THIS SECURITY HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, ORANY STATE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY BESOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS REGISTERED UNDERSAID ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION ISAVAILABLE AND THE CORPORATION SHALL HAVE RECEIVED, AT THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OFSUCH EXEMPTION REASONABLY SATISFACTORY TO THE CORPORATION (WHICH MAY INCLUDE, AMONG OTHER THINGS,AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION).**SUBORDINATED CONVERTIBLE PROMISSORY NOTE****Los Angeles, California**                     **, 2007**     FOR VALUE RECEIVED, Save the World Air, Inc., a Nevada corporation (the “Company”), promisesto pay to                                          (the “Holder”), or its assigns, the principal sum of                                        , the outstanding principal amount subscribed to hereof and hereby noted onthe signature page below, together with interest from the date of this convertible promissory note(the “Note”) on the unpaid principal balance at a rate equal to 10% (ten percent) per annum,computed on the basis of the actual number of days elapsed and a year of 365 days. Interest on theNote shall be paid quarterly. All unpaid principal, together with any then unpaid and accruedinterest and other amounts payable hereunder, shall be due and payable on the “Maturity Date”,which date shall be the earlier of (i) nine months after the date of this Note, (ii) when suchamounts are declared due and payable by the Holder (or made automatically due and payable) upon orafter the occurrence of an Event of Default (as defined in Section 7 below) or (iii) in the eventof Accelerated Maturity (as defined in Section 9 below).     The following is a statement of the rights of the Holder and the conditions to which this Noteis subject, and to which the Holder, by the acceptance of this Note, agrees:     1. DEFINITIONS. As used in this Note, the following capitalized terms have the followingmeanings:          (a) “Accelerated Maturity” has the meaning given in Section 9 hereof.          (b) The “Company” includes the corporation initially executing this Note and any Person whichshall succeed to or assume the obligations of the Company under this Note.          (c) “Certificate” shall mean the Articles of Incorporation of Company as in effect on the datehereof.
1

 
          (d) “Equity Securities” of any Person shall mean (a) all common stock, preferred stock,participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b)all warrants, options and other rights to acquire any of the foregoing.          (e) “Event of Default” has the meaning given in Section 7 hereof.          (f) “Financial Statements” shall mean, with respect to any accounting period for any Person,statements of operations, retained earnings and cash flows of such Person for such period, andbalance sheets of such Person as of the end of such period, setting forth in each case incomparative form figures for the corresponding period in the preceding fiscal year if such periodis less than a full fiscal year or, if such period is a full fiscal year, corresponding figuresfrom the preceding fiscal year, all prepared in reasonable detail and in accordance with generallyaccepted accounting principles (except, with respect to quarterly financial statements, forfootnotes and year end adjustments). Unless otherwise indicated, each reference to FinancialStatements of any Person shall be deemed to refer to Financial Statements prepared on aconsolidated basis.          (g) “Holder” shall mean the Person specified in the introductory paragraph of this Note or anyPerson who shall at the time be the holder of this Note, pursuant to a transfer, assignment orother transaction effected on the terms and subject to the conditions set forth in this Note.“Holders” shall mean the Holder, together with all other Persons who hold this series of Notes.          (h) “Indebtedness” shall mean and include the aggregate amount of, without duplication (a) allobligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes or othersimilar instruments, (c) all obligations to pay the deferred purchase price of property or services(other than accounts payable incurred in the ordinary course of business determined in accordancewith generally accepted accounting principals), (d) all obligations with respect to capital leases,(e) all guaranty obligations; (f) all obligations created or arising under any conditional sale orother title retention agreement with respect to property acquired by such Person, (g) allreimbursement and other payment obligations, contingent or otherwise, in respect of letters ofcredit and/or taxes or other charges not at the time delinquent or thereafter payable withoutpenalty or being contested in good faith.          (i) “Investment” of any Person shall mean any loan or advance of funds by such Person to anyother Person (other than advances to employees of such Person for moving and travel expense,drawing accounts and similar expenditures in the ordinary course of business), any purchase orother acquisition of any Equity Securities or Indebtedness of any other Person, any capitalcontribution by such Person to or any other investment by such Person in any other Person(including, without limitation, any Indebtedness incurred by such Person of the type described inclauses (a) and (b) of the definition of “Indebtedness” on behalf of any other Person); provided,however, that
2

 
Investments shall not include accounts receivable or other indebtedness owed by customers of suchPerson, which are current assets and arose from sales or non-exclusive licensing in the ordinarycourse of such Person’s business.          (j) “Lien” shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or theincome therefrom, including, without limitation, the interest of a vendor or lessor under aconditional sale agreement, capital lease or other title retention agreement, or any agreement toprovide any of the foregoing, and the filing of any financing statement or similar instrument underthe Uniform Commercial Code or comparable law of any jurisdiction.          (k) “Material Adverse Effect” shall mean a material adverse effect on (a) the business,assets, operations, or financial or other condition of the Company; (b) the ability of the Companyto pay or perform the Obligations in accordance with the terms of this Note and the otherTransaction Documents and to avoid a default or Event of Default under any Transaction Document; or(c) the rights and remedies, taken as a whole, of Holder under this Note, the other TransactionDocuments or any related document, instrument or agreement.          (l) “Permitted Indebtedness” means:               (i) Indebtedness of Company in favor of the Holder arising under this Note;               (ii) The existing indebtedness set forth on the Company’s Form 10-QSB for the period endedSeptember 30, 2006 filed by the Company with the Securities and Exchange Commission (the “SEC”), asthe same may have increased or decreased in the ordinary course of the Company’s business after thedate thereof;               (iii) Up to $1,000,000 of the Company’s Convertible Notes due December 5, 2007 and January 10,2008 (collectively, the “Morale Notes”), as disclosed in the Company’s Current Report on Form 8-Kdated December 11, 2006;               (iv) Indebtedness of up to $2,000,000 issued by the Company in connection with theCompany’s offering of its securities after the date of this Note;               (v) Indebtedness incurred in connection with the financing of the Company’s inventory orits accounts receivable;               (vi) Indebtedness to trade creditors, including, without limitation, affiliates of andservice providers to the Company, incurred in the ordinary course of business;               (vii) Other indebtedness of Company, not exceeding $1,000,000 in the aggregate outstanding atany time;
3

 
               (viii) Contingent obligations of Company consisting of guarantees (and other creditsupport) of the obligations of vendors and suppliers of Company in respect of transactions enteredinto in the ordinary course of business;               (ix) Indebtedness with respect to capital lease obligations and Indebtedness secured byPermitted Liens;               (x) Extensions, renewals, refundings, refinancings, modifications, amendments andrestatements of any of the items of Permitted Indebtedness (a) through (f) above, provided that theprincipal amount thereof is not increased or the terms thereof are not modified to impose moreburdensome terms upon Company.               (xi) Taxes or other charges not at the time delinquent or thereafter payable withoutpenalty or being contested in good faith.          (m) “Permitted Investments” shall mean and include: (a) deposits with commercial banksorganized under the laws of the United States or a state thereof to the extent such deposits arefully insured by the Federal Deposit Insurance Corporation; (b) Investments in marketableobligations issued or fully guaranteed by the United States and maturing not more than one (1) yearfrom the date of issuance; (c) Investments in open market commercial paper rated at least “A1” or“P1” or higher by a national credit rating agency and maturing not more than one (1) year from thecreation thereof; (d) Investments pursuant to or arising under currency agreements or interest rateagreements entered into in connection with bona fide hedging arrangements; (e) Investmentsconsisting of deposit accounts of the Company in which the Holder has a perfected security interestand deposit accounts of its Subsidiaries maintained in the ordinary course of business; (f)Investments existing on the Closing Date disclosed in the Schedule; (g) Extensions of credit in thenature of accounts receivable or notes receivable arising from the same or lease of goods orservices in the ordinary course of business; (h) Investments consisting of the endorsement ofnegotiable instruments for deposit or collection or similar transactions in the ordinary course ofbusiness; (i) Investments (including debt obligations) received in connection with the bankruptcyor reorganization of customers or suppliers and in settlement of delinquent obligations of, andother disputes with, customers or suppliers arising in the ordinary course of business; (j)Investments consisting of (i) compensation of employees, officers and directors of borrower so longas the Board of Directors of Company determines that such compensation is in the best interests ofCompany, (ii) travel advances, employee relocation loans and other employee loans and advances inthe ordinary course of business, (iii) loans to employees, officers or directors relating to thepurchase of equity securities of Company, (iv) other loans to officers and employees approved bythe Board of Directors; and (k) other Investments aggregating not in excess of $1,000,000 at anytime; (l) Investments in Subsidiaries of the Company or in joint ventures formed in connection withthe Company’s manufacturing, distribution or sales activities.
4

 
          (n) “Permitted Liens” shall mean and include: (i) Liens for taxes or other governmentalcharges not at the time delinquent or thereafter payable without penalty or being contested in goodfaith, provided provision is made to the reasonable satisfaction of Holder for the eventual paymentthereof if subsequently found payable; (ii) Liens of carriers, warehousemen, mechanics,materialmen, vendors, and landlords incurred in the ordinary course of business for sums notoverdue or being contested in good faith, provided provision is made to the reasonable satisfactionof Holder for the eventual payment thereof if subsequently found payable; (iii) deposits underworkers’ compensation, unemployment insurance and social security laws or to secure the performanceof bids, tenders, contracts (other than for the repayment of borrowed money) or leases, or tosecure statutory obligations of surety or appeal bonds or to secure indemnity, performance or othersimilar bonds in the ordinary course of business; (iv) Liens securing obligations under a capitallease if such Liens do not extend to property other than the property leased under such capitallease; (v) Liens upon any equipment acquired or held by Company or any of its Subsidiaries tosecure the purchase price of such equipment or indebtedness incurred solely for the purpose offinancing the acquisition of such equipment; (vi) easements, reservations, rights of way,restrictions, minor defects or irregularities in title and other similar charges or affecting thevalue or use of such property; (vii) Liens in favor of the Holder; (viii) Liens existing on thedate hereof in favor of holders of Senior Indebtedness; (ix) any liens existing as of the datehereof and disclosed in the Schedule; (x) liens on equipment leased by Company pursuant to anoperating lease in the ordinary course of business (including proceeds thereof and accessionsthereto) incurred solely for the purpose of financing the lease of such equipment (including Liensarising from UCC financing statements regarding such leases); (xi) liens arising from judgements,decrees or attachments to the extent and only so long as such judgment, decree or attachment doesnot constitute an Event of Default under 7(h); (xii) liens in favor of customs and revenueauthorities arising as a matter of law to secure payment of customs duties in connection with theimportation of goods; (xiii) liens arising solely by virtue of any statutory or common lawprovision relating to banker’s liens, rights off setoff or similar rights and remedies as todeposit accounts or other funds maintained with a creditor depository institution; (xiv) liens onthe Company’s inventory or accounts receivable to secure Indebtedness incurred in connection withthe financing of such accounts receivable or inventory; and (xv) liens incurred in connection withthe extension, renewal, refunding, refinancing, modification, amendment or restatement of theindebtedness secured by Liens of the type described in clauses (i) and (xiv) above, provided thatany extension, renewal or replacement Lien shall be limited to the property encumbered by theexisting Lien and the principal amount of the indebtedness being extended, renewed or refinanceddoes not increase.          (o) “Person” shall mean and include an individual, a partnership, a corporation (including abusiness trust), a joint stock company, a limited liability company, an unincorporated association,a joint venture or other entity or a governmental authority.
5

 
          (p) “Senior Indebtedness” shall mean the principal of, unpaid interest on and other amounts due inconnection with the notes payable and other evidences of indebtedness outstanding at the time ofexecution of this Note.          (q) “Subsidiary” shall mean (a) any corporation of which more than 50% of the issued andoutstanding equity securities having ordinary voting power to elect a majority of the Board ofDirectors of such corporation is at the time directly or indirectly owned or controlled by Company,(b) any partnership, joint venture, or other association of which more than 50% of the equityinterest having the power to vote, direct or control the management of such partnership, jointventure or other association is at the time directly or indirectly owned and controlled by Company(c) any other entity included in the financial statements of Company on a consolidated basis.          (r) “Transaction Documents” shall mean this Note and the Warrant (as the latter is defined inSection 12 hereof).     2. REPRESENTATIONS AND WARRANTIES OF COMPANY. The Company represents and warrants to the Holder as follows:          (a) Due Incorporation and Qualification. Each of the Company and its Subsidiaries (i) isa corporation duly organized, validly existing and in good standing under the laws of itsjurisdiction of incorporation; (ii) has the power and authority to own, lease and operate itsproperties and carry on its business as now conducted and as proposed to be conducted; and (iii) isduly qualified, licensed to do business and in good standing as a foreign corporation in eachjurisdiction where the failure to be so qualified or licensed could reasonably be expected to havea Material Adverse Effect.          (b) Authority. The execution, delivery and performance by Company of each Transaction Documentto be executed by Company and the consummation of the transactions contemplated thereby (i) arewithin the corporate power of Company and (ii) have been duly authorized by all necessary corporateactions on the part of Company.          (c) Enforceability. Each Transaction Document executed, or to be executed, by Companyhas been, or will be, duly executed and delivered by Company and constitutes, or will constitute, alegal, valid and binding obligation of Company, enforceable against Company in accordance with itsterms, except as limited by bankruptcy, insolvency or other laws of general application relating toor affecting the enforcement of creditors’ rights generally and general principles of equity.          (d) Non-Contravention. The execution and delivery by Company of the Transaction Documentsexecuted by Company and the performance and consummation of the transactions contemplated therebydo not and will not (i) violate the Certificate or Bylaws of the Company or any material judgment,order, writ, decree, statute, rule or regulation applicable to Company; (ii) violate any provisionof, or result in the breach or the acceleration of, or entitle any other Person to accelerate(whether after the giving of notice or lapse of time or both), any material mortgage, indenture,agreement, instrument
6

 
or contract to which Company is a party or by which it is bound; or (iii) result in the creation orimposition of any Lien upon any property, asset or revenue of Company or the suspension,revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization orapproval applicable to Company, its business or operations, or any of its assets or properties.          (e) Approvals. No consent, approval, order or authorization of, or registration,declaration or filing with, any governmental authority or other Person (including, withoutlimitation, the shareholders of any Person) is required in connection with the execution anddelivery of the Transaction Documents executed by Company and the performance and consummation ofthe transactions contemplated thereby, except for filings and notifications required by federal andstate securities laws in connection with the offer and sale of this Note and the consummation ofthe transactions contemplated hereby and thereby.          (f) No Violation or Default. None of the Company or the Company’s Subsidiaries is inviolation of or in default with respect to (i) its Certificate or Bylaws or equivalent charterdocument or any material judgment, order, writ, decree, statute, rule or regulation applicable tosuch Person; (ii) any material mortgage, indenture, agreement, instrument or contract to which suchPerson is a party or by which it is bound (nor is there any waiver in effect which, if not ineffect, would result in such a violation or default), where, in each case, such violation ordefault, individually, or together with all such violations or defaults, could reasonably beexpected to have a Material Adverse Effect.          (g) Litigation. Except as described in the Company’s Quarterly Report on Form 10-QSB for theperiod ended September 30, 2006, no actions (including, without limitation, derivative actions),suits, proceedings or investigations are pending or, to the knowledge of the Company, threatenedagainst the Company or the Company’s Subsidiaries at law or in equity in any court or before anyother governmental authority which if adversely determined (i) would (alone or in the aggregate)have a Material Adverse Effect or (ii) seeks to enjoin, either directly or indirectly, theexecution, delivery or performance by the Company of the Transaction Documents or the transactionscontemplated thereby.          (h) Title. The Company and the Company’s Subsidiaries own and have good and marketable titlein fee simple absolute to, or a valid leasehold interest in, all their respective real propertiesand good title to their other respective assets and properties as reflected in the most recentFinancial Statements delivered to Purchasers (except those assets and properties disposed of in theordinary course of business since the date of such Financial Statements) and all respective assetsand properties acquired by Company and Company’s Subsidiaries since such date (except thosedisposed of in the ordinary course of business). Such assets and properties are subject to no Lien,except for Permitted Liens.
7

 
          (i) Equity Securities. The authorized capital stock of the Company may be found in theCompany’s Quarterly Report on Form 10-QSB for the period ended September 30, 2006 filed by theCompany with the SEC.     3. REPRESENTATIONS AND WARRANTIES OF HOLDER. The Holder represents and warrants to theCompany that such Holder has been advised that neither this Note nor the securities which may beissued upon the conversion hereof have been registered under the Securities Act, or any statesecurities laws and, therefore, cannot be resold unless registered under the Securities Act andapplicable state securities laws or unless an exemption from such registration requirements isavailable. Such Holder is aware that the Company is under no obligation to effect any suchregistration with respect to the Note or to file for or comply with any exemption fromregistration. Such Holder has not been formed solely for the purpose of making this investment andis purchasing the Note to be acquired by such Holder hereunder for its own account for investment,not as a nominee or agent, and not with a view to, or for resale in connection with, thedistribution thereof. Such Holder has such knowledge and experience in financial and businessmatters that such Purchaser is capable of evaluating the merits and risks of such investment, isable to incur a complete loss of such investment and is able to bear the economic risk of suchinvestment for an indefinite period of time. Such Holder is an accredited investor as such term isdefined in Rule 501 of Regulation D under the Securities Act.     4. INTEREST. Accrued interest on the outstanding principal balance on this Note shall be payable on the Maturity Date.     5. PREPAYMENT. Upon 3 (three) days’ prior written notice to the Holder, theCompany may prepay this Note in whole or in part; provided that any such prepayment will be appliedfirst to the payment of expenses due under this Note, second to interest accrued on this Note andthird, if the amount of prepayment exceeds the amount of all such expenses and accrued interest, tothe payment of principal of this Note.     6. CERTAIN COVENANTS. While any amount is outstanding under the Note, without the priorwritten consent of Holders of 2/3 (two thirds) or more in interest of then-outstanding principalamount of the Notes, which consent shall not be unreasonably withheld or delayed:          (a) Indebtedness. Neither Company nor any of its Subsidiaries shall create, incur, assume orpermit to exist any Indebtedness except Senior Indebtedness and Permitted Indebtedness.          (b) Liens. Neither the Company nor any of its Subsidiaries shall create, incur, assume orpermit to exist any Lien on or with respect to any of its assets or property of any character,whether now owned or hereafter acquired, except for Permitted Liens.
8

 
          (c) Asset Dispositions. Neither the Company nor any of its Subsidiaries shall sell, lease,transfer, license or otherwise dispose of any of its assets or property (collectively, a“Transfer”), whether now owned or hereafter acquired, except (i) transfers in the ordinary courseof its business consisting of the sale of inventory and sales of worn-out or obsolete equipment and(ii) transfers not in excess of $1,000,000 for fair value and other than to any affiliate of theCompany.          (d) Mergers, Acquisitions, Etc. Neither the Company nor any of its Subsidiaries shallconsolidate with or merge into any other Person or permit any other Person to merge into it, oracquire all or substantially all of the assets or capital stock of any other Person.          (e) Investments. Neither the Company nor any of its Subsidiaries shall make anyInvestment except for Permitted Investments. Without previous notice to Holder, Company will notsell an amount greater than $100,000 in equity securities, with the exception of (i) up to anaggregate of UK £15,000,000 private and/or public offerings outside the United States; (ii)compensatory and incentive awards of Equity Securities to employees of and consultants to theCompany consistent with its prior practices; and (iii) for issuances of Equity Securities inconnection with the exercise of conversion rights of the holders of outstanding convertiblesecurities, including without limitation warrants or options, to purchase Company securitiesgranted or issued by the Company prior to the date hereof.          (f) Dividends, Redemptions, Etc. Neither the Company nor any of its Subsidiaries shall(i) pay any dividends or make any distributions on its Equity Securities; (ii) purchase, redeem,retire, decease or otherwise acquire for value any of its Equity Securities; (iii) return anycapital to any holder of its Equity Securities; (iv) make any distribution of assets, EquitySecurities, obligations or securities to any holder of its Equity Securities; or (v) set apart anysum for any such purpose; other than payments of principal and interest on outstanding InterimBridge Notes and repurchases of shares from terminated employees pursuant to the terms ofrestricted stock purchase agreements, and provided, however, that any Subsidiary may pay cashdividends to Company.          (g) Indebtedness Payments. Neither the Company nor any of its Subsidiaries shall (i)prepay, redeem, purchase, decrease or otherwise satisfy in any manner prior to the scheduledrepayment thereof any Indebtedness for borrowed money (other than (A) amounts due under this Noteand (B) Senior Indebtedness) or lease obligations, (ii) amend, modify or otherwise change the termsof any Indebtedness for borrowed money (other than (A) obligations under this Note and (B) SeniorIndebtedness) or lease obligations so as to accelerate the scheduled repayment thereof or (iii)repay any notes to officers, directors or stockholders.          (h) Information Rights; Notices. The Company shall furnish to the Holder the following:
9

 
               (i) SEC Reports. In no event later than five (5) business days after they are sent, madeavailable or filed, copies of all registration statements and reports filed by Company with theSecurities and Exchange Commission and all reports, proxy statements and financial statements sentor made available by Company to its stockholders generally; and               (ii) Notice of Defaults. Promptly upon the occurrence thereof, written notice of theoccurrence of any Event of Default hereunder or any event of default with respect to any SeniorIndebtedness.          (i) Inspection Rights. The Holder and its representatives shall have the right, at anytime during normal business hours, upon reasonable prior notice, and at the expense of the Holder,to visit and inspect the properties of the Company and its corporate, financial and operatingrecords, and make abstracts therefrom, and to discuss the Company’s affairs, finances and accountswith its directors, officers and independent public accountants.          (j) Use of Proceeds. The Company shall use the proceeds it receives from sales of Notes to allof the Holders as set forth in the Company’s Private Placement Memorandum dated January 12, 2006;provided, however that (i) not more than $25,000 per month of such proceeds may be used by theCompany to pay R&D payables reflected on the Balance Sheet contained in its Quarterly Report onForm 10-QSB for its period ended September 30, 2006 and (ii) not more than $10,000 per month may beused to pay other payables reflected on the Balance Sheet contained in said Form 10-QSB.     7. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an “Eventof Default” under this Note and the other Transaction Documents:          (a) Failure to Pay. The Company shall fail to pay (i) when due any principal payment onthe due date hereunder or (ii) any interest or other payment required under the terms of this Noteor any other Transaction Document on the date due and such payment shall not have been made withinfive (5) days of Company’s receipt of the Holder’s written notice to Company of such failure topay; or          (b) Breaches of Certain Covenants. The Company or any of its Subsidiaries shall fail toobserve or perform any covenant, obligation, condition or agreement set forth in Section 6(d), 6(f)or 6(j) of this Note; or          (c) Breaches of Other Covenants. The Company or any of its Subsidiaries shall fail to observeor perform any other covenant, Transaction Documents (other than those specified in Sections 7(a)and 7(b)) and (i) such failure shall continue for fifteen (15) days, or (ii) if such failure doesnot result from the payment of money or the failure to pay money and is not curable within suchfifteen (15) day period, but is reasonably capable of cure within forty-five (45) days, either (A)such failure shall continue for forty-five (45) days or (B) the Company or its Subsidiary shall nothave commenced a
10

 
cure in a manner reasonably satisfactory to the Holders within the initial fifteen (15) day period;or          (d) Representations and Warranties. Any representation, warranty, certificate, or otherstatement (financial or otherwise) made or furnished by or on behalf of the Company to the Holderin writing in connection with this Note or any of the other Transaction Documents, or as aninducement to the Holder to enter into this Note and the other Transaction Documents, shall befalse, incorrect, incomplete or misleading in any material respect when made or furnished, exceptany such false, incorrect, incomplete or misleading statement which will not result in a MaterialAdverse Effect on the Company; or          (e) Other Payment Obligations. The Company or any of its Subsidiaries shall (i)(A) fail tomake any payment when due under the terms of any bond, debenture, note or other evidence ofIndebtedness, including the Senior Indebtedness, to be paid by such Person (excluding this Note andthe other Transaction Documents but including any other evidence of Indebtedness of Company or anyof its Subsidiaries to the Holder) and such failure shall continue beyond any period of graceprovided with respect thereto, or (B) default in the observance or performance of any otheragreement, term or condition contained in any such bond, debenture, note or other evidence ofIndebtedness, and (ii) the effect of such failure or default is to cause, or permit the holder orholders thereof to cause, Indebtedness in an aggregate amount of Two Hundred Fifty Thousand Dollars($250,000) or more to become due prior to its stated date of maturity, unless such accelerationshall have been rescinded or forgone and such failure to pay cured within thirty (30) days from thedate of such acceleration; or          (f) Voluntary Bankruptcy or Insolvency Proceedings. The Company or any of its Subsidiariesshall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodianof itself or of all or a substantial part of its property, (ii) be unable, or admit in writing itsinability, to pay its debts generally as they mature, (iii) make a general assignment for thebenefit of its or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v)become insolvent (as such term may be defined or interpreted under any applicable statute), (vi)commence a voluntary case or other proceeding seeking liquidation, reorganization or other reliefwith respect to itself or its debts under any bankruptcy, insolvency or other similar law now orhereafter in effect or consent to any such relief or to the appointment of or taking possession ofits property by any official in an involuntary case or other proceeding commenced against it, or(vii) take any action for the purpose of effecting any of the foregoing; or          (g) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of areceiver, trustee, liquidator or custodian of the Company or any of its Subsidiaries or of all or asubstantial part of the property thereof, or an involuntary case or other proceedings seekingliquidation, reorganization or other relief with respect to the Company or any of its Subsidiariesor the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter ineffect shall be commenced and an order for relief
11

 
entered or such proceeding shall not be dismissed or discharged within sixty (60) days ofcommencement; or          (h) Judgments. A final judgment or order for the payment of money in excess of Two HundredFifty Thousand Dollars ($250,000) (exclusive of amounts covered by insurance issued by an insurernot an affiliate of Company) shall be rendered against the Company or any of its Subsidiaries andthe same shall remain undischarged for a period of thirty (30) days during which execution shallnot be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or executionor similar process shall be issued or levied against a substantial part of the property of theCompany or any of its Subsidiaries and such judgment, writ, or similar process shall not bereleased, stayed, vacated or otherwise dismissed within thirty (30) days after issue or levy; or          (i) Transaction Documents. Any Transaction Document or any material term thereof shall ceaseto be, or be asserted by the Company not to be, a legal, valid and binding obligation of Companyenforceable in accordance with its terms or if the Liens of the Holder in any of the assets ofCompany or its Subsidiaries shall cease to be or shall not be valid and perfected Liens or theCompany or any Subsidiary shall assert that such Liens are not valid and perfected Liens.     8. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of any Event ofDefault (other than an Event of Default referred to in Sections 7(f) and 7(g)) and at any timethereafter during the continuance of such Event of Default, the Holders may, by written notice tothe Company, declare all outstanding Obligations payable by the Company hereunder to be immediatelydue and payable without presentment, demand, protest or any other notice of any kind, all of whichare hereby expressly waived, anything contained herein or in the other Transaction Documents to thecontrary notwithstanding. Upon the occurrence or existence of any Event of Default described inSections 7(f) and 7(g), immediately and without notice, all outstanding Obligations payable byCompany hereunder shall automatically become immediately due and payable, without presentment,demand, protest or any other notice of any kind, all of which are hereby expressly waived, anythingcontained herein or in the other Transaction Documents to the contrary notwithstanding. In additionto the foregoing remedies, upon the occurrence or existence of any Event of Default, the Holdersmay exercise any other right, power or remedy granted to it by the Transaction Documents orotherwise permitted to it by law, either by suit in equity or by action at law, or both.     9. ACCELERATED MATURITY. Subject to the following sentence, at any time prior to the MaturityDate, for each additional $1,000,000 of gross proceeds raised from one or more offerings of theCompany’s equity or quasi-equity securities, the Company shall redeem Notes with a minimum facevalue of $500,000 together with accrued and unpaid interest, until the entire outstanding Note isredeemed. The Company’s transaction with Suisse Finance (America) Inc. and its affiliates(collectively, “Suisse Finance”), only outside of North America and only up to a maximum of UK£15,000,000 in the aggregate, are exempt from this provision and no sales of the Company’ssecurities arranged or facilitated by, to, or through Suisse Finance
12

 
shall obligate the Company to apply any portion of the proceeds of any such offering(s) to theredemption of the Notes in whole or in part.     10. SUBORDINATION. The indebtedness evidenced by this Note is hereby expressly subordinated,to the extent and in the manner hereinafter set forth, in right of payment to the prior payment infull of the Senior Indebtedness.          (a) Insolvency Proceedings. If there shall occur any receivership, insolvency, assignment forthe benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether ornot pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of theassets, dissolution, liquidation, or any other marshaling of the assets and liabilities of theCompany, (i) no amount shall be paid by the Company in respect of the principal of, interest on orother amounts due with respect to this Note at the time outstanding, unless and until the principalof and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) noclaim or proof of claim shall be filed with the Company by or on behalf of Holder of this Notewhich shall assert any right to receive any payments in respect of the principal of and interest onthis Note except subject to the payment in full of the principal of and interest on all of theSenior Indebtedness then outstanding.          (b) Default on Senior Indebtedness. If there shall occur an event of default which has beendeclared in writing with respect to any Senior Indebtedness, as defined therein, or in theinstrument under which it is outstanding, permitting the holder to accelerate the maturity thereofand the Holder shall have received written notice thereof from the holder of such SeniorIndebtedness, then, unless and until such event of default shall have been cured or waived or shallhave ceased to exist, or all Senior Indebtedness shall have been paid in full, no payment shall bemade in respect of the principal of or interest on this Note, unless within one hundred eighty(180) days after the happening of such event of default, the maturity of such Senior Indebtednessshall not have been accelerated. Not more than one notice may be given to Holder pursuant to theterms of this Section 10(b) during any 360 day period.          (c) Further Assurances. By acceptance of this Note, the Holder agrees to execute and delivercustomary forms of subordination agreement requested from time to time by holders of SeniorIndebtedness, and as a condition to the Holder’s rights hereunder, the Company may require that theHolder execute such forms of subordination agreement; provided that such forms shall not impose onthe Holder terms less favorable than those provided herein.          (d) Other Indebtedness. No Indebtedness which does not constitute Senior Indebtedness shall besenior in any respect to the indebtedness represented by this Note.          (e) Subrogation. Subject to the payment in full of all Senior Indebtedness, the Holder shallbe subrogated to the rights of the holder(s) of such Senior Indebtedness (to the extent of thepayments or distributions made to the holder(s) of such Senior Indebtedness pursuant to theprovisions of this Section 10) to receive payments and
13

 
distributions of assets of the Company applicable to the Senior Indebtedness. No such payments ordistributions applicable to the Senior Indebtedness shall, as between the Company and itscreditors, other than the holders of Senior Indebtedness and the Holder, be deemed to be a paymentby the Company to or on account of this Note; and for purposes of such subrogation, no payments ordistributions to the holders of Senior Indebtedness to which the Holder would be entitled exceptfor the provisions of this Section 10 shall, as between the Company and its creditors, other thanthe holders of Senior Indebtedness and the Holder, be deemed to be a payment by the Company to oron account of the Senior Indebtedness.          (f) No Impairment. Subject to the rights, if any, of the holders of Senior Indebtedness underthis Section 10 to receive cash, securities or other properties otherwise payable or deliverable tothe Holder, nothing contained in this Section 10 shall impair, as between the Company and theHolder, the obligation of the Company, subject to the terms and conditions hereof, to pay to theHolder the principal hereof and interest hereon as and when the same become due and payable, orshall prevent the Holder, upon default hereunder, from exercising all rights, powers and remediesotherwise provided herein or by applicable law.          (g) Reliance of Holders of Senior Indebtedness. The Holder, by its acceptance hereof, shallbe deemed to acknowledge and agree that the foregoing subordination provisions are, and areintended to be, an inducement to and a consideration of each holder of Senior Indebtedness, whethersuch Senior Indebtedness was created or acquired before or after the creation of the indebtednessevidenced by this Note, and each such holder of Senior Indebtedness shall be deemed conclusively tohave relied on such subordination provisions in acquiring and holding, or in continuing to hold,such Senior Indebtedness.     11. CONVERSION.          (a) Conversion by Holder. At any time prior to payment in full of the principal balance ofthis Note, the Holder shall have the right, at the Holder’s option, to convert this Note, inaccordance with the provisions of Section 11(c) hereof, in whole or in part, into fully paid andnonassessable shares of Common Stock, provided that the Holder shall provide at least fifteen (15)business days notice to the Company of Holder’s election to convert this Note into shares of theCompany’s Common Stock. The number of shares of the Company’s Common Stock into which this Note maybe converted shall be determined by dividing the aggregate amount of this Note to be converted bythe Conversion Price (as defined below) in effect at the time of such conversion. The initial“Conversion Price” shall be equal to $0.70 per share. The Conversion Price shall be subject toadjustment from time to time pursuant to Section 13 hereof.          (b) Conversion by the Company. The Company shall have the right, but only with the Holder’sconsent, to convert this Note, in accordance with the provisions of Section 11(c) hereof, in wholeor in part, into fully paid and nonassessable shares of the Company’s common stock. The number ofshares of common stock into which this Note
14

 
may be converted shall be determined by dividing the aggregate amount of this Note to be convertedby the Conversion Price in effect at the time of such conversion.          (c) Conversion Procedure.               (i) Conversion Pursuant to Section 11(a). Before the Holder shall be entitled to convert thisNote into shares of the Company’s Common Stock, it shall surrender this Note, duly endorsed, at theoffice of the Company and shall give written notice, postage prepaid, to the Company at itsprincipal corporate office, of the election to convert the same pursuant to Section 11(a), andshall state therein the amount of the unpaid principal amount of this Note, together with accruedbut unpaid interest, to be converted and the name or names in which the certificate or certificatesfor shares of the Company’s Common Stock are to be issued, subject to compliance by the Holder ofthis Note with the transfer restrictions applicable to this Note. The Company shall, as soon aspracticable thereafter (but in any event within ten (10) days thereafter), issue and deliver to theHolder of this Note a certificate or certificates for the number of shares of the Company’s CommonStock to which the Holder shall be entitled upon conversion (bearing such legends as are requiredby applicable state and federal securities laws), together with a replacement Note (if anyprincipal amount is not converted) and any other securities and property to which the Holder isentitled upon such conversion under the terms of this Note, including a check payable to Holder forany cash amounts payable as described in Section 11(d). The conversion shall be deemed to havebeen made immediately prior to the close of business on the date of the surrender of this Note, andthe Person or Persons entitled to receive the shares of the Company’s Common Stock upon suchconversion shall be treated for all purposes as the record holder or holders of such shares of theCompany’s Common Stock as of such date.               (ii) Conversion Pursuant to Section 11(b). If this Note is converted by the Company pursuantto Section 11(b), written notice shall be delivered to the Holder notifying the Holder of theconversion to be effected, specifying the Conversion Price, the principal amount of the Note to beconverted, the date on which such conversion is expected to occur and calling upon such Holder tosurrender to Company, in the manner and at the place designated, the Note. Upon such conversion ofthis Note, the Holder shall surrender this Note, duly endorsed, at the principal office of Company.At its expense, the Company shall, as soon as practicable thereafter (but in any event within ten(10) days thereafter), issue and deliver to such Holder a certificate or certificates for thenumber of shares to which Holder shall be entitled upon such conversion (bearing such legends asare required by applicable state and federal securities laws), together with any other securitiesand property to which the Holder is entitled upon such conversion under the terms of this Note,including a check payable to the Holder for any cash amounts payable as described in Section 11(d).Any conversion of this Note pursuant to Section 11(b) shall be deemed to have been made immediatelyprior to the closing of the issuance and sale of shares as described in Section 11(b) and on andafter such date the Person entitled to receive the shares issuable upon such conversion shall betreated for all purpose as the record Holder of such shares as of such date.
15

 
          (d) Fractional Shares; Interest; Effect of Conversion. No fractional shares shall be issuedupon conversion of this Note. In lieu of the Company issuing any fractional shares to the Holderupon the conversion of this Note, the Company shall pay to the Holder an amount equal to theproduct obtained by multiplying the Conversion Price by the fraction of a share not issued pursuantto the previous sentence. In addition, the Company shall pay to the Holder any interest accrued onthe amount converted and on the amount to be paid to the Company pursuant to the previous sentence.Upon conversion of this Note in full and the payment of the amounts specified in this Section11(d), the Company shall be forever released and discharged from all its obligations andliabilities under this Note.     12. ISSUANCES OF WARRANTS.          (a) The Holder shall receive, for no additional consideration, a stock purchase warrant (the“Warrant”) in a form attached to this Note, entitling the Holder to purchase shares of theCompany’s Common Stock.          (b) The Company shall issue to the Holder a Warrant entitling the Holder to purchase a numberof shares of the Company’s Common Stock equal to 150% of the number of shares of Common Stock intowhich this Note initially is convertible.          (c) Each Warrant to be issued by the Company pursuant to this Section 12 shall have an initialexercise price of $1.00 per share, and expiration date of three (3) years from the date when it isissued.          (d) The shares of the Company’s Common Stock issuable upon the exercise of any Warrants issuedpursuant to this Section 12 shall be entitled to “piggy back” registration rights.     13. CONVERSION PRICE ADJUSTMENTS.          (a) Adjustments for Stock Splits and Subdivisions. In the event the Company should at anytime or from time to time after the date of issuance hereof fix a record date for the effectuationof a split or subdivision of the outstanding shares of the Company’s Common Stock or otherdistribution payable in additional shares of the Company’s Common Stock or other securities orrights convertible into, or entitling the holder thereof to receive directly or indirectly,additional shares of the Company’s Common Stock (hereinafter referred to as “the Company’s CommonStock Equivalents”) without payment of any consideration by such holder (including the additionalshares of the Company’s Common Stock issuable upon conversion or exercise thereof), then, as ofsuch record date (or the date of such dividend distribution, split or subdivision if no record dateis fixed), the Conversion Price of this Note shall be appropriately decreased so that the number ofshares of the Company’s Common Stock issuable upon conversion of this Note shall be increased inproportion to such increase of outstanding shares.
16

 
          (b) Adjustments for Reverse Stock Splits. If the number of shares of the Company’s CommonStock outstanding at any time after the date hereof is decreased by a combination of theoutstanding shares of the Company’s Common Stock, then, following the record date of suchcombination, the Conversion Price for this Note shall be appropriately increased so that the numberof shares of the Company’s Common Stock issuable on conversion hereof shall be decreased inproportion to such decrease in outstanding shares.          (c) Notices of Record Date, etc. In the event of:               (i) Any taking by the Company of a record of the holders of any class of securities of theCompany for the purpose of determining the holders thereof who are entitled to receive any dividend(other than a cash dividend payable out of earned surplus at the same rate as that of the last suchcash dividend theretofore paid) or other distribution, or any right to subscribe for, purchase orotherwise acquire any shares of stock of any class or any other securities or property, or toreceive any other right; or               (ii) Any capital reorganization of the Company, any reclassification or recapitalization ofthe capital stock of the Company or any transfer of all or substantially all of the assets of theCompany to any other Person or any consolidation or merger involving the Company; or               (iii) Any voluntary or involuntary dissolution, liquidation or winding-up of the Company, theCompany will mail to Holder of this Note at least ten (10) days prior to the earliest datespecified therein, a notice specifying (A) the date on which any such record is to be taken for thepurpose of such dividend, distribution or right, and the amount and character of such dividend,distribution or right; and (B) the date on which any such reorganization, reclassification,transfer, consolidation, merger, dissolution, liquidation or winding-up is expected to becomeeffective and the record date for determining stockholders entitled to vote thereon.          (d) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve andkeep available out of its authorized but unissued shares of the Company’s Common Stock solely forthe purpose of effecting the conversion of this Note such number of its shares of the Company’sCommon Stock as shall from time to time be sufficient to effect the conversion of the Note; and ifat any time the number of authorized but unissued shares of the Company’s Common Stock shall not besufficient to effect the conversion of the entire outstanding principal amount of this Note,without limitation of such other remedies as shall be available to the holder of this Note, theCompany will use its best efforts to take such corporate action as may, in the opinion of counsel,be necessary to increase its authorized but unissued shares of the Company’s Common Stock to suchnumber of shares as shall be sufficient for such purposes.     14. SUCCESSORS AND ASSIGNS. Neither this Note nor any of the rights, interests or obligationshereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Companywithout the prior written consent of the Holder or by
17

 
the Holder without the prior written consent of the Company. Subject to the foregoing and therestrictions on transfer described in Section 16 below, the rights and obligations of the Companyand the Holder shall be binding upon and benefit the successors, assigns, heirs, administrators andtransferees of the parties.     15. WAIVER AND AMENDMENT. Any provision of this Note may be amended, waived or modifiedupon the written consent of the Company and the Holder.     16. TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE ON CONVERSION HEREOF. With respect to anyoffer, sale or other disposition of this Note or any securities into which this Note may beconverted, the Holder will give written notice to the Company prior thereto, describing briefly themanner thereof, together with a written opinion of the Holder’s counsel, to the effect that suchoffer, sale or other distribution may be effected without registration or qualification under anyfederal or state law then in effect. Promptly upon receiving such written notice and reasonablysatisfactory opinion, if so requested and subject to Section 14 above, the Company, as promptly aspracticable, shall notify the Holder that the Holder may sell or otherwise dispose of this Note orsuch securities, all in accordance with the terms of the notice delivered to the Company. If adetermination has been made pursuant to this Section 16 that the opinion of counsel for the Holderis not reasonably satisfactory to the Company, the Company shall so notify the Holder promptlyafter such determination has been made. Each Note thus transferred and each certificaterepresenting the securities thus transferred shall bear a legend as to the applicable restrictionson transferability in order to ensure compliance with the Act, unless in the opinion of counsel forthe Company such legend is not required in order to ensure compliance with the Act. The Company mayissue stop transfer instructions to its transfer agent in connection with such restrictions.     17. NOTICES. Any notice, request or other communication required or permitted hereundershall be in writing and shall be deemed to have been duly given if personally delivered or mailedby registered or certified mail, postage prepaid, or by recognized overnight courier, or byfacsimile transmission or personal delivery, addressed (i) if to the Holder, at such Holder’saddress set forth at the end of this Agreement, or at such other address as such Holder shall havefurnished the Company in writing, or (ii) if to the Company, at its address or fax number set forthat the end of this Agreement, or at such other address as the Company shall have furnished to theHolder in writing. Any party hereto may by notice so given change its address for future noticehereunder. Notice shall conclusively be deemed to have been given when received.     18. PAYMENT. Payment shall be made in lawful tender of the United States.     19. DEFAULT RATE; USURY. During any period in which an Event of Default has occurred and iscontinuing, the Company shall pay interest on the unpaid principal balance hereof at a rate perannum equal to the rate otherwise applicable hereunder plus 8% (eight percent) until such time asthe event of default has been cured in its entirety, and the Note Holders will be entitled toreceive additional Warrants to
18

 
purchase a number of shares of the Company’s Common Stock equal to 25% (twenty-five percent) of thenumber of shares of the Company’s Common Stock issuable upon the exercise of the original Warrantsissued hereunder, for each 60-day period the Company remains in default. In the event any interestis paid on this Note which is deemed to be in excess of the then legal maximum rate, then thatportion of the interest payment representing an amount in excess of the then legal maximum rateshall be deemed a payment of principal and applied against the principal of this Note.     20. EXPENSES; WAIVERS. If action is instituted to collect this Note, the Company promises topay all costs and expenses, including, without limitation, reasonable attorneys’ fees and costs,incurred by one counsel representing all Holders designated in accordance with Section 22 below, inconnection with such action. The Company hereby waives notice of default, presentment or demandfor payment, protest or notice of nonpayment or dishonor and all other notices or demands relativeto this instrument. The Company shall pay on demand all reasonable fees and expenses, includingreasonable attorneys’ fees and expenses, incurred by the Holder with respect to the enforcement orattempted enforcement of any of the obligations of the Company to the Holder under the TransactionDocuments or in preserving any of the Holder’s rights and remedies (including, without limitation,all such fees and expenses incurred in connection with any “workout” or restructuring affecting theTransaction Documents or the obligations thereunder or any bankruptcy or similar proceedinginvolving Company or any of its Subsidiaries).     21. REPLACEMENT NOTE. Upon receipt by the Company of evidence reasonably satisfactory toit of the ownership of and the loss, theft, destruction or mutilation of any Note and (a) in thecase of loss, theft or destruction, of indemnity reasonably satisfactory to it; or (b) in the caseof mutilation, upon surrender thereof; the Company, at its expense, will execute and deliver inlieu thereof a new Note executed in the same manner as the Note being replaced, in the sameprincipal amount as the unpaid principal amount of such Note and dated the date to which interestshall have been paid on such Note or, if no interest shall have yet been so paid, dated the date ofsuch Note.     22. ACTION OF HOLDERS. Any action required or permitted to be taken by the Holders of thisNote and the other Notes, and any demand, sent, forbearance or waiver, shall be effective only withthe consent or other affirmative action of 2/3 (two- thirds) or more in interest ofthen-outstanding principal amount of the Notes. No such demand, consent, waiver or forbearanceshall be of any force or effect without such consent or other action.
19

 
     23. GOVERNING LAW. This Note and all actions arising out of or in connection with thisNote shall be governed by and construed in accordance with the laws of the State of New York,without regard to the conflicts of law provisions of the State of New York or of any other state.     IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the date first writtenabove.     **SAVE THE WORLD AIR, INC.**