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                                                                     Exhibit 4.2

EXHIBIT B
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                            [FORM OF SUBSEQUENT NOTE]

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF WITHOUT EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE
STATE SECURITIES LAWS, (II) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE
FORM, THAT SUCH TRANSFER MAY BE MADE WITHOUT REGISTRATION OR QUALIFICATION UNDER
SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (III) SUCH TRANSFER BEING MADE
PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THIS NOTE
AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 20(a) HEREOF. THE PRINCIPAL
AMOUNT REPRESENTED BY THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO
SECTION 3(c)(iii) OF THIS NOTE.

                          SUBORDINATED CONVERTIBLE NOTE

Issuance Date: _______ __, 2002                    Principal: U.S. $____________

         FOR VALUE RECEIVED, PEMSTAR INC., a Minnesota corporation (the
"Company"), hereby promises to pay to the order of __________________ or
registered assigns ("Holder") the amount set out above as the Principal (as
reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the "Principal") when due, whether upon the Maturity Date (as defined
below), acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof, including, without limitation, the
subordination provisions in Section 15) and to pay interest ("Interest") on any
outstanding Principal at the rate of six and one-half percent (6.5%) per annum,
subject to periodic adjustment pursuant to Section 2 (the "Interest Rate"), from
the date set out above as the Issuance Date (the "Issuance Date") until the same
becomes due and payable, whether upon an Interest Date (as defined below), the
Maturity Date, acceleration, conversion, redemption or otherwise (in each case
in accordance with the terms hereof). This Convertible Note (including all
Convertible Notes issued in exchange, transfer or replacement hereof, this
"Note") is one of an issue of Convertible Notes (collectively, the "Notes" and
such other Convertible Notes, the "Other Notes") issued on the Issuance Date
pursuant to the Securities Purchase Agreement (as defined in Section 30).
Certain capitalized terms are defined in Section 30.

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         (1) MATURITY. On the Maturity Date, the Holder shall surrender this
Note to the Company and the Company shall pay to the Holder an amount in cash
representing all outstanding Principal, accrued and unpaid Interest and accrued
and unpaid Late Charges, if any. The "Maturity Date" shall be May 1, 2007 as
extended at the option of the Holder (i) in the event that, and for so long as,
a Triggering Event (as defined in Section 4(a)) shall have occurred and be
continuing or any event shall have occurred and be continuing which with the
passage of time and the failure to cure would result in a Triggering Event and
(ii) through the date that is ten days after the consummation of a Change of
Control (as defined in Section 5(a)) in the event that a Change of Control is
publicly announced or a Change of Control Notice (as defined in Section 5(c)) is
delivered prior to the Maturity Date.

         (2) INTEREST; INTEREST RATE. Interest on this Note shall commence
accruing on the Issuance Date and shall be computed on the basis of a 365-day
year and actual days elapsed and shall be payable quarterly in arrears on the
first day of each Calendar Quarter during the period beginning on the Issuance
Date and ending on, and including, the Maturity Date (each, an "Interest Date").
Interest shall be payable on each Interest Date in cash or, at the option of the
Company, in shares of Common Stock ("Interest Shares"), provided that the
Interest which accrued during any period shall be payable in Interest Shares
only if the Company delivers written notice of such election ("Interest Election
Notice") to each holder of the Notes and the Separate Tranche Notes then
outstanding at least 10 Trading Days prior to the Interest Date (an "Interest
Election Date"). Interest to be paid on an Interest Date in Interest Shares
shall be paid in a number of fully paid and nonassessable shares (rounded to the
nearest whole share in accordance with Section 3(a)) of Common Stock equal to
the quotient of (a) the Interest payable and (b) the Interest Conversion Price
on the applicable Interest Date. If any Interest Shares are to be paid on an
Interest Date, then the Company shall (X) issue and deliver on the applicable
Interest Date, to such address as specified by the Holder in writing to the
Company at least two Business Days prior to the applicable Interest Date, a
certificate, registered in the name of the Holder or its designee, for the
number of Interest Shares to which the Holder shall be entitled, or (Y) provided
that the Company's transfer agent (the "Transfer Agent") is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer Program,
upon the request of the Holder, credit such aggregate number of Interest Shares
to which the Holder shall be entitled to the Holder's or its designee's balance
account with DTC through its Deposit Withdrawal Agent Commission system.
Notwithstanding the foregoing, the Company shall not be entitled to pay Interest
in Interest Shares and shall be required to pay such Interest in cash on the
applicable Interest Date if (x) any event constituting a Triggering Event or an
event that with the passage of time and assuming it were not cured would
constitute a Triggering Event has occurred and is continuing on any day during
the period beginning on and including the applicable Interest Election Date and
ending on and including the Interest Date, unless consented to in writing by the
Holder, (y) the Registration Statement (as defined in the Registration Rights
Agreement) covering the Interest Shares is not effective and available for the
resale of all of the Registrable Securities (as defined in the Registration
Rights Agreement) relating to this Note on each day during the period beginning
on and including the Interest Election Date and ending on and including the
Interest Date or (z) the Company has not obtained the approval of its
shareholders as required by the applicable rules of the Principal Market for
issuances of Common Stock in excess of the Exchange Cap (as defined in Section
3(d)(ii)) prior

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to the Interest Election Date. Prior to the payment of Interest on an Interest
Date, Interest on this Note shall accrue at the Interest Rate and be payable by
way of inclusion of the Interest in the Conversion Amount in accordance with
Section 3(b)(i). From and after the occurrence of a Triggering Event, the
Interest Rate shall be increased to 12%; provided, however, that such increased
Interest Rate shall not apply to any portion of the Principal which is then
incurring a Late Charge. In the event that such Triggering Event is subsequently
cured, the adjustment referred to in the preceding sentence shall cease to be
effective as of the date of such cure; provided that the Interest as calculated
at such increased rate during the continuance of such Triggering Event shall
continue to apply to the extent relating to the days after the occurrence of
such Triggering Event through and including the date of cure of such Triggering
Event.

         (3) CONVERSION OF NOTES. This Note shall be convertible into shares of
the Common Stock on the terms and conditions set forth in this Section 3.

                  (a) Conversion Right. Subject to the provisions of Section
         3(d), at any time or times on or after the Issuance Date, the Holder
         shall be entitled to convert any portion of the outstanding and unpaid
         Conversion Amount (as defined below) into fully paid and nonassessable
         shares of Common Stock in accordance with Section 3(c), at the
         Conversion Rate (as defined below). The Company shall not issue any
         fraction of a share of Common Stock upon any conversion. If the
         issuance would result in the issuance of a fraction of a share of
         Common Stock, the Company shall round such fraction of a share of
         Common Stock up to the nearest whole share. The Company shall pay any
         and all taxes that may be payable with respect to the issuance and
         delivery of Common Stock upon conversion of any Conversion Amount.

                  (b) Conversion Rate. The number of shares of Common Stock
         issuable upon conversion of any Conversion Amount pursuant to Section
         3(a) shall be determined by dividing (x) such Conversion Amount by (y)
         the Conversion Price (as defined below) (the "Conversion Rate").

                           (i) "Conversion Amount" means the sum of (A) the
                  portion of the Principal to be converted, redeemed or
                  otherwise with respect to which this determination is being
                  made, (B) accrued and unpaid Interest with respect to such
                  Principal, (C) accrued and unpaid Late Charges with respect to
                  such Principal and Interest and (D) on any day after the
                  Company Optional Redemption Notice Date (as defined in Section
                  9), the amount of Interest which would accrue with respect to
                  such Principal (which amount is not included in the amount
                  referred to in clause (B) above) from the date on which this
                  determination is being made until May 1, 2005 as if such
                  Principal amount remained outstanding until May 1, 2005.

                           (ii) "Conversion Price" means, as of any Conversion
                  Date (as defined below) or other date of determination, and
                  subject to adjustment as provided herein, [{Subsequent Notes
                  issued prior to the First Target Day} INSERT THE RESULT OF THE
                  FOLLOWING: 120% of the Market Price (as defined in the
                  Securities Purchase Agreement) with respect to the Issuance
                  Date of this Note, provided that if 120% of the Market Price
                  with respect to the Issuance Date of this Note is less than
                  $6.50 (subject to

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                  adjustment as of such date for any stock dividend, stock
                  split, stock combination or other similar transaction which
                  occur after the Initial Issuance Date), then 120% of the
                  Market Price with respect to the Issuance Date of this Note
                  shall be deemed to mean $6.50 (subject to adjustment as of
                  such date for any stock dividend, stock split, stock
                  combination or other similar transaction which occur after the
                  Initial Issuance Date)] [{Subsequent Notes issued after the
                  First Target Day and on or prior to the Second Target Day (as
                  defined in the Securities Purchase Agreement)} INSERT THE
                  RESULT OF THE FOLLOWING: 120% of the Market Price (as defined
                  in the Securities Purchase Agreement) with respect to the
                  Issuance Date of this Note, provided that if 120% of the
                  Market Price with respect to the Issuance Date of this Note is
                  less than $7.00 (subject to adjustment as of such date for any
                  stock dividend, stock split, stock combination or other
                  similar transaction which occur after the Initial Issuance
                  Date), then 120% of the Market Price with respect to the
                  Issuance Date of this Note shall be deemed to mean $7.00
                  (subject to adjustment as of such date for any stock dividend,
                  stock split, stock combination or other similar transaction
                  which occur after the Initial Issuance Date)] [{Subsequent
                  Notes issued after the Second Target Day (as defined in the
                  Securities Purchase Agreement)} INSERT THE RESULT OF THE
                  FOLLOWING: 120% of the Market Price (as defined in the
                  Securities Purchase Agreement) with respect to the Issuance
                  Date of this Note, provided that if 120% of the Market Price
                  with respect to the Issuance Date of this Note is less than
                  $7.50 (subject to adjustment as of such date for any stock
                  dividend, stock split, stock combination or other similar
                  transaction which occur after the Initial Issuance Date), then
                  120% of the Market Price with respect to the Issuance Date of
                  this Note shall be deemed to mean $7.50 (subject to adjustment
                  as of such date for any stock dividend, stock split, stock
                  combination or other similar transaction which occur after the
                  Initial Issuance Date)].

                  (c) Mechanics of Conversion.

                           (i) Optional Conversion. To convert any Conversion
                  Amount into shares of Common Stock on any date (a "Conversion
                  Date"), the Holder shall (A) transmit by facsimile (or
                  otherwise deliver), for receipt on or prior to 11:59 p.m.,
                  Central Time, on such date, a copy of an executed notice of
                  conversion in the form attached hereto as Exhibit I (the
                  "Conversion Notice") to the Company and (B) if required by
                  Section 3(c)(iii), surrender this Note to a common carrier for
                  delivery to the Company as soon as practicable on or following
                  such date (or an indemnification undertaking with respect to
                  this Note in the case of its loss, theft or destruction). On
                  or before the first Business Day following the date of receipt
                  of a Conversion Notice, the Company shall transmit by
                  facsimile a confirmation of receipt of such Conversion Notice
                  to the Holder and the Transfer Agent. On or before the third
                  Business Day following the date of receipt of a Conversion
                  Notice (the "Share Delivery Date"), the Company shall (X)
                  issue and deliver to the address as specified in the
                  Conversion Notice, a certificate, registered in the name of
                  the Holder or its designee, for the number of shares of Common
                  Stock to which the Holder shall be entitled, or (Y) provided
                  that the Transfer Agent is participating in the DTC Fast
                  Automated Securities Transfer Program and provided that on the
                  Exercise Date the shares of Common Stock to be issued pursuant
                  to such exercise are registered for

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                  resale under the Securities Act of 1933, as amended (the "1933
                  Act"), or are eligible for resale under Rule 144(k)
                  promulgated under the 1933 Act, upon the request of the
                  Holder, credit such aggregate number of shares of Common Stock
                  to which the Holder shall be entitled to the Holder's or its
                  designee's balance account with DTC through its Deposit
                  Withdrawal Agent Commission system. If this Note is physically
                  surrendered for conversion as required by Section 3(c)(iii)
                  and the outstanding Principal of this Note is greater than the
                  Principal portion of the Conversion Amount being converted,
                  then the Company shall as soon as practicable and in no event
                  later than three Business Days after receipt of this Note (the
                  "Note Delivery Date") and at its own expense, issue and
                  deliver to the holder a new Note (in accordance with Section
                  20(d)) representing the outstanding Principal not converted.
                  The person or persons entitled to receive the shares of Common
                  Stock issuable upon a conversion of this Note shall be treated
                  for all purposes as the record holder or holders of such
                  shares of Common Stock on the Conversion Date.

                           (ii) Company's Failure to Timely Convert. If the
                  Company shall fail to issue a certificate to the Holder or
                  credit the Holder's balance account with DTC for the number of
                  shares of Common Stock to which the Holder is entitled upon
                  conversion of any Conversion Amount on or prior to the date
                  which is five Business Days after the Conversion Date (in each
                  case, a "Conversion Failure"), then (A) the Company shall pay
                  damages to the Holder for each date of such Conversion Failure
                  in an amount equal to 0.5% of the product of (I) the number of
                  shares of Common Stock not issued to the Holder on or prior to
                  the Share Delivery Date and to which the Holder is entitled,
                  and (II) the Closing Sale Price of the Common Stock on the
                  Share Delivery Date, and (B) the Holder, upon written notice
                  to the Company, may void its Conversion Notice with respect
                  to, and retain or have returned, as the case may be, any
                  portion of this Note that has not been converted pursuant to
                  such Conversion Notice; provided that the voiding of a
                  Conversion Notice shall not affect the Company's obligations
                  to make any payments which have accrued prior to the date of
                  such notice pursuant to this Section 3(c)(ii) or otherwise.

                           (iii) Book-Entry. Notwithstanding anything to the
                  contrary set forth herein, upon conversion of any portion of
                  this Note in accordance with the terms hereof, the Holder
                  shall not be required to physically surrender this Note to the
                  Company unless (A) the full Conversion Amount represented by
                  this Note is being converted or (B) the Holder has provided
                  the Company with prior written notice (which notice may be
                  included in a Conversion Notice) requesting physical surrender
                  and reissue of this Note. The Holder and the Company shall
                  maintain records showing the Principal and Interest converted
                  and the dates of such conversions or shall use such other
                  method, reasonably satisfactory to the Holder and the Company,
                  so as not to require physical surrender of this Note upon
                  conversion.

                           (v) Pro Rata Conversion; Disputes. In the event that
                  the Company receives a Conversion Notice from more than one
                  holder of the Notes or the Separate Tranche Notes for the same
                  Conversion Date and the Company can convert some, but not all,
                  of such portions of the Notes and the Separate Tranche Notes
                  submitted for conversion, the

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                  Company, subject to Section 3(d), shall convert from each
                  holder of the Notes and the Separate Tranche Notes electing to
                  have the Notes or the Separate Tranche Notes converted on such
                  date a pro rata amount of such holder's portion of its Notes
                  or Separate Tranche Notes submitted for conversion based on
                  the principal amount of the Notes and the Separate Tranche
                  Notes submitted for conversion on such date by such holder
                  relative to the aggregate principal amount of all the Notes
                  and the Separate Tranche Notes submitted for conversion on
                  such date. In the event of a dispute as to the number of
                  shares of Common Stock issuable to the Holder in connection
                  with a conversion of this Note, the Company shall issue to the
                  Holder the number of shares of Common Stock not in dispute and
                  resolve such dispute in accordance with Section 25.

                  (d) Limitations on Conversions.

                           (i) Beneficial Ownership. The Company shall not
                  effect any conversion of this Note, and the Holder of this
                  Note shall not have the right to convert any portion of this
                  Note pursuant to Section 3(a), to the extent that after giving
                  effect to such conversion, the Holder (together with the
                  Holder's affiliates) would beneficially own in excess of 5.0%
                  of the number of shares of Common Stock outstanding
                  immediately after giving effect to such conversion. For
                  purposes of the foregoing sentence, the number of shares of
                  Common Stock beneficially owned by the Holder and its
                  affiliates shall include the number of shares of Common Stock
                  issuable upon conversion of this Note with respect to which
                  the determination of such sentence is being made, but shall
                  exclude the number of shares of Common Stock which would be
                  issuable upon (A) conversion of the remaining, nonconverted
                  portion of this Note beneficially owned by the Holder or any
                  of its affiliates and (B) exercise or conversion of the
                  unexercised or nonconverted portion of any other securities of
                  the Company (including, without limitation, any Other Notes,
                  Separate Tranche Notes or warrants) subject to a limitation on
                  conversion or exercise analogous to the limitation contained
                  herein beneficially owned by the Holder or any of its
                  affiliates. Except as set forth in the preceding sentence, for
                  purposes of this Section 3(d)(i), beneficial ownership shall
                  be calculated in accordance with Section 13(d) of the
                  Securities Exchange Act of 1934, as amended. For purposes of
                  this Section 3(d)(i), in determining the number of outstanding
                  shares of Common Stock, the Holder may rely on the number of
                  outstanding shares of Common Stock as reflected in (x) the
                  Company's most recent Form 10-Q or Form 10-K, as the case may
                  be, (y) a more recent public announcement by the Company or
                  (z) any other notice by the Company or the Transfer Agent
                  setting forth the number of shares of Common Stock
                  outstanding. For any reason at any time, upon the written or
                  oral request of the Holder, the Company shall within three
                  Business Days confirm orally and in writing to the Holder the
                  number of shares of Common Stock then outstanding. In any
                  case, the number of outstanding shares of Common Stock shall
                  be determined after giving effect to the conversion or
                  exercise of securities of the Company, including this Note, by
                  the Holder or its affiliates since the date as of which such
                  number of outstanding shares of Common Stock was reported.

                           (ii) Principal Market Regulation. The Company shall
                  not be obligated to issue any shares of Common Stock upon
                  conversion of this Note if the issuance of such shares of

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                  Common Stock would exceed that number of shares of Common
                  Stock which the Company may issue upon conversion of the Notes
                  and the Separate Tranche Notes and as interest payable with
                  respect to the Notes and the Separate Tranche Notes (and
                  including, as applicable, any shares of Common Stock issuable
                  upon exercise of the Warrants) without breaching the Company's
                  obligations under the rules or regulations of the Principal
                  Market (the "Exchange Cap"), except that such limitation shall
                  not apply in the event that the Company (A) obtains the
                  approval of its shareholders as required by the applicable
                  rules of the Principal Market for issuances of Common Stock in
                  excess of such amount or (B) obtains a written opinion from
                  outside counsel to the Company that such approval is not
                  required, which opinion shall be reasonably satisfactory to
                  the holders of the Notes and the Separate Tranche Notes
                  representing a majority of the principal amounts of the Notes
                  and the Separate Tranche Notes then outstanding. Until such
                  approval or written opinion is obtained, no purchaser of the
                  Notes or the Separate Tranche Notes pursuant to the Securities
                  Purchase Agreement (the "Purchasers") shall be issued, upon
                  conversion of the Notes or the Separate Tranche Notes, shares
                  of Common Stock in an amount greater than the product of the
                  Exchange Cap multiplied by a fraction, the numerator of which
                  is the principal amount of the Notes and the Separate Tranche
                  Notes issued to such Purchaser pursuant to the Securities
                  Purchase Agreement on the Initial Issuance Date and the
                  denominator of which is the aggregate principal amount of all
                  the Notes and the Separate Tranche Notes issued to the
                  Purchasers pursuant to the Securities Purchase Agreement on
                  the Initial Issuance Date (with respect to each Purchaser, the
                  "Exchange Cap Allocation"). In the event that any Purchaser
                  shall sell or otherwise transfer any of such Purchaser's Notes
                  or Separate Tranche Notes, the transferee shall be allocated a
                  pro rata portion of such Purchaser's Exchange Cap Allocation,
                  and the restrictions of the prior sentence shall apply to such
                  transferee with respect to the portion of the Exchange Cap
                  Allocation allocated to such transferee. In the event that any
                  holder of the Notes or the Separate Tranche Notes shall
                  convert all of such holder's Notes or Separate Tranche Notes
                  into a number of shares of Common Stock which, in the
                  aggregate, is less than such holder's Exchange Cap Allocation,
                  then the difference between such holder's Exchange Cap
                  Allocation and the number of shares of Common Stock actually
                  issued to such holder shall be allocated to the respective
                  Exchange Cap Allocations of the remaining holders of the Notes
                  and the Separate Tranche Notes on a pro rata basis in
                  proportion to the aggregate principal amount of the Notes and
                  the Separate Tranche Notes then held by each such holder.

         (4) RIGHTS UPON TRIGGERING EVENT.

                  (a) Triggering Event. Each of the following events shall
         constitute a "Triggering Event":

                           (i) the failure of the applicable Registration
                  Statement to be declared effective by the SEC on or prior to
                  the date that is 60 days after the applicable Effectiveness
                  Deadline (as defined in the Registration Rights Agreement),
                  or, while the applicable Registration Statement is required to
                  be maintained effective pursuant to the terms of the
                  Registration Rights Agreement, the effectiveness of the
                  applicable Registration Statement lapses for

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                  any reason (including, without limitation, the issuance of a
                  stop order) or is unavailable to any holder of the Notes for
                  sale of all of such holder's Registrable Securities (as
                  defined in the Registration Rights Agreement) in accordance
                  with the terms of the Registration Rights Agreement, and such
                  lapse or unavailability continues for a period of 10
                  consecutive Business Days or for more than an aggregate of 20
                  Business Days in any 365-day period (other than days during an
                  Allowable Grace Period (as defined in the Registration Rights
                  Agreement));

                           (ii) the suspension from trading or failure of the
                  Common Stock to be listed on the Nasdaq National Market or The
                  New York Stock Exchange, Inc. for a period of five consecutive
                  Business Days or for more than an aggregate of 10 Business
                  Days in any 365-day period;

                           (iii) the Company's (A) failure to cure a Conversion
                  Failure by delivery of the required number of shares of Common
                  Stock or a new Note (in accordance with Section 20(d)), as
                  applicable, within 10 days after the applicable Conversion
                  Date or (B) notice, written or oral, to any holder of the
                  Notes, including by way of public announcement or through any
                  of its agents, at any time, of its intention not to comply
                  with a request for conversion of any Notes into shares of
                  Common Stock that is tendered in accordance with the
                  provisions of the Notes;

                           (iv) upon the Company's receipt of a Conversion
                  Notice, the Company is not obligated to issue shares of Common
                  Stock upon such conversion due to the provisions of Section
                  3(d)(ii);

                           (v) at any time following the tenth consecutive
                  Business Day that the Holder's Authorized Share Allocation is
                  less than the number of shares of Common Stock that the Holder
                  would be entitled to receive upon a conversion of the full
                  Conversion Amount of this Note (without regard to any
                  limitations on conversion set forth in Section 3(d) or
                  otherwise);

                           (vi) the Company's failure to pay to the Holder any
                  amount of Principal, Interest, Late Charges or other amounts
                  when and as due under this Note, the Securities Purchase
                  Agreement, the Registration Rights Agreement or any other
                  agreement, document, certificate or other instrument delivered
                  in connection with the transactions contemplated hereby and
                  thereby to which the Holder is a party, except, in the case of
                  a failure to pay Interest and Late Charges when and as due, in
                  which case only if such failure continues for a period of at
                  least three Business Days;

                           (vii) any default or defaults by the Company (A) in
                  the payment of any principal of, or interest or any other
                  amount on or with respect to, any Indebtedness, the principal
                  amount of which, individually or in the aggregate, exceeds
                  U.S. $5,000,000, when due after giving effect to any
                  applicable grace periods in the terms of the Indebtedness or
                  (B) on any Indebtedness, the principal amount of which,
                  individually or in the aggregate, exceeds U.S. $5,000,000,
                  which default or defaults in the case of clause (B) shall have

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                  resulted in such Indebtedness becoming due and payable prior
                  to the date on which it would otherwise have become due and
                  payable.

                           (viii) the Company or any of its Subsidiaries (as
                  defined in the Securities Purchase Agreement), pursuant to or
                  within the meaning of Title 11, U.S. Code, or any similar
                  Federal or state law for the relief of debtors (collectively,
                  "Bankruptcy Law"), (A) commences a voluntary case, (B)
                  consents to the entry of an order for relief against it in an
                  involuntary case, (C) consents to the appointment of a
                  receiver, trustee, assignee, liquidator or similar official (a
                  "Custodian"), (D) makes a general assignment for the benefit
                  of its creditors or (E) admits in writing that it is generally
                  unable to pay its debts as they become due;

                           (ix) a court of competent jurisdiction enters an
                  order or decree under any Bankruptcy Law that (A) is for
                  relief against the Company or any of its Subsidiaries in an
                  involuntary case, (B) appoints a Custodian of the Company or
                  any of its Subsidiaries or (C) orders the liquidation of the
                  Company or any of its Subsidiaries;

                           (x) a final judgment or judgments for the payment of
                  money aggregating in excess of $2,500,000 are rendered against
                  the Company or any of its Subsidiaries and which judgments are
                  not, within 60 days after the entry thereof, bonded,
                  discharged or stayed pending appeal, or are not discharged
                  within 60 days after the expiration of such stay; provided,
                  however, that any judgment which is covered by insurance or an
                  indemnity from a credit worthy party shall not be included in
                  calculating the $2,500,000 amount set forth above so long as
                  the Company provides the Holder a written statement from such
                  insurer or indemnity provider (which written statement shall
                  be reasonably satisfactory to the Holder) to the effect that
                  such judgment is covered by insurance or an indemnity and the
                  Company will receive the proceeds of such insurance or
                  indemnity within 30 days of the issuance of such judgment;

                           (xi) the Company breaches any representation,
                  warranty, covenant or other term or condition of the
                  Securities Purchase Agreement, the Registration Rights
                  Agreement, this Note, the Other Notes, the Separate Tranche
                  Notes or any other agreement, document, certificate or other
                  instrument delivered in connection with the transactions
                  contemplated thereby and hereby to which the Holder is a
                  party, except to the extent that such breach would not have a
                  Material Adverse Effect (as defined in Section 3(a) of the
                  Securities Purchase Agreement) and except, in the case of a
                  breach of a covenant or other term or condition which is
                  curable, only if such breach continues for a period of at
                  least fifteen consecutive Business Days;

                           (xii) the Company breaches or fails in any respect to
                  comply with Section 15; or

                           (xiii) any Triggering Event (as defined in the Other
                  Notes or the Separate Tranche Notes) occurs with respect to
                  any Other Notes or Separate Tranche Notes.

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                  (b) Redemption Right. Promptly after the occurrence of a
         Triggering Event with respect to this Note or the Other Notes, the
         Company shall deliver written notice thereof via facsimile and
         overnight courier (a "Triggering Event Notice") to the Holder. At any
         time after the earlier of the Holder's receipt of a Triggering Event
         Notice and the Holder becoming aware of a Triggering Event, the Holder
         may require the Company to redeem all or any portion of this Note by
         delivering written notice thereof (the "Triggering Event Redemption
         Notice") to the Company, which Triggering Event Redemption Notice shall
         indicate the portion of this Note the Holder is electing to redeem;
         provided that such Triggering Event Redemption Notice may only be sent
         during the period beginning on and including the date of the occurrence
         of the Triggering Event and ending on and including the later of the
         date which is (I) twenty Business Days after the date on which the
         Holder receives a Triggering Event Notice from the Company with respect
         to such Triggering Event and (II) five Business Days after the date on
         which the Triggering Event is cured and the Holder receives written
         notice from the Company confirming such Triggering Event has been
         cured. Each portion of this Note subject to redemption by the Company
         pursuant to this Section 4(b) shall be redeemed by the Company at a
         price equal to the greater of (i) 120% of the Conversion Amount to be
         redeemed and (ii) the product of (A) the Conversion Rate with respect
         to such Conversion Amount in effect at such time as the Holder delivers
         a Redemption Notice and (B) the Closing Sale Price of the Common Stock
         on the date immediately preceding such Triggering Event (the
         "Triggering Event Redemption Price"); provided, however, that with
         respect to any Triggering Event described in clauses (vii), (viii),
         (ix) and (x) of Section 4(a), clause (i) of this Section 4(b) shall be
         100%, rather than 120%, of the Conversion Amount to be redeemed.
         Redemptions required by this Section 4(b) shall be made in accordance
         with the provisions of Section 12; provided further, however, that with
         respect to any Triggering Event described in clause (xiii) of Section
         4(a), clause (i) of this Section 4(b) shall be the percentage which
         would apply pursuant to this Section 4(b) if such event had occurred
         with respect to this Note and constituted a Triggering Event under the
         applicable clause (i) through (xii) of Section 4(a).

         (5) RIGHTS UPON CHANGE OF CONTROL.

                  (a) Change of Control. Each of the following events shall
         constitute a "Change of Control":

                           (i) the consolidation, merger or other business
                  combination (including, without limitation, a reorganization
                  or recapitalization) of the Company with or into another
                  Person (other than (A) a consolidation, merger or other
                  business combination (including, without limitation,
                  reorganization or recapitalization) in which holders of the
                  Company's voting power immediately prior to the transaction
                  continue after the transaction to hold, directly or
                  indirectly, the voting power of the surviving entity or
                  entities necessary to elect a majority of the members of the
                  board of directors (or their equivalent if other than a
                  corporation) of such entity or entities, or (B) pursuant to a
                  migratory merger effected solely for the purpose of changing
                  the jurisdiction of incorporation of the Company);

                           (ii) the sale or transfer of all or substantially all
                  of the Company's assets; or

                                       10

<PAGE>

                           (iii) a purchase, tender or exchange offer made to
                  and accepted by the holders of more than the 50% of the
                  outstanding shares of Common Stock.

                  (b) Assumption. Prior to the consummation of any Change of
         Control, the Company will secure from any Person purchasing the
         Company's assets or Common Stock or any successor resulting from such
         Change of Control (in each case, an "Acquiring Entity") a written
         agreement (in form and substance reasonably satisfactory to the holders
         of Notes representing a majority of the aggregate principal amount of
         the Notes then outstanding) to deliver to each holder of Notes in
         exchange for such Notes, a security of the Acquiring Entity evidenced
         by a written instrument substantially similar in form and substance to
         the Notes, including, without limitation, having a principal amount and
         interest rate equal to the principal amounts and the interest rates of
         the Notes held by such holder, and satisfactory to the holders of Notes
         representing a majority of the principal amount of the Notes then
         outstanding. In the event that an Acquiring Entity is directly or
         indirectly controlled by a company or entity whose common stock or
         similar equity interest is listed, designated or quoted on a securities
         exchange or trading market, the holders of the Notes representing a
         majority of the aggregate principal amount of the Notes then
         outstanding may elect to treat such Person as the Acquiring Entity for
         purposes of this Section 5(b).

                  (c) Redemption Right. No sooner than 40 Business Days nor
         later than 30 Business Days prior to the consummation of a Change of
         Control, but not prior to the public announcement of such Change of
         Control, the Company shall deliver written notice thereof via facsimile
         and overnight courier to the Holder (a "Change of Control Notice"). At
         any time during the period beginning after the Holder's receipt of a
         Change of Control Notice and ending on the Business Day immediately
         prior to the date of the consummation of such Change of Control (or, in
         the event a Change of Control Notice is not delivered at least 30
         Business Days prior to a Change of Control, at any time on or after the
         date which is 30 Business Days prior to a Change of Control and ending
         30 Business Days after the consummation of such Change of Control), the
         Holder may require the Company to redeem all or any portion of this
         Note by delivering written notice thereof (a "Change of Control
         Redemption Notice") to the Company, which Change of Control Redemption
         Notice shall indicate the Conversion Amount the Holder is electing to
         have redeemed by the Company. The portion of this Note subject to
         redemption pursuant to this Section 5(c) shall be redeemed by the
         Company at a price equal to the product of (i) the Change of Control
         Redemption Percentage on the date of redemption and (ii) the Conversion
         Amount being redeemed (the "Change of Control Redemption Price").
         Redemptions required by this Section 5(c) shall be made in accordance
         with the provisions of Section 12 and shall have priority to payments
         to any shareholders of the Company in connection with a Change of
         Control.

         (6) RIGHTS UPON ISSUANCE OF VARIABLE SECURITIES OR PURCHASE RIGHTS AND
OTHER CORPORATE EVENTS.

                  (a) Variable Securities. If after the Initial Issuance Date
         the Company in any manner issues or sells (i) any stock or securities
         other than Options (as defined below) directly or indirectly
         convertible into or exercisable or exchangeable for Common Stock

                                       11

<PAGE>

         ("Convertible Securities") or (ii) any rights, warrants or options to
         subscribe for or purchase Common Stock or Convertible Securities
         ("Options") that are convertible into or exercisable or exchangeable,
         directly or indirectly, for Common Stock at a price which varies or may
         vary with the market price of the Common Stock, including by way of one
         or more adjustments or resets to a fixed price, or at a price which
         upon the passage of time or the occurrence of certain events is
         automatically reduced or is adjusted to a price which is based on some
         formulation of the then current market price of the Common Stock (each,
         a "Variable Price", and such securities, "Variable Securities"), the
         Company shall provide written notice thereof via facsimile and
         overnight courier to the Holder on the date of issuance of such
         Variable Securities. From and after the date the Company issues any
         Variable Securities, the Holder shall have the right, but not the
         obligation, in its sole discretion to substitute the Variable Price for
         the Conversion Price upon conversion of any Conversion Amount by
         designating in the Conversion Notice delivered upon conversion of such
         Conversion Amount that solely for purposes of such conversion the
         Holder is relying on the Variable Price rather than the Conversion
         Price then in effect. The Holder's election to rely on a Variable Price
         for a particular conversion of a Conversion Amount shall not obligate
         the holder to rely on a Variable Price for any future conversions of
         this Note.

                  (b) Purchase Rights. If at any time the Company grants, issues
         or sells any Options, Convertible Securities or rights to purchase
         stock, warrants, securities or other property pro rata to the record
         holders of any class of Common Stock (the "Purchase Rights"), then the
         Holder will be entitled to acquire, upon the terms applicable to such
         Purchase Rights, the aggregate Purchase Rights which the Holder could
         have acquired if the Holder had held the number of shares of Common
         Stock acquirable upon complete conversion of this Note (without taking
         into account any limitations or restrictions on the convertibility of
         this Note) immediately before the date on which a record is taken for
         the grant, issuance or sale of such Purchase Rights, or, if no such
         record is taken, the date as of which the record holders of Common
         Stock are to be determined for the grant, issue or sale of such
         Purchase Rights.

                  (c) Other Corporate Events. Prior to the consummation of any
         recapitalization, reorganization, consolidation, merger or other
         business combination (other than a Change of Control) pursuant to which
         holders of Common Stock are entitled to receive securities or other
         assets with respect to or in exchange for Common Stock (a "Corporate
         Event"), the Company shall make appropriate provision to insure that
         the Holder will thereafter have the right to receive upon a conversion
         of this Note, (i) in addition to the shares of Common Stock receivable
         upon such conversion, such securities or other assets to which the
         Holder would have been entitled with respect to such shares of Common
         Stock had such shares of Common Stock been held by the Holder upon the
         consummation of such Corporate Event or (ii) in lieu of the shares of
         Common Stock otherwise receivable upon such conversion, such securities
         or other assets received by the holders of Common Stock in connection
         with the consummation of such Corporate Event in such amounts as the
         Holder would have been entitled to receive had this Note initially been
         issued with conversion rights for the form of such consideration (as
         opposed to shares of Common Stock) at a conversion rate for such
         consideration commensurate with the Conversion Rate. Provision made
         pursuant to the preceding sentence shall be in a form and substance
         satisfactory to the holders of Notes representing a majority of the
         aggregate principal amount of the Notes then outstanding.

                                       12

<PAGE>

         (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

                  (a) Adjustment of Conversion Price upon Issuance of Common
         Stock. If and whenever on or after the Issuance Date, the Company
         issues or sells, or in accordance with this Section 7(a) is deemed to
         have issued or sold, any shares of Common Stock (including the issuance
         or sale of shares of Common Stock owned or held by or for the account
         of the Company, but excluding shares of Common Stock deemed to have
         been issued or sold by the Company (I) in connection with any employee
         benefit plan (including, without limitation, employee stock purchase
         plans, provided that issuances pursuant thereto are at a price which is
         at least equal to 85% of the then fair market price of the Common
         Stock) which has been approved by the Board of Directors of the
         Company, pursuant to which the Company's securities may be issued to
         any employee, officer or director for, or in connection with, services
         provided to, or employment with, the Company (an "Approved Stock
         Plan"), (II) upon conversion of the Notes or the Separate Tranche
         Notes, as Interest Shares relating to the Notes or the Separate Tranche
         Notes or upon exercise of the Warrants or the Separate Tranche Warrants
         or (III) in connection with any Excluded Securities) for a
         consideration per share less than a price (the "Applicable Price")
         equal to the Conversion Price in effect immediately prior to such issue
         or sale or deemed issuance or sale, then immediately after such issue
         or sale or deemed issuance or sale, the Conversion Price then in effect
         shall be reduced to an amount equal to the product of (x) the
         Conversion Price in effect immediately prior to such issue or sale or
         deemed issuance or sale and (y) the quotient determined by dividing (1)
         the sum of the product of the Applicable Price and the number of shares
         of Common Stock Deemed Outstanding immediately prior to such issue or
         sale or deemed issuance or sale and the consideration, if any, received
         by the Company upon such issue or sale or deemed issuance or sale, by
         (2) the product of the Applicable Price multiplied by the number of
         shares of Common Stock Deemed Outstanding immediately after such issue
         or sale or deemed issuance or sale. For purposes of determining the
         adjusted Conversion Price under this Section 7(a), the following shall
         be applicable:

                           (i) Issuance of Options. If the Company in any manner
                  grants or sells any Options and the lowest price per share for
                  which one share of Common Stock is issuable upon the exercise
                  of any such Option or upon conversion, exercise or exchange of
                  any Convertible Securities issuable upon exercise of such
                  Option is less than the Applicable Price, then such share of
                  Common Stock shall be deemed to be outstanding and to have
                  been issued and sold by the Company at the time of the
                  granting or sale of such Option for such price per share. For
                  purposes of this Section 7(a)(i), the "lowest price per share
                  for which one share of Common Stock is issuable upon the
                  exercise of any such Option or upon conversion, exercise or
                  exchange of any Convertible Securities issuable upon exercise
                  of such Option" shall be equal to the sum of the lowest
                  amounts of consideration (if any) received or receivable by
                  the Company with respect to any one share of Common Stock upon
                  granting or sale of the Option, upon exercise of the Option
                  and upon conversion, exercise or exchange of any Convertible
                  Security issuable upon exercise of such Option. No further
                  adjustment of the Conversion Price shall be made upon the
                  actual issuance of such Common Stock or of such Convertible
                  Securities upon the exercise of such Options or upon the
                  actual issuance of such Common Stock upon conversion, exercise
                  or exchange of such Convertible Securities. If the Company
                  issues or sells any Options which are Variable Securities, no
                  adjustment of the

                                       13

<PAGE>

                  Conversion Price shall be made pursuant to this Section 7(a),
                  and no shares of Common Stock shall be deemed outstanding with
                  respect to such Variable Securities, as a result of the
                  issuance of such Variable Securities until the actual issuance
                  of Common Stock or Convertible Securities upon exercise of
                  such Variable Securities, except to the extent such Variable
                  Security also includes as a component of the exercise price a
                  price which does not vary with the market price of the Common
                  Stock.

                           (ii) Issuance of Convertible Securities. If the
                  Company in any manner issues or sells any Convertible
                  Securities and the lowest price per share for which one share
                  of Common Stock is issuable upon such conversion, exercise or
                  exchange thereof is less than the Applicable Price, then such
                  share of Common Stock shall be deemed to be outstanding and to
                  have been issued and sold by the Company at the time of the
                  issuance of sale of such Convertible Securities for such price
                  per share. For the purposes of this Section 7(a)(ii), the
                  "price per share for which one share of Common Stock is
                  issuable upon such conversion, exercise or exchange" shall be
                  equal to the sum of the lowest amounts of consideration (if
                  any) received or receivable by the Company with respect to any
                  one share of Common Stock upon the issuance or sale of the
                  Convertible Security and upon the conversion, exercise or
                  exchange of such Convertible Security. No further adjustment
                  of the Conversion Price shall be made upon the actual issuance
                  of such Common Stock upon conversion, exercise or exchange of
                  such Convertible Securities, and if any such issue or sale of
                  such Convertible Securities is made upon exercise of any
                  Options for which adjustment of the Conversion Price had been
                  or are to be made pursuant to other provisions of this Section
                  7(a)), no further adjustment of the Conversion Price shall be
                  made by reason of such issue or sale. If the Company issues or
                  sells any Convertible Securities which are Variable
                  Securities, no adjustment of the Conversion Price shall be
                  made pursuant to this Section 7(a), and no shares of Common
                  Stock shall be deemed outstanding with respect to such
                  Variable Security, as a result of the issuance of such
                  Variable Securities until the actual issuance of Common Stock
                  upon exercise of such Variable Securities, except to the
                  extent such Variable Security also includes as a component of
                  the conversion, exercise or exchange price a price which does
                  not vary with the market price of the Common Stock.

                           (iii) Change in Option Price or Rate of Conversion.
                  If the purchase price provided for in any Options, the
                  additional consideration, if any, payable upon the issue,
                  conversion, exercise or exchange of any Convertible
                  Securities, or the rate at which any Convertible Securities
                  are convertible into or exercisable or exchangeable for Common
                  Stock increases or decreases at any time, the Conversion Price
                  in effect at the time of such increase or decrease shall be
                  adjusted to the Conversion Price which would have been in
                  effect at such time had such Options or Convertible Securities
                  provided for such increased or decreased purchase price,
                  additional consideration or increased or decreased conversion
                  rate, as the case may be, at the time initially granted,
                  issued or sold. For purposes of this Section 7(a)(iii), if the
                  terms of any Option or Convertible Security that was
                  outstanding as of the Issuance Date are increased or decreased
                  in the manner described in the immediately preceding sentence,
                  then such Option or Convertible Security and the Common Stock
                  deemed issuable upon exercise, conversion or exchange

                                       14

<PAGE>

                  thereof shall be deemed to have been issued as of the date of
                  such change. No adjustment shall be made if such adjustment
                  would result in an increase of the Conversion Price then in
                  effect.

                           (iv) Calculation of Consideration Received. In case
                  any Option is issued in connection with the issue or sale of
                  other securities of the Company, together comprising one
                  integrated transaction in which no specific consideration is
                  allocated to such Options by the parties thereto, the Options
                  will be deemed to have been issued for a consideration of
                  $.01. If any Common Stock, Options or Convertible Securities
                  are issued or sold or deemed to have been issued or sold for
                  cash, the consideration received therefor will be deemed to be
                  the net amount received by the Company therefor. If any Common
                  Stock, Options or Convertible Securities are issued or sold
                  for a consideration other than cash, the amount of the
                  consideration other than cash received by the Company will be
                  the fair value of such consideration, except where such
                  consideration consists of securities, in which case the amount
                  of consideration received by the Company will be the Closing
                  Sale Price of such securities on the date of receipt. If any
                  Common Stock, Options or Convertible Securities are issued to
                  the owners of the non-surviving entity in connection with any
                  merger in which the Company is the surviving entity, the
                  amount of consideration therefor will be deemed to be the fair
                  value of such portion of the net assets and business of the
                  non-surviving entity as is attributable to such Common Stock,
                  Options or Convertible Securities, as the case may be. The
                  fair value of any consideration other than cash or securities
                  will be determined jointly by the Company and the holders of
                  Notes representing a majority of the principal amounts of the
                  Notes then outstanding. If such parties are unable to reach
                  agreement within ten days after the occurrence of an event
                  requiring valuation (the "Valuation Event"), the fair value of
                  such consideration will be determined within fifteen Business
                  Days after the tenth day following the Valuation Event by an
                  independent, reputable appraiser jointly selected by the
                  Company and the holders of Notes representing a majority of
                  the principal amounts of the Notes then outstanding. The
                  determination of such appraiser shall be deemed binding upon
                  all parties absent manifest error and the fees and expenses of
                  such appraiser shall be borne by the Company.

                           (v) Record Date. If the Company takes a record of the
                  holders of Common Stock for the purpose of entitling them (A)
                  to receive a dividend or other distribution payable in Common
                  Stock, Options or in Convertible Securities or (B) to
                  subscribe for or purchase Common Stock, Options or Convertible
                  Securities, then such record date will be deemed to be the
                  date of the issue or sale of the shares of Common Stock deemed
                  to have been issued or sold upon the declaration of such
                  dividend or the making of such other distribution or the date
                  of the granting of such right of subscription or purchase, as
                  the case may be.

                           (vi) Common Stock Deemed Outstanding. "Common Stock
                  Deemed Outstanding" means, at any given time, the number of
                  shares of Common Stock actually outstanding at such time, plus
                  the number of shares of Common Stock deemed to be outstanding
                  pursuant to Sections 7(a)(i) and 7(a)(ii) hereof regardless of
                  whether the

                                       15

<PAGE>

                  Options or Convertible Securities are actually exercisable at
                  such time, but excluding any shares of Common Stock owned or
                  held by or for the account of the Company or issuable upon
                  conversion of the Notes or the Separate Tranche Notes or
                  exercise of the Warrants or the Separate Tranche Warrants.

                  (b) Adjustment of Conversion Price upon Subdivision or
         Combination of Common Stock. If the Company at any time subdivides (by
         any stock split, stock dividend, recapitalization or otherwise) one or
         more classes of its outstanding shares of Common Stock into a greater
         number of shares, the Conversion Price in effect immediately prior to
         such subdivision will be proportionately reduced. If the Company at any
         time combines (by combination, reverse stock split or otherwise) one or
         more classes of its outstanding shares of Common Stock into a smaller
         number of shares, the Conversion Price in effect immediately prior to
         such combination will be proportionately increased.

                  (c) Other Events. If any event occurs of the type contemplated
         by the provisions of this Section 7 but not expressly provided for by
         such provisions (including, without limitation, the granting of stock
         appreciation rights, phantom stock rights or other rights with equity
         features), then the Company's Board of Directors will make an
         appropriate adjustment in the Conversion Price so as to protect the
         rights of the Holder under this Note; provided that no such adjustment
         will increase the Conversion Price as otherwise determined pursuant to
         this Section 7.

         (8) HOLDER RIGHT OF OPTIONAL REDEMPTION. At any time during the 10
consecutive Business Days immediately following each of July 1, 2004 and May 1,
2006 (each a "Holder Redemption Period"), the Holder shall have the right, in
its sole discretion, to require that the Company redeem all or any portion of
this Note (a "Holder Redemption") by delivering written notice thereof (a
"Holder Redemption Notice" and, collectively with a Triggering Event Redemption
Notice and a Change of Control Redemption Notice, "Redemption Notices" and,
individually, each a "Redemption Notice") to the Company at any time during a
Holder Redemption Period, which Holder Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem. The portion of this Note
subject to redemption pursuant to this Section 8 shall be redeemed by the
Company at a price equal to the Conversion Amount being redeemed (the "Holder
Redemption Price" and, together with the Triggering Event Redemption Price and
the Change of Control Redemption Price, the "Redemption Price"). Redemptions
required by this Section 8 shall be made in accordance with the provisions of
Section 12.

         (9) COMPANY OPTIONAL REDEMPTION.

                  (a) Redemption Right. After November 1, 2003, the Company
         shall have the right to redeem from time to time all or any portion of
         this Note by delivering written notice thereof (a "Company Optional
         Redemption Notice" and the date on which the Holder receives such
         notice is referred to as the "Company Optional Redemption Notice Date")
         to each holder of the Notes then outstanding; provided that (i) the
         Conditions to Company Optional

                                       16

<PAGE>

         Redemption (as set forth in Section 9(d)) and the conditions of
         Sections 9(b) and 9(c) and this Section 9(a) are satisfied or waived in
         writing by the Holder, (ii) the Company shall not be entitled to
         deliver a Company Optional Redemption Notice prior to May 1, 2005
         unless during the 30 consecutive Trading Days immediately preceding the
         Company Optional Redemption Notice Date there are at least 20 Trading
         Days on which the Weighted Average Price of the Common Stock is greater
         than or equal to 200% of the Conversion Price as of the Issuance Date
         (subject to appropriate adjustments for stock splits, stock dividends,
         stock combinations and other similar transactions after the Issuance
         Date) and (iii) any Company Optional Redemption Notice relating to a
         Company Optional Redemption Date (as defined below) which is on or
         after May 1, 2005 shall elect redemption of all of the aggregate
         principal amount of this Note then outstanding. The Company may
         exercise its right of redemption under this Section 9(a) by delivering
         a Company Optional Redemption Notice after November 1, 2003 to each of
         the holders of the Notes at least 20 Business Days but not more than 65
         Business Days prior to the date selected by the Company for redemption
         under this Section 9(a) (the "Company Optional Redemption Date"). The
         Company Optional Redemption Notice shall be irrevocable. The portion of
         this Note subject to redemption pursuant to this Section 9(a) shall be
         redeemed by the Company at a price equal to the Conversion Amount (as
         determined in accordance with Section 3(b)(i)) being redeemed on the
         Company Optional Redemption Date (the "Company Optional Redemption
         Price").

                  (b) Company Pro Rata Redemption Requirement. If the Company
         elects to redeem this Note pursuant to Section 9(a), then it must
         simultaneously take the similar action with respect to the Other Notes.
         If the Company elects to redeem this Note pursuant to Section 9(a) with
         respect to less than all of the aggregate principal amount of the Notes
         then outstanding, then the Company shall require redemption of a
         principal amount (together with the related Interest, Late Charges and
         other amounts set forth in Section 3(b)(i) and analogous provisions
         under the Other Notes) from each of the holders of the Notes equal to
         the product of (I) the aggregate principal amount of Notes which the
         Company has elected to redeem pursuant to Section 9(a), multiplied by
         (II) the fraction, the numerator of which is the aggregate principal
         amount of the Notes initially purchased by such holder on the Issuance
         Date and the denominator of which is the aggregate principal amount of
         the Notes purchased by all holders on the Issuance Date (such fraction
         with respect to each holder is referred to as its "Allocation
         Percentage," and such amount with respect to each holder is referred to
         as its "Pro Rata Redemption Amount"). In the event that the initial
         holder of any Notes shall sell or otherwise transfer any of such
         holder's Notes, the transferee shall be allocated a pro rata portion of
         such holder's Allocation Percentage. The Company Optional Redemption
         Notice shall state (i) the date selected by the Company for the Company
         Optional Redemption Date in accordance with Section 9(a), (ii) the
         aggregate principal amount of the Notes which the Company has elected
         to redeem from all of the holders of the Notes pursuant to this Section
         9 (and similar provisions under the Other Notes) and (iii) each
         holder's Pro Rata Redemption Amount of the principal amount of the
         Notes the Company has elected to redeem pursuant to this Section 9 (and
         similar provisions under the Other Notes). If the Company elects to
         redeem this Note pursuant to Section 9(a) (or similar provisions under
         the Other Notes) on or after May 1, 2005, the Company shall also redeem
         all of the aggregate principal amount of the Separate Tranche Notes
         then outstanding pursuant to the similar provisions under the Separate
         Tranche Notes.

                                       17

<PAGE>

                  (c) Mechanics of Company Optional Redemption. If the Company
         has exercised its right to redeem all or any portion of this Note with
         this Section 9 and the conditions of this Section 9 are satisfied
         (including the Conditions to Company Optional Redemption as set forth
         in Section 9(d)), then the Holder's Pro Rata Redemption Amount, if any,
         which remains outstanding on the Company Optional Redemption Date shall
         be redeemed by the Company on such Company Optional Redemption Date by
         the payment by the Company to the Holder on the Company Optional
         Redemption Date, by wire transfer of immediately available funds, of an
         amount equal to the Company Optional Redemption Price for the Holder's
         Pro Rata Redemption Amount. Notwithstanding anything to the contrary in
         this Section 9, until the Company Optional Redemption Price is paid in
         full to the Holder, the Holder may convert its Pro Rata Redemption
         Amount (together with the related Interest, Late Charges and other
         amounts set forth in Section 3(b)(i)) into shares of Common Stock in
         accordance with Section 3. All Conversion Amounts converted after the
         Company Optional Redemption Notice Date but prior to the Company
         Optional Redemption Date shall be deducted from the Conversion Amounts
         selected by the Company for redemption under this Section 9.

                  (d) Conditions to Company Optional Redemption. For purposes of
         this Section 9, "Conditions to Company Optional Redemption" means the
         following conditions: (i) during the period beginning on the Initial
         Issuance Date and ending on and including the Company Optional
         Redemption Date, the Company shall have delivered shares of Common
         Stock upon conversion of Conversion Amounts on a timely basis as set
         forth in Section 3(c)(i) and delivered shares of Common Stock upon
         exercise of the Warrants and the Separate Tranche Warrants on a timely
         basis as set forth in Section 1(a) of the Warrants and the Separate
         Tranche Warrants; (ii) on each day during the period beginning 30
         Trading Days prior to the Company Optional Redemption Notice Date and
         ending on and including the Company Optional Redemption Date, (A) the
         Common Stock shall be listed on the Nasdaq National Market, Inc. or The
         New York Stock Exchange, Inc. and delisting or suspension by such
         market or exchange shall not have been threatened either (I) in writing
         by such market or exchange or (II) by falling below the minimum listing
         maintenance requirements of such market or exchange and (B) the
         Registration Statement shall be effective and available for the sale of
         at least all of the Registrable Securities in accordance with the terms
         of the Registration Rights Agreement while during the applicable
         Registration Period (as defined in the Registration Rights Agreement);
         (iii) during the period beginning on the Initial Issuance Date and
         ending on and including the Company Optional Redemption Date, there
         shall not have occurred either (x) the public announcement of a
         pending, proposed or intended Change of Control which has not been
         abandoned, terminated or consummated or (y) a Triggering Event; (iv)
         during the period beginning on the date which is 30 Trading Days prior
         to the Company Optional Redemption Notice Date and ending on and
         including the Company Optional Redemption Date, there shall not have
         occurred an event that with the passage of time or giving of notice,
         and assuming it were not cured, would constitute a Triggering Event;
         and (v) if a Change of Control is consummated after the Issuance Date,
         the Company Optional Redemption Date is at least 30 Trading Days after
         the consummation and public announcement of such Change of Control.

                                       18

<PAGE>

                  (e) Failure to Redeem. In the event that the Company does not
         pay the Company Optional Redemption Price in full for the Holder's Pro
         Rata Redemption Amount on the Company Optional Redemption Date, then in
         addition to any remedy the Holder may have under this Note and the
         Securities Purchase Agreement, the Company shall not be permitted to
         submit another Company Optional Redemption Notice without the prior
         written consent of the Holder.

         (10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Note, and will at all
times in good faith carry out all of the provisions of this Note and take all
action as may be required to protect the rights of the Holder of this Note.

         (11) RESERVATION OF AUTHORIZED SHARES.

                  (a) Reservation. The Company shall initially reserve out of
         its authorized and unissued Common Stock a number of shares of Common
         Stock for each of the Notes equal to 120% of the Conversion Rate with
         respect to the Conversion Amount of each such Note as of the Issuance
         Date. Thereafter, the Company shall, so long as any of the Notes are
         outstanding, take all action necessary to reserve and keep available
         out of its authorized and unissued Common Stock, solely for the purpose
         of effecting the conversion of the Notes, 110% of the number of shares
         of Common Stock as shall from time to time be necessary to effect the
         conversion of all of the Notes then outstanding; provided that at no
         time shall the number of shares of Common Stock so reserved be less
         than the number of shares required to be reserved by the previous
         sentence (without regard to any limitations on conversions) (the
         "Required Reserve Amount"). The initial number of shares of Common
         Stock reserved for conversions of the Notes and each increase in the
         number of shares so reserved shall be allocated pro rata among the
         holders of the Notes based on the principal amount of the Notes held by
         each holder at the time of Issuance Date or increase in the number of
         reserved shares, as the case may be (the "Authorized Share
         Allocation"). In the event that a holder shall sell or otherwise
         transfer any of such holder's Notes, each transferee shall be allocated
         a pro rata portion of such holder's Authorized Share Allocation. Any
         shares of Common Stock reserved and allocated to any Person which
         ceases to hold any Notes shall be allocated to the remaining holders of
         Notes, pro rata based on the principal amount of the Notes then held by
         such holders.

                  (b) Insufficient Authorized Shares. If at any time while any
         of the Notes remain outstanding the Company does not have a sufficient
         number of authorized and unreserved shares of Common Stock to satisfy
         its obligation to reserve for issuance upon conversion of the Notes at
         least a number of shares of Common Stock equal to the Required Reserve
         Amount (an "Authorized Share Failure"), then the Company shall
         immediately take all action necessary to increase the Company's
         authorized shares of Common Stock to an amount sufficient to allow the
         Company to reserve the Required Reserve Amount for the Notes then
         outstanding. Without limiting the generality of the foregoing sentence,
         as soon as practicable after the date of the occurrence of an
         Authorized Share Failure, but in no event later than 60 days

                                       19

<PAGE>

         after the occurrence of such Authorized Share Failure, the Company
         shall use its best efforts to hold a meeting of its shareholders for
         the approval of an increase in the number of authorized shares of
         Common Stock. In connection with such meeting, the Company shall
         provide each shareholder with a proxy statement and shall use its best
         efforts to solicit its shareholders' approval of such increase in
         authorized shares of Common Stock and to cause its board of directors
         to recommend to the shareholders that they approve such proposal.

         (12) HOLDER'S REDEMPTIONS.

                  (a) Mechanics. In the event that the Holder has sent a
         Redemption Notice to the Company pursuant to Section 4(b), Section 5(c)
         or Section 8, the Holder shall promptly submit this Note to the Company
         unless payment of the Redemption Price, although due, is restricted by
         Sections 15(c), 15(d) or 15(f). The Company shall deliver the
         applicable Triggering Event Redemption Price to the Holder within five
         (5) Business Days after the Company's receipt of the Holder's
         Triggering Event Redemption Notice and thereafter the Holder shall
         promptly deliver this Note to the Company. If the Holder has submitted
         a Change of Control Redemption Notice in accordance with Section 5(c),
         the Company shall deliver the applicable Change of Control Redemption
         Price to the Holder concurrently with the consummation of such Change
         of Control if such notice is received prior to the consummation of such
         Change of Control and within five (5) Business Days after the Company's
         receipt of such notice otherwise. The Company shall deliver the
         applicable Holder Redemption Price to the Holder within five Business
         Days after the Company's receipt of the Holder Redemption Notice and
         thereafter the Holder shall promptly deliver this Note to the Company.
         In the event of a redemption of less than all of the Conversion Amount
         of this Note, the Company shall promptly cause to be issued and
         delivered to the Holder a new Note (in accordance with Section 20(d))
         representing the outstanding Principal which has not been redeemed. In
         the event that the Company does not pay the Redemption Price to the
         Holder within the time period required above in this Section 12(a) at
         any time thereafter and until the Company pays such unpaid Redemption
         Price in full, the Holder shall have the option to, in lieu of
         redemption, require the Company to promptly return to the Holder all or
         any portion of this Note representing the Conversion Amount that was
         submitted for redemption and for which the applicable Redemption Price
         (together with any Late Charges thereon) has not been paid. Upon the
         Company's receipt of such notice, (x) the Redemption Notice shall be
         null and void with respect to such Conversion Amount, (y) the Company
         shall immediately return this Note, or issue a new Note (in accordance
         with Section 20(d)) to the Holder representing such Conversion Amount
         and (z) the Conversion Price of this Note or such new Notes shall be
         adjusted to the lesser of (A) the Conversion Price as in effect on the
         date on which the Redemption Notice is voided and (B) the lowest
         Closing Bid Price during the period beginning on and including the date
         on which the Redemption Notice is delivered to the Company and ending
         on and including the date on which the Redemption Notice is voided;
         provided that the adjustment to the Conversion Price set forth in
         clause (z) shall not be made if the Company's failure to pay the
         Redemption Price in full within the time period required above in this
         Section 12(a) was due solely to the fact that such payment was
         restricted by Section 15(c), Section 15(d) or Section 15(f) and the
         Redemption Price is paid in full within five (5) Business Days after
         the provisions of Section 15(c), Section 15(d) or Section 15(f) no
         longer restricted such payment. The Holder's delivery of a notice
         voiding a Redemption Notice

                                       20

<PAGE>

         and exercise of its rights following such notice shall not affect the
         Company's obligations to make any payments of Late Charges which have
         accrued prior to the date of such notice with respect to the Conversion
         Amount subject to such notice.

                  (b) Redemption by Other Holders. Upon the Company's receipt of
         notice from any of the holders of the Other Notes or the Separate
         Tranche Notes for redemption or repayment as a result of an event or
         occurrence substantially similar to the events or occurrences described
         in Section 4(b), Section 5(c) or Section 8 (each an "Other Redemption
         Notice"), the Company shall immediately forward to the Holder by
         facsimile a copy of such notice. If the Company receives a Redemption
         Notice and one or more Other Redemption Notices during the seven
         Business Day period beginning on and including the date which is three
         Business Days prior to the Company's receipt of the Holder's Redemption
         Notice and ending on and including the date which is three Business
         Days after the Company's receipt of the Holder's Redemption Notice and
         the Company is unable to redeem all principal, interest and other
         amounts designated in such Redemption Notice and such Other Redemption
         Notices received during such seven Business Day period, then the
         Company shall redeem a pro rata amount from each holder of the Notes
         (including the Holder) based on the principal amount of the Notes and
         the Separate Tranche Notes submitted for redemption pursuant to such
         Redemption Notice and such Other Redemption Notices received by the
         Company during such seven Business Day period.

         (13) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the
Notes have been converted, redeemed or otherwise satisfied in accordance with
their terms, the Company shall not, directly or indirectly, redeem, or declare
or pay any cash dividend or distribution on, its capital stock without the prior
express written consent of the holders of Notes representing at least a majority
of the aggregate principal amount of the Notes then outstanding.

         (14) VOTING RIGHTS. The Holder shall have no voting rights as the
holder of this Note, except as required by law, including but not limited to the
Minnesota Business Corporation Act, and as expressly provided in this Note.

         (15) SUBORDINATION; ADDITIONAL INDEBTEDNESS.

                  (a) Certain Indebtedness. So long as this Note is outstanding,
         the Subordinated Amounts (i) shall be subordinate to the Senior
         Indebtedness on the terms described in the other paragraphs of this
         Section 15 and shall be subordinate to Permitted Secured Indebtedness
         (other than Senior Indebtedness) in any Proceeding, (ii) shall rank
         pari passu with and shall not be subordinated to any Pari Passu
         Indebtedness, and (iii) shall be senior to all other Indebtedness of
         the Company other than the Permitted Secured Indebtedness and the Pari
         Passu Indebtedness. So long as this Note is outstanding (A) the Company
         shall not, and shall not permit any of its Subsidiaries located in the
         United States of America or formed after the Initial Issuance Date to,
         directly or indirectly, prepay or retire any Indebtedness (other than
         the Permitted Secured Indebtedness and the Indebtedness evidenced by
         the Notes and the Separate Tranche Notes) of the Company or any of its
         Subsidiaries prior to its scheduled payment dates or

                                       21

<PAGE>

         maturity date, and (B) the Company shall not issue or incur, and shall
         not permit any of its Subsidiaries located in the United States of
         America or formed after the Initial Issuance Date to issue or incur,
         (1) any secured Indebtedness other than the Permitted Secured
         Indebtedness or (2) any other Indebtedness other than Indebtedness the
         holders of which agree in writing to be subordinate to this Note on
         terms and conditions reasonably acceptable to the Holder. For the
         avoidance of doubt, the provisions of this Section 15 shall no longer
         have any effect, and shall terminate, upon the complete conversion
         and/or complete redemption or other payment in full of all amounts
         under this Note; provided, that, Section 15(g) shall remain effective
         to the extent any cash payments in respect of Subordinated Amounts
         shall have been made to the Holder of this Note in violation of Section
         15(c) or 15(d) prior to such complete conversion, complete redemption
         or payment in full of all amounts under this Note until the earlier of
         (x) such time as the terms of Section 15(g) in respect thereof shall
         have been complied with by the Holder and (y) the payment in full of
         the Senior Indebtedness.

                  (b) Agreement of Subordination. Except as otherwise provided
         in this Section 15, the Company covenants and agrees, and the Holder
         likewise covenants and agrees, that this Note shall be issued subject
         to the provisions of this Section 15; and each subsequent Holder of
         this Note accepts and agrees to be bound by such provisions.

                  The payment of the Subordinated Amounts shall, to the extent
         and in the manner set forth in this Section 15, be subordinate and
         subject in right of payment to the prior payment in full of all Senior
         Indebtedness, whether outstanding at the date of this Note or
         thereafter incurred.

                  Anything contained in this Section 15 to the contrary
         notwithstanding, no provision of this Section 15, or operation thereof,
         shall prevent the occurrence of any Triggering Event hereunder or the
         Holder's delivery of a Triggering Event Redemption Notice. It is
         understood that the provisions of this Section 15 are and are intended
         solely for the purposes of defining the relative rights of the Holder,
         on the one hand, and the holders of the Permitted Secured Indebtedness,
         on the other hand, and shall not be deemed to create any rights or
         priorities in favor of any other Person, including, without limitation,
         the Company. The Holder, the Company and the holders of Permitted
         Secured Indebtedness acknowledge that this Section 15 is not intended
         to subordinate this Note to any existing and future indebtedness of the
         Company that is not Permitted Secured Indebtedness.

                  None of (i) this Section 15, (ii) Section 4, (iii) Section 5,
         (iv) Section 8, (v) Section 9, (vi) Section 19, (vii) the definition of
         "Interest Rate," (viii) the definition of the "Maturity Date" or (ix)
         to the extent the amendment thereof would reasonably be expected to
         have a material adverse effect on the holders of the Senior
         Indebtedness, any other provision of this Note, may be amended without
         the prior written consent of the Required Senior Indebtedness Holders.

                  (c) Payments to Holder. No payment of the Subordinated Amounts
         shall be made in cash if:

                           (i) a default in the payment of principal or interest
                  (including required prepayments of principal or interest) due
                  on or in respect of any Senior Indebtedness occurs and is

                                       22

<PAGE>

                  continuing (including, without limitation, any such default in
                  payment resulting from the acceleration of any Senior
                  Indebtedness) and the Holder of this Note shall have received
                  written notice thereof from the applicable Senior Indebtedness
                  Notice Provider; or

                           (ii) subject to the immediately following paragraph
                  and clause (c)(2) below, an event of default, other than a
                  payment event of default, on any Senior Indebtedness occurs
                  and is continuing that then permits holders of such Senior
                  Indebtedness to accelerate its maturity and the Holder of this
                  Note shall have received written notice of such event of
                  default (a "Payment Blockage Notice") from the applicable
                  Senior Indebtedness Notice Provider.

                  Anything contained herein to the contrary notwithstanding, (v)
         for purposes of clause (c)(ii) above, no more than one (1) Payment
         Blockage Notice may be given during any period of 365 consecutive days
         by each Senior Indebtedness Notice Provider and no more than two (2)
         Payment Blockage Notices in the aggregate may be given during any
         period of 365 consecutive days by all Senior Indebtedness Notice
         Providers, (w) no Payment Blockage Notice delivered by any Senior
         Indebtedness Notice Provider shall be effective for purposes of clause
         (c)(ii) above unless and until all scheduled payments of Subordinated
         Amounts that became due, but were subject to and not paid due to a
         prior Payment Blockage Notice previously delivered by such Senior
         Indebtedness Notice Provider, and all Pro Rata Permitted Payments then
         owing, shall have been paid in full in cash, (x) no nonpayment event of
         default in respect of Senior Indebtedness existing on the date any
         Payment Blockage Notice is given by any Senior Indebtedness Notice
         Provider pursuant to clause (c)(ii) above may be used as a basis for
         any subsequent Payment Blockage Notice by such Senior Indebtedness
         Notice Provider, (y) no Senior Indebtedness Notice Provider shall be
         permitted to deliver a Payment Blockage Notice based on any nonpayment
         event of default if the underlying event, occurrence, breach or default
         giving rise thereto is the same event, occurrence, breach or default
         that gave rise to a nonpayment event of default that was the basis for
         any prior Payment Blockage Notice delivered by any Senior Indebtedness
         Notice Provider, and (z) no Senior Indebtedness Notice Provider shall
         be permitted to deliver a Payment Blockage Notice based solely on a
         cross default (including either a cross covenant default or cross
         payment default) to Senior Indebtedness not then owing to either such
         Senior Indebtedness Notice Provider or any other member of a bank
         syndicate in respect of Senior Indebtedness of which such Senior
         Indebtedness Notice Provider is a member or in respect of which such
         Senior Indebtedness Notice Provider is not then acting as agent for a
         bank syndicate.

                  The Company may and shall resume, and the Holder may retain,
         cash payments of Subordinated Amounts (and the Company may make and the
         Holder may retain any payments missed due to the application of clauses
         (c)(i) and/or (c)(ii) above) otherwise permitted hereunder:

                           (1) in the case of a payment default on any Senior
                  Indebtedness referred to in clause (c)(i) above resulting from
                  the acceleration of such Senior Indebtedness (which shall
                  include any payment default upon final maturity without
                  extension of any Senior Indebtedness), upon the earlier of (A)
                  a cure or written waiver thereof in accordance with

                                       23

<PAGE>

                  the terms of such Senior Indebtedness and (B) the date on
                  which such Senior Indebtedness shall have been paid in full,
                  and, in the case of any other payment default on any Senior
                  Indebtedness referred to in clause (c)(i) above, upon the
                  earliest of (A) a cure or written waiver thereof in accordance
                  with the terms of such Senior Indebtedness, (B) the date on
                  which such Senior Indebtedness shall have been paid in full
                  and (C) the expiration of 180 days from the date on which the
                  Holder shall have received notice of the respective payment
                  default in accordance with clause (c)(i) above (unless such
                  Senior Indebtedness shall have been accelerated, in which case
                  the first part of this clause (c)(1) shall apply);

                           (2) in the case of a nonpayment event of default in
                  respect of any Senior Indebtedness referred to in clause
                  (c)(ii) above, upon the earliest to occur of (A) the cure or
                  written waiver thereof in accordance with the terms of such
                  Senior Indebtedness, (B) the date on which such Senior
                  Indebtedness shall have been paid in full and (C) the
                  expiration of 120 days from the date on which the respective
                  Payment Blockage Notice was received; provided, that, (A)
                  subject to the terms and conditions herein contained, during
                  the effectiveness of any Payment Blockage Notice, any other
                  Senior Indebtedness Notice Provider may deliver a Payment
                  Blockage Notice in accordance with the terms hereof and such
                  subsequent Payment Blockage Notice shall be effective
                  immediately upon the cessation of the effectiveness of such
                  prior Payment Blockage Notice; provided, that, among other
                  things, the underlying event of default that is the basis of
                  such subsequent Payment Blockage Notice shall not have been
                  waived or otherwise cured at the time of such cessation; (B)
                  if the terms and conditions of the foregoing clause (A) are
                  satisfied, the Company shall not be prohibited from making,
                  and the Holder of this Note shall not be prohibited from
                  receiving, payments as a result of Payment Blockage Notices
                  delivered in accordance with the foregoing clause (A) for more
                  than an aggregate of 180 consecutive days (giving effect to
                  both such prior and subsequent Payment Blockage Notices); and
                  (C) if any Payment Blockage Notice expires prior to the
                  delivery of any subsequent Payment Blockage Notice, (X) no
                  Senior Indebtedness Notice Provider shall be permitted to
                  deliver any subsequent Payment Blockage Notice prior to the
                  thirtieth (30th) day after the cessation of such prior Payment
                  Blockage Notice and (Y) the Company shall not be prohibited
                  from making, and the Holder of this Note shall not be
                  prohibited from receiving, payments as a result of clause
                  (c)(ii) above for more than an aggregate of 240 days within
                  any period of 365 consecutive days.

         Anything contained herein to the contrary notwithstanding: (A) The
         Company may make and the Holder may accept and retain at any time and
         from time to time (I) nominal cash payments owing in connection with
         any conversion hereunder representing payments in lieu of receipt of
         fractional shares and (II) payments of Pro Rata Permitted Payments; (B)
         if any Change of Control shall occur, the provisions of clause (c)(i)
         or (c)(ii) above shall not operate to block or otherwise prohibit any
         required or mandatory cash payments in respect of this Note unless (x)
         all of the holders of the Senior Indebtedness then outstanding shall
         have elected to be paid in full in connection with such Change of
         Control and the net proceeds of such Change of Control shall not have
         been sufficient to so prepay the Senior Indebtedness then outstanding
         or (y) the Holder did not provide the holders of the Senior
         Indebtedness with at least 30 days' written notice that

                                       24

<PAGE>

         the Holder may elect to deliver a Change of Control Redemption Notice
         in connection with such Change of Control (in which cases the other
         terms of this paragraph (c) shall apply); (C) the Company at any time
         may issue to the Holder shares of capital stock of the Company; and (D)
         if any Proceeding constituting a reorganization under Chapter 11 of the
         United States Bankruptcy Code shall have occurred involving the Company
         (or any successor) and, under the terms of the relevant plan of
         reorganization that shall have been confirmed thereunder, this Note
         shall not have been paid in full in cash on the effective date of such
         plan of reorganization, then the provisions of this paragraph (c) shall
         apply from and after the effective date of such plan of reorganization
         until the Senior Indebtedness shall have been paid in full.

                  For clarification purposes, the Holder of this Note and the
         Company each acknowledges and agrees that, if any Senior Indebtedness
         shall have been accelerated, upon and after receipt of written notice
         by the Holder in accordance with clause (c)(i) above, the Company shall
         not make, and the Holder of this Note shall not receive or retain, any
         cash payments of Subordinated Amounts after receipt of such notice by
         the Holder of this Note until the earliest of (A) a cure or written
         waiver of the resulting payment default in accordance with the terms of
         such Senior Indebtedness, (B) the date on which such Senior
         Indebtedness shall have been paid in full and (C) the date on which
         such acceleration shall have been rescinded by the applicable holders
         of the Senior Indebtedness.

                  (d) Standstill. Subject to the last sentence of this paragraph
         (d), until the Senior Indebtedness is paid in full, the Holder of this
         Note shall not, without the prior written consent of the Required
         Senior Indebtedness Holders, accelerate this Note, cause the redemption
         of this Note due to the occurrence of any Triggering Event
         (specifically excluding any redemption pursuant to Section 8 of this
         Note) or any Change of Control or exercise any of the remedies with
         respect to the Subordinated Amounts that may be available to the Holder
         with respect thereto, either at law or in equity, by judicial
         proceedings or otherwise (an "Enforcement Action"), except as provided
         below; provided, however, that the Holder's delivery of a Triggering
         Event Redemption Notice shall not constitute an Enforcement Action.
         Upon the earliest to occur of:

                           (i) the passage of 179 days from the date the Holder
                  gave written notice to the holders of the Senior Indebtedness
                  of the occurrence of any Triggering Event, if such Triggering
                  Event shall not have been waived in writing within such
                  period;

                           (ii) acceleration of the Senior Indebtedness
                  (provided, however, that if, following any such acceleration
                  of the Senior Indebtedness, such acceleration in respect of
                  the Senior Indebtedness is rescinded, then all Enforcement
                  Actions taken by the Holder shall likewise be rescinded if (y)
                  such Enforcement Actions are based on this clause (ii) and (z)
                  the Holder shall not have any vested right under any other
                  clause of this paragraph (d) to take any Enforcement Action;
                  provided, further, that such rescission by the Holder shall
                  not effect the running of the 179 day period under clause
                  (d)(i) above to the extent the Triggering Event giving rise
                  thereto is not based solely on an acceleration of the Senior
                  Indebtedness);

                                       25

<PAGE>

                           (iii) the occurrence of a Proceeding (provided,
                  however, that if such Proceeding is dismissed, the
                  corresponding prohibition against the Holder taking any
                  Enforcement Action shall be reinstated automatically as of the
                  date of such dismissal as if such Proceeding had not been
                  initiated, unless the Holder shall have the vested right to
                  take any Enforcement Action under another clause of this
                  paragraph (d) (provided, that such reinstatement of the
                  prohibition against the Holder taking any Enforcement Action
                  shall not affect the running of the 179 day period under
                  clause (d)(i) above to the extent the Triggering Event giving
                  rise thereto is not based solely on the initiation of such
                  Proceeding)); and

                           (iv) if a Triggering Event has occurred, the sale or
                  other disposition of assets by the Company and/or any of its
                  Subsidiaries, whether in a single transaction or a series of
                  transactions, constituting more than fifteen percent (15%) of
                  the aggregate consolidated assets (calculated on a book-value
                  basis) of the Company and its Subsidiaries taken as a whole
                  (other than any such sale or other disposition to a Person
                  that is either wholly-owned by the Company or a wholly-owned
                  subsidiary thereof) outside of the ordinary course of business
                  for less than fair value (as certified by the Board of
                  Directors of the Company and determined by such board in good
                  faith); provided, that, if such sale or other disposition the
                  result of which is to cause the occurrence of the foregoing is
                  consummated without the consent of the Required Senior
                  Indebtedness Holders (evidence of which shall be requested by
                  the Holder of this Note from the Senior Indebtedness Notice
                  Providers), the Holder of this Note shall deliver to such
                  Senior Indebtedness Notice Providers not less than thirty (30)
                  days' prior written notice of its intent to take an
                  Enforcement Action;

         then the Holder may take any and all Enforcement Actions. Anything
         herein contained to the contrary notwithstanding, (A) the Holder from
         time to time and at any time shall be permitted to seek specific
         performance or other injunctive relief in the event of any breach or
         threatened breach by the Company of any of its agreements, obligations
         and covenants under this Note; provided, that, the Holder shall not be
         permitted to seek or receive payments hereunder (such prohibition being
         effective only to the extent such payments were missed due to the
         application of paragraph (c) of this Section 15), damages or monetary
         restitution, compensation or remuneration in respect of this Note or
         the obligations of the Company hereunder unless the Holder otherwise
         shall have been permitted to take such other actions pursuant to this
         paragraph (d) (for clarification, the Holder may always take action to
         seek or cause the payment of Pro Rata Permitted Payments); (B) the
         Holder shall be permitted to take any Enforcement Action immediately
         upon the occurrence of any Change of Control unless (x) all of the
         holders of the Senior Indebtedness then outstanding shall have elected
         to be paid in full in connection with such Change of Control and the
         net proceeds of such Change of Control shall not have been sufficient
         to so prepay the Senior Indebtedness then outstanding or (y) the Holder
         did not provide the holders of the Senior Indebtedness with at least 30
         days' written notice that the Holder may elect to deliver a Change of
         Control Redemption Notice in connection with such Change of Control (in
         which case the other terms of this paragraph (d) shall apply); (C) the
         Holder from time to time may bring and maintain actions against the
         Company solely to collect payments of accrued

                                       26

<PAGE>

         and unpaid Interest under, and any cash payments in respect of, this
         Note so long as the Company shall have otherwise been permitted to make
         such payment(s) to the Holder under the terms of this Section 15 and
         otherwise failed to do so (and the Holder shall be permitted to keep
         and retain such payments upon receipt); and (D) the Holder shall be
         permitted to exercise its rights under Section 8, and receive payments
         of Subordinated Amounts in connection therewith, so long as the Company
         shall otherwise be permitted to make such payments to the Holder under
         the terms of this Section 15.

                  (e) Proceeding. Upon any payment by the Company, or
         distribution of assets of the Company of any kind or character, whether
         in cash, property or securities, to creditors in connection with any
         Proceeding, subject to the immediately following paragraph, all amounts
         due or to become due upon all Senior Indebtedness shall first be paid
         in full in cash, cash equivalents or other property reasonably
         acceptable to the Required Senior Indebtedness Holders before any
         payment is made on account of the principal of, premium, if any, or
         interest on this Note or any other Subordinated Amount; and, subject to
         the immediately following paragraph, in connection with any such
         Proceeding, any payment by the Company, or distribution of assets of
         the Company of any kind or character, whether in cash, property or
         securities, to which the Holder would be entitled, except for the
         provision of this paragraph (e), shall (except as aforesaid) be paid by
         the Company, or by any receiver, trustee in bankruptcy, liquidating
         trustee, agent or other Person making such payment or distribution, or
         by the Holder if received by it, directly to the holders of Senior
         Indebtedness (to be applied pro rata to such holders on the basis of
         the respective amounts of Senior Indebtedness held by such holders, or
         as otherwise required by law or a court order) or their representative
         or representatives, as their respective interests may appear, to the
         extent necessary to pay all Senior Indebtedness in full in cash, cash
         equivalents or other Property reasonably acceptable to the holders of
         such Senior Indebtedness, after giving effect to any concurrent payment
         or distribution to or for the holders of Senior Indebtedness, before
         any payment or distribution or provision therefore is made to the
         Holder.

                  For purposes of this paragraph (e), the words, "cash, property
         or securities" shall not be deemed to include (A) shares of capital
         stock or other equity securities of the Company (or any successor
         corporation or other entity) as reorganized or readjusted or otherwise
         or (B) debt securities of the Company (or any successor corporation or
         other entity) provided for by a plan of reorganization or readjustment
         the payment of which is subordinated, at least to the extent provided
         in this Section 15 with respect to this Note, to the payment of all
         Senior Indebtedness which may at the time be outstanding.

                  Upon any payment or distribution of assets of the Company
         referred to in this Section 15, the Holder shall be entitled to rely
         upon any order or decree made by any court of competent jurisdiction in
         which a Proceeding is pending, or a certificate of the receiver,
         trustee in bankruptcy, liquidating trustee, agent or other Person
         making such payment or distribution, that shall have been delivered to
         the Holder for the purposes of ascertaining the persons entitled to
         participate in such distribution, the holders of the Senior
         Indebtedness and other Indebtedness of the Company, the amount thereof
         or payable thereon and all other facts pertinent thereto or to this
         Section 15.

                                       27

<PAGE>

                  (f) Redemption. With respect to any redemption in cash of all
         or any part of this Note pursuant to Section 8 hereof (which, for
         clarity, does not include regularly scheduled payments), the Holder
         shall provide prior written notice of any such redemption to the Senior
         Indebtedness Notice Providers, and the Company may effectuate such
         redemption if either (i) the Company or the Holder receives written
         consent thereto by the Required Senior Indebtedness Holders or (ii) (a)
         30 days have elapsed from the delivery of the notice referenced above
         to the Senior Indebtedness Notice Providers and (b)(x) no Payment
         Blockage Notice shall have been received by the Holder and is then
         effective in accordance with the terms of Section 15(c) or (y) the
         terms of Section 15(c) otherwise do not prohibit the cash redemption of
         this Note by the Company.

                  (g) Turnover. In the event that, notwithstanding the foregoing
         provisions, any payment or distribution of assets of the Company of any
         kind or character, whether in cash, property or securities (including,
         without limitation, by way of setoff or otherwise), otherwise
         prohibited by the terms of this Section 15, shall be received by the
         Holder before all Senior Indebtedness is paid in full, such payment or
         distribution shall be held in trust for the benefit of and shall be
         paid over or delivered to the holders of the Senior Indebtedness or
         their representative or representatives, as their respective interests
         may appear, as calculated by the Company, for application to the
         payment of all Senior Indebtedness then remaining unpaid to the extent
         necessary to pay all Senior Indebtedness in full, after giving effect
         to any concurrent payment or distribution to or for the holders of such
         Senior Indebtedness.

                  (h) Subrogation; Relative Rights; Reliance. Subject to the
         payment in full of all Senior Indebtedness, the rights of the Holder
         shall be subrogated to the extent of the payments or distributions made
         to the holders of such Senior Indebtedness pursuant to the provisions
         of this Section 15 to the rights of the holders of the Senior
         Indebtedness to receive payments or distributions of cash, property or
         securities of the Company applicable to the Senior Indebtedness until
         the Principal of, premium, if any, and Interest on and all other
         amounts owing under this Note, the Warrants, the Separate Tranche
         Warrants, the Securities Purchase Agreement and Registration Rights
         Agreement shall be paid in full in cash; and, for the purposes of such
         subrogation, no payments or distributions to the holders of the Senior
         Indebtedness of any cash, property or securities to which the Holder
         would be entitled except for the provisions of this Section 15, and no
         payment over pursuant to the provisions of this Section 15, to or for
         the benefit of the holders of Senior Indebtedness by the Holder shall,
         as among the Company, its creditors (other than holders of the Senior
         Indebtedness) and the Holder, be deemed to be a payment by the Company
         to or an account of the Senior Indebtedness; and no payments or
         distributions of cash, property or securities to or for the benefit of
         the Holder pursuant to the subrogation provisions of this Section 15,
         which would otherwise have been paid to the holders of the Senior
         Indebtedness, shall be deemed to be a payment by the Company to or for
         the account of this Note.

                  Nothing contained in this Section 15 or elsewhere in this Note
         is intended to or shall impair, as among the Company, its creditors
         (other than the holders of the Senior Indebtedness) and the Holder, the
         obligation of the Company, which is absolute and unconditional, to pay
         to

                                       28

<PAGE>

         the Holder the Principal of (and premium, if any) and interest on, and
         all other amounts under, this Note, the Warrants, the Separate Tranche
         Warrants, the Securities Purchase Agreement and the Registration Rights
         Agreement as and when the same shall become due and payable in
         accordance with their terms, or is intended to or shall affect the
         relative rights of the Holder and creditors of the Company (other than
         the holders of the Senior Indebtedness), nor shall anything herein
         prevent the Holder from exercising all remedies otherwise permitted by
         applicable law upon default under this Note, subject to the rights, if
         any, under this Section 15 of the holders of the Senior Indebtedness in
         respect of cash, property or securities of the Company received upon
         the exercise of any such remedy.

                  (i) No Collateral. The Holder may not take any voluntary
         security interest in any property of the Company to secure obligations
         of the Company under this Note.

                  (j) Notice to Holder. The Company shall give prompt written
         notice in the form of an officer's certificate to the Holder of any
         fact known to the Company which would prohibit the making of any
         payment of cash to the Holder in respect of this Note pursuant to the
         provisions of this Section 15.

                  (k) No Impairment of Subordination. Except as otherwise
         expressly provided in this Section 15, including, without limitation,
         certain obligations to deliver notices to the Holder in accordance with
         the terms hereof, no right of any present or future holder of any
         Senior Indebtedness to enforce the subordination 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, to the extent taken or not taken
         in good faith, by any act or failure to act by any such holder, or by
         any noncompliance by the Company with the terms, provisions and
         covenants of this Note, regardless of any knowledge thereof which any
         such holder may have or otherwise be charged with.

                  The subordination provisions set forth herein and the rights
         of the holders of the Senior Indebtedness arising under this Section 15
         shall not be affected, modified or impaired in any manner or to any
         extent by (i) subject to the restrictions set forth in the definition
         of Senior Indebtedness and subject to Section 15(n), any amendment,
         modification of or supplement to any of the documents evidencing the
         Senior Indebtedness, (ii) the validity or enforceability of such
         documents, (iii) the release, sale, exchange or surrender, in whole or
         in part, of any collateral security, now or hereafter existing, for any
         of the Senior Indebtedness, (iv) any exercise or non-exercise of any
         right, power or remedy under or in respect of the Senior Indebtedness
         or any such document described in clause (i) above or arising at law,
         or (v) any waiver, consent, release, indulgency, extension, renewal,
         modification, delivery or other action, inaction or omission in respect
         of the Senior Indebtedness or the documents evidencing or in respect of
         any collateral security therefor.

                  (l) Certain Conversions Deemed Payment. Nothing contained in
         this Section 15 shall prevent the Holder from exercising from time to
         time any of its rights of conversion under Sections 3, 6, or 7. For the
         purposes of this Section 15 only, (i) neither the issuance and delivery
         of shares of Common Stock upon conversion in accordance with Section 3

                                       29

<PAGE>

         nor the payment of Interest in shares of Common Stock in accordance
         with Section 2 hereof, shall be deemed to constitute a payment or
         distribution on account of the Subordinated Amounts or the Pro Rata
         Permitted Payments and (ii) the payment, issuance or delivery of cash,
         property or securities (other than Common Stock or, subject to the
         applicable terms hereof, other capital stock or equity or debt
         securities of the Company) upon conversion shall be deemed to
         constitute payment on account of the principal of this Note. Nothing
         contained in this Section 15 or elsewhere in this Note or in the
         Securities is intended to or shall impair, as among the Company, its
         creditors other than holders of the Senior Indebtedness, the right,
         which is absolute and unconditional, of the Holder to convert this Note
         in accordance with Section 3.

                  (m) Senior Indebtedness Entitled to Rely. The holders of the
         Senior Indebtedness shall have the right to rely upon this Section 15,
         and shall be third party beneficiaries thereof and may enforce their
         rights against the Holder and the Company for any breach of the
         provisions of this Section 15. As a condition to such reliance, the
         holders of the Senior Indebtedness and the Senior Indebtedness Notice
         Providers shall have provided to the Holder contact information for
         purposes of any and all notices and other communications hereunder to
         be delivered by the Holder to such holders and Senior Indebtedness
         Notice Providers; provided, that, if more than three (3) Persons are
         holders of the Senior Indebtedness, at the Company's expense, a
         receiving agent shall have been duly appointed and agreed to act as
         agent for all such holders of the Senior Indebtedness pursuant to
         documentation reasonably satisfactory to the Holder and, upon such
         appointment, any and all notices and other communications to be made
         under this Section 15 to any holder of Senior Indebtedness shall
         instead be given to such receiving agent, and any such notice shall be
         fully effective as if made to all such holders. Notwithstanding
         anything contained in the foregoing sentence to the contrary, subject
         to compliance with the second sentence of this paragraph (m) in respect
         of the delivery of contact information, all notices and other
         communications hereunder to be delivered by the Holder to the holders
         of the Senior Indebtedness shall also be made to the Senior
         Indebtedness Notice Providers.

                  (n) Amendments to Senior Indebtedness. The Company may at any
         time and from time to time without the consent of the Holder, without
         incurring liability to the Holder and without impairing or releasing
         the obligations of the Holder under this Section 15, change the amount,
         manner or place of payment or extend the time of payment of or renew or
         alter any of the terms of the Senior Indebtedness, or amend in any
         manner any agreement, note, guaranty or other instrument evidencing or
         securing or otherwise relating to the Senior Indebtedness except (x) as
         limited by the definition of Senior Indebtedness and (y) to the extent
         the effect of such change, extension, renewal, alteration or amendment
         would:

                           (i) increase the interest rate applicable to Senior
                  Indebtedness to a rate higher than a prime rate in effect from
                  time to time (as announced from time to time by a nationally
                  recognized banking association) plus 600 basis points (or
                  change any margin or spread or the level of any financial
                  covenant indicator or ratio if such change effectively would
                  so increase the interest rate to a rate higher than such prime
                  rate plus 600 basis points), except in connection with the
                  imposition of a default rate of interest;

                                       30

<PAGE>

                           (ii) revise the scheduled "maturity date"or the
                  equivalent thereof in the documents relating to the Senior
                  Indebtedness to a date earlier than June 29, 2003; or

                           (iii) cause the Senior Indebtedness to constitute a
                  credit facility other than a credit facility that constitutes
                  a revolving credit facility that is secured by accounts
                  receivable, inventory and other assets of the Company
                  utilizing a borrowing base determined by advance rates in
                  respect of eligible receivables and eligible inventory on
                  terms that are commonly considered among those offered in the
                  United States asset-based lending market to commercial
                  manufacturers with similar financial strength to the Company,
                  and which may provide for overadvances from time to time.

         (16) AUTOMATIC AMENDMENT. If any holder of Senior Indebtedness makes
any change to or adds any event of default or any covenant with respect to the
Senior Indebtedness, a corresponding change or addition, as the case may be,
shall automatically be made to this Note, and shall become effective,
simultaneously therewith, without any further action on the part of the Holder
or the Company; provided that no such change or addition shall be made pursuant
to this Section 16 if the result would be to make the Company's obligations
under this Note less restrictive than those in effect immediately prior to such
change or addition.

         (17) PARTICIPATION. The Holder, as the holder of this Note, shall be
entitled to such dividends paid and distributions made to the holders of Common
Stock to the same extent as if the Holder had converted this Note into Common
Stock (without regard to any limitations on conversion herein or elsewhere) and
had held such shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made concurrently
with the dividend or distribution to the holders of Common Stock.

         (18) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote
at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of Notes representing not less than a majority of the
aggregate principal amount of the then outstanding Notes, shall be required for
any change or amendment to this Note or the Other Notes .

         (19) TRANSFER. This Note may be offered, sold, assigned or transferred
by the Holder without the consent of the Company, subject only to the provisions
of Section 2(f) of the Securities Purchase Agreement. Notwithstanding the
foregoing, no transfer of less than $100,000 of principal amount of this Note
(or, if lower, the entire remaining principal amount outstanding hereunder)
shall be permitted without the prior written consent of the Company, which
consent shall not be unreasonably delayed. This Note may not be sold,
transferred or assigned by the Holder to any affiliate or Subsidiary of the
Company.

         (20) REISSUANCE OF THIS NOTE.

                  (a) Transfer. If this Note is to be transferred, the Holder
         shall surrender this Note to the Company, whereupon the Company will
         forthwith issue and deliver upon the order of the Holder a new Note (in
         accordance with Section 20(d)), registered as the

                                       31

<PAGE>

         Holder may request, representing the outstanding Principal being
         transferred by the Holder and, if less then the entire outstanding
         Principal is being transferred, a new Note (in accordance with Section
         20(d)) to the Holder representing the outstanding Principal not being
         transferred. The Holder and any assignee, by acceptance of this Note,
         acknowledge and agree that, by reason of the provisions of Section
         3(c)(iii) and this Section 20(a), following conversion or redemption of
         any portion of this Note, the outstanding Principal represented by this
         Note may be less than the Principal stated on the face of this Note.

                  (b) Lost, Stolen or Mutilated Note. Upon receipt by the
         Company of evidence reasonably satisfactory to the Company of the loss,
         theft, destruction or mutilation of this Note, and, in the case of
         loss, theft or destruction, of any indemnification undertaking by the
         Holder to the Company in customary form and, in the case of mutilation,
         upon surrender and cancellation of this Note, the Company shall execute
         and deliver to the Holder a new Note (in accordance with Section 20(d))
         representing the outstanding Principal.

                  (c) Note Exchangeable for Different Denominations. This Note
         is exchangeable, upon the surrender hereof by the Holder at the
         principal office of the Company, for a new Note or Notes (in accordance
         with Section 20(d) and in principal amounts of at least $100,000)
         representing in the aggregate the outstanding Principal of this Note,
         and each such new Note will represent such portion of such outstanding
         Principal as is designated by the Holder at the time of such surrender.

                  (d) Issuance of New Notes. Whenever the Company is required to
         issue a new Note pursuant to the terms of this Note, such new Note (i)
         shall be of like tenor with this Note, (ii) shall represent, as
         indicated on the face of such new Note, the Principal remaining
         outstanding (or in the case of a new Note being issued pursuant to
         Section 20(a) or Section 20(c), the Principal designated by the Holder
         which, when added to the principal represented by the other new Notes
         issued in connection with such issuance, does not exceed the Principal
         remaining outstanding under this Note immediately prior to such
         issuance of new Notes), (iii) shall have an issuance date, as indicated
         on the face of such new Note which is the same as the Issuance Date of
         this Note, (iv) shall have the same rights and conditions as this Note,
         and (v) shall represent accrued Interest and Late Charges on the
         Principal and Interest of this Note, from the Issuance Date.

         (21) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note, the Securities
Purchase Agreement, the Warrants and the Registration Rights Agreement, at law
or in equity (including a decree of specific performance and/or other injunctive
relief), and nothing herein shall limit the Holder's right to pursue actual and
consequential damages for any failure by the Company to comply with the terms of
this Note. Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts to be
received by the Holder and shall not, except as expressly provided herein, be
subject to any other obligation of the Company (or the performance thereof). The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the

                                       32

<PAGE>

remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

         (22) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this
Note is placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding or the Holder otherwise takes
action to collect amounts due under this Note or to enforce the provisions of
this Note or (b) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors' rights and
involving a claim under this Note, then the Company shall pay the costs incurred
by the Holder for such collection, enforcement or action or in connection with
such bankruptcy, reorganization, receivership or other proceeding, including but
not limited to attorneys fees and disbursements.

         (23) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly
drafted by the Company and all the Purchasers and shall not be construed against
any person as the drafter hereof. The headings of this Note are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Note.

         (24) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.

         (25) DISPUTE RESOLUTION. In the case of a dispute as to the
determination of the Redemption Price or the arithmetic calculation of the
Conversion Rate or the Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within two Business Days
of receipt of the Conversion Notice or Redemption Notice giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are
unable to agree upon such determination or calculation of the Conversion Rate
within three Business Days of such disputed determination or arithmetic
calculation being submitted to the Holder, then the Company shall, within two
Business Days submit via facsimile (a) the disputed determination of the Closing
Bid Price, Closing Sale Price or Weighted Average Price to an independent,
reputable investment bank selected by the Company and approved by the Holder or
(b) the disputed arithmetic calculation of the Conversion Rate or the Redemption
Price to the Company's independent, outside accountant. The Company, at the
Company's expense, shall cause the investment bank or the accountant, as the
case may be, to perform the determinations or calculations and notify the
Company and the Holder of the results no later than ten Business Days from the
time it receives the disputed determinations or calculations. Such investment
bank's or accountant's determination or calculation, as the case may be, shall
be binding upon all parties absent demonstrable error.

         (26) NOTICES; PAYMENTS.

                                       33

<PAGE>

                  (a) Notices. Whenever notice is required to be given under
         this Note, unless otherwise provided herein, such notice shall be given
         in accordance with Section 9(f) of the Securities Purchase Agreement.
         The Company shall provide the Holder with prompt written notice of all
         actions taken pursuant to this Note, including in reasonable detail a
         description of such action and the reason therefore. Without limiting
         the generality of the foregoing, the Company will give written notice
         to the Holder (i) immediately upon any adjustment of the Conversion
         Price, setting forth in reasonable detail, and certifying, the
         calculation of such adjustment and (ii) at least fifteen Business Days
         prior to the date on which the Company closes its books or takes a
         record (A) with respect to any dividend or distribution upon the Common
         Stock, (B) with respect to any grants, issues or sales of any Options,
         Convertible Securities or rights to purchase stock, warrants,
         securities or other property pro rata to holders of Common Stock or (C)
         for determining rights to vote with respect to any Change of Control,
         dissolution or liquidation, provided in each case that such information
         shall be made known to the public prior to or in conjunction with such
         notice being provided to such holder. Notwithstanding the foregoing,
         Section 4(j) of the Securities Purchase Agreement shall apply to all
         notices given pursuant to this Note.

                  (b) Payments. Whenever any payment of cash is to be made by
         the Company to any Person pursuant to this Note, such payment shall be
         made in lawful money of the United States of America by a check drawn
         on the account of the Company and sent via overnight courier service to
         such Person at such address as previously provided to the Company in
         writing (which address, in the case of each of the Purchasers (as
         defined in Section 3(d)(ii)), shall initially be as set forth on the
         Schedule of Buyers attached to the Securities Purchase Agreement);
         provided that the Holder may elect to receive a payment of cash via
         wire transfer of immediately available funds by providing the Company
         with prior written notice setting out such request and the Holder's
         wire transfer instructions. Whenever any amount expressed to be due by
         the terms of this Note is due on any day which is not a Business Day,
         the same shall instead be due on the next succeeding day which is a
         Business Day and, in the case of any Interest Date which is not the
         date on which this Note is paid in full, the extension of the due date
         thereof shall not be taken into account for purposes of determining the
         amount of Interest due on such date . Any amount of Interest, Principal
         or other amount due under the Transaction Documents (as defined in the
         Securities Purchase Agreement) which is not paid when due shall result
         in a late charge being incurred and payable by the Company in an amount
         equal to interest on such amount at the rate of 15% per annum from the
         date such amount was due until the same is paid in full ("Late
         Charge").

                  (c) Notices to Senior Indebtedness Notice Providers. Notice to
         the holders of Senior Indebtedness (including, without limitation, the
         Senior Indebtedness Notice Providers) as required under the terms of
         this Note shall be in writing and shall be deemed to have been validly
         delivered (i) upon receipt if deposited in the United States mails,
         first class mail, with proper postage prepaid, (ii) upon receipt of
         confirmation or answerback if sent by telecopy or other similar
         facsimile transmission, (iii) one Business Day after deposit with a
         reputable overnight courier with all charges prepaid, or (iv) when
         delivered, if hand-delivered by messenger, all of which shall be
         properly addressed to the holder of Senior Indebtedness to be notified
         and sent to the address or number indicated as follows:

                                       34

<PAGE>

                           (A) to IBM Credit Corporation, at North Castle Drive,
                  Armonk, NY 10504, Attention: Credit Manager, Facsimile: (914)
                  765-6276;

                           (B) to U.S. Bank National Association, at 601 Second
                  Avenue South, Minneapolis, MN 55402 , Attention: Christopher
                  J. Schaaf, Facsimile (612) 973-0829; and

                           (C) to any future holder of Senior Indebtedness at
                  such address and number as such holder of Senior Indebtedness
                  shall notify the Holder in writing prior to the delivery of
                  such notice;

         or in each case to such other address or number as a holder of Senior
         Indebtedness may from time to time designate to the Holder in writing.

         (27) CANCELLATION. After all Principal, accrued Interest and other
amounts at any time owed on this Note has been paid in full, this Note shall
automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.

         (28) WAIVER OF NOTICE. To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note and the Securities Purchase Agreement.

         (29) GOVERNING LAW. This Note shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York.

         (30) CERTAIN DEFINITIONS. For purposes of this Note, the following
terms shall have the following meanings:

                  (a) "Business Day" means any day other than Saturday, Sunday
         or other day on which commercial banks in The City of New York are
         authorized or required by law to remain closed.

                  (b) "Calendar Quarter" means, each of the period beginning on
         and including January 1 and ending on and including March 31, the
         period beginning on and including April 1 and ending on and including
         June 30, the period beginning on and including July 1 and ending on and
         including September 30, and the period beginning on and including
         October 1 and ending on and including December 31.

                  (c) "Change of Control Redemption Percentage" means, with
         respect to any date of determination, (i) prior to May 1, 2003, 116%,
         (ii) during the period

                                       35

<PAGE>

         beginning on and including May 1, 2003 and ending on but excluding May
         1, 2004, 112%, (iii) during the period beginning on and including May
         1, 2004 and ending on but excluding May 1, 2005, 108%, (iv) during the
         period beginning on and including May 1, 2005 and ending on but
         excluding May 1, 2006, 106%, and (v) on or after May 1, 2006, 104%.

                  (d) "Closing Bid Price" and "Closing Sale Price" means, for
         any security as of any date, the last closing bid price and last
         closing trade price, respectively, for such security on the Nasdaq
         National Market (the "Principal Market") as reported by Bloomberg
         Financial Markets ("Bloomberg"), or, if the Principal Market begins to
         operate on an extended hours basis and does not designate the closing
         bid price or the closing trade price, as the case may be, then the last
         bid price or last trade price, respectively, of such security prior to
         4:00:00 p.m. Eastern Time as reported by Bloomberg, or, if the
         Principal Market is not the principal securities exchange or trading
         market for such security, the last closing bid price or last trade
         price, respectively, of such security on the principal securities
         exchange or trading market where such security is listed or traded as
         reported by Bloomberg, or if the foregoing do not apply, the last
         closing bid price or last trade price, respectively, of such security
         in the over-the-counter market on the electronic bulletin board for
         such security as reported by Bloomberg, or, if no closing bid price or
         last trade price, respectively, is reported for such security by
         Bloomberg, the average of the bid prices, or the ask prices,
         respectively, of any market makers for such security as reported in the
         "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid
         Price or the Closing Sale Price cannot be calculated for a security on
         a particular date on any of the foregoing bases, the Closing Bid Price
         or the Closing Sale Price, as the case may be, of such security on such
         date shall be the fair market value as mutually determined by the
         Company and the Holder. If the Company and the Holder are unable to
         agree upon the fair market value of such security, then such dispute
         shall be resolved pursuant to Section 25. All such determinations to be
         appropriately adjusted for any stock dividend, stock split, stock
         combination or other similar transaction during any applicable
         calculation period.

                  (e) "Common Stock" means (i) the Company's common stock, par
         value $0.01 per share, and (ii) any capital stock resulting from a
         reclassification of such Common Stock.

                  (f) "Excluded Securities" means any shares of Common Stock
         issued or issuable (i) in connection with a strategic partnership or
         joint venture in which there is a significant commercial relationship
         with the Company and in which the primary purpose of which is not to
         raise capital, (ii) pursuant to a bona fide firm commitment
         underwritten public offering with a nationally recognized underwriter
         which generates gross proceeds in excess of $45,000,000 (other than an
         "at-the-market offering" as defined in Rule 415(a)(4) under the 1933
         Act and "equity lines"), (iii) upon conversion or exercise of any
         Options or Convertible Securities which are outstanding on the day
         immediately preceding the Initial Issuance Date, provided that the
         terms of such Options or Convertible Securities are not amended,
         modified or changed on or after the Initial Issuance Date, and (iv)
         pursuant to any subdivision of one or more classes or the Company's
         outstanding shares of Common Stock with respect to which an adjustment
         to the Conversion Price has been made pursuant to Section 7(b).

                                       36

<PAGE>

                  (g) "holders of the Senior Indebtedness" means the holders of
         the Senior Indebtedness, initially IBM Credit Corporation and U.S. Bank
         National Association.

                  (h) "Indebtedness" shall have the meaning ascribed to that
         term in Section 3(r) of the Securities Purchase Agreement.

                  (g) "Initial Issuance Date" means [INSERT: the Issuance Date
         of the Initial A-1 Notes.]

                  (h) "Interest Conversion Price" means, with respect to any
         Interest Date, that price which shall be computed as 95% of the
         arithmetic average of the Weighted Average Price of the Common Stock on
         each of the five consecutive Trading Days immediately preceding the
         second Trading Day immediately preceding such Interest Date. All such
         determinations to be appropriately adjusted for any stock split, stock
         dividend, stock combination or other similar transaction during such
         period.

                  (i) "Pari Passu Indebtedness" means any unsecured Indebtedness
         of the Company outstanding as of the date of the Securities Purchase
         Agreement, all of which is set forth on Schedule 3(r) of the Securities
         Purchase Agreement as of the date thereof, excluding any replacements,
         amendments or modifications thereto.

                  (j) "Permitted Refinancing Indebtedness" shall mean
         Indebtedness incurred by the Company to refinance Senior Indebtedness,
         but only if such Indebtedness (i) is evidenced by financing
         documentation constituting Permitted Refinancing Senior Indebtedness
         Documents (and such documentation otherwise complies with the terms
         conditions contained in the definition thereof) and (ii) is, with
         respect to each item of Senior Indebtedness being refinanced, evidenced
         by a credit facility that constitutes a revolving credit facility that
         is secured by accounts receivable, inventory and other assets of the
         Company utilizing a borrowing base determined by advance rates in
         respect of eligible receivables and eligible inventory on terms that
         are commonly considered among those offered in the United States
         asset-based lending market to commercial manufacturers with similar
         financial strength to the Company, and which may provide for
         overadvances from time to time.

                  (k) "Permitted Refinancing Senior Indebtedness Documents"
         shall mean any financing documentation evidencing Permitted Refinancing
         Indebtedness that replaces the documents evidencing Senior Indebtedness
         and pursuant to which such Senior Indebtedness is so refinanced, as
         such financing documentation may be amended, supplemented or otherwise
         modified from time to time in compliance with Section 15(n).

                  (l) "Permitted Secured Indebtedness" means (i) the Senior
         Indebtedness, (ii) any Indebtedness of the Company incurred in the
         ordinary course of business secured by a purchase money security
         interest, (iii) any capitalized lease obligations of the Company
         incurred in the ordinary course of business and (iv) any other secured
         Indebtedness of the Company which is set forth on Schedule 3(r) of the
         Securities Purchase Agreement as of the date thereof, excluding any
         replacements, amendments or modifications to such Indebtedness.

                                       37

<PAGE>

                  (m) "Person" means an individual, a limited liability company,
         a partnership, a joint venture, a corporation, a trust, an
         unincorporated organization, any other entity and a government or any
         department or agency thereof.

                  (n) "Proceeding" means any insolvency, bankruptcy,
         receivership, custodianship, liquidation, reorganization, assignment
         for the benefit of creditors or other proceeding for the liquidation,
         dissolution or other winding up of the Company.

                  (o) "Pro Rata Permitted Payments" means, as to the Holder,
         cash payments to the Holder under (i) this Note and any Separate
         Tranche Notes held by the Holder (other than payments of Principal,
         premium and Interest (including payment of the Redemption Price) with
         respect to this Note or such Separate Tranche Notes) and (ii) the
         Warrants, the Separate Tranche Warrants, the Securities Purchase
         Agreement and the Registration Rights Agreement, including, in any
         case, without limitation, payments of any closing fees, payments for
         reimbursable costs, fees and expenses relating to the transactions
         evidenced hereby and thereby, and reimbursement and indemnification
         payments required to be paid pursuant to the terms hereof or of the
         Securities Purchase Agreement or Registration Rights Agreement, up to
         an aggregate amount collectively equal to the Holder's Subsequent
         Closing Percentage (as defined in the Securities Purchase Agreement) of
         (a) if, at any time of determination, the aggregate original principal
         amount of this Note, the Other Notes and all Separate Tranche Notes
         (determined at time of issuance) issued at or prior to such time does
         not exceed $20,000,0000, then $500,000, or (b) if, at any time of
         determination, the aggregate original principal amount of this Note,
         the Other Notes and all Separate Tranche Notes (determined at time of
         issuance) issued at or prior to such time exceeds $20,000,0000, then
         $1,000,000.

                  (p) "Registration Rights Agreement" means that certain
         registration rights agreement between the Company and the initial
         holders of the Notes relating to the registration of the resale of the
         shares of Common Stock issuable upon conversion of the Notes.

                  (q) "Required Senior Indebtedness Holders" means, as of any
         date of determination, the holders of the Senior Indebtedness
         representing, in the aggregate, at least 50.1% of the aggregate
         principal amount of the Senior Indebtedness outstanding as of such
         date; provided, however, if there are only two holders of the Senior
         Indebtedness outstanding as of such date, then "Required Senior
         Indebtedness Holders" shall mean both of such holders of Senior
         Indebtedness; provided, further, that if, as of any date of
         determination, IBM Credit represents at least 30% of the aggregate
         principal amount of the Senior Indebtedness outstanding as of such
         date, then IBM Credit shall be one of the "Required Senior Indebtedness
         Holders."

                  (r) "Securities Purchase Agreement" means that certain
         securities purchase agreement between the Company and the initial
         holders of the Notes pursuant to which the Company issued the Notes.

                  (s) "Senior Indebtedness" means (i) all of the secured
         indebtedness, liabilities and obligations of the Company to (A) IBM
         Credit Corporation ("IBM Credit") or (B)

                                       38

<PAGE>

         U.S. Bank National Association ("U.S. Bank") whether now existing or
         hereafter arising under (x) the Amended and Restated Revolving Credit
         Agreement dated June 29, 2001, as amended by an Acknowledgment, Waiver
         and Amendment dated as of February 14, 2002, an Acknowledgment, Waiver
         #2 and Amendment dated as of March 29, 2002, an Amendment No. 3 to
         Amended and Restated Revolving Credit Agreement dated as of May 3, 2002
         and consent letters dated April 12, 2002, April 19, 2002, April 30,
         2002 and May 3, 2002 (two letters) among the Company, Turtle Mountain
         Corporation, Pemstar Pacific Consultants Inc. and IBM Credit, as in
         effect on the date of the Securities Purchase Agreement, and (y) the
         Amended and Restated Loan and Security Agreement dated as of June 28,
         2001, as amended by a First Amendment dated as of December 20, 2001, a
         waiver letter dated February 13, 2002, a Second Amendment dated as of
         March 25, 2002, and a Third Amendment dated as of May 3, 2002 between
         the Company and U.S. Bank, as in effect on the date of the Securities
         Purchase Agreement, (each, an "Original Facility" and collectively, the
         "Original Facilities"), whether for principal, interest, fees, cash or
         expenses regardless of the extent to which such documents are
         enforceable against the Company and regardless of the extent to which
         such amounts are allowed as claims against the Company in any
         bankruptcy or other proceeding relative to the Company, and including
         any interest accruing thereon after the date of filing any petition by
         or against the Company in connection with any bankruptcy or other
         proceeding and any other interest that would have accrued thereon, but
         for the commencement of such proceeding; (ii) any amendments,
         restatements, supplements, modifications or waivers to the Original
         Facilities after the date of the Securities Purchase Agreement which
         are in accordance with Section 15(n); (iii) any Permitted Refinancing
         Indebtedness; and (iv) any capitalized lease obligations of the Company
         owing to IBM Credit.

                  (t) "Senior Indebtedness Notice Provider" means (i) IBM
         Credit, or any successor thereto, whether as a successor by assignment
         to IBM Credit in its capacity as a holder under the Original Facility
         of IBM Credit (as amended in accordance with the terms hereof) or as a
         holder of Senior Indebtedness (or as agent for holders of Senior
         Indebtedness) constituting Permitted Refinancing Indebtedness of the
         Original Facility of IBM Credit (as amended in accordance with the
         terms hereof), or (ii) U.S. Bank, or any successor thereto, whether as
         a successor by assignment to U.S. Bank in its capacity as a holder
         under the Original Facility of U.S. Bank (as amended in accordance with
         the terms hereof) or as a holder of Senior Indebtedness (or as agent
         for holders of Senior Indebtedness) constituting Permitted Refinancing
         Indebtedness of the Original Facility of U.S. Bank (as amended in
         accordance with the terms hereof); provided, that, in no event shall
         there be more than two (2) Senior Indebtedness Notice Providers at any
         time. Each reference herein to any "Senior Indebtedness Notice
         Provider" shall include any such successor thereto as described in the
         foregoing definition.

                  (u) "Separate Tranche Notes" means the convertible notes
         issued pursuant to the Securities Purchase Agreement at one or more
         separate closings which occurred prior to the Issuance Date or which
         may be issued pursuant to the Securities Purchase Agreement at one or
         more separate closings following the Issuance Date.

                  (v) "Separate Tranche Warrants" means the warrants issued
         pursuant to the Securities Purchase Agreement at one or more separate
         closings which occurred

                                       39

<PAGE>

         prior to the Issuance Date or which may be issued pursuant to the
         Securities Purchase Agreement at one or more separate closings
         following the Issuance Date.

                  (w) "Subordinated Amounts" means any (i) cash amount of
         Principal of, premium, if any, and Interest on this Note (including
         payment of the Redemption Price), and (ii) other cash amounts payable
         to the Holder under this Note, the Warrants, the Separate Tranche
         Warrants, the Securities Purchase Agreement and the Registration Rights
         Agreement, including, without limitation, payments of any closing fees,
         payments for reimbursable costs, fees and expenses relating to the
         transactions evidenced hereby and thereby, and reimbursement and
         indemnification payments required to be paid pursuant to the terms
         hereof or of the Securities Purchase Agreement or Registration Rights
         Agreement but specifically excluding Pro Rata Permitted Payments.

                  (x) "Trading Day" means any day on which the Common Stock is
         traded on the Principal Market, or, if the Principal Market is not the
         principal trading market for the Common Stock, then on the principal
         securities exchange or securities market on which the Common Stock is
         then traded; provided that "Trading Day" shall not include any day on
         which the Common Stock is scheduled to trade on such exchange or market
         for less than 4.5 hours or any day that the Common Stock is suspended
         from trading during the final hour of trading on such exchange or
         market (or if such exchange or market does not designate in advance the
         closing time of trading on such exchange or market, then during the
         hour ending at 4:00 p.m., Eastern Time) (unless otherwise consented to
         in writing by the Holder).

                  (y) "Warrants" means the warrants issued to the holders of the
         initial holders of the Notes pursuant to the Securities Purchase
         Agreement, and all warrants issued in exchange therefore or replacement
         thereof.

                  (z) "Weighted Average Price" means, for any security as of any
         date, the dollar volume-weighted average price for such security on the
         Principal Market during the period beginning at 9:30 a.m., New York
         Time (or such other time as the Principal Market publicly announces is
         the official open of trading), and ending at 4:00 p.m., New York Time
         (or such other time as the Principal Market publicly announces is the
         official close of trading), as reported by Bloomberg through its
         "Volume at Price" functions (ignoring any trade of more than 20,000
         shares of such security pursuant to an individual transaction (subject
         to adjustment for stock splits, stock dividends, stock combinations and
         other similar transactions involving such security after the Initial
         Issuance Date)), or, if the foregoing does not apply, the dollar
         volume-weighted average price of such security in the over-the-counter
         market on the electronic bulletin board for such security during the
         period beginning at 9:30 a.m., New York Time (or such other time as the
         Principal Market publicly announces is the official open of trading),
         and ending at 4:00 p.m., New York Time (or such other time as the
         Principal Market publicly announces is the official close of trading),
         as reported by Bloomberg, or, if no dollar volume-weighted average
         price is reported for such security by Bloomberg for such hours, the
         average of the highest closing bid price and the lowest closing ask
         price of any of the market makers for such security as reported in the
         "pink sheets" by the National Quotation Bureau, Inc. If the Weighted
         Average Price cannot be calculated for a security on a particular date
         on any of the foregoing bases, the

                                       40

<PAGE>

         Weighted Average Price of such security on such date shall be the fair
         market value as mutually determined by the Company and the Holder. If
         the Company and the Holder are unable to agree upon the fair market
         value of such security, then such dispute shall be resolved pursuant to
         Section 25. All such determinations to be appropriately adjusted for
         any stock dividend, stock split, stock combination or other similar
         transaction during such period.

                            [Signature Page Follows]

                                       41

<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed as of the Issuance Date set out above.

                                 PEMSTAR INC.

                                 By:
                                     ------------------------------------------
                                     Name:
                                     Title: President / Chief Executive Officer

                                       42

<PAGE>

                                                                       EXHIBIT I

                                  PEMSTAR INC.
                                CONVERSION NOTICE

Reference is made to the Convertible Note (the "Note") issued to the undersigned
by Pemstar Inc. (the "Company"). In accordance with and pursuant to the Note,
the undersigned hereby elects to convert the Conversion Amount (as defined in
the Note) of the Note indicated below into shares of Common Stock, par value
$0.01 per share (the "Common Stock"), of the Company as of the date specified
below.

         Date of Conversion:
                            ----------------------------------------------------

         Aggregate Conversion Amount to be converted:
                                                     ---------------------------

Please confirm the following information:

         Conversion Price:
                            ----------------------------------------------------

         Number of shares of Common Stock to be issued:
                                                       -------------------------

         Is the Variable Price being relied on pursuant to Section 6(a)
         of the Note?  (check one)  YES ____    No ____

Please issue the Common Stock into which the Note is being converted and, if
applicable, any check drawn on an account of the Company in the following name
and to the following address:

         Issue to:
                  -------------------------------------------------------------

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

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

Notwithstanding anything to the contrary contained herein, this Conversion
Notice shall constitute a representation by the Holder of the Note that, after
giving effect to the conversion provided for in this Conversion Notice, such
Holder (together with its affiliates) will not have beneficial ownership
(together with the beneficial ownership of such person's affiliates) of a number
of shares of Common Stock which exceeds 5.0% of the total outstanding shares of
Common Stock as reflected in the Company's most recent Form 10-Q or Form 10-K or
other public filing with the SEC, as the case may be, or a more recent public
announcement by the Company or other notice by the Company or its transfer agent
setting forth the number of shares of Common Stock outstanding, but after giving
effect to conversions or exercise of securities of the Company, including this
Note, by such Holder and its affiliates since the date as of which such number
of outstanding shares of Common Stock was reported.

         Facsimile Number:
                          ------------------------------------------------------

         Authorization:
                       ---------------------------------------------------------

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

Dated:
      --------------------------------------------------------------------------

         Account Number:
                        --------------------------------------------------------

<PAGE>

           (if electronic book entry transfer)

         Transaction Code Number:
                                 -----------------------------------------------
           (if electronic book entry transfer)

<PAGE>

                                 ACKNOWLEDGMENT

         The Company hereby acknowledges this Conversion Notice and hereby
directs [TRANSFER AGENT] to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated _____ ___, 2002
from the Company and acknowledged and agreed to by [TRANSFER AGENT].

                                      PEMSTAR INC.

                                      By:
                                         ---------------------------------------
                                          Name:
                                          Title:<PAGE>

                                                                     Exhibit 4.3

EXHIBIT C
---------

                            [FORM OF ADDITIONAL NOTE]

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF WITHOUT EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE
STATE SECURITIES LAWS, (II) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE
FORM, THAT SUCH TRANSFER MAY BE MADE WITHOUT REGISTRATION OR QUALIFICATION UNDER
SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (III) SUCH TRANSFER BEING MADE
PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THIS NOTE
AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 20(a) HEREOF. THE PRINCIPAL
AMOUNT REPRESENTED BY THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO
SECTION 3(c)(iii) OF THIS NOTE.

                          SUBORDINATED CONVERTIBLE NOTE

Issuance Date: _______ __, 2002                    Principal: U.S. $____________

         FOR VALUE RECEIVED, PEMSTAR INC., a Minnesota corporation (the
"Company"), hereby promises to pay to the order of __________________ or
registered assigns ("Holder") the amount set out above as the Principal (as
reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the "Principal") when due, whether upon the Maturity Date (as defined
below), acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof, including, without limitation, the
subordination provisions in Section 15) and to pay interest ("Interest") on any
outstanding Principal at the rate of six and one-half percent (6.5%) per annum,
subject to periodic adjustment pursuant to Section 2 (the "Interest Rate"), from
the date set out above as the Issuance Date (the "Issuance Date") until the same
becomes due and payable, whether upon an Interest Date (as defined below), the
Maturity Date, acceleration, conversion, redemption or otherwise (in each case
in accordance with the terms hereof). This Convertible Note (including all
Convertible Notes issued in exchange, transfer or replacement hereof, this
"Note") is one of an issue of Convertible Notes (collectively, the "Notes" and
such other Convertible Notes, the "Other Notes") issued on the Issuance Date
pursuant to the Securities Purchase Agreement (as defined in Section 30).
Certain capitalized terms are defined in Section 30.

<PAGE>

         (1) MATURITY. On the Maturity Date, the Holder shall surrender this
Note to the Company and the Company shall pay to the Holder an amount in cash
representing all outstanding Principal, accrued and unpaid Interest and accrued
and unpaid Late Charges, if any. The "Maturity Date" shall be May 1, 2007 as
extended at the option of the Holder (i) in the event that, and for so long as,
a Triggering Event (as defined in Section 4(a)) shall have occurred and be
continuing or any event shall have occurred and be continuing which with the
passage of time and the failure to cure would result in a Triggering Event and
(ii) through the date that is ten days after the consummation of a Change of
Control (as defined in Section 5(a)) in the event that a Change of Control is
publicly announced or a Change of Control Notice (as defined in Section 5(c)) is
delivered prior to the Maturity Date.

         (2) INTEREST; INTEREST RATE. Interest on this Note shall commence
accruing on the Issuance Date and shall be computed on the basis of a 365-day
year and actual days elapsed and shall be payable quarterly in arrears on the
first day of each Calendar Quarter during the period beginning on the Issuance
Date and ending on, and including, the Maturity Date (each, an "Interest Date").
Interest shall be payable on each Interest Date in cash or, at the option of the
Company, in shares of Common Stock ("Interest Shares"), provided that the
Interest which accrued during any period shall be payable in Interest Shares
only if the Company delivers written notice of such election ("Interest Election
Notice") to each holder of the Notes and the Separate Tranche Notes then
outstanding at least 10 Trading Days prior to the Interest Date (an "Interest
Election Date"). Interest to be paid on an Interest Date in Interest Shares
shall be paid in a number of fully paid and nonassessable shares (rounded to the
nearest whole share in accordance with Section 3(a)) of Common Stock equal to
the quotient of (a) the Interest payable and (b) the Interest Conversion Price
on the applicable Interest Date. If any Interest Shares are to be paid on an
Interest Date, then the Company shall (X) issue and deliver on the applicable
Interest Date, to such address as specified by the Holder in writing to the
Company at least two Business Days prior to the applicable Interest Date, a
certificate, registered in the name of the Holder or its designee, for the
number of Interest Shares to which the Holder shall be entitled, or (Y) provided
that the Company's transfer agent (the "Transfer Agent") is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer Program,
upon the request of the Holder, credit such aggregate number of Interest Shares
to which the Holder shall be entitled to the Holder's or its designee's balance
account with DTC through its Deposit Withdrawal Agent Commission system.
Notwithstanding the foregoing, the Company shall not be entitled to pay Interest
in Interest Shares and shall be required to pay such Interest in cash on the
applicable Interest Date if (x) any event constituting a Triggering Event or an
event that with the passage of time and assuming it were not cured would
constitute a Triggering Event has occurred and is continuing on any day during
the period beginning on and including the applicable Interest Election Date and
ending on and including the Interest Date, unless consented to in writing by the
Holder, (y) the Registration Statement (as defined in the Registration Rights
Agreement) covering the Interest Shares is not effective and available for the
resale of all of the Registrable Securities (as defined in the Registration
Rights Agreement) relating to this Note on each day during the period beginning
on and including the Interest Election Date and ending on and including the
Interest Date or (z) the Company has not obtained the approval of its
shareholders as required by the applicable rules of the Principal Market for
issuances of Common Stock in excess of the Exchange Cap (as defined in Section
3(d)(ii)) prior

                                       2

<PAGE>

to the Interest Election Date. Prior to the payment of Interest on an Interest
Date, Interest on this Note shall accrue at the Interest Rate and be payable by
way of inclusion of the Interest in the Conversion Amount in accordance with
Section 3(b)(i). From and after the occurrence of a Triggering Event, the
Interest Rate shall be increased to 12%; provided, however, that such increased
Interest Rate shall not apply to any portion of the Principal which is then
incurring a Late Charge. In the event that such Triggering Event is subsequently
cured, the adjustment referred to in the preceding sentence shall cease to be
effective as of the date of such cure; provided that the Interest as calculated
at such increased rate during the continuance of such Triggering Event shall
continue to apply to the extent relating to the days after the occurrence of
such Triggering Event through and including the date of cure of such Triggering
Event.

         (3) CONVERSION OF NOTES. This Note shall be convertible into shares of
the Common Stock on the terms and conditions set forth in this Section 3.

                  (a) Conversion Right. Subject to the provisions of Section
         3(d), at any time or times on or after the Issuance Date, the Holder
         shall be entitled to convert any portion of the outstanding and unpaid
         Conversion Amount (as defined below) into fully paid and nonassessable
         shares of Common Stock in accordance with Section 3(c), at the
         Conversion Rate (as defined below). The Company shall not issue any
         fraction of a share of Common Stock upon any conversion. If the
         issuance would result in the issuance of a fraction of a share of
         Common Stock, the Company shall round such fraction of a share of
         Common Stock up to the nearest whole share. The Company shall pay any
         and all taxes that may be payable with respect to the issuance and
         delivery of Common Stock upon conversion of any Conversion Amount.

                  (b) Conversion Rate. The number of shares of Common Stock
         issuable upon conversion of any Conversion Amount pursuant to Section
         3(a) shall be determined by dividing (x) such Conversion Amount by (y)
         the Conversion Price (as defined below) (the "Conversion Rate").

                           (i) "Conversion Amount" means the sum of (A) the
                  portion of the Principal to be converted, redeemed or
                  otherwise with respect to which this determination is being
                  made, (B) accrued and unpaid Interest with respect to such
                  Principal, (C) accrued and unpaid Late Charges with respect to
                  such Principal and Interest and (D) on any day after the
                  Company Optional Redemption Notice Date (as defined in Section
                  9), the amount of Interest which would accrue with respect to
                  such Principal (which amount is not included in the amount
                  referred to in clause (B) above) from the date on which this
                  determination is being made until May 1, 2005 as if such
                  Principal amount remained outstanding until May 1, 2005.

                           (ii) "Conversion Price" means, as of any Conversion
                  Date (as defined below) or other date of determination, and
                  subject to adjustment as provided herein, $9.00 (subject to
                  adjustment as of such date for any stock dividend, stock
                  split, stock combination or other similar transaction which
                  occur after the Initial Issuance Date and, in accordance with
                  Section 7, for any issuances or deemed issuances of securities
                  by the Company which occur after the Initial Issuance Date).

                                       3

<PAGE>

                  (c) Mechanics of Conversion.

                           (i) Optional Conversion. To convert any Conversion
                  Amount into shares of Common Stock on any date (a "Conversion
                  Date"), the Holder shall (A) transmit by facsimile (or
                  otherwise deliver), for receipt on or prior to 11:59 p.m.,
                  Central Time, on such date, a copy of an executed notice of
                  conversion in the form attached hereto as Exhibit I (the
                  "Conversion Notice") to the Company and (B) if required by
                  Section 3(c)(iii), surrender this Note to a common carrier for
                  delivery to the Company as soon as practicable on or following
                  such date (or an indemnification undertaking with respect to
                  this Note in the case of its loss, theft or destruction). On
                  or before the first Business Day following the date of receipt
                  of a Conversion Notice, the Company shall transmit by
                  facsimile a confirmation of receipt of such Conversion Notice
                  to the Holder and the Transfer Agent. On or before the third
                  Business Day following the date of receipt of a Conversion
                  Notice (the "Share Delivery Date"), the Company shall (X)
                  issue and deliver to the address as specified in the
                  Conversion Notice, a certificate, registered in the name of
                  the Holder or its designee, for the number of shares of Common
                  Stock to which the Holder shall be entitled, or (Y) provided
                  that the Transfer Agent is participating in the DTC Fast
                  Automated Securities Transfer Program and provided that on the
                  Exercise Date the shares of Common Stock to be issued pursuant
                  to such exercise are registered for resale under the
                  Securities Act of 1933, as amended (the "1933 Act"), or are
                  eligible for resale under Rule 144(k) promulgated under the
                  1933 Act, upon the request of the Holder, credit such
                  aggregate number of shares of Common Stock to which the Holder
                  shall be entitled to the Holder's or its designee's balance
                  account with DTC through its Deposit Withdrawal Agent
                  Commission system. If this Note is physically surrendered for
                  conversion as required by Section 3(c)(iii) and the
                  outstanding Principal of this Note is greater than the
                  Principal portion of the Conversion Amount being converted,
                  then the Company shall as soon as practicable and in no event
                  later than three Business Days after receipt of this Note (the
                  "Note Delivery Date") and at its own expense, issue and
                  deliver to the holder a new Note (in accordance with Section
                  20(d)) representing the outstanding Principal not converted.
                  The person or persons entitled to receive the shares of Common
                  Stock issuable upon a conversion of this Note shall be treated
                  for all purposes as the record holder or holders of such
                  shares of Common Stock on the Conversion Date.

                           (ii) Company's Failure to Timely Convert. If the
                  Company shall fail to issue a certificate to the Holder or
                  credit the Holder's balance account with DTC for the number of
                  shares of Common Stock to which the Holder is entitled upon
                  conversion of any Conversion Amount on or prior to the date
                  which is five Business Days after the Conversion Date (in each
                  case, a "Conversion Failure"), then (A) the Company shall pay
                  damages to the Holder for each date of such Conversion Failure
                  in an amount equal to 0.5% of the product of (I) the number of
                  shares of Common Stock not issued to the Holder on or prior to
                  the Share Delivery Date and to which the Holder is entitled,
                  and (II) the Closing Sale Price of the Common Stock on the
                  Share Delivery Date, and (B) the Holder, upon written notice
                  to the Company, may void its Conversion Notice with respect
                  to, and retain or have returned, as the case may be, any
                  portion of this Note that

                                       4

<PAGE>

                  has not been converted pursuant to such Conversion Notice;
                  provided that the voiding of a Conversion Notice shall not
                  affect the Company's obligations to make any payments which
                  have accrued prior to the date of such notice pursuant to this
                  Section 3(c)(ii) or otherwise.

                           (iii) Book-Entry. Notwithstanding anything to the
                  contrary set forth herein, upon conversion of any portion of
                  this Note in accordance with the terms hereof, the Holder
                  shall not be required to physically surrender this Note to the
                  Company unless (A) the full Conversion Amount represented by
                  this Note is being converted or (B) the Holder has provided
                  the Company with prior written notice (which notice may be
                  included in a Conversion Notice) requesting physical surrender
                  and reissue of this Note. The Holder and the Company shall
                  maintain records showing the Principal and Interest converted
                  and the dates of such conversions or shall use such other
                  method, reasonably satisfactory to the Holder and the Company,
                  so as not to require physical surrender of this Note upon
                  conversion.

                           (v) Pro Rata Conversion; Disputes. In the event that
                  the Company receives a Conversion Notice from more than one
                  holder of the Notes or the Separate Tranche Notes for the same
                  Conversion Date and the Company can convert some, but not all,
                  of such portions of the Notes and the Separate Tranche Notes
                  submitted for conversion, the Company, subject to Section
                  3(d), shall convert from each holder of the Notes and the
                  Separate Tranche Notes electing to have the Notes or the
                  Separate Tranche Notes converted on such date a pro rata
                  amount of such holder's portion of its Notes or Separate
                  Tranche Notes submitted for conversion based on the principal
                  amount of the Notes and the Separate Tranche Notes submitted
                  for conversion on such date by such holder relative to the
                  aggregate principal amount of all the Notes and the Separate
                  Tranche Notes submitted for conversion on such date. In the
                  event of a dispute as to the number of shares of Common Stock
                  issuable to the Holder in connection with a conversion of this
                  Note, the Company shall issue to the Holder the number of
                  shares of Common Stock not in dispute and resolve such dispute
                  in accordance with Section 25.

                  (d) Limitations on Conversions.

                           (i) Beneficial Ownership. The Company shall not
                  effect any conversion of this Note, and the Holder of this
                  Note shall not have the right to convert any portion of this
                  Note pursuant to Section 3(a), to the extent that after giving
                  effect to such conversion, the Holder (together with the
                  Holder's affiliates) would beneficially own in excess of 5.0%
                  of the number of shares of Common Stock outstanding
                  immediately after giving effect to such conversion. For
                  purposes of the foregoing sentence, the number of shares of
                  Common Stock beneficially owned by the Holder and its
                  affiliates shall include the number of shares of Common Stock
                  issuable upon conversion of this Note with respect to which
                  the determination of such sentence is being made, but shall
                  exclude the number of shares of Common Stock which would be
                  issuable upon (A) conversion of the remaining, nonconverted
                  portion of this Note beneficially owned by the Holder or any
                  of its affiliates and (B) exercise or conversion of the
                  unexercised or nonconverted portion of any other

                                       5

<PAGE>

                  securities of the Company (including, without limitation, any
                  Other Notes, Separate Tranche Notes or warrants) subject to a
                  limitation on conversion or exercise analogous to the
                  limitation contained herein beneficially owned by the Holder
                  or any of its affiliates. Except as set forth in the preceding
                  sentence, for purposes of this Section 3(d)(i), beneficial
                  ownership shall be calculated in accordance with Section 13(d)
                  of the Securities Exchange Act of 1934, as amended. For
                  purposes of this Section 3(d)(i), in determining the number of
                  outstanding shares of Common Stock, the Holder may rely on the
                  number of outstanding shares of Common Stock as reflected in
                  (x) the Company's most recent Form 10-Q or Form 10-K, as the
                  case may be, (y) a more recent public announcement by the
                  Company or (z) any other notice by the Company or the Transfer
                  Agent setting forth the number of shares of Common Stock
                  outstanding. For any reason at any time, upon the written or
                  oral request of the Holder, the Company shall within three
                  Business Days confirm orally and in writing to the Holder the
                  number of shares of Common Stock then outstanding. In any
                  case, the number of outstanding shares of Common Stock shall
                  be determined after giving effect to the conversion or
                  exercise of securities of the Company, including this Note, by
                  the Holder or its affiliates since the date as of which such
                  number of outstanding shares of Common Stock was reported.

                           (ii) Principal Market Regulation. The Company shall
                  not be obligated to issue any shares of Common Stock upon
                  conversion of this Note if the issuance of such shares of
                  Common Stock would exceed that number of shares of Common
                  Stock which the Company may issue upon conversion of the Notes
                  and the Separate Tranche Notes and as interest payable with
                  respect to the Notes and the Separate Tranche Notes (and
                  including, as applicable, any shares of Common Stock issuable
                  upon exercise of the Warrants) without breaching the Company's
                  obligations under the rules or regulations of the Principal
                  Market (the "Exchange Cap"), except that such limitation shall
                  not apply in the event that the Company (A) obtains the
                  approval of its shareholders as required by the applicable
                  rules of the Principal Market for issuances of Common Stock in
                  excess of such amount or (B) obtains a written opinion from
                  outside counsel to the Company that such approval is not
                  required, which opinion shall be reasonably satisfactory to
                  the holders of the Notes and the Separate Tranche Notes
                  representing a majority of the principal amounts of the Notes
                  and the Separate Tranche Notes then outstanding. Until such
                  approval or written opinion is obtained, no purchaser of the
                  Notes or the Separate Tranche Notes pursuant to the Securities
                  Purchase Agreement (the "Purchasers") shall be issued, upon
                  conversion of the Notes or the Separate Tranche Notes, shares
                  of Common Stock in an amount greater than the product of the
                  Exchange Cap multiplied by a fraction, the numerator of which
                  is the principal amount of the Notes and the Separate Tranche
                  Notes issued to such Purchaser pursuant to the Securities
                  Purchase Agreement on the Initial Issuance Date and the
                  denominator of which is the aggregate principal amount of all
                  the Notes and the Separate Tranche Notes issued to the
                  Purchasers pursuant to the Securities Purchase Agreement on
                  the Initial Issuance Date (with respect to each Purchaser, the
                  "Exchange Cap Allocation"). In the event that any Purchaser
                  shall sell or otherwise transfer any of such Purchaser's Notes
                  or Separate Tranche Notes, the transferee shall be allocated a
                  pro rata portion of such Purchaser's Exchange Cap Allocation,
                  and the restrictions of the prior sentence shall apply to such
                  transferee with

                                       6

<PAGE>

                  respect to the portion of the Exchange Cap Allocation
                  allocated to such transferee. In the event that any holder of
                  the Notes or the Separate Tranche Notes shall convert all of
                  such holder's Notes or Separate Tranche Notes into a number of
                  shares of Common Stock which, in the aggregate, is less than
                  such holder's Exchange Cap Allocation, then the difference
                  between such holder's Exchange Cap Allocation and the number
                  of shares of Common Stock actually issued to such holder shall
                  be allocated to the respective Exchange Cap Allocations of the
                  remaining holders of the Notes and the Separate Tranche Notes
                  on a pro rata basis in proportion to the aggregate principal
                  amount of the Notes and the Separate Tranche Notes then held
                  by each such holder.

         (4) RIGHTS UPON TRIGGERING EVENT.

                  (a) Triggering Event. Each of the following events shall
         constitute a "Triggering Event":

                           (i) the failure of the applicable Registration
                  Statement to be declared effective by the SEC on or prior to
                  the date that is 60 days after the applicable Effectiveness
                  Deadline (as defined in the Registration Rights Agreement),
                  or, while the applicable Registration Statement is required to
                  be maintained effective pursuant to the terms of the
                  Registration Rights Agreement, the effectiveness of the
                  applicable Registration Statement lapses for any reason
                  (including, without limitation, the issuance of a stop order)
                  or is unavailable to any holder of the Notes for sale of all
                  of such holder's Registrable Securities (as defined in the
                  Registration Rights Agreement) in accordance with the terms of
                  the Registration Rights Agreement, and such lapse or
                  unavailability continues for a period of 10 consecutive
                  Business Days or for more than an aggregate of 20 Business
                  Days in any 365-day period (other than days during an
                  Allowable Grace Period (as defined in the Registration Rights
                  Agreement));

                           (ii) the suspension from trading or failure of the
                  Common Stock to be listed on the Nasdaq National Market or The
                  New York Stock Exchange, Inc. for a period of five consecutive
                  Business Days or for more than an aggregate of 10 Business
                  Days in any 365-day period;

                           (iii) the Company's (A) failure to cure a Conversion
                  Failure by delivery of the required number of shares of Common
                  Stock or a new Note (in accordance with Section 20(d)), as
                  applicable, within 10 days after the applicable Conversion
                  Date or (B) notice, written or oral, to any holder of the
                  Notes, including by way of public announcement or through any
                  of its agents, at any time, of its intention not to comply
                  with a request for conversion of any Notes into shares of
                  Common Stock that is tendered in accordance with the
                  provisions of the Notes;

                           (iv) upon the Company's receipt of a Conversion
                  Notice, the Company is not obligated to issue shares of Common
                  Stock upon such conversion due to the provisions of Section
                  3(d)(ii);

                                       7

<PAGE>

                           (v) at any time following the tenth consecutive
                  Business Day that the Holder's Authorized Share Allocation is
                  less than the number of shares of Common Stock that the Holder
                  would be entitled to receive upon a conversion of the full
                  Conversion Amount of this Note (without regard to any
                  limitations on conversion set forth in Section 3(d) or
                  otherwise);

                           (vi) the Company's failure to pay to the Holder any
                  amount of Principal, Interest, Late Charges or other amounts
                  when and as due under this Note, the Securities Purchase
                  Agreement, the Registration Rights Agreement or any other
                  agreement, document, certificate or other instrument delivered
                  in connection with the transactions contemplated hereby and
                  thereby to which the Holder is a party, except, in the case of
                  a failure to pay Interest and Late Charges when and as due, in
                  which case only if such failure continues for a period of at
                  least three Business Days;

                           (vii) any default or defaults by the Company (A) in
                  the payment of any principal of, or interest or any other
                  amount on or with respect to, any Indebtedness, the principal
                  amount of which, individually or in the aggregate, exceeds
                  U.S. $5,000,000, when due after giving effect to any
                  applicable grace periods in the terms of the Indebtedness or
                  (B) on any Indebtedness, the principal amount of which,
                  individually or in the aggregate, exceeds U.S. $5,000,000,
                  which default or defaults in the case of clause (B) shall have
                  resulted in such Indebtedness becoming due and payable prior
                  to the date on which it would otherwise have become due and
                  payable.

                           (viii) the Company or any of its Subsidiaries (as
                  defined in the Securities Purchase Agreement), pursuant to or
                  within the meaning of Title 11, U.S. Code, or any similar
                  Federal or state law for the relief of debtors (collectively,
                  "Bankruptcy Law"), (A) commences a voluntary case, (B)
                  consents to the entry of an order for relief against it in an
                  involuntary case, (C) consents to the appointment of a
                  receiver, trustee, assignee, liquidator or similar official (a
                  "Custodian"), (D) makes a general assignment for the benefit
                  of its creditors or (E) admits in writing that it is generally
                  unable to pay its debts as they become due;

                           (ix) a court of competent jurisdiction enters an
                  order or decree under any Bankruptcy Law that (A) is for
                  relief against the Company or any of its Subsidiaries in an
                  involuntary case, (B) appoints a Custodian of the Company or
                  any of its Subsidiaries or (C) orders the liquidation of the
                  Company or any of its Subsidiaries;

                           (x) a final judgment or judgments for the payment of
                  money aggregating in excess of $2,500,000 are rendered against
                  the Company or any of its Subsidiaries and which judgments are
                  not, within 60 days after the entry thereof, bonded,
                  discharged or stayed pending appeal, or are not discharged
                  within 60 days after the expiration of such stay; provided,
                  however, that any judgment which is covered by insurance or an
                  indemnity from a credit worthy party shall not be included in
                  calculating the $2,500,000 amount set forth above so long as
                  the Company provides the Holder a written statement from such
                  insurer or indemnity provider (which written statement shall
                  be reasonably satisfactory to the Holder) to the effect that
                  such judgment is covered by insurance or an indemnity and

                                       8

<PAGE>

                  the Company will receive the proceeds of such insurance or
                  indemnity within 30 days of the issuance of such judgment;

                           (xi) the Company breaches any representation,
                  warranty, covenant or other term or condition of the
                  Securities Purchase Agreement, the Registration Rights
                  Agreement, this Note, the Other Notes, the Separate Tranche
                  Notes or any other agreement, document, certificate or other
                  instrument delivered in connection with the transactions
                  contemplated thereby and hereby to which the Holder is a
                  party, except to the extent that such breach would not have a
                  Material Adverse Effect (as defined in Section 3(a) of the
                  Securities Purchase Agreement) and except, in the case of a
                  breach of a covenant or other term or condition which is
                  curable, only if such breach continues for a period of at
                  least fifteen consecutive Business Days;

                           (xii) the Company breaches or fails in any respect to
                  comply with Section 15; or

                           (xiii) any Triggering Event (as defined in the Other
                  Notes or the Separate Tranche Notes) occurs with respect to
                  any Other Notes or Separate Tranche Notes.

                  (b) Redemption Right. Promptly after the occurrence of a
         Triggering Event with respect to this Note or the Other Notes, the
         Company shall deliver written notice thereof via facsimile and
         overnight courier (a "Triggering Event Notice") to the Holder. At any
         time after the earlier of the Holder's receipt of a Triggering Event
         Notice and the Holder becoming aware of a Triggering Event, the Holder
         may require the Company to redeem all or any portion of this Note by
         delivering written notice thereof (the "Triggering Event Redemption
         Notice") to the Company, which Triggering Event Redemption Notice shall
         indicate the portion of this Note the Holder is electing to redeem;
         provided that such Triggering Event Redemption Notice may only be sent
         during the period beginning on and including the date of the occurrence
         of the Triggering Event and ending on and including the later of the
         date which is (I) twenty Business Days after the date on which the
         Holder receives a Triggering Event Notice from the Company with respect
         to such Triggering Event and (II) five Business Days after the date on
         which the Triggering Event is cured and the Holder receives written
         notice from the Company confirming such Triggering Event has been
         cured. Each portion of this Note subject to redemption by the Company
         pursuant to this Section 4(b) shall be redeemed by the Company at a
         price equal to the greater of (i) 120% of the Conversion Amount to be
         redeemed and (ii) the product of (A) the Conversion Rate with respect
         to such Conversion Amount in effect at such time as the Holder delivers
         a Redemption Notice and (B) the Closing Sale Price of the Common Stock
         on the date immediately preceding such Triggering Event (the
         "Triggering Event Redemption Price"); provided, however, that with
         respect to any Triggering Event described in clauses (vii), (viii),
         (ix) and (x) of Section 4(a), clause (i) of this Section 4(b) shall be
         100%, rather than 120%, of the Conversion Amount to be redeemed.
         Redemptions required by this Section 4(b) shall be made in accordance
         with the provisions of Section 12; provided further, however, that with
         respect to any Triggering Event described in clause (xiii) of Section
         4(a), clause (i) of this Section 4(b) shall be the percentage which
         would apply pursuant to this Section 4(b) if such event had occurred
         with respect to this Note and constituted a Triggering Event under the
         applicable clause (i) through (xii) of Section 4(a).

                                       9

<PAGE>

         (5) RIGHTS UPON CHANGE OF CONTROL.

                  (a) Change of Control. Each of the following events shall
         constitute a "Change of Control":

                           (i) the consolidation, merger or other business
                  combination (including, without limitation, a reorganization
                  or recapitalization) of the Company with or into another
                  Person (other than (A) a consolidation, merger or other
                  business combination (including, without limitation,
                  reorganization or recapitalization) in which holders of the
                  Company's voting power immediately prior to the transaction
                  continue after the transaction to hold, directly or
                  indirectly, the voting power of the surviving entity or
                  entities necessary to elect a majority of the members of the
                  board of directors (or their equivalent if other than a
                  corporation) of such entity or entities, or (B) pursuant to a
                  migratory merger effected solely for the purpose of changing
                  the jurisdiction of incorporation of the Company);

                           (ii) the sale or transfer of all or substantially all
                  of the Company's assets; or

                           (iii) a purchase, tender or exchange offer made to
                  and accepted by the holders of more than the 50% of the
                  outstanding shares of Common Stock.

                  (b) Assumption. Prior to the consummation of any Change of
         Control, the Company will secure from any Person purchasing the
         Company's assets or Common Stock or any successor resulting from such
         Change of Control (in each case, an "Acquiring Entity") a written
         agreement (in form and substance reasonably satisfactory to the holders
         of Notes representing a majority of the aggregate principal amount of
         the Notes then outstanding) to deliver to each holder of Notes in
         exchange for such Notes, a security of the Acquiring Entity evidenced
         by a written instrument substantially similar in form and substance to
         the Notes, including, without limitation, having a principal amount and
         interest rate equal to the principal amounts and the interest rates of
         the Notes held by such holder, and satisfactory to the holders of Notes
         representing a majority of the principal amount of the Notes then
         outstanding. In the event that an Acquiring Entity is directly or
         indirectly controlled by a company or entity whose common stock or
         similar equity interest is listed, designated or quoted on a securities
         exchange or trading market, the holders of the Notes representing a
         majority of the aggregate principal amount of the Notes then
         outstanding may elect to treat such Person as the Acquiring Entity for
         purposes of this Section 5(b).

                  (c) Redemption Right. No sooner than 40 Business Days nor
         later than 30 Business Days prior to the consummation of a Change of
         Control, but not prior to the public announcement of such Change of
         Control, the Company shall deliver written notice thereof via facsimile
         and overnight courier to the Holder (a "Change of Control Notice"). At
         any time during the period beginning after the Holder's receipt of a
         Change of Control Notice and ending on the Business Day immediately
         prior to the date of the consummation of such Change of Control (or, in
         the event a Change of Control Notice is not delivered at least 30
         Business Days prior to a Change of Control, at any time on or after the
         date which is 30 Business

                                       10

<PAGE>

         Days prior to a Change of Control and ending 30 Business Days after the
         consummation of such Change of Control), the Holder may require the
         Company to redeem all or any portion of this Note by delivering written
         notice thereof (a "Change of Control Redemption Notice") to the
         Company, which Change of Control Redemption Notice shall indicate the
         Conversion Amount the Holder is electing to have redeemed by the
         Company. The portion of this Note subject to redemption pursuant to
         this Section 5(c) shall be redeemed by the Company at a price equal to
         the product of (i) the Change of Control Redemption Percentage on the
         date of redemption and (ii) the Conversion Amount being redeemed (the
         "Change of Control Redemption Price"). Redemptions required by this
         Section 5(c) shall be made in accordance with the provisions of Section
         12 and shall have priority to payments to any shareholders of the
         Company in connection with a Change of Control.

         (6) RIGHTS UPON ISSUANCE OF VARIABLE SECURITIES OR PURCHASE RIGHTS AND
OTHER CORPORATE EVENTS.

                  (a) Variable Securities. If after the Initial Issuance Date
         the Company in any manner issues or sells (i) any stock or securities
         other than Options (as defined below) directly or indirectly
         convertible into or exercisable or exchangeable for Common Stock
         ("Convertible Securities") or (ii) any rights, warrants or options to
         subscribe for or purchase Common Stock or Convertible Securities
         ("Options") that are convertible into or exercisable or exchangeable,
         directly or indirectly, for Common Stock at a price which varies or may
         vary with the market price of the Common Stock, including by way of one
         or more adjustments or resets to a fixed price, or at a price which
         upon the passage of time or the occurrence of certain events is
         automatically reduced or is adjusted to a price which is based on some
         formulation of the then current market price of the Common Stock (each,
         a "Variable Price", and such securities, "Variable Securities"), the
         Company shall provide written notice thereof via facsimile and
         overnight courier to the Holder on the date of issuance of such
         Variable Securities. From and after the date the Company issues any
         Variable Securities, the Holder shall have the right, but not the
         obligation, in its sole discretion to substitute the Variable Price for
         the Conversion Price upon conversion of any Conversion Amount by
         designating in the Conversion Notice delivered upon conversion of such
         Conversion Amount that solely for purposes of such conversion the
         Holder is relying on the Variable Price rather than the Conversion
         Price then in effect. The Holder's election to rely on a Variable Price
         for a particular conversion of a Conversion Amount shall not obligate
         the holder to rely on a Variable Price for any future conversions of
         this Note.

                  (b) Purchase Rights. If at any time the Company grants, issues
         or sells any Options, Convertible Securities or rights to purchase
         stock, warrants, securities or other property pro rata to the record
         holders of any class of Common Stock (the "Purchase Rights"), then the
         Holder will be entitled to acquire, upon the terms applicable to such
         Purchase Rights, the aggregate Purchase Rights which the Holder could
         have acquired if the Holder had held the number of shares of Common
         Stock acquirable upon complete conversion of this Note (without taking
         into account any limitations or restrictions on the convertibility of
         this Note) immediately before the date on which a record is taken for
         the grant, issuance or sale of such Purchase Rights, or, if no such
         record is taken, the date as of which the record holders of Common
         Stock are to be determined for the grant, issue or sale of such
         Purchase Rights.

                                       11

<PAGE>

                  (c) Other Corporate Events. Prior to the consummation of any
         recapitalization, reorganization, consolidation, merger or other
         business combination (other than a Change of Control) pursuant to which
         holders of Common Stock are entitled to receive securities or other
         assets with respect to or in exchange for Common Stock (a "Corporate
         Event"), the Company shall make appropriate provision to insure that
         the Holder will thereafter have the right to receive upon a conversion
         of this Note, (i) in addition to the shares of Common Stock receivable
         upon such conversion, such securities or other assets to which the
         Holder would have been entitled with respect to such shares of Common
         Stock had such shares of Common Stock been held by the Holder upon the
         consummation of such Corporate Event or (ii) in lieu of the shares of
         Common Stock otherwise receivable upon such conversion, such securities
         or other assets received by the holders of Common Stock in connection
         with the consummation of such Corporate Event in such amounts as the
         Holder would have been entitled to receive had this Note initially been
         issued with conversion rights for the form of such consideration (as
         opposed to shares of Common Stock) at a conversion rate for such
         consideration commensurate with the Conversion Rate. Provision made
         pursuant to the preceding sentence shall be in a form and substance
         satisfactory to the holders of Notes representing a majority of the
         aggregate principal amount of the Notes then outstanding.

         (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

                  (a) Adjustment of Conversion Price upon Issuance of Common
         Stock. If and whenever on or after the Initial Issuance Date, the
         Company issues or sells, or in accordance with this Section 7(a) is
         deemed to have issued or sold, any shares of Common Stock (including
         the issuance or sale of shares of Common Stock owned or held by or for
         the account of the Company, but excluding shares of Common Stock deemed
         to have been issued or sold by the Company (I) in connection with any
         employee benefit plan (including, without limitation, employee stock
         purchase plans, provided that issuances pursuant thereto are at a price
         which is at least equal to 85% of the then fair market price of the
         Common Stock) which has been approved by the Board of Directors of the
         Company, pursuant to which the Company's securities may be issued to
         any employee, officer or director for, or in connection with, services
         provided to, or employment with, the Company (an "Approved Stock
         Plan"), (II) upon conversion of the Notes or the Separate Tranche
         Notes, as Interest Shares relating to the Notes or the Separate Tranche
         Notes or upon exercise of the Warrants or the Separate Tranche Warrants
         or (III) in connection with any Excluded Securities) for a
         consideration per share less than a price (the "Applicable Price")
         equal to the Conversion Price in effect immediately prior to such issue
         or sale or deemed issuance or sale, then immediately after such issue
         or sale or deemed issuance or sale, the Conversion Price then in effect
         shall be reduced to an amount equal to the product of (x) the
         Conversion Price in effect immediately prior to such issue or sale or
         deemed issuance or sale and (y) the quotient determined by dividing (1)
         the sum of the product of the Applicable Price and the number of shares
         of Common Stock Deemed Outstanding immediately prior to such issue or
         sale or deemed issuance or sale and the consideration, if any, received
         by the Company upon such issue or sale or deemed issuance or sale, by
         (2) the product of the Applicable Price multiplied by the number of
         shares of Common Stock Deemed Outstanding immediately after

                                       12

<PAGE>

         such issue or sale or deemed issuance or sale. For purposes of
         determining the adjusted Conversion Price under this Section 7(a), the
         following shall be applicable:

                           (i) Issuance of Options. If the Company in any manner
                  grants or sells any Options and the lowest price per share for
                  which one share of Common Stock is issuable upon the exercise
                  of any such Option or upon conversion, exercise or exchange of
                  any Convertible Securities issuable upon exercise of such
                  Option is less than the Applicable Price, then such share of
                  Common Stock shall be deemed to be outstanding and to have
                  been issued and sold by the Company at the time of the
                  granting or sale of such Option for such price per share. For
                  purposes of this Section 7(a)(i), the "lowest price per share
                  for which one share of Common Stock is issuable upon the
                  exercise of any such Option or upon conversion, exercise or
                  exchange of any Convertible Securities issuable upon exercise
                  of such Option" shall be equal to the sum of the lowest
                  amounts of consideration (if any) received or receivable by
                  the Company with respect to any one share of Common Stock upon
                  granting or sale of the Option, upon exercise of the Option
                  and upon conversion, exercise or exchange of any Convertible
                  Security issuable upon exercise of such Option. No further
                  adjustment of the Conversion Price shall be made upon the
                  actual issuance of such Common Stock or of such Convertible
                  Securities upon the exercise of such Options or upon the
                  actual issuance of such Common Stock upon conversion, exercise
                  or exchange of such Convertible Securities. If the Company
                  issues or sells any Options which are Variable Securities, no
                  adjustment of the Conversion Price shall be made pursuant to
                  this Section 7(a), and no shares of Common Stock shall be
                  deemed outstanding with respect to such Variable Securities,
                  as a result of the issuance of such Variable Securities until
                  the actual issuance of Common Stock or Convertible Securities
                  upon exercise of such Variable Securities, except to the
                  extent such Variable Security also includes as a component of
                  the exercise price a price which does not vary with the market
                  price of the Common Stock.

                           (ii) Issuance of Convertible Securities. If the
                  Company in any manner issues or sells any Convertible
                  Securities and the lowest price per share for which one share
                  of Common Stock is issuable upon such conversion, exercise or
                  exchange thereof is less than the Applicable Price, then such
                  share of Common Stock shall be deemed to be outstanding and to
                  have been issued and sold by the Company at the time of the
                  issuance of sale of such Convertible Securities for such price
                  per share. For the purposes of this Section 7(a)(ii), the
                  "price per share for which one share of Common Stock is
                  issuable upon such conversion, exercise or exchange" shall be
                  equal to the sum of the lowest amounts of consideration (if
                  any) received or receivable by the Company with respect to any
                  one share of Common Stock upon the issuance or sale of the
                  Convertible Security and upon the conversion, exercise or
                  exchange of such Convertible Security. No further adjustment
                  of the Conversion Price shall be made upon the actual issuance
                  of such Common Stock upon conversion, exercise or exchange of
                  such Convertible Securities, and if any such issue or sale of
                  such Convertible Securities is made upon exercise of any
                  Options for which adjustment of the Conversion Price had been
                  or are to be made pursuant to other provisions of this Section
                  7(a)), no further adjustment of the Conversion Price shall be
                  made by reason of such issue or sale. If the Company issues or
                  sells any

                                       13

<PAGE>

                  Convertible Securities which are Variable Securities, no
                  adjustment of the Conversion Price shall be made pursuant to
                  this Section 7(a), and no shares of Common Stock shall be
                  deemed outstanding with respect to such Variable Security, as
                  a result of the issuance of such Variable Securities until the
                  actual issuance of Common Stock upon exercise of such Variable
                  Securities, except to the extent such Variable Security also
                  includes as a component of the conversion, exercise or
                  exchange price a price which does not vary with the market
                  price of the Common Stock.

                           (iii) Change in Option Price or Rate of Conversion.
                  If the purchase price provided for in any Options, the
                  additional consideration, if any, payable upon the issue,
                  conversion, exercise or exchange of any Convertible
                  Securities, or the rate at which any Convertible Securities
                  are convertible into or exercisable or exchangeable for Common
                  Stock increases or decreases at any time, the Conversion Price
                  in effect at the time of such increase or decrease shall be
                  adjusted to the Conversion Price which would have been in
                  effect at such time had such Options or Convertible Securities
                  provided for such increased or decreased purchase price,
                  additional consideration or increased or decreased conversion
                  rate, as the case may be, at the time initially granted,
                  issued or sold. For purposes of this Section 7(a)(iii), if the
                  terms of any Option or Convertible Security that was
                  outstanding as of the Issuance Date are increased or decreased
                  in the manner described in the immediately preceding sentence,
                  then such Option or Convertible Security and the Common Stock
                  deemed issuable upon exercise, conversion or exchange thereof
                  shall be deemed to have been issued as of the date of such
                  change. No adjustment shall be made if such adjustment would
                  result in an increase of the Conversion Price then in effect.

                           (iv) Calculation of Consideration Received. In case
                  any Option is issued in connection with the issue or sale of
                  other securities of the Company, together comprising one
                  integrated transaction in which no specific consideration is
                  allocated to such Options by the parties thereto, the Options
                  will be deemed to have been issued for a consideration of
                  $.01. If any Common Stock, Options or Convertible Securities
                  are issued or sold or deemed to have been issued or sold for
                  cash, the consideration received therefor will be deemed to be
                  the net amount received by the Company therefor. If any Common
                  Stock, Options or Convertible Securities are issued or sold
                  for a consideration other than cash, the amount of the
                  consideration other than cash received by the Company will be
                  the fair value of such consideration, except where such
                  consideration consists of securities, in which case the amount
                  of consideration received by the Company will be the Closing
                  Sale Price of such securities on the date of receipt. If any
                  Common Stock, Options or Convertible Securities are issued to
                  the owners of the non-surviving entity in connection with any
                  merger in which the Company is the surviving entity, the
                  amount of consideration therefor will be deemed to be the fair
                  value of such portion of the net assets and business of the
                  non-surviving entity as is attributable to such Common Stock,
                  Options or Convertible Securities, as the case may be. The
                  fair value of any consideration other than cash or securities
                  will be determined jointly by the Company and the holders of
                  Notes representing a majority of the principal amounts of the
                  Notes then outstanding. If such parties are unable to reach
                  agreement within ten days after the

                                       14

<PAGE>

                  occurrence of an event requiring valuation (the "Valuation
                  Event"), the fair value of such consideration will be
                  determined within fifteen Business Days after the tenth day
                  following the Valuation Event by an independent, reputable
                  appraiser jointly selected by the Company and the holders of
                  Notes representing a majority of the principal amounts of the
                  Notes then outstanding. The determination of such appraiser
                  shall be deemed binding upon all parties absent manifest error
                  and the fees and expenses of such appraiser shall be borne by
                  the Company.

                           (v) Record Date. If the Company takes a record of the
                  holders of Common Stock for the purpose of entitling them (A)
                  to receive a dividend or other distribution payable in Common
                  Stock, Options or in Convertible Securities or (B) to
                  subscribe for or purchase Common Stock, Options or Convertible
                  Securities, then such record date will be deemed to be the
                  date of the issue or sale of the shares of Common Stock deemed
                  to have been issued or sold upon the declaration of such
                  dividend or the making of such other distribution or the date
                  of the granting of such right of subscription or purchase, as
                  the case may be.

                           (vi) Common Stock Deemed Outstanding. "Common Stock
                  Deemed Outstanding" means, at any given time, the number of
                  shares of Common Stock actually outstanding at such time, plus
                  the number of shares of Common Stock deemed to be outstanding
                  pursuant to Sections 7(a)(i) and 7(a)(ii) hereof regardless of
                  whether the Options or Convertible Securities are actually
                  exercisable at such time, but excluding any shares of Common
                  Stock owned or held by or for the account of the Company or
                  issuable upon conversion of the Notes or the Separate Tranche
                  Notes or exercise of the Warrants or the Separate Tranche
                  Warrants.

                           (vi) This Note Deemed Outstanding. If during the
                  period beginning on and including the Initial Issuance Date
                  and ending on the date immediately preceding the Issuance
                  Date, the Company issued or sold, or in accordance with this
                  Section 7(a) would have been deemed to have issued or sold
                  (had this Note been outstanding at such time), then solely for
                  purposes of determining any adjustment to the Conversion Price
                  under this Section 7(a) as of result of such issuance or sale,
                  or deemed issuance or sale, this Note shall be deemed to have
                  been outstanding at the time of each such issuance or sale, or
                  deemed issuance or sale.

                  (b) Adjustment of Conversion Price upon Subdivision or
         Combination of Common Stock. If the Company at any time subdivides (by
         any stock split, stock dividend, recapitalization or otherwise) one or
         more classes of its outstanding shares of Common Stock into a greater
         number of shares, the Conversion Price in effect immediately prior to
         such subdivision will be proportionately reduced. If the Company at any
         time combines (by combination, reverse stock split or otherwise) one or
         more classes of its outstanding shares of Common Stock into a smaller
         number of shares, the Conversion Price in effect immediately prior to
         such combination will be proportionately increased.

                                       15

<PAGE>

                  (c) Other Events. If any event occurs of the type contemplated
         by the provisions of this Section 7 but not expressly provided for by
         such provisions (including, without limitation, the granting of stock
         appreciation rights, phantom stock rights or other rights with equity
         features), then the Company's Board of Directors will make an
         appropriate adjustment in the Conversion Price so as to protect the
         rights of the Holder under this Note; provided that no such adjustment
         will increase the Conversion Price as otherwise determined pursuant to
         this Section 7.

         (8) HOLDER RIGHT OF OPTIONAL REDEMPTION. At any time during the 10
consecutive Business Days immediately following each of July 1, 2004 and May 1,
2006 (each a "Holder Redemption Period"), the Holder shall have the right, in
its sole discretion, to require that the Company redeem all or any portion of
this Note (a "Holder Redemption") by delivering written notice thereof (a
"Holder Redemption Notice" and, collectively with a Triggering Event Redemption
Notice and a Change of Control Redemption Notice, "Redemption Notices" and,
individually, each a "Redemption Notice") to the Company at any time during a
Holder Redemption Period, which Holder Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem. The portion of this Note
subject to redemption pursuant to this Section 8 shall be redeemed by the
Company at a price equal to the Conversion Amount being redeemed (the "Holder
Redemption Price" and, together with the Triggering Event Redemption Price and
the Change of Control Redemption Price, the "Redemption Price"). Redemptions
required by this Section 8 shall be made in accordance with the provisions of
Section 12.

         (9) COMPANY OPTIONAL REDEMPTION.

                  (a) Redemption Right. After November 1, 2003, the Company
         shall have the right to redeem from time to time all or any portion of
         this Note by delivering written notice thereof (a "Company Optional
         Redemption Notice" and the date on which the Holder receives such
         notice is referred to as the "Company Optional Redemption Notice Date")
         to each holder of the Notes then outstanding; provided that (i) the
         Conditions to Company Optional Redemption (as set forth in Section
         9(d)) and the conditions of Sections 9(b) and 9(c) and this Section
         9(a) are satisfied or waived in writing by the Holder, (ii) the Company
         shall not be entitled to deliver a Company Optional Redemption Notice
         prior to May 1, 2005 unless during the 30 consecutive Trading Days
         immediately preceding the Company Optional Redemption Notice Date there
         are at least 20 Trading Days on which the Weighted Average Price of the
         Common Stock is greater than or equal to 200% of the Conversion Price
         as of the Issuance Date (subject to appropriate adjustments for stock
         splits, stock dividends, stock combinations and other similar
         transactions after the Issuance Date) and (iii) any Company Optional
         Redemption Notice relating to a Company Optional Redemption Date (as
         defined below) which is on or after May 1, 2005 shall elect redemption
         of all of the aggregate principal amount of this Note then outstanding.
         The Company may exercise its right of redemption under this Section
         9(a) by delivering a Company Optional Redemption Notice after November
         1, 2003 to each of the holders of the Notes at least 20 Business Days
         but not more than 65 Business Days prior to the date selected by the
         Company for redemption under this Section 9(a) (the "Company Optional

                                       16

<PAGE>

         Redemption Date"). The Company Optional Redemption Notice shall be
         irrevocable. The portion of this Note subject to redemption pursuant to
         this Section 9(a) shall be redeemed by the Company at a price equal to
         the Conversion Amount (as determined in accordance with Section
         3(b)(i)) being redeemed on the Company Optional Redemption Date (the
         "Company Optional Redemption Price").

                  (b) Company Pro Rata Redemption Requirement. If the Company
         elects to redeem this Note pursuant to Section 9(a), then it must
         simultaneously take the similar action with respect to the Other Notes.
         If the Company elects to redeem this Note pursuant to Section 9(a) with
         respect to less than all of the aggregate principal amount of the Notes
         then outstanding, then the Company shall require redemption of a
         principal amount (together with the related Interest, Late Charges and
         other amounts set forth in Section 3(b)(i) and analogous provisions
         under the Other Notes) from each of the holders of the Notes equal to
         the product of (I) the aggregate principal amount of Notes which the
         Company has elected to redeem pursuant to Section 9(a), multiplied by
         (II) the fraction, the numerator of which is the aggregate principal
         amount of the Notes initially purchased by such holder on the Issuance
         Date and the denominator of which is the aggregate principal amount of
         the Notes purchased by all holders on the Issuance Date (such fraction
         with respect to each holder is referred to as its "Allocation
         Percentage," and such amount with respect to each holder is referred to
         as its "Pro Rata Redemption Amount"). In the event that the initial
         holder of any Notes shall sell or otherwise transfer any of such
         holder's Notes, the transferee shall be allocated a pro rata portion of
         such holder's Allocation Percentage. The Company Optional Redemption
         Notice shall state (i) the date selected by the Company for the Company
         Optional Redemption Date in accordance with Section 9(a), (ii) the
         aggregate principal amount of the Notes which the Company has elected
         to redeem from all of the holders of the Notes pursuant to this Section
         9 (and similar provisions under the Other Notes) and (iii) each
         holder's Pro Rata Redemption Amount of the principal amount of the
         Notes the Company has elected to redeem pursuant to this Section 9 (and
         similar provisions under the Other Notes). If the Company elects to
         redeem this Note pursuant to Section 9(a) (or similar provisions under
         the Other Notes) on or after May 1, 2005, the Company shall also redeem
         all of the aggregate principal amount of the Separate Tranche Notes
         then outstanding pursuant to the similar provisions under the Separate
         Tranche Notes.

                  (c) Mechanics of Company Optional Redemption. If the Company
         has exercised its right to redeem all or any portion of this Note with
         this Section 9 and the conditions of this Section 9 are satisfied
         (including the Conditions to Company Optional Redemption as set forth
         in Section 9(d)), then the Holder's Pro Rata Redemption Amount, if any,
         which remains outstanding on the Company Optional Redemption Date shall
         be redeemed by the Company on such Company Optional Redemption Date by
         the payment by the Company to the Holder on the Company Optional
         Redemption Date, by wire transfer of immediately available funds, of an
         amount equal to the Company Optional Redemption Price for the Holder's
         Pro Rata Redemption Amount. Notwithstanding anything to the contrary in
         this Section 9, until the Company Optional Redemption Price is paid in
         full to the Holder, the Holder may convert its Pro Rata Redemption
         Amount (together with the related Interest, Late Charges and other
         amounts set forth in Section 3(b)(i)) into shares of Common Stock in
         accordance with Section 3. All Conversion Amounts converted after the
         Company Optional Redemption Notice Date but prior

                                       17

<PAGE>

         to the Company Optional Redemption Date shall be deducted from the
         Conversion Amounts selected by the Company for redemption under this
         Section 9.

                  (d) Conditions to Company Optional Redemption. For purposes of
         this Section 9, "Conditions to Company Optional Redemption" means the
         following conditions: (i) during the period beginning on the Initial
         Issuance Date and ending on and including the Company Optional
         Redemption Date, the Company shall have delivered shares of Common
         Stock upon conversion of Conversion Amounts on a timely basis as set
         forth in Section 3(c)(i) and delivered shares of Common Stock upon
         exercise of the Warrants and the Separate Tranche Warrants on a timely
         basis as set forth in Section 1(a) of the Warrants and the Separate
         Tranche Warrants; (ii) on each day during the period beginning 30
         Trading Days prior to the Company Optional Redemption Notice Date and
         ending on and including the Company Optional Redemption Date, (A) the
         Common Stock shall be listed on the Nasdaq National Market, Inc. or The
         New York Stock Exchange, Inc. and delisting or suspension by such
         market or exchange shall not have been threatened either (I) in writing
         by such market or exchange or (II) by falling below the minimum listing
         maintenance requirements of such market or exchange and (B) the
         Registration Statement shall be effective and available for the sale of
         at least all of the Registrable Securities in accordance with the terms
         of the Registration Rights Agreement while during the applicable
         Registration Period (as defined in the Registration Rights Agreement);
         (iii) during the period beginning on the Initial Issuance Date and
         ending on and including the Company Optional Redemption Date, there
         shall not have occurred either (x) the public announcement of a
         pending, proposed or intended Change of Control which has not been
         abandoned, terminated or consummated or (y) a Triggering Event; (iv)
         during the period beginning on the date which is 30 Trading Days prior
         to the Company Optional Redemption Notice Date and ending on and
         including the Company Optional Redemption Date, there shall not have
         occurred an event that with the passage of time or giving of notice,
         and assuming it were not cured, would constitute a Triggering Event;
         and (v) if a Change of Control is consummated after the Issuance Date,
         the Company Optional Redemption Date is at least 30 Trading Days after
         the consummation and public announcement of such Change of Control.

                  (e) Failure to Redeem. In the event that the Company does not
         pay the Company Optional Redemption Price in full for the Holder's Pro
         Rata Redemption Amount on the Company Optional Redemption Date, then in
         addition to any remedy the Holder may have under this Note and the
         Securities Purchase Agreement, the Company shall not be permitted to
         submit another Company Optional Redemption Notice without the prior
         written consent of the Holder.

         (10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Note, and will at all
times in good faith carry out all of the provisions of this Note and take all
action as may be required to protect the rights of the Holder of this Note.

         (11) RESERVATION OF AUTHORIZED SHARES.

                                       18

<PAGE>

                  (a) Reservation. The Company shall initially reserve out of
         its authorized and unissued Common Stock a number of shares of Common
         Stock for each of the Notes equal to 120% of the Conversion Rate with
         respect to the Conversion Amount of each such Note as of the Issuance
         Date. Thereafter, the Company shall, so long as any of the Notes are
         outstanding, take all action necessary to reserve and keep available
         out of its authorized and unissued Common Stock, solely for the purpose
         of effecting the conversion of the Notes, 110% of the number of shares
         of Common Stock as shall from time to time be necessary to effect the
         conversion of all of the Notes then outstanding; provided that at no
         time shall the number of shares of Common Stock so reserved be less
         than the number of shares required to be reserved by the previous
         sentence (without regard to any limitations on conversions) (the
         "Required Reserve Amount"). The initial number of shares of Common
         Stock reserved for conversions of the Notes and each increase in the
         number of shares so reserved shall be allocated pro rata among the
         holders of the Notes based on the principal amount of the Notes held by
         each holder at the time of Issuance Date or increase in the number of
         reserved shares, as the case may be (the "Authorized Share
         Allocation"). In the event that a holder shall sell or otherwise
         transfer any of such holder's Notes, each transferee shall be allocated
         a pro rata portion of such holder's Authorized Share Allocation. Any
         shares of Common Stock reserved and allocated to any Person which
         ceases to hold any Notes shall be allocated to the remaining holders of
         Notes, pro rata based on the principal amount of the Notes then held by
         such holders.

                  (b) Insufficient Authorized Shares. If at any time while any
         of the Notes remain outstanding the Company does not have a sufficient
         number of authorized and unreserved shares of Common Stock to satisfy
         its obligation to reserve for issuance upon conversion of the Notes at
         least a number of shares of Common Stock equal to the Required Reserve
         Amount (an "Authorized Share Failure"), then the Company shall
         immediately take all action necessary to increase the Company's
         authorized shares of Common Stock to an amount sufficient to allow the
         Company to reserve the Required Reserve Amount for the Notes then
         outstanding. Without limiting the generality of the foregoing sentence,
         as soon as practicable after the date of the occurrence of an
         Authorized Share Failure, but in no event later than 60 days after the
         occurrence of such Authorized Share Failure, the Company shall use its
         best efforts to hold a meeting of its shareholders for the approval of
         an increase in the number of authorized shares of Common Stock. In
         connection with such meeting, the Company shall provide each
         shareholder with a proxy statement and shall use its best efforts to
         solicit its shareholders' approval of such increase in authorized
         shares of Common Stock and to cause its board of directors to recommend
         to the shareholders that they approve such proposal.

         (12) HOLDER'S REDEMPTIONS.

                  (a) Mechanics. In the event that the Holder has sent a
         Redemption Notice to the Company pursuant to Section 4(b), Section 5(c)
         or Section 8, the Holder shall promptly submit this Note to the Company
         unless payment of the Redemption Price, although due, is restricted by
         Sections 15(c), 15(d) or 15(f). The Company shall deliver the
         applicable Triggering Event Redemption Price to the Holder within five
         (5) Business Days after the Company's receipt of the Holder's
         Triggering Event Redemption Notice and thereafter the

                                       19

<PAGE>

         Holder shall promptly deliver this Note to the Company. If the Holder
         has submitted a Change of Control Redemption Notice in accordance with
         Section 5(c), the Company shall deliver the applicable Change of
         Control Redemption Price to the Holder concurrently with the
         consummation of such Change of Control if such notice is received prior
         to the consummation of such Change of Control and within five (5)
         Business Days after the Company's receipt of such notice otherwise. The
         Company shall deliver the applicable Holder Redemption Price to the
         Holder within five Business Days after the Company's receipt of the
         Holder Redemption Notice and thereafter the Holder shall promptly
         deliver this Note to the Company. In the event of a redemption of less
         than all of the Conversion Amount of this Note, the Company shall
         promptly cause to be issued and delivered to the Holder a new Note (in
         accordance with Section 20(d)) representing the outstanding Principal
         which has not been redeemed. In the event that the Company does not pay
         the Redemption Price to the Holder within the time period required
         above in this Section 12(a) at any time thereafter and until the
         Company pays such unpaid Redemption Price in full, the Holder shall
         have the option to, in lieu of redemption, require the Company to
         promptly return to the Holder all or any portion of this Note
         representing the Conversion Amount that was submitted for redemption
         and for which the applicable Redemption Price (together with any Late
         Charges thereon) has not been paid. Upon the Company's receipt of such
         notice, (x) the Redemption Notice shall be null and void with respect
         to such Conversion Amount, (y) the Company shall immediately return
         this Note, or issue a new Note (in accordance with Section 20(d)) to
         the Holder representing such Conversion Amount and (z) the Conversion
         Price of this Note or such new Notes shall be adjusted to the lesser of
         (A) the Conversion Price as in effect on the date on which the
         Redemption Notice is voided and (B) the lowest Closing Bid Price during
         the period beginning on and including the date on which the Redemption
         Notice is delivered to the Company and ending on and including the date
         on which the Redemption Notice is voided; provided that the adjustment
         to the Conversion Price set forth in clause (z) shall not be made if
         the Company's failure to pay the Redemption Price in full within the
         time period required above in this Section 12(a) was due solely to the
         fact that such payment was restricted by Section 15(c), Section 15(d)
         or Section 15(f) and the Redemption Price is paid in full within five
         (5) Business Days after the provisions of Section 15(c), Section 15(d)
         or Section 15(f) no longer restricted such payment. The Holder's
         delivery of a notice voiding a Redemption Notice and exercise of its
         rights following such notice shall not affect the Company's obligations
         to make any payments of Late Charges which have accrued prior to the
         date of such notice with respect to the Conversion Amount subject to
         such notice.

                  (b) Redemption by Other Holders. Upon the Company's receipt of
         notice from any of the holders of the Other Notes or the Separate
         Tranche Notes for redemption or repayment as a result of an event or
         occurrence substantially similar to the events or occurrences described
         in Section 4(b), Section 5(c) or Section 8 (each an "Other Redemption
         Notice"), the Company shall immediately forward to the Holder by
         facsimile a copy of such notice. If the Company receives a Redemption
         Notice and one or more Other Redemption Notices during the seven
         Business Day period beginning on and including the date which is three
         Business Days prior to the Company's receipt of the Holder's Redemption
         Notice and ending on and including the date which is three Business
         Days after the Company's receipt of the Holder's Redemption Notice and
         the Company is unable to redeem all principal, interest and other
         amounts designated in such Redemption Notice and such Other Redemption
         Notices received

                                       20

<PAGE>

         during such seven Business Day period, then the Company shall redeem a
         pro rata amount from each holder of the Notes (including the Holder)
         based on the principal amount of the Notes and the Separate Tranche
         Notes submitted for redemption pursuant to such Redemption Notice and
         such Other Redemption Notices received by the Company during such seven
         Business Day period.

         (13) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the
Notes have been converted, redeemed or otherwise satisfied in accordance with
their terms, the Company shall not, directly or indirectly, redeem, or declare
or pay any cash dividend or distribution on, its capital stock without the prior
express written consent of the holders of Notes representing at least a majority
of the aggregate principal amount of the Notes then outstanding.

         (14) VOTING RIGHTS. The Holder shall have no voting rights as the
holder of this Note, except as required by law, including but not limited to the
Minnesota Business Corporation Act, and as expressly provided in this Note.

         (15) SUBORDINATION; ADDITIONAL INDEBTEDNESS.

                  (a) Certain Indebtedness. So long as this Note is outstanding,
         the Subordinated Amounts (i) shall be subordinate to the Senior
         Indebtedness on the terms described in the other paragraphs of this
         Section 15 and shall be subordinate to Permitted Secured Indebtedness
         (other than Senior Indebtedness) in any Proceeding, (ii) shall rank
         pari passu with and shall not be subordinated to any Pari Passu
         Indebtedness, and (iii) shall be senior to all other Indebtedness of
         the Company other than the Permitted Secured Indebtedness and the Pari
         Passu Indebtedness. So long as this Note is outstanding (A) the Company
         shall not, and shall not permit any of its Subsidiaries located in the
         United States of America or formed after the Initial Issuance Date to,
         directly or indirectly, prepay or retire any Indebtedness (other than
         the Permitted Secured Indebtedness and the Indebtedness evidenced by
         the Notes and the Separate Tranche Notes) of the Company or any of its
         Subsidiaries prior to its scheduled payment dates or maturity date, and
         (B) the Company shall not issue or incur, and shall not permit any of
         its Subsidiaries located in the United States of America or formed
         after the Initial Issuance Date to issue or incur, (1) any secured
         Indebtedness other than the Permitted Secured Indebtedness or (2) any
         other Indebtedness other than Indebtedness the holders of which agree
         in writing to be subordinate to this Note on terms and conditions
         reasonably acceptable to the Holder. For the avoidance of doubt, the
         provisions of this Section 15 shall no longer have any effect, and
         shall terminate, upon the complete conversion and/or complete
         redemption or other payment in full of all amounts under this Note;
         provided, that, Section 15(g) shall remain effective to the extent any
         cash payments in respect of Subordinated Amounts shall have been made
         to the Holder of this Note in violation of Section 15(c) or 15(d) prior
         to such complete conversion, complete redemption or payment in full of
         all amounts under this Note until the earlier of (x) such time as the
         terms of Section 15(g) in respect thereof shall have been complied with
         by the Holder and (y) the payment in full of the Senior Indebtedness.

                                       21

<PAGE>

                  (b) Agreement of Subordination. Except as otherwise provided
         in this Section 15, the Company covenants and agrees, and the Holder
         likewise covenants and agrees, that this Note shall be issued subject
         to the provisions of this Section 15; and each subsequent Holder of
         this Note accepts and agrees to be bound by such provisions.

                  The payment of the Subordinated Amounts shall, to the extent
         and in the manner set forth in this Section 15, be subordinate and
         subject in right of payment to the prior payment in full of all Senior
         Indebtedness, whether outstanding at the date of this Note or
         thereafter incurred.

                  Anything contained in this Section 15 to the contrary
         notwithstanding, no provision of this Section 15, or operation thereof,
         shall prevent the occurrence of any Triggering Event hereunder or the
         Holder's delivery of a Triggering Event Redemption Notice. It is
         understood that the provisions of this Section 15 are and are intended
         solely for the purposes of defining the relative rights of the Holder,
         on the one hand, and the holders of the Permitted Secured Indebtedness,
         on the other hand, and shall not be deemed to create any rights or
         priorities in favor of any other Person, including, without limitation,
         the Company. The Holder, the Company and the holders of Permitted
         Secured Indebtedness acknowledge that this Section 15 is not intended
         to subordinate this Note to any existing and future indebtedness of the
         Company that is not Permitted Secured Indebtedness.

                  None of (i) this Section 15, (ii) Section 4, (iii) Section 5,
         (iv) Section 8, (v) Section 9, (vi) Section 19, (vii) the definition of
         "Interest Rate," (viii) the definition of the "Maturity Date" or (ix)
         to the extent the amendment thereof would reasonably be expected to
         have a material adverse effect on the holders of the Senior
         Indebtedness, any other provision of this Note, may be amended without
         the prior written consent of the Required Senior Indebtedness Holders.

                  (c) Payments to Holder. No payment of the Subordinated Amounts
         shall be made in cash if:

                           (i) a default in the payment of principal or interest
                  (including required prepayments of principal or interest) due
                  on or in respect of any Senior Indebtedness occurs and is
                  continuing (including, without limitation, any such default in
                  payment resulting from the acceleration of any Senior
                  Indebtedness) and the Holder of this Note shall have received
                  written notice thereof from the applicable Senior Indebtedness
                  Notice Provider; or

                           (ii) subject to the immediately following paragraph
                  and clause (c)(2) below, an event of default, other than a
                  payment event of default, on any Senior Indebtedness occurs
                  and is continuing that then permits holders of such Senior
                  Indebtedness to accelerate its maturity and the Holder of this
                  Note shall have received written notice of such event of
                  default (a "Payment Blockage Notice") from the applicable
                  Senior Indebtedness Notice Provider.

                  Anything contained herein to the contrary notwithstanding, (v)
         for purposes of clause (c)(ii) above, no more than one (1) Payment
         Blockage Notice may be given during any period of 365 consecutive days
         by each Senior Indebtedness Notice Provider and no more than

                                       22

<PAGE>

         two (2) Payment Blockage Notices in the aggregate may be given during
         any period of 365 consecutive days by all Senior Indebtedness Notice
         Providers, (w) no Payment Blockage Notice delivered by any Senior
         Indebtedness Notice Provider shall be effective for purposes of clause
         (c)(ii) above unless and until all scheduled payments of Subordinated
         Amounts that became due, but were subject to and not paid due to a
         prior Payment Blockage Notice previously delivered by such Senior
         Indebtedness Notice Provider, and all Pro Rata Permitted Payments then
         owing, shall have been paid in full in cash, (x) no nonpayment event of
         default in respect of Senior Indebtedness existing on the date any
         Payment Blockage Notice is given by any Senior Indebtedness Notice
         Provider pursuant to clause (c)(ii) above may be used as a basis for
         any subsequent Payment Blockage Notice by such Senior Indebtedness
         Notice Provider, (y) no Senior Indebtedness Notice Provider shall be
         permitted to deliver a Payment Blockage Notice based on any nonpayment
         event of default if the underlying event, occurrence, breach or default
         giving rise thereto is the same event, occurrence, breach or default
         that gave rise to a nonpayment event of default that was the basis for
         any prior Payment Blockage Notice delivered by any Senior Indebtedness
         Notice Provider, and (z) no Senior Indebtedness Notice Provider shall
         be permitted to deliver a Payment Blockage Notice based solely on a
         cross default (including either a cross covenant default or cross
         payment default) to Senior Indebtedness not then owing to either such
         Senior Indebtedness Notice Provider or any other member of a bank
         syndicate in respect of Senior Indebtedness of which such Senior
         Indebtedness Notice Provider is a member or in respect of which such
         Senior Indebtedness Notice Provider is not then acting as agent for a
         bank syndicate.

                  The Company may and shall resume, and the Holder may retain,
         cash payments of Subordinated Amounts (and the Company may make and the
         Holder may retain any payments missed due to the application of clauses
         (c)(i) and/or (c)(ii) above) otherwise permitted hereunder:

                           (1) in the case of a payment default on any Senior
                  Indebtedness referred to in clause (c)(i) above resulting from
                  the acceleration of such Senior Indebtedness (which shall
                  include any payment default upon final maturity without
                  extension of any Senior Indebtedness), upon the earlier of (A)
                  a cure or written waiver thereof in accordance with the terms
                  of such Senior Indebtedness and (B) the date on which such
                  Senior Indebtedness shall have been paid in full, and, in the
                  case of any other payment default on any Senior Indebtedness
                  referred to in clause (c)(i) above, upon the earliest of (A) a
                  cure or written waiver thereof in accordance with the terms of
                  such Senior Indebtedness, (B) the date on which such Senior
                  Indebtedness shall have been paid in full and (C) the
                  expiration of 180 days from the date on which the Holder shall
                  have received notice of the respective payment default in
                  accordance with clause (c)(i) above (unless such Senior
                  Indebtedness shall have been accelerated, in which case the
                  first part of this clause (c)(1) shall apply);

                           (2) in the case of a nonpayment event of default in
                  respect of any Senior Indebtedness referred to in clause
                  (c)(ii) above, upon the earliest to occur of (A) the cure or
                  written waiver thereof in accordance with the terms of such
                  Senior Indebtedness, (B) the date on which such Senior
                  Indebtedness shall have been paid in full and (C) the
                  expiration of 120

                                       23

<PAGE>

                  days from the date on which the respective Payment Blockage
                  Notice was received; provided, that, (A) subject to the terms
                  and conditions herein contained, during the effectiveness of
                  any Payment Blockage Notice, any other Senior Indebtedness
                  Notice Provider may deliver a Payment Blockage Notice in
                  accordance with the terms hereof and such subsequent Payment
                  Blockage Notice shall be effective immediately upon the
                  cessation of the effectiveness of such prior Payment Blockage
                  Notice; provided, that, among other things, the underlying
                  event of default that is the basis of such subsequent Payment
                  Blockage Notice shall not have been waived or otherwise cured
                  at the time of such cessation; (B) if the terms and conditions
                  of the foregoing clause (A) are satisfied, the Company shall
                  not be prohibited from making, and the Holder of this Note
                  shall not be prohibited from receiving, payments as a result
                  of Payment Blockage Notices delivered in accordance with the
                  foregoing clause (A) for more than an aggregate of 180
                  consecutive days (giving effect to both such prior and
                  subsequent Payment Blockage Notices); and (C) if any Payment
                  Blockage Notice expires prior to the delivery of any
                  subsequent Payment Blockage Notice, (X) no Senior Indebtedness
                  Notice Provider shall be permitted to deliver any subsequent
                  Payment Blockage Notice prior to the thirtieth (30th) day
                  after the cessation of such prior Payment Blockage Notice and
                  (Y) the Company shall not be prohibited from making, and the
                  Holder of this Note shall not be prohibited from receiving,
                  payments as a result of clause (c)(ii) above for more than an
                  aggregate of 240 days within any period of 365 consecutive
                  days.

         Anything contained herein to the contrary notwithstanding: (A) The
         Company may make and the Holder may accept and retain at any time and
         from time to time (I) nominal cash payments owing in connection with
         any conversion hereunder representing payments in lieu of receipt of
         fractional shares and (II) payments of Pro Rata Permitted Payments; (B)
         if any Change of Control shall occur, the provisions of clause (c)(i)
         or (c)(ii) above shall not operate to block or otherwise prohibit any
         required or mandatory cash payments in respect of this Note unless (x)
         all of the holders of the Senior Indebtedness then outstanding shall
         have elected to be paid in full in connection with such Change of
         Control and the net proceeds of such Change of Control shall not have
         been sufficient to so prepay the Senior Indebtedness then outstanding
         or (y) the Holder did not provide the holders of the Senior
         Indebtedness with at least 30 days' written notice that the Holder may
         elect to deliver a Change of Control Redemption Notice in connection
         with such Change of Control (in which cases the other terms of this
         paragraph (c) shall apply); (C) the Company at any time may issue to
         the Holder shares of capital stock of the Company; and (D) if any
         Proceeding constituting a reorganization under Chapter 11 of the United
         States Bankruptcy Code shall have occurred involving the Company (or
         any successor) and, under the terms of the relevant plan of
         reorganization that shall have been confirmed thereunder, this Note
         shall not have been paid in full in cash on the effective date of such
         plan of reorganization, then the provisions of this paragraph (c) shall
         apply from and after the effective date of such plan of reorganization
         until the Senior Indebtedness shall have been paid in full.

                  For clarification purposes, the Holder of this Note and the
         Company each acknowledges and agrees that, if any Senior Indebtedness
         shall have been accelerated, upon and after receipt of written notice
         by the Holder in accordance with clause (c)(i) above, the Company shall
         not make, and the Holder of this Note shall not receive or retain, any
         cash payments of Subordinated

                                       24

<PAGE>

         Amounts after receipt of such notice by the Holder of this Note until
         the earliest of (A) a cure or written waiver of the resulting payment
         default in accordance with the terms of such Senior Indebtedness, (B)
         the date on which such Senior Indebtedness shall have been paid in full
         and (C) the date on which such acceleration shall have been rescinded
         by the applicable holders of the Senior Indebtedness.

                  (d) Standstill. Subject to the last sentence of this paragraph
         (d), until the Senior Indebtedness is paid in full, the Holder of this
         Note shall not, without the prior written consent of the Required
         Senior Indebtedness Holders, accelerate this Note, cause the redemption
         of this Note due to the occurrence of any Triggering Event
         (specifically excluding any redemption pursuant to Section 8 of this
         Note) or any Change of Control or exercise any of the remedies with
         respect to the Subordinated Amounts that may be available to the Holder
         with respect thereto, either at law or in equity, by judicial
         proceedings or otherwise (an "Enforcement Action"), except as provided
         below; provided, however, that the Holder's delivery of a Triggering
         Event Redemption Notice shall not constitute an Enforcement Action.
         Upon the earliest to occur of:

                           (i) the passage of 179 days from the date the Holder
                  gave written notice to the holders of the Senior Indebtedness
                  of the occurrence of any Triggering Event, if such Triggering
                  Event shall not have been waived in writing within such
                  period;

                           (ii) acceleration of the Senior Indebtedness
                  (provided, however, that if, following any such acceleration
                  of the Senior Indebtedness, such acceleration in respect of
                  the Senior Indebtedness is rescinded, then all Enforcement
                  Actions taken by the Holder shall likewise be rescinded if (y)
                  such Enforcement Actions are based on this clause (ii) and (z)
                  the Holder shall not have any vested right under any other
                  clause of this paragraph (d) to take any Enforcement Action;
                  provided, further, that such rescission by the Holder shall
                  not effect the running of the 179 day period under clause
                  (d)(i) above to the extent the Triggering Event giving rise
                  thereto is not based solely on an acceleration of the Senior
                  Indebtedness);

                           (iii) the occurrence of a Proceeding (provided,
                  however, that if such Proceeding is dismissed, the
                  corresponding prohibition against the Holder taking any
                  Enforcement Action shall be reinstated automatically as of the
                  date of such dismissal as if such Proceeding had not been
                  initiated, unless the Holder shall have the vested right to
                  take any Enforcement Action under another clause of this
                  paragraph (d) (provided, that such reinstatement of the
                  prohibition against the Holder taking any Enforcement Action
                  shall not affect the running of the 179 day period under
                  clause (d)(i) above to the extent the Triggering Event giving
                  rise thereto is not based solely on the initiation of such
                  Proceeding)); and

                           (iv) if a Triggering Event has occurred, the sale or
                  other disposition of assets by the Company and/or any of its
                  Subsidiaries, whether in a single transaction or a series of
                  transactions, constituting more than fifteen percent (15%) of
                  the aggregate consolidated assets (calculated on a book-value
                  basis) of the Company and its Subsidiaries taken as a

                                       25

<PAGE>

                  whole (other than any such sale or other disposition to a
                  Person that is either wholly-owned by the Company or a
                  wholly-owned subsidiary thereof) outside of the ordinary
                  course of business for less than fair value (as certified by
                  the Board of Directors of the Company and determined by such
                  board in good faith); provided, that, if such sale or other
                  disposition the result of which is to cause the occurrence of
                  the foregoing is consummated without the consent of the
                  Required Senior Indebtedness Holders (evidence of which shall
                  be requested by the Holder of this Note from the Senior
                  Indebtedness Notice Providers), the Holder of this Note shall
                  deliver to such Senior Indebtedness Notice Providers not less
                  than thirty (30) days' prior written notice of its intent to
                  take an Enforcement Action;

                  then the Holder may take any and all Enforcement Actions.
         Anything herein contained to the contrary notwithstanding, (A) the
         Holder from time to time and at any time shall be permitted to seek
         specific performance or other injunctive relief in the event of any
         breach or threatened breach by the Company of any of its agreements,
         obligations and covenants under this Note; provided, that, the Holder
         shall not be permitted to seek or receive payments hereunder (such
         prohibition being effective only to the extent such payments were
         missed due to the application of paragraph (c) of this Section 15),
         damages or monetary restitution, compensation or remuneration in
         respect of this Note or the obligations of the Company hereunder unless
         the Holder otherwise shall have been permitted to take such other
         actions pursuant to this paragraph (d) (for clarification, the Holder
         may always take action to seek or cause the payment of Pro Rata
         Permitted Payments); (B) the Holder shall be permitted to take any
         Enforcement Action immediately upon the occurrence of any Change of
         Control unless (x) all of the holders of the Senior Indebtedness then
         outstanding shall have elected to be paid in full in connection with
         such Change of Control and the net proceeds of such Change of Control
         shall not have been sufficient to so prepay the Senior Indebtedness
         then outstanding or (y) the Holder did not provide the holders of the
         Senior Indebtedness with at least 30 days' written notice that the
         Holder may elect to deliver a Change of Control Redemption Notice in
         connection with such Change of Control (in which case the other terms
         of this paragraph (d) shall apply); (C) the Holder from time to time
         may bring and maintain actions against the Company solely to collect
         payments of accrued and unpaid Interest under, and any cash payments in
         respect of, this Note so long as the Company shall have otherwise been
         permitted to make such payment(s) to the Holder under the terms of this
         Section 15 and otherwise failed to do so (and the Holder shall be
         permitted to keep and retain such payments upon receipt); and (D) the
         Holder shall be permitted to exercise its rights under Section 8, and
         receive payments of Subordinated Amounts in connection therewith, so
         long as the Company shall otherwise be permitted to make such payments
         to the Holder under the terms of this Section 15.

                  (e) Proceeding. Upon any payment by the Company, or
         distribution of assets of the Company of any kind or character, whether
         in cash, property or securities, to creditors in connection with any
         Proceeding, subject to the immediately following paragraph, all amounts
         due or to become due upon all Senior Indebtedness shall first be paid
         in full in cash, cash equivalents or other property reasonably
         acceptable to the Required Senior Indebtedness Holders before any
         payment is made on account of the principal of, premium, if any, or
         interest on this Note or any other Subordinated Amount; and, subject to
         the immediately following

                                       26

<PAGE>

         paragraph, in connection with any such Proceeding, any payment by the
         Company, or distribution of assets of the Company of any kind or
         character, whether in cash, property or securities, to which the Holder
         would be entitled, except for the provision of this paragraph (e),
         shall (except as aforesaid) be paid by the Company, or by any receiver,
         trustee in bankruptcy, liquidating trustee, agent or other Person
         making such payment or distribution, or by the Holder if received by
         it, directly to the holders of Senior Indebtedness (to be applied pro
         rata to such holders on the basis of the respective amounts of Senior
         Indebtedness held by such holders, or as otherwise required by law or a
         court order) or their representative or representatives, as their
         respective interests may appear, to the extent necessary to pay all
         Senior Indebtedness in full in cash, cash equivalents or other Property
         reasonably acceptable to the holders of such Senior Indebtedness, after
         giving effect to any concurrent payment or distribution to or for the
         holders of Senior Indebtedness, before any payment or distribution or
         provision therefore is made to the Holder.

                  For purposes of this paragraph (e), the words, "cash, property
         or securities" shall not be deemed to include (A) shares of capital
         stock or other equity securities of the Company (or any successor
         corporation or other entity) as reorganized or readjusted or otherwise
         or (B) debt securities of the Company (or any successor corporation or
         other entity) provided for by a plan of reorganization or readjustment
         the payment of which is subordinated, at least to the extent provided
         in this Section 15 with respect to this Note, to the payment of all
         Senior Indebtedness which may at the time be outstanding.

                  Upon any payment or distribution of assets of the Company
         referred to in this Section 15, the Holder shall be entitled to rely
         upon any order or decree made by any court of competent jurisdiction in
         which a Proceeding is pending, or a certificate of the receiver,
         trustee in bankruptcy, liquidating trustee, agent or other Person
         making such payment or distribution, that shall have been delivered to
         the Holder for the purposes of ascertaining the persons entitled to
         participate in such distribution, the holders of the Senior
         Indebtedness and other Indebtedness of the Company, the amount thereof
         or payable thereon and all other facts pertinent thereto or to this
         Section 15.

                  (f) Redemption. With respect to any redemption in cash of all
         or any part of this Note pursuant to Section 8 hereof (which, for
         clarity, does not include regularly scheduled payments), the Holder
         shall provide prior written notice of any such redemption to the Senior
         Indebtedness Notice Providers, and the Company may effectuate such
         redemption if either (i) the Company or the Holder receives written
         consent thereto by the Required Senior Indebtedness Holders or (ii) (a)
         30 days have elapsed from the delivery of the notice referenced above
         to the Senior Indebtedness Notice Providers and (b)(x) no Payment
         Blockage Notice shall have been received by the Holder and is then
         effective in accordance with the terms of Section 15(c) or (y) the
         terms of Section 15(c) otherwise do not prohibit the cash redemption of
         this Note by the Company.

                  (g) Turnover. In the event that, notwithstanding the foregoing
         provisions, any payment or distribution of assets of the Company of any
         kind or character, whether in cash, property or securities (including,
         without limitation, by way of setoff or otherwise), otherwise
         prohibited by the terms of this Section 15, shall be received by the
         Holder

                                       27

<PAGE>

         before all Senior Indebtedness is paid in full, such payment or
         distribution shall be held in trust for the benefit of and shall be
         paid over or delivered to the holders of the Senior Indebtedness or
         their representative or representatives, as their respective interests
         may appear, as calculated by the Company, for application to the
         payment of all Senior Indebtedness then remaining unpaid to the extent
         necessary to pay all Senior Indebtedness in full, after giving effect
         to any concurrent payment or distribution to or for the holders of such
         Senior Indebtedness.

                  (h) Subrogation; Relative Rights; Reliance. Subject to the
         payment in full of all Senior Indebtedness, the rights of the Holder
         shall be subrogated to the extent of the payments or distributions made
         to the holders of such Senior Indebtedness pursuant to the provisions
         of this Section 15 to the rights of the holders of the Senior
         Indebtedness to receive payments or distributions of cash, property or
         securities of the Company applicable to the Senior Indebtedness until
         the Principal of, premium, if any, and Interest on and all other
         amounts owing under this Note, the Warrants, the Separate Tranche
         Warrants, the Securities Purchase Agreement and Registration Rights
         Agreement shall be paid in full in cash; and, for the purposes of such
         subrogation, no payments or distributions to the holders of the Senior
         Indebtedness of any cash, property or securities to which the Holder
         would be entitled except for the provisions of this Section 15, and no
         payment over pursuant to the provisions of this Section 15, to or for
         the benefit of the holders of Senior Indebtedness by the Holder shall,
         as among the Company, its creditors (other than holders of the Senior
         Indebtedness) and the Holder, be deemed to be a payment by the Company
         to or an account of the Senior Indebtedness; and no payments or
         distributions of cash, property or securities to or for the benefit of
         the Holder pursuant to the subrogation provisions of this Section 15,
         which would otherwise have been paid to the holders of the Senior
         Indebtedness, shall be deemed to be a payment by the Company to or for
         the account of this Note.

                  Nothing contained in this Section 15 or elsewhere in this Note
         is intended to or shall impair, as among the Company, its creditors
         (other than the holders of the Senior Indebtedness) and the Holder, the
         obligation of the Company, which is absolute and unconditional, to pay
         to the Holder the Principal of (and premium, if any) and interest on,
         and all other amounts under, this Note, the Warrants, the Separate
         Tranche Warrants, the Securities Purchase Agreement and the
         Registration Rights Agreement as and when the same shall become due and
         payable in accordance with their terms, or is intended to or shall
         affect the relative rights of the Holder and creditors of the Company
         (other than the holders of the Senior Indebtedness), nor shall anything
         herein prevent the Holder from exercising all remedies otherwise
         permitted by applicable law upon default under this Note, subject to
         the rights, if any, under this Section 15 of the holders of the Senior
         Indebtedness in respect of cash, property or securities of the Company
         received upon the exercise of any such remedy.

                  (i) No Collateral. The Holder may not take any voluntary
         security interest in any property of the Company to secure obligations
         of the Company under this Note.

                  (j) Notice to Holder. The Company shall give prompt written
         notice in the form of an officer's certificate to the Holder of any
         fact known to the Company which

                                       28

<PAGE>

         would prohibit the making of any payment of cash to the Holder in
         respect of this Note pursuant to the provisions of this Section 15.

                  (k) No Impairment of Subordination. Except as otherwise
         expressly provided in this Section 15, including, without limitation,
         certain obligations to deliver notices to the Holder in accordance with
         the terms hereof, no right of any present or future holder of any
         Senior Indebtedness to enforce the subordination 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, to the extent taken or not taken
         in good faith, by any act or failure to act by any such holder, or by
         any noncompliance by the Company with the terms, provisions and
         covenants of this Note, regardless of any knowledge thereof which any
         such holder may have or otherwise be charged with.

                  The subordination provisions set forth herein and the rights
         of the holders of the Senior Indebtedness arising under this Section 15
         shall not be affected, modified or impaired in any manner or to any
         extent by (i) subject to the restrictions set forth in the definition
         of Senior Indebtedness and subject to Section 15(n), any amendment,
         modification of or supplement to any of the documents evidencing the
         Senior Indebtedness, (ii) the validity or enforceability of such
         documents, (iii) the release, sale, exchange or surrender, in whole or
         in part, of any collateral security, now or hereafter existing, for any
         of the Senior Indebtedness, (iv) any exercise or non-exercise of any
         right, power or remedy under or in respect of the Senior Indebtedness
         or any such document described in clause (i) above or arising at law,
         or (v) any waiver, consent, release, indulgency, extension, renewal,
         modification, delivery or other action, inaction or omission in respect
         of the Senior Indebtedness or the documents evidencing or in respect of
         any collateral security therefor.

                  (l) Certain Conversions Deemed Payment. Nothing contained in
         this Section 15 shall prevent the Holder from exercising from time to
         time any of its rights of conversion under Sections 3, 6, or 7. For the
         purposes of this Section 15 only, (i) neither the issuance and delivery
         of shares of Common Stock upon conversion in accordance with Section 3
         nor the payment of Interest in shares of Common Stock in accordance
         with Section 2 hereof, shall be deemed to constitute a payment or
         distribution on account of the Subordinated Amounts or the Pro Rata
         Permitted Payments and (ii) the payment, issuance or delivery of cash,
         property or securities (other than Common Stock or, subject to the
         applicable terms hereof, other capital stock or equity or debt
         securities of the Company) upon conversion shall be deemed to
         constitute payment on account of the principal of this Note. Nothing
         contained in this Section 15 or elsewhere in this Note or in the
         Securities is intended to or shall impair, as among the Company, its
         creditors other than holders of the Senior Indebtedness, the right,
         which is absolute and unconditional, of the Holder to convert this Note
         in accordance with Section 3.

                  (m) Senior Indebtedness Entitled to Rely. The holders of the
         Senior Indebtedness shall have the right to rely upon this Section 15,
         and shall be third party beneficiaries thereof and may enforce their
         rights against the Holder and the Company for any breach of the
         provisions of this Section 15. As a condition to such reliance, the
         holders of the Senior Indebtedness and the Senior Indebtedness Notice
         Providers shall have provided to the

                                       29

<PAGE>

         Holder contact information for purposes of any and all notices and
         other communications hereunder to be delivered by the Holder to such
         holders and Senior Indebtedness Notice Providers; provided, that, if
         more than three (3) Persons are holders of the Senior Indebtedness, at
         the Company's expense, a receiving agent shall have been duly appointed
         and agreed to act as agent for all such holders of the Senior
         Indebtedness pursuant to documentation reasonably satisfactory to the
         Holder and, upon such appointment, any and all notices and other
         communications to be made under this Section 15 to any holder of Senior
         Indebtedness shall instead be given to such receiving agent, and any
         such notice shall be fully effective as if made to all such holders.
         Notwithstanding anything contained in the foregoing sentence to the
         contrary, subject to compliance with the second sentence of this
         paragraph (m) in respect of the delivery of contact information, all
         notices and other communications hereunder to be delivered by the
         Holder to the holders of the Senior Indebtedness shall also be made to
         the Senior Indebtedness Notice Providers.

                  (n) Amendments to Senior Indebtedness. The Company may at any
         time and from time to time without the consent of the Holder, without
         incurring liability to the Holder and without impairing or releasing
         the obligations of the Holder under this Section 15, change the amount,
         manner or place of payment or extend the time of payment of or renew or
         alter any of the terms of the Senior Indebtedness, or amend in any
         manner any agreement, note, guaranty or other instrument evidencing or
         securing or otherwise relating to the Senior Indebtedness except (x) as
         limited by the definition of Senior Indebtedness and (y) to the extent
         the effect of such change, extension, renewal, alteration or amendment
         would:

                           (i) increase the interest rate applicable to Senior
                  Indebtedness to a rate higher than a prime rate in effect from
                  time to time (as announced from time to time by a nationally
                  recognized banking association) plus 600 basis points (or
                  change any margin or spread or the level of any financial
                  covenant indicator or ratio if such change effectively would
                  so increase the interest rate to a rate higher than such prime
                  rate plus 600 basis points), except in connection with the
                  imposition of a default rate of interest;

                           (ii) revise the scheduled "maturity date"or the
                  equivalent thereof in the documents relating to the Senior
                  Indebtedness to a date earlier than June 29, 2003; or

                           (iii) cause the Senior Indebtedness to constitute a
                  credit facility other than a credit facility that constitutes
                  a revolving credit facility that is secured by accounts
                  receivable, inventory and other assets of the Company
                  utilizing a borrowing base determined by advance rates in
                  respect of eligible receivables and eligible inventory on
                  terms that are commonly considered among those offered in the
                  United States asset-based lending market to commercial
                  manufacturers with similar financial strength to the Company,
                  and which may provide for overadvances from time to time.

         (16) AUTOMATIC AMENDMENT. If any holder of Senior Indebtedness makes
any change to or adds any event of default or any covenant with respect to the
Senior Indebtedness, a corresponding change or addition, as the case may be,
shall automatically be made to this Note, and shall become effective,
simultaneously therewith, without any further action on the part of the Holder
or the Company; provided that no such change or addition shall

                                       30

<PAGE>

be made pursuant to this Section 16 if the result would be to make the Company's
obligations under this Note less restrictive than those in effect immediately
prior to such change or addition.

         (17) PARTICIPATION. The Holder, as the holder of this Note, shall be
entitled to such dividends paid and distributions made to the holders of Common
Stock to the same extent as if the Holder had converted this Note into Common
Stock (without regard to any limitations on conversion herein or elsewhere) and
had held such shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made concurrently
with the dividend or distribution to the holders of Common Stock.

         (18) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote
at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of Notes representing not less than a majority of the
aggregate principal amount of the then outstanding Notes, shall be required for
any change or amendment to this Note or the Other Notes .

         (19) TRANSFER. This Note may be offered, sold, assigned or transferred
by the Holder without the consent of the Company, subject only to the provisions
of Section 2(f) of the Securities Purchase Agreement. Notwithstanding the
foregoing, no transfer of less than $100,000 of principal amount of this Note
(or, if lower, the entire remaining principal amount outstanding hereunder)
shall be permitted without the prior written consent of the Company, which
consent shall not be unreasonably delayed. This Note may not be sold,
transferred or assigned by the Holder to any affiliate or Subsidiary of the
Company.

         (20) REISSUANCE OF THIS NOTE.

                  (a) Transfer. If this Note is to be transferred, the Holder
         shall surrender this Note to the Company, whereupon the Company will
         forthwith issue and deliver upon the order of the Holder a new Note (in
         accordance with Section 20(d)), registered as the Holder may request,
         representing the outstanding Principal being transferred by the Holder
         and, if less then the entire outstanding Principal is being
         transferred, a new Note (in accordance with Section 20(d)) to the
         Holder representing the outstanding Principal not being transferred.
         The Holder and any assignee, by acceptance of this Note, acknowledge
         and agree that, by reason of the provisions of Section 3(c)(iii) and
         this Section 20(a), following conversion or redemption of any portion
         of this Note, the outstanding Principal represented by this Note may be
         less than the Principal stated on the face of this Note.

                  (b) Lost, Stolen or Mutilated Note. Upon receipt by the
         Company of evidence reasonably satisfactory to the Company of the loss,
         theft, destruction or mutilation of this Note, and, in the case of
         loss, theft or destruction, of any indemnification undertaking by the
         Holder to the Company in customary form and, in the case of mutilation,
         upon surrender and cancellation of this Note, the Company shall execute
         and deliver to the Holder a new Note (in accordance with Section 20(d))
         representing the outstanding Principal.

                                       31

<PAGE>

                  (c) Note Exchangeable for Different Denominations. This Note
         is exchangeable, upon the surrender hereof by the Holder at the
         principal office of the Company, for a new Note or Notes (in accordance
         with Section 20(d) and in principal amounts of at least $100,000)
         representing in the aggregate the outstanding Principal of this Note,
         and each such new Note will represent such portion of such outstanding
         Principal as is designated by the Holder at the time of such surrender.

                  (d) Issuance of New Notes. Whenever the Company is required to
         issue a new Note pursuant to the terms of this Note, such new Note (i)
         shall be of like tenor with this Note, (ii) shall represent, as
         indicated on the face of such new Note, the Principal remaining
         outstanding (or in the case of a new Note being issued pursuant to
         Section 20(a) or Section 20(c), the Principal designated by the Holder
         which, when added to the principal represented by the other new Notes
         issued in connection with such issuance, does not exceed the Principal
         remaining outstanding under this Note immediately prior to such
         issuance of new Notes), (iii) shall have an issuance date, as indicated
         on the face of such new Note which is the same as the Issuance Date of
         this Note, (iv) shall have the same rights and conditions as this Note,
         and (v) shall represent accrued Interest and Late Charges on the
         Principal and Interest of this Note, from the Issuance Date.

         (21) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note, the Securities
Purchase Agreement, the Warrants and the Registration Rights Agreement, at law
or in equity (including a decree of specific performance and/or other injunctive
relief), and nothing herein shall limit the Holder's right to pursue actual and
consequential damages for any failure by the Company to comply with the terms of
this Note. Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts to be
received by the Holder and shall not, except as expressly provided herein, be
subject to any other obligation of the Company (or the performance thereof). The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the Holder shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.

         (22) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this
Note is placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding or the Holder otherwise takes
action to collect amounts due under this Note or to enforce the provisions of
this Note or (b) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors' rights and
involving a claim under this Note, then the Company shall pay the costs incurred
by the Holder for such collection, enforcement or action or in connection with
such bankruptcy, reorganization, receivership or other proceeding, including but
not limited to attorneys fees and disbursements.

                                       32

<PAGE>

         (23) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly
drafted by the Company and all the Purchasers and shall not be construed against
any person as the drafter hereof. The headings of this Note are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Note.

         (24) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.

         (25) DISPUTE RESOLUTION. In the case of a dispute as to the
determination of the Redemption Price or the arithmetic calculation of the
Conversion Rate or the Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within two Business Days
of receipt of the Conversion Notice or Redemption Notice giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are
unable to agree upon such determination or calculation of the Conversion Rate
within three Business Days of such disputed determination or arithmetic
calculation being submitted to the Holder, then the Company shall, within two
Business Days submit via facsimile (a) the disputed determination of the Closing
Bid Price, Closing Sale Price or Weighted Average Price to an independent,
reputable investment bank selected by the Company and approved by the Holder or
(b) the disputed arithmetic calculation of the Conversion Rate or the Redemption
Price to the Company's independent, outside accountant. The Company, at the
Company's expense, shall cause the investment bank or the accountant, as the
case may be, to perform the determinations or calculations and notify the
Company and the Holder of the results no later than ten Business Days from the
time it receives the disputed determinations or calculations. Such investment
bank's or accountant's determination or calculation, as the case may be, shall
be binding upon all parties absent demonstrable error.

         (26) NOTICES; PAYMENTS.

                  (a) Notices. Whenever notice is required to be given under
         this Note, unless otherwise provided herein, such notice shall be given
         in accordance with Section 9(f) of the Securities Purchase Agreement.
         The Company shall provide the Holder with prompt written notice of all
         actions taken pursuant to this Note, including in reasonable detail a
         description of such action and the reason therefore. Without limiting
         the generality of the foregoing, the Company will give written notice
         to the Holder (i) immediately upon any adjustment of the Conversion
         Price, setting forth in reasonable detail, and certifying, the
         calculation of such adjustment and (ii) at least fifteen Business Days
         prior to the date on which the Company closes its books or takes a
         record (A) with respect to any dividend or distribution upon the Common
         Stock, (B) with respect to any grants, issues or sales of any Options,
         Convertible Securities or rights to purchase stock, warrants,
         securities or other property pro rata to holders of Common Stock or (C)
         for determining rights to vote with respect to any Change of Control,
         dissolution or liquidation, provided in each case that such information
         shall be made known to the public prior to or in conjunction with such
         notice being provided to such holder. Notwithstanding the

                                       33

<PAGE>

         foregoing, Section 4(j) of the Securities Purchase Agreement shall
         apply to all notices given pursuant to this Note.

                  (b) Payments. Whenever any payment of cash is to be made by
         the Company to any Person pursuant to this Note, such payment shall be
         made in lawful money of the United States of America by a check drawn
         on the account of the Company and sent via overnight courier service to
         such Person at such address as previously provided to the Company in
         writing (which address, in the case of each of the Purchasers (as
         defined in Section 3(d)(ii)), shall initially be as set forth on the
         Schedule of Buyers attached to the Securities Purchase Agreement);
         provided that the Holder may elect to receive a payment of cash via
         wire transfer of immediately available funds by providing the Company
         with prior written notice setting out such request and the Holder's
         wire transfer instructions. Whenever any amount expressed to be due by
         the terms of this Note is due on any day which is not a Business Day,
         the same shall instead be due on the next succeeding day which is a
         Business Day and, in the case of any Interest Date which is not the
         date on which this Note is paid in full, the extension of the due date
         thereof shall not be taken into account for purposes of determining the
         amount of Interest due on such date . Any amount of Interest, Principal
         or other amount due under the Transaction Documents (as defined in the
         Securities Purchase Agreement) which is not paid when due shall result
         in a late charge being incurred and payable by the Company in an amount
         equal to interest on such amount at the rate of 15% per annum from the
         date such amount was due until the same is paid in full ("Late
         Charge").

                  (c) Notices to Senior Indebtedness Notice Providers. Notice to
         the holders of Senior Indebtedness (including, without limitation, the
         Senior Indebtedness Notice Providers) as required under the terms of
         this Note shall be in writing and shall be deemed to have been validly
         delivered (i) upon receipt if deposited in the United States mails,
         first class mail, with proper postage prepaid, (ii) upon receipt of
         confirmation or answerback if sent by telecopy or other similar
         facsimile transmission, (iii) one Business Day after deposit with a
         reputable overnight courier with all charges prepaid, or (iv) when
         delivered, if hand-delivered by messenger, all of which shall be
         properly addressed to the holder of Senior Indebtedness to be notified
         and sent to the address or number indicated as follows:

                  (A) to IBM Credit Corporation, at North Castle Drive, Armonk,
                  NY 10504, Attention: Credit Manager, Facsimile: (914)
                  765-6276;

                  (B) to U.S. Bank National Association, at 601 Second Avenue
                  South, Minneapolis, MN 55402 , Attention: Christopher J.
                  Schaaf, Facsimile (612) 973-0829; and

                  (C) to any future holder of Senior Indebtedness at such
                  address and number as such holder of Senior Indebtedness shall
                  notify the Holder in writing prior to the delivery of such
                  notice;

         or in each case to such other address or number as a holder of Senior
         Indebtedness may from time to time designate to the Holder in writing.

                                       34

<PAGE>

         (27) CANCELLATION. After all Principal, accrued Interest and other
amounts at any time owed on this Note has been paid in full, this Note shall
automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.

         (28) WAIVER OF NOTICE. To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note and the Securities Purchase Agreement.

         (29) GOVERNING LAW. This Note shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York.

         (30) CERTAIN DEFINITIONS. For purposes of this Note, the following
terms shall have the following meanings:

                  (a) "Business Day" means any day other than Saturday, Sunday
         or other day on which commercial banks in The City of New York are
         authorized or required by law to remain closed.

                  (b) "Calendar Quarter" means, each of the period beginning on
         and including January 1 and ending on and including March 31, the
         period beginning on and including April 1 and ending on and including
         June 30, the period beginning on and including July 1 and ending on and
         including September 30, and the period beginning on and including
         October 1 and ending on and including December 31.

                  (c) "Change of Control Redemption Percentage" means, with
         respect to any date of determination, (i) prior to May 1, 2003, 116%,
         (ii) during the period beginning on and including May 1, 2003 and
         ending on but excluding May 1, 2004, 112%, (iii) during the period
         beginning on and including May 1, 2004 and ending on but excluding May
         1, 2005, 108%, (iv) during the period beginning on and including May 1,
         2005 and ending on but excluding May 1, 2006, 106%, and (v) on or after
         May 1, 2006, 104%.

                  (d) "Closing Bid Price" and "Closing Sale Price" means, for
         any security as of any date, the last closing bid price and last
         closing trade price, respectively, for such security on the Nasdaq
         National Market (the "Principal Market") as reported by Bloomberg
         Financial Markets ("Bloomberg"), or, if the Principal Market begins to
         operate on an extended hours basis and does not designate the closing
         bid price or the closing trade price, as the case may be, then the last
         bid price or last trade price, respectively, of such security prior to
         4:00:00 p.m. Eastern Time as reported by Bloomberg, or, if the
         Principal Market is not the principal securities exchange or trading
         market for such security, the last closing bid price or last trade
         price, respectively, of such security on the principal securities
         exchange or trading market

                                       35

<PAGE>

         where such security is listed or traded as reported by Bloomberg, or if
         the foregoing do not apply, the last closing bid price or last trade
         price, respectively, of such security in the over-the-counter market on
         the electronic bulletin board for such security as reported by
         Bloomberg, or, if no closing bid price or last trade price,
         respectively, is reported for such security by Bloomberg, the average
         of the bid prices, or the ask prices, respectively, of any market
         makers for such security as reported in the "pink sheets" by the
         National Quotation Bureau, Inc. If the Closing Bid Price or the Closing
         Sale Price cannot be calculated for a security on a particular date on
         any of the foregoing bases, the Closing Bid Price or the Closing Sale
         Price, as the case may be, of such security on such date shall be the
         fair market value as mutually determined by the Company and the Holder.
         If the Company and the Holder are unable to agree upon the fair market
         value of such security, then such dispute shall be resolved pursuant to
         Section 25. All such determinations to be appropriately adjusted for
         any stock dividend, stock split, stock combination or other similar
         transaction during any applicable calculation period.

                  (e) "Common Stock" means (i) the Company's common stock, par
         value $0.01 per share, and (ii) any capital stock resulting from a
         reclassification of such Common Stock.

                  (f) "Excluded Securities" means any shares of Common Stock
         issued or issuable (i) in connection with a strategic partnership or
         joint venture in which there is a significant commercial relationship
         with the Company and in which the primary purpose of which is not to
         raise capital, (ii) pursuant to a bona fide firm commitment
         underwritten public offering with a nationally recognized underwriter
         which generates gross proceeds in excess of $45,000,000 (other than an
         "at-the-market offering" as defined in Rule 415(a)(4) under the 1933
         Act and "equity lines"), (iii) upon conversion or exercise of any
         Options or Convertible Securities which are outstanding on the day
         immediately preceding the Initial Issuance Date, provided that the
         terms of such Options or Convertible Securities are not amended,
         modified or changed on or after the Initial Issuance Date, and (iv)
         pursuant to any subdivision of one or more classes or the Company's
         outstanding shares of Common Stock with respect to which an adjustment
         to the Conversion Price has been made pursuant to Section 7(b).

                  (g) "holders of the Senior Indebtedness" means the holders of
         the Senior Indebtedness, initially IBM Credit Corporation and U.S. Bank
         National Association.

                  (h) "Indebtedness" shall have the meaning ascribed to that
         term in Section 3(r) of the Securities Purchase Agreement.

                  (g) "Initial Issuance Date" means [INSERT: the Issuance Date
         of the Initial A-1 Notes.]

                  (h) "Interest Conversion Price" means, with respect to any
         Interest Date, that price which shall be computed as 95% of the
         arithmetic average of the Weighted Average Price of the Common Stock on
         each of the five consecutive Trading Days immediately preceding the
         second Trading Day immediately preceding such Interest Date. All such

                                       36

<PAGE>

         determinations to be appropriately adjusted for any stock split, stock
         dividend, stock combination or other similar transaction during such
         period.

                  (i) "Pari Passu Indebtedness" means any unsecured Indebtedness
         of the Company outstanding as of the date of the Securities Purchase
         Agreement, all of which is set forth on Schedule 3(r) of the Securities
         Purchase Agreement as of the date thereof, excluding any replacements,
         amendments or modifications thereto.

                  (j) "Permitted Refinancing Indebtedness" shall mean
         Indebtedness incurred by the Company to refinance Senior Indebtedness,
         but only if such Indebtedness (i) is evidenced by financing
         documentation constituting Permitted Refinancing Senior Indebtedness
         Documents (and such documentation otherwise complies with the terms
         conditions contained in the definition thereof) and (ii) is, with
         respect to each item of Senior Indebtedness being refinanced, evidenced
         by a credit facility that constitutes a revolving credit facility that
         is secured by accounts receivable, inventory and other assets of the
         Company utilizing a borrowing base determined by advance rates in
         respect of eligible receivables and eligible inventory on terms that
         are commonly considered among those offered in the United States
         asset-based lending market to commercial manufacturers with similar
         financial strength to the Company, and which may provide for
         overadvances from time to time.

                  (k) "Permitted Refinancing Senior Indebtedness Documents"
         shall mean any financing documentation evidencing Permitted Refinancing
         Indebtedness that replaces the documents evidencing Senior Indebtedness
         and pursuant to which such Senior Indebtedness is so refinanced, as
         such financing documentation may be amended, supplemented or otherwise
         modified from time to time in compliance with Section 15(n).

                  (l) "Permitted Secured Indebtedness" means (i) the Senior
         Indebtedness, (ii) any Indebtedness of the Company incurred in the
         ordinary course of business secured by a purchase money security
         interest, (iii) any capitalized lease obligations of the Company
         incurred in the ordinary course of business and (iv) any other secured
         Indebtedness of the Company which is set forth on Schedule 3(r) of the
         Securities Purchase Agreement as of the date thereof, excluding any
         replacements, amendments or modifications to such Indebtedness.

                  (m) "Person" means an individual, a limited liability company,
         a partnership, a joint venture, a corporation, a trust, an
         unincorporated organization, any other entity and a government or any
         department or agency thereof.

                  (n) "Proceeding" means any insolvency, bankruptcy,
         receivership, custodianship, liquidation, reorganization, assignment
         for the benefit of creditors or other proceeding for the liquidation,
         dissolution or other winding up of the Company.

                  (o) "Pro Rata Permitted Payments" means, as to the Holder,
         cash payments to the Holder under (i) this Note and any Separate
         Tranche Notes held by the Holder (other than payments of Principal,
         premium and Interest (including payment of the Redemption Price) with
         respect to this Note or such Separate Tranche Notes) and (ii) the
         Warrants, the

                                       37

<PAGE>

         Separate Tranche Warrants, the Securities Purchase Agreement and the
         Registration Rights Agreement, including, in any case, without
         limitation, payments of any closing fees, payments for reimbursable
         costs, fees and expenses relating to the transactions evidenced hereby
         and thereby, and reimbursement and indemnification payments required to
         be paid pursuant to the terms hereof or of the Securities Purchase
         Agreement or Registration Rights Agreement, up to an aggregate amount
         collectively equal to the Holder's Subsequent Closing Percentage (as
         defined in the Securities Purchase Agreement) of (a) if, at any time of
         determination, the aggregate original principal amount of this Note,
         the Other Notes and all Separate Tranche Notes (determined at time of
         issuance) issued at or prior to such time does not exceed $20,000,0000,
         then $500,000, or (b) if, at any time of determination, the aggregate
         original principal amount of this Note, the Other Notes and all
         Separate Tranche Notes (determined at time of issuance) issued at or
         prior to such time exceeds $20,000,0000, then $1,000,000.

                  (p) "Registration Rights Agreement" means that certain
         registration rights agreement between the Company and the initial
         holders of the Notes relating to the registration of the resale of the
         shares of Common Stock issuable upon conversion of the Notes.

                  (q) "Required Senior Indebtedness Holders" means, as of any
         date of determination, the holders of the Senior Indebtedness
         representing, in the aggregate, at least 50.1% of the aggregate
         principal amount of the Senior Indebtedness outstanding as of such
         date; provided, however, if there are only two holders of the Senior
         Indebtedness outstanding as of such date, then "Required Senior
         Indebtedness Holders" shall mean both of such holders of Senior
         Indebtedness; provided, further, that if, as of any date of
         determination, IBM Credit represents at least 30% of the aggregate
         principal amount of the Senior Indebtedness outstanding as of such
         date, then IBM Credit shall be one of the "Required Senior Indebtedness
         Holders."

                  (r) "Securities Purchase Agreement" means that certain
         securities purchase agreement between the Company and the initial
         holders of the Notes pursuant to which the Company issued the Notes.

                  (s) "Senior Indebtedness" means (i) all of the secured
         indebtedness, liabilities and obligations of the Company to (A) IBM
         Credit Corporation ("IBM Credit") or (B) U.S. Bank National Association
         ("U.S. Bank") whether now existing or hereafter arising under (x) the
         Amended and Restated Revolving Credit Agreement dated June 29, 2001, as
         amended by an Acknowledgment, Waiver and Amendment dated as of February
         14, 2002, an Acknowledgment, Waiver #2 and Amendment dated as of March
         29, 2002, an Amendment No. 3 to Amended and Restated Revolving Credit
         Agreement dated as of May 3, 2002 and consent letters dated April 12,
         2002, April 19, 2002, April 30, 2002 and May 3, 2002 (two letters)
         among the Company, Turtle Mountain Corporation, Pemstar Pacific
         Consultants Inc. and IBM Credit, as in effect on the date of the
         Securities Purchase Agreement, and (y) the Amended and Restated Loan
         and Security Agreement dated as of June 28, 2001, as amended by a First
         Amendment dated as of December 20, 2001, a waiver letter dated February
         13, 2002, a Second Amendment dated as of March 25, 2002, and a Third
         Amendment dated as of May 3, 2002 between the Company and U.S. Bank, as
         in effect on the date of the Securities Purchase Agreement, (each, an
         "Original Facility" and collectively, the "Original Facilities"),
         whether for principal, interest,

                                       38

<PAGE>

         fees, cash or expenses regardless of the extent to which such documents
         are enforceable against the Company and regardless of the extent to
         which such amounts are allowed as claims against the Company in any
         bankruptcy or other proceeding relative to the Company, and including
         any interest accruing thereon after the date of filing any petition by
         or against the Company in connection with any bankruptcy or other
         proceeding and any other interest that would have accrued thereon, but
         for the commencement of such proceeding; (ii) any amendments,
         restatements, supplements, modifications or waivers to the Original
         Facilities after the date of the Securities Purchase Agreement which
         are in accordance with Section 15(n); (iii) any Permitted Refinancing
         Indebtedness; and (iv) any capitalized lease obligations of the Company
         owing to IBM Credit.

                  (t) "Senior Indebtedness Notice Provider" means (i) IBM
         Credit, or any successor thereto, whether as a successor by assignment
         to IBM Credit in its capacity as a holder under the Original Facility
         of IBM Credit (as amended in accordance with the terms hereof) or as a
         holder of Senior Indebtedness (or as agent for holders of Senior
         Indebtedness) constituting Permitted Refinancing Indebtedness of the
         Original Facility of IBM Credit (as amended in accordance with the
         terms hereof), or (ii) U.S. Bank, or any successor thereto, whether as
         a successor by assignment to U.S. Bank in its capacity as a holder
         under the Original Facility of U.S. Bank (as amended in accordance with
         the terms hereof) or as a holder of Senior Indebtedness (or as agent
         for holders of Senior Indebtedness) constituting Permitted Refinancing
         Indebtedness of the Original Facility of U.S. Bank (as amended in
         accordance with the terms hereof); provided, that, in no event shall
         there be more than two (2) Senior Indebtedness Notice Providers at any
         time. Each reference herein to any "Senior Indebtedness Notice
         Provider" shall include any such successor thereto as described in the
         foregoing definition.

                  (u) "Separate Tranche Notes" means the convertible notes
         issued pursuant to the Securities Purchase Agreement at one or more
         separate closings which occurred prior to the Issuance Date or which
         may be issued pursuant to the Securities Purchase Agreement at one or
         more separate closings following the Issuance Date.

                  (v) "Separate Tranche Warrants" means the warrants issued
         pursuant to the Securities Purchase Agreement at one or more separate
         closings which occurred prior to the Issuance Date or which may be
         issued pursuant to the Securities Purchase Agreement at one or more
         separate closings following the Issuance Date.

                  (w) "Subordinated Amounts" means any (i) cash amount of
         Principal of, premium, if any, and Interest on this Note (including
         payment of the Redemption Price), and (ii) other cash amounts payable
         to the Holder under this Note, the Warrants, the Separate Tranche
         Warrants, the Securities Purchase Agreement and the Registration Rights
         Agreement, including, without limitation, payments of any closing fees,
         payments for reimbursable costs, fees and expenses relating to the
         transactions evidenced hereby and thereby, and reimbursement and
         indemnification payments required to be paid pursuant to the terms
         hereof or of the Securities Purchase Agreement or Registration Rights
         Agreement but specifically excluding Pro Rata Permitted Payments.

                                       39

<PAGE>

                  (x) "Trading Day" means any day on which the Common Stock is
         traded on the Principal Market, or, if the Principal Market is not the
         principal trading market for the Common Stock, then on the principal
         securities exchange or securities market on which the Common Stock is
         then traded; provided that "Trading Day" shall not include any day on
         which the Common Stock is scheduled to trade on such exchange or market
         for less than 4.5 hours or any day that the Common Stock is suspended
         from trading during the final hour of trading on such exchange or
         market (or if such exchange or market does not designate in advance the
         closing time of trading on such exchange or market, then during the
         hour ending at 4:00 p.m., Eastern Time) (unless otherwise consented to
         in writing by the Holder).

                  (y) "Warrants" means the warrants issued to the holders of the
         initial holders of the Notes pursuant to the Securities Purchase
         Agreement, and all warrants issued in exchange therefore or replacement
         thereof.

                  (z) "Weighted Average Price" means, for any security as of any
         date, the dollar volume-weighted average price for such security on the
         Principal Market during the period beginning at 9:30 a.m., New York
         Time (or such other time as the Principal Market publicly announces is
         the official open of trading), and ending at 4:00 p.m., New York Time
         (or such other time as the Principal Market publicly announces is the
         official close of trading), as reported by Bloomberg through its
         "Volume at Price" functions (ignoring any trade of more than 20,000
         shares of such security pursuant to an individual transaction (subject
         to adjustment for stock splits, stock dividends, stock combinations and
         other similar transactions involving such security after the Initial
         Issuance Date)), or, if the foregoing does not apply, the dollar
         volume-weighted average price of such security in the over-the-counter
         market on the electronic bulletin board for such security during the
         period beginning at 9:30 a.m., New York Time (or such other time as the
         Principal Market publicly announces is the official open of trading),
         and ending at 4:00 p.m., New York Time (or such other time as the
         Principal Market publicly announces is the official close of trading),
         as reported by Bloomberg, or, if no dollar volume-weighted average
         price is reported for such security by Bloomberg for such hours, the
         average of the highest closing bid price and the lowest closing ask
         price of any of the market makers for such security as reported in the
         "pink sheets" by the National Quotation Bureau, Inc. If the Weighted
         Average Price cannot be calculated for a security on a particular date
         on any of the foregoing bases, the Weighted Average Price of such
         security on such date shall be the fair market value as mutually
         determined by the Company and the Holder. If the Company and the Holder
         are unable to agree upon the fair market value of such security, then
         such dispute shall be resolved pursuant to Section 25. All such
         determinations to be appropriately adjusted for any stock dividend,
         stock split, stock combination or other similar transaction during such
         period.

                            [Signature Page Follows]

                                       40

<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed as of the Issuance Date set out above.

                                   PEMSTAR INC.

                                   By:
                                      ------------------------------------------
                                      Name:
                                      Title: President / Chief Executive Officer

                                       41

<PAGE>

                                                                       EXHIBIT I

                                  PEMSTAR INC.
                                CONVERSION NOTICE

Reference is made to the Convertible Note (the "Note") issued to the undersigned
by Pemstar Inc. (the "Company"). In accordance with and pursuant to the Note,
the undersigned hereby elects to convert the Conversion Amount (as defined in
the Note) of the Note indicated below into shares of Common Stock, par value
$0.01 per share (the "Common Stock"), of the Company as of the date specified
below.

         Date of Conversion:
                            ----------------------------------------------------

         Aggregate Conversion Amount to be converted:
                                                     ---------------------------

Please confirm the following information:

         Conversion Price:
                          ------------------------------------------------------

         Number of shares of Common Stock to be issued:
                                                       -------------------------

         Is the Variable Price being relied on pursuant to Section 6(a)
         of the Note?  (check one)  YES ____    No ____

Please issue the Common Stock into which the Note is being converted and, if
applicable, any check drawn on an account of the Company in the following name
and to the following address:

         Issue to:
                  --------------------------------------------------------------

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

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

Notwithstanding anything to the contrary contained herein, this Conversion
Notice shall constitute a representation by the Holder of the Note that, after
giving effect to the conversion provided for in this Conversion Notice, such
Holder (together with its affiliates) will not have beneficial ownership
(together with the beneficial ownership of such person's affiliates) of a number
of shares of Common Stock which exceeds 5.0% of the total outstanding shares of
Common Stock as reflected in the Company's most recent Form 10-Q or Form 10-K or
other public filing with the SEC, as the case may be, or a more recent public
announcement by the Company or other notice by the Company or its transfer agent
setting forth the number of shares of Common Stock outstanding, but after giving
effect to conversions or exercise of securities of the Company, including this
Note, by such Holder and its affiliates since the date as of which such number
of outstanding shares of Common Stock was reported.

         Facsimile Number:
                          ------------------------------------------------------

         Authorization:
                       ---------------------------------------------------------

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

Dated:
      --------------------------------------------------------------------------

         Account Number:
                        --------------------------------------------------------

<PAGE>

           (if electronic book entry transfer)

         Transaction Code Number:
                                 -----------------------------------------------
           (if electronic book entry transfer)

<PAGE>

                                 ACKNOWLEDGMENT

         The Company hereby acknowledges this Conversion Notice and hereby
directs [TRANSFER AGENT] to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated _____ ___, 2002
from the Company and acknowledged and agreed to by [TRANSFER AGENT].

                                  PEMSTAR INC.

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

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