidity of our common stock and shareholders’ ability to sell our common stock in the secondary market. This lack of liquidity may make it difficult for us to raise capital in the future.

Item 2. Properties

          Our principal facility consists of leased office space in North Hollywood, California. We sublease this space from KZ Golf, Inc., pursuant to a lease we entered into on October 16, 2003 and which expires on October 16, 2005. Through May 31, 2004, the rent was $2,000 per month for approximately 1,000 square feet. Effective June 1, 2004, we amended the lease to add approximately 225 square feet of office space and to have provided expanded comprehensive services, including reception, parking and conference facilities, for a total rent of $3,400 per month.

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The lease, as amended, is renewable, at our option, for an additional two-year term at $3,760 per month. One of our directors, Bruce H. McKinnon, is an owner of KZ Golf, Inc. Management believes that the terms of the lease with KZ Golf, Inc. are no less favorable than what we would have had to pay for equivalent space and comparable services with an unaffiliated party. We believe that our North Hollywood facility is adequate for our current and planned administrative activities.

          Our research and development facility located in Queensland, Australia is leased. We entered into the lease for this facility on November 15, 2003 and the lease is for a term of two years. The rent is AUD $1,292 (approximately US $1,000) per month and is renewable, at our option, for an additional two-year term at an increase of the greater of 5% or the increase in the then-current Australian consumer price index. We believe that our present research and development facility is adequate for our current and planned activities and that suitable additional or replacement facilities in the Queensland area are readily available on commercially reasonable terms should such facilities be needed in the future.

Item 3. Legal Proceedings

          On December 19, 2001, the SEC filed civil charges in the United States Federal District Court, Southern District of New York, against us, our former President and then sole director Jeffrey A. Muller, and others, alleging that we and the other defendants were engaged in a fraudulent scheme to promote our stock. The SEC complaint alleged the existence of a promotional campaign using press releases, Internet postings, an elaborate website, and televised media events to disseminate false and materially misleading information as part of a fraudulent scheme to manipulate the market for stock in our corporation, which was then controlled by Mr. Muller. On March 22, 2002, we signed a Consent to Final Judgment of Permanent Injunction and Other Relief in settlement of this action as against the corporation only, which the court approved on July 2, 2002. Under this settlement, we were not required to admit fault and did not pay any fines or restitution. The SEC’s charges of fraud and stock manipulation continue against Mr. Muller and others.

          On July 2, 2002, after an investigation by our newly constituted board of directors, we filed a cross-complaint in the SEC action against Mr. Muller and others seeking injunctive relief, disgorgement of monies and stock and financial restitution for a variety of acts and omissions in connection with sales of our stock and other transactions occurring between 1998 and 2002. Among other things, we alleged that Mr. Muller and certain others sold Company stock without providing adequate consideration to us; sold insider shares without making proper disclosures and failed to make necessary filing required under federal securities laws; engaged in self-dealing and entered into various undisclosed related-party transactions; misappropriated for their own use proceeds from sales of our stock; and entered into various undisclosed arrangement regarding the control, voting and disposition of their stock. We contend that we are entitled to a judgment canceling all of the approximately 8,716,710 shares of our common stock that was previously obtained and controlled, directly or indirectly, by Mr. Muller; divesting and preventing any subsequent holders of the right to exercise options previously held by Mr. Muller for 10,000,000 shares of our common stock, conversion of an existing preliminary injunction to a permanent injunction to prevent Mr. Muller from any involvement with the Company and a monetary judgment against Mr. Muller and others in the amount of several million dollars.

          On July 30, 2002, the U.S. Federal District Court, Southern District of New York, granted our application for a preliminary injunction against Mr. Muller and others, which prevented Mr. Muller and other cross-defendants from selling, transferring, or encumbering any assets and property previously acquired from us, from selling or transferring any of our stock that they may own or control, or from taking any action to injure us or our business and from having any direct contact with our shareholders. The injunctive order also prevents Mr. Muller from engaging in any effort to exercise control over our corporation and from serving as an officer or director of our company. While we believe that we have valid claims, there can be no assurance that an adverse result or settlement would not have a material adverse effect on our financial position or cash flow.

          In the course of the litigation, we have obtained ownership control over Mr. Muller’s claimed patent rights to the ZEFS device. Under a Buy-Sell Agreement between Mr. Muller and dated December 29, 1998, Mr. Muller, who was listed on the ZEFS devise patent application as the inventor of the ZEFS device, purported to grant us all international marketing, manufacturing and distribution rights to the ZEFS device. Those rights were disputed because an original inventor of the ZEFS device contested Mr. Muller’s legal ability to have conveyed those rights.

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In Australia, Mr. Muller entered into a bankruptcy action seeking to overcome our claims for ownership of the ZEFS device. In conjunction with these litigation proceedings, a settlement agreement was reached whereby the $10 per unit royalty previously due to Mr. Muller under his contested Buy-Sell Agreement was terminated and replaced with a $.20 per unit royalty payable to the bankruptcy trustee. On November 7, 2002, under a settlement agreement executed with Mr. Muller’s bankruptcy trustee, the trustee transferred to us all ownership and legal rights to this international patent application for the ZEFS device.

          Both the SEC and we have filed Motions for Summary Judgment contending that there are no material issues of fact in contention and as a matter of law, the Court should grant a judgment against Mr. Muller and the cross-defendants. Mr. Muller has filed a response contending the motions are without merit or substance. A final decision on these motions, which potentially would terminate the ongoing litigation, is still pending. Should the Court not grant summary judgment in our favor, the case will be scheduled for final disposition in a trial.

          Mr. Muller and several of the defendants filed a Motion to Dismiss the complaint filed by us and moved for summary judgment in their favor. On December 21, 2004, Judge George B. Daniels, denied the cross-defendants’ motion to dismiss our cross-complaint, denied the request to vacate the July 2, 2002 preliminary injunction and denied the request for damages against us. The court also refused to grant a summary judgment in favor of the cross-defendants and dismissed Mr. Muller’s claims against us for indemnification for his legal costs and for damages resulting from the litigation. Neither Mr. Muller nor any of the cross-defendants have filed any cross-claims against us and we are not exposed to any liability as a result of the litigation, except for possibly incurring legal fees and expenses should we lose the litigation.

          Although the outcome of this litigation cannot be predicted with any degree of certainty, we are optimistic that the Court’s ruling will either significantly narrow the issues for any later trial or will result in a final disposition of the case in a manner favorable to us.. While we believe that we have valid claims, there can be no assurance that an adverse result or outcome on the pending motions or a trial of this case would not have a material adverse effect on our financial position or cash flow.

          We were named as a defendant in a complaint filed before the Los Angeles Superior Court, Civ. No. BC 312401, by Terracourt Pty Ltd, an Australian corporation, claiming breach of contract and related remedies from promises allegedly made by the former president of the Company in 1999. The plaintiff is seeking specific performance of the former president’s alleged promises to transfer to the plaintiff an aggregate 480,000 shares of our common stock for office consultant and multimedia services. The complaint was filed on March 18, 2004. Due to a late date of service of the complaint upon us and other preliminary legal procedures, our answer was not filed until October 20, 2004. We are opposing the plaintiff’s causes of action and have asserted that we have no liability for the claims asserted. The matter has been scheduled for further motion and trial proceedings in late April 2005 and is expected to be concluded by early June 2005.

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

          No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.

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PART II

Item 5. Market for Common Equity and Related Stockholder Matters

          Our common stock is traded on the Pink Sheets under the symbol “ZERO.” The following table sets forth the high and low closing prices of the common stock for the quarters indicated as quoted on the Pink Sheets.

                                 
    2003     2004  
    High     Low     High     Low  
First Quarter
  $ 0.55     $ 0.30     $ 1.50     $ 0.95  
Second Quarter
  $ 0.70     $ 0.33     $ 2.05     $ 1.20  
Third Quarter
  $ 0.95     $ 0.40     $ 2.05     $ 1.24  
Fourth Quarter
  $ 2.50     $ 0.85     $ 1.90     $ 1.16  

          According to the records of our transfer agent, we had 1,009 stockholders of record of our common stock at December 31, 2004.

          We do not pay a dividend on our common stock and we currently intend to retain future cash flows to finance our operations and fund the growth of our business. Any payment of future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions in respect to the payment of dividends and other factors that our Board of Directors deems relevant.

Issuances of Unregistered Securities in Last Fiscal Year

          From July 2004 through the date of filing this report, we have engaged in a private offering of units, comprised of shares of our common stock and one-year warrants to purchase an equal number of shares of our common stock at an exercise price of $1.50 per share. This effort is ongoing.

          During 2004, we sold an aggregate of 1,272,500 of such units, amounting to 1,272,500 shares of common stock and one-year warrants to purchase 1,272,500 shares of common stock exercisable at $1.50 per share. For the sale of such units, we received aggregate gross proceeds of $1,272,500 and net proceeds of $ 1,192,180. In addition, during 2004 we sold 119,000 of such units and received $119,000 of gross and net proceeds for those units, but did not issue the stock and warrant certificates until 2005.

          Also during 2004, we issued ten-year warrants to purchase 1,000,000 shares of common stock in connection with patent acquisition agreements with two individuals. These warrants are exercisable at $1.00 per share. In addition, we issued one-year warrants to purchase 50,000 shares of common stock pursuant to a distribution agreement with Gurminder Singh, which warrants are exercisable at $1.00 per share.

           During 2004, we issued 960,500 shares of common stock to 12 persons in connection with the exercise, at various exercise prices, of previously-issued warrants. We received aggregate gross and net proceeds of $194,200 in connection with such exercises.

          During 2004, we issued an aggregate of 850,000 shares of common stock to six individuals who are advisors or consultants to the Company and certain of their designees in exchange for advisory and consulting services rendered to the Company. Of such shares, 250,000 shares vested upon issuance thereof, 300,000 of such shares vested on April 1, 2004 and the remainder vested on April 1, 2005.

          In February 2004, we issued 488,560 shares of common stock to five individuals who provided services to the Company in connection with a private offering of our common stock, which offering was conducted between November 2002 and October 2003.

          In April 2004, we issued 60,000 shares of common stock in consideration of the cancellation of a loan in the amount of $15,000 made to us by Joette Masry, the wife of our Chief Executive Officer, Edward L. Masry.

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          During 2004, the Company issued options to purchase 1,172,652 shares of common stock to certain of our directors, officers and employees. These options have an aggregate intrinsic value of $304,272.

          In our Quarterly Report on Form 10-Q-SB for the quarter ended March 31, 2004, we also disclosed that we had sold 25,000 shares of common stock to one individual on October 14, 2003, but that a certificate for such shares was not issued until February 3, 2004.

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

Item 6. Management’s Discussion and Analysis or Plan of Operation

          The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Financial Statements and supplementary data referred to in Item 7 of this Form 10-KSB.

          This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning future revenue sources and concentration, selling, general and administrative expenses, research and development expenses, capital resources, additional financings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed above in Item 1 and elsewhere in this Form 10-KSB, particularly in “Risk Factors,” that could cause actual results to differ materially from those projected. Unless otherwise expressly indicated, the information set forth in this Form 10-KSB is as of December 31, 2004, and we undertake no duty to update this information.

Overview

          We are a development stage company that has not yet generated revenues. The company’s focus is on research and development of proprietary devices that are designed to reduce harmful emissions, improve fuel efficiency and engine performance for installation on equipment and vehicles driven by internal combustion engines. Our prototype devices are called “ZEFS” and “CAT-MATE.” We have devoted the bulk of our efforts to the completion of the design, the development of our production models and the promotion of our products in the market place worldwide. Expenses have been funded through the sale of company stock. We have devoted the bulk of our efforts to the completion of the design, the development of our production models.

          We anticipate that these efforts will continue during 2005 and that we will begin selling our devices by late 2005. We do not envision generating significant revenue in 2005. We will need to raise additional capital during 2005 to fund our research and development and marketing efforts and other expenses.

Results of Operation

          To date, we have not generated any revenues and our business continues in the development stage. We have focused our efforts on verifying and developing our technologies and devices and commencing marketing efforts for their license or sale. We expect to begin selling our devices in late 2005.

          General and administrative expenses were $3,323,030 for the fiscal year ended December 31, 2004, compared to $6,046,651 for the fiscal year ended December 31, 2003, an increase of $1,476,379. This increase is attributable to payroll expense which increased by $460,826, primarily as a result of additional personnel; consulting expense which increased by $228,314, primarily as a result of additional consulting services; corporate expense which increased by $239,161, primarily as a result of costs associated with financial printing, public relations, transfer agent and website design; professional expense which increased by $144,094, primarily as a result of legal and accounting fees associated with SEC reporting, our private offering that commenced in July 2004 and general corporate functions; and travel and other expense which increased in the aggregate by $335,324, primarily as a result of the expansion of our R&D activities worldwide. A significant portion of the total increase in general and administrative expense is the result of non-cash items in the aggregate amount of $1,195,210 in the fiscal year ended December 31, 2004 compared to $899,668 in the fiscal year ended December 31, 2003, an increase of $295,542.

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          Research and development expenses were $1,873,464 for the fiscal year ended December 31, 2004, compared to $628,832 for the fiscal year ended December 31, 2003, an increase of $1,244,632. Our research and development expenses include contractual payments to RAND, consultants’ fees, capital expenditures, cost of services and supplies. The increase in research and development expenses is primarily attributable to the valuation of $1,210,450 placed on the common stock that we issued as compensation in lieu of cash to our R&D consultants in Australia and the United States under two-year agreements with those individuals; and increases in actual R&D expenses.

          Patent settlement costs were $1,610,066 in the fiscal year ended December 31, 2004, attributable to Black-Scholes valuation placed on 1,000,000 warrants that we issued in connection with our acquisition of certain of our intellectual property.

          Non-cash items were $4,015,726 for the fiscal year ended December 31, 2004, compared to $899,668 for the fiscal year ended December 31, 2003. This increase is attributable to increases in general and administrative expense in the amount of $295,542, research and development expense in the amount of $1,210,450 and patent settlement costs in the amount of $$1,610,066.

          We had a net loss of $6,803,280, or $.19 per share, for the year ended December 31, 2004, compared to a net loss of $2,476,063, or $.09 per share, for the year ended December 31, 2003. We expect an increase in net loss in the fiscal year ending December 31, 2005, primarily attributable to increased general and administrative expenses and marketing-related expenditures, without the benefit of any revenue for most of the year.

Liquidity and Capital Resources

          We have incurred negative cash flow from operations in the developmental stage since our inception in 1998. As of December 31, 2004 we had cash of $84,826 and an accumulated deficit of $17,130,888. Our negative operating cash flows in 2004 were funded primarily through the sale of common stock and, to a lesser degree, by proceeds we received from the exercise of options and warrants.

          The financial statements accompanying this Annual Report have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the accompanying financial statements, the we had a net loss of $6,803,280 and a negative cash flow from operations of $2,411,464 for the year ending December 31, 2004, and a stockholders’ deficiency of $2,007,144 as of December 31, 2004. These factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional funds and implement our business plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

          From July 2004 through the date of filing this report, we have engaged in a private offering of units comprised of shares of our common stock and one-year warrants to purchase an equal number of shares of common stock at an exercise price of $1.50 per share. From July 2004 through December 31, 2004, we received aggregate gross proceeds of $1,272,500 and aggregate net proceeds of $1,167,180 in connection with the sale of 1,272,500 shares of our common stock to 27 purchasers. The offering is ongoing. See Note 6 to Notes to Financial Statements.

          We believe that we have sufficient cash to fund our operations through the second quarter of 2005 based on current cash on hand. For all of 2005, we will need to raise additional capital or incur new debt to fund our operations. We believe that exercises of in-the-money options and warrants, with various expiration dates during 2005, will provide some of the proceeds needed to meet our capital requirements during 2005, together with additional sales of our common stock in the private offering.

          In addition, we are actively exploring additional sources of financing, including borrowings from one or more of our directors and officers However, there can be no assurance that additional equity or debt financing will be available or available on terms favorable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of, or eliminate, our research and development programs, reduce any marketing activities or relinquish rights to technologies that we might otherwise seek to develop or commercialize.

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Critical Accounting Policies and Estimates

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

          The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results that we report in our Financial Statements. The SEC considers an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of a company’s financial condition and results of operations and those that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of estimation. We believe the following critical accounting policies, among others, require significant judgments and estimates used in the preparation of our Financial Statements:

          The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain significant estimates were made in connection with preparing our financial statements as described in Note 1 to Notes to Financial Statements. See Item 7, “Financial Statements”. Actual results could differ from those estimates.

      Stock-Based Compensation

          We account for stock-based compensation to employees as defined by using the intrinsic-value method prescribed in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.”

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

New Accounting Pronouncements

          In November 2004, the Financial Accounting Standards Board “(FASB”) issued Statement of Financial Accounting Standards No. 151, “Inventory Costs”. This Statement amends the guidance in ARB No. 43 Chapter 4 Inventory Pricing, to require items such as idle facility costs, excessive spoilage, double freight and rehandling costs to be expensed in the current period, regardless if they are abnormal amounts or not. This Statement will become effective for us in the first quarter of 2006. The adoption of SFAS No. 151 is not expected to have a material impact on our financial condition, results of operations, or cash flows.

          In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which revises SFAS No. 123. SFAS 123R also supersedes APB No. 25 and amends SFAS No. 95, “Statement of Cash Flows”. In general, the accounting required by SFAS 123R is similar to that of SFAS No. 123. However, SFAS No. 123 gave companies a choice to either recognize the fair value of stock options in their income statements or disclose the pro forma income statement effect of the fair value of stock options in the notes to the financial statements. SFAS 123R eliminates that choice and requires the fair value of all share-based payments to employees, including the fair value of grants of employee stock options, be recognized in the income statement, generally over the option vesting period. SFAS 123R must be adopted no later than July 1, 2005 (December 15, 2005 for small business filers). Early adoption is permitted.

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

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Item 7. Financial Statements

SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

YEARS ENDED DECEMBER 31, 2004 AND 2003

CONTENTS

         
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Save the World Air, Inc.

We have audited the accompanying balance sheets of Save the World Air, Inc. (a development stage enterprise) as of December 31, 2004 and 2003 and the related statements of operations, changes in stockholders’ deficiency and cash flows for the years then ended and for the period from inception (February 18, 1998) to December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Save the World Air, Inc. (a development stage enterprise) as of December 31, 2004 and 2003 and the results of its operations and its cash flows for the years then ended and for the period from inception (February 18, 1998) to December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a net loss of $6,803,280 and negative cash flow from operations of $2,411,464 for the year ended December 31, 2004, and had a working capital deficiency of $1,025,532 and a stockholders’ deficiency of $2,007,144 as of December 31, 2004. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

WEINBERG & COMPANY, P.A.

April 11, 2005
Boca Raton, Florida

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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS
DECEMBER 31, 2004 AND 2003

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

See notes to financial statements.

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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE PERIOD FROM INCEPTION (FEBRUARY
18, 1998) TO DECEMBER 31, 2004

                         
                    Cumulative  
    December 31,     December 31,     since  
    2004     2003     inception  
Net sales
  $     $     $  
Operating expenses
    3,323,030       1,846,651       12,865,369  
Research and development expenses
    1,873,464       628,832       2,653,226  
Non-cash patent settlement cost
    1,610,066             1,610,066  
 
                 
Loss before other income
    (6,806,560 )     (2,475,483 )     (17,128,661 )
Other Income
Interest income
    514       440       954  
 
                 
Loss before provision for income taxes
    (6,806,046 )     (2,475,043 )     (17,127,707 )
Provision (benefit) for income taxes
    (2,766 )     1,020       3,181  
 
                   
Net loss
  $ (6,803,280 )   $ (2,476,063 )   $ (17,130,888 )
 
                 
Net loss per common share, basic and diluted
  $ (0.19 )   $ (0.09 )        
 
                   
Weighted average common shares outstanding,
                       
    basic and diluted
    35,841,225       26,768,958          
 
                   

See notes to financial statements.

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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 2004

                                                                                         
                                            Additional                     Deficit accumulated     Total stockholders’          
    Price per     Common Stock     Common stock     paid-in     Deferred             during the     development          
    share     Shares     Amount     to be issued     capital     compensation     development stage     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  
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  
Stock issued for consulting services on December 20, 2000
    0.50       19,082       19                     9,522                           9,541  

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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS’ DEFICIENCY — Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 2004

                                                                         
                                            Additional             Deficit accumulated     Total stockholders’  
    Price per             Common Stock     Common stock     paid-in     Deferred     during the     development  
    share             Shares     Amount     to be issued     capital     compensation     development stage     stage deficiency  
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  
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  
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 services on November 2, 2001
    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  

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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS’ DEFICIENCY — Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 2004

                                                                         
                                            Additional             Deficit accumulated     Total stockholders’  
    Price per             Common Stock     Common stock     paid-in     Deferred     during the     development  
    share             Shares     Amount     to be issued     capital     compensation     development stage     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
                                                  (2,749,199 )     (2,749,199 )
 
                                                       
Balance, December 31, 2002
                    20,235,847       20,236       389,875       7,133,081       (1,572,060 )     (7,851,545 )     (1,880,413 )
Stock issued, previously paid for
    0.15               1,425,000       1,425       (213,750 )     212,325                    
Stock issued, previously paid for
    0.25               880,000       880       (220,000 )     219,120                    
Stock and warrants issued for cash on March 20, 2003
    0.25               670,000       670             166,830                   167,500  
Stock and warrants issued for cash on April 4, 2003
    0.25               900,000       900             224,062                   224,962  
Stock and warrants issued for cash on April 8, 2003
    0.25               100,000       100             24,900                   25,000  
Stock and warrants issued for cash on May 8, 2003
    0.25               1,150,000       1,150             286,330                   287,480  
Stock and warrants 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 and warrants 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 compensation
                                            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 )

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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS’ DEFICIENCY — Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 2004

                                                                         
                                            Additional             Deficit accumulated     Total stockholders’  
    Price per             Common Stock     Common stock     paid-in     Deferred     during the     development  
    share             Shares     Amount     to be issued     capital     compensation     development stage     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 warrants 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  
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 warrants 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  
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 )
 
                                                       
 
                    37,784,821     $ 37,784     $ 119,000     $ 15,043,028     $ 76,068     $ (17,130,888 )   $ (2,007,144 )
 
                                                         

See notes to financial statements.

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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE PERIOD FROM INCEPTION
(FEBRUARY 18, 1998) TO DECEMBER 31, 2004

                         
                    Cumulative  
    December 31,     December 31,     since  
    2004     2003     inception  
Cash flows from operating activities
                       
Net loss
  $ (6,803,280 )   $ (2,476,063 )   $ (17,130,888 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Write off of intangible assets
                505,000  
Fair value of options issued for services
    28,872             171,190  
Issuance of common stock for services
    1,427,750       45,877       5,280,623  
Amortization of deferred compensation
    936,537       863,727       2,883,113  
Depreciation
    8,685       5,205       14,417  
Non-cash patent settlement cost
    1,610,066             1,610,066  
Changes in operating assets and liabilities:
                       
Prepaid expenses
    (2,602 )           (2,602 )
Income taxes payable
    (5,991 )     1,064        
Accrued expenses
    388,499       (35,671 )     789,497  
 
                 
Net cash used in operating activities
    (2,411,464 )     (1,595,861 )     (5,879,584 )
 
                 
Cash flows from investing activities
Purchase of property and equipment
    (9,037 )     (16,525 )     (46,463 )
 
                 
Net cash used in investing activities
    (9,037 )     (16,525 )     (46,463 )
 
                 
Cash flows from financing activities
Increase (decrease) in loans from related parties
    (6,425 )     4,881       547,928  
Advances from founding executive officer
                517,208  
Issuance of common stock for cash
    1,466,700       2,419,818       4,820,487  
Cash received for common stock to be issued
    119,000       6,250       125,250  
 
                 
Net cash provided by financing activities
    1,579,275       2,430,949       6,010,873  
 
                 
Net (decrease) increase in cash
    (841,226 )     818,563       84,826  
Cash , beginning of period
    926,052       107,489        
 
                 
Cash , end of period
  $ 84,826     $ 926,052     $ 84,826  
 
                 

See notes to financial statements

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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS — Continued
YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE PERIOD FROM INCEPTION
(FEBRUARY 18, 1998) TO DECEMBER 31, 2004

                         
                    Cumulative  
    December 31,     December 31,     since  
    2004     2003     inception  
Supplemental disclosures of cash flow information
                       
Cash paid during the year for
Interest
  $     $     $  
 
                 
Income taxes
  $ 2,400     $     $ 2,400  
 
                 
Non-cash investing and financing activities
                       
Acquisition of intangible asset through advance from related party and issuance of common stock
  $     $     $ 505,000  
 
                       
Deferred compensation from stock options issued for services
    304,272             2,959,181  
 
                       
Purchase of property and equipment financed by advance from related party
                3,550  
 
                       
Conversion of related party debt to equity
    15,000       500,000       515,000  
 
                       
Issuance of common stock in settlement of payable
    113,492             113,492  
 
                       
Common stock issued, previously paid for
    6,250              
 
                       
Fees accrued for issuance of common stock
    88,384       312,582       400,966  

See notes to financial statements.

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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

1.      Description of business, significant matters and prior period corrections

     Description of business

      Save the World Air, Inc. (the “Company”) was incorporated in Nevada on February 18, 1998 under the name Mandalay Capital Corp. The Company changed its name to Save the World Air, Inc. on February 11, 1999 following the purchase of the Zero Emission Fuel-Saving Device (the “Agreement”). The Company acquired the worldwide exclusive manufacturing, marketing and distribution rights for the Zero Emission Fuel-Saving Device (“ZEFS”) by entering into the Agreement. The ZEFS is a product, which is fitted to an internal combustion engine and is expected to reduce carbon monoxide hydrocarbons and toxic exhaust emissions. During the past three years, the Company has been acquiring new technologies, developing products using the Company’s technologies and conducting scientific tests regarding the technologies and prototype products. In 2003, the Company acquired worldwide intellectual property and patent rights to technologies which reduce carbon monoxide, hydrocarbon and nitrous oxide emissions in two- and four-stroke motorcycles, fuel-injection engines, generators and small engines. The Company has developed prototype products and named them “CAT-MATE”.

2.     Summary of significant accounting policies

     Development stage enterprise

      The Company is a development stage enterprise as defined by Statement of Financial Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development Stage Enterprises.” All losses accumulated since the inception of the Company have been considered as part of the Company’s development stage activities.
 
      The Company’s focus is on research and development of proprietary devices that are designed to reduce harmful emissions, and improve fuel efficiency and engine performance on equipment and vehicles driven by internal combustion engines and has not yet generated any revenues. The prototype devices are called “ZEFS” (Zero Emission Fuel-Savings Device) and “CAT-MATE.” The Company has put forth efforts to complete the design, the development of production models and the promotion of products in the market place worldwide. Expenses have been funded through the sale of company stock. The Company has taken actions to secure the intellectual property rights to the ZEFS and CAT-MATE devices. In addition, the Company has initiated marketing efforts to international governmental entities in cooperation with the United Nations Environmental Programme (UNEP) and various original equipment manufacturers (OEMs), to eventually sell or license the ZEFS and CAT-MATE products and technology.

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2.     Summary of significant accounting policies - Continued

     Liquidity

      The Company is subject to the usual risks associated with a development stage enterprise. These risks include, among others, those associated with product development, acceptance of the product by users and the ability to raise the capital necessary to sustain operations. Since its inception, the Company has incurred significant losses. The Company anticipates increasing expenditures over at least the next year as the Company continues its product development and evaluation efforts, and begins its marketing activities. Without significant revenue increases, these expenditures will likely result in additional losses. The Company is in the process of raising additional funds and raised $1,378,316 (net of finders fees of $88,384) in 2004 through the sale of 1,212,500 shares of its common stock in private placement transactions and the exercise of 960,500 warrants and options. (See Note 6.)

     Going concern

      The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company had a net loss of $6,803,280 and a negative cash flow from operations of $2,411,464 for the year ended December 31, 2004, and had a working capital deficiency of $1,025,532 and a stockholders’ deficiency of $2,007,144 as of December 31, 2004. These factors raise substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

     Property and equipment and depreciation

      Property and equipment are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets, generally ranging from three to ten years. Expenditures for major renewals and improvements that extend the useful lives of property and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.

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2.     Summary of significant accounting policies - Continued

     Long-lived assets

      The Company accounts for the impairment and disposition of long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with SFAS No. 144, long-lived assets to be held are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying value of long-lived assets to determine whether or not an impairment to such value has occurred. No impairments were recorded during the period from inception (February 18, 1998) through December 31, 2004.

     Earnings (loss) per share

      Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. In computing diluted earnings per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants will have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. For the years ended December 31, 2004 and 2003, the dilutive impact of outstanding stock options of 14,422,652 and 13,250,000, respectively, and 15,529,414 and 14,117,414 warrants have been excluded because their impact on the loss per share is antidilutive.

     Income taxes

      The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in the Company’s financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

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2.     Summary of significant accounting policies - Continued

         Stock-based compensation

      The Company accounts for stock-based compensation issued to employees using the intrinsic-value method prescribed in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.”
 
      The Company accounts for stock option and warrant grants issued to non-employees using the guidance of SFAS No. 123, “Accounting for Stock-Based Compensation” and EITF No. 96-18: “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” whereby the fair value of such option and warrant grants is determined using the Black-Scholes option pricing model at the earlier of the date at which the non-employee’s performance is completed or a performance commitment is reached.
 
      The Company has elected to account for stock-based compensation using the intrinsic value method prescribed in APB No. 25 and related interpretations, and follow the pro forma disclosure requirements of SFAS No. 123. Accordingly, no compensation expense has been recognized related to the granting of stock options, except as noted above. The following table illustrates the effect on net income as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

                         
                    Cumulative  
    December 31,     December 31,     since  
    2004     2003     inception  
Net loss, as reported
  $ (6,803,280 )   $ (2,476,063 )   $ (17,130,888 )
Add: total fair value method stock-based employee compensation expense
    (1,721,222 )     (949,977 )     (3,929,504 )
Less: deferred compensation amortization for below market employee options
    895,001       850,000       2,786,668  
 
                 
Pro forma net loss
  $ (7,629,501 )   $ (2,576,040 )   $ (18,273,724 )
 
                 
Pro forma loss per share
  $ (0.21 )   $ (0.10 )        
 
                   

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2.     Summary of significant accounting policies - Continued

     The fair market value of the stock options at the grant date was estimated using the Black-Scholes pricing model with the following weighted average assumptions:

       
  Expected life (years) 7.32  
  Risk free interest rate 5.42 %
  Volatility 238.46 %
  Expected dividend yield 0.00 %

     Business and credit concentrations

      The Company’s cash balances in financial institutions at times may exceed federally insured limits. As of December 31, 2004, before adjustments for outstanding checks and deposits in transit, the Company had $67,718 on deposit with two banks. The deposits are federally insured up to $100,000 on each bank.

     Estimates

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

     Fair value of financial instruments

      The carrying amounts of financial instruments, including cash, accounts payable and accrued expenses, professional fees, and payables to related parties and founding officer approximate fair value because of their short maturity as of December 31, 2004.

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2.     Summary of significant accounting policies - Continued

     Recent accounting pronouncements

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

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3.     Certain relationships and related transactions

     Advances from founding executive officer

      All of the marketing and manufacturing rights for the ZEFS were acquired from Mr. Muller, for 5,000,000 shares of common stock, $500,000 and a $10 royalty for each unit sold (see discussion below), pursuant to the Agreement entered into in December 1998, by and between the Company and Mr. Muller. Working capital advances in the amount of $517,208 and payment in the amount of $500,000 for marketing and distribution rights of the ZEFS are due to Mr. Muller. Such amounts are interest free and do not have any due dates for payment (see Note 9).
 
      In January 2000, the Company entered into an agreement offering Mr. Muller and Lynne Muller, Mr. Muller’s wife, the option to purchase 5,000,000 shares each at $0.10 per share as consideration for work performed for the Company. Mrs. Muller subsequently transferred her option to Mr. Muller.
 
      In connection with the Company’s legal proceedings against Mr. Muller, the Company is attempting to obtain a judgment that will relieve the Company of $1,017,208, which represents all amounts due Mr. Muller. These amounts include the $500,000 due for the marketing and distribution rights of the ZEFS and the working capital advances of $517,208. As described in Note 9, the Company has been relieved of the $10 royalty interest that Mr. Muller held for each unit sold. In addition, the Company is also attempting to obtain a judgment that will cancel the options to purchase 10,000,000 shares granted to Mr. and Mrs. Muller, collectively. Based on the status of current legal proceedings, the Company does not believe that it will have to pay Mr. Muller the $500,000 for the rights to the ZEFS device and the $517,208 of advances. The Company also believes that the option Mr. Muller holds to purchase 10,000,000 shares of the Company’s stock will be cancelled and no longer valid. The Company has not made any adjustments for the above in its financial statements as the matters have not yet been finalized and may change.

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3.     Certain relationships and related transactions - Continued

     Loans from related parties

      Masry & Vititoe, a law firm in which Edward L. Masry, the Company’s Chief Executive Officer, is a partner, has loaned $36,478 and $57,903 as of December 31, 2004 and 2003, respectively, to the Company for working capital purposes. The loans payable to Masry & Vititoe were allocations to the Company for shared expenses, primarily payroll. Loans by Masry & Vititoe were unsecured, non-interest bearing, and were due on demand. In June 2003, Masry & Vititoe converted $500,000 of its loans due from the Company into 2,000,000 shares of common stock and 2,000,000 warrants (see Note 6). In April 2004, accounts payable due this firm totaling $15,000 was converted to 60,000 shares of common stock. The shares issued were valued at the current market price of the date of issuance of $91,800 resulting in additional charge to expense $76,800, which has been reflected in the accompanying financial statements ended December 31, 2004.
       
      In March 2005, Masry & Vititoe loaned an additional $100,000 to the Company for working capital purposes. This loan is unsecured, non-interest bearing and is due on demand.

     Lease agreement

      In October 2003, the Company entered into a lease agreement with an entity to lease office space for its primary administrative facility. A director of the Company owns the entity (see Note 9).

4.     Property and equipment

     At December 31, 2004 and 2003, property and equipment consist of the following:

                 
    December 31,     December 31,  
    2004     2003  
Office equipment
  $ 50,013     $ 40,976  
Less accumulated depreciation
    (14,417 )     (5,732 )
 
           
 
  $ 35,596     $ 35,244  
 
           

     Depreciation expense for the year ended December 31, 2004 and 2003 was $8,685 and $5,205, respectively.

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5.     Income taxes

      The Company has net operating loss (NOL) carryforwards in the amount of approximately $11.1 million, which begin to expire in 2018. The deferred tax asset related to these NOL carryforwards has been fully reserved. The provision for income taxes represents the minimum state income taxes payable plus estimated penalties and interest.
 
      The Company’s ability to utilize its NOL is dependent upon current filing status with the Internal Revenue Service (IRS) and is subject to the IRS’s statute of limitations. Currently, the Company has not filed any returns with the IRS.
 
      A reconciliation of the Company’s tax provision to income taxes at the applicable statutory rates is shown below.

                 
    December 31,     December 31,  
    2004     2003  
Income taxes at statutory federal rate
  $ (2,316,681 )   $ (841,861 )
State income taxes, net of federal benefit
    (408,197 )     (148,564 )
Valuation allowance
    2,721,312       990,425  
Minimum state income taxes, plus penalties and interest
    800       1,020  
 
           
 
  $ (2,766 )   $ 1,020  
 
           

6.     Stockholders’ deficiency

      As of December 31, 2003, the Company has authorized 200,000,000 shares of its common stock, of which 37,784,821 shares were issued and outstanding, and 119,000 shares are to be issued. As described in Note 1, estimates and judgments were used by management to determine the fair value for certain issuances of the outstanding shares.
 
      The Company’s significant stockholders are as follows:

                 
    Number     Percentage  
    of shares     ownership  
Mr.Edward Skoda
    4,000,000       10.6 %
Mr. Edward Masry
    3,060,000       8.1 %
Remaining stockholders
    30,724,821       81.3 %
 
           
 
    37,784,821       100.0 %
 
           

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6.     Stockholders’ deficiency

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

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7.     Stock options and warrants

     Option agreements

      The Company issues stock options to employees, directors and consultants under no formal plan. Employee options vest according to the terms of the specific grant and expire from 5 to 10 years from date of grant. Non-employee option grants to date are vested upon issuance. The weighted average remaining contractual life of employee options outstanding at December 31, 2004 was 7.32 years. Stock option activity for the years ended December 31, 2004 and 2003, was as follows:

                 
    Weighted Avg.     Weighted Avg.  
    Options     Exercise Price  
Options outstanding, January 1, 2003
    13,250,000     $ 0.11  
Options granted
           
Options exercised
           
Options cancelled
           
 
           
Options, December 31, 2003
    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  
 
           

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7.     Stock options and warrants - Continued

     Options outstanding at December 31, 2004 and the related weighted average exercise price and remaining life information is as follows:

                                 
            Weighted average     Total weighted        
Range of exercise   Total options     remaining life in     average exercise       Weighted average  
prices   outstanding     years     price   Options exercisable   exercise price  
 $0.10
    10,000,000       N/A       $0.10   10,000,000   $0.10  
 0.10
    3,000,000       4.84       0.10   3,000,000   0.10  
 0.40
    250,000       3.99       0.40   250,000   0.40  
 0.98
    900,000       3.99       0.98   -   -  
 1.15
    86,956       3.99       1.15   -   -  
 1.27
    185,696       3.99       1.27   -   -  
                         
$0.10-$1.27
    14,422,652       4.73       $0.18   13,250,000   $0.16  
                           

      The 10,000,000 options exercisable at $0.10 per share in the table above are held by Mr. Muller. The options have been accounted for as employee stock options under the provisions of APB No. 25. Accordingly, no compensation expense has been recorded in the statements of operations. However, the $1,000,000 fair value of the options has been reflected in the pro forma net loss below. The 10,000,000 options do not have an expiration date and vested in 1999. For purposes of computing fair value method stock-based employee compensation expense for the 10,000,000 employee options above, a ten-year life was used in the Black-Scholes option-pricing model, as ten years is the longest term for other option grants.

     Intrinsic value of employee options

      Certain employee options were granted with exercise prices less the than fair market value of the Company’s stock at the date of grant. As the grants were to employees, the intrinsic value method, as allowed under APB No. 25, was used to calculate the related compensation expense. For the years ended December 31, 2004, $248,891 of deferred compensation was recorded and $936,537 and $863,727 of deferred compensation costs was amortized and recognized as expense in the years ending December 31, 2004 and 2003 respectively.

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7.     Stock options and Warrants - Continued

     Warrants

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

                 
            Weighted Avg.  
    Warrants     Exercise Price  
Warrants outstanding, January 1, 2003
    2,600,000     $ .39  
Warrants granted
    11,517,414       .50  
Warrants exercised
           
Warrants cancelled
           
 
           
Warrants outstanding, December 31, 2003
    14,117,414       .48  
Warrants granted
    2,372,500       1.27  
Warrants exercised
    (960,500 )     .20  
Warrants cancelled
           
 
           
Warrants outstanding, December 31, 2004
    15,529,414     $ 0.62  
 
           

      In 2003, 11,517,414 warrants were issued to investors and non-employees. In 2003, $8,933,483 of the total fair value of $10,173,653 was related to 9,434,000 warrants issued to private placement investors and $1,240,171 was related to the 2,083,414 warrants issued in connection with the related party debt settlement and legal services.
 
      During the year ended December 31, 2004, the Company issued 1,000,000 10 year warrants to acquire 1,000,000 shares of the Company’s common stock. The warrants require a payment of $1 for each share purchased. The warrants were issued to finalize a settlement with the bankruptcy trustee and others who had claims to ZEFS technology in exchange for the full release of their claims. The Company valued the warrants at $1,585,265 and reflected the amount as patent settlement costs during the year ended December 31, 2004. The warrants were issued in July 2004 when the Company became current in its SEC filings. The warrants were valued by the Company using the Black Scholes pricing model using a ten year term (statutory term), 46.2% volatility, no annual dividends, and a discount rate of 4.57%. The trustee and the other individuals will also receive royalties when the product is sold. There are no required royalties payable under this agreement for the year ending December 31, 2004.
 
      During 2004, the Company issued 100,000 warrants to two consultants and using the Black Scholes pricing model, the fair value of these warrants was valued at $53,300 and included as compensation expense. The remaining 1,272,500 warrants issued during 2004 were issued to investors as part of equity agreement and were not ascribed any valued in the accompanying financial statements.

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8.     Research and development

      The Company has established a research and development facility in Queensland, Australia where test vehicles, test engines and testing equipment were purchased. The Company has expanded research and development to include applications of the ZEFS and CAT-MATE technology to diesel engines, motorbikes, boats, generators, lawnmowers and other small engines. The Company has also purchased test vehicles, test engines and testing equipment. The Company completed testing on ZEFS and CAT-MATE devices for multiple automobiles, trucks, motorcycles, off-road vehicles and stationary engines, the results of which have been provided to RAND Corporation (RAND) for evaluation. During 2004, RAND expanded its role with the Company and now oversees the Company’s research and development facility in Australia. The Company also uses third party research and development facilities in Los Angeles and San Jose, California for the development of our ZEFS and CAT-MATE devices. For the years ended December 31, 2004 and 2003, the Company has spent $1,873,464 and $628,832, respectively, on research and development.

9.     Commitments and contingencies

     Legal matters

      On December 19, 2001, the SEC filed civil charges in the United States Federal District Court, Southern District of New York, against its former President and then sole director Jeffrey A. Muller, and others, alleging that the Company and the other defendants were engaged in a fraudulent scheme to promote the Company’s stock. The SEC complaint alleged the existence of a promotional campaign using press releases, Internet postings, an elaborate website, and televised media events to disseminate false and materially misleading information as part of a fraudulent scheme to manipulate the market for stock for the Company, which was then controlled by Mr. Muller. On March 22, 2002, the Company signed a Consent to Final Judgment of Permanent Injunction and Other Relief in settlement of this action as against the corporation only, which the court approved on July 2, 2002. Under this settlement, the Company was not required to admit fault and did not pay any fines or restitution. The SEC’s charges of fraud and stock manipulation continue against Mr. Muller and others.
       
      On July 2,2002, after an investigation by the Company’s newly constituted board of directors, the Company filed a cross-complaint in the SEC action against Mr. Muller and others seeking injunctive relief, disgorgement of monies and stock and financial restitution for a variety of acts and omissions in connection with sales of the Company’s stock and other transactions occurring between 1998 and 2002. Among other things, the Company alleged that Mr. Muller and certain others sold company stock without providing adequate consideration to the Company; sold insider shares without making proper disclosures and failed to make necessary filings required under federal securities laws; engaged in self-dealing and entered into various undisclosed related-party transactions; misappropriated for their own use proceeds from sales of the Company’s stock; and entered into various undisclosed arrangement regarding the control, voting and disposition of their stock. The Company contends that it is entitled to a judgment canceling all of the approximately 8,716,710 shares of the Company’s common stock that were previously obtained and controlled, directly or indirectly, by Mr, Muller; divesting and preventing any subsequent holders of the right to exercise options previously held by Mr. Muller for 10,000,000 shares of the Company’s common stock, conversion of an existing preliminary injunction to a permanent injunction to prevent Mr. Muller from any involvement with the Company and a monetary judgment against Mr. Muller and others in the amount of several million dollars.

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9.     Commitments and contingencies - Continued

     Legal matters — Continued

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

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9.     Commitments and contingencies - Continued

     Legal matters — Continued

      Mr. Muller and several of the defendants filed a Motion to Dismiss the complaint filed by the Company and moved for summary judgment in their favor. On December 21, 2004, Judge George B. Daniels, denied the cross-defendants’ motion to dismiss the Company’s cross-complaint, denied the request to vacate the July 2, 2002 preliminary injunction and denied the request for damages against the Company. The court also refused to grant a summary judgment in favor of the cross-defendants and dismissed Mr. Muller’s claims against the Company for indemnification for his legal costs and for damages resulting from the litigation. Neither Mr. Muller nor any of the cross-defendants have filed any cross-claims against the Company and the Company is not exposed to any liability as a result of the litigation, except for possibly incurring legal fees and expenses should the Company lose the litigation.
 
      Although the outcome of this litigation cannot be predicted with any degree of certainty, the Company is optimistic that the Court’s ruling will either significantly narrow the issues for any later trial or will result in a final disposition of the case in a manner favorable to the Company. The Company believes that they have valid claims, however, there can be no assurance that an adverse result or outcome on the pending motions or a trial of this case would not have a material adverse effect on the Company’s financial position or cash flow.
 
      The Company was named as a defendant in a complaint filed before the Los Angeles Superior Court, Civ. No. BC 312401, by Terracourt Pty Ltd, an Australian corporation, claiming breach of contract and related remedies from promises allegedly made by the former president of the Company in 1999. The plaintiff is seeking specific performance of the former president’s alleged promises to transfer to the plaintiff an aggregate 480,000 shares of the Company’s common stock for office consultant and multimedia services. The complaint was filed on March 18, 2004. Due to a late date of service of the complaint upon the Company and other preliminary legal procedures, the Company’s answer was not filed until October 20, 2004. The Company is opposing the plaintiff’s causes of action and has asserted that the Company has no liability for the claims asserted. The matter has been scheduled for further motion and trial proceedings in late April 2005 and is expected to be concluded by early June 2005.

     Royalty agreements

      The Company has entered into various royalty agreements whereby it has agreed to provide an aggregate of $0.80 per unit for each ZEFS device sold. Certain of these royalty agreements were reached in exchange for the royalty recipients’ release of their claims to the intellectual property rights to the ZEFS.
 
      In connection with these royalty agreements, the Company has committed to issue options to purchase an aggregate of 1,000,000 shares of common stock at $1.00 per share. The options expire 10 years from the date of grant. These options were granted by the Company on July 1, 2004 when the company became in full compliance with the SEC reporting requirements.
 
      Also, in connection with the royalty agreements, the Company has issued an aggregate of 128,000 shares of common stock upon completion of successful ZEFS testing, as defined. On April 1, 2004, the company issued 600,000 shares at $1.70 per share, to fulfill the terms of the two-year research and development consulting agreements.

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9.     Commitments and contingencies - Continued

     Royalty agreements — Continued

      In July 2004, the Company executed a License Agreement with Temple University in Philadelphia, Pennsylvania. In consideration of the license granted to Licensee under the terms of this Agreement, Licensee shall pay to Temple a royalty of two percent (2%) of net sales for each calendar quarter during the term of this Agreement.
 
      In further consideration of the license granted to Licensee under the terms of this Agreement, Licensee shall pay to Temple, on the first anniversary of the expiration of the option period, a non-refundable license fee of fifty thousand dollars ($50,000). In further consideration of the license granted to licensee under the terms of this Agreement, licensee shall pay to Temple, on the second anniversary of the expiration of the option period and annually thereafter, a non-refundable license maintenance fee regardless of or irrespective of actual net sales. The amount of each license maintenance fee payment shall be as follows: (i) twenty five thousand dollars ($25,000) for the first through fourth payment, and (ii) fifty thousand dollars ($50,000) for all subsequent payments.
 
      This undertaking relates to commercialization of myriads of products that the Company hopes will be widely accepted by the petroleum industry. The Company has applied for patent protection for this new technology. Use of these new SWA products may extend the life of world oil reserves and be beneficial in reducing future damage to the world’s ecology, threatened by oil exploration.
 
      The Company expects that by mid-2005 the feasibility study, including market assessment and the theoretical and engineering evaluations, will have been completed. If at that time the Company determines the products are both practical to engineer and will be accepted by the petroleum industry, the Company may then proceed with the design of prototypes, a demonstration program and the commercialization of these products.
 
      In October 2004, the Company entered into a representation agreement with an individual who will represent and introduce the Company to key personnel in India. The representative was granted 50,000 warrants at $1.00 upon signing of the agreement. Once all duties have been performed, the representative will receive an additional 50,000 warrants at the medium price of stock traded on March 31, 2005 at a discount of 30%, plus 2% royalty on gross receipts from contracts that are signed from his contract. The fair value of the 50,000 warrants issued upon signing was $24,428 using the Black-Scholes pricing model and was reflected as compensation costs in the accompanying financial statement.

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9.     Commitments and contingencies - Continued

     Royalty agreements

      In November 2004, the Company entered into an agreement with an outside consultant to provide various consulting and management services. In exchange for these services the Company has agreed to pay a royalty of 1.25% of gross receipts for sales originating in certain geographic locations paid over a 10 years period. In addition, the company issued 50,000 warrants at $1.00 to the consultant. The fair value of the 50,000 warrants issued is $28,872 using the Black-Scholes pricing model and was reflected as compensation costs in the accompanying financial statement. Furthermore, the Company agreed to issue warrants to purchase 450,000 shares of common stock of the Company, issuable upon the Company making a formal public announcement that it has entered into a binding joint venture, strategic alliance or similar agreement with the Strategic Partner. Such warrants shall have a term of five years and an exercise price of $1.00 per share.

     Employment agreements

      In March 2004, the Company entered into an amendment to the employment agreement dated December 1, 2003 with an individual to serve as the Company’s President. The agreement expires December 2007, with an automatic extension for one additional year and calls for annual base compensation of not less than $240,000 for the period ending December 31, 2004. During the employment term, the individual is eligible to participate in certain incentive plans, stock option plans, and similar arrangements in accordance with the Company’s recommendation at award levels consistent and commensurate with the position and duties hereunder.
 
      In March 2004, the Company entered into an amendment to the employment agreement dated December 1, 2003 with an individual to serve as the Company’s Chief Operating Officer. The agreement expires December 2007, with an automatic extension for one additional year and calls for annual base compensation of not less than $192,000 for the period ending December 31, 2004. During the employment term, the individual is eligible to participate in certain incentive plans, stock option plans, and similar arrangements in accordance with the Company’s recommendation at award levels consistent and commensurate with the position and duties hereunder.

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9.     Commitments and contingencies - Continued

     Employment agreements

      In September 2004, the Company entered into an employment agreement with an individual to serve as the Company’s Vice President of Environmental Affairs. The agreement expires September 2005, with an automatic extension for one additional year and calls for annual base compensation of not less than $60,000 per year. During the employment term, the individual is eligible to participate in certain incentive plans, stock option plans, and similar arrangements in accordance with the Company’s recommendation at award levels consistent and commensurate with the position and duties hereunder.

     Leases

      In June 2004, the Company amended its sublease of a portion of a building in North Hollywood, California from an entity that is owned by a director of the Company. The lease term is from November 1, 2003 through October 31, 2005 and carries an option to renew for two additional years with a 10 percent increase in the rental rate. Monthly rent is $3,400 per month under this lease with the remaining commitment of $34,000 through October 31, 2005.
 
      In November 2003, the Company entered into a lease for a research and development facility located in Queensland, Australia. The term of the lease is from November 15, 2003 through November 15, 2005 and carries an option to renew for two additional years with an increase of the greater of 5% or the increase in the then-current Australian Consumer Price Index. Monthly rent is AUD $1,292 (approximately US $1,000) per month under this lease with the remaining commitment of AUD $14,212 through November 15, 2005.

10.     Subsequent events

      In 2005, the Company sold 709,500 units, consisting of one share of common stock and one warrant to acquire common stock at $1.50 per share for $664,200 in a series of private placements.

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Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

          In April 2003, the SEC promulgated rules that no annual or quarterly report submitted to the SEC may include financial reports audited by independent public accountants unregistered with the Public Company Accounting Oversight Board (PCAOB). Our prior accountants, Good Swartz Brown & Berns, LLP, indicated that they would not be registered with the PCAOB, and as such, they resigned as our independent public accountants. On November 21, 2003, our Board of Directors approved the dismissal of Good Swartz Brown & Berns, LLP as our independent public accountant and retained Weinberg & Company, P.A.

          During the last fiscal year prior to and preceding the resignation of Good Swartz Brown & Berns, LLP and any subsequent interim period preceding such resignation, there were no disagreements with Good Swartz Brown & Berns, LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Good Swartz Brown & Berns, LLP’s satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its reports; and there were no reportable events described under Item 304(a)(1)(iv) of Regulation S-B. During the last two fiscal years, Good Swartz Brown & Berns did not issue any audit reports containing a disclaimer or adverse or qualified opinion.

          We did not consult with Weinberg & Company, P.A. for the year ended December 31, 2002 and through November 21, 2003, with respect to (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements or (ii) any matter that was the subject of any prior disagreement between us and our previous independent accountant.

Item 8A. Controls and Procedures

  (a)    Evaluation of disclosure controls and procedures: Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-KSB. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are inadequate to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are developing a plan to ensure that all information will be recorded, processed, summarized and reported on a timely basis. This plan is dependent, in part, upon reallocation of responsibilities among various personnel, possibly hiring additional personnel and additional funding. It should also be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
 
  (b)    Changes in internal control over financial reporting: There was no change in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-KSB that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 8B. Other Information

          None.

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PART III

          Certain information required by Part III is incorporated by reference from our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2005 Annual Meeting of Stockholders to be held on May 24, 2005 (the “Proxy Statement”).

Item 9. Directors and Executive Officers of Registrant

          The information required by this section is incorporated by reference from the section entitled “Proposal 1 — Election of Directors” in the Proxy Statement. Item 405 of Regulation S-B calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act. This disclosure is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. The information required by this Item with respect to our executive officers is contained in Item 1 of Part I of this Annual Report under the heading “Business — Executive Officers”.

Item 10. Executive Compensation

          The information required by this section is incorporated by reference from the information in the section entitled “Executive Compensation” in the Proxy Statement.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

          The information required by this section is incorporated by reference from the information in the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

Item 12. Certain Relationships and Related Transactions

          The information required by this section is incorporated by reference from the information in the section entitled “Certain Relationships and Related Transactions” in the Proxy Statement.

Item 13. Exhibits and Reports on Form 8-K

  (a)   The following documents are filed as part of this Form 10-KSB.

               Financial Statements:

   Reference is made to the contents to Financial Statements of Save the World Air, Inc. under Item 7 of this Form 10-KSB.

  (b)   Exhibits:

               The exhibits listed below are required by Item 601 of Regulation S-B.

       
Exhibit No.   Description  
 
3.1(1)
  Articles of Incorporation, as amended, of the Registrant.
3.2(1)
  Bylaws of the Registrant.
10.1(2)
  Commercial Sublease dated October 16, 2003 between the Registrant and KZ Golf, Inc.
10.2*
  Amendment dated June 15, 2004 to Exhibit 10.1
10.3(2)
  General Tenancy Agreement dated November 15, 2003 between the Registrant and Autumlee Pty Ltd.
10.4(3)
  Agreement dated December 13, 2002 between the Registrant and RAND.
10.5(2)**
  Agreement dated May 7, 2003 between the Registrant and RAND.
10.6(4)
  Modification No. 1 dated as of August 21, 2003 to Exhibit 10.5

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Exhibit No.   Description  
 
10.7(4)
  Modification No. 2 dated as of October 17, 2003 to Exhibit 10.5
10.8(4)
  Modification No. 3 dated as of January 20, 2004 to Exhibit 10.5
10.9(5)
  Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne Muller (Bankrupts).
10.10(5)
  Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.
10.11(6)†
  Consulting Agreement dated December 1, 2003 between the Registrant and Joseph Helleis.
10.12(6)†
  Employment Agreement dated December 1, 2003 between the Registrant and Edward L. Masry.
10.13(6)†
  Employment Agreement dated December 1, 2003 between the Registrant and Eugene E. Eichler.
10.14*†
  Amendment dated as of March 2, 2004 to Exhibit 10.13
10.15(6)†
  Employment Agreement dated December 1, 2003 between the Registrant and Bruce H. McKinnon.
10.16*†
  Amendment dated as of March 2, 2004 to Exhibit 10.15
10.17(7)
  Save the World Air, Inc. 2004 Stock Option Plan
10.18*
  Form of Incentive Stock Option Agreement under 2004 Stock Option Plan
10.19*
  Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan
10.20*
  Consulting Agreement dated as of April 1, 2003 between the Registrant and Adrian Menzell
10.21*
  Consulting Agreement dated as of April 1, 2003 between the Registrant and Pat Baker
10.22*
  Consulting Agreement dated as of April 1, 2003 between the Registrant and John Kostic
10.23*
  Consulting Agreement dated as of October 1, 2004 between the Registrant and John Fawcett
10.24*
  Advisory Services Agreement dated as of February 26, 2003 between the Registrant and Kevin Charles Hart
10.25*
  Advisory Services Agreement dated as of July 7, 2003 between the Registrant and Sir Jack Brabham
10.26(8)
  License Agreement dated as of July 1, 2004 between the Registrant and Temple University – The Commonwealth System of Higher Education
10.27*
  Exclusive Capital Raising Agreement dated as of July 29, 2004 between the Registrant and London Aussie Marketing, Ltd.
10.28*
  Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.
10.29*†
  Employment Agreement dated September 1, 2004 with Erin Brockovich
10.30*
  Representation Agreement dated as of October 1, 2004 between the Registrant and Gurminder Singh
10.31*
  Advisory Services Agreement dated as of August          , 2002 between the Registrant and Bobby Unser, Jr.
10.32*
  Advisory Services Agreement dated as of August          , 2002 between the Registrant and Jack Reader
10.33*†
  Advisory Services Agreement dated as of August          , 2002 between the Registrant and Nate Sheldon
10.34*
  Assignment of Patent Rights dated as of September 1, 2003 between the Registrant and Adrian Menzell
10.35*
  Global Deed of Assignment dated June 26, 2004 between the Registrant and Adrian Menzell
14.1*
  Code of Business Conduct and Ethics
14.2*
  Code of Ethics for Senior Executives and Financial Officers
23.1*
  Consent of Weinberg & Co.
24*
  Power of Attorney (included on Signature Page)
31.1*
  Certification of Chief Executive Officer of Annual Report Pursuant to Rule 13(a)—15(e) or Rule 15(d)—15(e).
31.2*
  Certification of Chief Financial Officer of Annual Report Pursuant to 18 U.S.C. Section 1350.
32.1*
  Certification of Chief Executive Officer and Chief Financial Officer of Annual Report pursuant to Rule 13(a)—15(e) or Rule 15(d)—15(e).
   
*   Filed herewith.
**   Confidential treatment previously requested.
  Management contract or compensatory plan or arrangement.
(1)   Incorporated by reference from Registrant’s Registration Statement on Form 10-SB (Registration Number 000-29185), as amended, filed on March 2, 2000.

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(2)   Incorporated by reference from Registrant’s Form 10-KSB for the fiscal year ended December 31, 2002.
(3)   Incorporated by reference from Registrant’s Form 8-K filed on December 30, 2002.
(4)   Incorporated by reference from Registrant’s Form 10-QSB for the quarter ended March 31, 2004.
(5)   Incorporated by reference from Registrant’s Form 8-K filed on November 12, 2002.
(6)   Incorporated by reference from Registrant’s Form 10-KSB for the fiscal year ended December 31, 2003.
(7)   Incorporated by reference from Appendix C of Registrant’s Schedule 14A filed on April 30, 2004, in connection with its Annual Meeting of Stockholders held on May 24, 2004.
(8)   Incorporated by reference from Registrant Form 8-K filed on July 12, 2004.

Item 14. Principal Accountant Fees and Services

          The information required by this section is incorporated by reference from the information in the section entitled “Proposal 3 — Ratification of Appointment of Independent Auditors” in the Proxy Statement.

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SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
         
  Save The World Air, Inc.
 
 
  By:   /s/ EDWARD L. MASRY  
    Edward L. Masry   
Date: April 25, 2005    Chief Executive Officer    
 

POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Eugene E. Eichler and Bruce H. McKinnon, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-KSB, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

         
Name   Title   Date
 
/s/ EDWARD L. MASRY   Chief Executive Officer and Chairman of the Board  
April 25, 2005
       
 
Edward L. Masry      
 
       
 
/s/ EUGENE E. EICHLER   President, Chief Financial Officer, Treasurer and Director  
April 25, 2005
       
 
Eugene E. Eichler      
 
       
 
/s/ BRUCE H. McKINNON   Chief Operating Officer and Director  
April 25, 2005
       
 
Bruce H. McKinnon      
 
       
 
/s/ ROBERT F. SYLK   Director  
April 25, 2005
       
 
Robert F. Sylk      
 
       
 
/s/ J. JOSEPH BROWN   Director  
April 25, 2005
       
 
J. Joseph Brown      
 
       
 
/s/ JOHN F. PRICE   Director  
April 25, 2005
       
 
John F. Price      
 
       
 
/s/ JOSEPH HELLEIS   Director  
April 25, 2005
       
 
Joseph Helleis      
 

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EXHIBIT INDEX

       
Exhibit No.   Description  
 
3.1(1)
  Articles of Incorporation, as amended, of the Registrant.
3.2(1)
  Bylaws of the Registrant.
10.1(2)
  Commercial Sublease dated October 16, 2003 between the Registrant and KZ Golf, Inc.
10.2*
  Amendment dated June 15, 2004 to Exhibit 10.1
10.3(2)
  General Tenancy Agreement dated November 15, 2003 between the Registrant and Autumlee Pty Ltd.
10.4(3)
  Agreement dated December 13, 2002 between the Registrant and RAND.
10.5(2)**
  Agreement dated May 7, 2003 between the Registrant and RAND.
10.6(4)
  Modification No. 1 dated as of August 21, 2003 to Exhibit 10.5
10.7(4)
  Modification No. 2 dated as of October 17, 2003 to Exhibit 10.5
10.8(4)
  Modification No. 3 dated as of January 20, 2004 to Exhibit 10.5
10.9(5)
  Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne Muller (Bankrupts).
10.10(5)
  Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.
10.11(6)†
  Consulting Agreement dated December 1, 2003 between the Registrant and Joseph Helleis.
10.12(6)†
  Employment Agreement dated December 1, 2003 between the Registrant and Edward L. Masry.
10.13(6)†
  Employment Agreement dated December 1, 2003 between the Registrant and Eugene E. Eichler.
10.14*†
  Amendment dated as of March 2, 2004 to Exhibit 10.13
10.15(6)†
  Employment Agreement dated December 1, 2003 between the Registrant and Bruce H. McKinnon.
10.16*†
  Amendment dated as of March 2, 2004 to Exhibit 10.15
10.17(7)
  Save the World Air, Inc. 2004 Stock Option Plan
10.18*
  Form of Incentive Stock Option Agreement under 2004 Stock Option Plan
10.19*
  Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan
10.20*
  Consulting Agreement dated as of April 1, 2003 between the Registrant and Adrian Menzell
10.21*
  Consulting Agreement dated as of April 1, 2003 between the Registrant and Pat Baker
10.22*
  Consulting Agreement dated as of April 1, 2003 between the Registrant and John Kostic
10.23*
  Consulting Agreement dated as of October 1, 2004 between the Registrant and John Fawcett
10.24*
  Advisory Services Agreement dated as of February 26, 2003 between the Registrant and Kevin Charles Hart
10.25*
  Advisory Services Agreement dated as of July 7, 2003 between the Registrant and Sir Jack Brabham
10.26(8)
  License Agreement dated as of July 1, 2004 between the Registrant and Temple University – The Commonwealth System of Higher Education
10.27*
  Exclusive Capital Raising Agreement dated as of July 29, 2004 between the Registrant and London Aussie Marketing, Ltd.
10.28*
  Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.
10.29*†
  Employment Agreement dated September 1, 2004 with Erin Brockovich
10.30*
  Representation Agreement dated as of October 1, 2004 between the Registrant and Gurminder Singh
10.31*
  Advisory Services Agreement dated as of August          , 2002 between the Registrant and Bobby Unser, Jr.
10.32*
  Advisory Services Agreement dated as of August          , 2002 between the Registrant and Jack Reader
10.33*†
  Advisory Services Agreement dated as of August          , 2002 between the Registrant and Nate Sheldon
10.34*
  Assignment of Patent Rights dated as of September 1, 2003 between the Registrant and Adrian Menzell
10.35*
  Global Deed of Assignment dated June 26, 2004 between the Registrant and Adrian Menzell
14.1*
  Code of Business Conduct and Ethics
14.2*
  Code of Ethics for Senior Executives and Financial Officers
23.1*
  Consent of Weinberg & Co.
24*
  Power of Attorney (included on Signature Page)
31.1*
  Certification of Chief Executive Officer of Annual Report Pursuant to Rule 13(a)—15(e) or Rule 15(d)—15(e).
31.2*
  Certification of Chief Financial Officer of Annual Report Pursuant to 18 U.S.C. Section 1350.
32.1*
  Certification of Chief Executive Officer and Chief Financial Officer of Annual Report pursuant to Rule 13(a)—15(e) or Rule 15(d)—15(e).
   
*   Filed herewith.
**   Confidential treatment previously requested.
  Management contract or compensatory plan or arrangement.
(1)   Incorporated by reference from Registrant’s Registration Statement on Form 10-SB (Registration Number 000-29185), as amended, filed on March 2, 2000.
(2)   Incorporated by reference from Registrant’s Form 10-KSB for the fiscal year ended December 31, 2002.
(3)   Incorporated by reference from Registrant’s Form 8-K filed on December 30, 2002.
(4)   Incorporated by reference from Registrant’s Form 10-QSB for the quarter ended March 31, 2004.
(5)   Incorporated by reference from Registrant’s Form 8-K filed on November 12, 2002.
(6)   Incorporated by reference from Registrant’s Form 10-KSB for the fiscal year ended December 31, 2003.
(7)   Incorporated by reference from Appendix C of Registrant’s Schedule 14A filed on April 30, 2004, in connection with its Annual Meeting of Stockholders held on May 24, 2004.
(8)   Incorporated by reference from Registrant Form 8-K filed on July 12, 2004.

 

 

Exhibit 10.2

ADDENDUM TO COMMERCIAL SUBLEASE

This is an Addendum to that Commercial Sublease (Master Lease) dated October 16 th , 2003 and is made between KZG (hereinafter “Sublessor”) and Save the World Air, Inc. (hereinafter “Sublessee”).

Sublessee hereby leases from Sublessor the additional premises described herein on the following terms and conditions.

1. Description of Additional Sublet Property .

Sublessor sublets one additional office on the South side of the building located at 5125 Lankershim Blvd., North Hollywood, CA 91601.

2. Term and Rent .

Sublessor demises the additional premises for a term to run concurrent with the Master Lease and shall commence June 1, 2004 and terminating on October 31, 2005, or sooner as provided herein at an additional rental of $1,400 per month payable in equal installments in advance on the first day of each month in the sum of $1,400 per month during the term of the Master Lease.

3. Option to Renew.

Provided that Sublessee is not in default in the performance of this lease and the Master lease, Sublessee shall have the option to renew the Sublease for an additional term of two years commencing at the expiration of the initial lease term. All of the terms and conditions of the Sublease shall apply during the renewal term except that the Sublease payment shall be 10% greater for this additional space, which will bring the total due for the initial space in the master lease ($2,000) and this additional space ($1,400) a total of $3,400 shall be 10% greater or $3,740 per month. The option shall be exercised by a written notice given to Sublessor not less than sixty (60) days prior to the expiration of the initial Sublease term. If notice is not timely given, this option will expire.

4. All other Terms and Conditions from the Commercial Sublease (Master Lease) shall remain in full force and effect.

Signed this 15 th day of June, 2004 in North Hollywood, California:

     
SAVE THE WORLD AIR, INC.
  KZG
 
   
 
   
/s/ EUGENE EICHLER
  /s/ JENNIFER KING
By: Gene Eichler
  By: Jennifer King
Title: CFO
  Title: President

 

Exhibit 10.14

AMENDMENT TO EMPLOYMENT AGREEMENT

     This AMENDMENT ( “Amendment ) is entered into for the purpose of amending certain provisions of that certain EMPLOYMENT AGREEMENT ( “Agreement”) entered into as of December 1, 2003 by and between Save the World Air, Inc., a Nevada corporation (the “Company”) and Eugene E. Eichler (“Executive”) and this Amendment is incorporated into the Agreement by this reference.

      1. Paragraph 4. Position and Duties is amended by deleting the following:

“The Executive shall serve as Chief Operating Officer of STWA and he shall have such responsibilities, duties and authority as may, from time to time, be generally associated with such position and or as specifically detailed in the company’s official “Position Description.””

and replacing it with the following:

“The Executive shall serve as President of the Company and he shall have such responsibilities, duties and authority as may, from time to time, be generally associated with such position and or as specifically detailed in the company’s official “Position Description.””

      2. Paragraph 5. Compensation and Related Matters is amended by deleting the following:

Base Compensation . During the period of the Executive’s employment hereunder, STWA shall pay to him annual base compensation as follows:

For the period from March 2, 2004 to December 31, 2004 at an annual rate not less than $192,000.00;”

and replacing it with the following:

Base Compensation . During the period of the Executive’s employment hereunder, the Company shall pay to him annual base compensation as follows:

For the period from March 2, 2004 to December 31, 2005 at an annual rate of $240,000 and from January 1, 2005 to December 31, 2007 at an annual rate not less than $240,000;”

     All other terms and conditions of the Agreement not expressly amended hereby shall remain in full force and effect.

      IN WITNESS WHEREOF , the parties have executed this Amendment as of March 2, 2004.

           
 
“EXECUTIVE”   SAVE THE WORLD AIR, INC.
 
/s/ EUGENE E. EICHLER
  By   /s/ EDWARD L. MASRY 
 
       
 
Name: Eugene E. Eichler
  Name:   Edward L. Masry 
       
 
  Title:   Chief Executive Officer 
       

 

Exhibit 10.16

AMENDMENT TO EMPLOYMENT AGREEMENT

     This AMENDMENT ( “Amendment ) is entered into for the purpose of amending certain provisions of that certain EMPLOYMENT AGREEMENT ( “Agreement”) entered into as of December 1, 2003 by and between Save the World Air, Inc., a Nevada corporation (the “Company”) and Bruce H. McKinnon (“Executive”) and this Amendment is incorporated into the Agreement by this reference.

      1. Paragraph 4. Position and Duties is amended by deleting the following:

“The Executive shall serve as Executive Vice President/Business Development of STWA and he shall have such responsibilities, duties and authority as may, from time to time, be generally associated with such position and or as specifically detailed in the company’s official “Position Description.””

and replacing it with the following:

“The Executive shall serve as Chief Operating Officer of the Company and he shall have such responsibilities, duties and authority as may, from time to time, be generally associated with such position and or as specifically detailed in the company’s official “Position Description.””

      2. Paragraph 5. Compensation and Related Matters is amended by deleting the following:

Base Compensation . During the period of the Executive’s employment hereunder, STWA shall pay to him annual base compensation as follows:

For the period from March 2, 2004 to December 31, 2004 at an annual rate not less than $153,600.00

and replacing it with the following:

Base Compensation . During the period of the Executive’s employment hereunder, the Company shall pay to him annual base compensation as follows:

For the period from March 2, 2004 to December 31, 2005 at an annual rate of $192,000 and from January 1, 2005 to December 31, 2007 at an annual rate not less than $192,000;”

     All other terms and conditions of the Agreement not expressly amended hereby shall remain in full force and effect.

      IN WITNESS WHEREOF , the parties have executed this Amendment as of March 2, 2004.

           
 
“EXECUTIVE”   SAVE THE WORLD AIR, INC.
 
/s/ BRUCE H. McKINNON
  By   /s/ EDWARD L. MASRY 
 
       
 
Name: Bruce H. McKinnon
  Name:   Edward L. Masry 
       
 
  Title:   Chief Executive Officer 
       

 

Exhibit 10.18

NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS AGREEMENT, NO SHARES OF THE COMPANY’S STOCK SHALL BE ISSUED PURSUANT HERETO UNLESS THE SAVE THE WORLD AIR, INC. 2004 STOCK OPTION PLAN SHALL HAVE FIRST BEEN APPROVED BY SHAREHOLDERS OF THE COMPANY HOLDING NOT LESS THAN A MAJORITY OF THE VOTING POWER OF THE COMPANY.

INCENTIVE STOCK OPTION AGREEMENT

THIS INCENTIVE STOCK OPTION AGREEMENT (this “Agreement”) is made and entered into as of ____________, 20___(the “Grant Date” ) by and between SAVE THE WORLD AIR, INC ., a Nevada corporation (the “Company”), whose address is 5125 Lankershim Boulevard, North Hollywood, California 91601, and ___an individual (“Executive”), with reference to the following facts (capitalized terms used and not otherwise defined in this Agreement shall have the meanings set forth in the “Glossary of Terms” attached as Appendix “A” hereto, which Appendix is hereby incorporated by this reference):

      A.  The Board of Directors of the Company (the “Board”) has heretofore adopted the Save The World Air, Inc. 2004 Stock Option Plan (the “Plan”, a copy of which is attached hereto and incorporated by this reference) under which the Company may grant Stock Options to certain personnel of the Company such as Executive.

      B.  Pursuant to the Plan, the Board has authorized granting to Executive, effective as of the date of this Agreement, an Incentive Stock Option under such terms and conditions as are hereinafter set forth.

      C.  Executive is an employee of the Company and is not a Ten Percent Shareholder of the Company.

      NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations and warranties herein set forth and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

      1. Grant of Stock Option. Pursuant to the action of the Board described above, the Company hereby grants to Executive an Incentive Stock Option to purchase, upon and subject to the terms and conditions of the Plan, all or any part of___(___) shares of Stock at an Exercise Price of Dollars ___($___) per share (which Exercise Price equals one hundred percent (100%) of the Fair Market Value of a share of Stock as of the Grant Date).

      2. Vesting . The Stock Option granted under Section I hereof shall become exercisable with respect to the following percentages of the number of shares subject to such Stock Option upon the following dates and at any time thereafter unless and until such Stock Option shall terminate under Sections 4, 6 or 7 hereof, and subject to acceleration upon a Corporate Transaction only if and as provided under the Plan (provided, that no installment of the Stock Option hereunder shall be

Page 1 of 7


 

exercisable except with respect to a whole share, and fractional shares shall be disregarded except that they may be accumulated):

         
Percentage   Vesting Date   Fair Market Value*
Percent ( ___%)
  First (181) anniversary of Grant Date    
 
       
Percent ( ___%)
  Second (2nd) anniversary of Grant Date    
 
       
Percent ( ___%)
  Third (3rd) anniversary of Grant Date    
 
       
Percent ( ___%)
  Fourth (4th) anniversary of Grant Date    

* Determined as of Grant Date; may not exceed One Hundred Thousand Dollars ($100,000) for vesting date(s) during any calendar year (taking into account any other ISOs granted to Executive under any other plan of the Company or a Parent or Subsidiary)

      3. Manner of Exercise and Payment . Executive shall exercise the Stock Option granted under Section 1 hereof: if at all, by giving (a) written notice .of such exercise to the Committee specifying the number of shares of Stock with respect to which such Stock Option is being exercised, together with (b) payment of the full purchase price for such shares, by wire transfer to a Company account designated by the Committee or by unendorsed certified or cashier’s check, equal to the number of shares to be purchased times the Exercise Price per share.

           3.1 Effective Date of Exercise. The date upon which such written notice is given and payment of the full purchase price is received by the Committee shall be the exercise date for such Stock Option. From such exercise date, Executive shall be entitled to the issuance of a stock certificate evidencing Executive’s ownership of the shares of Stock acquired pursuant to such exercise (but subject to Section 8 hereof). Executive shall not have any of the rights or privileges of a shareholder of the Company (including, without limitation, rights to distributions, voting rights, inspection rights, dissenter’s rights, rights to bring a derivative action, or other rights of a shareholder under applicable corporate law) in respect of any shares of Stock issuable upon exercise of such Stock Option until and only to the extent such Stock Option is exercised and certificates representing such shares shall have been issued and delivered.

           3.2 Minimum Number of Shares Purchased; Fractional Shares. No fewer than five (5) share (or, if less, the maximum number of shares that may be purchased pursuant to the Stock Option to the extent vested but unexercised) may be purchased pursuant to the exercise under anyone notice given under Section 3 hereof. No installment of such Stock Option shall be exercisable except with respect to whole shares.

Page 2 of 7


 

      4. Termination

      4.1 In General. The Stock Option granted under Section 1 hereof, to the extent unexercised, shall terminate at the close of business of the day before the tenth (10th) anniversary of the Grant Date, but subject to Section 6 or Section 7 hereof ( as applicable).

      4.2 Corporate Transaction. The Committee shall notify Executive of the pendency of a Corporate Transaction a reasonable time before such Corporate Transaction is to occur, and Executive (or such other person entitled to exercise such Stock Option under Section 7 hereof) shall have the right, at any time prior to such Corporate Transaction, to exercise such Stock Option of such person to the extent that such Stock Option is otherwise exercisable under Section 2 hereof. Except and to the extent provided in the Plan and as set forth in the notice under this Section 4.2, the Stock Option granted under Sect. on 1 hereof to the extent unexercised shall terminate as of the Effective Date of the Corporate Transaction.

5. Non-Transferability. Neither Executive nor any successor or assignee thereof shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the Stock Option granted under Section 1 hereof, other than. by Will or by the laws of descent and distribution, and such Stock Option shall be exercisable during Executive’s lifetime only by Executive; nor shall all or any part of such Stock Option be subject to seizure by any creditor of any such person, by a proceeding at law or in equity, and no such benefit shall be transferable by operation of law in the event of the bankruptcy or insolvency of Executive or any successor or assignee thereof. Any such attempted assignment or transfer shall be void and shall terminate this Agreement, and the Company shall thereupon have no further liability hereunder.

6. Cessation of Employment

      6.1 In General. Subject to Sections 6.2 and 7 hereof, if Executive ceases to be employed by the Company or any of Subsidiary or Parent thereof~ Executive may, subject to the time limitations of Section 4 hereof, exercise the Stock Option granted under Section 1 hereof to the extent that Executive was entitled to exercise it under Section 2 hereof on the date of such cessation at any time (a) within one (1) year after such cessation if such cessation results from the Disability of Executive, or (b) otherwise within ninety (90) days after such cessation.

      6.2 Termination for Cause. If Executive is terminated as an employee of the Company or any Subsidiary or Parent thereof for Cause, the Stock Option granted under Section 1 hereof shall terminate immediately.

7. Death of Executive. If Executive dies while employed by the Company or any Parent or Subsidiary thereof, or during the period described in clause (a) or clause (b) of Section 6.1 hereof as applicable, then, subject to the time limitations of Section 4 hereof, the Stock Option granted under Section 1 hereof shall expire within one (1) year after the date of death; and the executor or administrator of Executive's estate, or the person or persons to whom Executive’s rights under such

Page 3 of 7


 

Stock Option shall have passed by Will or by the applicable laws of descent and distribution, shall have the right to exercise such Stock Option to the extent ~at Executive was entitled to exercise such Stock Option under Section 2 hereof on the date of death.

      8. Compliance With Securities and Tax Laws. No shares of Stock shall be issued pursuant to the exercise of the Stock Option hereunder except in compliance with all applicable federal and state securities and tax laws and regulations and in compliance with rules of stock exchanges on which the Stock may be listed. In furtherance of the foregoing and not in order to limit the generality of the foregoing in any way:

           8.1 Representation. The Company, as a condition to the issuance of such shares, may require the person exercising such Stock Option to represent and warrant at the time of such exercise that any shares of Stock acquired upon exercise are being acquired only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required under any applicable law, regulation or rule of any governmental agency.

           8.2 Notice of Sale. The person acquiring such shares shall give the Company notice of any sale or other disposition of any such shares not less than ten (10) days after such sale or other disposition.

           8.3 Withholding. Executive acknowledges and agrees that the Company, in order to fulfill its withholding obligations under any federal, state or local tax law (including, without limitation, upon the disposition by Executive of shares of Stock acquired pursuant to the exercise of the Stock Option hereunder within two (2) years after the Grant Date or within one (1) year after exercise of the Stock Option, or upon Executive’s exercising an ISO more than three (3) months after Executive has ceased to be an employee of the Company or a Parent or Subsidiary) may (a) withhold such sums from other compensation due Executive, (b) require Executive to pay to the Company such amounts as a condition to the delivery of shares pursuant to such exercise, or (c) sell shares that would otherwise be delivered to Executive upon exercise of the Stock Option in order to raise cash in the necessary amount.

Page 4 of 7


 

      9. Miscellaneous

           9.1 Complete Agreement. This Agreement, and any appendices, schedules, exhibits or documents referred to herein or executed contemporaneously herewith, constitute the entire agreement among the parties hereto with respect to the subject matter hereof, and supersede all prior written, and all prior and contemporaneous oral, agreements, representations, warranties, statements, promises and understandings with respect to the subject matter hereof; whether express or implied. All schedules, appendices and exhibits attached hereto are hereby incorporated in and made a part of this Agreement as if fully set forth herein. .

           9.2 Payments Subject to Creditors. Payments to Executive hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general assets of the Company; and no person, other than the Company, shall have, by virtue of the provisions of the Plan or the grant of the Stock Option hereunder, any interest in such assets. To the extent that any person acquires a right to receive payments from the Company under the provisions hereof; such right shall be no greater than the right of any unsecured general creditor of the Company.

           9.3 No Trust or Contract of Employment. It is expressly understood by the parties hereto that this Agreement and the Plan relate exclusively to additional compensation for Executive’s services, and are not intended to be an employment contract. Nothing contained in this Agreement or the Plan, and no action taken pursuant to their provisions by either party hereto shall create, or be construed to create, (a) a trust of any kind, or a fiduciary relationship between the Company and Executive; or (b) a contract of employment for any term of years, or a right of Executive to continue in the employ of the Company in any capacity.

           9.4 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and Executive and Executive’s successors, assigns, heirs, executors, administrators and beneficiaries. Nothing in this Section 9.4 shall be deemed to modify or waive in any manner whatsoever such prohibitions on transfer or assignment of Executive’s rights hereunder as are contained elsewhere in this Agreement.

           9.5 Amendment . Except as provided herein, this Agreement may not be amended, altered, modified or terminated except by a written instrument signed by the parties hereto, or their respective successors or assigns.

           9.6 Notice. Whenever this Agreement or the Plan requires that notice be given by or to the Company or Executive, such notice shall be given to the Company at the address first set forth above (or to such other address as the Company may communicate to Executive under this Section 9.6) and to Executive at such address as is set forth on the books and records of the Company for the mailing of any Form W-2 with respect to Executive as follows: (a) by personal delivery, in which case notice shall be deemed to have been given on the date of delivery; (b) by certified United States mail, in which case notice shall be deemed to have been given two (2) days after deposit of such notice with the United States Postal Service; or (c) by DHL, Federal Express,

Page 5 of 7


 

United Parcel Service, or similar internationally-recognized overnight delivery service, in which case notice shall be deemed to have been given one (1) day after deposit of such notice or instrument with such service

           9.7 Governing Law; Jurisdiction. This Agreement shall be governed by the laws of the State of California, regardless of the choice of law provisions of California or any other jurisdiction and regardless of where the parties hereto may now or hereafter be formed, do business, or reside. Any and all disputes between the parties which may arise pursuant to this Agreement will be heard and determined before an appropriate federal or state court located in Los Angeles, California. The parties hereto acknowledge that such court has the jurisdiction to interpret and enforce the provisions of this Agreement and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts.

           9.8 Headings. The headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or interpret the scope of this Agreement or of any particular section hereof.

           9.9 Waivers Strictly Construed. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder, (a) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party, and (b) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or by any other indulgence.

           9.10 Severability . The validity, legality or enforceability of the remainder of this Agreement shall not be affected even if one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable in any respect.

           9.11 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Page 6 of 7


 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.

         
“Company”   “Executive”
 
       
SAVE THE WORLD AIR, INC., a Nevada
corporation
   
 
       
By
       
 
 
Name:
       
 
   
Title:
       
 
   
 
       
By
       
 
   
Name:
       
 
   
Title:
       
 
   

Page 7 of 7


 

SPOUSAL CONSENT

I certify that :

      1 . I am the spouse of __________________who signed the foregoing Incentive Stock Option Agreement dated as of ___________, 20___(the “Agreement”) by and between-as the “Executive” thereunder and Save The World Air, Inc. as the “Company” thereunder.

      2.  I have read and approve the provisions of the Agreement, including, but not limited to, those relating to the exercise, transfer and disposition of the Stock Option described therein.

      3.  I agree to be bound by and accept those provisions of that Agreement in lieu of all other interests I may have in the Stock Options thereby granted, whether that interest may be community property or otherwise.

      4.  Executive shall have full power of management of Executive’s interests in the Stock Options, including any portion of those interests that may be community property, and Executive has the full right, without my further approval, to exercise Executive’s rights with respect to such Stock Options, to execute any amendments to the Agreement, and to exercise and otherwise deal in any manner with such Stock Options, including any portion of such interests that may be community property.

             
Date:
           
   
 
        Name of Spouse:
         

 


 

APPENDIX A
GLOSSARY OF TERMS

1.    “Agreement” means the Incentive Stock Option Agreement dated _______ ___ 20___by and between Save The World Air, Inc., an Nevada corporation, as the “Company” thereunder, and _________, an individual, as the “Executive” thereunder.
 
2.    “Board” is as defined in Recital “A” of the Agreement.
 
3.    “Cause” is as defined in the Plan .
 
4.    “Committee” is as defined in the Plan.
 
5.    “Company” means Save The World Air, Inc., a Nevada corporation.
 
6.    “Corporate Transaction” is as defined in the Plan.
 
7.    “Disability” is as defined in the Plan.
 
8.    “Effective Date” of a Corporate Transaction is as defined in the Plan.
 
9.    “Executive” means                         , an individual.
 
10.    “Exercise Price” is as defined in Section 1 of the Agreement .
 
11.    “Grant Date” is as set forth in the first paragraph of the Agreement.
 
12.    “Incentive Stock Option ” is as defined in the Plan.
 
13.    “Parent” is as defined in the Plan.
 
14.    “Plan” is as defined in Recital “A” of the Agreement.
 
15.    “Stock” is as defined in the Plan.
 
16.    “Stock Option” is as defined in the Plan.
 
17.    “Subsidiary” is as defined in the Plan.
 
18.    “Ten Percent Shareholder” is as defined in the Plan.
 
19.    “Will” is as defined in the Plan.

 

 

Exhibit 10.19

NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS AGREEMENT, NO SHARES OF THE COMPANY’S STOCK SHALL BE ISSUED PURSUANT HERETO UNLESS THE SAVE THE WORLD AIR, INC. 2004 STOCK OPTION PLAN SHALL HAVE FIRST BEEN APPROVED BY SHAREHOLDERS OF THE COMPANY HOLDING NOT LESS THAN A MAJORITY OF THE VOTING POWER OF THE COMPANY.

NON-QUALIFIED STOCK OPTION AGREEMENT

This NON-QUALIFIED STOCK OPTION AGREEMENT ( this “ Agreement”) is made and entered into as of                      ,20 (the “Grant Date”) by and between SAVE THE WORLD AIR, INC. , a Nevada corporation ( the “Company”), whose address is 5125 Lankershim Boulevard, North Hollywood, California 91601, and                      , an individual (“Executive”), with reference to the following facts (capitalized terms used and not otherwise defined in this Agreement shall have the meanings set forth in the “Glossary of Terms” attached as Appendix” A” hereto, which Appendix is hereby incorporated by this reference): .

      A.  The Board of Directors of the Company (the “Board”) has heretofore adopted the Save The World Air, Inc. 2004 Stock Option Plan (the “Plan”, a copy of which is attached hereto and incorporated by this reference) under which the Company may grant Stock Options to certain personnel of the Company such as Executive.

      B.  Pursuant to the Plan, the Board has authorized granting to Executive, effective as of the date of this Agreement, a Non-Qualified Stock Option under such terms and conditions as are hereinafter set forth.

NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations and warranties herein set forth and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

      1. Grant of Stock Option. Pursuant to the action of the Board described above, the Company hereby grants to Executive a Non-Qualified Stock Option to purchase, upon and subject to the terms and conditions of the Plan, all or any part of                      (                      ) shares of Stock at an Exercise Price of                      Dollars ($                      ) per share.

      2. Vesting. The Stock Option granted under Section 1 hereof shall become exercisable with respect to the following percentages of the number of shares subject to such Stock Option upon the following dates and at any time thereafter unless and until such Stock Option shall terminate under Sections 4, 6 or 7 hereof, and subject to acceleration upon a Corporate Transaction only if and as provided under the Plan (provided, however, that no installment of the Stock Option shall be exercisable except with respect to a whole share, and fractional shares shall be disregarded except that they may be accumulated):

Page 1 of 7 Pages

 


 

     
                     percent (                      %)
  First (1st) anniversary of Grant Date
                     percent (                      %)
  Second (2nd) anniversary of Grant Date
                     percent (                      %)
  Third (3rd) anniversary of Grant Date
                     percent (                      %)
  Fourth (4th) anniversary of Grant Date

      3. Manner of Exercise and Payment. Executive shall exercise the Stock Option granted under Section 1 hereof, if ata1l, by giving (a) written notice of such exercise to the Committee specifying the number of shares of Stock with respect to which such Stock Option is being exercised, together with (b) payment of the full purchase price for such shares, by wire transfer to a Company account designated by the Committee or by unendorsed certified or cashier’s check, equal to the number of shares to be purchased times the Exercise Price per share.

3.1 Effective Date of Exercise. The date upon which such written notice is given and payment of the full purchase price is received by the Committee shall be the exercise date for such Stock Option. From such exercise date, Executive shall be entitled to the issuance of a stock certificate evidencing Executive’s ownership of the shares of Stock acquired pursuant to such exercise (but subject to Section 8 hereof). Executive shall not have any of the rights or privi1~ges of a shareholder of the Company (including, without limitation, rights to distributions, voting rights, inspection rights, dissenter’s rights, rights to bring a derivative action, or other rights of a shareholder under applicable corporate law) in respect of any shares of Stock issuable upon exercise of such Stock Option until and only to the extent such Stock Option is exercised and certificates representing such shares shall have been issued and delivered.

3.2 Minimum Number of Shares Purchased. Fractional Shares. No fewer than five (5) share (or, if less, the maximum number of shares that may be purchased pursuant to the Stock Option to the extent vested but unexercised) may be purchased pursuant to the exercise under anyone notice given under Section 3 hereof. No installment of such Stock Option shall be exercisable except with respect to whole shares.

      4. Termination

4.1 In General. The Stock Option granted under Section 1 hereof, to the extent unexercised, shall terminate at the close of business of the day before the tenth (10th) anniversary of the Grant Date, but subject to Section 6 or Section 7 hereof (as applicable).

4.2 Corporate Transaction. The Committee shall notify Executive of the pendency of a Corporate Transaction a reasonable time before such Corporate Transaction is to occur, and Executive (or such other person entitled to exercise such Stock Option under Section 7 hereof) shall have the right, at any time prior to such Corporate Transaction, to exercise such Stock Option of such person to the extent that such Stock Option is otherwise exercisable under Section 2 hereof. Except and to the extent provided in the Plan and as set forth in the notice under this Section 4.2, the Stock Option granted under Section 1 hereof to the extent unexercised shall terminate as of the Effective Date of the Corporate Transaction.

Page 2 of 7 Pages

 


 

      5. Transferability

5.1 In General . Except as provided in Section 5.2 hereof, neither Executive nor any successor or assignee thereof shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the Stock Option granted under Section 1 hereof, other than by Will or by the laws of descent and distribution, and such Stock Option shall be exercisable during Executive’s lifetime only by Executive; nor shall all or any part of such Stock Option be subject to seizure by any creditor of any such person, by a proceeding at law or in equity, and no such benefit shall be transferable by operation of law in the event of the bankruptcy or insolvency of Executive or any successor or assignee thereof Any such attempted assignment or transfer shall be void and shall terminate this Agreement, and the Company shall thereupon have no further liability hereunder.

5.2 Certain Family Transfers . Executive may transfer the Stock Option granted hereunder only under the following terms and conditions:

5.2.1 Such transfer may only be to (a) a trust of which Executive is a grantor, provided that the named beneficiaries of such trust shall include only Executive and/or members of Executive’ s Family (and such a trust shall be unrestricted as to the identity of the trustee or trustees); (b) a corporation, partnership or limited liability company; provided, that the owners of equity interests in the foregoing shall consist solely of one or a combination of Executive, member(s) of Executive’ s Family, or one or more trusts described in the foregoing clause (a); or (c) as an outright gift one or more members of Executive’ s Family.

5.2.2 Executive and the transferee shall execute and acknowledge such assignments or other instruments as the Committee may reasonably request, in form and substance reasonably satisfactory to the Committee, to confirm or memorialize such transfer.

5.2.3 Executive or the transferee shall provide the Committee with the name, address, and taxpayer identification number of the transferee and such other information as the Committee shall request to prepare tax returns and other filings reflecting such transfer as are required by applicable tax laws.

5.2.4 Executive or the transferee shall, at their expense, furnish the Committee with an opinion of counsel in form and substance satisfactory to the Committee to the effect that such transfer, and the issuance of shares of Stock to the transferee upon exercise of the Stock Option transferred, will comply with federal or state securities laws (including, without limitation, any exemption there under pursuant to which the Company has caused such Stock Option or share to be issued).

5.2.5 The transferee shall have executed and acknowledged this Agreement and shall have assumed all obligations and liabilities of Executive hereunder.

Page 3 of 7 Pages

 


 

      6. Cessation of Employment

6.1 In General. Subject to Sections 6.2 and 7 hereof, if Executive ceases to be employed by the Company or any of Subsidiary or Parent thereof, Executive may, subject to the time limitations of Section 4 hereof, exercise the Stock Option granted under Section 1 hereof to the extent that Executive was entitled to exercise it under Section 2 hereof on the date of such cessation at any time (a) within one (I) year after such cessation if such cessation results from the Disability of Executive, or (b) otherwise within ninety (90) days after such cessation.

6.2 Termination for Cause . If Executive is terminated as an employee of the Company or any Subsidiary or Parent thereof for Cause, the Stock Option granted under Section 1 hereof shall terminate immediately. .

      7. Death of Executive. If Executive dies while employed by the Company or any Parent or Subsidiary thereof, or during the period described in clause (a) or clause (b) of Section 6.1 hereof as applicable, then, subject to the time limitations of Section 4 hereof, the Stock Option granted under Section 1 hereof shall expire within one (1) year after the date of death; and the executor or administrator of Executive ‘ s estate, or the person or persons to whom Executive’s rights under such Stock Option shall have passed by Will or by the applicable laws of descent and distribution, shall have the right to exercise such Stock Option to the extent that Executive was entitled to exercise such Stock Option under Section 2 hereof on the date of death.

      8. Compliance With Securities and Tax Laws . No shares of Stock shall be issued pursuant to the exercise of the Stock Option hereunder except in compliance with all applicable federal and state securities and tax laws and regulations and in compliance with rules of stock exchanges on which the Stock may be listed. In furtherance of the foregoing and not in order to limit the generality of the foregoing in any way:

8.1 Representation. The Company, as a condition to the issuance of such shares, may require the person exercising such Stock Option to represent and warrant at the time of such exercise that any shares of Stock acquired upon exercise are being acquired only fur investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required under any applicable law, regulation or rule of any governmental agency.

8.2 Notice of Sale. The person acquiring such shares shall give the Company notice of any sale or other disposition of any such shares not less than ten (10) days after such sale or other disposition.

8.3 Withholding . Executive acknowledges and agrees that the Company, in order to fulfill its withholding obligations under any federal, state or local tax law upon exercise of the Stock Option, may (a) withhold such sums from other compensation due Executive, (b) require Executive to pay to the Company such amounts as a condition to the delivery of shares pursuant to

Page 4 of 7 Pages

 


 

such exercise, or ( c) sell shares that would otherwise be delivered to Executive upon exercise of the Stock Option in order to raise cash in the necessary amount.

      9. Miscellaneous

9.1 Complete Agreement. This Agreement, and any appendices, schedules, exhibits or documents referred to herein or executed contemporaneously herewith, constitute the entire agreement among the parties hereto with respect to the subject matter hereof, and supersede all prior written, and all prior and contemporaneous oral, agreements, representations, warranties, statements, promises and understandings with respect to the subject matter hereof, whether express or implied. All schedules, appendices and exhibits attached hereto are hereby incorporated in and made a part of this Agreement as if fully set forth herein.

9.2 Payments Subject to Creditors. Payments to Executive hereunder shall be made from assets which shall continue, for all purposes, to, be a part of the general assets of the Company; and no person, other than the Company, shall have, by virtue of the provisions of the Plan or the grant of the Stock Option hereunder, any interest in such assets. To the extent that any person acquires a right to receive payments from the Company under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Company.

9.3 No Trust or Contract of Employment. It is expressly understood by the parties hereto that this Agreement and the Plan relate exclusively to additional compensation for Executive’s services, and are not intended to be an employment contract. Nothing contained in this Agreement or the Plan, and no action taken pursuant to their provisions by either party hereto shall create, or be construed to create, (a) a trust of any kind, or a fiduciary relationship between the Company and Executive; or (b) a contract of employment for any term of years, or a right of Executive to continue in the employ of the Company in any capacity.

9.4 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and its succeSSOI5 and assigns, and Executive and Executive’s successors, assigns, heirs, executors, administrators and beneficiaries. Nothing in this Section 9.4 shall be deemed to modify or waive in any manner whatsoever such prohibitions on transfer or assignment of Executive’s rights hereunder as are contained elsewhere in this Agreement.

9.5 Amendment. Except as provided herein, this Agreement may not be amended, altered, modified or terminated except by a written instrument signed by the parties hereto, or their respective successors or assigns.

9.6 Notice. Whenever this Agreement or the Plan requires that notice be given by or to the Company or Executive, such notice shall be given to the Company at the address first set forth above (or to such other address as the Company may communicate to Executive under this Section 9.6) and to Executive at such address as is set forth on the books and records of the Company for the mailing of any Form W-2 with respect to Executive as follows: (a) by personal

Page 5 of 7 Pages

 


 

delivery, in which case notice shall be deemed to have been given on the date of delivery; (b) by certified United States mail, in which case notice shall be deemed to have been given two (2) days after deposit of such notice with the United States Postal Service; or (c) by DHL, Federal Express, United Parcel Service, or similar internationally-recognized overnight delivery service, in which case notice shall be deemed to have been given one (I) day after deposit of such notice or instrument with such service

9.7 Governing Law . Jurisdiction. This Agreement shall be governed by the laws of the State of California, regardless of the choice of law provisions of California or any other jurisdiction and regardless of where the parties hereto may now or hereafter be formed, do business, or reside. Any and all disputes between the parties which may arise pursuant to this Agreement will be heard and determined before an appropriate federal or state court located in Los Angeles, California. The parties hereto ackn0’Yledge that such court has the jurisdiction to interpret and enforce the provisions of this Agreement and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts.

9.8 Headings. The headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or interpret the scope of this Agreement or of any particular section hereof.

9.9 Waivers Strictly Construed. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder, (a) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party, and (b) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or by any other indulgence.

9.10 Severability. The validity, legality or enforceability of the remainder of this Agreement shall not be affected even if one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable in any respect.

9.11 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Page 6 of 7 Pages

 


 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.

                 
“Company”       “Executive”  
 
               
SAVE THE WORLD AIR, INC.,            
a Nevada corporation            
 
               
By
               
               
 
               
Name:
               
               
Title:
               
               
 
               
By
               
               
 
               
Name:
               
               
Title:
               
               

Page 7 of 7 Pages

 


 

SPOUSAL CONSENT

I certify that:

     1. I am the spouse of      who signed the foregoing Non-Qualified Stock Option Agreement dated as of       . 20- ( the “Agreement”) by and between — as the “Executive” thereunder and Save The World Air, Inc. as the “Company” thereunder.

     2. I have read and approve the provisions of the Agreement, including, but not limited to, those relating to the exercise, transfer and disposition of the Stock Option described therein.

     3. I agree to be bound by and accept those provisions of that Agreement in lieu of all other interests I may have in the Stock Options thereby granted, whether that interest may be community property or otherwise.

     4. Executive shall have full power of management of Executive . s interests in the Stock Options, including any portion of those interests that may be community property, and Executive has the full right, without my further approval, to exercise Executive’s rights with respect to such Stock Options, to execute any amendments to the Agreement, and to exercise and otherwise deal in any manner with such Stock Options, including any portion of such interests that may be community property.

                 
Date:
               
               
 
               
             
          Name of spouse:    
               

 


 

APPENDIX A
GLOSSARY OF TERMS

1. “Agreement” means the Non-Qualified Stock Option Agreement dated                      20- by and between Save The Wodd Air, Inc., a Nevada corporation, as the “Company” thereunder, and                      , an individual, as the “Executive” thereunder.

2.    “Board” is as defined in Recital “A” of the Agreement.
 
3 .   “Cause” is as defined in the Plan.
 
4.    “Committee” is as defined in the Plan.
 
5.    “Company” means Save The World Air, Inc., a Nevada corporation.
 
6.    “Corporate Transaction” is as defined in the Plan.
 
7.    “Disability” is as defined in the Plan.
 
8.    “Effective Date” of a Corporate Transaction is as defined in the Plan.
 
9.    “Executive” means                      , an individual.
 
10.    “Exercise Price” is as defined in Section 1 of the Agreement.
 
11.    “Family” is as defined in the Plan.
 
12.    “Grant Date” is as set forth in the first paragraph of the Agreement.
 
13.    “Non-Qualified Stock Option” is as defined in the Plan.
 
14.    “Parent” is as defined in the Plan.
 
15.    “Plan” is as defined in Recital” A” of the Agreement.
 
16.    “Stock” is as defined in the Plan.
 
17.    “Stock Option” is as defined in the Plan.
 
18.    “Subsidiary” is as defined in the Plan.
 
19.    “Will” is as defined in the Plan.

(1)

 

 

Exhibit 10.20

CONSULTING AGREEMENT

     This Consulting Agreement (“Agreement”), is made effective and entered into as of April 1,2003 by and between Save the World Air, Inc., a Nevada corporation (the “Company”), and Adrian Menzell (“Consultant’).

RECITALS

     A. The Company has developed proprietary technologies for reducing harmful emissions from fuel combustion engines and improving fuel efficiency, among other benefits. The development of these proprietary technologies and enhancements to them, as well as the anticipated manufacturing, distribution and sale of products derived from them, are sometimes referred to below as the Company’s “Business.” The Company’s current products are known as the ZEFS device, as described in the Company’s patent applications which are pending in various countries (the “ZEFS Product’). The Company is currently engaged in research and development for next-generation products and enhancements for use with diesel engines (“Diesel Product’), multiport or multipoint electronic fuel injection (“EFI Product”), each of which may consist of a device that is attached to an engine or to a component that is attached to the engine or a technology that is incorporated into an engine or a component attached to an engine. The ZEFS Products, Diesel Products and EFI Products are sometimes referred to collectively in this Agreement as the “Products.”

     B. The parties hereto anticipate that the Products will be based on the ZEFS Product or new technologies developed pursuant to this Agreement and certain related consulting agreements being entered into between the Company and certain others who are part of the Company’s R&D team.

     C. The Company desires to engage the services of Consultant to assist the Company in research and development and to provide other services and assistance to the Company in matters relating to the Company’s business, as they may arise from time to time, upon the terms and conditions contained herein.

     D. Consultant desires to provide services to the Company upon the terms and conditions contained herein.

     NOW, THEREFORE, the Company and Consultant hereby mutually agree as follows:

     Section I. Scope of Services to Be Provided. Consultant shall provide to the Company, on an as needed basis, assistance, advice and support relating to the Company’s business, including project management and supporting the project lead and development team, as the Company may request from time to time. Without limiting the generality of the foregoing, Consultant shall:

     (a)  R&D. Consultant shall undertake and perform the tasks outlined on Annex A hereto and such additional or other responsibilities as may be reasonably assigned to Consultant from time to time by the Company’s Chief Executive Officer, Chief Operating Officer, or Director of Research and Development.

 


 

     (b)  Reports. Consultant shall assist in the preparation of regular monthly reports to the Company on the efforts expended and undertaken on each project assigned to or undertaken by Consultant. Consultant shall maintain and make available to the Company upon request complete records for purchases, products, prices, analyses, testing and test results, contacts, drawings and such other matters as the Company may request from time to time.

     (c)  Procedures for Maintaining Proprietary Information. Consultant shall keep and maintain such procedures as may be customary and appropriate and as may be specified by the Company to protect, maintain and keep confidential any proprietary or confidential information of the Company, including without limitation all know how and information that may constitute a trade secret or otherwise confer strategic or competitive advantages to the Company, by use of passwords, locked cabinets, identification of such information and materials as “Confidential’ and other limits on access as may be customary or appropriate or set forth in Company policies.

     (d)  Travel. The Company may require Consultant to travel at Company expense to its U.S. offices and facilities at least twice per year and internationally from time to time as may be reasonably required to fulfill Consultant’s assigned duties and responsibilities, provided that each such trip shall not exceed two weeks without Consultant’s consent.

     Section 2. Non-Disclosure Obligations. Concurrently with the parties’ execution of this Agreement, Consultant shall execute and deliver to the Company the Confidentiality Agreement attached hereto as Annex B (the “Confidentiality Agreement”), the provisions of which are incorporated herein by this reference.

     Section 3. Consultant’s Representations and Covenants. Consultant represents, warrants and covenants to the Company that:

          (a) Consultant shall devote such time, energy, interest, ability, and skill as may be fairly and reasonably necessary to provide to the Company the services described in Section 1 above;

          (b) The Company may require Consultant to travel to its U.S. offices and facilities at the Company’s expense at least twice per year and internationally from time to time as may be reasonably required to fulfill Consultant’s assigned duties and responsibilities, provided that each such trip shall not exceed two weeks without Consultant’s consent.

          (c) Consultant shall not, during the term of this Agreement, directly or indirectly, promote, participate, or engage in any business activity that would materially interfere with the performance of Consultant’s duties under this Agreement or which is competitive with the Company’s or any Company Affiliate’s business, including, without limitation, any involvement as a shareholder, director, officer, employee, partner, joint venturer, consultant, advisor, individual proprietor, lender, or agent of any business, without the prior written consent of the Company. The term “Affiliate” shall mean, with respect to any person or entity, any other person or entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with, such person or entity. “Control of,” “controlled by” and “under common control with” mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person or entity, by

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contract or credit arrangement, as trustee or executor, or otherwise. The term “Affiliate” includes, but is not limited to, each and every subsidiary of the Company.

          (d) During the term of this Agreement and for a period of one year after the termination of this Agreement, Consultant shall not solicit, attempt to solicit, or cause to be solicited any customers of the Company for purposes of promoting or selling products or services which are competitive with those of the Company, nor shall Consultant solicit, attempt to solicit, or cause to be solicited any employees, agents, or other independent contractors of the Company to cease their relationship with the Company.

          (e) Consultant does not have any agreements with or commitments to any other person or entity which conflict with any of Consultant’s obligations to the Company arising under this Agreement.

          (f) Consultant shall maintain any and all licenses and permits as may be required for Consultant to provide the consulting services contemplated hereby. In the event Consultant shall utilize the services or shall acquire any products in order to render the consulting services contemplated hereby, Consultant shall be solely responsible for the payment for such services and products, except to the extent reimbursable by the Company in accordance with Section 7 below. Consultant shall be solely responsible for any and all income and other taxes that may be due to any state, local or federal governmental authorities in respect of the compensation to Consultant pursuant to this Agreement. Consultant acknowledges that the Company shall not make any withholdings from payments to Consultant hereunder.

          (g) Except upon the express written consent of the Company, Consultant shall have no authority, and shall not represent, suggest or imply that Consultant has the authority, express or implied: (1) to bind the Company to any agreements or arrangements, written or oral; (2) to make an offer or accept an offer on behalf of the Company; or (3) to make representations, warranties, guaranties, commitments or covenants on behalf of Company.

     Section 4. Ownership

          (a) The compensation payments set forth herein shall be full and complete compensation both for all obligations assumed by Consultant hereunder and for any and all Creations (as defined in the Confidentiality Agreement) assigned under this Agreement.

          (b) The Company shall retain the exclusive right to use or distribute, at its sole discretion, any and all Creations. Consultant shall make no claim on any consideration received by the Company for the sale, lease or use of the Creations.

          (c) The Company shall include Consultant’s profile on its Company website with other members of the R&D team and may include such information as it deems appropriate in the Company’s Product and marketing materials.

     Section 5. Term. This Agreement shall terminate on March 31,2005, unless earlier terminated in accordance with this Section 5. In addition, this Agreement shall terminate automatically upon the death of Consultant, or the mental or physical incapacity of Consultant for a period of 60 consecutive days. Either party hereto may terminate this Agreement upon a

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material breach of this Agreement by the other party; and the Company may terminate this Agreement upon a material breach of the Confidentiality Agreement by Consultant.

     Section 6. Compensation. Consultant’s compensation for his consulting services hereunder shall be as set forth on Annex C hereto.

     Section 7. Reimbursement of Business Expenses. To the extent Consultant is authorized by the Company to order equipment and supplies or make other expenditures to carry out Consultant’s duties hereunder, the Company shall reimburse Consultant for the actual costs thereof, subject to receipt of such documentation and other information as the Company may reasonably request or require in accordance with its policies, and subject further to any limitations on the amount that Consultant may be authorized to incur in ordering such equipment and supplies or making other expenditures on the Company’s behalf. Reimbursement for each qualifying expense shall be made on the last day of the calendar month following the month in which a receipt for payment by Consultant of such expense item and any and all other documentation which the Company may reasonably require regarding the expense item was submitted to. Company.

     Section 8. Independent Contractor. Consultant shall be retained by the Company only for the purposes and to the extent set forth in this Agreement, and his relation to the Company, during the term of this Agreement, shall be that of an independent contractor. Consultant shall not be considered as having an employee status.

     Section 9. Injunctive Relief Remedies at law shall be deemed to be inadequate for any breach of any of the covenants of this Agreement, and the Company shall be entitled to injunctive relief in addition to any other remedies it may have in the event of such breach.

     Section 10. Indemnification. If Consultant becomes a defendant in, or is threatened to be made a party to, a Claim by reason of (or arising in part out of) an Identifiable Event, the Company shall indemnify, defend and hold harmless Consultant against any and all Expenses, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of any Claim, subject to any limitations set forth herein below. For purposes of this section, the following terms shall have the meanings set forth below:

     (a) “Claim” shall mean any threatened, pending or completed action, suit or proceeding against Consultant, whether civil, criminal, administrative, investigative or other.

     (b) “Expenses” shall mean attorneys’ fees and all other costs, expenses and obligations paid or incurred by Consultant arising from defense of a Claim.

     (c) “Identifiable Event” shall mean any act or omission of Consultant in carrying out Consultant’s duties under this Agreement that is (i) other than a criminal act and (ii) within the scope of Consultant’s services to the Company under this Agreement, including without limitation Claims alleging facts based on theories of negligence; violation of securities laws in connection with the offer and sale of the Company’s securities; that the Consultant is or was an agent, employee or fiduciary of the Company; or that Consultant is or was serving at the request

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of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or relating to anything done or not done by the Consultant in any such capacity.

     Section 11. Amendments; Consents. No amendment, modification, supplement, termination, or waiver of any provision in this Agreement, and no consent to any departure there from, shall be effective unless in writing and signed by both Consultant and the Company and then only in the specific instance and for the specific purpose given.

     Section 12. Notices. Any notices required or permitted to be given in writing will be deemed received when personally delivered or, if earlier, ten (10) days after mailing by registered or certified United States mail, postage prepaid, and return receipt requested. Notice to the Company is valid if sent to the Company’s principal place of business and notice to Consultant is valid if sent to Consultant at Consultant’s address as it appears in the Company’s records. The Company or Consultant may change their address only by notice given to the other in the manner set forth herein.

     Section 13. Counterparts; Facsimile Signatures. This Agreement may be executed in two or more counterparts, and the counterparts, taken together, shall constitute one original. Executed copies of this Agreement and any amendments or modifications thereto may be delivered by facsimile transmission in lieu of an original.

     Section 14. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of Consultant and the Company and their respective permitted successors and assigns. This Agreement, including the rights and obligations hereunder, shall not be assigned, delegated or transferred by Consultant without the prior written consent of the Company.

     Section 15. Integration; Construction. This Agreement (together with the appendices thereof) shall comprise the complete and integrated agreement of the Company and Consultant and shall supersede all prior agreements, written or oral, on the subject matter hereof. Neither party hereto shall have a provision construed against it by reason of such party having drafted the same.

     Section 16. Survival. The rights and obligations provided in Section 3(c), Section 4, Section 9, Section 10, Section 14, Section 20 and paragraph (c) of Annex C hereto shall survive termination of this Agreement.

     Section 17. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     Section 18. Severability of Provisions. Any provision in this Agreement that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall be, as to that jurisdiction only, inoperative, unenforceable, or invalid without affecting the remaining provisions in that
jurisdiction or the operation, enforceability, or validity of those provisions in any other jurisdiction, and to this end the provisions of this Agreement shall be severable.

     Section 19. Headings. Headings of this Agreement are included for convenience only and shall not be considered a part of this Agreement for any other purpose.

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     Section 20. Attorneys’ Fees. In the event of any litigation or other dispute arising as a result of or by reason of this Agreement, the prevailing party in any such litigation or other dispute shall be entitled to, in addition to any other damages assessed, its reasonable attorneys’ fees, and all other costs and expenses incurred in connection with settling or resolving such dispute. The attorneys’ fees which the prevailing party is entitled to recover shall include fees for prosecuting or defending any appeal and shall be awarded for any supplemental proceedings until the final judgment is satisfied in full. In addition to the foregoing award of attorneys’ fees to the prevailing party, the prevailing party in any lawsuit on this Agreement shall be entitled to its reasonable attorneys’ fees incurred in any post judgment proceedings to collect or enforce the judgment. This attorneys’ fees provision is separate and several and shall survive the merger of this Agreement into any judgment.

     Section 21. Waiver; Rights and Remedies. Neither Consultant’s nor the Company’s failure to exercise any right under this Agreement shall constitute a waiver of any other term or condition of this Agreement with respect to any other preceding, concurrent, or subsequent breach, nor shall it constitute a waiver by the Company or Consultant of its rights at any time thereafter to require exact and strict compliance with any of the terms of this Agreement. The rights and remedies set forth in this Agreement shall be in addition to any other rights or remedies which may be granted by law.

     IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.

         
    CONSULTANT
 
       
  By   /s/ A. MENZELL 
       
  Name:   Adrian Menzell 
       
 
       
    SAVE THE WORLD AIR, INC.
 
       
  By   /s/ EUGENE E. EICHLER 
       
  Name:   Eugene E. Eichler 
       
  Title:   Chief Operating Officer 
       

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ANNEX A
CONSUL TANT’S DUTIES AND RESPONSIBILITIES

     
   
 

•   The design, development of new configurations and testing of all units.
 
•   All mechanical repairs that need to be performed to have the vehicles running correctly and diagnose and rectify problems before and during testing.
 
•   Assisting with the ordering, organizing and purchase of products and plant and equipment, etc.
 
•   Decision making in relation to such issues as leasing of workshops and insurance needs, etc.
 
•   Assist in preparatory reports to the Company in relation to the ZEFS devices.
 
•   Development of new ways of dealing with the issue of multi-port fuel injection along with Pat Baker.
 
•   Control the ordering, organizing and purchase of products and plant and equipment relating to the development and supply of the devices.
 
•   Show and explain the basic principles of the operation and functions of an engine e.g. multi-point fuel injection and engine management systems and all associated items.
 
•   Look at all new possible sites and to determine the conditions of vehicles and fitting stations, talk to transport authorities and to talk and set up standards with other engineering and technical personnel.
 
•   Look at all working relations and access the progress and development of all new and upcoming devices including the assessment of all the multi-fuel injection systems.

 


 

      ANNEX “B”

CONFIDENTIALITY AGREEMENT

     This Confidentiality Agreement (“Agreement”) dated as of April 1, 2003, is entered into by and between the individual whose name appears on the signature page of the related Consulting Agreement (“Consultant”), on the one hand, and Save the World Air, Inc., a Nevada corporation (the “Company”), on the other, with reference to the following facts:

      RECITALS

  A.   This Agreement is being entered into pursuant to that certain Consulting Agreement of even date herewith, between the Company and Consultant (“Consulting Agreement”).
 
  B.   The Company has retained the services of Consultant to provide Policies and Procedures and other services as called upon from time to time.
 
  C.   The Company desires to protect various proprietary and confidential information that it uses in its business.

     Therefore, the parties hereto do hereby agree as follows:

     1.  Definition of Confidential Information .

          (a) For the purposes of this Agreement, the term “Confidential Information” shall mean information, material and trade secrets (i) proprietary to the Company or to any Affiliate (as defined below) of the Company or (ii) designated as confidential by the Company, whether or not owned or developed by the Company, which Consultant may obtain knowledge of or access to, through or as a result of, Consultant’s relationship with the Company or with any Affiliate of the Company.

          (b) Without limiting the generality of the foregoing, Confidential Information shall include, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing or still in development):

     (i) The “Technology,” which means:

  (1)   Any and all “Creations” as defined below; and
 
  (2)   any and all enhancements thereto.

     (ii) Economic and financial analyses, marketing techniques and materials, marketing and development plans, customer names and other information related to customers, price lists, pricing policies, financial information and Consultant files.

     (iii) Information constituting a “trade secret” as defined in California Civil Code Section 3426.1.

 


 

Save the World Air, Inc.

     (iv) Any information described above which Company obtains from another party and which Company treats as proprietary or designates as Confidential Information, whether or not owned or developed by the Company.

          (c) The term “Creations” shall mean any and all discoveries, ideas, inventions, concepts, software in various states of development, designs, drawings, specifications, techniques, models, data, source code, object code, documentation, diagrams, flow charts, research, developments, processes, procedures, “know-how,” any enhancements to the foregoing and Consultant’s files that may be conceived or developed by Consultant, either alone or with others, during the term of this Agreement, whether or not conceived or developed during Consultant’s working hours, that relate to the Products or the Company’s Business (each as defined in the Consulting Agreement) or to the Company’s actual or demonstrably anticipated research and development, or that result from any services rendered by Consultant for the Company.

          (d) The term “Affiliate” shall mean, with respect to any person or entity, any other person or entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with such person or entity. “Control of,” “controlled by” and “under common control with” mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person or entity, by contract or credit arrangement, as trustee or executor or otherwise. The term “Affiliate” includes, but is not limited to, each and every subsidiary of the Company, if any.

          (e) INFORMATION PUBLICLY KNOWN THAT IS GENERALLY EMPLOYED BY THE TRADE AT OR AFTER THE TIME CONSULTANT FIRST LEARNS OF SUCH INFORMATION, OR GENERIC INFORMATION OR KNOWLEDGE WHICH CONSULTANT WOULD HAVE LEARNED IN THE COURSE OF SIMILAR SERVICES OR EMPLOYMENT ELSEWHERE IN THE TRADE, SHALL NOT BE DEEMED PART OF THE CONFIDENTIAL INFORMATION.

          (f) Any capitalized terms used and not otherwise defined herein shall have the meanings, if any, ascribed to them in the Consulting Agreement.

     2.  Confidential Treatment . Consultant hereby agrees, during the term of his consulting arrangement with Company and at all times thereafter, to hold in confidence and not to directly or indirectly reveal, report, publish, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Consultant’s services for Company, without the prior written consent of the chief executive officer of Company. Consultant agrees that, as between Consultant and Company, Company owns all of the Confidential Information, and Consultant hereby agrees to regard and preserve as confidential all Confidential Information. Consultant hereby agrees not to take, retain or copy, without the prior written consent of the chief executive officer of Company, any or all of the Confidential Information. Without limiting the generality of the foregoing, during the term hereof and after termination of Consultant’s employment with the Company, Consultant shall not use, build, reverse-engineer, decompile, modify for use or disassemble any of the Technology.

     3.  Ownership . The Technology including without limitations any and all Creations shall be the sole and exclusive property of the Company. At any time upon the request of the Company, Consultant shall: (i) assign, without charge to the Company, all his rights, title, and interests in any of the Creations to the Company; (ii) execute, acknowledge, and deliver any and

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Save the World Air, Inc.

all instruments necessary to confirm the Company’s complete ownership of the Creations; and (iii) perform all other reasonable acts which may be necessary to perfect and to protect the Company’s ownership rights in the Creations. Consultant hereby assigns to the Company all of his right, title and inters in and to the Creations. Consultant shall disclose promptly and only to the Company, and shall make an adequate record of, any and all Creations conceived or developed by Consultant (either alone or jointly with others) during the term of this Agreement and within one year thereafter, whether or not the property of the Company.

     4.  Return of Materials and Copies . All notes, data, reference materials, sketches, drawings, memoranda, documentation and records in any way incorporating or reflecting any of the Confidential Information and all proprietary rights therein, including copyrights, shall belong exclusively to Company, and Consultant hereby agrees to turn over promptly all copies of such materials in Consultant’s control to Company upon Company’s request or upon termination of Consultant’s employment by Company.

     5.  Non-Competition and Non-Solicitation . During the Company’s employment of Consultant and for a period of two (2) years following the term of the Consulting Agreement, Consultant shall not assist, become employed by or engage in any consulting or other services for any person or entity that is engaged in any business or other activity in competition with the Company, nor solicit or entice any of the Company’s employees to do any of the foregoing. During the Company’s employment of Consultant and for a period of two (2) years following the term of the Consulting Agreement, Consultant shall not set up or take preliminary steps to set up or engage in any business enterprise that would be in competition with the Company and Consultant shall disclose to the Company, any and all competitive plans that Consultant may have, without regard to Consultant’s intent to act or not act on such plans.

     6.  Fiduciary Obligations . Nothing in this Agreement is intended to limit Consultant’s obligations to Company in any capacity, and Consultant shall be bound by all fiduciary and other obligations to Company which may arise by reason of Consultant’s employment, capacity or other duties to the Company.

     7.  Injunctive Relief . Due to the unique nature of the Confidential Information, Consultant understands and hereby agrees that Company will suffer irreparable harm in the event that Consultant fails to comply with any of Consultant’s obligations under Section 2 or 3 above and that monetary damages will be inadequate to compensate Company for such breach. Accordingly, Consultant hereby agrees that Company will be entitled, in addition to any other remedies available to it at law or in equity, to injunctive relief to enforce the terms of Sections 2 and 3 above.

     8.  Amendments; Consents . No amendment, modification, supplement, termination or waiver of any provision in this Agreement, and no consent to any departure therefrom, shall be effective unless in writing and signed by both Consultant and Company and then only in the specific instance and for the specific purpose given.

     9.  Notice . Any notices required or permitted to be given in writing and will be deemed received when personally delivered or, if earlier, ten (10) days after mailing by registered or certified United States mail, postage prepaid, and with return receipt requested. Notice to the Company is valid if sent to the Company’s principal place of business and notice to Consultant is valid if sent to Consultant at Consultant’s address as it appears in the Company’s records.

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Save the World Air, Inc.

     10.  Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all such counterparts when taken together shall be deemed to be but one and the same instrument.

     11.  Binding Effect; Assignment . This Agreement shall be binding upon and inure to the benefit of Consultant and Company and their respective permitted successors and assigns. This Agreement, including the rights and obligations hereunder, shall not be assigned or transferred by Consultant without the prior written consent of Company.

     12.  Integration; Construction . This Agreement (together with the Consulting Agreement) shall comprise the complete and integrated agreement of the Company and Consultant and shall supersede all prior agreements, written or oral, on the subject matter hereof. Neither party hereto shall have a provision construed against it by reason of such party having drafted the same.

     13.  Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     14.  Severability of Provisions . Any provision in this Agreement that is held to be inoperative, unenforceable or invalid in any jurisdiction shall be, as to that jurisdiction only, inoperative, unenforceable or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of those provisions in any other jurisdiction, and to this end the provisions of this Agreement shall be severable.

     15.  Headings . Headings of this Agreement are included for convenience only and shall not be considered a part of this Agreement for any other purpose.

     16.  Attorneys’ Fees . In the event of any litigation or other dispute arising as a result of or by reason of this Agreement, the prevailing party in any such litigation or other dispute shall be entitled to, in addition to any other damages assessed, its reasonable attorneys’ fees, and all other costs and expenses incurred in connection with settling or resolving such dispute. The attorneys’ fees which the prevailing party is entitled to recover shall include fees for prosecuting or defending any appeal and shall be awarded for any supplemental proceedings until the final judgment is satisfied in full. In addition to the foregoing award of attorneys’ fees to the prevailing party, the prevailing party in any lawsuit on this Agreement shall be entitled to its reasonable attorneys’ fees incurred in any post judgment proceedings to collect or enforce the judgment. This attorneys’ fees provision is separate and several and shall survive the merger of this Agreement into any judgment.

     17.  Waiver; Rights and Remedies . Neither Consultant’s nor Company’s failure to exercise any right under this Agreement shall constitute a waiver of any other term or condition of this Agreement with respect to any other preceding, concurrent or subsequent breach, nor shall it constitute a waiver by the Company or Consultant of its rights at any time thereafter to require exact and strict compliance with any of the terms of this Agreement. The rights and remedies set forth in this Agreement shall be in addition to any other rights or remedies which may be granted by law.

(Signature page follows)

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Save the World Air, Inc.

IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.

         
    SAVE THE WORLD AIR, INC.
 
       
  By   /s/ EUGENE E. EICHLER
       
      Eugene E. Eichler
Its Chief Financial Officer
         
    CONSULTANT
 
       
  By   /s/ ADRIAN MENZELL
       
      Name Adrian Menzell
      Address:

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ANNEX C
CONSULTANT’S COMPENSATION

     
   
 

Pursuant to Section 6 of the Agreement to which this Annex is attached, and into which the provisions of this Annex are incorporated, and subject to the terms and conditions contained in the Agreement, the Company shall pay and deliver to Consultant the following:

     (a)  Consulting Fees. The Company shall pay Consultant compensation equal to AU$7,000 per month, payable semi-monthly in accordance with the Company’s usual payroll practices. Such consulting fees shall be payable to Consultant by no later than the twenty-fifth (25th) day of each calendar month, provided the Company shall have received from Consultant (i) a reasonably detailed accounting of consulting services rendered by Consultant during the immediately preceding month by no later than the fifth day of the calendar month, together with (ii) any supporting documentation for such accounting as the Company may reasonably request from Consultant by no later than five Business Days following the date of such request. The term “Business Day” as used herein shall mean any day other than a Saturday, Sunday or a day on which banks in Los Angeles, California are authorized or required to be closed.

     (b)  Equity Incentives. Subject to compliance with applicable securities laws, the Company shall grant and/or issue to Consultant Common stock awards for an aggregate of 200,000 shares of Company common stock, as follows:

                 
Type of shares:   Common Stock.        
 
               
Number of shares:   Grant 1:     100,000  
 
               
      Grant 2:     100,000  
 
               
Award vesting:            
 
               
    Grant 1:   On the first anniversary of this Agreement.
 
               
    Grant 2:   On the second anniversary of this Agreement.

 


 

         
  Other:   Upon vesting of Grant 1 or Grant 2, the Company shall promptly deliver stock certificates to Consultant evidencing the number of shares having then vested. Consultant must be engaged or employed by the Company at the time of the award; provided that the award shall vest automatically if Consultant is terminated without cause prior to expiration of the term of the Agreement. The Company shall provide Consultant with a separate ''Notice of Stock Grant.”

    (c). Other Incentives. The Company shall pay and/or provide to Consultant the following:

         
      A royalty of {US$0.25 per unit or ZEFS device sold by the Company (after allowance for any returns and return reserves). The royalty shall be payable 30 days after the close of each quarter in arrears.

Royalties shall be payable 30 days after the close of each quarter in arrears.

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Exhibit 10.21

CONSULTING AGREEMENT

     This Consulting Agreement (“Agreement”) is made effective and entered into as of April 1, 2003, by and between Save the World Air, Inc., a Nevada corporation (the “Company”), and Pat Baker (“Consultant’), with reference to the following facts:

RECITALS

     A. The Company has developed proprietary technologies for reducing harmful emissions from fuel combustion engines and improving fuel efficiency, among other benefits. The development of these proprietary technologies and enhancements to them, as well as the anticipated manufacturing, distribution and sale of products derived from them, are sometimes referred to below as the Company’s “Business.” The Company’s current products are known as the ZEFS device, as described in the Company’s patent applications which are pending in various countries (the “ZEFS Product’). The Company is currently engaged in research and development for next-generation products and enhancements for use with diesel engines (“Diesel Product”), multiport or multipoint electronic fuel injection (“EFI Product’), each of which may consist of a device that is attached to an engine or to a component that is attached to the engine or a technology that is incorporated into an engine or a component attached to an engine. The ZEFS Products, Diesel Products and EFI Products are sometimes referred to collectively in this Agreement as the “Products.”

     B. The parties hereto anticipate that the Products will be based on the ZEFS Product or new technologies developed pursuant to this Agreement and certain related consulting agreements being entered into between the Company and certain others who are part of the Company’s R&D team.

     C. The Company desires to engage the services of Consultant to assist the Company in research and development and to provide other services and assistance to the Company in matters relating to the Company’s business, as they may arise from time to time, upon the terms and conditions contained herein.

     D. Consultant desires to provide services to the Company upon the terms and conditions contained herein.

     NOW, THEREFORE, the Company and Consultant hereby mutually agree as follows:

     Section 1. Scope of Services to Be Provided. Consultant shall provide to the Company, on an as needed basis, assistance, advice and support relating to the Company’s business, including technical support of the project lead and development team, as the Company may request from time to time. Without limiting the generality of the foregoing, Consultant shall:

     (a)  R&D. Consultant shall undertake and perform the tasks outlined on Annex A hereto and such additional or other responsibilities as may be reasonably assigned to Consultant from time to time by the Company’s Chief Executive Officer, President, Chief Operating Officer, Consultant’s project supervisors or Director of R&D.

 


 

     (b)  Reports. Consultant shall assist in the preparation of regular monthly reports to the Company or Consultant’s project supervisor on the efforts expended and undertaken on each project assigned to or undertaken by Consultant. Consultant shall maintain and make available to the Company upon request complete records for purchases, products, prices, analyses, testing and test results, contacts, drawings and such other matters as the Company may request from time to time.

     (c)  Procedures for Maintaining Proprietary Information. Consultant shall keep and maintain such procedures as may be customary and appropriate and as may be specified by the Company to protect, maintain and keep confidential any proprietary or confidential information of the Company, including without limitation all know how and information that may constitute a trade secret or otherwise confer strategic or competitive advantages to the Company, by use of passwords, locked cabinets, identification of such information and materials as “Confidential’ and other limits on access as may be customary or appropriate or set forth in Company policies.

     Section 2. Non-Disclosure Obligations. Concurrently with the parties’ execution of this Agreement, Consultant shall execute and deliver to the Company the Confidentiality Agreement attached hereto as Annex B (the “Confidentiality Agreement”), the provisions of which are incorporated herein by this reference.

     Section 3. Consultant’s Representations and Covenants. Consultant represents, warrants and covenants to the Company that:

          (a) Consultant shall devote such time, energy, interest, ability, and skill as may be fairly and reasonably necessary to provide to the Company the services described in Section 1 above.

          (b) The Company may require Consultant to travel to its U.S. offices and facilities at the Company’s expense at least twice per year and internationally from time to time as may be reasonably required to fulfill Consultant’s assigned duties and responsibilities, provided that each such trip shall not exceed two weeks without Consultant’s consent.

          (c) Consultant shall not, during the term of this Agreement, directly or indirectly, promote, participate, or engage in any business activity that would materially interfere with the performance of Consultant’s duties under this Agreement or which is competitive with the Company’s or any Company Affiliate’s business, including, without limitation, any involvement as a shareholder, director, officer, employee, partner, joint venturer, consultant, advisor, individual proprietor, lender, or agent of any business, without the prior written consent of the Company. The term “Affiliate” shall mean, with respect to any person or entity, any other person or entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with, such person or entity. “Control of,” “controlled by” and “under common control with” mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person or entity, by contract or credit arrangement, as trustee or executor, or otherwise. The term “Affiliate” includes, but is not limited to, each and every subsidiary of the Company.

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          (d) During the term of this Agreement and for a period of one year after the termination of this Agreement, Consultant shall not solicit, attempt to solicit, or cause to be solicited any customers of the Company for purposes of promoting or selling products or services which are competitive with those of the Company, nor shall Consultant solicit, attempt to solicit, or cause to be solicited any employees, agents, or other independent contractors of the Company to cease their relationship with the Company.

          (e) Consultant does not have any agreements with or commitments to any other person or entity which conflict with any of Consultant’s obligations to the Company arising under this Agreement.

          (f) Consultant shall maintain any and all licenses and permits as may be required for Consultant to provide the consulting services contemplated hereby. In the event Consultant shall utilize the services or shall acquire any products in order to render the consulting services contemplated hereby, Consultant shall be solely responsible for the payment for such services and products, except to the extent reimbursable by the Company in accordance with Section 7 below. Consultant shall be solely responsible for any and all income and other taxes that may be due to any state, local or federal governmental authorities in respect of the compensation to Consultant pursuant to this Agreement. Consultant acknowledges that the Company shall not make any withholdings from payments to Consultant hereunder.

          (g) Except upon. the express written consent of the Company, Consultant shall have no authority, and shall not represent, suggest or imply that Consultant has the authority, express or implied: (1) to bind the Company to any agreements or arrangements, written or oral; (2) to make an offer or accept an offer on behalf of the Company; or (3) to make representations, warranties, guaranties, commitments or covenants on behalf of Company.

     Section 4. Ownership.

          (a) The compensation payments set forth herein shall be full and complete compensation both for all obligations assumed by Consultant hereunder and for any and all Creations (as defined in the Confidentiality Agreement) assigned under this Agreement.

          (b) The Company shall retain the exclusive right to use or distribute, at its sole discretion, any and all Creations. Consultant shall make no claim on any consideration received by the Company for the sale, lease or use of the Creations.

          (c) The Company shall include Consultant’s profile on its Company website with other members of the R&D team and may include such information as it deems appropriate in the Company’s Product and marketing materials.

     Section 5. Term. This Agreement shall terminate on March 31,2005, unless earlier terminated in accordance with this Section 5. In addition, this Agreement shall terminate automatically upon the death of Consultant, or the mental or physical incapacity of Consultant for a period of 60 consecutive days. Either party hereto may terminate this Agreement upon a material breach of this Agreement by the other party; and the Company may terminate this Agreement upon a material breach of the Confidentiality Agreement by Consultant.

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     Section 6. Compensation. Consultant’s compensation for his consulting services hereunder shall be as set forth on Annex C hereto.

     Section 7. Reimbursement of Business Expenses. To the extent Consultant is authorized by the Company to order equipment and supplies or make other expenditures to carry out Consultant’s duties hereunder, the Company shall reimburse Consultant for the actual costs thereof, subject to receipt of such documentation and other information as the Company may reasonably request or require in accordance with its policies, and subject further to any limitations on the amount that Consultant may be authorized to incur in ordering such equipment and supplies or making other expenditures on the Company’s behalf. Reimbursement for each qualifying expense shall be made on the last day of the calendar month following the month in which a receipt for payment by Consultant of such expense item and any and all other documentation which the Company may reasonably require regarding the expense item was submitted to Company.

     Section 8. Independent Contractor. Consultant shall be retained by the Company only for the purposes and to the extent set forth in this Agreement, and his relation to the Company, during the term of this Agreement, shall be that of an independent contractor. Consultant shall not be considered as having an employee status.

     Section 9. Injunctive Relief. Remedies at law shall be deemed to be inadequate for any breach of any of the covenants of this Agreement, and the Company shall be entitled to injunctive relief in addition to any other remedies it may have in the event of such breach.

     Section 10. Indemnification. If Consultant becomes a defendant in, or is threatened to be made a party to, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify, defend and hold harmless Consultant against any and all Expenses, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of any Claim, subject to any limitations set forth herein below. For purposes of this section, the following terms shall have the meanings set forth below:

     (a) “Claim” shall mean any threatened, pending or completed action, suit or proceeding against Consultant, whether civil, criminal, administrative, investigative or other.

     (b) “Expenses” shall mean attorneys’ fees and all other costs, expenses and obligations paid or incurred by Consultant arising from defense of a Claim.

     (c) “Indemnifiable Event” shall mean any act or omission of Consultant in carrying out Consultant’s duties under this Agreement that is (i) other than a criminal act and (ii) within the scope of Consultant’s services to the Company under this Agreement, including without limitation Claims alleging facts based on theories of negligence; violation of securities laws in connection with the offer and sale of the Company’s securities; that the Consultant is or was an agent, employee or fiduciary of the Company; or that Consultant is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another

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corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or relating to anything done or not done by the Consultant in any such capacity.

     Section 11. Amendments; Consents. No amendment, modification, supplement, termination, or waiver of any provision in this Agreement, and no consent to any departure therefrom, shall be effective unless in writing and signed by both Consultant and the Company and then only in the specific instance and for the specific purpose given.

     Section 12. Notices. Any notices required or permitted to be given in writing will be deemed received when personally delivered or, if earlier, ten (10) days after mailing by registered or certified United States mail, postage prepaid, and return receipt requested. Notice to the Company is valid if sent to the Company’s principal place of business and notice to Consultant is valid if sent to Consultant at Consultant’s address as it appears in the Company’s records. The Company or Consultant may change their address only by notice given to the other in the manner set forth herein.

     Section 13. Counterparts; Facsimile Signatures. This Agreement may be executed in two or more counterparts, and the counterparts, taken together, shall constitute one original. Executed copies of this Agreement and any amendments or modifications thereto may be delivered by facsimile transmission in lieu of an original.

     Section 14. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of Consultant and the Company and their respective permitted successors and assigns. This Agreement, including the rights and obligations hereunder, shall not be assigned, delegated or transferred by Consultant without the prior written consent of the Company.

     Section 15. Integration; Construction. This Agreement (together with the appendices thereof) shall comprise the complete and integrated agreement of the Company and Consultant and shall supersede all prior agreements, written or oral, on the subject matter hereof. Neither party hereto shall have a provision construed against it by reason of such party having drafted the same.

     Section 16. Survival. The rights and obligations provided in Section 3(c), Section 4, Section 9, Section 10, Section 14, Section 20 and paragraph (c) of Annex C hereto shall survive termination of this Agreement.

     Section 17. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     Section 18. Severability of Provisions. Any provision in this Agreement that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall be, as to that jurisdiction only, inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of those provisions in any other jurisdiction, and to this end the provisions of this Agreement shall be severable.

     Section 19. Headings. Headings of this Agreement are included for convenience only and shall not be considered a part of this Agreement for any other purpose.

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     Section 20. Attorneys’ Fees. In the event of any litigation or other dispute arising as a result of or by reason of this Agreement, the prevailing party in any such litigation or other dispute shall be entitled to, in addition to any other damages assessed, its reasonable attorneys’ fees, and all other costs and expenses incurred in connection with settling or resolving such dispute. The attorneys’ fees which the prevailing party is entitled to recover shall include fees for prosecuting or defending any appeal and shall be awarded for any supplemental proceedings until the final judgment is satisfied in full. In addition to the foregoing award of attorneys’ fees to the prevailing party, the prevailing party in any lawsuit on this Agreement shall be entitled to its reasonable attorneys’ fees incurred in any post judgment proceedings to collect or enforce the judgment This attorneys’ fees provision is separate and several and shall survive the merger of this Agreement into any judgment.

     Section 21. Waiver; Rights and Remedies. Neither Consultant’s nor the Company’s failure to exercise any right under this Agreement shall constitute a waiver of any other term or condition of this Agreement with respect to any other preceding, concurrent, or subsequent breach, nor shall it constitute a waiver by the Company or Consultant of its rights at any time thereafter to require exact and strict compliance with any of the terms of this Agreement. The rights and remedies set forth in this Agreement shall be in addition to any other rights or remedies which may be granted by law.

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     IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.

         
    CONSULTANT
 
       
  By:   /s/ PATRICK DENNIS BAKER 
       
 
       
  Name:   Patrick Dennis Baker 
       
 
       
    SAVE THE WORLD AIR, INC.
 
       
  By:   /s/ EUGENE E. EICHLER 
       
 
       
  Name:   Eugene E. Eichler 
       
 
       
  Title:   Chief Operating Officer 
       

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ANNEX A
Consultant’s Duties and Responsibilities

•   The design, development of new configuration and testing of all units.

•   Assist in preparatory to reports to the Company in relation to the ZEFS devices.

•   Development of new ways of dealing with the issue of multi-port fuel injection.

 


 

      ANNEX “B”

CONFIDENTIALITY AGREEMENT

     This Confidentiality Agreement (“Agreement”) dated as of April 1, 2003, is entered into by and between the individual whose name appears on the signature page of the related Consulting Agreement (“Consultant”), on the one hand, and Save the World Air, Inc., a Nevada corporation (the “Company”), on the other, with reference to the following facts:

      RECITALS

  A.   This Agreement is being entered into pursuant to that certain Consulting Agreement of even date herewith, between the Company and Consultant (“Consulting Agreement”).
 
  B.   The Company has retained the services of Consultant to provide Policies and Procedures and other services as called upon from time to time.
 
  C.   The Company desires to protect various proprietary and confidential information that it uses in its business.

     Therefore, the parties hereto do hereby agree as follows:

     1.  Definition of Confidential Information .

          (a) For the purposes of this Agreement, the term “Confidential Information” shall mean information, material and trade secrets (i) proprietary to the Company or to any Affiliate (as defined below) of the Company or (ii) designated as confidential by the Company, whether or not owned or developed by the Company, which Consultant may obtain knowledge of or access to, through or as a result of, Consultant’s relationship with the Company or with any Affiliate of the Company.

          (b) Without limiting the generality of the foregoing, Confidential Information shall include, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing or still in development):

     (i) The “Technology,” which means:

  (1)   Any and all “Creations” as defined below; and
 
  (2)   any and all enhancements thereto.

     (ii) Economic and financial analyses, marketing techniques and materials, marketing and development plans, customer names and other information related to customers, price lists, pricing policies, financial information and Consultant files.

     (iii) Information constituting a “trade secret” as defined in California Civil Code Section 3426.1.

 


 

Save the World Air, Inc.

     (iv) Any information described above which Company obtains from another party and which Company treats as proprietary or designates as Confidential Information, whether or not owned or developed by the Company.

          (c) The term “Creations” shall mean any and all discoveries, ideas, inventions, concepts, software in various states of development, designs, drawings, specifications, techniques, models, data, source code, object code, documentation, diagrams, flow charts, research, developments, processes, procedures, “know-how,” any enhancements to the foregoing and Consultant’s files that may be conceived or developed by Consultant, either alone or with others, during the term of this Agreement, whether or not conceived or developed during Consultant’s working hours, that relate to the Products or the Company’s Business (each as defined in the Consulting Agreement) or to the Company’s actual or demonstrably anticipated research and development, or that result from any services rendered by Consultant for the Company.

          (d) The term “Affiliate” shall mean, with respect to any person or entity, any other person or entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with such person or entity. “Control of,” “controlled by” and “under common control with” mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person or entity, by contract or credit arrangement, as trustee or executor or otherwise. The term “Affiliate” includes, but is not limited to, each and every subsidiary of the Company, if any.

          (e) INFORMATION PUBLICLY KNOWN THAT IS GENERALLY EMPLOYED BY THE TRADE AT OR AFTER THE TIME CONSULTANT FIRST LEARNS OF SUCH INFORMATION, OR GENERIC INFORMATION OR KNOWLEDGE WHICH CONSULTANT WOULD HAVE LEARNED IN THE COURSE OF SIMILAR SERVICES OR EMPLOYMENT ELSEWHERE IN THE TRADE, SHALL NOT BE DEEMED PART OF THE CONFIDENTIAL INFORMATION.

          (f) Any capitalized terms used and not otherwise defined herein shall have the meanings, if any, ascribed to them in the Consulting Agreement.

     2.  Confidential Treatment . Consultant hereby agrees, during the term of his consulting arrangement with Company and at all times thereafter, to hold in confidence and not to directly or indirectly reveal, report, publish, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Consultant’s services for Company, without the prior written consent of the chief executive officer of Company. Consultant agrees that, as between Consultant and Company, Company owns all of the Confidential Information, and Consultant hereby agrees to regard and preserve as confidential all Confidential Information. Consultant hereby agrees not to take, retain or copy, without the prior written consent of the chief executive officer of Company, any or all of the Confidential Information. Without limiting the generality of the foregoing, during the term hereof and after termination of Consultant’s employment with the Company, Consultant shall not use, build, reverse-engineer, decompile, modify for use or disassemble any of the Technology.

     3.  Ownership . The Technology including without limitations any and all Creations shall be the sole and exclusive property of the Company. At any time upon the request of the Company, Consultant shall: (i) assign, without charge to the Company, all his rights, title, and interests in any of the Creations to the Company; (ii) execute, acknowledge, and deliver any and

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Save the World Air, Inc.

all instruments necessary to confirm the Company’s complete ownership of the Creations; and (iii) perform all other reasonable acts which may be necessary to perfect and to protect the Company’s ownership rights in the Creations. Consultant hereby assigns to the Company all of his right, title and inters in and to the Creations. Consultant shall disclose promptly and only to the Company, and shall make an adequate record of, any and all Creations conceived or developed by Consultant (either alone or jointly with others) during the term of this Agreement and within one year thereafter, whether or not the property of the Company.

     4.  Return of Materials and Copies . All notes, data, reference materials, sketches, drawings, memoranda, documentation and records in any way incorporating or reflecting any of the Confidential Information and all proprietary rights therein, including copyrights, shall belong exclusively to Company, and Consultant hereby agrees to turn over promptly all copies of such materials in Consultant’s control to Company upon Company’s request or upon termination of Consultant’s employment by Company.

     5.  Non-Competition and Non-Solicitation . During the Company’s employment of Consultant and for a period of two (2) years following the term of the Consulting Agreement, Consultant shall not assist, become employed by or engage in any consulting or other services for any person or entity that is engaged in any business or other activity in competition with the Company, nor solicit or entice any of the Company’s employees to do any of the foregoing. During the Company’s employment of Consultant and for a period of two (2) years following the term of the Consulting Agreement, Consultant shall not set up or take preliminary steps to set up or engage in any business enterprise that would be in competition with the Company and Consultant shall disclose to the Company, any and all competitive plans that Consultant may have, without regard to Consultant’s intent to act or not act on such plans.

     6.  Fiduciary Obligations . Nothing in this Agreement is intended to limit Consultant’s obligations to Company in any capacity, and Consultant shall be bound by all fiduciary and other obligations to Company which may arise by reason of Consultant’s employment, capacity or other duties to the Company.

     7.  Injunctive Relief . Due to the unique nature of the Confidential Information, Consultant understands and hereby agrees that Company will suffer irreparable harm in the event that Consultant fails to comply with any of Consultant’s obligations under Section 2 or 3 above and that monetary damages will be inadequate to compensate Company for such breach. Accordingly, Consultant hereby agrees that Company will be entitled, in addition to any other remedies available to it at law or in equity, to injunctive relief to enforce the terms of Sections 2 and 3 above.

     8.  Amendments; Consents . No amendment, modification, supplement, termination or waiver of any provision in this Agreement, and no consent to any departure therefrom, shall be effective unless in writing and signed by both Consultant and Company and then only in the specific instance and for the specific purpose given.

     9.  Notice . Any notices required or permitted to be given in writing and will be deemed received when personally delivered or, if earlier, ten (10) days after mailing by registered or certified United States mail, postage prepaid, and with return receipt requested. Notice to the Company is valid if sent to the Company’s principal place of business and notice to Consultant is valid if sent to Consultant at Consultant’s address as it appears in the Company’s records.

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Save the World Air, Inc.

     10.  Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all such counterparts when taken together shall be deemed to be but one and the same instrument.

     11.  Binding Effect; Assignment . This Agreement shall be binding upon and inure to the benefit of Consultant and Company and their respective permitted successors and assigns. This Agreement, including the rights and obligations hereunder, shall not be assigned or transferred by Consultant without the prior written consent of Company.

     12.  Integration; Construction . This Agreement (together with the Consulting Agreement) shall comprise the complete and integrated agreement of the Company and Consultant and shall supersede all prior agreements, written or oral, on the subject matter hereof. Neither party hereto shall have a provision construed against it by reason of such party having drafted the same.

     13.  Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     14.  Severability of Provisions . Any provision in this Agreement that is held to be inoperative, unenforceable or invalid in any jurisdiction shall be, as to that jurisdiction only, inoperative, unenforceable or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of those provisions in any other jurisdiction, and to this end the provisions of this Agreement shall be severable.

     15.  Headings . Headings of this Agreement are included for convenience only and shall not be considered a part of this Agreement for any other purpose.

     16.  Attorneys’ Fees . In the event of any litigation or other dispute arising as a result of or by reason of this Agreement, the prevailing party in any such litigation or other dispute shall be entitled to, in addition to any other damages assessed, its reasonable attorneys’ fees, and all other costs and expenses incurred in connection with settling or resolving such dispute. The attorneys’ fees which the prevailing party is entitled to recover shall include fees for prosecuting or defending any appeal and shall be awarded for any supplemental proceedings until the final judgment is satisfied in full. In addition to the foregoing award of attorneys’ fees to the prevailing party, the prevailing party in any lawsuit on this Agreement shall be entitled to its reasonable attorneys’ fees incurred in any post judgment proceedings to collect or enforce the judgment. This attorneys’ fees provision is separate and several and shall survive the merger of this Agreement into any judgment.

     17.  Waiver; Rights and Remedies . Neither Consultant’s nor Company’s failure to exercise any right under this Agreement shall constitute a waiver of any other term or condition of this Agreement with respect to any other preceding, concurrent or subsequent breach, nor shall it constitute a waiver by the Company or Consultant of its rights at any time thereafter to require exact and strict compliance with any of the terms of this Agreement. The rights and remedies set forth in this Agreement shall be in addition to any other rights or remedies which may be granted by law.

(Signature page follows)

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Save the World Air, Inc.

IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.

         
    SAVE THE WORLD AIR, INC.
 
       
  By   /s/ EUGENE E. EICHLER
       
      Eugene E. Eichler
Its Chief Operating Officer
         
    CONSULTANT
 
       
  By   /s/ PATRICK DENNIS BAKER
       
      Name Patrick Dennis Baker
      Address:

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ANNEX C
CONSULTANT’S COMPENSATION

Pursuant to Section 6 of the Agreement to which this Annex is attached, and into which the provisions of this Annex are incorporated, and subject to the terms and conditions contained in the Agreement, the Company shall pay and deliver to Consultant the following:

     (a)  Consulting Fees. The Company shall pay Consultant compensation equal to AU$5,000 per month, payable semi-monthly in accordance with the Company usual payroll practices. Such consulting fees shall be payable to Consultant by no later than the twenty-fifth (25th) day of each calendar month, provided the Company shall have received from Consultant (i) a reasonably detailed accounting of consulting services rendered by Consultant during the immediately preceding month by no later than the fifth day of the calendar month, together with (ii) any supporting documentation for such accounting as the Company may reasonably request from Consultant by no later than five Business Days following the date of such request. The term “Business Day” as used herein shall mean any day other than a Saturday, Sunday or a day on which banks in Los Angeles, California are authorized or required to be closed.

     (b)  Equity Incentives. Subject to compliance with applicable securities laws, the Company shall grant and/or issue to Consultant Common stock awards for an aggregate of 200,000 shares of Company common stock, as follows:

                 
     Type of shares:   Common Stock.        
 
               
     Number of shares:   Grant 1:     100,000  
 
               
      Grant 2:     100,000  
             
    Award vesting:    
 
           
      Grant 1:   On the first anniversary of the effective date of this Agreement
 
           
      Grant 2:   On the second anniversary of this Agreement.
 
           
  Other:       Upon vesting of Grant 1 or Grant 2, the Company shall promptly deliver stock certificates to Consultant evidencing the number of shares having then vested. Consultant must be engaged or employed by the Company at the time of the award; provided that the award shall vest automatically if Consultant is terminated without cause prior to expiration of the term of the Agreement. The Company shall provide Consultant with a separate “Notice of Stock Grant.”

 


 

     (c)  Other Incentives. The Company shall pay and/or provide to Consultant the following: the

     
  A royalty of US$0.05 per unit or ZEFS Product sold by the Company (after allowance for any returns and return reserves).
 
   
  Royalties shall be payable 30 days after the close of each quarter in arrears.

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Exhibit 10.22

CONSULTING AGREEMENT

     This Consulting Agreement (“Agreement”), is made effective and entered into as of April 1,2003, by and between Save the World Air, Inc., a Nevada corporation (the “Company”), and John Kostic (“Consultant’) with reference to the following facts:

RECITALS

     A. The Company has developed proprietary technologies for reducing harmful emissions from fuel combustion engines and improving fuel efficiency, among other benefits. The development of these proprietary technologies and enhancements to them, as well as the anticipated manufacturing, distribution and sale of products derived from them, are sometimes referred to below as the Company’s ~~Business.” The Company’s current products are known as the ZEFS device, as described in the Company’s patent applications which are pending in various countries (the “ZEFS Product’). The Company is currently engaged in research and development for next-generation products and enhancements for use with diesel engines (“Diesel Product”), multiport or multipoint electronic fuel injection (“EFI Product”), each of which may consist of a device that is attached to an engine or to a component that is attached to the engine or a technology that is incorporated into an engine or a component attached to an engine. The ZEFS Products, Diesel Products and EFI Products are sometimes referred to collectively in this Agreement as the “Products.”

     B. The parties hereto anticipate that the Products will be based on the ZEFS Product or new technologies developed pursuant to this Agreement and certain related consulting agreements being entered into between the Company and certain others who are part of the Company’s R&D team.

     C. The Company desires to engage the services of Consultant to assist the Company in research and development and to provide other services and assistance to the Company in matters relating to the Company’s business, as they may arise from time to time, upon the terms and conditions contained herein. .

     D. Consultant desires to provide services to the Company upon the terms and conditions contained herein.

     NOW, THEREFORE, the Company and Consultant hereby mutually agree as
     follows:

     Section 1. Scope of Services to Be Provided. Consultant shall provide to the Company, on an as needed basis, assistance, advice and support relating to the Company’s business, including project management and supporting the project lead and development team, as the Company may request from time to time. Without limiting the generality of the foregoing, Consultant shall:

     (a)  R&D. Consultant shall undertake and perform the tasks outlined on Annex A hereto and such additional or other responsibilities as may be reasonably assigned to Consultant from time to time by the Company’s Chief Executive Officer, President, Chief Operating Officer or Director of R&D.

 


 

     (b)  Reports. Consultant shall provide regular monthly reports to the Company on the efforts expended and undertaken on each project assigned to or undertaken by Consultant. Consultant shall maintain and make available to the Company upon request complete records for purchases, products, prices, analyses, testing and test results, contacts, drawings and such other matters as the Company may request from time to time.

     (c)  Potential Customers. Consultant shall use its best efforts to actively and diligently identify and provide to the Company potential customers and, when requested by the Company, demonstrate the Company’s products for potential customers and others to demonstrate the products’ operation and capabilities.

     (d)  Procedures for Maintaining Proprietary Information. Consultant shall keep and maintain such procedures as may be customary and appropriate and as may be specified by the Company to protect, maintain and keep confidential any proprietary or confidential information of the Company, including without limitation all know how and information that may constitute a trade secret or otherwise confer strategic or competitive advantages to the Company, by use of passwords, locked cabinets, identification of such information and materials as “Confidential” and other limits on access as may be customary or appropriate or set forth in Company policies.

     (e)  Travel. The Company may require Consultant to travel at Company expense to its U.S. offices and facilities at least twice per year and internationally from time to time as may be reasonably required to fulfill Consultant’s assigned duties and responsibilities, provided that each such trip shall not exceed two weeks without Consultant’s consent.

     Section 2. Non-Disclosure Obligations. Concurrently with the parties’ execution of this Agreement, Consultant shall execute and deliver to the Company the Confidentiality Agreement attached hereto as Annex B (the “Confidentiality Agreement”), the provisions of which are incorporated herein by this reference.

     Section 3. Consultant’s Representations and Covenants. Consultant represents, warrants and covenants to the Company that:

          (a) Consultant shall devote such time, energy, interest, ability, and skill as may be fairly and reasonably necessary to provide to the Company the services described in Section 1 above.

          (b) The Company may require Consultant to travel to its U.S. offices and facilities at the Company’s expense at least twice per year and internationally from time to time as may be reasonably required to fulfill Consultant’s assigned duties and responsibilities, provided that each such trip shall not exceed two weeks without Consultant’s consent.

          (c) Consultant shall not, during the term of this Agreement, directly or indirectly, promote, participate, or engage in any business activity that would materially interfere with the performance of Consultant’s duties under this Agreement or which is competitive with the Company’s or any Company Affiliate’s business, including, without limitation, any involvement as a shareholder, director, officer, employee, partner, joint venturer, consultant, advisor, individual proprietor, lender, or agent of any business, without the prior written consent of the Company. The term “Affiliate” shall mean, with respect to any person or entity, any other

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person or entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with, such person or entity. “Control of,” “controlled by” and “under common control with” mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person or entity, by contract or credit arrangement, as trustee or executor, or otherwise. The term “Affiliate” includes, but is not limited to, each and every subsidiary of the Company.

          (d) During the term of this Agreement and for a period of one year after the termination of this Agreement, Consultant shall not solicit, attempt to solicit, or cause to be solicited any customers of the Company for purposes of promoting or selling products or services which are competitive with those of the Company, nor shall Consultant solicit, attempt to solicit, or cause to be solicited any employees, agents, or other independent contractors of the Company to cease their relationship with the Company.

          (e) Consultant does not have any agreements with or commitments to any other person or entity which conflict with any of Consultant’s obligations to the Company arising under this Agreement.

          (f) Consultant shall maintain any and all licenses and permits as may be required for Consultant to provide the consulting services contemplated hereby. In the event Consultant shall utilize the services or shall acquire any products in order to render the consulting services contemplated hereby, Consultant shall be solely responsible for the payment for such services and products, except to the extent reimbursable by the Company in accordance with Section 7 below. Consultant shall be solely responsible for any and all income and other taxes that may be due to any state, local or federal governmental authorities in respect of the compensation to Consultant pursuant to this Agreement. Consultant acknowledges that the Company shall not make any withholdings from payments to Consultant hereunder.

          (g) Except upon the express written consent of the Company, Consultant shall have no authority, and shall not represent, suggest or imply that Consultant has the authority, express or implied: (1) to bind the Company to any agreements or arrangements, written or oral; (2) to make an offer or accept an offer on behalf of the Company; or (3) to make representations, warranties, guaranties, commitments or covenants on behalf of Company.

     Section 4. Ownership.

          (a) The compensation payments set forth herein shall be full and complete compensation both for all obligations assumed by Consultant hereunder and for any and all Creations (as defined in the Confidentiality Agreement) assigned under this Agreement.

          (b) The Company shall retain the exclusive right to use or distribute, at its sole discretion, any and all Creations. Consultant shall make no claim on any consideration received by the Company for the sale, lease or use of the Creations.

          (c) The Company shall include Consultant’s profile on its Company website with other members of the R&D team and may include such information as it deems appropriate in the Company’s Product and marketing materials.

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     Section 5. Term. This Agreement shall terminate on March 31, 2005, unless earlier terminated in accordance with this Section 5. In addition, this Agreement shall terminate automatically upon the death of Consultant, or the mental or physical incapacity of Consultant for a period of 60 consecutive days. Either party hereto may terminate this Agreement upon a material breach of this Agreement by the other party; and the Company may terminate this Agreement upon a material breach of the Confidentiality Agreement by Consultant.

     Section 6. Compensation. Consultant’s compensation for his consulting services. hereunder shall be as set forth on Annex C hereto.

     Section 7. Reimbursement of Business Expenses. To the extent Consultant is authorized by the Company to order equipment and supplies or make other expenditures to carry out Consultant’s duties hereunder, the Company shall reimburse Consultant for the actual costs thereof, subject to receipt of such documentation and other information as the Company may reasonably request or require in accordance with its policies, and subject further to any limitations on the amount that Consultant may be authorized to incur in ordering such equipment and supplies or making other expenditures on the Company’s behalf. Reimbursement for each qualifying expense shall be made on the last day of the calendar month following the month in which a receipt for payment by Consultant of such expense item and any and all other documentation which the Company may reasonably require regarding the expense item was submitted to Company.

     Section 8. Independent Contractor. Consultant shall be retained by the Company only for the purposes and to the extent set forth in this Agreement, and his relation to the Company, during the term of this Agreement, shall be that of an independent contractor. Consultant shall not be considered as having an employee status.

     Section 9. Injunctive Relief. Remedies at law shall be deemed to be inadequate for any breach of any of the covenants of this Agreement, and the Company shall be entitled to injunctive relief in addition to any other remedies it may have in the even! of such breach.

     Section 10. Indemnification. If Consultant becomes a defendant in, or is threatened to be made a party to, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify, defend and hold harmless Consultant against any and all Expenses, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of any Claim, subject to any limitations set forth herein below. For purposes of this section, the following terms shall have the meanings set forth below:

     (a) “Claim” shall mean any threatened, pending or completed action, suit or proceeding against Consultant, whether civil, criminal, administrative, investigative or other.

     (b) “Expenses” shall mean attorneys’ fees and all other costs, expenses and obligations paid or incurred by Consultant arising from defense of a Claim.

     (c) “Indemnifiable Event” shall mean any act or omission of Consultant in carrying out Consultant’s duties under this Agreement that is (i) other than a criminal act and (ii) within the

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scope of Consultant’s services to the Company under this Agreement, including without limitation Claims alleging facts based on theories of negligence; violation of securities laws in connection with the offer and sale of the Company’s securities; that the Consultant is or was an agent, employee or fiduciary of the Company; or that Consultant is or was serving at the request of the Company as a director, officer,. employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or relating to anything done or not done by the Consultant in any such capacity.

     Section 11. Amendments; Consents. No amendment, modification, supplement, termination, or waiver of any provision in this Agreement, and no consent to any departure therefrom, shall be effective unless in writing and signed by both Consultant and the Company and then only in the specific instance and for the specific purpose given.

     Section 12. Notices. Any notices required or permitted to be given in writing will be deemed received when personally delivered or, if earlier, ten (10) days after mailing by registered or certified United States mail, postage prepaid, and return receipt requested. Notice to the Company is valid if sent to the Company’s principal place of business and notice to Consultant is valid if sent to Consultant at Consultant’s address as it appears in the Company’s records. The Company or Consultant may change their address only by notice given to the other in the manner set forth herein.

     Section 13. Counterparts; Facsimile ,Signatures. This Agreement may be executed in two or more counterparts, and the counterparts, taken together, shall constitute one original. Executed copies of this Agreement and any amendments or modifications thereto may be delivered by facsimile transmission in lieu of an original.

     Section 14. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of Consultant and the Company and their respective permitted successors and assigns. This Agreement, including the rights and obligations hereunder, shall not be assigned, delegated or transferred by Consultant without the prior written consent of the Company.

     Section 15. Integration; Construction. This Agreement (together with the appendices thereof) shall comprise the complete and integrated agreement of the Company and Consultant and shall supersede all prior agreements, written or oral, on the subject matter hereof. Neither party hereto shall have a provision construed against it by reason of such party having drafted the same.

     Section 16. Survival. The rights and obligations provided in Section 3( c), Section 4, Section 9, Section 10, Section 14, Section 20 and paragraph (c) of Annex C hereto shall survive termination of this Agreement.

     Section 17. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     Section 18. Severability of Provisions. Any provision in this Agreement that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall be, as to that jurisdiction only, inoperative, unenforceable, or invalid without affecting the remaining provisions in that

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jurisdiction or the operation, enforceability, or validity of those provisions in any other jurisdiction, and to this end the provisions of this Agreement shall be severable.

     Section 19. Headings. Headings of this Agreement are included for convenience only and shall not be considered a part of this Agreement for any other purpose.

     Section 20. Attorneys’ Fees. In the event of any litigation or other dispute arising as a result of or by reason of this Agreement, the prevailing party in any such litigation or other dispute shall be entitled to, in addition to any other damages assessed, its reasonable attorneys’ fees, and all other costs and expenses incurred in connection with settling or resolving such dispute. The attorneys’ fees which the prevailing party is entitled to recover shall include fees for prosecuting or defending any appeal and shall be awarded for any supplemental proceedings until the final judgment is satisfied in full. In addition to the foregoing award of attorneys’ fees to the prevailing party, the prevailing party in any lawsuit on this Agreement shall be entitled to its reasonable attorneys’ fees incurred in any post judgment proceedings to collect or enforce the judgment. This attorneys’ fees provision is separate and several and shall survive the merger of this Agreement into any judgment.

     Section 21. Waiver; Rights and Remedies. Neither Consultant’s nor the Company’s failure to exercise any right under this Agreement shall constitute a waiver of any other term or condition of this Agreement with respect to any other preceding, concurrent, or subsequent breach, nor shall it constitute a waiver by the Company or Consultant of its rights at any time thereafter to require exact and strict compliance with any of the terms of this Agreement. The rights and remedies set forth in this Agreement shall be in addition to any other rights or remedies which may be granted by law.

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     IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.

         
    CONSULTANT
 
       
  By   /s/ JOHN KOSTIC 
       
 
       
  Name:   John Kostic 
       
 
       
    SAVE THE WORLD AIR, INC.
 
       
  By   /s/ EUGENE E. EICHLER 
       
 
       
  Name:   Eugene E. Eichler 
       
 
       
  Title:   Chief Operating Officer 
       

 


 

ANNEX A

CONSULTANT’S DUTIES AND RESPONSIBILITIES

Manage operations and business development.
 
All Australian administrative work and Australian public relations work.
 
Communication with Australian shareholders.
 
Arranging meetings and overseeing general operations of Company in Australia.

Coordinate product testing and demonstrations.

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      ANNEX “B”

CONFIDENTIALITY AGREEMENT

     This Confidentiality Agreement (“Agreement”) dated as of April 1, 2003, is entered into by and between the individual whose name appears on the signature page of the related Consulting Agreement (“Consultant”), on the one hand, and Save the World Air, Inc., a Nevada corporation (the “Company”), on the other, with reference to the following facts:

      RECITALS

  A.   This Agreement is being entered into pursuant to that certain Consulting Agreement of even date herewith, between the Company and Consultant (“Consulting Agreement”).
 
  B.   The Company has retained the services of Consultant to provide Policies and Procedures and other services as called upon from time to time.
 
  C.   The Company desires to protect various proprietary and confidential information that it uses in its business.

     Therefore, the parties hereto do hereby agree as follows:

     1.  Definition of Confidential Information .

          (a) For the purposes of this Agreement, the term “Confidential Information” shall mean information, material and trade secrets (i) proprietary to the Company or to any Affiliate (as defined below) of the Company or (ii) designated as confidential by the Company, whether or not owned or developed by the Company, which Consultant may obtain knowledge of or access to, through or as a result of, Consultant’s relationship with the Company or with any Affiliate of the Company.

          (b) Without limiting the generality of the foregoing, Confidential Information shall include, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing or still in development):

     (i) The “Technology,” which means:

  (1)   Any and all “Creations” as defined below; and
 
  (2)   any and all enhancements thereto.

     (ii) Economic and financial analyses, marketing techniques and materials, marketing and development plans, customer names and other information related to customers, price lists, pricing policies, financial information and Consultant files.

     (iii) Information constituting a “trade secret” as defined in California Civil Code Section 3426.1.

 


 

Save the World Air, Inc.

     (iv) Any information described above which Company obtains from another party and which Company treats as proprietary or designates as Confidential Information, whether or not owned or developed by the Company.

          (c) The term “Creations” shall mean any and all discoveries, ideas, inventions, concepts, software in various states of development, designs, drawings, specifications, techniques, models, data, source code, object code, documentation, diagrams, flow charts, research, developments, processes, procedures, “know-how,” any enhancements to the foregoing and Consultant’s files that may be conceived or developed by Consultant, either alone or with others, during the term of this Agreement, whether or not conceived or developed during Consultant’s working hours, that relate to the Products or the Company’s Business (each as defined in the Consulting Agreement) or to the Company’s actual or demonstrably anticipated research and development, or that result from any services rendered by Consultant for the Company.

          (d) The term “Affiliate” shall mean, with respect to any person or entity, any other person or entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with such person or entity. “Control of,” “controlled by” and “under common control with” mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person or entity, by contract or credit arrangement, as trustee or executor or otherwise. The term “Affiliate” includes, but is not limited to, each and every subsidiary of the Company, if any.

          (e) INFORMATION PUBLICLY KNOWN THAT IS GENERALLY EMPLOYED BY THE TRADE AT OR AFTER THE TIME CONSULTANT FIRST LEARNS OF SUCH INFORMATION, OR GENERIC INFORMATION OR KNOWLEDGE WHICH CONSULTANT WOULD HAVE LEARNED IN THE COURSE OF SIMILAR SERVICES OR EMPLOYMENT ELSEWHERE IN THE TRADE, SHALL NOT BE DEEMED PART OF THE CONFIDENTIAL INFORMATION.

          (f) Any capitalized terms used and not otherwise defined herein shall have the meanings, if any, ascribed to them in the Consulting Agreement.

     2.  Confidential Treatment . Consultant hereby agrees, during the term of his consulting arrangement with Company and at all times thereafter, to hold in confidence and not to directly or indirectly reveal, report, publish, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Consultant’s services for Company, without the prior written consent of the chief executive officer of Company. Consultant agrees that, as between Consultant and Company, Company owns all of the Confidential Information, and Consultant hereby agrees to regard and preserve as confidential all Confidential Information. Consultant hereby agrees not to take, retain or copy, without the prior written consent of the chief executive officer of Company, any or all of the Confidential Information. Without limiting the generality of the foregoing, during the term hereof and after termination of Consultant’s employment with the Company, Consultant shall not use, build, reverse-engineer, decompile, modify for use or disassemble any of the Technology.

     3.  Ownership . The Technology including without limitations any and all Creations shall be the sole and exclusive property of the Company. At any time upon the request of the Company, Consultant shall: (i) assign, without charge to the Company, all his rights, title, and interests in any of the Creations to the Company; (ii) execute, acknowledge, and deliver any and

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Save the World Air, Inc.

all instruments necessary to confirm the Company’s complete ownership of the Creations; and (iii) perform all other reasonable acts which may be necessary to perfect and to protect the Company’s ownership rights in the Creations. Consultant hereby assigns to the Company all of his right, title and inters in and to the Creations. Consultant shall disclose promptly and only to the Company, and shall make an adequate record of, any and all Creations conceived or developed by Consultant (either alone or jointly with others) during the term of this Agreement and within one year thereafter, whether or not the property of the Company.

     4.  Return of Materials and Copies . All notes, data, reference materials, sketches, drawings, memoranda, documentation and records in any way incorporating or reflecting any of the Confidential Information and all proprietary rights therein, including copyrights, shall belong exclusively to Company, and Consultant hereby agrees to turn over promptly all copies of such materials in Consultant’s control to Company upon Company’s request or upon termination of Consultant’s employment by Company.

     5.  Non-Competition and Non-Solicitation . During the Company’s employment of Consultant and for a period of two (2) years following the term of the Consulting Agreement, Consultant shall not assist, become employed by or engage in any consulting or other services for any person or entity that is engaged in any business or other activity in competition with the Company, nor solicit or entice any of the Company’s employees to do any of the foregoing. During the Company’s employment of Consultant and for a period of two (2) years following the term of the Consulting Agreement, Consultant shall not set up or take preliminary steps to set up or engage in any business enterprise that would be in competition with the Company and Consultant shall disclose to the Company, any and all competitive plans that Consultant may have, without regard to Consultant’s intent to act or not act on such plans.

     6.  Fiduciary Obligations . Nothing in this Agreement is intended to limit Consultant’s obligations to Company in any capacity, and Consultant shall be bound by all fiduciary and other obligations to Company which may arise by reason of Consultant’s employment, capacity or other duties to the Company.

     7.  Injunctive Relief . Due to the unique nature of the Confidential Information, Consultant understands and hereby agrees that Company will suffer irreparable harm in the event that Consultant fails to comply with any of Consultant’s obligations under Section 2 or 3 above and that monetary damages will be inadequate to compensate Company for such breach. Accordingly, Consultant hereby agrees that Company will be entitled, in addition to any other remedies available to it at law or in equity, to injunctive relief to enforce the terms of Sections 2 and 3 above.

     8.  Amendments; Consents . No amendment, modification, supplement, termination or waiver of any provision in this Agreement, and no consent to any departure therefrom, shall be effective unless in writing and signed by both Consultant and Company and then only in the specific instance and for the specific purpose given.

     9.  Notice . Any notices required or permitted to be given in writing and will be deemed received when personally delivered or, if earlier, ten (10) days after mailing by registered or certified United States mail, postage prepaid, and with return receipt requested. Notice to the Company is valid if sent to the Company’s principal place of business and notice to Consultant is valid if sent to Consultant at Consultant’s address as it appears in the Company’s records.

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Save the World Air, Inc.

     10.  Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all such counterparts when taken together shall be deemed to be but one and the same instrument.

     11.  Binding Effect; Assignment . This Agreement shall be binding upon and inure to the benefit of Consultant and Company and their respective permitted successors and assigns. This Agreement, including the rights and obligations hereunder, shall not be assigned or transferred by Consultant without the prior written consent of Company.

     12.  Integration; Construction . This Agreement (together with the Consulting Agreement) shall comprise the complete and integrated agreement of the Company and Consultant and shall supersede all prior agreements, written or oral, on the subject matter hereof. Neither party hereto shall have a provision construed against it by reason of such party having drafted the same.

     13.  Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     14.  Severability of Provisions . Any provision in this Agreement that is held to be inoperative, unenforceable or invalid in any jurisdiction shall be, as to that jurisdiction only, inoperative, unenforceable or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of those provisions in any other jurisdiction, and to this end the provisions of this Agreement shall be severable.

     15.  Headings . Headings of this Agreement are included for convenience only and shall not be considered a part of this Agreement for any other purpose.

     16.  Attorneys’ Fees . In the event of any litigation or other dispute arising as a result of or by reason of this Agreement, the prevailing party in any such litigation or other dispute shall be entitled to, in addition to any other damages assessed, its reasonable attorneys’ fees, and all other costs and expenses incurred in connection with settling or resolving such dispute. The attorneys’ fees which the prevailing party is entitled to recover shall include fees for prosecuting or defending any appeal and shall be awarded for any supplemental proceedings until the final judgment is satisfied in full. In addition to the foregoing award of attorneys’ fees to the prevailing party, the prevailing party in any lawsuit on this Agreement shall be entitled to its reasonable attorneys’ fees incurred in any post judgment proceedings to collect or enforce the judgment. This attorneys’ fees provision is separate and several and shall survive the merger of this Agreement into any judgment.

     17.  Waiver; Rights and Remedies . Neither Consultant’s nor Company’s failure to exercise any right under this Agreement shall constitute a waiver of any other term or condition of this Agreement with respect to any other preceding, concurrent or subsequent breach, nor shall it constitute a waiver by the Company or Consultant of its rights at any time thereafter to require exact and strict compliance with any of the terms of this Agreement. The rights and remedies set forth in this Agreement shall be in addition to any other rights or remedies which may be granted by law.

(Signature page follows)

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Save the World Air, Inc.

IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.

         
    SAVE THE WORLD AIR, INC.
 
       
  By   /s/ EUGENE E. EICHLER
       
      Eugene E. Eichler
Its Chief Operating Officer
         
    CONSULTANT
 
       
  By   /s/ JOHN KOSTIC
       
      Name John Kostic
      Address:

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ANNEX C CONSULTANT’S COMPENSATION

Pursuant to Section 6 of the Agreement to which this Annex is attached, and into which the provisions of this Annex are incorporated, and subject to the terms and conditions contained in the Agreement, the Company shall pay and deliver to Consultant the following:

     (a)  Consulting Fees. The Company shall pay Consultant compensation equal to AU$6,000 per month, payable semi-monthly in accordance with the Company usual payroll practices. Such consulting fees shall be payable to Consultant by no later than the twenty-fifth (25th) day of each calendar month, provided the Company shall have received from Consultant (i) a reasonably detailed accounting of consulting services rendered by Consultant during the immediately preceding month by no later than the fifth day of the calendar month, together with (ii) any supporting documentation for such accounting as the Company may reasonably request from Consultant by no later than five Business Days following the date of such request. The term “Business Day” as used herein shall mean any day other than a Saturday, Sunday or a day on which banks in Los Angeles, California are authorized or required to be closed.

     (b)  Equity Incentives. Subject to compliance with applicable securities laws, the Company shall grant and/or issue to Consultant Common stock awards for 200,000 shares of Company common stock, as follows:

                 
     Type of shares:   Common Stock.        
 
               
    Number of shares:   Grant 1:     100,000  
 
               
      Grant 2:     100,000  
             
    Award vesting:    
 
           
      Grant 1:   On the first anniversary of this Agreement
 
           
      Grant 2:   On the second anniversary of this Agreement.
 
           
  Other:       Upon vesting of Grant 1 or Grant 2, the Company shall promptly deliver stock certificates to Consultant evidencing the number of shares having then vested. Consultant must be engaged or employed by the Company at the time of the award; provided that the award shall vest automatically if Consultant is terminated without cause prior to expiration of the term of the Agreement. The Company shall provide Consultant with a separate “Notice of Stock Grant.”

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     (c)  Other Incentives. The Company shall pay and/or provide to Consultant the following:

     
  A royalty of US$0.10 per unit or ZEFS device sold by the Company (after allowance for any returns and return reserves). The royalty shall be payable 30 days after the close of each quarter in arrears.
 
   
  Royalties shall be payable 30 days after the close of each quarter in arrears.

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EXHIBIT 10.23

CONSULTING AGREEMENT

     This Consulting Agreement {“Agreement”) is made effective and entered into as of October 1, 2004; by and between Save the World Air, Inc., a Nevada corporation (the “Company”), and John Fawcett (“Consultant”), with reference to the following facts:

RECITALS

     A. The Company has developed proprietary technologies for reducing harmful emissions from fuel combustion engines and improving fuel efficiency, among other benefits. The development of these proprietary technologies and enhancements to them, as well as the anticipated manufacturing, distribution and sale of products derived from them, are sometimes referred to below as the Company’s “Business.” The Company’s current products are known as the ZEFS device, as described in the Company’s patent applications which are pending in various countries (the “ZEFS Product”). The Company is currently engaged in research and development for next-generation products and enhancements for use with diesel engines (“Diesel Product”), multiport or muitipoint electronic fuel injection (“EFI Product”), each of which may consist of a device that is attached to an engine or to a component that is attached to the engine or a technology that is incorporated into an engine or a component attached to an engine. The ZEFS Products, Diesel Products and EFI Products are sometimes referred to collectively in this Agreement as the “Products.”

     B. The parties hereto anticipate that the Products will be based on the ZEFS Product or new technologies developed pursuant to this Agreement and certain related consulting agreements being entered into between the Company and certain others who are part of the Company’s R&D team.

     C. The Company desires to engage the services of Consultant to assist the Company in research and development, including without limitation, prototype testing and making available certain Consultant facilities and Consultant employees, and to provide other services and assistance to the Company in matters relating to the Company’s business, as they may arise from time to time, upon the terms and conditions contained herein.

     D. Consultant desires to provide services to the Company upon the terms and conditions contained herein.

     E. This Agreement renews and supersedes the Consulting Agreement, dated as of December 1, 2001, between the Company and the Consultant.

     NOW THERFORE, the Company and Consultant hereby mutually agree as follows:

(a) Scope of Services to Be Provided. Consultant shall provide to the Company, on an as needed basis, assistance, advice and support relating to the Company’s business, including prototype testing and making available certain Consultant facilities and Consultant employees, as the Company may request from time to time, including no less than thirty prototype tests. Without limiting the generality of the foregoing, Consultant shall keep and maintain such procedures as may be customary and appropriate and as may be specified by the Company to

 


 

protect, maintain and keep confidential any proprietary or confidential information of the Company, including without limitation all know how and information that may constitute a trade secret or otherwise confer strategic or competitive advantages to the Company, by use of passwords, locked cabinets, identification of such information and materials as “Confidential” and other limits on access as may be customary or appropriate or set forth in Company policies.

     Section 2. Non-Disclosure Obligations. Concurrently with the parties’ execution of this Agreement, Consultant shall execute and deliver to the Company the Confidentiality Agreement attached hereto as Annex B (the “Confidentiality Agreement”), the provisions of which are incorporated herein by this reference.

     Section 3. Consultant’s Representations and Covenants. Consultant represents, warrants and covenants to the Company that:

          (a) Consultant shall devote such time, energy, interest; ability, and skill as may be fairly and reasonably necessary ±o provide to the Company the services described in Section 1 above.

          (b) Consultant shall not, during the term of this Agreement, directly or indirectly, promote, participate, or engage in any business activity that would materially interfere with the performance of Consultant’s duties under this Agreement or which is competitive with the Company’s or any Company Affiliate’s business; including, without limitation, any involvement as a shareholder, director, officer, employee, partner, joint venturer, consultant, advisor, individual proprietor, lender, or agent of any business, without the prior written consent of the Company. The term “Affiliate” shall mean, with respect to any person or entity, any other person or entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with, such person or entity. “Control of “ “controlled by” and “under common control with” mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person or entity, by contract or credit arrangement, as trustee or executor; or otherwise. The term “Affiliate” includes, but is not limited to, each and every subsidiary of the Company.

          (c) During the term of this Agreement and for a period of one year after the termination of this Agreement, Consultant shall not solicit. attempt to solicit, or cause to be solicited any customers of the Company for purposes of promoting or selling products or services which are competitive with those of the Company, nor shall Consultant solicit, attempt to solicit. or cause to be solicited any employees, agents, or other independent contractors of the Company to cease their relationship with the Company.

          (d) Consultant does not nave any agreements with or other person or entity which conflict with any of Consultant’s obligations to the Company arising under this Agreement.

          (e) Consultant shall maintain any and a11 licenses and permits as may be required for Consultant to provide the consulting services contemplated hereby. In the event Consultant shall utilize the services or shall require any products in order to render the consulting services or shall acquire any products in order to render the consulting services contemplated hereby, Consultant shall solely be responsible for the payment

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for such services and products, except to the extent reimbursable by the Company in accordance with Section 7 below. Consultant shall be solely responsible for any and a11 income and other taxes that may be due to any state, local or federal governmental authorities in respect of the compensation to Consultant pursuant to this Agreement. Consultant acknowledges that the Company shall not make any withholdings from payments to Consultant hereunder.

          (f) Except upon the express written consent of the Company, Consultant shall have no authority, and shall not represent, suggest or imply that Consultant has the authority, express or implied: (1) to bind the Company to any agreements or arrangements, written or oral; (2) to make an offer or accept an offer on behalf of the Company; or (3) to make representations, warranties, guaranties, commitments or covenants on behalf of Company.

     Section 4. Ownership.

          (a) The compensation payments set forth herein shall be full and complete compensation both for all obligations assumed by Consultant hereunder and for any and ail Creations (as defined in the Confidentiality Agreement) assigned under this Agreement.

          (b) The Company shall retain the exclusive right to use or distribute, at its sole discretion, any and all Creations. Consultant shall make no claim on any consideration received by the Company for the sale, lease or use of the Creations.

          (c) The Company shall include Consultant’s profile on its Company website with other members of the R&D team and may include such information as it deems appropriate in the Company’s Product and marketing materials.

     Section 5. Term. This Agreement shall terminate on October 31, 2006, unless earlier terminated in accordance with this Section 5. In addition, this Agreement shall terminate automatically upon the death of Consultant, or the mental or physical incapacity of Consultant for a period of 60 consecutive days. Either party hereto may terminate this Agreement upon a material breach of this Agreement by the other party; and the Company may terminate this Agreement upon a material breach of the Confidentiality Agreement by Consultant.

     Section 6. Compensation. Consultant’s compensation for his consulting services hereunder shall be as set forth on Annex C hereto.

     Section 7. Reimbursement of Business Expenses. To the extent Consultant is authorized by the Company to order equipment and supplies or mane other expenditures, to carry out Consultant’s duties hereunder, the Company shall reimburse Consultant far the actual costs thereof, subject to receipt of such documentation and other information as the Company may reasonably request or require in accordance with its policies, and subject further to any limitations on the amount that Consultant may be authorized to incur in ordering such equipment supplies or making other expenditures on the Company’s behalf. Reimbursement for each qualifying expense shall be made on the last day of the calendar month following the month in which a receipt for payment by Consultant of such expense item and any and all other documentation which the company may reasonably require regarding the expense item was submitted to the company.

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     Section 8. Independent Contractor. Consultant shall be retained by the Company only for the purposes and to the extent set forth in this Agreement, and his relation to the Company, during the term of this Agreement; shall be that of an independent contractor. Consultant shall not be considered as having an employee status.

     Section 9. Injunctive Relief. Remedies at law shall be deemed to be inadequate for any breach of any of the covenants of this Agreement, and the Company shall be entitled to injunctive relief in addition to any other remedies it may have in the event of such breach.

     Section 10. Amendments; Consents. No amendment, modification; supplement, termination, or waiver of any provision in this Agreement, and no consent to any departure therefrom, shall be effective unless in writing and signed by both Consultant and the Company and then only in the specific instance and for the specific purpose given.

     Section 11. Notices. Any notices required or permitted to be given in writing will be deemed received when personally delivered or, if earlier, ten (10) days after mail registered or certified United States mail, postage prepaid, and return receipt requested. Notice to the Company is valid if sent to the Company’s principal place of business and notice to Consultant is valid if sent to Consultant at Consultant’s address as it appears in the Company’s records. The Company or Consultant may change their address only by notice given to the other in the manner set forth herein.

     Section 12. Counterparts; Facsimile Signatures. This Agreement may be executed in two or more counterparts, and the counterparts, taken together, shall constitute one original. Executed copies of this Agreement and any amendments or modifications thereto may be delivered by facsimile transmission in lieu of an original.

     Section 13. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of Consultant and the Company and their respective permitted successors and assigns. This Agreement, including the rights and obligations hereunder, shall not be assigned, delegated or

     Section 14. Integration; Construction. This Agreement (together with the appendices thereof shall comprise the complete and integrated agreement of the Company and Consultant and shall supersede all prior agreements; written or oral, on the subject matter hereof, Neither party hereto shall have a provision construed against it by reason of such party having drafted the same. Transferred by Consultant without the prior written consent of the Company.

     Section 15. Survival . The rights and obligations provided in Section 3(b), Section4, Section 9, Section 13, Section 19 and paragraph (a) of Annex C hereto shall survive termination of this Agreement.

     Section 16. Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     Section 17. Severability of Provisions . Any provisions in this Agreement that is held to be operative, enforceable, or invalid in any jurisdiction shall be, as that jurisdiction only, inoperative, unenforceable, or invalid without affecting the remaining provisions that

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jurisdiction or the operation, enforceability, or validity of those provisions in any other jurisdiction, and to this end the provisions of this Agreement shall be severable.

     Section 18. Headings. Headings of this Agreement are included for convenience only and shall not be considered a part of this Agreement for any other purpose.

     Section 19. Attorneys’ Fees. In the event of any litigation or other dispute arising as a result of or by reason of this Agreement, the prevailing party in any such litigation or other dispute shall be entitled to, in addition to any other damages assessed, its reasonable attorneys’ fees, and all other costs and expenses incurred in connection with settling or resolving such dispute. The attorneys’ fees which the prevailing party is entitled to recover shall include fees for prosecuting or defending any appeal and shall be awarded for any supplemental proceedings until the final judgment is satisfied in full. In addition to the foregoing award of attorneys’ fees to the prevailing party, the prevailing party in any lawsuit on this Agreement shall be entitled to its reasonable attorneys’ fees incurred in any post judgment proceedings to collect or enforce the judgment. This attorneys’ fees provision is separate and several and shall survive the merger of this Agreement into any judgment.

     Section 20. Waiver; Rights and Remedies. Neither Consultant’s nor the Company’s failure to exercise any right under this Agreement shall constitute a waiver of any other term or condition of this Agreement with respect to any other preceding, concurrent, or subsequent breach, nor shall it constitute a waiver by the Company or Consultant of its rights at any time thereafter to require exact and strict compliance with any of the terms of this Agreement. The rights and remedies set forth in this Agreement shall be in addition to any other rights or remedies which may be granted by law.

(signature page follows)

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     IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.
         
  CONSULTANT
 
 
 
  By   /s/ John B. Fawcett    
  Name:    John B. Fawcett   
       
 
         
  SAVE THE WORLD AIR, INC.
 
 
 
  By    /s/ Eugene E. Eichler    
  Name:    Eugene E. Eichler   
  Title:    President   

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ANNEX A
CONSULTANT’S DUTIES AND RESPONSIBILITIES


  •   Making available facilities and personnel in order to design, develop and test new configurations and units.
 
  •   Assist in preparatory reports to the Company in relation to the ZEFS and other devices.

 


 

ANNEX B

CONFIDENTIALITY AGREEMENT


(To be attached)

 


 

CONFIDENTIALITY AGREEMENT

     This Confidentiality Agreement {“Agreement"} which constitutes Annex B, is entered into by and between the individual whose name appears on the signature page of the related Consulting Agreement (“Consultant”), on the one hand, and Save the World, Air, Inc., a Nevada corporation (the “Company”), on the other, with reference to the following facts:

RECITALS

      A.   This Agreement is being entered into pursuant to that certain Consulting Agreement of even date herewith, between the Company and Consultant (“Consulting Agreement”).
 
  B.   The Company has retained the services of Consultant to conduct further research and development on a work-for-hire basis.
 
  C.   The Company desires to protect various proprietary and confidential information that it uses in its business.

     Therefore, the parties hereto do hereby agree as follows:

      1.   Definition of Confidential Information .

               (a) For the purposes of this Agreement, the term “Confidential Information” shall mean information, material and trade secrets (i) proprietary to the Company or to any Affiliate (as defined below) of the Company or {ii} designated as confidential by the Company, whether or not owned or developed by the Company, which Consultant may obtain knowledge of or access to, through or as a result of, Consultant’s relationship with the Company or with any Affiliate of the Company:

               (b) Without limiting the generality of the foregoing, Confidential Information shall include, but is not limited to, the following types of information and other information of a similar nature {whether or not reduced to writing or still in development}:

                 (i)   The “Technology,” which means:

  (1)   Any and all “Creations” as defined below; and
 
  (2)   any and all enhancements thereto,

  (ii)   Economic and financial analyses, marketing technique and materials, marketing and development plans, customer names and other information related to customers, price lists, pricing policies, financial information and consultant files.
 
  (iii)   Information constituting a “trade secret” as defined in California Civil Code Section 3426.1
 
  (iv)   Any information described above which the company obtains from another party and which the Company treats as proprietary and designates as

 


 

      Confidential Information, whether or not owned or developed by the Company.

               (c) The term “Creations” shall mean any and all discoveries, ideas, inventions, concepts; software in various states of development, designs, drawings, specifications, techniques, models, data, source code; object code, documentation, diagrams, flow charts, research, developments, processes, procedures, “know-how,” any enhancements to the foregoing and Consultant’s files that may be conceived or developed by Consultant, either alone or with others, during the term of this Agreement, whether or not conceived or developed during Consultant’s working hours; that relate to the Products or the Company’s Business (each as defined in the Consulting Agreement) or to the Company’s actual or demonstrably anticipated research and development, or that result from any services rendered by Consultant for the Company.

               (d) The term “Affiliate” shall mean, with respect to any person or entity, any other person or entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with such person or entity. “Control of, “controlled by” and “under common control with” mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person or entity, by contract or credit arrangement; as trustee or executor or otherwise. The term “Affiliate” includes, but is not limited to, each and every subsidiary of the Company, if any.

               (e) INFORMATION PUBLICLY KNOWN THAT IS GENERALLY EMPLOYED BY THE TRADE AT OR AFTER THE TIME CONSULTANT FIRST LEARNS OF SUCH INFORMATION, OR GENERIC INFORMATION OR KNOWLEDGE WHICH CONSULTANT WOULD HAVE LEARNED IN THE COURSE OF SIMILAR SERVICES OR EMPLOYMENT ELSEWHERE N THE TRADE, SHALL NOT BE DEEMED PART OF THE CONFIDENTIAL INFORMATION.

               (f) Any capitalized terms used and not otherwise defined herein shall have the meanings, if any, ascribed to them in the Consulting Agreement.

     2.  Confidential Treatment . Consultant hereby agrees, during the term of his consulting arrangement with Company and at all times thereafter, to hold in confidence and not to directly or indirectly reveal, report, publish, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Consultant’s services for Company, without the prior written consent of the chief executive officer of Company. Consultant agrees that, as between Consultant and Company, Company owns all of the Confidential Information, and Consultant hereby agrees to regard and preserve as confidential all Confidential Information. Consultant hereby agrees not to take, retain or copy, without the prior written consent of the chief executive officer of Company; any or all of the Confidential information. Without limiting the foregoing, during the term hereof and after termination of Consultant’s employment wit Company, Consultant shall riot use, build, reverse-engineer, decompile, modify for use or disassemble of the Technology.

     3.  Ownership . The Technology including without limitations any and all Creations shall be the sole and exclusive property of the Company. At any time upon the request of the Company, Consultant shall: (i) assign, without charge to the Company, all his rights, title, and interests in any of the Creations of the Company; (ii) execute, acknowledge, and deliver any and all instruments

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necessary to confirm the Company’s complete ownership and creations; and (iii) perform all other reasonable acts which may be necessary to perfect and to protect the Company’s ownership rights in the Creations. Consultant hereby assigns to the Company a11 of his right, title and interest in and to the Creations. Consultant shall disclose promptly and only to the Company, and shall make an adequate record of, any and all Creations conceived or developed by Consultant (either alone or jointly with others) during the term of this Agreement and within one year thereafter, whether or not the property of the Company.

     4.  Return of Materials and Copies . All notes, data, reference materials, sketches, drawings, memoranda, documentation and records in any way incorporating or reflecting any of the Confidential Information and all proprietary rights therein, including copyrights, shall belong exclusively to Company, and Consultant hereby agrees to turn over promptly a11 copies of such materials in Consultant’s control to Company upon Company’s request or upon termination of Consultant’s employment by Company.

     5.  Non-Competition and Non-Solicitation . During the Company’s employment of Consultant and for a period of two (2) years following the term of the Consulting Agreement, Consultant shall not assist, become employed by or engage in any consulting or other services for any person or entity that is engaged in any business or other activity in competition with the Company, nor solicit or entice any of the Company’s employees to do any of the foregoing. During the Company’s employment of Consultant and for a period of two (2) years following the term of the Consulting Agreement, Consultant shall not set up or take preliminary steps to set up or engage in any business enterprise that would be in competition with the Company and Consultant shall disclose to the Company, any and all competitive plans that Consultant may have, without regard to Consultant’s intent to act or not act on such plans.

     6.  Fiduciary Obligations . Nothing in this Agreement is intended to limit Consultant’s obligations to Company in any capacity, and Consultant shall be bound by all fiduciary and other obligations to Company which may arise by reason of Consultant’s employment, capacity or other duties to the Company.

     7.  Injunctive Relief . Due to the unique nature of the Confidential Information; Consultant understands and hereby agrees that Company will suffer irreparable harm in the event that Consultant fails to comply with any of Consultant’s obligations under Section 2 or 3 above and that monetary damages will be inadequate to compensate Company for such breach. Accordingly, Consultant hereby agrees that Company will be entitled, in addition to any other remedies available to it at law or in equity, to injunctive relief to enforce the terms of Sections 2 and 3 above.

     8.  Amendments; Consents . No amendment, modification, supplement, termination or waiver of any provision in this Agreement, and no consent to any departure therefrom, shall be effective unless in writing and signed by both Consultant and Company and then only in the specific instance and for the specific purpose given.

     9.  Notice . Any notices required or permit deemed received when personally delivered or, if earlier, ten (10) days after mailing by registered or certified United States mail; postage prepaid, and with return receipt requested. Notice to the Company is valid if sent to the Company’s principal place of business and notice to Consultant is valid if sent to Consultant at Consultant’s address as it appears in the Company’s records.

     10.  Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all such counterparts when taken together shall be deemed to be one and the same instrument.

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     11.  Binding Effect; Assignment . This Agreement shall be binding upon and inure to the benefit of Consultant and Company and their respective permitted successors and assigns. This Agreement, including the rights and obligations hereunder, shall not be assigned or transferred by Consultant without the prior written consent of Company.

     12.  Integration; Construction . This Agreement (together with the Consulting Agreement) shall comprise the complete and integrated agreement of the Company and Consultant and shall supersede all prior agreements, written or oral, on the subject matter hereof. Neither party hereto shall have a provision construed against it by reason of such party having drafted the same.

     13.  Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     14.  Severability of Provisions . Any provision in this Agreement that is held to be inoperative, unenforceable or invalid in any jurisdiction shall be, as to that jurisdiction only, inoperative, unenforceable or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of those provisions in any other jurisdiction, and to this end the provisions of this Agreement shall be severable.

     15.  Headings . Headings of this Agreement are included for convenience only and shall not be considered a part of this Agreement for any other purpose.

     16.  Attorneys’ Fees . In the event of any litigation or other dispute arising as a result of or by reason of this Agreement, the prevailing party in any such litigation or other dispute shall be entitled to, in addition to any other damages assessed, its reasonable attorneys’ fees, and all other costs and expenses incurred in connection with settling or resolving such dispute. The attorneys’ fees which the prevailing party is entitled to recover shall include fees for prosecuting or defending any appeal and shall be awarded for any supplemental proceedings until the final judgment is satisfied in full. In addition to the foregoing award of attorneys’ fees to the prevailing party, the prevailing party in any lawsuit on this Agreement shall be entitled to its reasonable attorneys’ fees incurred in any past judgment proceedings to collect or enforce the judgment. This attorneys’ fees provision is separate and several and shall survive the merger of this Agreement into any judgment.

     17.  Waiver; Rights and Remedies . Neither Consultant’s nor Company’s failure to exercise any right under this Agreement shall constitute a waiver of any other term or condition of this Agreement with respect to any other preceding, concurrent or subsequent breach, nor shall it constitute a waiver by the Company or Consultant or its rights at any time thereafter to require exact and strict compliance with any oil the terms of this Agreement. The rights and remedies set forth in’ his Agreement shall be in addition to any other rights or remedies which may be granted by law.

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     IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.
         
  SAVE THE WORLD AIR, INC.
 
 
 
  By   /s/ EUGENE E. EICHLER    
  Its   President   
       
 
         
  CONSULTANT
 
 
 
  By   /s/ JOHN B. FAWCETT   
  Name    John B. Fawcett    
  Address    22146 Placeritos Bl  
    Newhall, CA 91521  
       

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ANNEX C

CONSULTANT’S COMPENSATION


Pursuant to Section 6 of the Agreement to which this Annex is attached, and into which the provisions of this Annex are incorporated, and subject to the terms and conditions contained in the Agreement, the Company shall pay and deliver to Consultant the following:

          (a) Equity Incentives. Subject to compliance with applicable securities laws, the Company shall issue to Consultant Common stock awards for an aggregate of 65,000 shares of Company common stock, as follows:

     
Type of shares:   Common Stock.
 
Number of shares:   65,000

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Exhibit 10.24

ADVISORY SERVICES AGREEMENT

     This Advisory Services Agreement (this “ Agreement ”) is made and entered into as of this 7 th day of July, 2003 by and between Save the World Air, Inc. , a Nevada corporation (the “ Company ”) and Kevin Charles Hart , also known as “Pro Hart” (“ Advisor ”), with reference to the following facts.

RECITALS

  A.   The Company has certain rights to a proprietary technology (the “Technology ”) for a product known as the Zero Emissions Fuel Saving device (“ ZEFS Device ”) that is intended to be used on motor vehicles to reduce pollution and improve fuel efficiency. The Company desires to further develop the Technology and market and sell the ZEFS Device.

  B.   Advisor is a famed Australian artist and inventor of the ZEFS Device. The Company desires to engage Advisor, and Advisor desires to serve the Company, in an advisory capacity on and subject to the terms of this Agreement.

     THEREFORE, the Company and Advisor hereby agree as follows:

      Section 1 . Scope of Services Provided .

     1.1 Advisor shall provide advice, counsel and support to the Company’s Board of Directors and management on an as-needed basis, by telephone or in person, in matters relating to the Company’s business, including product development, marketing and promotion, and other matters concerning the ZEFS Device as the Company may reasonably request from time to time during the term of this Agreement. Advisor also agrees to serve on the “Advisory Board” which shall report to the Company’s Board of Directors.

     1.2 Advisor agrees to appear at not less than two events per year during the term of this Agreement subject to Advisor’s prior commitments, schedule and availability, and at such other times as may be mutually agreed, to assist and support the Company in promoting the ZEFS Device.

      Section 2 . Compensation; Expenses.

     2.1 As soon as practicable following the parties execution of this Agreement, the Company shall issue to Advisor 50,000 shares of the Company’s common stock, par value $.001 per share (the “Stock”). The Stock shall be deemed to have a value of $.001 per share. Advisor shall execute and deliver to the Company a subscription agreement substantially in the form attached hereto in Annex A , the provisions of which are incorporated herein by this reference.

     2.2 The Company shall reimburse Advisor for all reasonable and necessary out-of-pocket expenses incurred by Advisor in performing the services requested by the Company hereunder, including without limitation travel, meals, accommodations and phone charges, subject to Advisor’s presentation to the Company of receipts for such charges, in accordance with the Company’s practices and policies as adopted or approved from time to time.

      Section 3 . Non-Disclosure Obligations .

     Advisor acknowledges that the Technology is proprietary and agrees to execute a standard confidentiality agreement substantially in the form attached hereto in Annex B , the provisions of which are incorporated herein by this reference.

 


 

      Section 4 . Use of Advisor’s Name and Likeness .

     4.1 The Company will not use Advisor’s name or likeness in any advertising or marketing/promotional material without Advisor’s prior written approval or consent, to be given or refused in the Adviser’s absolute discretion.. Except as may be expressly agreed to by the parties hereto in writing, the Company shall acquire no ownership or rights in or to Advisor’s name or likeness that by its use or incorporation in any company advertising or promotional materials other than the right to use, duplicate and distribute such name or likeness as and to the extent to which Advisor may have previously consented.

     4.2 The Company may identify Advisor as member of the Company’s Advisory Board and may make such disclosures as may be necessary or advisable to comply with federal securities laws, including without limitation disclosures in filings with the Securities and Exchange Commission or press releases as to: (1) the terms of this Agreement; (2) the appointment of Advisor to the Company’s Advisory Board; and (3) Advisor’s Stock ownership.

      Section 5 . Miscellaneous Provisions.

     5.1 Term . The initial term of this Agreement is one year from the effective date of this Agreement. This Agreement shall renew automatically from year to year unless terminated by either party by giving the other not less than thirty (30) days’ prior written notice of its election to terminate this Agreement.

     5.2 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all such counterparts when taken together shall be deemed to be but one and the same instrument.

     5.3 Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.

         
 
ADVISOR    
 
       
 
By:
  /s/ K.C. HART    
       
  Kevin Charles Hart    
 
       
 
 
SAVE THE WORLD AIR, INC.    
 
 
       
By:
  /s/ EUGENE E. EICHLER    
       
Name: Eugene E. Eichler    
Title: Chief Financial Officer    

2


 

ANNEX A

SUBSCRIPTION AGREEMENT

SAVE THE WORLD AIR, INC.

The undersigned hereby proposes to acquire Common Stock of Save the World Air, Inc., a Nevada corporation (the
“Company”). .

The undersigned understands that the shares of Common Stock are being offered and sold without registration under the Securities Act of 1933, as amended (the “Act”), in reliance upon the private placement exemption contained in Sections 4(2) and 4(6) of the Act, and Regulation. D promulgated thereunder, and that such reliance ~s based on the undersigned’s representations set forth below.

To induce the Company to accept this subscription and issue and deliver the Common Stock, the undersigned agrees, warrants, and represents as follows:

1. This offer is irrevocable and subject to acceptance or rejection by the Company in its sole discretion.

2. The undersigned is acquiring the Common Stock for investment for his or her own account, and not with a view toward distribution thereof, and with no present intention of dividing his or her interest with others or reselling or otherwise disposing of all or any portion of the Common Stock. The undersigned has not offered or sold a participation in this purchase of Common Stock, and will not offer or sell the Common Stock or interest therein or otherwise, in violation of the Act. The undersigned further acknowledges that he or she does not have in mind any sale of the Common Stock currently or after the passage of a fixed or determinable period of time or upon the occurrence or non-occurrence of any predetermined events or consequence; and that he or she has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for or which is likely to compel a disposition of the Common Stock and is not aware of any circumstances presently in existence that are likely in the future to prompt a disposition of the Common Stock.

3. The undersigned acknowledges that the shares of Common Stock have been offered to him or her in direct communication between himself or herself and the Company or through registered broker-dealers and not through any advertisement of any kind.

4. The undersigned acknowledges that he or she has read all the materials included in the Executive Summary and Exhibits thereto and has had access to all of the Company’s filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, that the Company has not timely filed its annual report of Form 10-KSB nor does it have current audited financial statements, that the offer and sale of Common Stock to the undersigned were based on the representations and warranties of the undersigned in this Subscription Agreement, and acknowledges that he or she has been encouraged to seek his or her own legal and financial counsel to assist him or her in evaluating this investment. The undersigned acknowledges that the Company has given him or her and all of his or her counselors access to all information relating to the Company’s business that they or anyone of them has’ requested. The undersigned acknowledges that he or she has sufficient knowledge, financial and business experience concerning the affairs and conditions of the Company so that he or she can make a reasoned decision as to this investment in the Company and is capable of evaluating the merits and risks of this investment. Based on the foregoing, the undersigned hereby agrees to indemnify the Company thereof and to hold each of such persons and entities, and the officers, directors and employees thereof harmless against all liability, costs or expenses (including reasonable attorneys’ fees) arising by reason of or in connection with any misrepresentation or any breach of such warranties of the undersigned, or arising as a result of the sale or distribution of the Common Stock by the undersigned in violation of the Act, the Securities Exchange Act of 1934, as amended, or any

 


 

other applicable law, either federal or state. This subscription and the representations and warranties contained herein shall be binding upon the heirs, legal representatives, successors and assigns of the undersigned.

5. The undersigned acknowledges that he or she is able to bear, and understands, the economic risks of the proposed investment and all other risks of the Company’s business.

                         The undersigned represents that he or she is:

     
  (a) An Accredited Investor, as that term is defined by Regulation D of the Securities and Exchange Commission, which means any investor meeting at least one of the following conditions:
         
  (i)   Any natural person whose individual net worth (or joint net worth with that person’s spouse, if applicable) at the time of purchase exceeds $1,000,000; or
  (ii)   Any natural person who had an individual income in excess of $200,000 or joint income with that person’s spouse in excess of 5300,000 in each of the two most recent years and who reasonably expects an income in excess of 5200,000 or joint income with that person’s spouse in excess of $300,000 in the current year; or
  (iii)   Any other Accredited Investor as that term is defined in Regulation D as adopted by the Securities and Exchange Commission.
     
6.
  (a) The undersigned is aware of the restrictions of transferability of the Common Stock and further understands and acknowledges that any certificates evidencing the Common Stock will bear the following legends, to which such interests will be subject:
     
  THE SHARES EVIDE:\CED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AMENDED, OR QUALIFIED FOR SALE UNDDER ANY STATE SECURITIES LAWS (COLLECTIVELY, “SECURITIES LA W5”) A:\D MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED FOR SALE UNDER ALL APPLICABLE SECVRITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER. ANY SUCH OFFER. SALE OR OTHER TRANSFER IS EXEMPT FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.
     
  (b) The undersigned understands that following the purchase of the Common Stock, the Common Stock may only be disposed of pursuant to either (i) an effective registration statement under the Act, or (ii) an exemption from the registration requirements of the Securities Act of 1933.
 
  (c) The Company has neither filed such a registration statement with the SEC or any state authorities nor agreed to do so, nor contemplates doing so in the future for this offering of Common Stock, and in the absence of such a registration statement or exemption, the undersigned may have to hold the Common Stock indefinitely and may be unable to liquidate them in case of an emergency.
 
  (d) The undersigned acknowledges that the Company is not obligated and does not propose to furnish the undersigned with information necessary to enable it to be able to make sales under Rule 144 of the Securities Act of 1933.

7. The undersigned represents that he or she is a resident of                          and makes the following representation:

     
  I, THE UNDERSIGNED, REPRESENT THAT I HAVE A PRE-EXISTING PERSONAL OR BUSINESS RELATIONSHIP WITH THE CONIPANY, ANY OFFICER, DIRECTOR OR CONTROLLING PERSON THEREOF OR HAVE, THROUGH MYSELF OR THROUGH MY UNAFFILIATED PROFESSIONAL ADVISER, THE BUSINESS OR FINANCIAL EXPERIENCE TO PROTECT MY INTERESTS IN CONNECTION WITH MY SUBSCRIPTION HERETO.

 


 

FURTHER, I AM PURCHASING THE COMMON STOCK OFFERED HEREBY FOR INVESTMENT AND NOT WITH A VIEW TOWARD DISTRIBUTION THEREOF.

8. This Subscription Agreement has been delivered in, and shall be construed in accordance with the laws of the State of California. Subject to the provisions of the paragraph immediately following, any action in connection with this Subscription Agreement shall be brought in the appropriate state or federal court in and for the County of Los Angeles, State of California, which shall have exclusive jurisdiction over such action.

     
  Executed as of this      30     

day of     July     2003
S
 
 
  /s/  K.C. Hart
   
  Signature of Subscriber
 
 
  Kevin Hart
   
  Print Name

*******************************************
* * * * ** * * * * * * *

The above and foregoing Subscription accepted this 7th day of     July      2003

Save the World Air, Inc.
a Nevada corporation

       
 
By:
  /s/   Eugene E. Eichler
 
   
 
 
 
Its:
  Chief Financial Officer
 
   

 


 

ANNEX B

Confidentiality Agreement

July 7, 2003

STRICTLY PRIVATE AND CONFIDENTIAL

BY FACSIMILE
Save the World Air, Inc.
29229 Canwood Street, Suite 206
Agoura Hills, California 91301

Attention: Eugene E. Eichler, Chief Financial Officer

Gentlemen:

In connection with the advisory services that you have asked me to provide to Save the World Air, Inc. (the “Company”) as a member of its Advisory Board, I may be provided and/or have access to technical and other information concerning the Company and its proprietary technology (the “Technology”) for a product known as the Zero Pollution-Fuel Saving Device (“ZERO Device”) that can be used on motor vehicles to reduce pollution and improve fuel efficiency. As a condition to my being furnished such information, I agree to treat any information concerning the Technology (including without limitation all specifications, designs, processes, concepts, ideas, strategic plans, product development plans, research and development, information about the Company’s operations, finances, reports, interpretations, forecasts and records, and any analyses, compilations, studies or other documents, whether prepared by the Company or others, that contain or reflect such information (collectively, the “Confidential Information" ) in accordance with the provisions of this letter. The term “Confidential Information” does not include information which (a) was or becomes generally available to the public other than as a result of a disclosure by me or my agents or advisors, (b) was or becomes available to me on a non-confidential .basis from a source other than the Company or its advisors provided that such source is not bound by a confidentiality agreement with the Company, (c) was within my possession prior to its being furnished to me by or on behalf of the Company, provided that the source of such information was not bound by a confidentiality agreement with the Company in respect thereof.

By this letter, I agree that the Confidential Information will be used solely for the purposes in furtherance of my advisory services to the Company and will not be used by me in any way detrimental to the Company. I also agree that the Confidential Information will be kept confidential by me, my agents and employees; provided, however, that (i) any such information may be disclosed to my agents and employees who need to know such information for the purpose of providing the advisory services (it being understood that such persons shall be informed by me of the confidential nature of such information and shall be directed by me to treat such information confidentially and shall assume the same obligations as I under this letter) and (ii) any disclosure of such information may be made to which the Company consents in writing. I shall be responsible for any breach of this letter by my agents or employees.

 


 

Save the World Air, Inc.
Page 2 of 2

I shall promptly redeliver to the Company all written material containing or reflecting any information contained in the Confidential Information (whether prepared by the Company or otherwise) if I choose not to proceed with the advisory services, and shall not retain any copies, extracts, or other reproductions in whole or in part of such written material. All documents, memoranda, notes, and other writings whatsoever, prepared by me or my advisors based on the information contained in the Confidential Information shall be destroyed, and such destruction shall be certified in writing to the Company by an authorized officer supervising such destruction.

In the event I am required by legal process to disclose any of the Confidential Information, I shall provide you with prompt notice of such requirement so that you may seek a protective order or other appropriate remedy or waive compliance with the provisions of this letter. In the event that a protective order or other remedy is obtained, I shall use all reasonable efforts to . assure that all Confidential Information disclosed will be covered by such order or other remedy. Whether such protective order or other remedy is obtained or we waive compliance with the provisions of this letter, I will disclose only that portion of the Confidential Information that I am legally required to disclose.

No failure or delay by the Company in exercising any right, power or privilege under this letter shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. If there should arise any conflict between the terms of this letter agreement and any other agreement concerning the advisory services, the provisions of this letter agreement shall control. This letter shall be governed by laws of California, U.S.A, in all respects. Any assignment of this letter by me without our prior written consent shall be void.

I certify that no Confidential Information, or any portion thereof, will be exported to any country in violation of the United States Export Administration Act and regulations thereunder. I hereby further certify that I am not a resident of any of the following countries: Iraq, Iran, Libya, North Korea, Syria, Laos, Mongolian People’s Republic, Cuba, Cambodia, North Korea, Nicaragua, or the People’s Republic of China.

* * *

Very truly yours,

/s/ K. C. Hart


 

 

Exhibit 10.25

ADVISORY SERVICES AGREEMENT

     This Advisory Services Agreement (this “ Agreement ”) is made and entered into as of this 26 th day of February, 2004, by and between Save The World Air, Inc. , a Nevada corporation (the “ Company ”) and Sir Jack Brabham (“ Advisor ”), with reference to the following facts.

RECITALS

  A.   The Company has certain rights to a proprietary technology (the “Technology ”) for a product known as the Zero Emissions Fuel Saving device (“ ZEFS Device ”) that is intended to be used on motor vehicles to reduce pollution and improve fuel efficiency. The Company desires to further develop the Technology and market and sell the ZEFS Device.
 
  B.   Advisor is well known to the public and associated with Grand Prix automobile racing and products. The Company desires to engage Advisor, and Advisor desires to serve the Company, in an advisory capacity on and subject to the terms of this Agreement.

     THEREFORE, the Company and Advisor hereby agree as follows:

      Section 1 .      Scope of Services Provided .

     1.1      Advisor shall provide advice, counsel and support to the Company’s Board of Directors and management on an as-needed basis, by telephone or in person, in matters relating to the Company’s business, including product development, marketing and promotion, and other matters concerning the ZEFS Device as the Company may reasonably request from time to time during the term of this Agreement. Advisor also agrees to serve on the “Board of Advisors” which shall report to the Company’s Board of Directors.

     1.2      Advisor agrees to appear at not less than two events per year during the term of this Agreement subject to Advisor’s prior commitments, schedule and availability, and at such other times as may be mutually agreed, to assist and support the Company in promoting the ZEFS Device.

      Section 2 .      Compensation ; Expenses.

     2.1      As soon as practicable following the parties execution of this Agreement, the Company shall issue to Advisor 50,000 shares of the Company’s common stock, par value $.001 per share (the “Stock”). The Stock shall be deemed to have a value of $.001 per share. Advisor shall execute and deliver to the Company a subscription agreement substantially in the form attached hereto in Annex A , the provisions of which are incorporated herein by this reference.

     2.2      The Company shall reimburse Advisor for all reasonable and necessary out-of-pocket expenses incurred by Advisor in performing the services requested by the Company hereunder, including without limitation travel, meals, accommodations and phone charges, subject to Advisor’s presentation to the Company of receipts for such charges, in accordance with the Company’s practices and policies as adopted or approved from time to time.

      Section 3 .      Non-Disclosure Obligations .

     Advisor acknowledges that the Technology is proprietary and agrees to execute a standard confidentiality agreement substantially in the form attached hereto in Annex B , the provisions of which are incorporated herein by this reference.

 


 

      Section 4 .      Use of Advisor’s Name and Likeness .

     4.1      The Company will not use Advisor’s name or likeness in any advertising or marketing/promotional material without Advisor’s prior written approval or consent, which shall not be unreasonably withheld. Except as may be expressly agreed to by the parties hereto in writing, the Company shall acquire no ownership or rights in or to Advisor’s name or likeness that by its use or incorporation in any company advertising or promotional materials other than the right to use, duplicate and distribute such name or likeness as and to the extent to which Advisor may have previously consented.

     4.2      The Company may identify Advisor as member of the Company’s Board of Advisors and may make such disclosures as may be necessary or advisable to comply with federal securities laws, including without limitation disclosures in filings with the U.S. Securities and Exchange Commission or press releases as to: (1) the terms of this Agreement; (2) the appointment of Advisor to the Company’s Board of Advisors; and (3) Advisor’s Stock ownership.

      Section 5 .      Miscellaneous Provisions.

     5.1      Term . The initial term of this Agreement is one year from the effective date of this Agreement. This Agreement shall renew automatically from year to year unless terminated by either party by giving the other not less than thirty (30) days’ prior written notice of its election to terminate this Agreement.

     5.2      Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all such counterparts when taken together shall be deemed to be but one and the same instrument.

     5.3      Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California.

     IN WITNESS WHEREOF, the parties hereto have executed or caused their respective duly authorized officer to execute this Agreement as of the date first set forth above.

       
ADVISOR
  SAVE THE WORLD AIR, INC.
 
   
By: /s/ JACK BRABHAM
  By: /s/ EUGENE E. EICHLER
         
       Sir Jack Brabham
  Name:  Eugene E. Eichler
  Title:   Chief Operating Officer

 


 

Annex A

SUBSCRIPTION AGREEMENT

SAVE THE WORLD AIR, INC.

The undersigned hereby proposes to acquire Common Stock of Save the World Air, Inc., a Nevada corporation (the “Company”).

The undersigned understands that the shares of Common Stock are being offered and sold without registration under the Securities Act of 1933, as amended (the “Act”), in reliance upon the private placement exemption contained in Sections 4(2) and 4(6) of the Act, and Regulation D promulgated thereunder, and that such reliance is based on the undersigned’s representations set forth below.

To induce the Company to accept this subscription and issue and deliver the Common Stock, the undersigned agrees, warrants, and represents as follows:

1. This offer is irrevocable until both parties execution and delivery of that certain Advisory Services Agreement to which this subscription is a part and is subject to acceptance or rejection by the Company in its sole discretion.

2. The undersigned is acquiring the Common Stock for investment for his or her own account, and not with a view toward distribution thereof, and with no present intention of dividing his or her interest with others or reselling or otherwise disposing of all or any portion of the Common Stock. The undersigned has not offered or sold a participation in this purchase of Common Stock, and will not offer or sell the Common Stock or interest therein or otherwise, in violation of the Act. The Undersigned further acknowledges that he or she does not have in mind any sale of the Common Stock currently or after the passage of a fixed or determinable period of time or upon the occurrence or non-occurrence of any predetermined events or consequence; and that he or she has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for or which is likely to compel a disposition of the Common Stock and is not aware of any circumstances presently in existence that are likely in the future to prompt a disposition of the Common Stock.

3. The undersigned acknowledges that the shares of Common Stock have been offered to him or her in direct communication between himself or herself and the Company or through registered broker-dealers and not through any advertisement of any kind.

4. The undersigned acknowledges that he or she has read or has had access to all of the Company’s filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, that the Company has not timely filed its annual report of Form 10-KSB nor does it have current audited financial statements, that the offer and sale of Common Stock to the undersigned were based on the representations and warranties of the undersigned in this Subscription Agreement, and acknowledges that he or she has been encouraged to seek his or her own legal and financial counsel to assist him or her in evaluating this investment. The undersigned acknowledges that the Company has given him or her and all of his or her counselors access to all information relating to the Company’s business that they or any one of them has requested. The undersigned acknowledges that he or she has sufficient knowledge, financial and business experience concerning the affairs and conditions of the Company so that he or she can make a reasoned decision as to this investment in the Company and is capable of evaluating the merits and risks of this investment. Based on the foregoing, the undersigned hereby agrees to indemnify the Company thereof and to hold each of such persons and entities, and the officers, directors and employees thereof harmless against all liability, costs or expenses (including reasonable attorneys’ fees) arising by reason of or in connection with any misrepresentation or any breach of such warranties of the undersigned, or arising as a result of the sale or distribution of the Common Stock by the undersigned in violation of the Act, the Securities Exchange Act of 1934, as amended, or any other applicable law, either federal or state. This subscription and the representations and warranties contained herein shall be binding upon the heirs, legal representatives, successors and assigns of the undersigned.

 


 

5. The undersigned acknowledges that he or she is able to bear, and understands, the economic risks of the proposed investment and all other risks of the company’s business.

     The undersigned represents that he or she is:

(a) An Accredited Investor, as that term is defined by Regulations of the Securities and Exchange Commission, which means any investor meeting at least one of the following conditions:

  (i)   Any natural person whose individual net worth (or joint net worth with that person’s spouse. If applicable) at the time of purchase exceeds $1000,000: or
 
  (ii)   Any natural person who had an individual income in excess of $200,000 or joint income with that person’s spouse in excess of $300,000 in each of the two most recent years and who reasonably expects an income in excess of or joint income with that person’s spouse in excess of $300,000 in the current year: or
 
  (iii)   Any other Accredited Investor as that term is defined in Regulation D as adopted by the Securities and Exchange Commission.

6.

(a) The undersigned is aware of the restrictions of transferability of the Common Stock and further understands and acknowledges that any certificates evidencing the Common Stock will bear the following legends, to which such interests will be subject:

THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED FOR SALE UNDER ANY STATE SECURITIES LAWS (COLLECTIVELY, “SECURITIES LAWS”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED FOR SALE UNDER ALL APPLICABLE SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, ANY SUCH OFFER, SALE OR OTHER TRANSFER IS EXEMPT FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.

(b) The undersigned understands that following the purchase of the Common Stock, the Common Stock may only be disposed of pursuant to either (i) an effective registration statement under the Act, or (ii) an exemption from the registration requirements of the Securities Act of 1933.

(c) The Company has neither filed such a registration statement with the SEC or any state authorities nor agreed to do so, nor contemplates doing so in the future for this offering of Common Stock, and in the absence of such a registration statement or exemption, the undersigned may have to hold the Common Stock indefinitely and may be unable to liquidate them in case of an emergency.

(d) The undersigned acknowledges that the Company is not obligated and does not propose to furnish the undersigned with information necessary to enable it to be able to make sales under Rule 144 of the Securities Act of 1933.

  7.   The undersigned represents that he or she is a resident of England_ and makes the following representation:
 
      I, THE UNDERSIGNED, REPRESENT THAT I HAVE A PRE-EXISTING PERSONAL OR BUSINESS RELATIONSHIP WITH THE COMPANY, ANY OFFICER, DIRECTOR OR CONTROLLING PERSON THEREOF OR HAVE, THROUGH MYSELF OR THROUGH MY UNAFFILIATED PROFESSIONAL

 


 

      ADVISER, THE BUSINESS OR FINANCIAL EXPERIENCE TO PROTECT MY INTERESTS IN CONNECTION WITH MY SUBSCRIPTION HERETO.
 
      FURTHER, I AM PURCHASING THE COMMON STOCK OFFERED HEREBY FOR INVESTMENT AND NOT WITH A VIEW TOWARD DISTRIBUTION THEREOF.
 
  8.   This Subscription Agreement has been delivered in, and shall be construed in accordance with the laws of the State of California. Subject to the provisions of the paragraph immediately following, any action in connection with this Subscription Agreement shall be brought in the appropriate state or federal court in and for the County of Los Angeles, State of California, which shall have exclusive jurisdiction over such action.

         
    Executed as of this 26th day of February 2004
 
       
  By:        /s/ Jack Brabham
       
                 Signature of Subscriber
 
       
           Sir Jack Brabham
       
                      Print Name

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * *

The above and foregoing Subscription accepted this 26th day of February , 2004.

         
    Save the World Air, Inc.
a Nevada corporation
 
       
  By:   Eugene E. Eichler
     
 
       
  Its:   Chief Financial Officer
       

 


 

Annex B

February 21,2003

STRICTLY PRIVATE AND CONFIDENTIAL

BY FACSIMILE
Save the World Air, Inc.
29229 Canwood Street, Suite 206
Agoura Hills, California 91301

Attention: Eugene E. Eichler, Chief Financial Officer

Gentlemen:

In connection with the advisory services that you have asked me to provide to Save the World Air, Inc. (the “ Company ”) as a member of its Advisory Board, I may be provided and/or have access to technical and other information concerning the Company and its proprietary technology (the “Technology”) for a product known as the Zero Pollution-Fuel Saving Device (“ZERO Device”) that can be used on motor vehicles to reduce pollution and improve fuel efficiency. As a condition to my being furnished such information, I agree to treat any information concerning the Technology (including without limitation all specifications, designs, processes, concepts, ideas, strategic plans, product development plans, research and development, information about the Company’s operations, finances, reports, interpretations, forecasts and records, and any analyses, compilations, studies or other documents, whether prepared by the Company or others, that contain or reflect such information (collectively, the “ Confidential Information ”) in accordance with the provisions of this letter. The term “ Confidential Information ” does not include information which (a) was or becomes generally available to the public other than as a result of a disclosure by me or my agents or advisors, (b) was or becomes available to me on a non-confidential basis from a source other than the Company or its advisors provided that such source is not bound by a confidentiality agreement with the Company, (c) was within my possession prior to its being furnished to me by or on behalf of the Company, provided that the source of such information was not bound by a confidentiality agreement with the Company in respect thereof.

By this letter, I agree that the Confidential Information will be used solely for the purposes in furtherance of my advisory services to the Company and will not be used by me in any way detrimental to the Company. I also agree that the Confidential Information will be kept confidential by me, my agents and employees; provided, however , that (i) any such information may be disclosed to my agents and employees who need to know such information for the purpose of providing the advisory services (it being understood that such persons shall be informed by me of the confidential nature of such information and shall be directed by me to treat such information confidentially and shall assume the same obligations as I under this letter) and (ii) any disclosure of such information may be made to which the Company consents in writing. I shall be responsible for any breach of this letter by my agents or employees.

In the event I am required by legal process to disclose any of the Confidential Information, I shall provide you with prompt notice of such requirement so that you may seek a protective order or other appropriate remedy or waive compliance with the provisions of this letter. In the event that a protective order or other remedy is obtained, I shall use all reasonable efforts to assure that all Confidential Information disclosed will be covered by such order or other remedy. Whether such protective order or other remedy is obtained or the Company waives compliance with the provisions of this letter, I will disclose only that portion of the Confidential Information that I am legally required to disclose. This letter shall be governed by laws of California, U.S.A, in all respects.

* * *

       
  Very truly yours,  
 
   
       /s/ Jack Brabham
   

 

 

Exhibit 10.27

EXCLUSIVE CAPITAL RAISING AGREEMENT

     This Exclusive Capital Raising Agreement (the “Agreement”) is entered into as of the date set forth on the signature page hereof by and between Save the World Air, Inc (“STWA”), and London Aussie Marketing, Limited. (“Introducer”), a UK based financial consulting company, with respect to the following:

     Introducer has indicated its desire to act as an Introducer for STWA with respect to locating private equity entities or individuals (collectively, “Designated Prospects”), that are interested in providing capital to STWA. STWA is agreeable to having an Introducer act in such capacity.

     STWA and Introducer hereby agree as follows:

  1.   Amount of Capital to be Raised: STWA has indicated its intention to raise up to USD $10 million in a private placement. STWA grants exclusive rights to Introducer to raise USD $5 million with private equity firms.
 
  2.   Start and End Date of Capital Raising: It is STWA’s intention to conclude the private placement by November 2004. STWA is not bound by this date.
 
  3.   Terms of Capital Raising: These are as set forth in the Private Placement Memorandum dated July 26, 2004.

IMPACT

Given the benefits to STWA for accessing professional private equity firms, STWA will advise its other sources that the total amount to be raised by other sources is less than USD $5 million. This is because private equity firms have no interest in amount less than USD $5 million.

For example, if the private placement total is USD $7 million, then the Introducer is allocated USD $5 million and USD $2 million is allocated to other sources.

The Introducer can raise more than USD $5 million, and can market to others the total private placement. For example, the Introducer can market to Designated Prospects that the full amount of the private placement is available for funding. However, any amounts greater than USD 5 million raised by the Introducer must have prior approval of both Bruce McKinnon and Eugene Eichler.

The Introducer understands that if private individuals subscribe to the whole amount, then STWA has the right to decide whether to go with the private investor or whether private equity funding would be more or less beneficial.

  1.   STWA hereby appoints Introducer, and Introducer agrees to use its best efforts to (a) locate, and solicit Designated Prospects, (b) prepare reports to STWA on the status of discussion with Designated Prospects and (c) devote as much time, attention and skill as may be necessary to conduct such activities properly. Introducer shall ask Eugene E. Eichler and Bruce McKinnon if they would like to attend the introduction meetings prior to any formal presentations. Introducer shall have no right to use the STWA logo in any manner or for any purpose without the prior written consent of STWA. Introducer will also comply with any other requirements reasonably requested by STWA. Introducer will only introduce Designated Prospects to whom Introducer reasonably believes are “accredited investors” as defined by Rule 501 under the Securities Act of 1933, as amended.

 


 

  2.   Designation of Designated Prospects . A private equity, business entity or individual shall be deemed a Designated Prospect hereunder, if introduced by Mark Thornton, director of the Introducer.
 
  3.   Definition of Designated Person . A Designated Prospect is a person who (i) is not an existing shareholder of STWA, a party to a contract with STWA or a business entity or individual who can be demonstrated by written materials (such as sales reports) to have already been known to STWA as a potential source of financing, (ii) has not been brought or introduced to STWA by any other person in connection with a capital raising transaction, and (iii) is an “accredited investor” as defined in Rule 501 under the Securities Act of 1933, as amended. A person shall cease to be a Designated Prospect for all purposes hereof upon the date twelve months following its or his introduction to STWA by Introducer.
 
  4.   Effect of Direct or Indirect Introductions . A Designated Prospect includes any person who invests in STWA through a direct or indirect introduction made by Introducer.
 
  5.   Independent Contractor . Introducer is and at all times shall be an independent contractor in all matters relating to this agreement. Introducer and its employees are not agents of STWA for any purposes and have no power or authority, whether apparent, actual, ostensible or otherwise, to bind or commit STWA in any way. Introducer and its employees are not and shall not be employees of STWA for any purpose and shall not be entitled to any benefits STWA provides to its employees.
 
  6.   Introducer’s Fee . In consideration for the services performed by Introducer hereunder, STWA shall pay to Introducer an Introducer’s fee (“Introducer’s Fee”) with respect to each capital raising transaction consummated with a Designated Prospect. The Introducer’s Fee is a cash compensation calculated as eight percent (8%) of the total proceeds received by STWA from Designated Prospect. Introducer’s Fee is only upon STWA’s receipt of proceeds of a financing involving the Designated Prospect, the receipt of which STWA has the right to accept or reject, in whole or in part, in its sole and absolute discretion. STWA shall not be obligated to pay any fee to Introducer with respect to a Designated Prospect for which a financing is not completed.
 
  7.   Expenses . STWA shall not be responsible for any of the expenses Introducer incurs in connection with Introducer’s performance of its services hereunder.
 
  8.   No Obligation . Introducer acknowledges that the decision to pursue discussions with a Designated Prospect with respect to a possible capital raising transaction is solely STWA’s and that STWA shall have no obligation to pursue any Designated Prospect that Introducer brings to STWA. Introducer agrees and understands that the decision to accept or reject an investment from any potential investor is for STWA to make, in its sole and absolute discretion, including reasons related to shareholder limitations and confidentiality.
 
  9.   Compliance with Laws . Introducer shall not enter into any agreement, contract or arrangement with any government or government representative or with any other person, firm, corporation, entity or enterprise imposing any legal obligation or liability of any kind on STWA. Without limiting the generality of the foregoing, Introducer specifically shall not sign STWA’s name to any contract or other instrument and shall not contract any debt or enter into any agreement, either express or implied, binding to the payment of money or the

 


 

      performance of any obligation. Moreover, Introducer shall not make any representations or warranties on behalf of STWA to any Designated Prospects, it being understood that such representations and warranties will be made by STWA only in the definitive financing documents. Introducer represents and warrants that it will conduct all of its activities hereunder in accordance with all applicable laws, including laws relating to qualification and licensure of broker-dealers in the several states of the United States.
 
  10.   Term . This letter agreement is effective as of the date hereof and shall continue in effect for six months unless earlier terminated in writing by both parties. Notwithstanding the previous sentence, the period during which Introducer shall have the right to act exclusively on behalf of the Company in connection with a capital raising transaction shall commence as of the date hereof and terminated on November 15, 2004, unless extended by mutual agreement of the parties.
 
  11.   Termination .

(a) Upon the termination of this Agreement for any reason, Introducer’s entitlement to compensation from STWA shall immediately cease. Introducer shall be entitled to receive compensation, to the extent that Designated Prospect referrals made on or before the termination date consummate a capital raising transaction, and STWA receives all capital to be received under the terms of the definitive agreements within 12 months of the date of such termination.

  12.   General Provisions .

(a) Governing Law; Severability . This Agreement shall be governed by and under the laws of the State of New York without giving effect to conflicts of law principles. If any provision hereof is found invalid or unenforceable, that part shall be amended to achieve as nearly as possible the same effect as the original provision and the remainder of this Agreement shall remain in full force and effect.

(b) Construction . The headings set forth in this Agreement are for convenience only and shall not be used in interpreting the text of the section in which they appear. The parties acknowledge that each party and its counsel has reviewed and revised this Agreement and that the rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or schedules hereto, or any documents executed in connection herewith. When necessary herein, all terms used in the singular shall apply to the plural, and all terms used in the masculine or feminine gender shall apply to the neuter.

(c) Disputes . Any dispute arising under or in any way related to this Agreement shall be submitted to binding arbitration by the American Arbitration Association (the “Association”) in accordance with the Association’s commercial rules then in effect. The arbitration shall be conducted only in New York, New York. The arbitration shall be binding on the parties and the arbitration award may be confirmed by any court of competent jurisdiction. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. In the event of any dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the losing party reasonable expenses, attorneys’ fees, and costs incurred in connection therewith or in the enforcement or

 


 

collection of any judgment or award rendered therein. The “prevailing party” means the party determined by the arbitration proceeding to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment or award is rendered. Further, in the event of any default by a party under this Agreement, such defaulting party shall pay all the expenses and attorneys’ fees incurred by the other party in connection with such default, whether or not any arbitration is commenced.

(d) Confidential Information . Introducer acknowledges that, in the course of performing its duties under this Agreement, it may obtain information relating to STWA that is not available to the public (“Confidential Information”). As a condition to entering into this Agreement, Introducer shall have executed the customary form of Confidentiality or Non- Disclosure Agreement used by STWA and Introducer further agrees to execute any amended or revised agreement that may subsequently be adopted by STWA. In amplification of Introducer’s duties under such agreements Introducer agrees to hold at all times, both during the term of this Agreement and at all times thereafter, such Confidential Information in the strictest confidence, and shall not use such Confidential Information for any purpose, other than as may be reasonably necessary for the performance of its duties as an Introducer pursuant to this Agreement, without STWA’s prior written consent. Introducer shall not disclose any Confidential Information to any person or entity (other than employees, consultants and advisors of Introducer who are obligated to protect the Confidential Information from disclosure or misuse and as to whom Introducer shall be responsible to STWA for any such unauthorized disclosure or use), without STWA’s prior written consent. Notwithstanding the above, the terms of this Agreement shall not alter, in any way, the obligations of Introducer and STWA pursuant to any Confidentiality Agreement or Non-Disclosure Agreement previously entered into between Introducer and STWA. The terms of any such Confidentiality Agreement or Non-Disclosure Agreement shall survive the termination of this Agreement.

(e) Entire Agreement . This Agreement constitutes the entire Agreement and final understanding of the parties with respect to the subject matter hereof and supersedes all prior and/or contemporaneous understandings and/or discussions between the parties, whether written or verbal, express or implied, relating in any way to the subject matter hereof including, but not limited any other arrangements between the parties for contingency fees. This Agreement may not be altered, amended, modified or otherwise changed in any way except by a written agreement, signed by both parties.

(f) Notices . Any notice or other communication pursuant hereto shall be given to a party at the address below its signature hereto by (i) personal delivery, (ii) commercial overnight delivery service with written verification of receipt, or (iii) registered or certified mail. If so mailed or delivered, a notice shall be deemed given on the earlier of the date of actual receipt or three days after the date of transmission by authorized means.

  (g)    Nonassignability . Neither this Agreement, nor any rights, duties or interest herein, shall be assigned, transferred, pledged, hypothecated or otherwise conveyed by either party without the prior written consent of the other party. Any such attempted conveyance in violation of this paragraph shall be void and shall constitute a default entitling the other party to terminate this Agreement.

 


 

  (h)    Due Authority . The signing officers of STWA and Introducer represent and warrant to each other that they are empowered to enter into, and to be legally bound by, this Agreement.

IN WITNESS WHEREOF, STWA and Introducer have executed this Agreement as of
July 29, 2004.

LONDON AUSSIE MARKETING LIMITED (“INTRODUCER”)

     
/s/ Mark Thornton
   
     
By: Mark Thornton
   
Title: Director
   
 
   
SAVE THE WORLD AIR, INC. (“STWA”)
 
   
/s/ Eugene E. Eichler
   
     
By:    Eugene E. Eichler
   
Title: President, Treasurer,
          Chief Financial Officer
   

 

 

Exhibit 10.28

CONSULTING AGREEMENT

     This Agreement (this “Agreement”), dated as of November 19, 2004, between Save the World Air, Inc., a Nevada corporation (the “Company”), and London Aussie Marketing, Ltd. (the “Consultant”).

RECITALS

     WHEREAS, the Company is in the business, among other things, of supplying the goods described on Exhibit A attached hereto (the “Goods”).

     WHEREAS, Consultant has provided services to the Company including the introduction of the Company to a strategic partner (the “Strategic Partner”);

     WHEREAS, the Company and Consultant desire to enter into a relationship whereby Consultant will provide services to the Company on the terms and conditions set forth herein.

AGREEMENT

     NOW THEREFORE, the parties hereto, intending to be legally bound, agree as follows:

     1.  Scope of Services to Be Provided . Consultant shall provide to the Company, on an as needed basis, assistance, advice and support relating to the Company’s business, as the Company may request from time to time. Without limiting the generality of the foregoing, Consultant shall:

       (a) Shall undertake and perform the following tasks and such additional or other responsibilities as may be reasonably assigned to Consultant from time to time by the Company’s Chief Executive Officer, Chief Operating Officer, or Director of Research and Development:

          (i) Managing the Company’s relationship with the Strategic Partner, including management services already provided by Consultant.

          (ii) Assisting the Strategic Partner in soliciting orders for, and generating contracts with respect to, the Products, including assistance already provided by Consultant.

       (b) Assist in the preparation of regular monthly reports to the Company on the efforts expended and undertaken on each project assigned to or undertaken by Consultant.

     2.  Term .

       (a) This Agreement shall continue in full force for a period of 7 , years unless earlier terminated in accordance with this Section 2 or Section 6. The obligations of Consultant upon the termination of this Agreement for any reason are described in Section 7.

       (b) This Agreement shall be automatically renewed for successive one-year

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terms unless either party provides written notice of its election not to renew this Agreement at least 60 days prior to the expiration of the then current term, in which case the Agreement shall terminate upon expiration of such term.

     3.  Compensation of Consultant .

       (a)  Royalties . In full consideration of all rights granted herein and all services performed and to be performed hereunder, the Company will pay to Consultant royalties from revenues derived from contracts with customers generated by the Strategic Partner, provided that the Strategic Partner was instrumental in generation of such contracts, subject to the Company’s acceptance of the Strategic Partner and entry into a binding joint venture, strategic alliance or similar agreement of Strategic Partner, as follows.

          (i) Consultant shall be paid a royalty equal to 1.25% of Gross Receipts (as defined below) from revenues derived from contracts generated by the Strategic Partner.

          (ii) “Gross Receipts” shall mean 100% of all sums received by or credited to the Company and its affiliates from unrelated third parties from revenues that are derived from contracts generated by the Strategic Partner and that originate from the country in which such contract is located. Gross Receipts shall be deemed to exclude sums received by the Company and/or its affiliates which represent sales taxes, value added taxes, excise taxes, and similar taxes which are collected by the Company and its affiliates as required by any requisite taxing authorities of any government, but limited to the extent that such taxes are paid and not returned or credited to the Company or an affiliate. Gross Receipts shall also be deemed to exclude foreign currencies to the extent any foreign licensing society or organization collects or withholds any portion thereof on behalf of or for the benefit of the Company. With respect to foreign currencies received by the Company and its affiliates in connection herewith, it is agreed and understood that such sums received shall be included in Gross Receipts hereunder, whether or not such sums have been received in U.S. dollars in the United States, and whether or not such sums which are capable of being remitted to the United States have yet been remitted. Gross Receipts are not subject to retroactive adjustments for returns, refunds, credits, settlements, rebates and discounts.

          (iii) Royalties shall be payable pursuant to this Section 8(a) during the period beginning on the date of this Agreement and ending on the date occurring ten years thereafter.

          (iv) All amounts payable to Consultant pursuant to this Section 8(a) shall be paid by the Company no later than 30 days after the end of each calendar quarter in respect of the applicable Gross Receipts amounts actually received by the Company in such quarter. A statement of account prepared by the Company shall accompany each such payment to Consultant.

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       (b)  Warrants . Subject to compliance with applicable securities laws, the Company shall issue to Mark Thornton, an individual, warrants to purchase shares of common stock of the Company as follows:

          (i) Warrants to purchase 50,000 shares of common stock of the Company issuable upon the date hereof in exchange for the Consultant’s introduction of the Strategic Partner to the Company. Such warrants shall have a term of five years and have an exercise price of $1.00 per share.

          (ii) Warrants to purchase 450,000 shares of common stock of the Company, subject to and issuable upon the Company making a formal public announcement that it has entered into a binding joint venture, strategic alliance or similar agreement with the Strategic Partner. Such warrants shall have a term of five years and have an exercise price of $1.00 per share. Shares shall be in the name of London Ausie Marketing Ltd.

       (c)  Form S-8 Registration . The Company agrees to file with the Securities and Exchange Commission as soon as practicable a registration statement on Form S-8 (or other available form) registering the resale of the shares of common stock issuable upon exercise of the warrants to be issued pursuant to Section 3(b).

     4.  Nondisclosure . Without the express prior written consent of the Company, Consultant shall not reveal to any third party any information of the Company that is identified by the Company as being of a confidential or proprietary nature (the “Confidential Information”). Confidential Information may be used by Consultant only with respect to performance of its obligations under this Agreement, and only by those employees of Consultant who have a need to know such information for the purposes related to this Agreement. Consultant shall protect the Confidential Information by using the same degree of care (but no less than a reasonable degree of care) to prevent the unauthorized use, dissemination or publication of such Confidential Information that the Company uses. Consultant’s obligation with respect to any Confidential Information under this Section 5 shall continue after and survive the termination of this Agreement.

     5.  No Servicing by Consultant . It is understood by Consultant that it is not authorized by this Agreement to perform servicing of any kind upon any Goods in the Territory or elsewhere, absent the express prior written approval of the Company.

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     6.  Termination .

       (a) The Company shall have the right to terminate this Agreement effective immediately by written notice to Consultant if:

          (i) Consultant engages in any conduct which threatens injury to the good name and reputation of the Company;

          (ii) the Company has reasonable grounds to believe that Consultant will be unable, whether because of financial difficulty or otherwise, to fulfill satisfactorily its obligations under this Agreement;

          (iii) Consultant fails to conduct its business in accordance with all applicable laws or regulations.

       (b) Either party to this Agreement may terminate this Agreement effectively immediately upon written notice if the other party becomes insolvent, discontinues its business, has a receiver appointed for it, any petition is filed by or against it in accordance with the bankruptcy laws, or any assignment is made by it for the benefit of creditors.

       (c) In the event either party to this Agreement shall fail to perform or fulfill any of its responsibilities as set forth herein, the other party may notify such defaulting party of the matter in breach and if such matter is not cured within 30 days after receipt of such notice the complaining party may by further written notice immediately terminate this Agreement.

       (d) Either party may terminate this Agreement in its sole discretion by giving to the other party no less than 90 days written notice thereof.

     7.  Effect of Termination . Consultant shall immediately upon termination return to the Company all Confidential Information within its possession, including any documents of a confidential or proprietary nature concerning the Goods which it has in its possession and all forms, brochures and samples pertaining to the Goods. Any and all amounts due to Consultant pursuant to this Agreement in respect of orders that were placed prior to the date of termination shall be paid to Consultant pursuant to the manner described in Section 8.

     8.  Applicable Law . This Agreement shall be construed in accordance with, and shall be governed by, the laws of the State of California.

     9.  Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

     10.  Amendments . The provisions of this Agreement may be waived, altered, amended or repealed in whole or in part only on the written consent of all the parties to this Agreement.

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     11.  Notice . All notices, demands, and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (i) on the date of delivery if delivered in person to the party to whom such notice is given, (ii) on the date such notice is posted by mail, postage prepaid, registered mail, properly addressed to the party receiving such notice, or (iii) upon the date of telex transmission, if by telex. Any notices hereunder shall be sent to the following addresses and telex numbers or such other addresses or telex numbers as may be designated by a party in writing from time to time in accordance with the procedure stated herein:

         
  If to the Company:    
 
       
  Save the World Air, Inc.    
  5125 Lankershim Boulevard    
  North Hollywood, CA 91601    
  Facsimile: 818-487-8003    
  Attention: Eugene Eichler    
 
       
  If to Consultant:    
 
       
  London Aussie Marketing, Ltd.    
  2053 8th Avenue #2C    
  New York, NY 10026    
  Telephone: 212-222-0440    
  Attention: Mark Thornton    

     12.  Divisibility . If any of the terms, provisions, covenants or conditions of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the provisions shall remain in full effect and shall in no way be affected, impaired or invalidated.

     13.  Final Agreement of the Parties . This Agreement supersedes and terminates any and all prior agreements or contracts, written or oral, entered into between the parties hereto with respect to the subject matter hereof.

     14.  Assignment . This Agreement may not be assigned by Consultant, in whole or in part, to any other party without the express written consent of the Company.

     15.  Headings . The Section headings in this Agreement are for convenience of reference only and shall have no bearing on the enforcement or interpretation of this Agreement.

     16.  Waiver . No waiver, forbearance or failure by either party of its rights to enforce any provision of this Agreement shall constitute a waiver or estoppel of such party’s right to enforce such provision thereafter or to enforce any other provision of this Agreement.

     17.  Jurisdiction . The parties hereby unconditionally and irrevocably agree that the state and federal courts of California and any California or federal court competent to hear appeals therefrom shall have the exclusive jurisdiction over any and all actions arising out of or

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in relation to this Agreement, or for the breach hereof.

     18.  Relationship of the Parties . Consultant is not an employee of the Company for any purpose whatsoever, but is an independent contractor. The parties, by this Agreement, have not entered into any form of joint venture or any other mutual enterprise, other than the rendering by Consultant of the services for the Company in accordance with the terms hereof. All expenses and disbursements, including, but not limited to, those for travel and maintenance, entertainment, office, clerical, and general selling expenses, that may be incurred by Consultant in connection with this Agreement shall be born wholly and completely by Consultant, and the Company shall not be in any way responsible or liable therefore. Consultant does not have, nor shall it hold itself out as having, any right, power, or authority to create any contract or obligation, either expressed or implied, on behalf, in the name of, or binding upon the Company. Any and all agents and employees of Consultant shall be at Consultant’s own risk, expense and supervision, and the agents and employees of Consultant shall not have any claim against the Company for salaries, commissions, items of cost, or any other form of compensation. Consultant shall indemnify and hold the Company harmless from any cost and liability caused by any unauthorized act of Consultant, its agents or employees.

[remainder of page intentionally left blank]

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     IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first written above.

             
    “Company”    
 
           
    SAVE THE WORLD AIR, INC.    
 
           
  By:   /s/ Eugene Eichler    
             
      Name: Eugene E. Eichler    
      Title: President and Chief Financial Officer    
 
           
    “Consultant”    
 
           
    LONDON AUSSIE MARKETING, LTD.    
 
           
  By:   /s/ Mark Thornton    
             
      Name    
      Title:    

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Exhibit A

Description of the Goods

1. ZEFS devices

2. CAT-MATE devices

A-1

 

Exhibit 10.29

EMPLOYMENT AGREEMENT

          AGREEMENT made as of the 1st day of September 2004 by and between SAVE THE WORLD AIR, INC. (“STWA”), a Nevada chartered corporation, and Erin Brockovich (the “Executive”).

BACKGROUND

          A. STWA desires to employ the Executive and the Executive is willing to serve on the terms and conditions herein provided.

          B. In order to effect the foregoing, the parties hereto desire to enter into an employment agreement on the terms and conditions set forth below.

          NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties contained herein, and intending to be legally bound hereby, the parties hereto agree as follows:

          1.  Definitions and Special Provisions Each capitalized word and term used herein shall have the meaning ascribed to it in the glossary appended hereto, unless the context in which such word or term is used otherwise clearly requires further definition. Such glossary is incorporated herein by reference and made a part hereof.

          2.  Employment . STWA hereby agrees to employ the Executive, and the Executive hereby agrees to serve STWA, on the terms and conditions set forth herein.

          3.  Term of Agreement The Executive’s employment under this Agreement shall commence on the date hereof and, except as otherwise provided herein, shall continue until July 31, 2005; provided, however, that commencing on July 31, 2005 and each anniversary thereafter, the term of this Agreement shall automatically be extended for one additional year beyond the term otherwise established unless, prior to such date, STWA or the Executive shall have given a Notice of Non-Extension.

          4.  Position and Duties The Executive shall serve as Vice President of Environmental Affairs of STWA and she shall have such responsibilities, duties and authority as may, from time to time, be generally associated with such position and or as specifically detailed in the company’s official “Position Description.” In addition, the Executive shall serve in such capacity, with respect to each Subsidiary or affiliated company, as the Board of Directors of each such Subsidiary or affiliated company shall designate from time to time. During the term of this Agreement, she shall devote such working time and efforts to the business and a