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                                                                     Exhibit 4.2


         THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
         UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
         ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
         RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
         SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY
         NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED,
         TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF, EXCEPT
         PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
         ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH REGISTRATION.

No. ___                                                         $_______________

                                    CRAY INC.

                      5% CONVERTIBLE SUBORDINATED DEBENTURE

                              DUE NOVEMBER 6, 2004

         THIS DEBENTURE is one of a series of duly authorized and issued
debentures of Cray Inc., a Washington corporation, having a principal place of
business at 411 First Avenue South, Suite 600, Seattle, WA 98104 (the
"Company"), designated as its 5% Convertible Subordinated Debentures, due
November 6, 2004, in the aggregate principal amount of Eight Million Dollars
($8,000,000) (the "Debentures" and this debenture, this "Debenture") pursuant to
the Convertible Subordinated Debentures and Warrants Purchase Agreement, as
amended from time to time, originally dated November 6, 2001 among the Company,
Riverview Group, LLC, Omicron Partners, LP, Laterman & Co. and Forevergreen
Partners (the "Purchase Agreement"). CAPITALIZED TERMS NOT DEFINED IN SECTION 17
HEREIN SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN THE PURCHASE AGREEMENT.

         FOR VALUE RECEIVED, the Company promises to pay to [ ], or its
registered assigns (the "Holder"), the principal sum of _____________ Dollars
($_________________), or such lesser amount reflecting the principal balance
then-outstanding, on November 6, 2004 or such earlier date as the Debentures are
required or permitted to be repaid as provided hereunder (the "Maturity Date")
and to pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture at the rate of 5% per annum,
payable semi-
<PAGE>
annually, in cash or shares of Common Stock. On each conversion of this
Debenture, the Company and the Holder shall agree in writing as to the
unconverted principal amount then-outstanding following each such conversion.
Subject to the terms and conditions herein, the decision whether to pay interest
hereunder in registered shares of Common Stock or cash shall be at the
discretion of the Company. Semi-annual interest payments shall be due and
payable on April 30 and September 30 of each year, commencing with April 30,
2002. Not less than 10 Trading Days prior to each interest payment date, the
Company shall provide the Holder with written notice of its election to pay
interest hereunder either in cash or registered shares of Common Stock (the
Company may indicate in such notice that the election contained in such notice
shall continue for later periods until revised). Failure to timely provide such
written notice shall be deemed an election by the Company to pay interest in
cash. Payment in shares shall be based on the Alternate Conversion Price on the
interest payment date. Interest shall be calculated on the basis of a 360-day
year and shall accrue daily commencing on the Original Issue Date until payment
in full of the principal sum, together with all accrued and unpaid interest and
other amounts which may become due hereunder, has been made. Interest hereunder
will be paid to the Person in whose name this Debenture is registered on the
records of the Company regarding registration and transfers of Debentures (the
"Debenture Register"). All overdue accrued and unpaid interest to be paid in
cash hereunder shall entail a late fee at the rate of 18% per annum (or such
lower maximum amount of interest permitted to be charged under applicable law)
(the "Late Fee") (to accrue daily, from the date such interest is due hereunder
through and including the date of payment), payable in cash.

         This Debenture is subject to the following additional provisions:

         Section 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.

         Section 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement
and the legend set forth on the face of this Debenture. Prior to due presentment
to the Company for transfer of this Debenture, the Company and any agent of the
Company may treat the Person in whose name this Debenture is duly registered on
the Debenture Register as the owner hereof for the purpose of receiving payment
as herein provided and for all other purposes, whether or not this Debenture is
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.

         Section 3. Events of Default.

                  (a) "Event of Default", wherever used herein, means any one of
         the following events (whatever the reason and whether it shall be
         voluntary or involuntary or effected by operation of law or pursuant to
         any judgment, decree or order of any court, or any order, rule or
         regulation of any administrative or governmental body):


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                           (i) any default in the payment of the principal of,
                  or semi-annual interest on, any Debentures, as and when the
                  same shall become due and payable (whether on a Conversion
                  Date or the Maturity Date or by acceleration or otherwise); or

                           (ii) any of the material representations or
                  warranties made by the Company herein, in the Purchase
                  Agreement, the Registration Rights Agreement, or in any
                  agreement or certificate heretofore or hereafter furnished by
                  the Company in connection with the execution and delivery of
                  this Debenture or the Purchase Agreement shall be false or
                  misleading, in light of the circumstances when made, in any
                  material respect at the time made; or

                           (iii) the Company (a) fails to issue Conversion
                  Shares to the Holder or to cause its Transfer Agent to issue
                  Conversion Shares, or, if applicable, cash, upon proper
                  exercise by the Holder of the conversion rights of the Holder
                  in accordance with the terms of this Debenture, (b) fails to
                  transfer or to cause its Transfer Agent to transfer any
                  certificate for Conversion Shares issued to the Holder as and
                  when required by this Debenture or the Registration Rights
                  Agreement, and such transfer is otherwise lawful, or (c) fails
                  to remove any restrictive legend or to cause its Transfer
                  Agent to transfer any certificate or any Conversion Shares
                  issued to the Holder as and when required by this Debenture,
                  the Purchase Agreement or the Registration Rights Agreement
                  and such legend removal is otherwise lawful, and any such
                  failure described in sub-clauses (a), (b) or (c) shall
                  continue uncured for 10 Trading Days; or

                           (iv) the Company shall fail to perform or observe, in
                  any material respect, any other covenant, term, provision,
                  condition, agreement or obligation of the Company under the
                  Purchase Agreement, the Registration Rights Agreement or this
                  Debenture including the payments of interest (other than
                  semi-annual interest payments), liquidated damages and Late
                  Fees, provided the Holder has provided the Company notice and
                  an opportunity to cure within 20 business days of any such
                  event of default under this Section 3(a)(iv); or

                           (v) any governmental agencies or any court of
                  competent jurisdiction at the instance of any governmental
                  agency shall assume custody or control of the whole or any
                  substantial portion of the properties or assets of the Company
                  and such action shall not be dismissed within sixty (60) days
                  thereafter; or

                           (vi) if any judgment or other claim becomes a lien or
                  encumbrance upon any material portion of the Company's assets;
                  or

                           (vii) the Registration Statement is not declared
                  effective by the SEC


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                  within 180 days from the Closing; or

                           (viii) the Company or its subsidiary (solely for
                  purposes of this sub-section, Cray Federal, Inc. shall be
                  deemed the only subsidiary of the Company) shall commence, or
                  there shall be commenced against any of them a case under any
                  applicable bankruptcy or insolvency laws as now or hereafter
                  in effect or any successor thereto, or the Company or any of
                  its respective subsidiaries commences any other proceeding
                  under any reorganization, arrangement, adjustment of debt,
                  relief of debtors, dissolution, insolvency or liquidation or
                  similar law of any jurisdiction whether now or hereafter in
                  effect relating to the Company or any of its respective
                  subsidiaries or there is commenced against the Company or any
                  of its respective subsidiaries any such bankruptcy, insolvency
                  or other proceeding which remains undismissed for a period of
                  60 days; or the Company or any of its respective subsidiaries
                  is adjudicated insolvent or bankrupt; or any order of relief
                  or other order approving any such case or proceeding is
                  entered; or the Company or any of its respective subsidiaries
                  suffers any appointment of any custodian or the like for it or
                  any substantial part of its property which continues
                  undischarged or unstayed for a period of 60 days; or the
                  Company or any of its subsidiaries makes a general assignment
                  for the benefit of creditors; or the Company or any of its
                  subsidiaries shall fail to pay, or shall state that it is
                  unable to pay, or shall be unable to pay, its debts generally
                  as they become due; or the Company or any of its subsidiaries
                  shall call a meeting of its creditors with a view to arranging
                  a composition, adjustment or restructuring of its debts; or
                  the Company or any of its subsidiaries shall by any act or
                  failure to act expressly indicate its consent to, approval of
                  or acquiescence in any of the foregoing; or any corporate or
                  other action is taken by the Company or any of its
                  subsidiaries for the purpose of effecting any of the
                  foregoing; or

                           (ix) the Common Stock shall be delisted from the
                  Principal Market or suspended from trading on the Principal
                  Market (other than a general suspension of trading of
                  substantially all of the securities on the Principal Market)
                  without resuming trading and/or being relisted or thereon or
                  listed on another Principal Market or having such suspension
                  lifted, in either case, for more than 5 consecutive Trading
                  Days, or an aggregate of 8 Trading Days (which need not be
                  consecutive Trading Days); or

                           (x) the Company shall be a party to any Change of
                  Control Transaction; or

                           (xi) if the effectiveness of the Registration
                  Statement lapses for any reason or the Holder shall not be
                  permitted to resell Registrable Securities (as defined in the
                  Registration Rights Agreement) under the Registration
                  Statement, in either case, for more than 20 Trading Days, in
                  the aggregate, during any 12


4
<PAGE>
                  month period (excluding any Blackout Period under Section 2(h)
                  of the Registration Rights Agreement).

                  (b) During the time that any portion of this Debenture remains
         outstanding, if any Event of Default occurs and is continuing, unless
         such Event of Default shall have been waived in writing by the Holder
         (which waiver shall not be deemed to be a waiver of any subsequent
         default) at the option of the Holder and in the Holder's sole
         discretion, the Holder may consider this Debenture immediately due and
         payable in cash, without presentment, demand, protest or notice of any
         kind, all of which are hereby expressly waived, anything herein or in
         any note or other instruments contained to the contrary
         notwithstanding, and the Holder may immediately enforce any and all of
         the Holder's rights and remedies provided herein or any other rights or
         remedies afforded by law. The aggregate amount payable upon an Event of
         Default shall be equal to the Mandatory Redemption Amount Interest
         shall accrue on the redemption amount hereunder from the 7th calendar
         day after such amount is due (being the date of an Event of Default)
         through the date of redemption in full thereof at the rate of 18% per
         annum (or such lesser maximum amount that is permitted to be paid by
         applicable law), to accrue daily from the date such payment is due
         hereunder through and including the date of payment. All Debentures and
         Conversion Shares for which the full redemption price hereunder shall
         have been paid in accordance herewith shall promptly be surrendered to
         or as directed by the Company. The Holder need not provide and the
         Company hereby waives any presentment, demand, protest or other notice
         of any kind, and the Holder may immediately and without expiration of
         any grace period enforce any and all of its rights and remedies
         hereunder and all other remedies available to it under applicable law.
         Such declaration may be rescinded and annulled by Holder at any time
         prior to payment hereunder. No such rescission or annulment shall
         affect any subsequent Event of Default or impair any right consequent
         thereon.

         Section 4. Conversion.

                  (a) Conversion at Option of Holder.

                           (i) At the option of the Holder, this Debenture shall
                  be convertible into Conversion Shares, in whole or in part, at
                  any time and from time to time, after the Original Issue Date
                  (subject to the limitations on conversion set forth in Section
                  4(a)(ii) hereof). The number of Conversion Shares issuable
                  hereunder shall be determined by dividing (1) the outstanding
                  principal amount of this Debenture to be converted plus all
                  accrued and unpaid interest on such Debenture by (2) $2.35
                  (the "Set Price"), provided that if the Company has not
                  elected to pay the accrued and unpaid interest on such
                  Debenture in shares of Common Stock, then the number of shares
                  shall be determined by dividing the outstanding principal
                  amount of this Debenture to be converted by the Set Price.


5
<PAGE>
                           (ii) Notwithstanding anything to the contrary
                  contained in Section 4(a)(i) above, at any time commencing 3
                  months after the Original Issue Date, every 3 months, the
                  Holder shall have the cumulative right to elect to convert up
                  to an outstanding principal amount of this Debenture equal to
                  25% of the original principal amount of this Debenture and any
                  accrued but unpaid interest hereon (unless the Company elects
                  to pay such accrued and unpaid interest in cash) at such time
                  at a conversion price equal to 94% OF THE AVERAGE OF THE 7
                  LOWEST VWAPS DURING THE 20 TRADING DAYS IMMEDIATELY PRIOR TO
                  THE CONVERSION DATE (the "Alternate Conversion Price") rather
                  than at the Set Price. Accordingly, beginning on the 4th month
                  after the Original Issue Date, the Holder shall have the right
                  to convert up to 25% of the original principal amount of this
                  debenture at the lower of the Set Price or the Alternate
                  Conversion Price, beginning on the 7th month after the
                  Original Issue Date, the Holder shall have the right to
                  convert up to 50% of the original principal amount of this
                  debenture at the lower of the Set Price or the Alternate
                  Conversion Price, beginning on the 10th month after the
                  Original Issue Date, the Holder shall have the right to
                  convert up to 75% of the original principal amount of this
                  debenture at the lower of the Set Price or the Alternate
                  Conversion Price and beginning on the 13th month after the
                  Original Issue Date, the Holder shall have the right to
                  convert up to 100% of the original principal amount of this
                  debenture at the lower of the Set Price or the Alternate
                  Conversion Price until the Holder no longer holds any part of
                  this Debenture.

                           (iii) Notwithstanding anything to the contrary
                  contained herein, if on any Conversion Date:

                                    (A) the Common Stock is not listed or quoted
                           on a Principal Market;

                                    (B) the Company has failed to timely satisfy
                           its conversion obligations hereunder with respect to
                           Debentures submitted for conversion on such
                           conversion date; or

                                    (C) the issuance of such shares of Common
                           Stock would result in a violation of Sections
                           4(d)(ii).

                           then, at the option of the Holder, the Company, in
                  lieu of delivering Conversion Shares, shall deliver, within 3
                  Trading Days of each applicable Conversion Date, an amount in
                  cash equal to the product of the number of Conversion Shares
                  otherwise deliverable to the Holder in connection with such
                  Conversion Date and the highest VWAP during the period
                  commencing on the Conversion Date and ending on the Trading
                  Day prior to the date such payment is made, provided that if
                  the Holder elects the remedy provided in this sub-section and
                  in lieu of another remedy with respect to such conversion
                  (subject to timely


6
<PAGE>
                  payment hereunder), it shall not be entitled to declare an
                  Event of Default for the items set forth in Section
                  4(a)(iii)A-C.

                  (b) Mandatory Conversion. If on the Maturity Date, there
         remains any principal amount due and payable under this Debenture then
         the Holder of this Debenture shall convert the then outstanding
         principal balance due hereunder for Conversion Shares at a conversion
         price equal to the average of the Closing Prices during the 15 Trading
         Days immediately prior to the Maturity Date (the "Mandatory
         Conversion"). Notwithstanding the foregoing, the Holders shall not
         convert that portion of this Debenture to the extent that such
         conversion would violate Section 4(d)(ii). To the extent that the
         Debenture is not converted pursuant to the Mandatory Conversion, the
         Company shall pay to the Holder the remaining principal amount plus any
         accrued and unpaid interest in cash on the Maturity Date. At least 5
         Trading Days (but not more than 10 Trading Days) prior to the Mandatory
         Conversion Date, the Company shall provide written notice to the Holder
         of the Mandatory Conversion. Nothing herein shall preclude the Holder
         from converting this Debenture to the extent this Debenture remains
         unpaid and unconverted after the Mandatory Conversion Date.

                  (c) Conversion Procedure.

                           (i) CONVERSION NOTICES. The Holder shall effect
                  conversions by surrendering, if applicable, this Debenture
                  (but only if the Holder is converting the entire outstanding
                  principal amount of this Debenture), together with the form of
                  conversion notice attached hereto (a "Conversion Notice") to
                  the Company. Each Conversion Notice shall specify the
                  principal amount of this Debenture to be converted, the
                  applicable conversion price and, if applicable, the basis for
                  determining the Alternate Conversion Price, and the date on
                  which such conversion is to be effected, which date may not be
                  prior to the date such Conversion Notice is deemed to have
                  been delivered hereunder (a "Conversion Date"). If the Holder
                  is converting less than all of the principal amount
                  represented by this Debenture, the Holder shall convert at
                  least $100,000 in principal amount of this Debenture. If no
                  Conversion Date is specified in a Conversion Notice, the
                  Conversion Date shall be the date that such Conversion Notice
                  is deemed delivered hereunder. Unless otherwise provided for
                  by the terms hereunder, each Conversion Notice, once given,
                  shall be irrevocable. If the Holder is converting less than
                  all of the principal amount represented by this Debenture, it
                  shall not be required to surrender this Debenture but may
                  exercise its right to convert solely by the delivery of a
                  Conversion Notice. If a conversion hereunder cannot be
                  effected in full for any reason, the Company shall honor such
                  conversion to the extent permissible hereunder. At anytime the
                  Holder may elect, upon delivery of this Debenture to the
                  Company, to receive a new Debenture for such principal amount
                  as has not been converted.


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<PAGE>
                  (ii) DELIVERY OF CONVERSION SHARES. Not later than 3 Trading
                  Days after any Conversion Date, the Company will deliver to
                  the Holder, at an address in the United States supplied by the
                  Holder, (A) a certificate or certificates which shall be free
                  of restrictive legends and trading restrictions (other than
                  those required by the Purchase Agreement) representing the
                  number of shares of Common Stock being acquired upon the
                  conversion of this Debenture (subject to the limitations set
                  forth in Section 4(d) hereof), (B) if applicable, a new
                  Debenture in a principal amount equal to the principal amount
                  of Debentures not converted (if the Holder elects to surrender
                  this Debenture and a principal amount remains outstanding
                  after conversion), and (C) a bank wire or a bank or certified
                  check in the amount of accrued and unpaid interest (if the
                  Company has timely elected or is required to pay accrued
                  interest in cash). The Company shall, upon request of the
                  Holder, if available, use its best efforts to deliver any
                  certificate or certificates required to be delivered by the
                  Company under this Section electronically through the
                  Depository Trust Corporation or another established clearing
                  corporation performing similar functions. If in the case of
                  any Conversion Notice such certificate or certificates are not
                  delivered to or as directed by the applicable Holder by the
                  3rd Trading Day after a Conversion Date, the Holder shall be
                  entitled by written notice to the Company at any time on or
                  before its receipt of such certificate or certificates
                  thereafter, to rescind such conversion, in which event the
                  Company shall immediately return the certificates representing
                  the principal amount of Debentures tendered for conversion.

                           (iii) FAILURE TO DELIVER CONVERSION SHARES IN A
                  TIMELY MANNER. If the Company fails for any reason to deliver
                  to the Holder such certificate or certificates by the 3rd
                  Trading Day after the Conversion Date in accordance with
                  Section 4(c)(ii), including, (in the event that shares are to
                  be delivered in certificated form) but not limited to, the
                  obligation of the Company to deliver such shares without any
                  restrictive legend, the Company shall pay to such Holder, in
                  cash, as liquidated damages and not as a penalty, for each
                  $5,000 of principal amount being converted, $50 per Trading
                  Day (increasing to $100 per Trading Day after 3 Trading Days
                  and increasing to $200 per Trading Day 6 Trading Days after
                  such damages begin to accrue) after such third Trading Day
                  until such certificates are delivered; provided, however, in
                  the event the Holder elects to rescind a conversion notice,
                  liquidated damages shall accrue only up to the date of such
                  rescission notice but not thereafter with respect to such
                  rescinded conversion. Nothing herein shall limit a Holder's
                  right to pursue actual damages or declare an Event of Default
                  pursuant to Section 3 herein for the Company's failure to
                  deliver certificates representing shares of Common Stock upon
                  conversion within the period specified herein and such Holder
                  shall have the right to pursue all remedies available to it at
                  law or in equity including, without limitation, a decree of
                  specific performance and/or injunctive relief. The exercise of
                  any such rights shall not prohibit the Holders from seeking to
                  enforce damages pursuant to any other


8
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                  Section hereof or under applicable law. Further, if the
                  Company shall not have delivered any cash due as payment of
                  interest hereon by the third Trading Day after the Conversion
                  Date, the Holder may, by notice to the Company, require the
                  Company to issue shares of Common Stock pursuant to Section
                  4(a), except that for such purpose the conversion price
                  applicable thereto shall be the lesser of (A) the lesser of
                  the Set Price and the Alternate Conversion Price on the
                  Conversion Date and, (B) the lesser of the Set Price and the
                  Alternate Conversion Price on the date of the Holder's demand.
                  Any such shares will be subject to the provision of this
                  Section.

                           (iv) BUY-IN. In addition to any other rights
                  available to the Holder, if the Company fails to deliver to
                  the Holder such certificate or certificates by the 3rd Trading
                  Day after the Conversion Date in accordance with Section
                  4(c)(ii), and if after such 3rd Trading Day the Holder
                  purchases (in an open market transaction or otherwise) Common
                  Stock to deliver in satisfaction of a sale by such Holder of
                  the Conversion Shares which the Holder anticipated receiving
                  upon such conversion (a "Buy-In"), then the Company shall pay
                  in cash to the Holder (in addition to any remedies available
                  to or elected by the Holder) the amount by which (x) the
                  Holder's total purchase price (including brokerage
                  commissions, if any) for the Common Stock so purchased exceeds
                  (y) the product of (1) the aggregate number of shares of
                  Common Stock that such Holder anticipated receiving from the
                  conversion at issue multiplied by (2) the market price of the
                  Common Stock at the time of the sale giving rise to such
                  purchase obligation. For example, if the Holder purchases
                  Common Stock having a total purchase price of $11,000 to cover
                  a Buy-In with respect to an attempted conversion of this
                  Debentures with respect to which the market price of the
                  Conversion Shares on the date of conversion was a total of
                  $10,000, the Company shall be required to pay the Holder
                  $1,000. The Holder shall provide the Company written notice
                  indicating the amounts payable to the Holder in respect of the
                  Buy-In and the basis for determining such amount.
                  Notwithstanding anything contained herein to the contrary, if
                  a Holder requires the Company to make payment in respect of a
                  Buy-In for the failure to timely deliver certificates
                  hereunder and the Company timely pays in full such payment,
                  the Company shall not be required to pay such Holder
                  liquidated damages under Section 4(c)(iii) in respect of the
                  certificates resulting in such Buy-In.

                           (v) OBLIGATION TO HONOR CONVERSIONS. If at any time
                  (A) the Company challenges, disputes or denies the right of
                  the Holder to effect the conversion of this Debenture
                  permitted under this Section 4 into Conversion Shares or, if
                  applicable, cash, or otherwise dishonors or rejects any Notice
                  of Conversion permitted under this Section 4 and properly
                  delivered pursuant to Section 7 or (B) any Company stockholder
                  who is not and has never been an Affiliate (as defined in Rule
                  405 under the Securities Act) of the Holder obtains a


9
<PAGE>
                  judgment or any injunctive relief from any court or public or
                  governmental authority which denies, enjoins, limits,
                  modifies, delays or disputes the right of the Holder hereof to
                  effect the conversion of this Debenture into Conversion
                  Shares, then the Holder shall have the right, by written
                  notice, to require the Company to promptly redeem this
                  Debenture for cash at a redemption price equal to 120% of the
                  outstanding principal amount hereof and all accrued and unpaid
                  interest hereon. Under any of the circumstances set forth
                  above, the Company shall indemnify and hold harmless the
                  Holder and be responsible for the payment of all costs and
                  expenses of the Holder, including its reasonable legal fees
                  and expenses, as and when incurred in disputing any such
                  action or pursuing its rights hereunder (in addition to any
                  other rights of the Holder). In the event a Holder of this
                  Debenture shall elect to convert any or all of the outstanding
                  principal amount hereof, to the extent and in the manner
                  permitted by this Debenture, the Company may not refuse
                  conversion based on any claim that the Holder or any one
                  associated or affiliated with the Holder has been engaged in
                  any violation of law, or any agreement or for any other
                  reason, unless, an injunction from a court, on notice,
                  restraining and or enjoining conversion of all or part of this
                  Debenture shall have been sought and obtained and the Company
                  posts a surety bond for the benefit of the Holder in the
                  amount of 120% of the principal amount of this Debenture
                  outstanding which is subject to the injunction, which bond
                  shall remain in effect until the completion of litigation of
                  the dispute and the proceeds of which shall be payable to such
                  Holder to the extent it obtains judgment. In the absence of an
                  injunction precluding the same, the Company shall issue
                  Conversion Shares or, if applicable, cash, upon a properly
                  noticed conversion permitted hereunder.

                  (d) Conversion Restrictions.

                           (i) BENEFICIAL OWNERSHIP LIMITATION. Notwithstanding
                  anything herein to the contrary, the Holder may not convert
                  this Debenture or receive shares of Common Stock as payment of
                  interest hereunder to the extent such conversion or receipt of
                  such interest payments would result in the Holder, together
                  with any affiliate thereof, beneficially owning (as determined
                  in accordance with Section 13(d) of the Exchange Act (as
                  defined in Section 6) and the rules promulgated thereunder) in
                  excess of 4.999% of the then issued and outstanding shares of
                  Common Stock, including shares issuable upon conversion of,
                  and payment of interest on, this Debenture or any other
                  debenture of the Company held by such Holder after application
                  of this Section. Since the Holder will not be obligated to
                  report to the Company the number of shares of Common Stock it
                  may hold at the time of a conversion hereunder, unless the
                  conversion at issue would result in the issuance of shares of
                  Common Stock in excess of 4.999% of the then outstanding
                  shares of Common Stock without regard to any other shares
                  which may be beneficially owned by the Holder or an affiliate
                  thereof, the Holder shall have the authority and obligation to
                  determine whether


10
<PAGE>
                  the restriction contained in this Section will limit any
                  particular conversion hereunder and to the extent that the
                  Holder determines that the limitation contained in this
                  Section applies, the determination of which portion of the
                  principal amount of this Debenture is convertible shall be the
                  responsibility and obligation of the Holder. If the Holder has
                  delivered a Conversion Notice for a principal amount of this
                  Debenture that, without regard to any other shares that the
                  Holder or its affiliates may beneficially own, would result in
                  the issuance in excess of the permitted amount hereunder, the
                  Company shall notify the Holder of this fact and shall honor
                  the conversion for the maximum principal amount permitted to
                  be converted on such Conversion Date in accordance with this
                  Section. If this Debenture was not surrendered on the
                  Conversion Date, the Company shall provide the Holder written
                  notice of the amount actually converted. If the Holder
                  surrendered this Debenture on the Conversion Date, the Company
                  shall, at the option of the Holder, either retain any
                  principal amount tendered for conversion in excess of the
                  permitted amount hereunder for future conversions or return
                  such excess principal amount to the Holder. The provisions of
                  this Section may be waived by a Holder (but only as to itself
                  and not to any other Holder) upon not less than 61 days prior
                  notice to the Company. Other Holders shall be unaffected by
                  any such waiver.

                           (ii) LIMITATION ON NUMBER OF SHARES ISSUABLE.
                  Notwithstanding anything herein to the contrary, the Company
                  shall not be required to issue to the Holder and any other
                  holders of the Debentures in excess of 8,422,204 shares of
                  Common Stock, in the aggregate, at a price below the market
                  price of the Common Stock on the Closing Date, or such greater
                  number of shares of Common Stock permitted pursuant to Nasdaq
                  Rule 4350(i), as confirmed in writing by counsel to the
                  Company, upon conversion of the Debentures (the "Maximum
                  Aggregate Share Amount"), unless the Company first obtains
                  shareholder approval permitting such issuances in accordance
                  with Nasdaq rules. If the number of shares of Common Stock
                  which would, notwithstanding the limitation set forth herein,
                  be issuable and sold to the Holder equals or exceeds the
                  Maximum Aggregate Share Amount, then, at the sole election of
                  the Holder, in whole or in part, the Company shall either: (i)
                  honor the conversion of this Debenture by the Holder at the
                  lowest possible conversion price which would permit such
                  conversion without violating Nasdaq Rule 4350(i), and/or (ii)
                  redeem the portion of this Debenture submitted to the Company,
                  the conversion of which would exceed the Maximum Aggregate
                  Share Amount, in accordance with Section 5, except that the
                  Company's obligation to make such redemption payments in
                  clause (ii) shall be pro-rata in accordance with Alternate
                  Conversion Price schedule in Section 4(a)(ii) such that, the
                  Company shall be obligated hereunder to redeem up to 25% of
                  the original principal amount of this Debenture, every 3
                  months, beginning on the 4th month after the Closing Date. By
                  way of example, after the 13th month after the Closing Date,
                  any such redemption


11
<PAGE>
                  payments shall be for the full outstanding principal amount.
                  The Holder shall be entitled to convert this Debenture up to
                  its pro-rata portion of the Maximum Aggregate Share Amount
                  based upon the initial Purchase Price paid for this Debenture.
                  In the event the other holders of the Debentures have elected
                  the second option pursuant to the penultimate preceding
                  sentence, the Holder's pro-rata portion of such maximum amount
                  shall be proportionally increased.

                  (e) Anti-Dilution Provisions.

                           (i) DIVIDENDS, STOCK SPLITS, ETC. If the Company, at
                  any time while this Debenture is outstanding, (A) shall pay a
                  stock dividend or otherwise make a distribution or
                  distributions on shares of its Common Stock or any other
                  equity or equity equivalent securities payable in shares of
                  Common Stock, (B) subdivide outstanding shares of Common Stock
                  into a larger number of shares, (C) combine (including by way
                  of reverse stock split) outstanding shares of Common Stock
                  into a smaller number of shares, or (D) issue by
                  reclassification of shares of the Common Stock any shares of
                  capital stock of the Company, then the Set Price shall be
                  multiplied by a fraction of which the numerator shall be the
                  number of shares of Common Stock (excluding treasury shares,
                  if any) outstanding before such event and of which the
                  denominator shall be the number of shares of Common Stock
                  outstanding after such event. Any adjustment made pursuant to
                  this Section shall become effective immediately after the
                  record date for the determination of stockholders entitled to
                  receive such dividend or distribution and shall become
                  effective immediately after the effective date in the case of
                  a subdivision, combination or re-classification.

                           (ii) RIGHTS, OPTIONS, WARRANTS, ETC. If the Company,
                  at any time while this Debenture is outstanding, shall issue
                  rights, options or warrants to all holders of Common Stock
                  (and not to holders of the Debentures) entitling them to
                  subscribe for or purchase shares of Common Stock at a price
                  per share less than the Set Price (the "Lower Price"), then
                  the Set Price shall be multiplied by a fraction, of which the
                  denominator shall be the number of shares of the Common Stock
                  (excluding treasury shares, if any) outstanding on the date of
                  issuance of such rights or warrants plus the number of
                  additional shares of Common Stock offered for subscription or
                  purchase, and of which the numerator shall be the number of
                  shares of the Common Stock (excluding treasury shares, if any)
                  outstanding on the date of issuance of such rights or warrants
                  plus the number of shares which the aggregate offering price
                  of the total number of shares so offered would purchase at the
                  Set Price. Such adjustment shall be made whenever such rights
                  or warrants are issued, and shall become effective immediately
                  after the record date for the determination of stockholders
                  entitled to receive such rights, options or warrants. However,
                  upon the expiration of any such right, option or warrant to
                  purchase shares of the Common Stock the issuance of which
                  resulted in


12
<PAGE>
                  an adjustment in the Set Price pursuant to this Section, if
                  any such right, option or warrant shall expire and shall not
                  have been exercised, the Set Price shall immediately upon such
                  expiration be recomputed and effective immediately upon such
                  expiration be increased to the price which it would have been
                  (but reflecting any other adjustments in the Set Price made
                  pursuant to the provisions of this Section after the issuance
                  of such rights or warrants) had the adjustment of the Set
                  Price made upon the issuance of such rights, options or
                  warrants been made on the basis of offering for subscription
                  or purchase only that number of shares of the Common Stock
                  actually purchased upon the exercise of such rights, options
                  or warrants actually exercised.

                           (iii) FUTURE ISSUANCES. If the Company or any
                  subsidiary thereof, as applicable with respect to Capital
                  Share Equivalents, at any time while this Debenture is
                  outstanding, shall issue Capital Share Equivalents entitling
                  any Person to acquire shares of Common Stock at a price per
                  share less than the Set Price (if the holder of the Common
                  Stock or Capital Share Equivalent so issued shall at any time,
                  whether by operation of purchase price adjustments, reset
                  provisions, floating conversion, exercise or exchange prices
                  or otherwise, or due to warrants, options or rights issued in
                  connection with such issuance, be entitled to receive shares
                  of Common Stock at a price less than the Set Price, such
                  issuance shall be deemed to have occurred for less than the
                  Set Price)(the "Lower Price"), then, the Set Price shall be
                  multiplied by a fraction, of which the denominator shall be
                  the number of shares of the Common Stock (excluding treasury
                  shares, if any) outstanding on the date of issuance of such
                  Capital Share Equivalent plus the number of Capital Share
                  Equivalents offered for subscription or purchase, and of which
                  the numerator shall be the number of shares of the Common
                  Stock (excluding treasury shares, if any) outstanding on the
                  date of issuance of such Capital Share Equivalent plus the
                  number of shares which the aggregate offering price of the
                  total number of shares so offered would purchase at the Set
                  Price, provided, that for purposes hereof, all shares of
                  Common Stock that are issuable upon conversion, exercise or
                  exchange of Capital Share Equivalents shall be deemed
                  outstanding immediately after the issuance of such Capital
                  Share Equivalents. Such adjustment shall be made whenever such
                  shares of Common Stock or Capital Share Equivalents are
                  issued. However, upon the expiration of any Capital Share
                  Equivalents the issuance of which resulted in an adjustment in
                  the Conversion Price pursuant to this Section, if any such
                  Capital Share Equivalents shall expire and shall not have been
                  exercised, the Set Price shall immediately upon such
                  expiration be recomputed and effective immediately upon such
                  expiration be increased to the price which it would have been
                  (but reflecting any other adjustments in the Set Price made
                  pursuant to the provisions of this Section after the issuance
                  of such Capital Share Equivalents) had the adjustment of the
                  Set Price made upon the issuance of such Capital Share
                  Equivalents been made on the basis of offering for
                  subscription or purchase only that number of


13
<PAGE>
                  shares of Common Stock actually purchased upon the exercise of
                  such Capital Share Equivalents actually exercised.

                           (iv) NO ADJUSTMENT. No adjustment to the Set Price
                  pursuant to this Section will be made: (A) upon the exercise
                  of any warrants, options, convertible securities or other
                  rights issued and outstanding as of the original issuance date
                  of this Debenture in accordance with the terms of such
                  securities as of such date; (B) upon issuance, grant or
                  exercise of shares, warrants, options or convertible
                  securities to employees, officers, consultants or directors of
                  the Company in accordance with plans approved by the Board of
                  Directors; (C) upon the issuance of shares or other securities
                  of the Company pursuant to an agreement or other written
                  obligation entered into prior to the initial issuance of this
                  Debenture; (D) upon the issuance of shares of Common Stock
                  upon conversion of this or similar Debentures and exercise of
                  Warrants being issued in connection with the issuance of this
                  and similar Debentures; and (E) any securities issued in any
                  firmly underwritten public offering.

                           (v) RIGHTS OF SHAREHOLDERS, ETC. If the Company, at
                  any time while this Debenture is outstanding, shall distribute
                  to all holders of Common Stock (and not to Holders) evidences
                  of its indebtedness or assets or rights or warrants to
                  subscribe for or purchase any security, then in each such case
                  the Set Price at which this Debenture shall thereafter be
                  convertible shall be determined by multiplying the Set Price
                  in effect immediately prior to the record date fixed for
                  determination of stockholders entitled to receive such
                  distribution by a fraction of which the denominator shall be
                  the Closing Price determined as of the record date mentioned
                  above, and of which the numerator shall be such Closing Price
                  on such record date less the then fair market value at such
                  record date of the portion of such assets or evidence of
                  indebtedness so distributed applicable to one outstanding
                  share of the Common Stock as determined by the Board of
                  Directors in good faith. In either case the adjustments shall
                  be described in a statement provided to the Holder of the
                  portion of assets or evidences of indebtedness so distributed
                  or such subscription rights applicable to one share of Common
                  Stock. Such adjustment shall be made whenever any such
                  distribution is made and shall become effective immediately
                  after the record date mentioned above.

                  (f) Miscellaneous.

                                    (i) All calculations under this Section 4
                           shall be made to the nearest cent or the nearest
                           1/100th of a share, as the case may be. No
                           adjustments in the Set Price shall be required if
                           such adjustment is less than $0.01, provided,
                           however, that any adjustments which by reason of this
                           Section are not required to be made shall be carried
                           forward and taken into account in any subsequent
                           adjustment.


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<PAGE>
                                    (ii) Whenever the Set Price is adjusted
                           pursuant to Section 4(e), the Company shall promptly
                           mail to each Holder a notice setting forth the Set
                           Price after such adjustment and setting forth a brief
                           statement of the facts requiring such adjustment.

                                    (iii) The Company covenants that it will at
                           all times reserve and keep available out of its
                           authorized and unissued shares of Common Stock solely
                           for the purpose of issuance upon conversion of this
                           Debenture and payment of interest on this Debenture,
                           each as herein provided, free from preemptive rights
                           or any other actual contingent purchase rights of
                           persons other than the Holder, not less than such
                           number of shares of the Common Stock as shall
                           (subject to any additional requirements of the
                           Company as to reservation of such shares set forth in
                           the Purchase Agreement) be issuable (taking into
                           account the adjustments and restrictions of Section
                           4) upon the conversion of the outstanding principal
                           amount of this Debenture and payment of interest
                           hereunder. The Company covenants that all shares of
                           Common Stock that shall be so issuable shall, upon
                           issue, be duly and validly authorized, issued, fully
                           paid and nonassessable.

                                    (iv) Upon a conversion hereunder, the
                           Company shall not be required to issue stock
                           certificates representing fractions of shares of the
                           Common Stock, but may if otherwise permitted, make a
                           cash payment in respect of any final fraction of a
                           share based on the Closing Price at such time. If the
                           Company elects not, or is unable, to make such a cash
                           payment, the Holder shall be entitled to receive, in
                           lieu of the final fraction of a share, one whole
                           share of Common Stock.

                                    (v) The issuance of certificates for shares
                           of the Common Stock on conversion of this Debenture
                           shall be made without charge to the Holder for any
                           documentary stamp or similar taxes that may be
                           payable in respect of the issue or delivery of such
                           certificate, provided that the Company shall not be
                           required to pay any tax that may be payable in
                           respect of any transfer involved in the issuance and
                           delivery of any such certificate upon conversion in a
                           name other than that of the Holder and the Company
                           shall not be required to issue or deliver such
                           certificates unless or until the person or persons
                           requesting the issuance thereof shall have paid to
                           the Company the amount of such tax or shall have
                           established to the satisfaction of the Company that
                           such tax has been paid.

         Section 5. Redemption.

                  (a) Optional Redemption by the Company. The Company shall have
         the right,


15
<PAGE>
         at any time after the Effective Date, upon 10 Trading Days' notice to
         the Holder (an "Optional Redemption Notice" and the date such notice is
         received by the Holder, the "Notice Date"), to redeem no less than the
         entire principal amount of this Debenture then held by the Holder, at a
         cash price equal to, (i) if the Notice Date occurs within the 6 month
         period immediately following the Closing Date, 105% of the principal
         amount outstanding of this Debenture plus any accrued but unpaid
         interest hereon, and (ii) if the Notice Date occurs after the 6 month
         period immediately following the Closing Date, 110% of the principal
         amount outstanding of this Debenture plus any accrued but unpaid
         interest hereon (the "Optional Redemption Price". The Company may only
         deliver an Optional Redemption Notice to the Holder if, on the Notice
         Date: (i) either there is an effective Registration Statement pursuant
         to which the Holder is permitted to utilize the prospectus thereunder
         to resell all of the Conversion Shares issued to the Holder and all of
         the Conversion Shares as are issuable to the Holder upon conversion in
         full of the Debentures subject to the Optional Redemption Notice or all
         of such issued or issuable Conversion Shares may be sold without volume
         restrictions pursuant to Rule 144 promulgated under the Securities Act,
         as determined by counsel to the Company pursuant to a written opinion
         letter, addressed and delivered prior to the Notice Date to the
         Company's transfer agent in the form and substance acceptable to the
         Holders and such transfer agent, and (ii) the Common Stock is listed
         for trading on a Principal Market. If any of the foregoing conditions
         shall cease to be in effect during the period between the Notice Date
         and the date the Optional Redemption Price is paid in full, then the
         Holders subject to such redemption may elect, by written notice to the
         Company given at any time after any of the foregoing conditions shall
         cease to be in effect, to invalidate ab initio such redemption,
         notwithstanding anything herein contained to the contrary. The Holders
         may convert any portion of the outstanding principal amount of the
         Debentures subject to an Optional Redemption Notice prior to the date
         that the Optional Redemption Price is due and paid in full.

                  (b) Redemption Procedure. The Optional Redemption Price is due
         on the 10th Trading Day following the Notice Date. If any portion of
         the Optional Redemption Price shall not be paid by the Company by
         expiration of such 10th Trading Day, interest shall accrue thereon at
         the rate of 18% per annum (or the maximum rate permitted by applicable
         law, whichever is less) until the Optional Redemption Price plus all
         such interest is paid in full. In addition, if any portion of the
         Optional Redemption Price remains unpaid after such date, the Holders
         subject to such Redemption may elect, by written notice to the Company
         given at any time thereafter, to invalidate ab initio such redemption,
         notwithstanding anything herein contained to the contrary. If a Holder
         elects to invalidate such redemption the Company shall promptly, and,
         in any event, not later than 3 Trading Days from receipt of such
         Holder's notice of such election, return to such Holder all of the
         Debentures for which the Optional Redemption Price shall not have been
         paid in full.

         Section 6. Dividends, Mergers, Consolidations, Reclassifications, Etc.


16
<PAGE>
                  (a) Notice of Certain Events. If (i) the Company shall declare
         a dividend (or any other distribution) on the Common Stock; (ii) the
         Company shall declare a special nonrecurring cash dividend on or a
         redemption of the Common Stock; (iii) the Company shall authorize the
         granting to all holders of the Common Stock rights or warrants to
         subscribe for or purchase any shares of capital stock of any class or
         of any rights; (iv) the approval of any stockholders of the Company
         shall be required in connection with any reclassification of the Common
         Stock, any consolidation or merger to which the Company is a party, any
         sale or transfer of all or substantially all of the assets of the
         Company, or any compulsory share exchange whereby the Common Stock is
         converted into other securities, cash or property; or (v) the Company
         shall authorize the voluntary or involuntary dissolution, liquidation
         or winding up of the affairs of the Company; then, in each case, the
         Company shall cause to be filed at each office or agency maintained for
         the purpose of conversion of the Debentures, and shall cause to be
         mailed to the Holder at their last addresses as they shall appear upon
         the stock books of the Company, at least 20 calendar days prior to the
         applicable record or effective date hereinafter specified, a notice
         stating (i) the date on which a record is to be taken for the purpose
         of such dividend, distribution, redemption, rights or warrants, or if a
         record is not to be taken, the date as of which the holders of the
         Common Stock of record to be entitled to such dividend, distributions,
         redemption, rights or warrants are to be determined, or (ii) the date
         on which such reclassification, consolidation, merger, sale, transfer
         or share exchange is expected to become effective or close, and the
         date as of which it is expected that holders of the Common Stock of
         record shall be entitled to exchange their shares of the Common Stock
         for securities, cash or other property deliverable upon such
         reclassification, consolidation, merger, sale, transfer or share
         exchange, provided, that the failure to mail such notice or any defect
         therein or in the mailing thereof shall not affect the validity of the
         corporate action required to be specified in such notice. The Holder is
         entitled to convert this Debenture during the 20-day period commencing
         the date of such notice to the effective date of the event triggering
         such notice.

                  (b) Change of Control. In case of any Change of Control, the
         Holder shall have the right to either (i) declare an Event of Default,
         (ii) convert its aggregate principal amount of Debentures then
         outstanding into the shares of stock and other securities, cash and
         property receivable upon or deemed to be held by holders of Common
         Stock following such merger, consolidation or sale, and such Holder
         shall be entitled upon such event or series of related events to
         receive such amount of securities, cash and property as the shares of
         Common Stock into which such aggregate principal amount of Debentures
         could have been converted immediately prior to such merger,
         consolidation or sale would have been entitled, or (iii) in the case of
         Change of Control involving a merger in which the Company is not the
         surviving corporation or a consolidation, (A) require the surviving
         entity to issue convertible subordinated debentures in such face amount
         equal to the aggregate principal amount of Debentures then held by the
         Holder, plus all accrued and unpaid interest and other amounts owing
         thereon, which newly issued debentures shall


17
<PAGE>
         have terms identical (including with respect to conversion) to the
         terms of this Debenture and shall be entitled to all of the rights and
         privileges of a Holder of this Debenture and the agreements pursuant to
         which this Debenture was issued (including, without limitation, as such
         rights relate to the acquisition, transferability, registration and
         listing of such shares of stock or other securities issuable upon
         conversion thereof), and (B) simultaneously with the issuance of such
         convertible subordinated debentures, shall have the right to convert
         such instrument only into shares of stock and other securities, cash
         and property receivable upon or deemed to be held by holders of Common
         Stock following such merger or consolidation. In the case of clause
         (iii), the conversion price applicable for the newly issued convertible
         subordinated debentures shall be based upon the amount of securities,
         cash and property that each share of Common Stock would receive in such
         transaction and the Set Price in effect immediately prior to the
         effectiveness or closing date for such transaction. The terms of any
         such merger, sale or consolidation shall include such terms so as to
         continue to give the Holders the right to receive the securities, cash
         and property set forth in this Section upon any conversion or
         redemption following such event. This provision shall similarly apply
         to successive such events. The terms of any agreement to be executed in
         connection with any Change of Control transaction shall include terms
         requiring any successor or surviving entity to comply with the
         provisions of this Section.

                  (c) Reclassification. In case of any reclassification of the
         Common Stock (other than a change in par value or a change from par
         value to no par value) or any compulsory share exchange pursuant to
         which the Common Stock is converted into other securities, cash or
         property, the Holder shall have the right thereafter to, at its option,
         (i) to convert, at any time, in whole or in part, the then outstanding
         principal amount, together with all accrued but unpaid interest and any
         other amounts then owing hereunder in respect of this Debenture only
         into the shares of stock and other securities, cash and property
         receivable upon or deemed to be held by holders of the Common Stock
         following such reclassification or share exchange, and the Holder of
         this Debenture shall be entitled upon such event to receive such amount
         of securities, cash or property as the shares of the Common Stock of
         the Company into which the then outstanding principal amount, together
         with all accrued but unpaid interest and any other amounts then owing
         hereunder in respect of this Debenture could have been converted
         immediately prior to such reclassification or share exchange would have
         been entitled, or (ii) to cause the Company to exercise its right to
         redeem the aggregate outstanding principal amount of this Debenture,
         plus all interest and other amounts due and payable thereon, pursuant
         to Section 5. The entire redemption price due hereunder shall be paid
         in cash. This provision shall similarly apply to successive
         reclassifications or share exchanges.

         Section 7. Notices. Any and all notices or other communications or
deliveries to be provided by the Holders hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company,


18
<PAGE>
at 411 First Avenue South, Suite 600, Seattle, WA 98104, fax: (206) 701-2218,
attention Chief Financial Officer, or such other address or facsimile number as
the Company may specify for such purposes by notice to the Holders delivered in
accordance with this Section. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight
courier service or sent by certified or registered mail, postage prepaid,
addressed to each Holder at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 4:30 p.m. (New York City time), (ii) the date
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later than
4:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the Trading Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given.

         Section 8. Subordination

         (a) Agreement of Subordination. The Company covenants and agrees, and
the Holder, by its acceptance hereof, likewise covenants and agrees, that the
payment of the principal of and interest on and other payments due pursuant to
this Debenture are each hereby expressly subordinated, to the extent and in the
manner hereinafter set forth, to the prior payment and/or cancellation (as shall
be appropriate) in full of all Senior Indebtedness. The provisions of this
Section 8 shall automatically terminate upon the indefeasible payment in full in
cash or cash equivalents of all Senior Indebtedness due and owing by the Company
to the Senior Lender.

         The provisions of this Section 8 are made for the benefit of Senior
Lender, and Senior Lender shall, at any time, be entitled to enforce such
provisions against the Company or the Holder of this Debenture. Senior Lender
shall not be deemed to owe any fiduciary duty or any other obligation to the
Holder of this Debenture now or at any time hereafter.

         (b) Terms of Subordination.

                  (i) In the event of (x) any insolvency, bankruptcy,
receivership, liquidation, reorganization, readjustment, composition or other
similar proceeding relative to the Company or its creditors or its property, (y)
any proceeding for voluntary liquidation, dissolution or other winding up of the
Company whether or not involving insolvency or bankruptcy proceedings, or (z)
any assignment for the benefit of creditors or any marshalling of the assets of
the Company, then and in any such event:

                  (A) all Senior Indebtedness (including all interest that but
for the provisions of


19
<PAGE>
the Bankruptcy Code would have accrued on such Senior Indebtedness after the
date of filing a petition or other action commencing any such proceeding) shall
first be paid in full in cash or cash equivalents, or have provision made for
payment and/or cancellation (as shall be appropriate) in full to the reasonable
satisfaction of Senior Lender, before the Holder is entitled to receive any
payment (other than securities upon conversion or issuance under this Debenture)
on account of the principal of or premium, if any, or interest on the
indebtedness evidenced by this Debenture, and

                  (B) any payment or distribution of assets of the Company of
any kind or character, whether in cash or cash equivalents, property or
securities (other than securities upon conversion or issuance under this
Debenture and other than securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, provided the rights of
Senior Lender are not altered by such reorganization or readjustment, the
payment of which is subordinate, at least to the extent provided in this Section
8 with respect to this Debenture, to the payment of all Senior Indebtedness at
the time outstanding and to the payment of all securities issued in exchange
therefor to Senior Lender at the time outstanding), to which Holder would be
entitled except for the provisions of this Section 8, shall be paid by the
liquidating trustee or agent or other person making such payment or
distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee
or other trustee or agent, directly to Senior Lender or its representative, to
the extent necessary to make payment of and/or to cancel (as may be appropriate)
in full all Senior Indebtedness remaining unpaid and/or outstanding (as the case
may be), after giving effect to any concurrent payment or distribution, or
provision therefor, to Senior Lender.

         (ii) In the event and during the continuation of any Senior Default, or
if there is no Designated Senior Excess Availability after giving effect to any
payment made in respect of the indebtedness evidenced by this Debenture,
provided, however, that the Holder has been given written notice thereof and the
basis therefor, then, unless and until such Senior Default shall have been cured
or waived or shall have ceased to exist or there is Designated Senior Excess
Availability after giving effect to any such payment, no payment shall be made
by the Company and no application of funds shall be made with respect to the
principal of or interest on this Debenture, the redemption of this Debenture
pursuant to Section 4(c)(v), or any other payment of funds under this Debenture
or under any of the agreements relating to the issuance of the Debenture,
provided, however, that the Holder may demand and the Company may pay at any
time and from time to time liquidated damages and Late Fees pursuant to Sections
4(a)(iii), 4(c)(iii) and 4(c)(iv) of this Debenture and Section 2(f) of the
Registration Rights Agreement of even date by and among the Company and the
holders of this Debenture and the other Debentures even if a Senior Default
exists and/or there is no Designated Senior Excess Availability at the time of
such payment(s), but only so long as, of the date of such payment by the
Company, the Holder (or the holder of any other Debenture) has not declared that
an Event of Default exists under Section 3 of this Debenture or such other
Debenture, and provided, further, that the Senior Lender has not accelerated the
Senior Indebtedness. If, however, no Senior Default then exists and there is
Designated Senior Excess Availability after giving effect to any


20
<PAGE>
such payment, nothing herein shall prohibit the Company from making and the
Holder from receiving a payment in respect of a regularly scheduled principal or
interest payment, redemption payments under Section 4(c)(v) or liquidated
damages or Late Fees that are due that but for the occurrence of a Senior
Default or the lack of the Designated Senior Excess Availability would have been
made on its originally scheduled payment date or due date of such payment
hereunder, as the case may be.

         (iii) In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities (other than securities upon conversion or issuance under
this Debenture and other than securities of the Company or any other entity
provided for by a plan of reorganization or readjustment, provided that the
rights of Senior Lender are not altered by such reorganization or readjustment,
the payment of which is subordinate, at least to the extent provided in this
Section 8 with respect to this Debenture, to the payment of all Senior
Indebtedness at the time outstanding and to the payment of all securities issued
in exchange therefor to Senior Lender at the time outstanding), shall be
received by Holder during the continuance of any event specified in Sections
8(b)(i) or 8(b)(ii) prohibiting such payment and before all Senior Indebtedness
is paid in full in cash and/or canceled (as may be appropriate), or provision
made for its payment to the reasonable satisfaction of Senior Lender of the
Senior Indebtedness, such payment or distribution (subject to Section 8(e))
shall be immediately paid by Holder over to Senior Lender for application to the
payment of such Senior Indebtedness until all such Senior Indebtedness shall
have been paid in full in cash, after giving effect to any concurrent payment or
distribution, or provision therefor, to Senior Lender.

         (iv) Subject to the payment in full in cash and/or cancellation (as may
be appropriate) of all Senior Indebtedness and the irrevocable and complete
termination of all commitments and obligations to issue or fund any Senior
Indebtedness (and not before such time), Holder shall be subrogated to all
rights of Senior Lender to receive payments or distributions of cash, property
or securities (other than securities upon conversion or issuance under this
Debenture) of the Company applicable to the Senior Indebtedness until this
Debenture and all other obligations owed to Holder by the Company shall be paid
in full; and, for purposes of such subrogation, no payments or distributions to
Senior Lender of cash, property or securities distributable or paid over to
Senior Lender under the provisions hereof to which Holder would be entitled
except for the provisions of this Section 8 shall, as between the Company, its
creditors other than Senior Lender, and Holder, be deemed to be a payment by the
Company to or account of the Senior Indebtedness, it being understood that the
provisions of this Section 8 are and are intended solely for the purpose of
defining the relative rights of Holder and Senior Lender.

         (v) Nothing contained in this Section 8 or elsewhere in this Debenture
is intended to or shall impair, as between the Company, its creditors other than
Senior Lender (and the persons and entities committed or obligated to issue or
fund any Senior Indebtedness), and Holder, the obligation of the Company, which
is absolute and unconditional, to pay to Holder the principal and interest
hereon and other payments required hereby (and to honor all conversions and


21
<PAGE>
issuances of securities under this Debenture), as and when the same shall become
due and payable in accordance with the terms hereof, or is intended to or shall
affect the relative rights of Holder and other creditors of the Company other
than Senior Lender (and the persons and entities committed or obligated to issue
or fund any Senior Indebtedness), nor shall anything in this Debenture, except
to the extent provided below, prevent Holder from exercising all remedies
otherwise permitted by applicable law upon the happening of any Event of Default
under this Debenture, subject to the rights, if any, under this Section 8 of
Senior Lender (and the persons and entities committed or obligated to issue or
fund any Senior Indebtedness) in respect of cash, property or securities of the
Company received upon the exercise of any such remedy.

         (vi) Except as otherwise provided below, unless and until the Senior
Indebtedness has been paid and discharged in full in cash, the Holder shall not,
without the prior written consent of Senior Lender, which Senior Lender may give
or withhold in its sole discretion, directly or indirectly take any of the
following actions (each an "Enforcement Action"):

                           (A) Commence any lawsuit or legal proceeding against
                  the Company to collect the Junior Indebtedness;

                           (B) Seek to attach any asset of the Company, or seek
                  the appointment of a liquidator, trustee, conservator,
                  receiver, keeper or custodian for the Company or any of its
                  assets;

                           (C) Commence or join in the commencement of
                  involuntary bankruptcy or insolvency proceedings against the
                  Company unless failure to join could materially prejudice
                  Holder's rights in such proceeding; or

                           (D) Take any other enforcement action against the
                  Company with respect to the Junior Indebtedness;

provided, however, that, if an Event of Default under this Debenture shall have
occurred and be continuing (or Holder is otherwise entitled to enforce any
rights hereunder, including its right to receive liquidated damages or Late
Fees) and so long as Holder has not received written notice from the Senior
Lender that a Senior Default has occurred or is continuing or there is no
Designated Senior Excess Availability, which notice shall include the basis
therefor (any such written notice a "Standstill Notice"), then the Holder may,
to the extent the Holder is legally entitled to do so, undertake any Enforcement
Action; provided, further, however, that if Holder has received a Standstill
Notice, then for a period commencing on the date of the receipt by Holder of the
Standstill Notice and ending on the earliest of (a) the waiver of the Senior
Default, (b) the receipt by Holder of the written consent of Senior Lender, or
(c) the date that is 180 days immediately following Holder's receipt of the
Standstill Notice, Holder shall not take any Enforcement Action except and to
the extent the Holder is permitted, pursuant to Section 8(b)(ii) above, to
demand and receive liquidated damages and Late Fees under Section 8(b)(ii)
above.


22
<PAGE>
Notwithstanding anything in this Section 8 to the contrary, nothing herein shall
limit or restrict the Holder's right to continue any action commenced or taken
prior to receipt of a Standstill Notice to collect liquidated damages and Late
Fees and the proceeds representing liquidated damages and Late Fees received by
the Holder for any such action commenced or taken prior to receipt of such
Standstill Notice shall not be subrogated under this Section 8, provided that
the Holder's rights as described above in this sentence shall not be effective
if the Senior Lender has accelerated the Senior Indebtedness, nor shall limit or
restrict the Holder's rights to file proofs of claim against the Company in any
proceeding described in sub-clause (B) or (C) above, with copies thereof being
sent to the Senior Lender promptly after such filing.

         (vii) The Company shall give prompt written notice to Holder of any
Senior Default or any insolvency, bankruptcy, liquidation, reorganization,
readjustment, composition, dissolution, assignment, marshalling of assets or
similar proceedings of the Company within the meaning of this Section 8.

         Upon any payment or distribution of assets of the Company referred to
in this Section 8, Holder shall be entitled to rely upon any order or decree
made by any court of competent jurisdiction in which such dissolution, winding
up, liquidation or reorganization proceedings are pending or a certificate of
the liquidating trustee or agent or other person making any distribution to
Holder for the purpose of ascertaining the persons entitled to participate in
such distribution, Senior Lender and other indebtedness of the Company, the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Section 8.

         (viii) Except as expressly provided herein, the Senior Lender may, at
any time and from time to time, without impairing or releasing the subordination
herein made, change the manner, place or terms of payment, or change or extend
the time of payment of or renew, increase the amount of or alter the Senior
Indebtedness or the commitment or obligation to issue or fund any Senior
Indebtedness, or amend or supplement in any manner any instrument evidencing the
Senior Indebtedness or the commitment or obligation to issue or fund any Senior
Indebtedness, any agreement pursuant to which the Senior Indebtedness was issued
or incurred or any instrument securing or relating to the Senior Indebtedness or
the commitment or obligation to issue or fund any Senior Indebtedness; release
any person liable in any manner for the payment or collection of the Senior
Indebtedness; exercise or refrain from exercising any rights in respect of the
Senior Indebtedness against the Company or any other person; apply any money or
other property paid by any person or released in any manner to the Senior
Indebtedness; accept or release any security for the Senior Indebtedness; sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; or exercise or refrain from exercising
any rights against the Company or any other person, provided, however, that the
Senior Lender and the Company shall not, without the prior written consent of
the Holder, increase the principal amount of the Senior Indebtedness above
$14,000,000; all without thereby impairing in any respect the rights of the
Senior Lender as provided in this Section 8.


23
<PAGE>
         (ix) Notwithstanding anything to the contrary in any other agreement to
which Holder is a party or of which Holder is a beneficiary, Holder agrees and
acknowledges that, subject to the terms of this Debenture:

                           (A) Holder shall not take any security interest in,
                  mortgage, pledge, assignment or transfer of any properties of
                  the Company, or any other person to secure or satisfy any of
                  the Junior Indebtedness;

                           (B) Holder shall not take any action to challenge the
                  validity, enforceability, amount or priority of the Senior
                  Liens, or induce any other entity to take such an action or
                  cooperate with any other entity in taking such an action;

                           (C) Holder has no right to direct Senior Lender to
                  exercise any right, remedy or power with respect to the
                  collateral securing the Senior Debt and Senior Lender shall be
                  free to take all actions whatsoever in respect of such
                  collateral without consent of Holder; and

                           (D) Holder will not institute any Enforcement Action
                  against Senior Lender seeking damages from it, or other
                  relief, by way of specific performance, injunction or
                  otherwise, with respect to any action with respect to the
                  collateral securing the Senior Indebtedness taken or omitted
                  by Senior Lender in accordance with the provisions of this
                  Section 8

         (xi) Without limiting the foregoing, Holder hereby expressly and
unconditionally waives any right to affect the order or manner in which Senior
Lender exercises its remedies (whether at law, in equity or pursuant to any
agreement with the Company or any other party) or the selection of property
against which Senior Lender exercises its remedies, and knowingly waives and
disclaims the benefit of any provision of law or equity affording to Holder
(directly or as third party beneficiary) any such right. In particular, Holder
knowingly waives and disclaims the benefits of any principle of "election of
remedies" or marshalling and acknowledges that Senior Lender's remedies are
cumulative.

         (c) Notices to Other Lender; Right to Cure Senior Payment Default.

         (i) Senior Lender shall notify Holder of: (i) any Senior Payment
Default concurrently with Senior Lender's notification to the Company; (ii)
Senior Lender's commencement of its exercise of remedies following any Senior
Default; (iii) any increase in the Maximum Revolver Amount (as defined in the
Senior Loan Documents); or (iv) the creation of any other credit facility for
the Company not contemplated by the Senior Loan Documents.

         (ii) Holder shall notify Senior Lender in writing of any default or
Event of Default under this Debenture concurrently with Holder's notification to
the Company.


24
<PAGE>
         (iii) Senior Lender will allow Holder, at Holder's option, within 5
days following notice to Holder of a Senior Payment Default, to cure said Senior
Payment Default by paying to Senior Lender, in cash, the Senior Indebtedness in
full, including without limitation the Applicable Prepayment Premium (as such
term is defined in the Senior Loan Documents); provided, however, that Holder's
cure shall consist only of payment of all sums due under the Senior Loan
Documents prior to acceleration of the Senior Indebtedness by Senior Lender if
and only if Senior Lender has not, prior to receipt of such cure payment from
Holder, accelerated the Senior Indebtedness.

         (d) No Waiver of Subordination Provision. No right of Senior Lender to
enforce subordination, as herein provided, shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, by Senior Lender, or by any noncompliance by
the Company with the terms, provisions and covenants of this Debenture,
regardless of any knowledge thereof that Senior Lender may have or be otherwise
charged with.

         (e) Payments to Holder. Nothing contained in this Section 8 or
elsewhere in this Debenture, shall, however, affect the obligation of the
Company to make, or prevent the Company from making, at any time, except as
provided in Section 8(b), payments of principal of or premium, if any, or
interest on, and other payments due under this Debenture.

         (f) Authorization of Holder to the Company. Holder by its acceptance
hereof irrevocably authorizes and directs the Company on its behalf to take such
action as may be necessary or appropriate to effectuate the subordination
provided in this Section 8 and appoints the Company its attorney-in-fact for
such purpose. This authorization and appointment shall be effective only after
the Senior Lender has requested in writing, copy to the Company, the Holder to
take such necessary or appropriate action and Holder has failed to take such
action for a period of not less than five business days, and Senior Lender has
so notified the Company in writing, copy to the Holder, of such request and
failure.

         (g) Securities Issuable to Holder. Notwithstanding anything herein to
the contrary, nothing herein shall restrict, delay or otherwise affect the
Holder's right to receive securities upon any conversion or issuance under this
Debenture.

         (h) All Provisions of Debenture Qualified by Section 8. Notwithstanding
anything herein contained to the contrary, all the provisions of this Debenture
shall, except as otherwise provided herein, be subject to the provisions of this
Section 8, so far as the same may be applicable thereto.

         (i) Definitions. For purposes of this Section 8 only, the following
terms have the indicated meanings:

         "Availability" shall be used as defined in the Senior Loan Agreement.


25
<PAGE>
         "Bankruptcy Code" shall mean the United States Bankruptcy Code, 11
United States Code 101 et seq., or any successor statute thereto.

         "Designated Senior Excess Availability" shall mean "Excess
Availability" of not less than $1,000,000.

         "Excess Availability" means the amount, as of the date of any
determination thereof is to be made, equal to Availability minus the aggregate
amount, if any, of all trade payables of Borrower aged in excess of historical
levels with respect thereto and all book overdrafts in excess of historical
practices with respect thereto, in each case as determined by Senior Lender in
its Permitted Discretion (as defined in the Senior Loan Documents).

         "Junior Indebtedness" shall mean the principal and interest heretofore
or hereafter evidenced pursuant to this Debenture.

         "Senior Default" shall mean an "Event of Default" as that term is
defined in the Senior Loan Documents.

         "Senior Payment Default" means any Senior Default consisting of a
failure to pay Senior Lender any portion of the Senior Indebtedness when due
following any applicable grace periods.

         "Senior Indebtedness" shall mean all "Obligations," as that term is
defined in the Senior Loan Documents, of Borrower now or hereafter due Senior
Lender together with any increases, refundings, refinancings, renewals,
rearrangements or extensions of and amendments, modifications and supplements
thereto.

         "Senior Lender" shall mean Foothill Capital Corporation, a California
corporation, and its successors and assigns, or Wells Fargo Bank N.A.

         "Senior Liens" shall mean, collectively, the liens and security
interests granted to Senior Lender pursuant to the terms of the Senior Loan
Documents.

         "Senior Loan Documents" means that certain Loan and Security Agreement,
between Borrower and Senior Lender, dated as of March 28, 2001, and the other
"Loan Documents" referred to and defined therein, as now in effect or hereafter
amended, restated, modified or supplemented from time to time, in accordance
with the provisions hereof, or any similar agreement between the Company and
Wells Fargo Bank N.A..

         Section 9. Company's Obligations. Except as expressly provided herein,
no provision of this Debenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, interest
and liquidated damages (if any) on, this Debenture at the time, place, and rate,
and in the coin or currency, herein prescribed. This


26
<PAGE>
Debenture is a direct obligation of the Company. This Debenture ranks pari passu
with all other Debentures now or hereafter issued under the terms set forth
herein. As long as this Debenture is outstanding, the Company shall not and
shall cause it subsidiaries not to, without the consent of the Holder, (i) amend
its certificate of incorporation, bylaws or other charter documents so as to
adversely affect any rights of the Holder; (ii) repay, repurchase or offer to
repay, repurchase or otherwise acquire shares of its Common Stock or other
equity securities other than as to the Conversion Shares to the extent permitted
or required under the Purchase Agreement or this Debenture; or (iii) enter into
any agreement with respect to any of the foregoing. THE COMPANY MAY ONLY
VOLUNTARILY PREPAY THE OUTSTANDING PRINCIPAL AMOUNT ON THE DEBENTURES IN
ACCORDANCE WITH SECTION 5 HEREOF.

         Section 10. Rights as Holder. This Debenture shall not entitle the
Holder to any of the rights of a stockholder of the Company, including without
limitation, the right to vote, to receive dividends and other distributions, or
to receive any notice of, or to attend, meetings of stockholders or any other
proceedings of the Company, unless and to the extent converted into shares of
Common Stock in accordance with the terms hereof.

         Section 11. Replacement Debentures. If this Debenture shall be
mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in
exchange and substitution for and upon cancellation of a mutilated Debenture, or
in lieu of or in substitution for a lost, stolen or destroyed debenture, a new
Debenture for the principal amount of this Debenture so mutilated, lost, stolen
or destroyed but only upon receipt of evidence of such loss, theft or
destruction of such Debenture, and of the ownership hereof, and indemnity, if
requested, all reasonably satisfactory to the Company.

         Section 12. Governing Law. This Debenture shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to conflicts of laws thereof. The Company and the Holder hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. Each of the Company and the Holder
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by receiving a copy thereof
sent to the Company at the address in effect for notices to it under this
instrument and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.

         Section 13. Waivers. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on


27
<PAGE>
one or more occasions shall not be considered a waiver or deprive that party of
the right thereafter to insist upon strict adherence to that term or any other
term of this Debenture. Any waiver must be in writing.

         Section 14. Severability. If any provision of this Debenture is
invalid, illegal or unenforceable, the balance of this Debenture shall remain in
effect, and if any provision is inapplicable to any person or circumstance, it
shall nevertheless remain applicable to all other persons and circumstances. If
it shall be found that any interest or other amount deemed interest due
hereunder shall violate applicable laws governing usury, the applicable rate of
interest due hereunder shall automatically be lowered to equal the maximum
permitted rate of interest. The Company covenants (to the extent that it may
lawfully do so) that it shall not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law or other law which would prohibit or forgive the Company from
paying all or any portion of the principal of or interest on the Debentures as
contemplated herein, wherever enacted, now or at any time hereafter in force, or
which may affect the covenants or the performance of this indenture, and the
Company (to the extent it may lawfully do so) hereby expressly waives all
benefits or advantage of any such law, and covenants that it will not, by resort
to any such law, hinder, delay or impeded the execution of any power herein
granted to the Holder, but will suffer and permit the execution of every such as
though no such law has been enacted.

         Section 15. Non Trading Days. Whenever any payment or other obligation
hereunder shall be due on a day other than a Trading Day, such payment shall be
made on the next succeeding Trading Day.

         Section 16. Headings. The headings used in this Debenture are used for
convenience only and are not to be considered in construing or interpreting this
Debenture.

         Section 17. Definitions. For the purposes hereof, the following terms
shall have the following meanings:

                  (a) "Alternate Conversion Price" shall have the meaning
         ascribed to such term in Section 4(a)(ii).

                  (b) "Buy In" shall have the meaning assigned to such term in
         Section 4(c)(iv).

                  (c) "Change of Control Transaction" means the occurrence of
         any of (i) an acquisition after the date hereof by an individual or
         legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated
         under the Exchange Act) of effective control (whether through legal or
         beneficial ownership of capital stock of the Company, by contract or
         otherwise) of in excess of 40% of the voting securities of the Company
         in a transaction or series of transactions not approved by the board of
         directors of the Company, (ii) a replacement at one time or over time
         of more than one-half of the members of the


28
<PAGE>
         Company's board of directors which is not approved by a majority of
         those individuals who are members of the board of directors on the date
         hereof (or by those individuals who are serving as members of the board
         of directors on any date whose nomination to the board of directors was
         approved by a majority of the members of the board of directors who are
         members on the date hereof), (iii) the consolidation or merger of the
         Company with or into another entity (other than a merger or
         consolidation of a subsidiary of the Company into the Company or the
         Company into a wholly-owned subsidiary of the Company) where (A) the
         shareholders of the Company immediately prior to such transaction do
         not collectively own at least 51% of the outstanding voting securities
         of the surviving corporation of such consolidation or merger
         immediately following such transaction or (B) the common stock of such
         surviving corporation is not listed for trading on the Nasdaq National
         Market System, the New York Stock Exchange or the American Stock
         Exchange immediately after the completion of such transaction, (iv) the
         sale of all or substantially all of the assets of the Company in one or
         a series of related transactions, or (v) the execution by the Company
         of an agreement to which the Company is a party or by which it is
         bound, providing for any of the events set forth above in (i), (ii),
         (iii) or (iv).

                  (d) "Conversion Date" shall have the meaning ascribed to such
         term in Section 4(c).

                  (e) "Conversion Notice" shall have the meaning ascribed to
         such term in Section 4(c).

                  (f) "Conversion Shares" means the shares of Common Stock
         issuable upon conversion of Debentures or as payment of interest in
         accordance with the terms hereof.

                  (g) "Debenture(s)" shall have the meanings ascribed to such
         terms in the opening paragraph of this Debenture.

                  (h) "Debenture Register" shall have the meaning ascribed to
         such term in the second opening paragraph of this Debenture.

                  (i) "Event of Default" shall have the meaning ascribed to such
         term in Section 3(a)

                  (j) "Holder" shall have the meaning ascribed to such term in
         second opening paragraph of this Debenture.

                  (k) "Mandatory Conversion" shall have the meaning ascribed to
         such term in Section 4(b).

                  (l) "Mandatory Conversion Date" shall have the meaning
         ascribed to such


29
<PAGE>
         term in Section 4(b).

                  (m) "Mandatory Redemption Amount" for any Debentures shall
         equal the sum of (i) the greater of (A) 120% of the principal amount of
         Debentures to be prepaid, plus all accrued and unpaid interest thereon,
         and (B) the principal amount of Debentures to be prepaid, plus all
         accrued and unpaid interest thereon, divided by the then applicable
         conversion price on the date of acceleration multiplied by the Closing
         Price on (x) the date the Mandatory Redemption Amount is demanded or
         otherwise due or (y) the date immediately prior to the date the
         Mandatory Redemption Amount is paid in full, whichever is greater, and
         (ii) all other amounts, costs, expenses and liquidated damages due in
         respect of such Debentures.

                  (n) "Maturity Date" shall have the meaning ascribed to such
         term in the second opening paragraph of this Debenture.

                  (o) "Maximum Aggregate Share Amount" shall have the meaning
         ascribed to such term in Section 4(d)(ii).

                  (p) "Notice Date" shall have the meaning ascribed to such term
         in Section 5(a).

                  (q) "Optional Redemption Notice" shall have the meaning
         ascribed to such term in Section 5(a).

                  (r) "Optional Redemption Price" shall have the meaning
         ascribed to such term in Section 5(a).

                  (s) "Original Issue Date" shall mean the date of the first
         issuance of the Debentures regardless of the number of transfers of any
         Debenture and regardless of the number of instruments which may be
         issued to evidence such Debenture.

                  (t) "Person" means a corporation, an association, a
         partnership, organization, a business, an individual, a government or
         political subdivision thereof or a governmental agency.

                  (u) "Purchase Agreement" Shall have the meaning ascribed to
         such term in the first paragraph of this Debenture.

                  (v) "Set Price" shall have the meaning ascribed to such term
         in Section 4(a)(i).

                  (w) "VWAP" shall mean the daily volume weighted average price
         of the Common Stock on the Principal Market as reported by Bloomberg
         Financial L.P. using the VAP function on the date in question.


30
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                             SIGNATURE PAGE FOLLOWS]




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                  IN WITNESS WHEREOF, the Company has caused this Debenture to
be duly executed by a duly authorized officer as of the date first above
indicated.

                                    CRAY INC.

                                    By:
                                       -----------------------------------------
                                       Name:
                                       Title:



                                                           Convertible Debenture
<PAGE>
                                    EXHIBIT A

                              NOTICE OF CONVERSION

(To be Executed by the Registered Holder
in order to Convert the Debenture)

The undersigned hereby elects to convert the attached Debenture into shares of
common stock, $.01 par value per share (the "Common Stock"), of Cray Inc. (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.

Conversion calculations:

                            Date to Effect Conversion

                            Principal Amount of Debentures to be Converted

                            Number of shares of Common Stock to be Issued

                            Conversion Price

                            Signature

                            Name

                            Address



                                      -33-

                                                           Convertible Debenture