Document:

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                                   Exhibit 4.2
                    Form of 12% Convertible Subordinated Note

                                   EXHIBIT "A"

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND IS TRANSFERABLE ONLY UPON THE CONDITIONS SPECIFIED IN THE NOTE AGREEMENT
REFERRED TO HEREIN.

               12% Convertible Subordinated Note Due June 30, 2005

                                                                   $____________

TERAFORCE TECHNOLOGY CORPORATION, a corporation duly organized and existing
under the laws of the State of Delaware (herein called the "Company") for value
received, hereby promises to pay to ___________________________ or registered
assigns, the principal sum of ___________________________Dollars ($_______) and
all accrued interest on June 30, 2005, at 12% per annum, from the date of
issuance of this Note, and upon prepayment hereof, as provided in the Note
Agreement, until the principal hereof is paid or made available for payment.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.

Payment of the principal of and interest on this Note will be made at the
offices or agencies of the Company maintained for that purpose in Richardson,
Texas, and at any other office or agency maintained by the Company for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that at the option of the Company payment of interest may be made by
check mailed to the address of the person entitled thereto as such address shall
appear in the Note register. The Company may prepay the Note without penalty at
any time, provided that the Company gives the Noteholder written notice not less
than 30 days and not more than 60 days prior to the Optional Prepayment Date

This Note is one of a duly authorized issue of Notes of the Company (which term
includes any successor corporation under the Note Agreement hereinafter referred
to) designated as its 12% Subordinated Notes due June 30, 2005 (the "Notes"),
limited in aggregate principal amount of up to $2,000,000, issued pursuant to a
Note Agreement, dated as of July 3, 2003 (the "Note Agreement"), between the
Company and the purchasers of the Notes. The terms of this Note include those
stated in the Note Agreement. Reference is hereby made to the Note Agreement and
all supplements thereto for a statement of the respective rights, limitations of
rights, duties and immunities thereunder of the Company, and the holders of the
Notes and of the terms upon which the Notes are, and are to be, and delivered.

If an Event of Default shall occur and be continuing, the principal of all the
Notes may be declared due and payable in the manner and with the effect provided
in the Note Agreement.

The indebtedness evidenced by the Notes is, to the extent provided in the Note
Agreement, subordinate and junior in right of payment to the prior payment in
full of all Senior Indebtedness, as defined in the Note Agreement. Each holder
of this Note, by accepting the same, agrees to and shall be bound by such
provisions of the Note Agreement.

The Note Agreement permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the holders under the Note Agreement at any time by
the Company with the consent of the holders of 51% in aggregate principal amount
of the Notes at the time outstanding. The Note Agreement also contains
provisions permitting the holders of 51 % or more in aggregate principal amount
of the Notes at the time outstanding, on behalf of the holders of all the Notes,
to waive compliance by the Company with certain provisions of the Note Agreement
and certain past defaults under the Note Agreement and their consequences. Any
such

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consent or waiver by the holder of this Note shall be conclusive and binding
upon such holder and upon all future holders of this Note and of any Note issued
upon the registration of transfer hereof or in exchange herefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Note.

No reference herein to the Note Agreement and no provision of this Note or of
the Note Agreement shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this Note at
the times, places and rate, and in the coin or currency, herein prescribed.

As provided in the Note Agreement and subject to certain limitations therein set
forth, the transfer of this Note is registrable in the Note register, upon
surrender of this Note or registration of transfer at the offices or agencies of
the Company in Richardson, Texas duly endorsed by, or accompanied by a written
instrument of transfer in substantially the form accompanying this Note duly
executed by, the holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Notes, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.

As provided in the Note Agreement and subject to certain limitations therein set
forth, the Notes are exchangeable for a like aggregate principal amount of Notes
of a different authorized denomination, as requested by the holder surrendering
the same.

Prior to due presentment of this Note for registration of transfer, the Company,
and any agent of the Company may treat the person in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note be
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.

All terms used in this Note which are defined in the Note Agreement shall have
the meanings assigned to them in the Note Agreement. The Company will furnish to
any Note holder of record upon written request without charge a copy of the Note
Agreement. Requests may be made to the Company at 1240 E. Campbell, Richardson,
Texas 75081 (which address shall be subject to the change of address provisions
of the Note Agreement).

         IN WITNESS WHEREOF, TERAFORCE TECHNOLOGY CORPORATION has caused this
instrument to be executed in its corporate name.

Dated: July 3, 2003

Teraforce Technology Corporation

By:_____________________________
   Herman M. Frietsch, President

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                                   Exhibit 4.3
                            Form of Warrant Agreement

                                WARRANT AGREEMENT

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED
("ACT") OR APPLICABLE STATE SECURITIES LAWS ("STATE ACTS") AND SHALL NOT BE
SOLD, PLEDGED, HYPOTHECATED, DONATED, OR OTHERWISE TRANSFERRED (WHETHER OR NOT
FOR CONSIDERATION) BY THE HOLDER EXCEPT UPON THE ISSUANCE TO THE COMPANY OF AN
OPINION OF COUNSEL OR SUBMISSION TO THE COMPANY OF SUCH EVIDENCE AS MAY BE
SATISFACTORY TO COUNSEL TO THE COMPANY, IN EACH SUCH CASE, TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND THE STATE ACTS.

            WARRANT TO PURCHASE _____________ SHARES OF COMMON STOCK

                        TERAFORCE TECHNOLOGY CORPORATION
                            (a Delaware corporation)
                              1240 E. Campbell Road
                             Richardson, Texas 75081

                     Not Transferable or Exercisable Except
                        upon Conditions Herein Specified

         TERAFORCE TECHNOLOGY CORPORATION, a Delaware corporation ("Company"),
hereby certifies that _________________, its registered successors and permitted
assigns registered on the books of the Company maintained for such purposes, as
the registered holder hereof ("Holder"), for value received, is entitled to
purchase from the Company, _____________________ shares of Common Stock of the
Company, $.01 par value ("Shares" or "Common Stock") at the purchase price per
share set forth in Section 1(b) below. The number of shares of Common Stock
purchasable upon exercise of the Warrants is subject to adjustment as provided
in Section 5 below. This Warrant has been issued in consideration of an
investment in the Company by you pursuant to a Private Placement Memorandum
dated May 27, 2003, as amended.

         1.       Exercise of Warrants.

         (a)      Subject to subsection (b) of this Section 1, upon presentation
and surrender of this Warrant Agreement, with the attached Purchase Form duly
executed, at the principal office of the Company, or at such other place as the
Company may designate by notice to the Holder hereof, together with a certified
or bank cashier's check payable to the order of the Company in the amount of the
Exercise Price times the number of Shares being purchased (or in the case of
exercise pursuant to Section 1(c)(i) or (ii), as set forth in such sections),
the Company shall deliver to the Holder hereof, as promptly as practicable,
certificates representing the Shares being purchased. This Warrant may be
exercised in whole or in part; and, in case of exercise hereof in part only, the
Company, upon surrender hereof, will deliver to the Holder a new Warrant
Agreement or Warrant Agreements of like tenor entitling the Holder to purchase
the number of Shares as to which this Warrant has not been exercised.

         (b)      This Warrant may be exercised at a price of $0.16 per share
(the "Exercise Price"); provided however, that the Exercise Price shall be
subject to adjustment pursuant to Section 6(b). The Warrant shall expire upon
the close of business ____________, 2007.

         (c)      The Exercise Price shall be payable at the time of exercise.
The Exercise Price may be paid in cash (by cashiers' check) or by: (i) surrender
of shares of Common Stock of the Company already owned by the Holder, having a
Market Price (as defined below) equal to the Exercise Price per share; or (ii)
upon surrender of the Warrant at the principal office of the Company together
with notice of election,

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in which event the Company shall issue Holder a number of Shares computed using
the following formula:

                  X = Y (A-B)/A

where:                     X = the number of Shares to be issued to Holder (not
                  to exceed the number of Shares set forth on the cover page of
                  this Warrant Agreement, as adjusted pursuant to the provisions
                  of Section 6 of this Warrant Agreement).

                  Y = the number of Shares for which the Warrant is being
exercised.

                  A = the Market Price of one Share (for purposes of this
                  Section 1(c)), the "Market Price" shall be defined as the
                  average closing price on the exchange on which the Common
                  Stock trades for the five trading days prior to the date of
                  exercise of this Warrant Agreement; provided if the Common
                  Stock does not trade on any exchange, the Market Price shall
                  equal the average closing bid price in the over-the-counter
                  market for the five trading days prior to the date of exercise
                  of this Warrant Agreement, as reported by the National
                  Association of Securities Dealers Automated Quotation System;
                  and, provided further, that if the common stock is not quoted
                  or listed by any organization, the fair value of the common
                  stock, as determined by the Board of Directors of the Company,
                  whose determination shall be conclusive, shall be used).

                  B = the Exercise Price.

         2.       Exchange and Transfer of Warrant.

         At any time prior to the exercise hereof, upon presentation and
surrender to the Company, this Warrant (a) may be exchanged, alone or with other
Warrants of like tenor registered in the name of the Holder, for another Warrant
or other Warrants of like tenor in the name of such Holder exercisable for the
same aggregate number of Shares as the Warrant or Warrants surrendered, but (b)
may not be sold, transferred, hypothecated, or assigned, in whole or in part,
without the prior written consent of the Company.

         3.       Rights and Obligations of Warrant Holder.

         (a)      The Holder of this Warrant Agreement shall not, by virtue
hereof, be entitled to any rights of a stockholder in the Company, either at law
or in equity; provided, however, that in the event that any certificate
representing the Shares is issued to the Holder hereof upon exercise of this
Warrant, such Holder shall, for all purposes, be deemed to have become the
holder of record of such Shares on the date on which this Warrant Agreement,
together with a duly executed Purchase Form, was surrendered and payment of the
Exercise Price was made, irrespective of the date of delivery of such Share
certificate. The rights of the Holder of this Warrant are limited to those
expressed herein and the Holder of this Warrant, by his acceptance hereof,
consents to and agrees to be bound by and to comply with all the provisions of
this Warrant Agreement, including, without limitation, all the obligations
imposed upon the Holder hereof by Sections 2 and 5 hereof. In addition, the
Holder of this Warrant Agreement, by accepting the same, agrees that the Company
may deem and treat the person in whose name this Warrant Agreement is registered
on the books of the Company maintained for such purposes as the absolute, true
and lawful owner for all purposes whatsoever, notwithstanding any notation of
ownership or other writing thereon, and the Company shall not be affected by any
notice to the contrary.

         (b)      No Holder of this Warrant Agreement shall be entitled to vote
or receive dividends or to be deemed the holder of Shares for any purpose, nor
shall anything contained in this Warrant Agreement be construed to confer upon
any Holder of this Warrant Agreement any of the rights of a stockholder of the
Company or any right to vote, give or withhold consent to any action by the
Company, whether upon any recapitalization, issue of stock, reclassification of
stock, consolidation, merger, conveyance or

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otherwise, receive notice of meetings or other action affecting stockholders
(except for notices provided for herein), receive dividends, subscription
rights, or otherwise, until this Warrant shall have been exercised and the
Shares purchasable upon the exercise thereof shall have become deliverable as
provided herein; provided, however, that any such exercise on any date when the
stock transfer books of the Company shall be closed shall constitute the person
in whose name the certificate for those Shares are to be issued as the record
holder thereof for all purposes at the opening of business on the next
succeeding day on which such stock transfer books are open, and the Warrant
surrendered shall not be deemed to have been exercised, in whole or in part as
the case may be, until the next succeeding day on which stock transfer books are
open for the purpose of determining entitlement to dividends on the Company's
common stock.

         4.       Shares Underlying Warrant.

         The Company covenants and agrees that all Shares delivered upon
exercise of this Warrant shall, upon delivery and payment therefor, be duly and
validly authorized and issued, fully paid and non-assessable, and free from all
stamp taxes, liens and charges with respect to the purchase thereof.

         5.       Representations and Warranties of Holder; Disposition of
Warrant or Shares; Registration Rights.

         (a)      The Holder acknowledges that it has had access to all material
information concerning the Company which it has requested. The Holder also
acknowledges that it has had the opportunity to, and has to its satisfaction,
questioned the officers of the Company with respect to this Warrant. The Holder
is purchasing the Warrant and any Common Stock issued upon exercise thereof for
investment for its own account only and not with a view to, or for resale in
connection with, any "distribution" thereof in violation of the Act or State
Acts. The Holder further represents that it understands that the Warrant and
Common Stock to be issued upon exercise thereof have not been registered under
the Act or State Acts by reason of specific exemptions therefrom, which
exemptions depend upon, among other things, the bona fide nature of the Holder's
investment intent as expressed herein. The Holder is an "accredited investor" as
defined in Regulation D promulgated under the Act.

         (b)      The Holder of this Warrant Agreement and any transferee hereof
or of the Shares issuable upon the exercise of the Warrant Agreement, by their
acceptance hereof, hereby understand and agree that the Warrant, and the Shares
issuable upon the exercise hereof, have not been registered under either the Act
or State Acts and shall not be sold, pledged, hypothecated, or otherwise
transferred (whether or not for consideration) except upon the issuance to the
Company of an opinion of counsel favorable to the Company or its counsel or
submission to the Company of such evidence as may be satisfactory to the Company
or its counsel, in each such case, to the effect that any such transfer shall
not be in violation of the Act or the State Acts. It shall be a condition to the
transfer of this Warrant that any transferee of this Warrant deliver to the
Company his written agreement to accept and be bound by all of the terms and
conditions of this Warrant Agreement.

         (c)      The stock certificates of the Company that will evidence the
shares of Common Stock with respect to which this Warrant may be exercisable
will be imprinted with a conspicuous legend in substantially the following form:

                  "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
                  REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933 ("ACT") OR
                  THE SECURITIES LAWS OF ANY STATE ("STATE ACTS"). SUCH
                  SECURITIES SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, OR
                  OTHERWISE TRANSFERRED (WHETHER OR NOT FOR CONSIDERATION) AT
                  ANY TIME WHATSOEVER EXCEPT UPON REGISTRATION OR UPON DELIVERY
                  TO THE COMPANY OF AN OPINION OF ITS COUNSEL SATISFACTORY TO
                  THE COMPANY OR ITS COUNSEL THAT REGISTRATION IS NOT REQUIRED
                  FOR SUCH TRANSFER OR THE SUBMISSION OF SUCH OTHER EVIDENCE AS
                  MAY BE SATISFACTORY TO THE COMPANY OR ITS COUNSEL

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                  TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION
                  OF THE ACT, STATE ACTS OR ANY RULE OR REGULATION PROMULGATED
                  THEREUNDER."

         (d)      The Company has granted Holder registration rights to the
shares underlying this Warrant, as set forth in the Registration Rights
Agreement between the Company and the Holder dated ___________, 2003.

         6.       Adjustments.

         The number of Shares purchasable upon the exercise of each Warrant is
subject to adjustment from time to time upon the occurrence of any of the events
enumerated below:

         (a)      If at any time after the date of this Warrant and so long as
this Warrant is outstanding, there is (i) a stock split, stock dividend,
subdivision, or similar distribution with respect to the Common Stock, (ii) a
combination of the Common Stock, or (iii) a sale or issuance of Common Stock, or
exchangeable for its Common Stock, or any rights, options or warrants to
subscribe for or to purchase of its Common Stock, then, in such event, the
Exercise Price shall be adjusted in accordance with (b) below.

         (b)      Immediately upon the effective date of any event requiring
adjustment pursuant to (a), the Company shall adjust the Exercise Price then in
effect (to the nearest whole cent) as follows:

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                  (i)      IF THE COMPANY (A) SHALL PAY A STOCK DIVIDEND OR
         OTHERWISE MAKE A DISTRIBUTION OR DISTRIBUTIONS ON SHARES OF ITS COMMON
         STOCK PAYABLE IN SHARES OF COMMON STOCK, (B) SUBDIVIDE OUTSTANDING
         SHARES OF COMMON STOCK INTO A LARGER NUMBER OF SHARES, (C) COMBINE
         OUTSTANDING SHARES OF COMMON STOCK INTO A SMALLER NUMBER OF SHARES, OR
         (D) ISSUE BY RECLASSIFICATION OF SHARES OF COMMON STOCK ANY SHARES OF
         CAPITAL STOCK OF THE COMPANY, THE EXERCISE 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 SUBPARAGRAPH (i) 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)     IF THE COMPANY SHALL DISTRIBUTE TO ALL HOLDERS OF
         COMMON STOCK EVIDENCES OF ITS INDEBTEDNESS OR ASSETS OR RIGHTS OR
         WARRANTS TO SUBSCRIBE FOR OR PURCHASE ANY SECURITY (EXCLUDING THOSE
         REFERRED TO IN SUBPARAGRAPH (i) ABOVE), THEN IN EACH SUCH CASE THE
         EXERCISE PRICE SHALL BE DETERMINED BY MULTIPLYING THE EXERCISE 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 MARKET PRICE OF COMMON STOCK
         DETERMINED AS OF THE RECORD DATE MENTIONED ABOVE, AND OF WHICH THE
         NUMERATOR SHALL BE SUCH MARKET PRICE OF THE COMMON STOCK 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 COMMON STOCK AS DETERMINED BY THE COMPANY'S
         BOARD OF DIRECTORS IN GOOD FAITH; PROVIDED, HOWEVER, THAT IF THE HOLDER
         DISPUTES SUCH AMOUNT, THE HOLDER MAY SELECT A NATIONALLY RECOGNIZED OR
         MAJOR REGIONAL INVESTMENT BANKING FIRM OR FIRM OF INDEPENDENT CERTIFIED
         PUBLIC ACCOUNTANTS OF RECOGNIZED STANDING (AN "APPRAISER") PAID FOR BY
         THE HOLDER AND THE COMPANY EQUALLY, IN WHICH CASE THE FAIR MARKET VALUE
         SHALL BE EQUAL TO THE AVERAGE OF THE DETERMINATIONS BY THE COMPANY'S
         BOARD OF DIRECTORS AND SUCH APPRAISER. 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.

                  (iii)    In case the Company (A) consolidates with or merges
         into any other entity and is not the continuing or surviving entity of
         such consolidation or merger, or (B) permits any other entity to
         consolidate with or merge into the Company and the Company is the
         continuing or surviving Company but, in connection with such
         consolidation or merger, the Common Stock is changed into or exchanged
         for common stock or other securities of any other entity or cash or any
         other assets, or (C) transfers all or substantially all of its
         properties and assets to any other entity, or (D) effects a
         reorganization or reclassification of the equity of the Company in such
         a way that holders of Common Stock shall be entitled to receive stock,
         securities, cash or assets with respect to or in exchange for Common
         Stock, then, and in each such case, proper provision shall be made so
         that, upon the exercise of the Warrant at any time after the
         consummation of such consolidation, merger, transfer, reorganization or
         reclassification, the Holder shall be entitled to receive (at the
         Exercise Price in effect for Common Stock issuable upon such exercise
         of the Warrant immediately prior to such consummation), in lieu of
         Common Stock issuable upon such exercise of the Warrant prior to such
         consummation, the stock and other securities, cash and assets to which
         the Holder would have been entitled upon such consummation if such
         Holder had so exercised the Warrant immediately prior thereto.

                  (iv)     In the event that the Company issues or sells any
         Common Stock or securities which are convertible into or exchangeable
         for its Common Stock, or any rights, options or warrants to subscribe
         for or to purchase its Common Stock for "Consideration" (as defined
         below) at a price per share ("Per Share Selling Price") which is less
         than the Exercise Price in effect immediately prior to the time of such
         issue or sale, then the Exercise Price shall be adjusted

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         downward to equal such lower Per Share Selling Price effective
         concurrently with such issue or sale. Notwithstanding the foregoing,
         the foregoing adjustments shall not apply to the issuance of (A) shares
         of Common Stock upon exercise of rights, options, warrants and other
         convertible securities outstanding on the date of this Warrant and have
         been disclosed in the Company's Form 10-K for fiscal year ended
         December 31, 2002 and the Company's Form 10-Q for the quarter ended
         March 31, 2003, or (B) shares of Common Stock issued upon the exercise
         of stock options granted pursuant to the Company's employee stock
         option plan in effect from time to time (and as amended if approved by
         the stockholders of the Company).

         For purposes of this subparagraph (iv), the following provisions will
be applicable:

                           (V)      In the case of an issue or sale for cash of
                  shares of Common Stock, the "Consideration" received by the
                  Company therefor shall be deemed to be the amount of cash
                  received, before deducting therefrom any commissions or
                  expenses paid by the Company.

                           (W)      In case of the issuance (otherwise than upon
                  conversion or exchange of obligations or shares of stock of
                  the Company) of additional shares of Common Stock for a
                  consideration other than cash or a consideration partly other
                  than cash, the amount of the consideration other than cash
                  received by the Company for such shares shall be deemed to be
                  the fair value of such consideration as determined in good
                  faith by the Company's board of directors.

                           (X)      In the case of the issuance by the Company
                  in any manner of any rights to subscribe for or to purchase
                  shares of Common Stock, or any options for the purchase of
                  shares of Common Stock or stock convertible into Common Stock,
                  all shares of Common Stock or stock convertible into Common
                  Stock to which the holders of such rights or options shall be
                  entitled to subscribe for or purchase pursuant to such rights
                  or options shall be deemed to be outstanding as of the date of
                  the offering of such rights or the granting of such options,
                  as the case may be, and the minimum aggregate consideration
                  named in such rights or options for the shares of Common Stock
                  or stock convertible into Common Stock covered thereby, plus
                  the consideration, if any, received by the Company for such
                  rights or options, shall be deemed to be the "Consideration"
                  received by the Company (as of the date of the offering of
                  such rights or the granting of such options, as the case may
                  be) for the issuance of such shares.

                           (Y)      In case of the issuance or issuances by the
                  Company in any manner of any obligations or of any shares of
                  stock of the Company that shall be convertible into or
                  exchangeable for Common Stock, all shares of Common Stock
                  issuable upon the conversion or exchange of such obligations
                  or shares shall be deemed to be issued as of the date such
                  obligations or shares are issued, and the amount of the
                  "Consideration" received by the Company for such additional
                  shares of Common Stock shall be deemed to be the total of (x)
                  the amount of consideration received by the Company upon the
                  issuance of such obligations or shares, as the case may be,
                  plus (y) the minimum aggregate consideration, if any, other
                  than such obligations or shares, receivable by the Company
                  upon such conversion or exchange, except in adjustment of
                  dividends.

                           (Z)      The amount of the "Consideration" received
                  by the Company upon the issuance of any rights or options
                  referred to in subparagraph (X) above or upon the issuance of
                  any obligations or shares which are convertible or
                  exchangeable as described in subparagraph (Y) above, and the
                  amount of the consideration, if any, other than such
                  obligations or shares so convertible or exchangeable,
                  receivable by the Company upon the exercise, conversion or
                  exchange thereof shall be determined in the same manner
                  provided in subparagraphs (V) and (W) above with respect to
                  the consideration received by the Company in case of the
                  issuance of additional shares of Common Stock; provided,

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                  however, that if such obligations or shares of stock so
                  convertible or exchangeable are issued in payment or
                  satisfaction of any dividend upon any stock of the Company
                  other than Common Stock, the amount of the "Consideration"
                  received by the Company upon the original issuance of such
                  obligations or shares of stock so convertible or exchangeable
                  shall be deemed to be the value of such obligations or shares
                  of stock, as of the date of the adoption of the resolution
                  declaring such dividend, as determined by the board of
                  directors as of that date. Upon the expiration of any rights
                  or options referred to in subparagraph (X), or the termination
                  of any right of conversion or exchange referred to in
                  subparagraph (Y), or any change in the number of shares of
                  Common Stock deliverable upon exercise of such options or
                  rights or upon conversion of or exchange of such convertible
                  or exchangeable securities, the Exercise Price then in effect
                  shall forthwith be readjusted to such Exercise Price as would
                  have obtained had the adjustments made upon the issuance of
                  such options, rights or convertible or exchangeable securities
                  been made upon the basis of the delivery of only the number of
                  shares of Common Stock actually delivered or to be delivered
                  upon the exercise of such rights or options or upon the
                  conversion or exchange of such securities.

         (c)      Upon each adjustment of the Exercise Price pursuant to (b)
above, the Warrant outstanding prior to such adjustment in the Exercise Price
shall thereafter evidence the right to purchase, at the adjusted Exercise Price,
that number of shares of Common Stock (calculated to the nearest hundredth)
obtained by (i) multiplying the number of shares of Common Stock issuable upon
exercise of the Warrant prior to adjustment of the number of shares of Common
Stock by the Exercise Price in effect prior to adjustment of the Exercise Price
and (ii) dividing the product so obtained by the Exercise Price in effect after
such adjustment of the exercise price.

         (d)      In case the Company (i) consolidates with or merges into any
other entity and is not the continuing or surviving entity of such consolidation
or merger, or (ii) permits any other entity to consolidate with or merge into
the Company and the Company is the continuing or surviving Company but, in
connection with such consolidation or merger, the Common Stock is changed into
or exchanged for common stock or other securities of any other entity or cash or
any other assets, or (iii) transfers all or substantially all of its properties
and assets to any other entity, or (iv) effects a reorganization or
reclassification of the equity of the Company in such a way that holders of
Common Stock shall be entitled to receive stock, securities, cash or assets with
respect to or in exchange for Common Stock, then, and in each such case, proper
provision shall be made so that, upon the exercise of this Warrant at any time
after the consummation of such consolidation, merger, transfer, reorganization
or reclassification, the Holder shall be entitled to receive (at the aggregate
Exercise Price in effect for Common Stock issuable upon such exercise of this
Warrant immediately prior to such consummation), in lieu of Common Stock
issuable upon such exercise of this Warrant prior to such consummation, the
stock and other securities, cash and assets to which such Holder would have been
entitled upon such consummation if such Holder had so exercised this Warrant
immediately prior thereto.

         7.       Loss or Destruction.

         Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant Agreement and, in the case of
any such loss, theft or destruction, upon delivery of an indemnity agreement or
bond satisfactory in form, substance and amount to the Company or, in the case
of any such mutilation, upon surrender and cancellation of this Warrant
Agreement, the Company will execute and deliver, in lieu thereof, a new Warrant
Agreement of like tenor.

         8.       Survival.

         The various representations, warranties, rights and obligations of the
Holder hereof as set forth herein shall survive the exercise of the Warrants
represented hereby and the surrender of this Warrant Agreement.

                                       7

<PAGE>

         9.       Notices.

         Whenever any notice, payment of any purchase price, or other
communication is required to be given or delivered under the terms of this
Warrant, it shall be in writing and delivered by hand delivery or United States
registered or certified mail, return receipt requested, postage prepaid (or
similar delivery if outside of the United States), and will be deemed to have
been given or delivered on the date such notice, purchase price or other
communication is so delivered or posted, as the case may be; and, if to the
Company, it will be addressed to the address specified on the cover page hereof,
and if to the Holder, it will be addressed to the registered Holder at its, his
or his address as it appears on the books of the Company.

         [THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK.]

                                       8
<PAGE>

         The parties hereto have executed this Agreement as of the date first
set forth above.

                               TERAFORCE TECHNOLOGY CORPORATION

                                By:_____________________________________________
                                Name:___________________________________________
                                Title:__________________________________________

                                HOLDER:

                                By:_____________________________________________

                                Name:___________________________________________

                                Title:__________________________________________

                                       9

<PAGE>

                                  PURCHASE FORM
                  (To be signed only upon exercise of Warrant)

To TERAFORCE TECHNOLOGY CORPORATION:

         The undersigned, the holder of the enclosed Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, _________* shares of Common Stock of TeraForce Technology
Corporation and herewith makes payment of $_______________ therefor, and
requests that the certificate or certificates for such shares be issued in the
name of and delivered to the undersigned.

Dated:______________

                                  ______________________________________________
                                  (Signature must conform in all respects to
                                   name of holder as specified on the face of
                                   the enclosed Warrant)

                                  ______________________________________________

                                  ______________________________________________
                                  (Address)

                                  ______________________________________________
                                  (SSN#)

---------------------------

(*)      Insert here the number of shares called for on the face of the Warrant
         without making any adjustment for additional Common Stock or any other
         stock or other securities or property or cash which, pursuant to the
         adjustment provisions of the Warrant Agreement pursuant to which the
         Warrant was granted, may be delivered upon exercise.

                                       10

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