Rather than for me to explain it at length here, the exercise is well explained, with some really good, honest opinion on it on the following linked blog entry. I'm fortunate enough to have had someone take this lesson and comment on it first hand, so rather than to have me speak of this exercise's virtue, on this occassion I can actually post a link to another blog which not only explains exactly what to do, but also offers some critical feedback on it:
From Sam M's Blog:
"I recently took a guitar lesson where the first exercise was to play 10 individual notes, and after playing each one, to rate it from 1-10. It took me a good 10 minutes to grasp what I was being asked to do - play 10 notes, one at a time, anyway you like; loud, soft, dull, bright, muted, with vibrato, maybe bend it, the list goes on... What this exercise pertains to is the translation of what you intend to play, and how close this is to the actual sounds you make when you do play. I found this to be enlightening and scary in equal measure - my average was 8/10. This doesn't sound too bad until you consider we're talking about single notes played one at a time. What this means is that the average note I play on the guitar is only 80% as good as it could be. Scary.
This might seem like a very pedantic and overly-analytical way to look at playing an instrument, but think about it a bit more and it makes sense. Everything else - double stops, chords, flashy solo runs - are made up of single notes. If each note isn't as good as it could be, it stands to reason that neither are any of the above - neither is the rest of your playing, in fact."
Expanded upon here: