Document:

EXHIBIT 10.2

 

AMENDMENT NO. 1 AND WAIVER TO

PURCHASE AGREEMENT

THIS AMENDMENT NO. 1 (this "Amendment"), dated as of May 27, 2004, to
the Purchase Agreement, dated as of March 11, 2004 (the "Original Agreement"),
is made and entered into by and among HORIZON OFFSHORE, INC., a Delaware
corporation (the "Issuer") and the Holders (as defined in the Original
Agreement) listed on the signature pages hereof.

W I T N E S S 
E T H:

WHEREAS, the Issuer and the Holders listed on the signature pages hereof
desire to waive or amend certain provisions of the Original Agreement, as more
particularly set forth below, in order to permit the issuance by the Issuer of
its 18% Subordinated Secured Notes due March 31, 2007 (the "New Subordinated
Notes"; such term to include (i) any such notes issued in exchange or
substitution therefor or renewal thereof pursuant to Section 10.2 or 
Section 10.3 of the New Purchase Agreement (as defined below), (ii) any
Additional Notes (as defined in the New Purchase Agreement) and (iii) unless the
context indicates otherwise, the related Guarantees (as defined in the New
Purchase Agreement)) pursuant to a Purchase Agreement (the "New Purchase
Agreement"), dated as of May 27, 2004, among the Issuer, the guarantors
listed on the signature pages thereof, and the purchasers listed on the
signature pages thereof; and

WHEREAS, such waivers and amendments require the approval of the Required
Holders.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the parties hereto agree as follows:

1.        
    Definitions. Except as otherwise provided in this Amendment,
    capitalized terms used in this Amendment shall have the meanings set forth
    for such terms in the Original Agreement. The Notes, as defined in the
    Original Agreement, are referred to herein as the "Old Notes." 

2.        Effectiveness.
This Amendment shall be effective upon the execution
    hereof by the Issuer and the Required Holders; provided, however,
    that in the event that the Closing under the New Purchase Agreement does not
    occur on or before May 27, 2004, then this Amendment shall be null and void
    and of no further force and effect. 

3.        Representation and Warranty of each Holder. Each party hereto (other
    than the Issuer) represents and warrants that it is currently the Holder as
    of the date hereof of the aggregate principal amount of Old Notes set forth
    under its name on the signature pages hereof. 

4.        Due Authorization. The Issuer represents and warrants that the
    execution and delivery by the Issuer of this Amendment and of each other
    Document executed or to be executed by it have been duly authorized by all
    necessary corporate action, do not require any Approval (except those
    Approvals already obtained), do not and will not conflict with, result in
    any violation of, or constitute any default under, any provision of any
    Organic Document or Contractual Obligation of the Issuer or any law or
    governmental regulation or court decree or order, and will not result in or
    require the creation or imposition of any Lien on the properties of the
    Issuer pursuant to the provisions of any Contractual Obligation of any
    Obligor, except for Liens imposed pursuant to this Amendment, the Original
    Agreement or any other Document. 

5.        Validity, etc. The Issuer represents and warrants that each of this
    Amendment and the Amendment Payment (as defined below) constitutes, the
    legal, valid and binding obligation of the Issuer, enforceable in accordance
    with its terms subject, as to enforcement of remedies, to bankruptcy,
    insolvency, reorganization, moratorium, or similar laws affecting rights of
    creditors generally and to the effect of general principles of equity. 

6.        Amendment Payment. The Issuer agrees, if the Closing under the New
    Purchase Agreement occurs, to make an additional cash payment (the
    "Amendment Payment") on the Old Notes currently held by the Holders party
    hereto on a pro rata basis to the Holders thereof at Maturity
    in an aggregate amount equal to (i) $3,700,000 (such amount to be reduced by
    a percentage equal to the percentage of the aggregate principal amount of
    outstanding Old Notes held on the date hereof by Holders who are not parties
    to this Amendment) if the Maturity date is the Stated Maturity Date or (ii)
    if the Maturity date is earlier than the Stated Maturity Date, the present
    value of $3,700,000 (such amount to be reduced by a percentage equal to the
    percentage of the aggregate principal amount of outstanding Old Notes held
    on the date hereof by Holders who are not parties to this Amendment) on such
    Maturity date, discounted from the Stated Maturity Date using a rate of 16%,
    compounded quarterly. For purposes of the immediately preceding sentence,
    "Maturity" shall include with respect to any Old Note any issuance by the
    Issuer or any of its Subsidiaries of equity securities in exchange for such
    Old Note. Each Old Note held by a Holder party hereto will, following the
    Closing under the New Purchase Agreement, also represent the Issuer’s pro
    rata obligation with respect to the Amendment Payment. Promptly following
    the Closing under the New Purchase Agreement, each Old Note held by a Holder
    party hereto will be replaced by a replacement Old Note so reflecting. The
    Amendment Payment will be subordinated Indebtedness of the Issuer and the
    Guarantors, subject to all provisions of the Original Agreement to the same
    extent as the Old Notes, except as follows:

	 	
		(a)	for the avoidance of doubt, the amount of any Amendment Payment shall
    not be considered outstanding principal under the Original Agreement prior
    to Maturity except for purposes of Sections 2.1.2, 2.2(b), 2.2(c) and 2.5
    thereof (each as described below);
	 	 	 
	 	
		(b)	for the avoidance of doubt, the Amendment Payment will not accrue
    interest pursuant to the Original Agreement, except during the occurrence of
    an event described in Section 2.1.2 thereof, at which time the Amendment
    Payment will accrue interest at the Post-Default Rate then applicable to the
    Old Notes, as set forth in Section 2.1 of the Original Agreement; and
	 	 	 
	 	
		(c)	any principal payments pursuant to Section 2.2(b) or (c) or Section 2.5
    of the Original Agreement shall be applied first to the payment of the
    principal of the Old Notes and then to the payment of the Amendment Payment.

7.       
    
    Amendment of Section
    2.2(b). Section 2.2(b) of the Original
    Agreement is hereby amended and restated in its entirety as follows:
    

(b)        Prior to the Stated Maturity Date, the Issuer may from time to time
    on any Business Day, make a voluntary prepayment (allocated on a pro rata
    basis to each Noteholder), in whole or in part, of the outstanding principal
    amount of the Notes; provided, however, that (i) the Issuer shall allocate
    the amount of any such voluntary prepayment between the Notes and the New
    Subordinated Notes on a pro rata basis based on the aggregate
    principal amount of the Notes and New Subordinated Notes then outstanding;
    (ii) all such voluntary prepayments shall require at least three (3)
    Business Days prior written notice to the Noteholders, (iii) all such
    voluntary prepayments shall be in a minimum amount of $1,000,000 (subject to
    the Issuer’s right to prepay in full the entire unpaid principal amount of
    the Notes), and (iv) as to the voluntary prepayment in full of the Notes,
    such prepayment shall require at least five (5) Business Days prior written
    notice to the Noteholders.

8.        Amendment of Section 2.4(a). Section 2.4(a) of the Original
    Agreement is hereby amended to add the following sentence after the first
    sentence thereof:
    

In addition, the Obligors may issue Additional Notes to the Noteholders
    (allocated on a pro rata basis to each Noteholder) in
    compliance with the terms of this Agreement.

9.        
Amendment of Section 6.1.8. The first sentence of Section 6.1.8 of
    the Original Agreement is hereby amended and restated in its entirety as
    follows:
    

If (1) any Obligor transfers or causes to be transferred, in one
    transaction or a series of related transactions, any Collateral to any
    Subsidiary that, following such transaction or series of related transactions, is not a Guarantor, (2) if any Subsidiary that is a
    "significant subsidiary" (as defined in Rule 1-02(w) of Regulation S-X
    promulgated by the Commission) is not at such time a Guarantor or (3) if any
    Subsidiary that is not at such time a Guarantor is or becomes a guarantor of
    the subordinated secured notes issued by the Issuer pursuant to the terms of
    the New Purchase Agreement, then such transferee, significant subsidiary or
    other Subsidiary shall:

10.      Amendment of Section 9.1. Section 9.1 of the Original Agreement
    shall be amended by adding alphabetically therein the following defined
    terms:
    

"New Purchase
Agreement" means the Purchase Agreement, dated as of
    May 27, 2004, among the Issuer, the guarantors listed on the signature pages
    thereof, and the purchasers listed on the signature pages thereof.

"New Subordinated
Notes" means the 18% Subordinated Secured Notes
    due March 31, 2007 issued from time to time by the Issuer pursuant to the
    New Purchase Agreement and guaranteed by the guarantors as set forth
    therein.

11.      Collateral-Related Amendments. (a) Schedule 3 of the Original
    Agreement shall be amended by adding at the end thereof:
    

(24) Upon the conditions and as more fully described in
Section
    6.1.11(b) of the New Purchase Agreement, an escrow and security
    agreement or other appropriate agreement or document, in form and substance
    satisfactory to the Noteholders, pursuant to which the escrow agent holds
    the monies thereunder first in favor of RLI Insurance Company, second in
    favor of the Collateral Agent on behalf of the Noteholders (as defined in
    the New Purchase Agreement) and third in favor of the Noteholders

(25) Time Deposit Account Pledge and Control Agreement, dated May 27,
    2004, by and among Horizon Offshore Contractors, Inc. and Elliott
    Associates, L.P., as Collateral Agent, and Southwest Bank of Texas, N.A.

(b)       Schedule 5 of the Original Agreement shall be amended by amending and
    restating paragraph (2) therein as follows: 

(2) "Contrato de Fianza" (Guaranty Agreement), dated as of May 27, 2004,
    granted by ECH Offshore, S. de R.L. de C.V. in favor of Elliott Associates,
    L.P.

Schedule 5 of the Original Agreement is further amended to add at the end
    thereof:

(4) "Contrato de Fianza" (Guaranty Agreement), dated as of May 27, 2004,
    granted by HOC Offshore S. de R.L. de C.V. in favor of Elliott Associates,
    L.P.

12.        Tax Treatment. For U.S. federal income tax purposes, the Issuer and
    each Holder listed on the signature pages hereof agree (i) to treat the
    amendments made pursuant to this Amendment as not resulting in a
    "significant modification" of the Old Notes within the meaning of U.S.
    Treasury regulations section 1.1001-3, (ii) solely for purposes of Sections
    1272 and 1273 of the Internal Revenue Code of 1986, as amended (relating to
    the computation of original issue discount), to treat the amendment set
    forth in paragraph 6 hereof as resulting in the retirement and reissuance of
    the Old Notes on the date hereof for an amount equal to the adjusted issue
    price of the Old Notes on such date, resulting in a yield-to-maturity of
    34.84748% and (iii) not to take any position on any return or report filed
    with the Internal Revenue Service or any other Governmental Authority that
    is inconsistent with the foregoing. 

13.        Waivers. Each of the Holders hereby consents to the issuance of the
    New Subordinated Notes and all of the other transactions contemplated by the
    New Purchase Agreement, including, without limitation, the taking of any
    action with respect to collateral and the issuance of additional New
    Subordinated Notes, and in furtherance thereof hereby waives compliance with
    all of the provisions contained in the Original Agreement and the other
    Documents to the fullest extent necessary to permit the execution and
    delivery of the New Purchase Agreement, the issuance of the New Subordinated
    Notes and all of the other transactions contemplated by the New Purchase
    Agreement. 

14.        Ratification of Original Agreement. The parties hereto hereby ratify
    and confirm all of the terms and conditions of the Original Agreement, as
    amended hereby, and except as modified, amended or supplemented by this
    Amendment, all of the terms and provisions of the Original Agreement shall
    remain in full force and effect. 

15.        Counterparts; Effectiveness. This Amendment may be executed by the
    parties hereto in several counterparts, each of which shall be deemed to be
    an original and all of which shall constitute together but one and the same
    agreement. This Amendment shall become effective when counterparts hereof
    have been executed by the Issuer and each Holder listed on the signature
    pages hereof. 

16.        Headings. The various Headings of this Amendment are inserted for
    convenience only and shall not affect the meaning or interpretation of this
    Amendment or any provisions hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first above written.

	 	
                        
                        HORIZON OFFSHORE, INC.
	 	 	 
	 	 	 
	 	By: 
			
		
/s/ David W. Sharp

		
	 	 	Name:
		David W. Sharp
	 	 	Title:
		Executive Vice President and Chief Financial Officer
	 	 	 
	 	 	 
	 	 	 

 

 

	 	
                        INITIAL PURACHASERS:
	 	 	 
	 	ELLIOTT ASSOCIATES, L.P.
	 	 
	 	By: 
			
		
Elliott Capital Advisors, L.P.,
as General Partner

		
	 	 	 
	 	
		By: 	Braxton
		Associates, Inc.,
as General Partner
	 	 	 
	 	
		By: 	
		
/s/ Elliot Greenberg

		
	 	 	Name:
		Elliot Greenberg
	 	 	Title:
		Vice President
	 	 	 
	 	
		Aggregate Principal Amount:     $5,000,000.00
	 	 
	 	
		Address:   	712 Fifth Avenue
36th Floor
New York, New York 10019

 

	 	 	 
	 	ELLIOTT INTERNATIONAL, L.P.
	 	 
	 	By: 
			
		
Elliott International Capital Advisors Inc.,
as Attorney-in-Fact

		
	 	 	 
	 	
		By: 	
		
/s/ Elliot Greenberg

		
	 	 	Name:
		Elliot Greenberg
	 	 	Title:
		Vice President
	 	 	 
	 	
		Address:   	712 Fifth Avenue
36th Floor
New York, New York 10019
	 	 	 
	 	
		Aggregate Principal Amount:     $10,000,000.00
	 	 

 

 

	 	 	 
	 	FALCON MEZZANINE PARTNERS, LP
	 	 
	 	By: 
			
		
Falcon Mezzanine Investments, LLC, its General Partner

		
	 	 	 
	 	
		By: 	
		
/s/ Eric Rogoff

		
	 	 	Name:
		Eric Rogoff
	 	 	Title:
		Vice President
	 	 	 
	 	
		Address:   	
		60 Kendrick Street
Needham, Massachusetts 02494
	 	Telecopier
		No.:	(781) 247-7299
	 	 	 
	 	
		Aggregate Principal Amount:     $17,850,000.00
	 	 

 

 

	 	 	 
	 	D. E. SHAW LAMINAR PORTFOLIOS, L.L.C.
	 	 
	 	
		By: 	
		
/s/ Max Holmes

		
	 	 	Name:
		Max Holmes
	 	 	Title:
		Authorized Signatory
	 	 	 
	 	
		Address:   	
		120 West 45th St.
New York, New York 10036
	 	Telecopier
		No.:	(781) 247-7299
	 	 	 
	 	
		Aggregate Principal Amount:     $3,150,000.00
	 	 

 

 

	 	 	 
	 	SACC PARTNERS, LP
	 	 
	 	
		By: 	
		
/s/ Tom Kelleher

		
	 	 	Name: 
		Tom Kelleher
	 	 	Title: 
		General Partner
	 	 	 
	 	
		Address:   	
		11150 Santa Monica Blvd., Suite 750
Los Angeles, CA 90025
	 	Telecopier
		No.:	(781) 247-7299
	 	 	 
	 	
		Aggregate Principal Amount:     $4,095,000.00
	 	 

 

 

	 	KEVIN G. DOUGLAS AND MICHELLE M. DOUGLAS, JTWROS
	 	 
	 	
		By: 	
		
/s/ Kevin Douglas

		
	 	 	Name: 
		Kevin Douglas
	 	 	in his capacity as joint tenant with right of
                          survivorship
	 	 
	 	
		By: 	
		
/s/ Michelle Douglas

		
	 	 	Name: 
		Michelle Douglas
	 	 	in her capacity as joint tenant with right of
                          survivorship
	 	 
	 	
		Address:   	
		1101 5th Ave., Suite 360
San Rafael, CA 94901
	 	 	 
	 	Aggregate Principal Amount: $2,100,000.00

 

 

	 	DOUGLAS FAMILY TRUST
	 	 
	 	
		By: 	
		
/s/ James E. Douglas Jr.

		
	 	 	Name: 
		James E. Douglas Jr.
	 	 	Title: Trustee
	 	 
	 	
		By: 	
		
/s/ Jean A. Douglas

		
	 	 	Name: 
		Jean A. Douglas
	 	 	Title: Trustee
	 	 
	 	
		Address:   	
		1101 5th Ave., Suite 360
San Rafael, CA 94901
	 	 	 
	 	
		Aggregate Principal Amount: $1,050,000.00

 

 

	 	JAMES DOUGLAS AND JEAN DOUGLAS IRREVOCABLE
                        DESCENDANT’S TRUST
	 	 
	 	
		By: 	
		
/s/ Kevin Douglas

		
	 	 	Name: 
		Kevin Douglas
	 	 	Title: Trustee
	 	 
	 	
		By: 	
		
/s/ Michelle Douglas

		
	 	 	Name: 
		Michelle Douglas
	 	 	Title: Trustee
	 	 
	 	
		Address:   	
		1101 5th Ave., Suite 360
San Rafael, CA 94901
	 	 	 
	 	
		Aggregate Principal Amount: $1,050,000.00

 

 

	 	 	 
	 	B. RILEY & CO. PROFIT SHARING, INC.
	 	 
	 	
		By: 	
		
/s/ Bryant Riley

		
	 	 	Name: 
		Bryant Riley
	 	 	Title: 
		Trustee
	 	 	 
	 	
		Address:   	
		11150 Santa Monica Blvd., Suite 750
Los Angeles, CA 90025
	 	 	 
	 	
		Aggregate Principal Amount:     $105,000.00
	 	 

 

 

	 	 	 
	 	B. RILEY & CO., INC.
	 	 
	 	
		By: 	
		
/s/ Bryant Riley

		
	 	 	Name: 
		Bryant Riley
	 	 	Title: 
		Chairman
	 	 	 
	 	
		Address:   	
		11150 Santa Monica Blvd., Suite 750
Los Angeles, CA 90025
	 	 	 
	 	
		Aggregate Principal Amount:     $682,500.00
	 	 

 

 

	 	 	 
	 	L. MILLER III GST dtd 12/31/91
	 	 
	 	
		By: 	
		
/s/ Lloyd I. Miller

		
	 	 	Name: 
		Lloyd I. Miller
	 	 	Title: 
		Trustee
	 	 	 
	 	
		Address:   	
		4550 Gordon Drive
Naples, FL 34102
	 	 	 
	 	
		Aggregate Principal Amount:     $262,500.00
	 	 

 

 

	 	 	 
	 	MILFAM, LLC
	 	 
	 	
		By: 	
		
/s/ Lloyd I. Miller

		
	 	 	Name: 
		Lloyd I. Miller
	 	 	Title: 
		General Partner
	 	 	 
	 	
		Address:   	
		4550 Gordon Drive
Naples, FL 34102
	 	 	 
	 	
		Aggregate Principal Amount:     $262,500.00
	 	 

 

 

	 	 	 
	 	CATHERINE C. MILLER IRREV TR DTD 3/26/91
	 	 
	 	
		By: 	
		
/s/ Lloyd I. Miller

		
	 	 	Name: 
		Lloyd I. Miller
	 	 	Title: 
		Trustee
	 	 	 
	 	
		Address:   	
		4550 Gordon Drive
Naples, FL 34102
	 	 	 
	 	
		Aggregate Principal Amount:     $262,500.00
	 	 

 

 

	 	 	 
	 	ALEXANDRA B. MILLER
	 	 
	 	
		By: 	
		
/s/ Lloyd I. Miller

		
	 	 	Name: 
		Lloyd I. Miller
	 	 	Title: 
		Custodian FL/UTMA
	 	 	 
	 	
		Address:   	
		4550 Gordon Drive
Naples, FL 34102
	 	 	 
	 	
		Aggregate Principal Amount:     $262,500.00
	 	 

 

 

	 	 	 
	 	LLOYD I. MILLER
	 	 
	 	
		By: 	
		
/s/ Lloyd I. Miller

		
	 	 	Name: 
		Lloyd I. Miller
	 	 	in his individual capacity
	 	 	 
	 	
		Address:   	
		4550 Gordon Drive
Naples, FL 34102
	 	 	 
	 	
		Aggregate Principal Amount:     $262,500.00
	 	 

 

 

	 	 	 
	 	LLOYD I. MILLER TRUST A-4
	 	 
	 	
		
														By: 
														
														PNC Bank
	 	 
	 	
		By: 	
		
/s/ Alan Goldman

		
	 	 	Name: 
		Alan Goldman
	 	 	iTitle: Trustee
	 	 	 
	 	
		Address:   	
		4550 Gordon Drive
Naples, FL 34102
	 	 	 
	 	
		Aggregate Principal Amount:     $2,100,000.00
	 	 

 

 

	 	 	 
	 	MILFAM I, L.P.
	 	 
	 	
		By: 	
		
/s/ Lloyd I. Miller

		
	 	 	Name: 
		Lloyd I. Miller
	 	 	iTitle:
		Limited Partner
	 	 	 
	 	
		Address:   	
		4550 Gordon Drive
Naples, FL 34102
	 	 	 
	 	
		Aggregate Principal Amount:     $2,100,000.00
	 	 

 

 

	 	 	 
	 	MILFAM II, L.P.
	 	 
	 	
		By: 	
		
/s/ Lloyd I. Miller

		
	 	 	Name: 
		Lloyd I. Miller
	 	 	iTitle:
		Limited Partner
	 	 	 
	 	
		Address:   	
		4550 Gordon Drive
Naples, FL 34102
	 	 	 
	 	
		Aggregate Principal Amount:     $2,100,000.00
	 	 

 

 

	 	 	 
	 	MILGRAT II PREMIUM
	 	 
	 	
		By: 	
		
/s/ Lloyd I. Miller

		
	 	 	Name: 
		Lloyd I. Miller
	 	 	iTitle:
		Trustee
	 	 	 
	 	
		Address:   	
		4550 Gordon Drive
Naples, FL 34102
	 	 	 
	 	
		Aggregate Principal Amount:    $525,000.00
	 	 

 

 

	 	 	 
	 	HIGHLAND CRUSADER OFFSHORE PARTNERS
	 	 
	 	
		By: 	
		
/s/ Kurt Plumer

		
	 	 	Name:
		Kurt Plumer
	 	 	iTitle:
		General Partner
	 	 	 
	 	
		Address:   	
		13455 Noel Road, Suite 1300
Dallas, TX 75240
	 	 	 
	 	
		Aggregate Principal Amount:    $4,200,000.00
	 	 

 

 

	 	 	 
	 	RICHARD RILEY
	 	 
	 	
		By: 	
		
/s/ Richard Riley

		
	 	 	Name:
		Richard Riley
	 	 	in his individual capacity
	 	 	 
	 	
		Address:   	
		133 Shoreclifff Road,
															
Corona del Mar, CA 92625
	 	 	 
	 	
		Aggregate Principal Amount:   $262,500.00
	 	 

 

 

	 	 	 
	 	BRYANT AND CARLEEN RILEY
	 	 
	 	
		By: 	
		
/s/ Bryant Riley

		
	 	 	Name:
		Bryant Riley
	 	 	in his capacity as joint tenant with right of
                          survivorship
	 	 
	 	
		By: 	
		
/s/ Carleen Riley

		
	 	 	Name: Carleen Riley
	 	 	in her capacity as joint tenant with right of
                          survivorship
	 	 	 
	 	
		Address:   	
		12710 Marlboro Street
Brentwood, CA 9004
	 	 	 
	 	
		Aggregate Principal Amount:   $105,000.00EXHIBIT 4.1

                                                                  EXECUTION COPY

================================================================================

                              STARCRAFT CORPORATION

                                   $15,000,000

           Convertible Subordinated Promissory Notes due July 1, 2009

                                ________________

                      CONVERTIBLE SENIOR SUBORDINATED NOTE

                               PURCHASE AGREEMENT

                                ________________

                               Dated July 12, 2004

================================================================================

<PAGE>

                              STARCRAFT CORPORATION
                                  P.O. BOX 7903
                            1123 SOUTH INDIANA AVENUE
                              GOSHEN, INDIANA 46526
                            Telephone: (574) 534-7827
                            Facsimile: (574) 534-1238

         8.5% Convertible Subordinated Promissory Notes due July 1, 2009

                                                                   July 12, 2004

To Each of the Purchasers Listed in
  the Attached Schedule A

Ladies and Gentlemen:

     Starcraft Corporation,  a corporation organized under the laws of the State
of Indiana (the  "Company"),  agrees with each of the  purchasers  listed in the
attached Schedule A (the "Purchasers") as follows:

ARTICLE 1. AUTHORIZATION OF ISSUANCE OF NOTES.

     The  Company  has  authorized  the  issue  and  sale to the  Purchasers  of
$15,000,000 in aggregate  principal amount of its 8.5% Convertible  Subordinated
Promissory  Notes due July 1, 2009 (the notes  being  referred  to herein as the
"Notes").  The Notes  shall be  substantially  in the form set out in Exhibit 1,
with such changes  therefrom,  if any, as may be approved by each  Purchaser and
the  Company.  The Notes shall bear the legend set forth on the form of the Note
set out in  Exhibit  1 and  shall  include  such  other  notations,  legends  or
endorsements  as required by law. The Notes are  convertible  into shares of the
Company's Common Stock,  without par value (the "Common Shares").  The terms and
provisions  contained in the Notes shall  constitute,  and are hereby  expressly
made, a part of this Agreement and, accordingly,  each of the Purchasers and the
Company, by its respective  execution and delivery of this Agreement,  expressly
agree to the terms and provisions thereof and to be bound thereby.

ARTICLE 2.        SALE AND PURCHASE OF NOTES.

     Sale and  Purchase.  Subject to the terms and  conditions  of this purchase
agreement  (the "Purchase  Agreement"),  the Company will issue and sell to each
Purchaser,  and each  Purchaser  will purchase  from the Company,  the aggregate
principal  amount  of the  Notes  set forth  opposite  the  Purchaser's  name on
Schedule  A at a purchase  price  equal to 100% of the  principal  amount of the
Notes (the "Purchase  Price").  The obligations  hereunder of each Purchaser are
several and not joint,  and each of the Purchasers  shall have no obligation and
no liability to any Person for the  performance or  nonperformance  hereunder by
any other Purchaser.
<PAGE>

     Section 2.1 Restricted  Securities.  Each  Purchaser,  and each  subsequent
holder of any Securities (as defined in Section 6.1, below), by such Purchaser's
or the subsequent  holder's  acceptance  thereof agrees that no transfer or sale
(including, without limitation, by pledge or hypothecation) of Securities by any
holder of  Securities  which is  otherwise  permitted  hereunder,  other  than a
transfer or sale to the Company, shall be effective, unless the transfer or sale
is made:

          (a)  pursuant  to  an  effective   registration  statement  under  the
     Securities  Act of 1933,  as amended (the  "Securities  Act"),  and a valid
     qualification under applicable state securities or "blue sky" laws; or

          (b)  without  the  registration  or  qualification  as a result of the
     availability  of an exemption  therefrom  and, if requested by the Company,
     counsel for such holder of Securities shall have furnished the Company with
     an opinion,  satisfactory  in form and  substance  to the  Company,  to the
     effect that no registration is required  because of the  availability of an
     exemption from the registration requirements of the Securities Act.

     Section 2.2  Registration  Rights.  Each  Purchaser will be entitled to the
benefits  of  a  Registration  Rights  Agreement  dated  the  Closing  Date  (as
hereinafter  defined) between the Company and the Purchasers (the  "Registration
Rights  Agreement"),  pursuant  to  which  the  Company  agrees  to file a Shelf
Registration  Statement (as defined in the Registration  Rights  Agreement) with
the U.S. Securities and Exchange  Commission (the "Commission")  registering the
resale by each  Purchaser of the Common Shares  issued to it upon  conversion of
the Notes or as payment thereon under Rule 415 of the Securities Act.

ARTICLE 3. CLOSING.

     The sale and purchase of the Notes  contemplated  hereby shall occur at the
offices  of  Messerli  & Kramer  P.A.,  150  South  Fifth  Street,  Suite  1800,
Minneapolis,  Minnesota at 9:00 a.m.  (Central Time), (the "Closing") or on such
other  business day as may be agreed upon by the Company and the  Purchasers  in
writing. At the Closing, the Company will deliver to each Purchaser the Notes to
be  purchased  by the  Purchaser  in a single Note dated the date of the Closing
(the "Closing Date") and made payable to the Purchaser,  against delivery by the
Purchaser to the Company of the Purchaser's  Purchase Price, by wire transfer of
immediately  available  funds for the  account  of the  Company  to the  account
specified to the Purchasers in writing by the Company.

ARTICLE 4. CONDITIONS TO CLOSING; TERMINATION.

     Section 4.1 Conditions to Purchaser's Obligation to Close. Each Purchaser's
obligation to purchase and pay for the Notes to be sold to that Purchaser at the
Closing is subject to the fulfillment to the Purchaser's satisfaction,  prior to
or at the Closing of the following conditions:

          (a)  The  representations  and  warranties  of  the  Company  in  this
     Agreement shall be correct when made and at the time of the Closing.
<PAGE>

          (b) The Company shall have  delivered  the Notes and the  Registration
     Rights   Agreement   (together  with  this  Agreement,   the   "Transaction
     Documents"), duly executed by the Company.

          (c) The Company shall have obtained the Required  Consents (as defined
     in Section 5.4(c)).

          (d) The  Company  shall have paid Gary S.  Kohler and Scot W.  Malloy,
     together,  a $225,000  cash  origination  fee  related to the  transactions
     contemplated hereby.

          (e) Barnes & Thornburg LLP,  legal counsel to the Company,  shall have
     delivered an opinion to the Purchasers  with respect to such matters and in
     such  form  as  is  acceptable  to  the  Purchasers  in  their   reasonable
     discretion.

ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

     The  Company   represents  and  warrants  the  following  to  each  of  the
Purchasers, as of the date hereof:

     Section 5.1 Organization; Power and Authority. The Company is a corporation
duly organized and validly existing under the laws of the State of Indiana.  The
Company's only  subsidiaries  are the  subsidiaries  listed on Schedule 5.1 (the
"Subsidiaries").  Except as indicated on Schedule 5.1,  each  Subsidiary is duly
organized, validly existing and, as applicable, in good standing, under the laws
of its  jurisdiction of  organization.  Each of the Company and the Subsidiaries
has the respective corporate, limited liability company or partnership power and
authority to own or hold under lease the  properties  it purports to own or hold
under lease, to transact the business it transacts or proposes to transact.  The
Company has the requisite  corporate  power and authority to execute and deliver
the Transaction  Documents,  to sell and issue the Common Shares upon conversion
of the Notes and to  perform  the  provisions  hereof and  thereof.  Each of the
Company and the  Subsidiaries is duly qualified and is authorized to do business
and, as applicable, is in good standing in each jurisdiction in which the nature
of its respective  activities and of its respective  properties  (both owned and
leased) makes such qualification  necessary,  except for those  jurisdictions in
which failure to be so qualified  would not have a materially  adverse effect on
the Company and its  Subsidiaries  or their  businesses,  operations,  financial
condition,  assets or  properties  taken as a whole  (referred to hereafter as a
"Material" adverse effect).

     Section 5.2  Capitalization.  The Company is authorized to issue  2,000,000
shares of Preferred Stock, no par value, of which no shares are outstanding, and
20,000,000  shares of Common Stock, no par value, of which 8,853,191  shares are
issued and outstanding.  Except as set forth on Schedule 5.2 or in the Company's
current,  quarterly, annual and other periodic filings (the "SEC Reports") filed
with the Commission or in other  documents  delivered to the  Purchasers,  their
attorneys  or agents in  connection  herewith,  the Company  has no  outstanding
options,  warrants or other rights to acquire any capital  stock,  or securities
convertible  or  exchangeable  for capital  stock or for  securities  themselves
convertible  or   exchangeable   for  capital  stock   (together,   "Convertible
Securities").  Except as set forth on Schedule  5.2 or in the SEC  Reports,  the
Company  has no other  agreement  or  commitment  to sell or issue any shares of
capital stock or

<PAGE>

Convertible  Securities.  All issued  and  outstanding  shares of the  Company's
capital stock (i) have been duly authorized and validly  issued,  (ii) are fully
paid and nonassessable, (iii) are free from any preemptive and cumulative voting
rights and (iv) were issued  pursuant  to an  effective  registration  statement
filed  with the  Commission  and  applicable  state  securities  authorities  or
pursuant to valid exemptions under federal and state securities laws.  Except as
set forth on  Schedule  5.2,  or in the SEC  Reports,  there are no  outstanding
rights of first refusal or voting or shareholder agreements of any kind relating
to any of the Company's  securities to which the Company or any of its executive
officers  and  directors  is a party or as to which the  Company  otherwise  has
knowledge.  When issued in  compliance  with the  conversion  provisions  of the
Notes, the Common Shares will be validly issued,  fully paid and  nonassessable,
and  will be free of any  liens or  encumbrances;  provided,  however,  that the
Common  Shares may be subject to  restrictions  on transfer  under state  and/or
federal  securities  laws as set forth herein or as  otherwise  required by such
laws at the time a transfer is  proposed.  Notwithstanding  the  foregoing,  the
issuance  of Common  Shares in payment of  interest  or  principal  on the Notes
pursuant  to  the  provisions  of  Article  9  thereof  is  subject  to  further
authorization  of such  issuance  at the  time by the  Board of  Directors  or a
committee thereof.

     Section 5.3 Authorization; Binding Obligations. All corporate action on the
part of the Company, its officers,  directors and shareholders necessary for the
authorization of the Transaction  Documents,  the performance of all obligations
of the Company  hereunder and  thereunder at the Closing and the  authorization,
sale,  issuance and delivery of the Common  Shares upon  conversion of the Notes
has been taken.  The  Transaction  Documents  have been duly  authorized  by all
necessary  corporate  action  on  the  part  of the  Company,  and  each  of the
Transaction Documents constitutes,  and upon execution and delivery thereof each
will  constitute,   a  legal,  valid  and  binding  obligation  of  the  Company
enforceable  against the Company in  accordance  with its terms,  except as such
enforceability  may  be  limited  by  (a)  applicable  bankruptcy,   insolvency,
reorganization,  moratorium or other similar laws  affecting the  enforcement of
creditors' rights generally and (b) general  principles of equity (regardless of
whether the  enforceability  is considered in a proceeding in equity or at law).
The sale of the Common  Shares upon  conversion of the Notes is not and will not
be subject to any preemptive rights or rights of first refusal.  Notwithstanding
the foregoing, the issuance of Common Shares in payment of interest or principal
on the Notes  pursuant  to the  provisions  of  Article 9 thereof  is subject to
further  authorization of such issuance at the time by the Board of Directors or
a committee thereof.

     Section 5.4 Compliance with Laws and Other Instruments. Except as disclosed
in the SEC Reports,  the Company is not in violation of any applicable  statute,
rule, regulation, order or restriction of any Governmental Authority (as defined
in Section  5.5) in respect of the conduct of its  business or the  ownership of
its  properties  that would  Materially  and adversely  affect the Company.  The
Company  has  all  franchises,  permits,  licenses  and  any  similar  authority
necessary for the conduct of its business as now being conducted by it, the lack
of which would  Materially  and  adversely  affect the Company,  and the Company
believes it can obtain any similar  authority for the conduct of its business as
planned to be conducted.

     Except as disclosed in the SEC Reports,  the Company is not in violation or
default of any term of its Articles of Incorporation  or Code of By-laws,  or of
any provision of any

<PAGE>

mortgage, indenture, contract, agreement,  instrument or contract to which it is
party or by which it is bound or of any judgment, decree, order, writ or, to its
knowledge,  any statute,  rule or  regulation  applicable  to the Company  which
violation would, in any such case,  Materially and adversely affect the Company.
The  execution,  delivery  and  performance  by the  Company of the  Transaction
Documents,  and the sale and issuance of Common  Shares upon  conversion  of the
Notes, will not (with or without the passage of time or giving of notice):

          (a) violate,  result in any breach of, or constitute a default  under,
     or result in the creation of, any mortgage,  pledge, lien, encumbrance,  or
     charge in respect of any property of the Company;

          (b)  cause  the  suspension,  revocation,  impairment,  forfeiture  or
     nonrenewal of any permit, license, authorization or approval applicable to,
     the Company, its business or operations or any of its assets or properties;

          (c) except as expressly described in Schedule 5.4, require the consent
     of any third  party  (the  "Required  Consents"),  with  respect to (i) any
     indenture,  loan or  credit  agreement,  mortgage,  deed of  trust or other
     agreement  or  instrument  to which  the  Company  is bound or by which the
     Company  or any of its  properties  may be  bound,  in  each  case  that is
     Material or (ii) the  Articles of  Incorporation  or Code of By-laws of the
     Company;

          (d) violate or result in a breach of any of the terms,  conditions  or
     provisions  of any  order,  judgment,  decree,  or  ruling  of  any  court,
     arbitrator  or  Governmental  Authority (as defined in Section 5.5) that is
     applicable and Material to the Company; or

          (e) violate any  provision of any statute or other rule or  regulation
     of any  Governmental  Authority  that is  applicable  and  Material  to the
     Company.

     Section  5.5   Governmental   Authorizations.   No  consent,   approval  or
authorization of, or registration,  filing or declaration with, any Governmental
Authority is required in connection with the execution,  delivery or performance
by the Company of Transaction  Documents,  other than  customary  notice filings
under Commission  Regulation D and applicable blue sky laws and the registration
of the Common Shares as contemplated in the Registration  Rights Agreement.  For
purposes of this Agreement "Governmental  Authority" means the government of (a)
the  United  States  of  America  or any  state or other  political  subdivision
thereof, or (b) any jurisdiction in which the Company or any of its subsidiaries
conducts all or any part of its business, or which asserts jurisdiction over any
properties of the Company or any of its subsidiaries.

     Section 5.6  Disclosures.  The Company's Annual Report on Form 10-K for the
fiscal year ended  September  28, 2003 (the "Most Recent  Annual  Report"),  the
Company's  Quarterly Reports on Form 10-Q for the fiscal quarters ended December
28, 2003 and March 28, 2004 (the "Quarterly  Reports," with March 28, 2004 being
the "Latest Statement Date" and the consolidated financial statements at and for
the three months then ended being the "Latest  Financial  Statements"),  and the
Company's  Current  Reports on Form 8-K, in each case filed with the  Commission
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(but excluding information contained in any Current Reports on Form 8-K that was
furnished  but not

<PAGE>

filed with the  Commission)  (collectively  the "Exchange  Act Filings")  fairly
describe,  in all  Material  respects,  the general  nature of the  business and
principal  properties  of the  Company.  None  of this  Agreement  or any of the
Exchange Act Filings  contains any untrue  statement of a Material fact or omits
to state  any  Material  fact  necessary  to make  the  statements  therein  not
misleading in light of the  circumstances  under which they were made. Except as
expressly  described in Schedule 5.6 or in the SEC Reports or in other documents
delivered to the Purchasers,  their attorneys or agents in connection  herewith,
since  March 28,  2004,  there has been no  change in the  financial  condition,
operations, business or properties of the Company that is Material. There are no
facts that (individually or in the aggregate) Materially and adversely affecting
the Company that have not been set forth in the Transaction  Documents,  the SEC
Reports or in other  documents  delivered to the  Purchaser or its  attorneys or
agents in connection herewith.

     Section  5.7  Financial  Statements.  The  Company's  audited  consolidated
financial  statements  filed as part of the Most  Recent  Annual  Report and the
Company's  unaudited  consolidated  financial  statements  filed  as part of the
Quarterly  Reports  (including  in each case the  related  schedules  and notes)
fairly present in all material respects the consolidated  financial  position of
the Company and its  Subsidiaries  as of the  respective  dates  thereof and the
consolidated  results  of their  operations  and cash  flows for the  respective
periods  so  specified  and have been  prepared  in  accordance  with  generally
accepted  accounting  principles  ("GAAP")  consistently  applied throughout the
periods involved except as set forth in the notes thereto (subject,  in the case
of any interim  financial  statements,  to normal year-end  adjustments)  and in
accordance with the rules and regulations of the Commission.

     Section 5.8  Liabilities.  The Company has no Material  liabilities and, to
the  best  of  its  knowledge,  the  Company  knows  of no  Material  contingent
liabilities,  not disclosed in the Latest  Financial  Statements or SEC Reports,
except  current  liabilities   incurred  in  the  ordinary  course  of  business
subsequent  to the  Latest  Statement  Date that  have not  been,  either in any
individual case or in the aggregate, Materially adverse.

     Section 5.9 Certain Agreements and Actions. Except as disclosed on Schedule
5.6 or in the  SEC  Reports,  the  Company  has  not (i)  declared  or paid  any
dividends,  or authorized or made any  distribution  upon or with respect to any
class or series of its  capital  stock,  (ii) since the Latest  Statement  Date,
incurred any indebtedness  for money borrowed or any other material  liabilities
out of the ordinary course of business,  (iii) made any loans or advances to any
person,  other than ordinary  advances for travel or  entertainment  expenses or
(iv) sold, exchanged or otherwise disposed of any of its assets or rights, other
than in the ordinary course of business.

     Section 5.10 Obligations of or to Related  Parties.  Except as disclosed on
Schedule 5.10 or in the SEC Reports,  there are no obligations of the Company to
officers, directors,  shareholders,  employees or consultants of the Company, or
to any members of their immediate  families or other affiliates,  other than (i)
for  payment of salary  for  services  rendered  since the  commencement  of the
Company's most recent payroll period, (ii) reimbursement for expenses reasonably
incurred on behalf of the Company and (iii) for other standard employee benefits
made generally  available to all employees  (including  stock option  agreements
outstanding  under any stock  option plan  approved by the Board of Directors of
the Company).  Except as disclosed on Schedule 5.10 or in the

<PAGE>

SEC  Reports,  none  of the  officers,  directors,  shareholders,  employees  or
consultants of the Company,  or any members of their immediate families or other
affiliates, are indebted to the Company or have any direct or indirect ownership
interest  in any firm,  corporation  or other  entity  with which the Company is
affiliated or with which the Company has a business  relationship,  or any firm,
corporation or other entity that competes with the Company.  Except as disclosed
in the SEC Reports, no officer, director, shareholder, employee or consultant of
the  Company,  or, to the  Company's  knowledge,  any member of their  immediate
families or other  affiliates,  is,  directly or indirectly,  interested in or a
party to any Material contract with the Company. Except as disclosed on Schedule
5.10 or in the SEC Reports,  the Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.

     Section 5.11 Title to Properties and Assets;  Liens. Except as set forth on
Schedule 5.11 or in the SEC Reports,  the Company has good and marketable  title
to its properties and assets,  including the properties and assets  reflected in
the Latest Financial Statements and good title to its leasehold estates, in each
case subject to no mortgage,  pledge, lien, lease,  encumbrance or charge, other
than (i) those  resulting from taxes that have not yet become  delinquent,  (ii)
minor liens and  encumbrances  that do not materially  detract from the value of
the property subject thereto or materially  impair the operations of the Company
(iii) those that have otherwise  arisen in the ordinary  course of business,  or
(iv) liens  securing  Senior  Indebtedness  (as defined in Section  7.6(a)(xxii)
below).  All facilities,  machinery,  equipment,  fixtures and other  properties
owned,  leased or used by the Company are in good operating condition and repair
and are  reasonably  fit and  usable for the  purposes  for which they are being
used, reasonable wear and tear excepted.

     Section 5.12 Patents and  Trademarks.  Except as set forth on Schedule 5.12
or in the SEC Reports,  the Company  owns or licenses  all patents,  trademarks,
service marks,  trade names,  copyrights,  trade secrets,  information and other
proprietary rights and processes necessary for its business as now conducted and
as proposed to be  conducted,  without any known  infringement  of the rights of
others.  The Company is not aware that any of its  employees is obligated  under
any contract  (including  licenses,  covenants or  commitments of any nature) or
other  agreement,  or subject to any  judgment,  decree or order of any court or
administrative  agency, that would interfere with their duties to the Company or
that would conflict with the Company's business as proposed to be conducted. The
Company does not believe it is or will be  necessary to utilize any  inventions,
trade secrets or  proprietary  information of any of its employees made prior to
their  employment  by the  Company,  except  for  inventions,  trade  secrets or
proprietary information that have been assigned to the Company.

     Section 5.13 Litigation.  Except as disclosed in the SEC Reports,  there is
no action,  suit,  proceeding  or  investigation  pending  or, to the  Company's
knowledge,  currently threatened against the Company that questions the validity
of this Agreement or the other  agreements  contemplated  hereby or the right of
the  Company  to  enter  into  any of  such  agreements,  or to  consummate  the
transactions  contemplated  hereby or thereby.  Except as  disclosed  in the SEC
Reports,  there is no  action,  suit,  proceeding  or  investigation  or, to the
Company's knowledge, currently threatened against the Company that might result,
either  individually or in the aggregate,  in any Material adverse change in the
assets, condition,  affairs or prospects of the Company, financial or otherwise,
or any change in the current equity ownership of the Company, nor is the Company
aware that

<PAGE>

there  is  any  basis  for  the  foregoing.  The  foregoing  includes,   without
limitation,  actions  pending or threatened  (or any basis therefor known to the
Company)  involving the prior employment of any of the employees of the Company,
their use in  connection  with the  Company's  business  of any  information  or
techniques  allegedly  proprietary  to any of their  former  employers  or their
obligations  under any agreements with prior  employers.  Except as disclosed in
the SEC Reports,  the Company is not a party or subject to the provisions of any
order, writ,  injunction,  judgment or decree of any Governmental Authority that
is, an any such case, Material to the Company or its operations.

     Section 5.14 Tax Returns and Payments. The Company has timely filed all tax
returns  (federal,  state and local) required to be filed by it. All taxes shown
to be due and payable on such  returns,  any  assessments  imposed,  and, to the
Company's knowledge, all other taxes due and payable by the Company on or before
the  Closing  have  been  paid or will be paid  prior  to the time  they  become
delinquent.  The  Company  has not been  advised  (i)  that any of its  returns,
federal, state or other, have been or are being audited as of the date hereof or
(ii) of any  deficiency  in  assessment  or proposed  adjustment to its federal,
state or other taxes.  The Company has no knowledge of any  liability of any tax
to be imposed  upon the  properties  or assets of the  Company as of the date of
this Agreement that is not adequately provided for.

     Section 5.15 Employees. The Company has no collective bargaining agreements
with any of its employees.  There is no labor union organizing  activity pending
or, to the Company's knowledge,  threatened with respect to the Company.  Except
as set  forth  on  Schedule  5.15 or in the SEC  Reports,  no  employee  has any
agreement or contract,  written or oral,  regarding  his  employment.  Except as
disclosed on Schedule 5.15 or in the SEC Reports,  the Company is not a party to
or bound by any currently effective employment contract,  deferred  compensation
arrangement,  bonus plan,  incentive  plan,  profit  sharing plan or  retirement
agreement in which executive  officers can participate  that is not available to
employees generally. To the Company's knowledge, no employee of the Company, nor
any  consultant  with whom the Company has  contracted,  is in  violation of any
material term of any employment contract,  proprietary  information agreement or
any other agreement  relating to the right of any such individual to be employed
by, or to contract with, the Company because of the nature of the business to be
conducted  by the  Company;  and,  to the  Company's  knowledge,  the  continued
employment by the Company of its present  employees,  and the performance of the
Company's  contracts with its  independent  contractors,  will not result in any
such  violation.  The Company has not received any notice alleging that any such
violation  has  occurred.  Except as  disclosed  on Schedule  5.15 or in the SEC
Reports,  no employee of the  Company  has been  granted the right to  continued
employment by the Company or to any Material compensation  following termination
of employment with the Company. The Company is not aware that any officer or key
employee,  or that any  group  of key  employees,  intends  to  terminate  their
employment  with the Company,  nor does the Company have a present  intention to
terminate the employment of any officer, key employee or group of key employees.

     Section  5.16  Registration  Rights.  Except as  required  pursuant  to the
Registration Rights Agreement or as disclosed in the SEC reports, the Company is
presently not under any obligation,  and has not granted any rights, to register
(as defined in the Registration Rights Agreement) any of the Company's presently
outstanding securities or any of its securities that may hereafter be issued.
<PAGE>

     Section 5.17  Environmental and Safety Laws. Except as disclosed in the SEC
Reports,  to the  Company's  knowledge,  the Company is not in  violation of any
applicable   statute,   law  or  regulation   relating  to  the  environment  or
occupational  health and safety,  and to the  Company's  knowledge,  no material
expenditures  are or will be required in order to comply with any such  existing
statute,  law or  regulation.  Without  limiting  the  foregoing,  and except as
disclosed in the SEC Reports:

     (a) with respect to any real property owned,  leased or otherwise  utilized
by the Company ("Real Property"), the Company is not or has not in the past been
in violation of any Hazardous  Substance Law which violation could reasonably be
expected to result in a Material  liability to the Company or its properties and
assets;

     (b) neither the Company nor, to the  knowledge  of the  Company,  any third
party has used, released, generated,  manufactured,  produced or stored, in, on,
under,  or about any Real  Property,  or transported  thereto or therefrom,  any
Hazardous Substances that could reasonably be expected to subject the Company to
Material liability, under any Hazardous Substance Law;

     (c) to the  knowledge  of the  Company,  there  are no  underground  tanks,
whether  operative or  temporarily or  permanently  closed,  located on any Real
Property  that could  reasonably  be expected to subject the Company to Material
liability under any Hazardous Substance Law;

     (d) to the  knowledge  of the Company,  there are no  Hazardous  Substances
used,  stored or  present  at or on,  the  Company's  Real  Property  that could
reasonably  be  expected  to  migrate  onto any other Real  Property,  except in
compliance with Hazardous Substance Laws; and

     (e) to the  knowledge  of the  Company,  there  neither is nor has been any
condition,  circumstance,  action,  activity or event that could  reasonably  be
expected to be a Material  violation by the Company of any  Hazardous  Substance
Law,  or to result in Material  liability  to the  Company  under any  Hazardous
Substance Law.

     For purposes hereof,  "Hazardous  Substances" means (statutory acronyms and
abbreviations  having  the  meaning  given  them  in  the  definition  below  of
"Hazardous  Substances  Laws")  substances  defined as  "hazardous  substances,"
"pollutants" or  "contaminants"  in Section 101 of the CERCLA;  those substances
defined as "hazardous waste," "hazardous materials" or "regulated substances" by
the RCRA; those  substances  designated as a "hazardous  substance"  pursuant to
Section 311 of the CWA;  those  substances  defined as "hazardous  materials" in
Section 103 of the HMTA;  those  substances  regulated  as a hazardous  chemical
substance or mixture or as an imminently hazardous chemical substance or mixture
pursuant  to  Sections  6  or  7  of  the  TSCA;  those  substances  defined  as
"contaminants"  by Section 1401 of the SDWA, if present in excess of permissible
levels;  those  substances  regulated by the Oil Pollution Act; those substances
defined as a pesticide  pursuant to Section 2(u) of the FIFRA;  those substances
defined as a source, special nuclear or by-product material by Section 11 of the
AEA; those substances defined as "residual  radioactive material" by Section 101
of the  UMTRCA;  those  substances  defined  as "toxic  materials"  or  "harmful
physical agents"

<PAGE>

pursuant to Section 6 of the OSHA; those substances  defined as hazardous wastes
in 40 C.F.R. Part 261; those substances  defined as hazardous waste constituents
in 40 C.F.R. Part 260, specifically including Appendix VII and VIII of Subpart D
of 40 C.F.R. Part 261; those substances designated as hazardous substances in 40
C.F.R. ss.ss. 116.4 and 302.4; those substances defined as hazardous  substances
or hazardous  materials in 49 C.F.R. ss. 171.8;  those  substances  regulated as
hazardous materials, hazardous substances, or toxic substances in 29 C.F.R. Part
1910; any chemical,  material, toxin, pollutant, or waste regulated by or in any
other Hazardous Substances Laws; and in the regulations adopted and publications
promulgated   pursuant  to  said  laws,  whether  or  not  such  regulations  or
publications are  specifically  referenced  herein,  as may be applicable to the
Company.

     "Hazardous  Substances Law" means any of the following as applicable to the
Company:

     (i) the Comprehensive Environmental Response,  Compensation,  and Liability
Act of 1980, as amended (42 U.S.C. Section 9601 et seq.) ("CERCLA");

     (ii) the Federal  Water  Pollution  Control Act (33 U.S.C.  Section 1251 et
seq.) ("Clean Water Act" or "CWA");

     (iii) the Solid Waste  Disposal Act, as amended (42 U.S.C.  Section 6901 et
seq.) ("RCRA");

     (iv)  the  Atomic  Energy  Act of 1954  (42  U.S.C.  Section  2014 et seq.)
("AEA");

     (v) the Clean Air Act (42 U.S.C. Section 7401 et seq.) ("CAA");

     (vi) the  Emergency  Planning and  Community  Right to Know Act of 1986 (42
U.S.C. Section 11001 et seq.) ("EPCRA");

     (vii) the Federal  Insecticide,  Fungicide,  and  Rodenticide Act (7 U.S.C.
Section 136 et seq.) ("FIFRA");

     (viii) the Oil  Pollution  Act of 1990 (33  U.S.C.A.  Section 2701 et seq.)
(the "Oil Pollution Act");

     (ix) the Safe  Drinking  Water Act in the  Public  Health  Service  Act (42
U.S.C. Sections 300f et seq.) ("SDWA");

     (x) the  Surface  Mining  Control  and  Reclamation  Act of 1974 (30 U.S.C.
Sections 1201 et seq.) ("SMCRA");

     (xi) the Toxic  Substances  Control  Act (15 U.S.C.  Section  2601 et seq.)
("TSCA");

     (xii) the Hazardous Materials Transportation Act (49 U.S.C. Section 5101 et
seq.) ("HMTA");

     (xiii) the Uranium Mill Tailings  Radiation  Control Act of 1978 (42 U.S.C.
Section 7901 et seq.) ("UMTRCA");

     (xiv) the  Occupational  Safety and Health  Act (29 U.S.C.  Section  651 et
seq.) ("OSHA"); and
<PAGE>

     (xv) all other  federal,  state and local  governmental  rules which govern
Hazardous Substances,  and the regulations adopted and publications  promulgated
pursuant to all such foregoing laws.

     Section  5.18  Private  Offering  by the  Company.  Assuming  the truth and
correctness of the representations and warranties of the Purchasers set forth in
Article 6, the sale of the Notes hereunder is exempt from the  registration  and
prospectus delivery  requirements of the Securities Act of 1933, as amended (the
"Securities  Act"), and will have been registered or qualified (or exempted from
registration and qualification) under the registration,  permit or qualification
requirements of the State of Minnesota.

     Section  5.19  Insurance.  The  Company  has  fire and  casualty  insurance
policies  with  coverage  customary  for  companies  similarly  situated  to the
Company.

     Section 5.20  Investment  Company Act. The Company is not, and will not use
the  proceeds  from the  Notes  in a  manner  so as to  become,  an  "investment
company,"  or a company  "controlled"  by an  "investment  company,"  within the
meaning of the Investment Company Act of 1940, as amended.

     Section 5.21 Nasdaq  Compliance.  The Company's  Common Stock is registered
pursuant to Section  12(g) of the  Exchange  Act,  and is listed on the SmallCap
Market  administered by The Nasdaq Stock Market,  Inc. (the "SmallCap  Market").
The  Company has taken no action  designed  to, or likely to have the effect of,
and the transactions contemplated by this Agreement will not have the effect of,
terminating  the  registration  of the Common  Stock under the  Exchange  Act or
de-listing  of the Common  Stock from the SmallCap  Market.  The Company has not
received any  notification  that the  Commission,  the National  Association  of
Securities  Dealers,  Inc.,  the  SmallCap  Market or any other  self-regulatory
organizational  body is contemplating  terminating such registration or listing.
Without limiting the foregoing,  the Transaction  Documents and the transactions
contemplated  by them  require  no  shareholder  approval  under  the  rules  or
interpretations of the SmallCap Market.

     Section 5.22 Reporting Status. The Company has filed in a timely manner all
documents  that the Company was  required to file under the  Exchange Act during
the 12 months preceding the date of this Agreement.  As of the date hereof,  the
Company satisfies the eligibility requirements for the use of Form S-2 under the
Securities Act.

     Section 5.23 No Manipulation of Stock.  Neither the Company, nor any of its
directors,   officers  or  controlling  persons,  has  taken,  in  violation  of
applicable law, any action  designed to or that might  reasonably be expected to
cause or result in, or which has  constituted,  stabilization or manipulation of
the  price  of the  Common  Shares  to  facilitate  the  sale or  resale  of the
securities  issued or issuable in connection with the transactions  contemplated
hereunder.

     Section 5.24 Foreign Corrupt Practices; Sarbanes-Oxley.

          (a) Neither the Company,  nor to the  knowledge  of the  Company,  any
     agent or other person acting on behalf of the Company,  has (i) directly or
     indirectly,  used any  corrupt  funds for  unlawful  contributions,  gifts,
     entertainment  or other  unlawful  expenses  related to foreign or domestic
     political  activity,  (ii) made any unlawful payment to foreign or domestic
     government  officials or

<PAGE>

     employees or to any foreign or domestic political parties or campaigns from
     corporate funds,  (iii) failed to disclose fully any  contribution  made by
     the  Company  (or made by any  person  acting  on its  behalf  of which the
     Company is aware)  which is in  violation  of law, or (iv)  violated in any
     material  respect any  provision of the Foreign  Corrupt  Practices  Act of
     1977, as amended.

          (b) The Company is in  compliance  in all material  respects  with all
     provisions of the  Sarbanes-Oxley  Act of 2002 that are applicable to it as
     of the Closing Date.

     ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.

     Each  Purchaser  severally  represents  and warrants  the  following to the
Company:

     Section 6.1 Purchase for Investment.  Such Purchaser is purchasing its Note
or the  securities  acquired  pursuant to its Note  (including the Common Shares
issued upon conversion of its Note) (collectively,  the "Securities") solely for
its own account and not as nominee or agent for any other  person and not with a
view to, or for  offer or sale in  connection  with,  any  distribution  thereof
(within the meaning of the  Securities  Act) that would be in  violation  of the
securities  laws of the  United  States of America  or any state  thereof.  Such
Purchaser understands that its Note has not been registered under the Securities
Act and may be resold  only if  registered  pursuant  to the  provisions  of the
Securities Act or if an exemption from  registration is available,  except under
circumstances  where neither such registration nor such exemption is required by
law, and that the Company is not required to register such Purchaser's Note.

     Section  6.2  Accredited   Investor.   Such  Purchaser  is   knowledgeable,
sophisticated and experienced in business and financial matters.  Such Purchaser
acknowledges  that the Securities have not been registered  under the Securities
Act and understands  that the Securities must be held  indefinitely  unless they
are  subsequently  registered  under the Securities Act or the sale is permitted
pursuant to an  available  exemption  from the  registration  requirement.  Such
Purchaser  (a) is able to  bear  the  economic  risk  of its  investment  in the
Securities and is presently able to afford the complete loss of the  investment;
(b) is an  Accredited  Investor as defined in Rule  501(a)  under  Regulation  D
promulgated by the  Commission;  and (c) has been afforded access to information
about the Company and its financial  condition and business sufficient to enable
it to evaluate its investment in the Securities.

     Section 6.3  Authorization.  Such Purchaser has taken all actions necessary
to authorize it (a) to execute, deliver and perform all of its obligations under
this Agreement,  (b) to perform all of its obligations  under the Securities and
(c) to  consummate  the  transactions  contemplated  hereby  and  thereby.  This
Agreement  is  a  legally  valid  and  binding   obligation  of  such  Purchaser
enforceable against it in accordance with this Agreement's terms, except as such
enforceability  may  be  limited  by  (i)  applicable  bankruptcy,   insolvency,
reorganization,  moratorium or other similar laws  affecting the  enforcement of
creditors' rights generally and (ii) general principles of equity (regardless of
whether the enforceability is considered in a proceeding in equity or at law).
<PAGE>

ARTICLE 7. COVENANTS OF THE COMPANY.

     Section  7.1 Filing of Form 8-K.  Within five (5)  business  days after the
Closing  Date,  the Company shall file with the  Commission a Current  Report on
Form 8-K in compliance with the  requirements  thereof  disclosing the execution
and delivery of this Agreement.

     Section 7.2 Financial and Business  Information.  The Company shall deliver
to each Purchaser (or any other holder of the Notes):

          (a)  Quarterly  Statements  --  within  45 days  after the end of each
     quarterly  fiscal period in each fiscal year of the Company (other than the
     last quarterly  fiscal period of each such fiscal year),  duplicate  copies
     of,

               (i) a consolidated  balance sheet of the Company as at the end of
          such quarter, and

               (ii) consolidated  statements of income, changes in shareholders'
          equity and cash flows of the  Company,  for such  quarter  and (in the
          case of the second and third  quarters)  for the portion of the fiscal
          year  ending  with  such  quarter,  setting  forth  in  each  case  in
          comparative  form the  figures  for the  corresponding  periods in the
          previous fiscal year, all in reasonable detail, prepared in accordance
          with GAAP and Commission rules and regulations applicable to quarterly
          financial statements  generally,  and certified by the Chief Financial
          Officer as fairly presenting,  in all Material respects, the financial
          position  of the  companies  being  reported  on and their  results of
          operations and cash flows,  subject to changes resulting from year-end
          adjustments,  provided that the filing with the Commission  within the
          time period specified above of the Company's  Quarterly Report on Form
          10-Q prepared in compliance  with the  requirements  therefor shall be
          deemed to satisfy the requirements of this Section 7.2(a);

          (b) Annual  Statements  -- within 90 days after the end of each fiscal
     year of the Company, duplicate copies of,

               (i) a consolidated balance sheet of the Company, as at the end of
          such year, and

               (ii) consolidated  statements of income, changes in shareholders'
          equity and cash flows of the Company,  for such year, setting forth in
          each case in  comparative  form the  figures for the  previous  fiscal
          year, all in reasonable detail,  prepared in accordance with GAAP, and
          accompanied  by an opinion  thereon of  independent  certified  public
          accountants of recognized national standing, which opinion shall state
          that  such  financial  statements  present  fairly,  in  all  material
          respects,  the financial position of the companies being reported upon
          and their results of operations  and cash flows and have been prepared
          in conformity with GAAP and Commission rules and regulations, and that
          the examination of such  accountants in connection with such financial
          statements  has  been  made  in  accordance  with  generally  accepted
          auditing  standards,  and that such audit provides a reasonable  basis
          for such opinion in the  circumstances;  provided that the

<PAGE>

          filing with the Commission  within the time period  specified above of
          the Company's Annual Report on Form 10-K for such fiscal year prepared
          in  accordance  with the  requirements  therefor  shall be  deemed  to
          satisfy the requirements of this Section 7.2(b);

               (c)  Shareholder  Written  Communications  --  promptly  upon the
          mailing thereof to shareholders,  a copy of any written  communication
          mailed to shareholders of the Company  generally,  including any proxy
          statement related to any management  solicitation of shareholder votes
          or  consents  or any  information  statement  related to any annual or
          special  meeting  of  shareholders,  as well as the  Company's  annual
          report to shareholders,  if any, prepared pursuant to Rule 14a-3 under
          the Exchange Act;  provided that the filing with the Commission within
          the  required  time  period   therefor  and  in  compliance  with  the
          requirements  therefor  of any such  written  communications  shall be
          deemed to satisfy the requirements of this Section 7.2(c).

               (d) Requested  Information -- with  reasonable  promptness,  such
          other  data and  information  relating  to the  business,  operations,
          affairs,  financial condition,  assets or properties of the Company or
          relating  to the  ability of the  Company to perform  its  obligations
          hereunder  and under the Notes as from time to time may be  reasonably
          requested by any such holder of the Notes.

     Section 7.3  Reservation of Common  Shares.  The Company shall at all times
reserve and keep  available out of its  authorized  but unissued  Common Shares,
solely for the purpose of issuance upon the conversion of the Notes,  the number
of Common Shares  issuable upon the  conversion of the Notes.  All Common Shares
that are so issuable shall, when issued, be duly and validly issued,  fully paid
and nonassessable and free from all taxes, liens and charges.  The Company shall
take all such actions as may be necessary to assure that all such Common  Shares
may be so  issued  without  violation  of  any  applicable  law or  governmental
regulation or any  requirements of any domestic  securities  exchange upon which
the Common Shares may be listed  (except for official  notice of issuance  which
shall be immediately transmitted by the Company upon issuance).

     Section 7.4 Transactions  with Affiliates.  The Company will not enter into
directly or indirectly  any Material  transaction  or Material  group of related
transactions (including without limitation the purchase, lease, sale or exchange
of properties of any kind or the rendering of any service) with any  individual,
partnership,  corporation,  limited liability company, association,  joint stock
company, trust, joint venture, unincorporated organization,  governmental entity
or any department,  agency or political  subdivision thereof or any other entity
(a "Person") controlling, controlled by or under common control with the Company
(an  "Affiliate"),  other than a subsidiary,  except in the ordinary  course and
pursuant to the reasonable  requirements of the Company's business and upon fair
and  reasonable  terms no less favorable to the Company than would be obtainable
in a comparable arm's-length transaction with a Person that is not an Affiliate,
and only if such transaction or transactions  shall have been approved by action
of at least a majority of the  directors  of the  Company who are  disinterested
with respect to the transaction or transactions considered for approval.

     Section 7.5 Merger,  Consolidation or Sale of Assets. The Company shall not
consolidate or merge with or into any other Person or convey,  transfer or lease
all or

<PAGE>

substantially  all  of  its  assets  in  a  single   transaction  or  series  of
transactions  to any  Person  unless  the  conditions  in (a) or (b)  below  are
satisfied:

     (a) each of the following is satisfied:

          (i) the Company is the survivor of such merger; and

          (ii)  the  Person  merged  into  the  Company  is  not a  "significant
     subsidiary" as defined in Rule 1-02(w) of Regulation S-X promulgated by the
     Commission but  substituting "20 percent" for "10 percent" in each instance
     thereof; or

     (b) each of the following is satisfied:

          (iii) the successor  formed by such  consolidation  or the survivor of
     such merger or the Person that  acquires by  conveyance,  transfer or lease
     all or  substantially  all of the assets of the Company as an entirety,  as
     the case may be,  shall be a solvent  corporation  organized  and  existing
     under  the laws of the  United  States or any State  thereof,  and,  if the
     Company is not such  corporation,  (i) such corporation shall have executed
     and  delivered  to each holder of the Notes its  assumption  of the due and
     punctual  performance  and observance of each covenant and condition of the
     Transaction  Documents  and (ii) shall have caused to be  delivered to each
     holder of the Notes an opinion of independent  counsel,  to the effect that
     all agreements or instruments  effecting such assumption are enforceable in
     accordance with their terms and comply with the terms hereof;

          (iv) immediately after giving effect to such  transaction,  no Default
     or Event of Default shall have occurred and be continuing; and

          (v) holders of a majority in outstanding principal amount of the Notes
     shall have given their written  consent,  which they shall not unreasonably
     withhold.

No such conveyance,  transfer or lease of all or substantially all of the assets
of the Company  shall have the effect of releasing  the Company or any successor
corporation that shall  theretofore have become such in the manner prescribed in
this  Section 7.5 from its  liability  under the  Transaction  Documents.  It is
agreed that a Purchaser  may withhold  its consent to any  proposed  transaction
under  this  Section  7.5 if it,  in its sole  discretion,  determines  that the
Company's  ability  to  repay  the  Note to such  Purchaser  will be  Materially
impaired as a result of the proposed transaction.

     Section 7.6 Financial Covenants.

     (a) Definitions. For purposes of this Section 7.6:

          (i)  "Agent"  means,  the Person  serving  as the lead  administrative
     Lender under the Credit  Agreement  from time to time in effect  (initially
     Comerica  Bank) and,  in the  absence  of such a Person,  the holder of the
     largest principal amount of outstanding Senior Indebtedness.
<PAGE>

          (ii)  "Attributable  Debt" in respect of a Sale/Leaseback  Transaction
     means, as at the time of  determination,  the present value  (discounted at
     the interest  rate implicit in such  transaction,  determined in accordance
     with GAAP and the rules and  regulations  of the  Commission)  of the total
     obligations of the lessee for net rental payments during the remaining term
     of the lease  included in such  Sale/Leaseback  Transaction  (including any
     period for which such lease has been  extended  or may be, at the option of
     the lessor, extended).

          (iii)  "Average  Life" means,  as of the date of  determination,  with
     respect  to any  Indebtedness  or  Preferred  Stock,  the  number  of years
     obtained  by dividing  (a) the sum of the  products of the numbers of years
     from the date of  determination  to the dates of each successive  scheduled
     principal payment of such  Indebtedness or scheduled  redemption or similar
     payment with respect to such  Preferred  Stock  multiplied by the amount of
     such payment by (b) the then outstanding sum of all such payments.

          (iv) "Bank Indebtedness" means any and all amounts payable under or in
     respect of the  Credit  Agreement  and any  Refinancing  Indebtedness  with
     respect thereto, as amended from time to time, including principal, premium
     (if any),  interest  (including interest accruing on or after the filing of
     any petition in  bankruptcy or for  reorganization  relating to the Company
     whether  or not a  claim  for  post-filing  interest  is  allowed  in  such
     proceedings),   fees,   charges,   expenses,   reimbursement   obligations,
     guarantees and all other amounts payable  thereunder or in respect thereof.
     It is understood and agreed that Refinancing Indebtedness in respect of the
     Credit Agreement may be Incurred from time to time after termination of the
     Credit Agreement.

          (v) "Capital Stock" of the Company or any subsidiary means any and all
     shares, partnership, membership or other interests, participations or other
     equivalents of or interests in (however  designated)  equity of the Company
     or any  subsidiary,  including any Preferred  Stock (but excluding any debt
     securities  convertible  into such  equity)  and any  rights  to  purchase,
     warrants, options or similar interests with respect to the foregoing.

          (vi)  "Capitalized  Lease  Obligations"  means an  obligation  that is
     required to be classified  and  accounted  for as a  capitalized  lease for
     financial  reporting  purposes  in  accordance  with GAAP and the rules and
     regulations of the Commission,  and the amount of Indebtedness  represented
     by such  obligation  shall be the  capitalized  amount  of such  obligation
     determined in  accordance  with GAAP and the rules and  regulations  of the
     Commission;  and the Stated Maturity  thereof shall be the date of the last
     payment of rent or any other amount due under such

<PAGE>

     lease  prior to the first  date upon which such lease may be prepaid by the
     lessee without payment of a penalty.

          (vii)  "Credit  Agreement"  means  the  Credit  Agreement  dated as of
     January 16, 2004, as amended as of January 30, 2004, and as further amended
     on March 23, 2004 among the Company,  the banks named  therein and Comerica
     Bank,  as  agent  for  the  banks,   including  any  collateral  documents,
     instruments and agreements executed in connection  therewith (and any "Loan
     Documents"  as  defined   therein),   and  any   amendments,   supplements,
     modifications,  extensions,  renewals,  restatements or refundings  thereof
     (except to the extent that any such  amendment,  supplement,  modification,
     extension,  renewal,  restatement  or refunding  would be prohibited by the
     terms of this Agreement,  unless  otherwise  agreed to by the Purchasers or
     any  other  Note  holder)  and  any  indentures  or  credit  facilities  or
     commercial paper facilities with banks or other institutional  lenders that
     replace,  refund or refinance  any part of the loans,  notes,  other credit
     facilities  or  commitments  thereunder,  including  any such  replacement,
     refunding or  refinancing  facility or indenture  that increases the amount
     borrowable thereunder or alters the maturity thereof.

          (viii)  "Currency  Agreement" means with respect to the Company or any
     subsidiary any foreign exchange contract, currency swap agreements or other
     similar  agreement or arrangement to which the Company or any subsidiary is
     a party.

          (ix)  "Disqualified  Stock" means,  with respect to the Company or any
     subsidiary,  any  Capital  Stock which by its terms (or by the terms of any
     security into which it is  convertible or for which it is  exchangeable  or
     exercisable)  or  upon  the  happening  of  any  event  (a)  matures  or is
     mandatorily  redeemable pursuant to a sinking fund obligation or otherwise,
     (b) is convertible or exchangeable for  Indebtedness or Disqualified  Stock
     or (c) is  redeemable at the option of the holder  thereof,  in whole or in
     part,  in the case of clauses (a), (b) and (c) on or prior to 90 days after
     the Stated Maturity of the Notes; provided,  however, that only the portion
     of  Capital  Stock  that so matures  or is  mandatorily  redeemable,  is so
     convertible or exchangeable or is so redeemable at the option of the holder
     thereof  prior  to  the  Stated  Maturity  of the  Notes  shall  be  deemed
     Disqualified  Stock;  and provided  further,  however,  that Capital  Stock
     issued  to any plan for the  benefit  of  employees  shall  not  constitute
     Disqualified  Stock solely  because it may be required to be repurchased by
     the Company or any subsidiary in order to satisfy  applicable  statutory or
     regulatory obligations.

          (x) "Fair  Market  Value" means with respect to any asset or property,
     the  price  which  could be  negotiated  in an arm's  length,  free  market
     transaction,  for cash,  between a willing  seller  and a willing  and able
     buyer,  neither of whom is under undue  pressure or  compulsion to

<PAGE>

     complete the transaction.  For all purposes hereof,  Fair Market Value will
     be  determined in good faith by the  Company's  Board of  Directors,  whose
     determination will be conclusive and evidenced by a resolution of the Board
     of Directors.

          (xi) "Guarantee" means any obligation, contingent or otherwise, of the
     Company  or  any  subsidiary   directly  or  indirectly   guaranteeing  any
     Indebtedness  of any other Person and any  obligation,  direct or indirect,
     contingent or otherwise,  of the Company or any  subsidiary (a) to purchase
     or pay (or  advance or supply  funds for the  purchase  or payment of) such
     Indebtedness of such other Person (whether arising by virtue of partnership
     arrangements,  or by agreement to  keep-well,  to purchase  assets,  goods,
     securities or services,  to take-or-pay or to maintain financial  statement
     conditions  or  otherwise)  or (b) entered into for purposes of assuring in
     any other manner the obligee of such Indebtedness of the payment thereof or
     to protect  such obligee  against  loss in respect  thereof (in whole or in
     part);  provided,  however,  that the term  "Guarantee"  shall not  include
     endorsements  for collection or deposit in the ordinary course of business.
     The term "Guarantee" used as a verb has a corresponding meaning.

          (xii) "Hedging Obligations" of the Company or any subsidiary means the
     obligations of the Company or any subsidiary  pursuant to any Interest Rate
     Agreement or Currency Agreement.

          (xiii)  "Incur"  means,  with  respect  to any  Indebtedness  or other
     obligation of the Company or any subsidiary,  to issue, assume,  Guarantee,
     incur  or  otherwise  become  liable  for;  provided,   however,  that  any
     Indebtedness  or Capital Stock of a Person existing  immediately  after the
     time such Person  becomes a subsidiary  (whether by merger,  consolidation,
     acquisition or otherwise) shall be deemed to be Incurred by such subsidiary
     at the time it becomes a subsidiary.  The term  "Incurrence" when used as a
     noun shall have a  correlative  meaning.  The  accretion  of principal of a
     non-interest  bearing or other  discount  security  shall not be deemed the
     Incurrence of Indebtedness.

          (xiv) "Indebtedness" means, with respect to the Company on any date of
     determination,  without  duplication,  the  following  items  if and to the
     extent that any of them (other than items specified under clauses (c), (h),
     (i) and (j) below)  would  appear as a liability  or, in the case of clause
     (f) only, Preferred Stock on the consolidated balance sheet of the Company,
     prepared in accordance  with GAAP and applicable  rules and  regulations of
     the Commission, on such date:

               (a) the  principal  amount of and  premium (if any) in respect of
          indebtedness of the Company or any subsidiary for borrowed money;
<PAGE>

               (b) the  principal  amount of and  premium (if any) in respect of
          obligations  of the  Company  or any  subsidiary  evidenced  by bonds,
          debentures, notes or other similar instruments;

               (c) all  obligations  of the Company or any subsidiary in respect
          of  letters  of  credit  or  other  similar   instruments   (including
          reimbursement   obligations   with  respect   thereto  but   excluding
          obligations in respect of letters of credit issued in respect of Trade
          Payables);

               (d) all  obligations  of the Company or any subsidiary to pay the
          deferred  and unpaid  purchase  price of property or services  (except
          Trade  Payables),  which purchase price is due more than twelve months
          after the date of placing such property in service or taking  delivery
          and title thereto or the completion of such services;

               (e) all Capitalized  Lease  Obligations and all Attributable Debt
          of the Company or any subsidiary;

               (f)  the  amount  of  all  obligations  of  the  Company  or  any
          subsidiary  with  respect  to  the  redemption,   repayment  or  other
          repurchase of any Disqualified Stock;

               (g) all  Indebtedness  of other Persons  secured by a Lien on any
          asset  of  the  Company  or  any  subsidiary,   whether  or  not  such
          Indebtedness  is assumed by the Company or any  subsidiary;  provided,
          however,  that  the  amount  of  Indebtedness  of the  Company  or any
          subsidiary  shall be the lesser of (i) the Fair  Market  Value of such
          asset  at such  date of  determination  and (ii)  the  amount  of such
          Indebtedness of such other Persons;

               (h) Hedging Obligations of the Company or any subsidiary;

               (i) all  obligations  of the Company or any subsidiary in respect
          of a Receivables Facility; and

               (j) all  obligations  of the  type  referred  to in  clauses  (a)
          through (i) of other  Persons and all  dividends of other  Persons for
          the payment of which, in either case, the Company or any subsidiary is
          responsible or liable, directly or indirectly,  as obligor,  guarantor
          or otherwise, including by means of any Guarantee.

               The amount of  Indebtedness  of the Company or any  subsidiary at
          any  date  shall  be the  outstanding  balance  at  such  date  of all
          unconditional   obligations   as  described   above  and  the  maximum
          liability,  upon the occurrence of the contingency  giving rise to the
          obligation,  of any contingent  obligations  described  above, at such
          date;  provided,  however,  that the amount outstanding at any time of
          any Indebtedness issued with

<PAGE>

          original  issue  discount will be deemed to be the face amount of such
          Indebtedness  less the  remaining  unaccreted  portion of the original
          issue  discount of such  Indebtedness  at such time,  as determined in
          accordance with GAAP and the rules and regulations of the Commission.

               (xv) "Interest Rate Agreement"  means with respect to the Company
          or any subsidiary  any interest rate  protection  agreement,  interest
          rate future agreement,  interest rate option agreement,  interest rate
          swap  agreement,  interest  rate cap  agreement,  interest rate collar
          agreement, interest rate hedge agreement or other similar agreement or
          arrangement as to which the Company or any subsidiary is party.

               (xvi)  "Lien"  means any  mortgage,  pledge,  security  interest,
          encumbrance,  lien or charge of any kind  (including  any  conditional
          sale or  other  title  retention  agreement  or  lease  in the  nature
          thereof).

               (xvii)  "Preferred  Stock" as applied to the Capital Stock of the
          Company or any subsidiary  means Capital Stock of any class or classes
          (however designated) that is preferred as to the payment of dividends,
          or as to the  distribution of assets upon any voluntary or involuntary
          liquidation  or  dissolution  of such  Person,  over shares of Capital
          Stock of any other class of such Person.

               (xviii)  "Receivables  Facility"  means  one or more  receivables
          financing facilities,  as amended from time to time, pursuant to which
          the  Company  and/or  any  of  its  subsidiaries  sells  its  accounts
          receivable  to  a  Person  that  is  not  a  subsidiary   pursuant  to
          arrangements customary in the industry.

               (xix)  "Refinance"  means,  in  respect of any  Indebtedness,  to
          refinance,  extend, renew, refund, repay, prepay,  redeem,  defease or
          retire, or to issue other Indebtedness in exchange or replacement for,
          such   Indebtedness.   "Refinanced"  and   "Refinancing"   shall  have
          correlative meanings.

               (xx)  "Refinancing   Indebtedness"  means  Indebtedness  that  is
          Incurred  to  refund,  refinance,  replace,  renew,  repay  or  extend
          (including  pursuant to any  defeasance  or discharge  mechanism)  any
          Indebtedness of the Company or any subsidiary (including  Indebtedness
          of the Company that Refinances  Refinancing  Indebtedness);  provided,
          however,  that,  with respect to Refinancing  Indebtedness  other than
          Refinancing Indebtedness Incurred in respect of Bank Indebtedness, (a)
          the Refinancing Indebtedness has a Stated Maturity no earlier than the
          Stated  Maturity  of  the  Indebtedness  being  Refinanced,   (b)  the
          Refinancing  Indebtedness  has  an  Average  Life  at  the  time  such
          Refinancing  Indebtedness is Incurred that is equal to or greater than
          the  Average  Life of the  Indebtedness  being  refinanced,  (c)  such
          Refinancing  Indebtedness is Incurred in an aggregate principal amount
          (or if issued with original issue discount,  an aggregate issue price)
          that is equal to or less than the  aggregate

<PAGE>

          principal  amount (or if issued  with  original  issue  discount,  the
          aggregate  accreted value) then outstanding of the Indebtedness  being
          Refinanced   and  (d)  if  the   Indebtedness   being   refinanced  is
          subordinated  in right  of  payment  to the  Notes,  such  Refinancing
          Indebtedness is subordinated in right of payment to the Notes at least
          to the same extent as the Indebtedness being Refinanced.

               (xxi) "Sale/Leaseback  Transaction" means an arrangement relating
          to  property  now owned or  hereafter  acquired  by the  Company  or a
          subsidiary  whereby  the  Company  or the  subsidiary  transfers  such
          property to a Person and the Company or the subsidiary  leases it from
          such Person,  other than leases between the Company and a wholly-owned
          subsidiary or between wholly-owned subsidiaries.

               (xxii) "Senior  Indebtedness"  of the Company means the principal
          of,  premium (if any) and accrued  and unpaid  interest on  (including
          interest accruing on or after the filing of any petition in bankruptcy
          or for  reorganization of the Company,  regardless of whether or not a
          claim for  post-filing  interest is allowed in such  proceedings)  and
          fees and other amounts owing in respect of, Bank  Indebtedness and all
          other  Indebtedness of the Company whether  outstanding on the Closing
          Date  or  thereafter  Incurred,  if  in  the  instrument  creating  or
          evidencing the same or pursuant to which the same is outstanding it is
          provided that such obligations are superior in right of payment to the
          Senior Subordinated Indebtedness; provided, however, that in any case,
          Senior  Indebtedness  shall  not  include  (a) any  obligation  of the
          Company  to any  subsidiary  of the  Company,  (b) any  liability  for
          federal, state, local or other taxes owed or owing by the Company, (c)
          any accounts payable or other liability to trade creditors  arising in
          the  ordinary  course of  business  (including  Guarantees  thereof or
          instruments  evidencing  such  liabilities),  (d) any  Indebtedness or
          obligation  of the Company  (and any  accrued  and unpaid  interest in
          respect  thereof) that by its terms is subordinated or junior in right
          of payment to any other  Indebtedness  or  obligation  of the Company,
          including any Senior  Subordinated  Indebtedness,  (e) any obligations
          with respect to any Capital Stock or (f) any  obligations  not secured
          by assets of the Company or any subsidiary.

               (xxiii) "Senior  Subordinated  Indebtedness"  means the Notes and
          any other Indebtedness of the Company that specifically  provides that
          such  Indebtedness  is to rank pari  passu  with the Notes in right of
          payment.  Senior Subordinated  Indebtedness is subordinate in right of
          payment only to Senior Indebtedness of the Company or any subsidiary.

               (xxiv) "Stated Maturity" means, with respect to any security, the
          date  specified in such  security as the fixed date on which the final
          payment

<PAGE>

          of principal of such security is due and payable,  including  pursuant
          to any mandatory  redemption  provision  (but  excluding any provision
          providing  for the  repurchase  of such  security at the option of the
          holder  thereof  upon the  happening  of any  contingency  beyond  the
          control of the issuer unless such contingency has occurred).

               (xxv)  "Subordinated  Obligation"  means any  Indebtedness of the
          Company  (whether  outstanding  on  the  Closing  Date  or  thereafter
          Incurred)  that is  subordinate  or junior in right of  payment to the
          Notes and any other Senior Subordinated Indebtedness.

               (xxvi) "Trade Payables" means, with respect to the Company or any
          subsidiary,  any  accounts  payable or any  indebtedness  or  monetary
          obligation to trade  creditors  created,  assumed or Guaranteed by the
          Company or any subsidiary  arising in the ordinary  course of business
          in connection with the acquisition of goods or services.

          (b)  Limitation  on  Senior   Indebtedness  and  Senior   Subordinated
     Indebtedness. Without the prior written permission of holders of a majority
     in outstanding  principal amount of the Notes, the Company shall not permit
     the sum of its total Senior  Indebtedness  to exceed  $30,000,000 and shall
     not permit the sum of its total Senior Indebtedness and Senior Subordinated
     Indebtedness   (including  the  obligations  under  the  Notes)  to  exceed
     $45,000,000; provided, that this provision does not limit Indebtedness that
     may be incurred that is a Subordinated Obligation.

ARTICLE 8. EVENTS OF DEFAULT; REMEDIES ON DEFAULT.

     The term "Event of Default" shall have the meaning ascribed to such term in
the Notes.  If an Event of Default with respect to the Company shall occur,  the
holders of the Notes shall have those remedies provided for in the Notes.

ARTICLE 9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.

     All  representations  and  warranties  contained  herein shall  survive the
execution and delivery of this Agreement and the Notes, the purchase or transfer
by the  Purchasers of the Notes or portion  thereof or interest  therein and the
payment of the Notes,  and may be relied  upon by any  subsequent  holder of the
Notes,  regardless of any investigation  made at any time by or on behalf of any
Purchaser or any other holder of the Notes. The Transaction Documents embody the
entire  agreement and  understanding  between the Purchasers and the Company and
supersede all prior agreements and understandings relating to the subject matter
hereof.
<PAGE>

ARTICLE 10. AMENDMENT AND WAIVER.

     Section 10.1 Requirements.  The Transaction  Documents may be amended,  and
the observance of any term hereof or of the Registration Rights Agreement or the
Notes may be waived  (either  retroactively  or  prospectively),  with (and only
with) the written  consent of the Company and each  Purchaser or the  subsequent
holder of any Notes.

     Section 10.2 Binding Effect,  etc. Any amendment or waiver  consented to as
provided  in this  Article 10 applies to all future  holders of the Notes and is
binding upon them and upon the Company  without regard to whether the Notes have
been marked to indicate  the  amendment  or waiver.  No amendment or waiver will
extend to or affect any obligation,  covenant,  agreement,  Event of Default not
expressly amended or waived or impair any right consequent thereon. No course of
dealing  between  the  Company  and the  holder  of the  Notes  nor any delay in
exercising any rights  hereunder or under the Notes shall operate as a waiver of
any rights of any holder of the Notes. As used herein,  the term "Agreement" and
references  thereto  shall  mean this  Agreement  as it may from time to time be
amended or supplemented.

ARTICLE 11. NOTICES.

     All notices and  communications  provided for hereunder shall be in writing
and  sent  (a) by  hand  delivery,  or (b) by  facsimile  or  e-mail,  or (c) by
registered or certified mail with return receipt requested (postage prepaid), or
(d) by a recognized  overnight  delivery  service  (with charges  prepaid).  Any
notice must be sent:

          (i) if to the Purchasers,  to Whitebox Advisors, LLC at 3033 Excelsior
     Boulevard,  Suite 300,  Minneapolis,  Minnesota  55416 to the  attention of
     Jonathan  Wood,  Chief  Financial  Officer,  or at such other  address as a
     Purchaser shall have specified to the Company in writing, and in any event,
     with a copy (which shall not constitute  notice) to Messerli & Kramer P.A.,
     150  South  Fifth  Street,  Suite  1800,   Minneapolis,   Minnesota  55402,
     Attention: Jeffrey C. Robbins (jrobbins@mandklaw.com),

          (ii) if to any other holder of any Note,  to the holder at the address
     as the other holder shall have specified to the Company in writing, or

          (iii) if to the  Company,  to the  Company at its address set forth on
     page 1 of this Agreement to the attention of the Chief  Financial  Officer,
     or at the other address as the Company  shall have  specified to the holder
     of each Note in writing,  and in any event,  with a copy  (which  shall not
     constitute  notice) to Barnes & Thornburg  LLP, Suite 200, 121 W. Franklin,
     Elkhart, IN, 46516, Attention: Rand Nilsson (rand.nilsson@btlaw.com).

     Notices  delivered  by  personal  delivery or  facsimile  or e-mail will be
deemed  given  when  actually  received.  Notices  delivered  by  registered  or
certified  mail shall be deemed  delivered  four (4)  business  days after being
sent.  Notices delivered by overnight delivery service shall be deemed delivered
the next business day after being sent.
<PAGE>

ARTICLE 12. MISCELLANEOUS.

     Section  12.1  Indemnification  by  the  Company.  The  Company  agrees  to
indemnify and hold each Purchaser harmless against any loss,  liability,  damage
or expense  (including  reasonable  legal fees and costs) that the Purchaser may
suffer,  sustain or become  subject to as a result of or in connection  with the
breach by the Company of any representation,  warranty, covenant or agreement of
the Company contained in any of the Transaction Documents.

     Section 12.2 Expenses.  At Closing,  the Company shall pay the  Purchasers'
counsel,  Messerli & Kramer  P.A.,  $25,000  for its legal fees and  expenses in
representing  the Purchaser in  connection  with the  transactions  contemplated
hereby.  In addition,  the Company agrees to pay or reimburse the Purchasers for
(i) up to an  additional  $25,000  (in  the  aggregate  for all  Purchasers)  of
out-of-pocket   expenses   incurred  in  connection  with  their  due  diligence
investigation of the Company to the Closing Date and (ii) their reasonable legal
fees and  expenses  that they may incur at any time  after the  Closing  Date in
connection with the granting of any waiver with respect to, the  modification of
any of the terms or provisions of, or the  enforcement of any of the Transaction
Documents.

     Section 12.3  Successors  and Assigns.  All covenants and other  agreements
contained in this  Agreement  by or on behalf of any of the parties  hereto bind
and inure to the benefit of their respective  successors and assigns (including,
without  limitation,  any  subsequent  holder of a Note) whether so expressed or
not.

     Section  12.4  Severability.  Any  provision  of  this  Agreement  that  is
prohibited or unenforceable in any jurisdiction  shall, as to the  jurisdiction,
be ineffective to the extent of such  prohibition  or  unenforceability  without
invalidating  the  remaining  provisions  hereof,  and any such  prohibition  or
unenforceability in any jurisdiction shall (to the full extent permitted by law)
not invalidate or render unenforceable the provision in any other jurisdiction.

     Section  12.5  Construction.   Each  covenant  contained  herein  shall  be
construed  (absent  express  provision to the contrary) as being  independent of
each other covenant  contained  herein, so that compliance with any one covenant
shall not (absent an express contrary  provision) be deemed to excuse compliance
with any other covenant.

     Section 12.6 Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one  instrument.  Each  counterpart may consist of a number of copies
hereof, each signed by less than all, but together signed by all, of the parties
hereto.

          Section 12.7 Governing Law; Jurisdiction.

          (a) THIS AGREEMENT,  THE NOTE, THE  REGISTRATION  RIGHTS AGREEMENT AND
     ALL ISSUES  HEREUNDER AND THEREUNDER  SHALL BE GOVERNED BY AND CONSTRUED IN
     ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF MINNESOTA (WITHOUT REGARD
     TO PRINCIPLES OF CONFLICTS OF LAW),  EXCEPT TO THE EXTENT THE AUTHORIZATION
     AND ISSUANCE OF THE COMPANY'S SHARES ARE GOVERNED BY INDIANA LAW.
<PAGE>

          (b)  The  parties   agree  that  the  federal  and  state   courts  in
     Minneapolis,  Minnesota shall have exclusive personal jurisdiction (and are
     deemed to be a  convenient  forum for each party) as to  resolution  of any
     dispute;  except that either  party may enforce an order issued by any such
     court in other jurisdictions.

          (c) EACH PARTY HERETO IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN
     ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH
     THIS  AGREEMENT  OR ANY MATTER  ARISING  HEREUNDER  INCLUDING  ANY  DISPUTE
     BETWEEN THE HOLDER HEREOF AND THE HOLDER OF ANY SENIOR INDEBTEDNESS.

                                    * * * * *
<PAGE>

     If you are in agreement  with the foregoing,  please sign the  accompanying
counterpart  signature  page and return a signed copy of this  Agreement  to the
Company,  whereupon the foregoing shall become a binding  agreement  between you
and the Company.

                                        Very truly yours,

                                        STARCRAFT CORPORATION

                                        By: /s/ Joseph E. Katona, III
                                            -------------------------------
                                            Joseph E. Katona, III
                                            Chief Financial Officer

<PAGE>

                           COUNTERPART SIGNATURE PAGE

AGREED AND ACCEPTED:

WHITEBOX CONVERTIBLE ARBITRAGE PARTNERS L.P.

By:  /s/ Andrew Redleaf
   -------------------------------------------

Its: Managing Member of the General Partner
   -------------------------------------------

WHITEBOX HEDGED HIGH YIELD PARTNERS L.P.

By:  /s/ Andrew Redleaf
   -------------------------------------------

Its: Managing Member of the General Partner
   -------------------------------------------

PANDORA SELECT PARTNERS L.P.

By:  /s/ Andrew Redleaf
   -------------------------------------------

Its: Managing Member of the General Partner
   -------------------------------------------

WHITEBOX INTERMARKET PARTNERS L.P.

By:  /s/ Andrew Redleaf
   -------------------------------------------

Its: Managing Member of the General Partner
   -------------------------------------------

WHITEBOX DIVERSIFIED CONVERTIBLE ARBITRAGE PARTNERS L.P.

By:  /s/ Andrew Redleaf
   -------------------------------------------

Its: Managing Member of the General Partner
   -------------------------------------------
<PAGE>

                                   SCHEDULE A

                                   PURCHASERS

                         Name                                         Amount
------------------------------------------------------------------------------
Whitebox Convertible Arbitrage Partners L.P.                        $7,000,000

Whitebox Hedged High Yield Partners L.P.                            $4,000,000

Pandora Select Partners L.P.                                        $1,500,000

Whitebox Intermarket Partners L.P.                                  $1,000,000

Whitebox Diversified Convertible Arbitrage Partners L.P.            $1,500,000
                                                                   -----------

                                                                   $15,000,000
                                                                   ===========

<PAGE>

                                                                       Exhibit 1

     THE SECURITY  REPRESENTED BY THIS INSTRUMENT WAS ORIGINALLY  ISSUED ON JULY
12, 2004,  AND HAS NOT BEEN  REGISTERED  UNDER THE  SECURITIES  ACT OF 1933,  AS
AMENDED. THE TRANSFER OF THIS SECURITY IS SUBJECT TO THE CONDITIONS SPECIFIED IN
THE SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT, DATED AS OF JULY 12, 2004,
AS AMENDED AND MODIFIED FROM TIME TO TIME,  BETWEEN  STARCRAFT  CORPORATION (THE
"COMPANY") AND THE PURCHASERS  PARTY THERETO.  THE COMPANY RESERVES THE RIGHT TO
REFUSE THE TRANSFER OF SUCH SECURITY UNTIL SUCH  CONDITIONS  HAVE BEEN FULFILLED
WITH RESPECT TO SUCH TRANSFER.  UPON WRITTEN REQUEST,  A COPY OF SUCH CONDITIONS
SHALL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT CHARGE.

     THE  INDEBTEDNESS  EVIDENCED BY THIS NOTE IS  SUBORDINATED TO THE COMPANY'S
SENIOR INDEBTEDNESS AS MORE FULLY SET FORTH IN ARTICLE 4 HEREOF.

                              STARCRAFT CORPORATION

                            CONVERTIBLE SUBORDINATED
                                 PROMISSORY NOTE

July 12, 2004                                                $[principal amount]

     STARCRAFT  CORPORATION,  an Indiana  corporation  (the  "Company"),  hereby
promises  to  pay  to  the  order  of   [name/organization  of  purchaser]  (the
"Purchaser"),  the  principal  amount of [principal  amount] and 00/100  Dollars
($[principal  amount])  together with interest thereon  calculated from the date
hereof in accordance with the provisions of this Note.

     This Note was issued pursuant to a Convertible  Subordinated  Note Purchase
Agreement, dated as of July 12, 2004 (as amended and modified from time to time,
the "Purchase Agreement"),  between the Company and the purchasers party thereto
including the Purchaser,  and this Note one of is one of the "Notes" referred to
in the Purchase  Agreement.  The Purchase Agreement contains terms governing the
rights of the holder of this Note, and all provisions of the Purchase  Agreement
are hereby incorporated herein in full by reference.  Unless otherwise indicated
herein,  capitalized terms used in this Note have the same meanings set forth in
the Purchase Agreement.

ARTICLE 1. PAYMENT OF INTEREST; CONTINGENT INTEREST.

     Interest shall accrue at an annual rate equal to eight and one-half percent
(8 1/2 %) (computed on the basis of a 365/366-day  year and the actual number of
days  elapsed  in  any  year)  on the  unpaid  principal  amount  of  this  Note
outstanding from time to

<PAGE>

time, or (if less) at the highest rate then permitted under  applicable law. The
Company  shall pay to the holder of this Note all  accrued  interest  (including
Contingent Additional Interest as described below) on the first day of each July
and  January,  beginning  January 1, 2005.  Any accrued  interest  which for any
reason has not  theretofore  been paid shall  increase the principal of the Note
and be paid in full on the date on which the  final  principal  payment  on this
Note is made. Interest shall accrue on any principal payment due under this Note
(including as to accrued  interest  added to the  principal)  until such time as
payment therefore is actually delivered to the holder of this Note.

     In the event that the Company  fails by  September  10,  2004 (the  "Filing
Deadline") to file the Registration  Statement with the Commission,  or fails by
January 8, 2005 (the "Registration  Deadline") to obtain effectiveness under the
Securities  Act  and  applicable  state  securities  laws  of  the  Registration
Statement (as required by the terms of a Registration  Rights Agreement  between
the Company and Purchaser of this date)  registering all of the shares of Common
Shares  issuable as payment  under or upon  conversion  of this Note as provided
therein,  then for each full month thereafter (prorated for partial months) that
this failure continues (the "Failure Term"), and to the extent permitted by law,
the  Company  shall pay in arrears in cash,  with the next  otherwise  scheduled
payment of interest  pursuant to the above  paragraph (or if the last  scheduled
interest  payment has been made, then monthly on the same day of each succeeding
month),  additional interest (the "Contingent Additional Interest") equal to the
greater of $5,000 or 0.5% of the outstanding  principal  balance on this Note as
of the last day of the prior month.  However,  if the Failure Term runs for more
than three months, the additional monthly cash interest payable thereafter shall
increase, to the extent permitted by law, to the greater of $10,000 or 1% of the
outstanding  principal  balance  on this  Note as of the last  day of the  prior
month.

ARTICLE 2. PAYMENT OF PRINCIPAL ON NOTE.

     Section  2.1  Scheduled  Payment.  The  Company  shall pay the  outstanding
principal  amount to the holder of this Note on July 1, 2009,  together with all
accrued and unpaid interest on the principal amount being repaid.

     Section 2.2  Conversion.  Notwithstanding  any provision  contained in this
Article  2, the  holder  of this  Note may  convert  all or any  portion  of the
outstanding  principal amount of this Note into shares of common stock,  without
par value,  of the Company (the "Common  Shares") in  accordance  with Article 6
until such time as such principal amount has been paid.

ARTICLE 3. PRO RATA PAYMENT.

     Except as otherwise  expressly  provided in this Note,  all payments to the
holders of the Note (whether for principal, interest or otherwise) shall be made
pro rata among such holders based upon the aggregate  unpaid principal amount of
the Note held by each such holder. If any holder of the Note obtains any payment
(whether voluntary,  involuntary, or otherwise) of principal,  interest or other
amount with respect to the Note in excess of the holder's pro rata share of such
payments obtained by all holders of the Notes (other than as expressly  provided
herein), then the holder, by acceptance of the Note, agrees to purchase from the
other  holders  of the  Note a  participation  in the  Note

<PAGE>

held by them as is  necessary  to cause the other  holders  to share the  excess
payment ratably among each of them as provided in this paragraph.

ARTICLE 4. SUBORDINATION.

     Section 4.1 Extent of Subordination. The indebtedness evidenced by the Note
is  subordinate  and  junior  to any and all  Indebtedness  constituting  Senior
Indebtedness   within  the   meaning   of  the   Purchase   Agreement   ("Senior
Indebtedness").  The Note is  subordinate  to  Senior  Indebtedness  only to the
extent and in the manner hereinafter set forth.

          (a) During the  continuance of any default on any Senior  Indebtedness
     (including  without  limitation  a Default  or Event of  Default as defined
     under the Credit  Agreement) and so long as any such default  remains which
     has not been cured or waived by the holder of such Senior Indebtedness,  no
     payment of principal or interest shall be made on the Note, unless (and, if
     applicable,  to the  extent  permitted  by clause  4.1(b)(i),  below)  such
     payment is made in kind in the form of Common Shares as provided in Article
     6 or Article 9.

          (b) If any cash payment is made on the Note at a time when the holders
     are not  entitled  to receive  cash  payments  on the Note,  the payment or
     distribution   shall  be  delivered  directly  to  the  holders  of  Senior
     Indebtedness for application  against the Senior  Indebtedness,  unless and
     until all principal and interest on the Senior  Indebtedness  has been paid
     in full, or the payment has been adequately provided for, except that

               (i) no such delivery shall be made of stock or obligations issued
          by the  Company  or any  corporation  succeeding  to  the  Company  or
          acquiring  its  property  and  assets,   pursuant  to   reorganization
          proceedings  or  dissolution  or  liquidation  proceedings or upon any
          merger,  consolidation,  sale, lease,  transfer or other disposal,  if
          such stock or obligations  are  subordinate and junior at least to the
          extent provided hereunder to the payment of Senior Indebtedness to the
          extent then outstanding and to the payment of any stock or obligations
          which are issued in  exchange  for Senior  Indebtedness  to the extent
          then outstanding, and

               (ii) if any holder of Senior Indebtedness receives any payment or
          distribution  that,  except for the  provisions  of this  Section 4.1,
          would have been payable or  deliverable  with respect to the Note, the
          holders of the Note shall (after all principal  and interest  owing on
          such Senior  Indebtedness  has been paid in full) be subrogated to the
          rights  of  such  holders  of such  Senior  Indebtedness  against  the
          Company.

          (c) Any and all security  interests,  liens,  encumbrances and claims,
     whether now  existing  of  hereafter  arising,  which in any way secure the
     payment  of the  Note,  or any of them,  are  subordinate  to all  security
     interests,   liens,  encumbrances  and  claims,  whether  now  existing  or
     hereafter  arising,  which in any way  secure  the  payment  of any  Senior
     Indebtedness.  For so long as the Credit Agreement is in effect, the holder
     of the Note  shall  not take any lien or  security  interest  in any of the
     assets of the Company or any of its subsidiaries  without the

<PAGE>

     prior  written  consent of the Agent,  which consent may be withheld in the
     Agent's sole discretion.

          (d) If an event of default  (including without limitation a Default or
     Event of  Default  as defined  under the  Credit  Agreement)  in respect of
     Senior  Indebtedness has occurred and is continuing,  then until all Senior
     Indebtedness  has  been  paid  in  full  and  all  obligations  arising  in
     connection  therewith  have been  discharged,  no holder of any of the Note
     will sue or seek to enforce  against  the Company or any other  Person,  by
     setoff or otherwise,  all or any portion of the  indebtedness  evidenced by
     the Note, except to the extent that payment in Common Shares is permissible
     under Article 6 or Article 9.

          (e) Each  holder  of the Note  waives  notice of the  creation  of the
     Senior  Indebtedness  and notice of  acceptance  by the holder(s) of Senior
     Indebtedness of the  subordination  and other  provisions set forth herein.
     The holder of the Note agrees that, so long as the Credit Agreement remains
     in effect, the subordination  provisions of the Note may not be modified or
     amended  without  the  prior  written  consent  of the  Agent  and that any
     amendment or  modification  entered into without such consent shall be null
     and void.

          (f)  Each  holder  of the Note  agrees  that  each  holder  of  Senior
     Indebtedness,  at any time and from time to time hereafter, but only to the
     extent  provided  for  by the  Purchase  Agreement,  may  enter  into  such
     agreements with the Company as the holder of such Senior  Indebtedness  may
     deem  proper  extending  the time of payment of or  renewing  or  otherwise
     altering  the  terms of any such  Senior  Indebtedness,  or  affecting  the
     collateral  securing any such Senior  Indebtedness,  without  notice to the
     holders  of the Note and  without in any way  impairing  or  affecting  the
     subordination  provisions  set forth herein.  The holder of the Note agrees
     that, so long as the Credit Agreement remains in effect,  the subordination
     provisions  of the  Purchase  Agreement  shall not be  modified  or amended
     without the prior  written  consent of the Agent and that any  amendment or
     modification entered into without such consent shall be null and void.

          (g) Each  holder  of the Note  consents  and  agrees  that all  Senior
     Indebtedness  shall be deemed to have been made,  incurred and/or continued
     in reliance upon the  subordination  provisions set forth herein and in the
     Purchase  Agreement  and  each  holder  of any  Senior  Indebtedness  is an
     intended third party  beneficiary of the subordination and other provisions
     of this Article 4.

          (h) Each  holder  of the Note  agrees  that it shall  not  accept  any
     prepayment of the Note until the Senior Indebtedness has been paid in full,
     unless (and, if  applicable,  to the extent  permitted by clause  4.1(b)(i)
     above)  such  payment  is  made in kind in the  form of  Common  Shares  as
     provided in Article 6 or Article 9).

          (i) All rights and interest of the holders of the Senior  Indebtedness
     hereunder,  and all  agreements  and  obligations of the holder of the Note
     hereunder, shall remain in full force and effect irrespective of:
<PAGE>

               (1) any  lack  of  validity  or  enforceability  of any  document
          evidencing Senior Indebtedness;

               (2) any change in the time, manner or place of payment of, or any
          other  term of, all of any of the  Senior  Indebtedness,  or any other
          amendment  or waiver of or any  consent to  departure  from any of the
          documents evidencing or relating to the Senior Indebtedness;

               (3) any exchange, release or non-perfection of any collateral, or
          any release or amendment or waiver of or consent to departure from any
          guaranty or loan document, for all or any of the Senior Indebtedness;

               (4) any  failure of any holder of Senior  Indebtedness  to assert
          any claim or to enforce  any right or remedy  against  any other party
          hereto under the provisions of the Notes or the Credit Agreement;

               (5) any reduction,  limitation,  impairment or termination of the
          Senior  Indebtedness for any reason (other than the defense of payment
          in full of the Senior  Indebtedness),  including  any claim of waiver,
          release, surrender, alteration or compromise, and shall not be subject
          to any  defense  (other  than the  defense  of  payment in full of the
          Senior   Indebtedness)   or  setoff,   counterclaim,   recoupment   or
          termination   whatsoever   by   reason  of   invalidity,   illegality,
          nongenuineness,  irregularity,  compromise,  unenforceability,  or any
          other event or occurrence affecting, any Senior Indebtedness; and

               (6) any other  circumstance  which might  otherwise  constitute a
          defense  (other  than the  defense  of  payment  in full of the Senior
          Indebtedness)  available to, or a discharge of, the Company in respect
          of the Senior Indebtedness or the holder of the Note in respect of the
          Note.

     Section 4.2 Rights not Subordinated.  The provisions of Section 4.1 are for
the  purpose  of  defining  the  relative   rights  of  the  holders  of  Senior
Indebtedness  on the one hand and the  holder  of the  Note on the  other  hand.
Nothing  herein shall impair the Company's  obligation to the holder of the Note
to pay to the holder both principal and interest in accordance with the terms of
the Note. Except as provided in Section 4.1 nothing herein shall be construed to
prevent the holder of the Note from exercising all rights and remedies otherwise
available under the Note or the Purchase  Agreement or under applicable law upon
the  occurrence  of an Event of Default.  No  provision  of Section 4.1 shall be
deemed to  subordinate,  to any extent,  any claim or right of any holder of the
Note to any claim against the Company by any creditor or any other Person except
to the extent expressly provided in Section 4.1.
<PAGE>

ARTICLE 5. EVENTS OF DEFAULT; REMEDIES ON DEFAULT

     Section 5.1 Event of Default.  An "Event of Default"  shall exist if any of
the following conditions or events shall occur and be continuing:

          (a) the Company  defaults in the payment of principal on the Note when
     the same  becomes due and  payable,  whether at maturity or at a date fixed
     for  prepayment or by  declaration  or otherwise and such failure to pay is
     not cured within ten (10) business days after the occurrence thereof; or

          (b) the Company  defaults  in the payment of any  interest on the Note
     for more  than  five (5)  business  days  after  the same  becomes  due and
     payable; or

          (c) the  Company  defaults  with  respect  to  Section  7.6(b)  of the
     Purchase Agreement; or

          (d) the Company  defaults in the performance  of, or compliance  with,
     any other term contained in the Purchase Agreement, the Registration Rights
     Agreement or the Note (other than those referred to in Section 5.1(a),  (b)
     or (c) above) and the default is not remedied within thirty (30) days after
     the  earlier of (i) a  Co-Chief  Executive  Officer or the Chief  Financial
     Officer  obtaining  actual  knowledge  of the  default and (ii) the Company
     receiving  written  notice of the default  from the holder of the Note (any
     such written  notice to be identified as a "notice of default" and to refer
     specifically to this Section 5.1(d)); or

          (e) any representation or warranty made by the Company in Article 5 of
     the Purchase Agreement proves to have been false in any Material respect on
     the Closing Date; or

          (f) the Company (i) is generally not paying,  or admits in writing its
     inability  to pay its debts as they become due (ii)  files,  or consents by
     answer or otherwise  to the filing  against it of, a petition for relief or
     reorganization  or arrangement  or any other  petition in  bankruptcy,  for
     liquidation   or  to  take   advantage  of  any   bankruptcy,   insolvency,
     reorganization,  moratorium or other similar law of any jurisdiction, (iii)
     makes an assignment for the benefit of its creditors,  (iv) consents to the
     appointment of a custodian, receiver, trustee or other officer with similar
     powers with  respect to it or with respect to any  substantial  part of its
     property, or (v) is adjudicated as insolvent or to be liquidated; or

          (g) a court or Governmental Authority of competent jurisdiction enters
     an order appointing, without consent by the Company, a custodian, receiver,
     trustee or other  officer  with  similar  powers with respect to it or with
     respect to any substantial  part of its property,  or constituting an order
     for relief or  approving  a petition  for relief or  reorganization  or any
     other petition in bankruptcy or for liquidation or to take advantage of any
     bankruptcy  or  insolvency  law  of  any  jurisdiction,   or  ordering  the
     dissolution, winding-up or liquidation of the Company, or any such petition
     shall be filed against the Company and such petition shall not be dismissed
     within thirty (30) days; or
<PAGE>

          (h) an Event of Default  (as  defined in the Credit  Agreement)  shall
     have  occurred  and be  continuing  and shall  not have been  waived by the
     requisite holders of Indebtedness under the Credit Agreement or cured.

Section 5.2 Acceleration.

          (a) If an Event of Default  with  respect to the Company  described in
     subsection  (f) of Section 5.1 has occurred,  the Note shall  automatically
     become immediately due and payable.

          (b) If any other Event of Default has occurred and is continuing,  the
     holder of the Note may at any time at his, her or its option,  by notice to
     the  Company,   declare  the  Note  to  be  immediately  due  and  payable.
     Notwithstanding the foregoing, any acceleration of the Note based solely on
     an Event of Default under Section 5.1(h) (Event of Default under the Credit
     Agreement) shall be deemed rescinded upon the discontinuance of such Credit
     Agreement Event of Default, (including,  without limitation, upon waiver by
     the requisite  holders of Indebtedness  under the Credit Agreement or other
     cure of such default).

          (c) Upon the Note  becoming  due and payable  under this  Section 5.2,
     whether automatically or by declaration, the Note will forthwith mature and
     the entire unpaid principal amount of the Note, plus all accrued and unpaid
     interest  thereon,  shall all be immediately  due and payable,  in each and
     every case without presentment,  demand,  protest or further notice, all of
     which are hereby waived.

     Section 5.3 Other  Remedies.  If any Event of Default has  occurred  and is
continuing, and irrespective of whether the Note has become or has been declared
immediately  due and  payable  under  Section  5.1,  the  holder of the Note may
proceed to protect  and  enforce  the rights of such holder by an action at law,
suit in  equity  or  other  appropriate  proceeding,  whether  for the  specific
performance of any agreement  contained herein,  or for an injunction  against a
violation  of any of the terms  hereof or thereof,  or in aid of the exercise of
any power granted hereby or thereby or by law or otherwise.

     Section  5.4 No Waivers or  Election of  Remedies;  Expenses.  No course of
dealing  and no delay on the part of the  holder of the Note in  exercising  any
right, power or remedy shall operate as a waiver thereof or otherwise  prejudice
such holder's  rights,  powers or remedies.  The Company shall pay the principal
and interest of the Note without any deduction  for any setoff or  counterclaim.
No right,  power or remedy  conferred by the  Purchase  Agreement or by the Note
upon the holder  thereof shall be exclusive of any other right,  power or remedy
referred to herein or therein or now or  hereafter  available at law, in equity,
by  statute  or  otherwise.  The  Company  will pay to the holder of the Note on
demand such further amount as shall be sufficient to cover all reasonable  costs
and expenses of such holder incurred in any enforcement or collection under this
Article 5, including,  without limitation,  reasonable attorneys' fees, expenses
and disbursements.

     Section  5.5  Waiver  of  Demand.  The  Company  hereby  waives  diligence,
presentment,  protest and demand and notice of protest and demand,  dishonor and
nonpayment  of this Note,  and  expressly  agrees that this Note, or any payment
hereunder,  may be  extended  from time to time and that the  holder  hereof may
accept security for this

<PAGE>

Note or release  security for this Note,  all without in any way  affecting  the
liability of the Company hereunder.

ARTICLE 6. CONVERSION.

     Section 6.1 Conversion Procedure.

          (a) At any time and from  time to time  prior to the  payment  of this
     Note in full, the holder of this Note may convert all or any portion of the
     outstanding  principal  and/or accrued  interest amount of this Note into a
     number of Common Shares  (excluding  any  fractional  share)  determined by
     dividing the principal  and/or accrued  interest amount  designated by such
     holder to be converted,  by the Conversion Price then in effect;  provided,
     that in no event  shall any amount of accrued  interest  due on the Note be
     converted to Common  Shares  without the Company's  prior written  consent,
     which it may withhold in its absolute discretion.

          (b) Except as otherwise  expressly provided herein, each conversion of
     this Note shall be deemed to have been effected as of the close of business
     on the date on which this Note has been  surrendered  for conversion at the
     principal  office of the Company.  At such time as such conversion has been
     effected,  the  rights of the  holder  of this  Note as such  holder to the
     extent of the  conversion  shall cease,  and the Person or Persons in whose
     name or names any certificate or  certificates  for Common Shares are to be
     issued  upon such  conversion  shall be deemed to have become the holder or
     holders of record of the Common Shares represented thereby.

          (c) Notwithstanding any other provision hereof, if a conversion of any
     portion of this Note is to be made in connection  with a registered  public
     offering or a sale of the Company,  the  conversion  of any portion of this
     Note may, at the election of the holder  hereof,  be  conditioned  upon the
     consummation  of the public  offering or the sale of the Company,  in which
     case  such  conversion  shall  not be  deemed  to be  effective  until  the
     consummation of such transaction.

          (d) As soon as possible  after a conversion  has been effected (but in
     any event within five (5)  business  days in the case of clause (i) below),
     the Company shall deliver to the converting holder:

               (i) a  certificate  or  certificates  representing  the number of
          Common Shares  (excluding any fractional  share) issuable by reason of
          such  conversion  in such  name or  names  and  such  denomination  or
          denominations as the converting holder has specified;

               (ii)  payment  in an  amount  equal  to the  sum  of all  accrued
          interest with respect to the principal amount converted,  which is not
          also being  converted  and has not been paid prior  thereto,  plus the
          amount payable under subsection (e) below; and

               (iii) a new Note representing any portion of the principal amount
          which  was  represented  by the Note  surrendered  to the  Company  in
          connection  with such  conversion but which was not converted or which
<PAGE>

          could not be converted  because it would have required the issuance of
          a fractional share of Common Shares.

          (e) If any  fractional  share of Common Shares  would,  except for the
     provisions  hereof,  be  deliverable  upon  conversion  of this  Note,  the
     Company,  in lieu of delivering such fractional  share,  shall in the event
     the conversion is being consummated in connection with repayment in full of
     the  Note,  pay in  cash  an  amount  equal  to the  Market  Price  of such
     fractional share as of the date of such conversion.

          (f) The issuance of certificates  for Common Shares upon conversion of
     this  Note  shall be made  without  charge  to the  holder  hereof  for any
     issuance  tax in respect  thereof or other cost  incurred by the Company in
     connection with such conversion and the related  issuance of Common Shares.
     Upon  conversion  of this Note,  the Company shall take all such actions as
     are  necessary  in order to insure  that the Common  Shares  issuable  with
     respect  to such  conversion  shall  be  validly  issued,  fully  paid  and
     nonassessable.

          (g) The  Company  shall not close its books  against  the  transfer of
     Common Shares issued or issuable upon conversion of this Note in any manner
     which interferes with the timely conversion of this Note.

          (h) (i) Despite  anything  above to the  contrary,  the holder may not
     convert  this Note into Common  Shares under this Article 6 during the time
     period and to the extent that the shares of the Company's Common Stock that
     the holder could acquire upon the  conversion  would cause holder's (or its
     controlling  Person's)  Beneficial Ownership of the Company's Common Shares
     to exceed  4.99% of the  Company's  outstanding  Common  Shares  (including
     Common  Shares,  if any, that holder has  acquired,  or, by exercise by the
     Company  of its  rights to effect  payment  in kind  under  Article 9, that
     holder has the right to acquire,  under Article 9). The holder will, at the
     request of the Company,  from time to time,  notify the Company of holder's
     computation of holder's or its controlling  Person's Beneficial  Ownership.
     The parties shall compute  "Beneficial  Ownership" of the Company's  Common
     Shares in  accordance  with  Commission  Rule  13d-3.  Notwithstanding  the
     foregoing,  the limitation of 4.99% set forth in this  paragraph  shall not
     apply and a limitation of 9.99% shall, instead, apply on the same terms and
     conditions (i) during the period commencing with the Company's provision of
     notice of an Organic Change  pursuant to Section  6.5(b)(iii) and ending on
     the earlier of (a) the date  holder  gives  notice to the  Company  that it
     waives  irrevocably such temporary  increase in its right to acquire Common
     Shares in respect of such Organic Change,  (b) notice from the Company that
     it has  determined in good faith that such Organic Change will not occur or
     (c) the date 30 days after such Organic Change; and (ii) at and after April
     1, 2009. To the extent the holder requests conversion of principal or, with
     Company  consent,  accrued  interest  on the Note,  and the  Common  Shares
     issuable upon such  conversion  would exceed the applicable  limitation set
     forth in this  Section  6.1(h)(i),  then,  first,  the amount  representing
     accrued interest,  and, second (at the election of the Company, if prior to
     maturity),  the amount  representing  principal,  that,  in either case, if
     converted would cause Common Shares in excess of such

<PAGE>

     limitation  to be  issued,  shall,  instead,  be paid in cash in the actual
     amounts  outstanding (and not based on the value of Common Shares otherwise
     issuable).

          (ii)   Unless  the  Company   obtains  the   approval  of  its  voting
     shareholders  to such issuance in  accordance  with the rules of Nasdaq (in
     effect on the date  hereof)  with which the  Company  shall be  required to
     comply (but only to the extent  required  thereby),  the Company  shall not
     issue Common Shares upon  conversion  of the Note,  which when added to the
     number of shares of Common Shares previously issued by the Company (i) upon
     conversion  of the Note and (ii) in payment of the Note pursuant to Article
     9 below, would exceed the greater (i) 19.99% of the number of shares of the
     Company's  Common Shares which were issued and  outstanding  on the Closing
     Date or (ii)  such  number of Common  Shares as shall  have been  expressly
     authorized by action of the Company's  shareholders  in accordance with the
     Nasdaq marketplace rules (the "Maximum Issuance Amount"). In the event that
     the holder  requests  conversion  of the Note such that would  require  the
     Company to issue shares of Common Shares in excess of the Maximum  Issuance
     Amount,  the Company shall honor such conversion  request by (i) converting
     the  Note  into the  number  of  shares  of  Common  Shares  stated  in the
     conversion notice up to, but not in excess of, the Maximum Issuance Amount,
     and (ii)  redeeming  the  number of shares of Common  Shares  stated in the
     conversion  notice in excess of the  Maximum  Issuance  Amount in cash at a
     price equal to the  then-current  fair market value (i.e.,  the closing bid
     price of the Company's  Common Stock on the Nasdaq  System,  or if not then
     traded on the Nasdaq System,  then on the OTC Bulletin Board as reported by
     bigcharts.com,  or if this service is  discontinued,  such other  reporting
     service acceptable to the holder) on the date of redemption.

     Section 6.2 Conversion Price. The initial  Conversion Price shall be $15.60
(an amount  equal to the  product of (i) the  average  of the  closing  price as
reported  on the Nasdaq  System for the Common  Shares for the five (5)  trading
days immediately preceding the Closing Date, and (ii) 1.25). To address dilution
of the conversion  rights granted under the Notes, the Conversion Price shall be
subject to adjustment from time to time pursuant to Section 6.3.

     Section 6.3  Subdivision or Combination of Common Stock.  If the Company at
any time  subdivides  (by any share split,  share  dividend or otherwise) one or
more classes of its  outstanding  Common Shares into a greater number of shares,
the Conversion Price in effect  immediately  prior to such subdivision  shall be
proportionately  reduced,  and if the Company at any time  combines  (by reverse
share split or otherwise) one or more classes of its  outstanding  Common Shares
into a smaller  number of shares,  the  Conversion  Price in effect  immediately
prior to such combination shall be proportionately increased.

     Section  6.4  Reorganization,  Reclassification,  Consolidation,  Merger or
Sale. Any  recapitalization,  reorganization,  reclassification,  consolidation,
merger,  sale of all or  substantially  all of the  Company's  assets  or  other
transaction,  which in each case is effected  in such a manner  that  holders of
Common  Shares are  entitled  to receive  (either  directly  or upon  subsequent
liquidation)  stock,  securities  or assets with  respect to or in exchange  for
Common  Shares  is  referred  to  herein as an  "Organic  Change."  Prior to the
<PAGE>

consummation of any Organic  Change,  the Company shall make lawful and adequate
provision  (in form and  substance  satisfactory  to the  holder of the Note) to
insure  that the holder of the Note shall  thereafter  have the right to acquire
and  receive,  in lieu of or  addition  to (as the  case may be)  Common  Shares
immediately  theretofore  acquirable and  receivable  upon the conversion of the
holder's  Note,  such shares of stock,  securities or assets as may be issued or
payable  with  respect  to or in  exchange  for  the  number  of  Common  Shares
immediately  theretofore  acquirable  and  receivable  upon  conversion  of  the
holder's  Note had such  Organic  Change  not  taken  place.  In any such  case,
appropriate  provision (in form and substance  satisfactory to the holder of the
Note) shall be made with respect to the holder's  rights and interests to insure
that the provisions of this Article 6 shall thereafter be applicable in relation
to any shares of stock,  securities or assets  thereafter  deliverable  upon the
conversion of the Note (including, in the case of any such consolidation, merger
or sale in which the  successor  entity or  purchasing  entity is other than the
Company,  an immediate  adjustment of the Conversion  Price to the value for the
Common Shares reflected by the terms of such consolidation,  merger or sale, and
a corresponding  immediate  adjustment in the number of Common Shares acquirable
and  receivable  upon  conversion of the Note, if the value so reflected is less
than the Conversion  Price in effect  immediately  prior to such  consolidation,
merger or sale). The Company shall not effect any such consolidation,  merger or
sale, unless prior to the consummation  thereof,  the successor entity (if other
than  the  Company)  resulting  from  consolidation  or  merger  or  the  entity
purchasing  such  assets  assumes  by  written  instrument  (in form  reasonably
satisfactory  to the holder of the Note),  the obligation to deliver to each the
holder such shares of stock,  securities  or assets as, in  accordance  with the
foregoing provisions, the holder may be entitled to acquire.

     Section 6.5 Notices.

          (a)  Immediately  upon any  adjustment of the  Conversion  Price,  the
     Company  shall  send  written  notice  thereof  to the holder of this Note,
     setting forth in reasonable  detail and certifying the  calculation of such
     adjustment.

          (b) The Company  shall send written  notice to the holder of this Note
     at least twenty (20) days prior to the date on which the Company closes its
     books or takes a record (i) with  respect to any  dividend or  distribution
     upon the Common  Shares,  (ii) with  respect  to any pro rata  subscription
     offer to holders of Common Shares or (iii) for  determining  rights to vote
     with respect to any Organic Change, dissolution or liquidation.

          (c) The  Company  shall  also give at least  twenty  (20)  days  prior
     written  notice to the holder of this Note of the date on which any Organic
     Change, dissolution or liquidation shall take place.

ARTICLE 7. AMENDMENT AND WAIVER.

     The provisions of the Note may be amended with the holder's consent and the
Company may take any action herein prohibited, or omit to perform any act herein
required  to be  performed  by  it,  in the  manner  provided  in  the  Purchase
Agreement.
<PAGE>

ARTICLE 8. CANCELLATION.

     After all principal and accrued  interest at any time owed on this Note has
been paid in full or this Note has been  converted  in full to Common  Shares or
other property,  this Note shall be surrendered to the Company for  cancellation
and shall not be reissued.

ARTICLE 9. PAYMENTS.

     This Note is payable  without relief from valuation or  appraisement  laws.
All  payments  to be made to the  holder of the Note shall be made in the lawful
money of the United States of America in immediately available funds;  provided,
that payment of interest or principal hereon may be made, at the election of the
Company, in kind, in the form of Common Shares, only as follows:

          (a)  The  Common  Shares  must  be  registered  for  resale  with  the
     Commission  and  applicable  state  securities  authorities  on  the  Shelf
     Registration  Statement  provided for in the Registration  Rights Agreement
     (defined in the Purchase Agreement) and the Registration  Statement must be
     effective.

          (b)  The  per  share  value  of the  Common  Shares  for  purposes  of
     determining  the number of shares of Common  Shares  issuable as payment in
     kind is 95%  (rounded to the nearest  $.01) of the average  (rounded to the
     nearest $.01) of the high closing bid prices of the Company's Common Shares
     on the Nasdaq System (or if not then traded on the Nasdaq  System,  then on
     the OTC Bulletin Board as reported by bigcharts.com,  or if this service is
     discontinued,  such other reporting  service  reasonably  acceptable to the
     holder of the Note) for the five trading  days  immediately  preceding  the
     particular due date of the payment to be made in kind.

          (c) Payment in kind will be considered  timely under this Note only if
     the Company complies similarly with Sections  6.1(d)(i),  (f) and (g) above
     with respect to the in kind payment payable under this Article 9.

          (d) The  limitations  of Section  6.1(h)(ii)  respecting  the  Maximum
     Issuance Amount shall likewise apply to Common Shares that may be issued by
     the Company under this Article 9.

          (e) The  Company  does  not  have the  right  to  pre-pay  outstanding
     principal of the Note without consent of the holder.

ARTICLE 10. PLACE OF PAYMENT.

          Payments of principal and interest shall be delivered to the Purchaser
     in  care  of  Whitebox  Advisors,  LLC  (attention:  Jonathan  Wood,  Chief
     Financial Officer) at the following address:

        3033 Excelsior Boulevard, Suite 300, Minneapolis, Minnesota 55416

or to such other  address or to the  attention of such other person as specified
by prior written notice to the Company.
<PAGE>

ARTICLE 11. GOVERNING LAW.

          (a)  THIS  NOTE  AND ALL  ISSUES  HEREUNDER  AND  THEREUNDER  SHALL BE
     GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE
     OF MINNESOTA  (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW), EXCEPT TO
     THE EXTENT THE  AUTHORIZATION  AND  ISSUANCE  OF THE  COMPANY'S  SHARES ARE
     GOVERNED BY INDIANA LAW.

          (b)  The  parties   agree  that  the  federal  and  state   courts  in
     Minneapolis,  Minnesota shall have exclusive personal jurisdiction (and are
     deemed to be a  convenient  forum for each party) as to  resolution  of any
     dispute;  except that either  party may enforce an order issued by any such
     court in other jurisdictions.

          (c) EACH PARTY HERETO IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN
     ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH
     THIS  AGREEMENT  OR ANY MATTER  ARISING  HEREUNDER  INCLUDING  ANY  DISPUTE
     BETWEEN THE HOLDER HEREOF AND THE HOLDER OF ANY SENIOR INDEBTEDNESS.

          IN WITNESS  WHEREOF,  the Company has executed and delivered this Note
     on July 12, 2004.

                                    STARCRAFT CORPORATION

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

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