Exhibit 10

SECURITIES PURCHASE AGREEMENT

     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of December 18,
2003, by and among TeleCommunication Systems, Inc., a Maryland corporation, with
headquarters located at 275 West Street, Suite 400, Annapolis, Maryland 21401
(the “Company”), and the investors listed on the Schedule of Buyers attached
hereto (individually, a “Buyer” and collectively, the “Buyers”).

     WHEREAS:

     A. The Company and each Buyer are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Section
4(2) of the Securities Act of 1933, as amended (the “1933 Act”), and Rule 506 of
Regulation D (“Regulation D”) as promulgated by the United States Securities and
Exchange Commission (the “SEC”) under the 1933 Act.

     B. The Company has authorized a new series of subordinated convertible
debentures of the Company in the form attached hereto as Exhibit A (together
with any subordinated convertible debentures issued in replacement thereof in
accordance with the terms thereof, the “Debentures”), which Debentures shall be
convertible into shares of the Company’s Class A Common Stock, par value $0.01
per share (the “Common Stock”) (as converted, the “Conversion Shares”), in
accordance with the terms of the Debentures.

     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions stated in this Agreement and in the Debentures, (i) that
aggregate number of shares of the Common Stock set forth opposite such Buyer’s
name in column (3) on the Schedule of Buyers (which aggregate amount for all
Buyers together shall be 1,364,288 shares of Common Stock and shall collectively
be referred to herein as the “Common Shares”), and (ii) warrants, in
substantially the form attached hereto as Exhibit B (the “Warrants”), to acquire
250 shares of Common Stock for each 1,000 Common Shares purchased (as exercised,
collectively, the “Warrant Shares”) and as set forth opposite such Buyer’s name
in column (5) on the Schedule of Buyers.

     D. Certain of the Buyers wish to purchase, and the Company wishes to sell,
upon the terms and conditions stated in this Agreement, that aggregate principal
amount of Debentures set forth opposite such Buyer’s name in column (4) on the
Schedule of Buyers (which aggregate principal amount for all Buyers shall be
$15,000,000).

     E. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit C (the “Registration Rights
Agreement”), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Common Shares, the Conversion Shares,
the Repayment Shares (as defined in the Debentures), the Interest Shares (as
defined in the Debentures) and the Warrant Shares as provided in the
Registration Rights Agreement.

 

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     F. The Common Shares, the Debentures, the Conversion Shares, the Repayment
Shares, the Interest Shares, the Warrants and the Warrant Shares collectively
are referred to herein as the “Securities”.

     NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

     1. PURCHASE AND SALE OF COMMON SHARES, DEBENTURES AND WARRANTS.

          (a) Purchase of Common Shares, Debentures and Warrants.

               (i) Common Shares, Debentures and Warrants. Subject to the
satisfaction (or waiver) of the conditions set forth in Sections 6 and 7 below,
the Company shall issue and sell to each Buyer, and each Buyer severally, but
not jointly, agrees to purchase from the Company on the Closing Date (as defined
below), a number of Common Shares as is set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers, for certain Buyer’s only, a principal
amount of Debentures, as is set forth opposite such Buyer’s name in column
(4) on the Schedule of Buyers, and Warrants to acquire that number of Warrant
Shares as is set forth opposite such Buyer’s name in column (5) on the Schedule
of Buyers (the “Closing”).

               (ii) Closing. The Closing shall occur on the Closing Date at the
offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.

               (iii) Purchase Price. The purchase price for each Buyer (the
“Common Share Purchase Price”) of the Common Shares and related Warrants to be
purchased by each such Buyer at the Closing shall be equal to $4.3979 per Common
Share. The purchase price for the applicable Buyer (the “Debenture Purchase
Price”) for the Debentures to be purchased by such Buyer at the Closing shall be
equal to $1,000.00 for each $1,000.00 of principal amount of Debentures being
purchased by such Buyer at the Closing.

          (b) Closing Date. The date and time of the Closing (the “Closing
Date”) shall be 10:00 a.m., New York Time, on the second business day after
notification of satisfaction (or waiver) of the conditions to the Closing set
forth in Sections 6 and 7 below (or such later date as is mutually agreed to by
the Company and each Buyer).

          (c) Form of Payment. On the Closing Date, (i) each Buyer shall pay its
Common Share Purchase Price for the Common Shares and Warrants to be issued and
sold to such Buyer at the Closing and, if applicable, the Debenture Purchase
Price for the Debentures to be issued and sold to such Buyer at the Closing, in
each case to the Company, by wire transfer of immediately available funds in
accordance with the Company’s written wire instructions, and (ii) the Company
shall deliver to each Buyer the Common Shares (in such denominations as such
Buyer shall reasonably request at least one Business Day prior to the Closing
Date) along with the Warrants (in the amounts as such Buyer shall reasonably
request in writing at least one Business Day prior to the Closing Date) such
Buyer is purchasing, and, if applicable, the Debentures (in the principal
amounts as such Buyer shall reasonably request in writing at least one Business
Day prior to the Closing Date) which such Buyer is then purchasing, in all cases

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duly executed on behalf of the Company and registered in the name of such Buyer
or its designee.

     2. BUYER’S REPRESENTATIONS AND WARRANTIES.

          Each Buyer represents and warrants with respect to only itself that:

          (a) No Public Sale or Distribution. Such Buyer is (i) acquiring the
Common Shares and Warrants and, if it is a purchaser thereof, the Debentures,
and (ii) upon conversion of the Debentures and exercise of the Warrants will
acquire the Conversion Shares issuable upon conversion of the Debentures and the
Warrant Shares issuable upon exercise of the Warrants, in the ordinary course of
business for its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act and applicable state securities
laws. Buyer has no present arrangement (whether or not legally binding) at any
time to sell any of the Securities, as applicable, to or through any person or
entity; provided, however, that by making the representations herein, such Buyer
does not agree to hold any of the Securities for any minimum or other specific
term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under
the 1933 Act in accordance with Section 2(g) hereof and, if applicable, the
terms and conditions of the Registration Rights Agreement.

          (b) Accredited Investor Status. Such Buyer is an “accredited investor”
as that term is defined in Rule 501(a)(3) of Regulation D.

          (c) General Solicitation. At no time was Buyer presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.

          (d) Reliance on Exemptions. Such Buyer understands that the Securities
are being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

          (e) Information. No prospectus or “offering memorandum” has been
delivered to the undersigned in connection with the purchase of the Securities.
Such Buyer and its advisors, if any, have been furnished with all materials
relating to the business, finances and operations of the Company and materials
relating to the offer and sale of the Securities which have been requested by
such Buyer. Such Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer’s right to
rely on the Company’s representations and warranties contained herein. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such Buyer is able to bear such risk and is able to afford a complete
loss of such

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investment. Such Buyer has sought such accounting, legal and tax advice as it
has considered necessary to make an informed investment decision with respect to
its acquisition of the Securities. Buyer acknowledges and agrees that the
Company does not make and has not made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically
set forth in the Transaction Documents (as defined below).

          (f) No Governmental Review. Such Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

          (g) Transfer or Resale. Such Buyer understands that except as provided
in the Registration Rights Agreement: (i) the Securities have not been and are
not being registered under the 1933 Act or any state securities laws, and may
not be offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of reasonably acceptable counsel, in a form reasonably acceptable to the
Company, to the effect that such Securities to be sold, assigned or transferred
may be sold, assigned or transferred pursuant to an exemption from such
registration, or (C) such Buyer provides the Company with an opinion of
reasonably acceptable counsel, in a form reasonably acceptable to the Company,
to the effect that such Securities can be sold, assigned or transferred pursuant
to Rule 144 promulgated under the 1933 Act (or a successor rule thereto)
(collectively, “Rule 144”); (ii) any sale of the Securities made in reliance on
Rule 144 may be made only in accordance with the terms of Rule 144 and further,
if Rule 144 is not applicable, any resale of the Securities under circumstances
in which the seller (or the Person (as defined in Section 3(q) hereof) through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other exemption under
the 1933 Act or the rules and regulations of the SEC thereunder; and
(iii) neither the Company nor any other Person is under any obligation to
register the Securities under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder. The Securities
may be pledged in connection with a bona fide margin account or other loan
secured by the Securities and such pledge of Securities shall not be deemed to
be a transfer, sale or assignment of such Securities hereunder, and no Buyer
effecting a pledge of any of the Securities shall be required to provide the
Company with any notice thereof or otherwise make any delivery to the Company
pursuant to this Agreement or any other Transaction Document, including, without
limitation, this Section 2(g); provided, that in order to make any sale,
transfer or assignment of Securities, such Buyer and its pledgee makes such
disposition in accordance with or pursuant the above provisions of this
Section 2(g).

          (h) Legends. Such Buyer understands that the certificates or other
instruments representing any applicable Securities shall bear any legend as
required by the “blue sky” laws of any state and restrictive legends in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):

    [NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[CONVERTIBLE][EXERCISABLE]

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    HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN]
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY ONLY BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (B) AN OPINION OF
COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (C) RULE 144(K) UNDER SAID ACT AND, IN EACH CASE,
IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.

    THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO A
REGISTRATION RIGHTS AGREEMENT AND SECURITIES PURCHASE AGREEMENT EACH DATED
DECEMBER 18, 2003, THAT ARE ON FILE WITH THE COMPANY.

The legends set forth above shall be removed and the Company shall issue a
certificate without such legends to the holder of the Securities upon which it
is stamped, if, unless otherwise required by state securities laws, (i) such
securities are sold, assigned or transferred pursuant to an effective
registration statement covering the resale of such securities under the 1933
Act, (ii) such securities are sold, assigned or transferred pursuant to Rule 144
and in connection with sale, assignment or other transfer, such holder provides
the Company with an opinion of reasonably acceptable counsel as provided in
Section 2(g), in a form reasonably acceptable to the Company, to the effect that
such sale, assignment or transfer of the Securities may be made without
registration under the applicable requirements of the 1933 Act, or (iii) such
holder provides the Company with reasonable assurance that the Securities can be
sold, assigned or transferred pursuant to Rule 144(k).

          (i) Organization, Authority. Each Buyer is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and consummate
the transactions contemplated by the Transaction Documents and to otherwise
carry out its obligations hereunder and thereunder.

          (j) Validity; Enforcement. This Agreement and the Registration Rights
Agreement have been duly and validly authorized, executed and delivered on
behalf of such Buyer and shall constitute the legal, valid and binding
obligations of such Buyer enforceable against such Buyer in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or to applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws relating to, or affecting
generally, the enforcement of applicable creditors’ rights and remedies.

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          (k) No Conflicts. The execution, delivery and performance by such
Buyer of this Agreement and the Registration Rights Agreement and the
consummation by such Buyer of the transactions contemplated hereby and thereby
will not (i) result in a violation of the organizational documents of such Buyer
or (ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which such Buyer is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws) applicable to such Buyer, except
in the case of clauses (ii) and (iii) above, for such conflicts, defaults,
rights or violations which would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the ability of such
Buyer to perform its obligations hereunder.

          (l) Brokers, Finders. Neither such Buyer nor any of its affiliates has
engaged any placement agent or other agent in connection with the sale of the
Securities. Such Buyer shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions payable to any
persons engaged by any Buyer or its investment advisor relating to or arising
out of the transactions contemplated hereby. Such Buyer shall pay, and hold the
Company harmless against, any liability, loss or expense (including, without
limitation, attorney’s fees and out-of-pocket expenses) arising in connection
with any such claim.

          (m) Residency. Such Buyer is a resident of that jurisdiction specified
below its address on the Schedule of Buyers.

     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

          The Company represents and warrants to each of the Buyers that the
statements contained in this Section 3 are true and correct as of the date
hereof (unless the particular statement is, by its language, as of another date,
in which case, it is true and correct as of that other date), except as
disclosed in the disclosure schedule delivered by the Company to the Buyers on
the date of this Agreement and attached hereto as Exhibit D hereto (the
“Disclosure Schedule”) which Disclosure Schedule shall be arranged in sections
corresponding to the lettered sections contained in this Section 3, and the
disclosure in any such lettered section of the Disclosure Schedule shall qualify
the corresponding section in this Section 3 and any other section in this
Section 3 identified therein.

          (a) Organization and Qualification. The Company and its “Subsidiaries”
(which for purposes of this Agreement means any “significant subsidiary” of the
Company, as defined in Rule 1-02(w) of Regulation S-X) are corporations duly
organized and validly existing in good standing under the laws of the
jurisdiction in which they are incorporated, and have the requisite corporate
power and authorization to own their properties and to carry on their business
as now being conducted in all material respects. Each of the Company and its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which its ownership of property or the
nature of the business conducted by it makes such qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not reasonably be expected to have a Material Adverse Effect. As used in

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this Agreement, “Material Adverse Effect” means any material adverse effect on
the business, properties, assets, operations, results of operations or financial
condition of the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby and the other Transaction Documents or by the
agreements and instruments to be entered into in connection herewith or
therewith, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents (as defined below). The Company has
no Subsidiaries except as set forth on Schedule 3(a) of the Disclosure Schedule.

          (b) Authorization; Enforcement; Validity. The Company has the
requisite corporate power and authority to enter into and perform its
obligations under this Agreement, the Debentures, the Registration Rights
Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section
5(b)), the Warrants, the Voting Agreement, in the form attached hereto as
Exhibit E (the “Voting Agreement”), and each of the other agreements entered
into by the parties hereto in connection with the transactions expressly
contemplated by this Agreement (collectively, the “Transaction Documents”) and
to issue the Securities in accordance with the terms hereof and thereof. The
execution and delivery of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Common Shares, the Debentures
and the Warrants and the reservation for issuance and the issuance of the
Conversion Shares, the Repayment Shares, the Interest Shares and the Warrant
Shares issuable upon conversion, issuance or exercise thereof, as the case may
be, in each case as contemplated by, in accordance with the terms of and subject
to the limitations contained in the Transaction Documents, have been duly
authorized by the Company’s Board of Directors and no further consent or
authorization is required by the Company, its Board of Directors or its
stockholders (except for the Stockholder Approval). This Agreement and the other
Transaction Documents have been duly executed and delivered by the Company and
constitute the legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of applicable creditors’
rights and remedies.

          (c) Issuance of Securities. The Common Shares, the Debentures and the
Warrants are duly authorized and, upon issuance in accordance with the terms
hereof, shall be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof. As of the Closing, a
number of shares of Common Stock shall have been duly authorized and reserved
for issuance which equals the sum of 150% of the number of shares of Common
Stock issuable upon conversion of the Debentures to be issued at such Closing
and 150% of the number of shares of Common Stock issuable upon exercise of the
Warrants to be issued at such Closing. Upon conversion, exercise or issuance in
accordance with this Agreement, the Debentures or the Warrants, as the case may
be, the Common Shares, the Conversion Shares, the Repayment Shares, the Interest
Shares and the Warrant Shares, respectively, will be validly issued, fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, with the holders being entitled to all rights accorded to a
holder of Common Stock. Assuming the accuracy, on the date hereof and after the
date hereof as required, of each of the representations and warranties of the
Buyers contained in Section 2, the issuance by the Company of the Securities is
exempt from registration under the 1933 Act.

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          (d) No Conflicts. Except as set forth in Schedule 3(d) of the
Disclosure Schedule, the execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Common Shares, the Debentures and the Warrants and reservation for issuance
and issuance of the Conversion Shares, the Interest Shares, the Repayment Shares
and the Warrant Shares) will not (i) result in a violation of the charter
documents or bylaws of the Company or any of its Subsidiaries or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any material rights of
termination, amendment, acceleration or cancellation of, any material agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including federal and state securities laws and regulations
and the rules and regulations of the Nasdaq National Market (the “Principal
Market”)) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or
affected, other than any such violation which would not reasonably be expected
to have a Material Adverse Effect.

          (e) Consents. Except as contemplated by the Transaction Documents and
except for state securities or “Blue Sky” filings and the filing of a Form D
with the SEC or as disclosed in Schedule 3(e) of the Disclosure Schedule, the
Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for it to
execute, deliver or perform any of its obligations under or contemplated by the
Transaction Documents, in each case in accordance with the terms hereof or
thereof. All consents, authorizations, orders, filings and registrations which
the Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or prior to the Closing Date, and the Company and its
Subsidiaries are unaware of any facts or circumstances which might prevent the
Company from obtaining or effecting any of the registration, application or
filings pursuant to the preceding sentence, except to the extent that the
failure to obtain such consents, authorizations, orders, filings and
registrations would not reasonably be expected to have a Material Adverse
Effect. The Company is not in violation of the listing requirements of the
Principal Market and has no knowledge of any facts which would reasonably lead
to delisting or suspension of the Common Stock in the foreseeable future.

          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. The
Company acknowledges and agrees that each Buyer is acting solely in the capacity
of arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is an officer or
director of the Company. The Company further acknowledges that no Buyer is
acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to the Transaction Documents and the transactions
contemplated hereby and thereby, and any advice given by a Buyer or any of its
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such
Buyer’s purchase of the Securities. The Company further represents to each Buyer
that the Company’s decision to enter into the Transaction Documents has been
based solely on the independent evaluation by the Company and its
representatives.

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          (g) No General Solicitation; Placement Agent’s Fees. Except as set
forth in Schedule 3(g) of the Disclosure Schedule, neither the Company, nor any
of its affiliates, nor any Person acting on its or their behalf, has engaged in
any form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the Securities. The
Company acknowledges that it has engaged Roth Capital Partners LLC as placement
agent (the “Agent”) in connection with the sale of the Common Shares, the
Debentures and the Warrants. Other than the Agent, the Company has not engaged
any placement agent or other agent in connection with the sale of the Common
Shares, the Debentures and the Warrants. The Company shall be responsible for
the payment of any placement agent’s fees, financial advisory fees, or brokers’
commissions payable to the Agent relating to or arising out of the transactions
contemplated hereby; provided, the Company shall not be responsible for any such
fees or commission for persons engaged by any Buyer or its investment advisor.
The Company shall pay, and hold each Buyer harmless against, any liability, loss
or expense (including, without limitation, reasonable attorney’s fees and
out-of-pocket expenses) arising in connection with any such claim.

          (h) No Integrated Offering. None of the Company, its Subsidiaries, any
of their affiliates, and any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act in a
manner that would require registration of any of the Securities under the 1933
Act or any applicable stockholder approval provisions, including, without
limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or
designated. None of the Company, its Subsidiaries, their affiliates and any
Person acting on their behalf will take any action or steps referred to in the
preceding sentence that would require registration of any of the Securities
under the 1933 Act or cause the offering of the Securities to be integrated with
other offerings.

          (i) Dilutive Effect. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Debentures and the
Warrant Shares issuable upon exercise of the Warrants will increase in certain
circumstances, pursuant to the terms and conditions of the Debentures and the
Warrants, as the case may be. The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Debentures, the
Company’s option to issue the Repayment Shares and Interest Shares in accordance
with this Agreement and the Debentures and its obligation to issue the Warrant
Shares upon exercise of the Warrants in accordance with this Agreement and the
Warrants is, in each case, absolute and unconditional regardless of the dilutive
effect that such issuance may have on the ownership interests of other
stockholders of the Company.

          (j) Application of Takeover Protections; Rights Agreement. The Company
and its board of directors (the “Board of Directors”) have taken all necessary
action, if any, in order to render inapplicable any control share acquisition,
business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company’s Articles
of Incorporation, as amended and as in effect on the date hereof (the “Articles
of Incorporation”) or the laws of the state of its incorporation which is or
could become applicable to any Buyer as a result of the transactions
contemplated by this Agreement,

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including, without limitation, the Company’s issuance of the Securities and any
Buyer’s ownership of the Securities. The Company has not adopted a stockholder
rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.

          (k) SEC Documents; Financial Statements. Since December 31, 2002, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the 1934 Act (all of the foregoing filed prior to the date hereof, and all
exhibits included therein and consolidated financial statements and schedules
thereto and documents incorporated by reference therein being hereinafter
referred to as the “SEC Documents”). Except as modified or corrected by
subsequent filings, as of their respective dates, the SEC Documents complied in
all material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. Except as modified or corrected by subsequent filings, as of their
respective dates, the consolidated financial statements of the Company included
in the SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto. Such consolidated financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such consolidated financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent they
may exclude footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company as of the
dates thereof and the results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments).

          (l) Absence of Certain Changes. Since September 30, 2003, there has
been no Material Adverse Effect with respect to the Company or its Subsidiaries.
Since September 30, 2003, the Company has not (i) declared or paid any
dividends, (ii) sold any assets, individually or in the aggregate, in excess of
$100,000 outside of the ordinary course of business or (iii) had capital
expenditures, individually or in the aggregate, in excess of $500,000. The
Company has not taken any steps to seek protection pursuant to any bankruptcy
law nor does the Company have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact which would reasonably lead a creditor to do so. The
Company is not as of the date hereof, and after giving effect to the
transactions contemplated hereby to occur at the Closing, will not be Insolvent
(as defined below). For purposes of this Section 3(l), “Insolvent” means (i) the
present fair saleable value of the Company’s assets is less than the amount
required to pay the Company’s total Indebtedness ( as defined in Section 3(q)),
(ii) the Company is unable to pay its debts and liabilities, subordinated,
contingent or otherwise, as such debts and liabilities become absolute and
matured, (iii) the Company intends to incur or believes that it will incur debts
that would be beyond its ability to pay as such debts mature or (iv) the Company
has unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be conducted.

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          (m) No Undisclosed Events, Liabilities, Developments or Circumstances.
No event, liability, development or circumstance has occurred or exists with
respect to the Company or its Subsidiaries or their respective business,
properties, prospects, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws on a
registration statement on Form S-1 filed with the SEC relating to an issuance
and sale by the Company of its Common Stock and which has not been publicly
announced.

          (n) Conduct of Business; Regulatory Permits. Neither the Company nor
its Subsidiaries is in violation of any term of or in default under its Articles
of Incorporation, any Certificate of Designations, Preferences and Rights of any
outstanding series of preferred stock of the Company or the Company’s Bylaws, as
amended and as in effect on the date hereof (the “Bylaws”) or their
organizational charter or bylaws, respectively, except for such violations or
defaults that would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect. Except as disclosed in Schedule 3(n) of
the Disclosure Schedule, neither the Company nor any of its Subsidiaries is in
violation of any judgment, decree or order or any statute, ordinance, rule or
regulation applicable to the Company or its Subsidiaries, and neither the
Company nor any of its Subsidiaries will conduct its business in violation of
any of the foregoing, except for possible violations which would not reasonably
be expected, individually or in the aggregate, to have a Material Adverse
Effect. Without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of the Principal
Market which would reasonably lead to delisting or suspension of the Common
Stock by the Principal Market in the foreseeable future. Except as disclosed in
Schedule 3(n) of the Disclosure Schedule, since January 1, 2003, (i) the Common
Stock has been designated for quotation on the Principal Market, (ii) trading in
the Common Stock has not been suspended by the SEC or the Principal Market and
(iii) the Company has received no communication, written or oral, from the SEC
or the Principal Market regarding the suspension or delisting of the Common
Stock from the Principal Market. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not be expected to have, individually or in the
aggregate, a Material Adverse Effect, and neither the Company nor any such
Subsidiary has received any written notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit.

          (o) Transactions With Affiliates. Except as set forth on Schedule 3(o)
of the Disclosure Schedule or in on the SEC Documents filed at least two
Business Days prior to the date hereof and other than the grant of stock
options, restricted stock or other stock incentives pursuant to stock incentive
plans adopted by the Board of Directors, none of the officers, directors or
employees of the Company is presently a party to any material transaction with
the Company or any of its Subsidiaries (other than for ordinary course services
as employees, officers or directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring material
payments to or from any such officer, director or employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.

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          (p) Equity Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of (x) 225,000,000 shares of Common Stock,
of which 21,900,732 are issued and outstanding, 75,000,000 shares of Class B
Common Stock, of which 9,507,988 are issued and outstanding, 11,794,786 shares
of Common Stock are reserved for issuance pursuant to the Company’s stock option
and purchase plans and 32,046 shares of Common Stock are reserved for issuance
pursuant to securities (other than the Debentures and the Warrants) exercisable
or exchangeable for, or convertible into, shares of Common Stock, and (y) no
shares of preferred stock. All of such outstanding shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except as
disclosed in Schedule 3(p) of the Disclosure Schedule: (i) no shares of the
Company’s capital stock are subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company;
(ii) there are no outstanding options, warrants, scrip, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into, or exercisable or exchangeable for, any shares of
capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its Subsidiaries; (iii) there
are no outstanding debt securities, notes, credit agreements, credit facilities
or other agreements, documents or instruments evidencing Indebtedness of the
Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the aggregate,
filed in connection with the Company; (v) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement); (vi) there are no outstanding securities or
instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) the Company does not have any stock appreciation rights
or “phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the SEC Documents but not so disclosed in the SEC
Documents, other than those incurred in the ordinary course of the Company’s or
its Subsidiaries’ respective businesses and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect.

          (q) Indebtedness and Other Contracts. Except as disclosed in
Schedule 3(q) of the Disclosure Schedule and the SEC Documents, neither the
Company nor any of its Subsidiaries has (i) incurred any Indebtedness that is
outstanding on the date hereof and in excess of $500,000 in the aggregate, or
(ii) violated any term of or defaulted under any contract, agreement or
instrument relating to any Indebtedness, except such violations and defaults
which did not or would not result, individually or in the aggregate, in a
Material Adverse Effect, or (iv) entered into any contract, agreement or
instrument relating to any Indebtedness, the performance of which, in the
judgment of the Company’s officers, has or is reasonably expected to have a

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Material Adverse Effect. Schedule 3(q) of the Disclosure Schedule provides a
detailed description of the material terms of any such outstanding Indebtedness.
For purposes of this Agreement: (x) “Indebtedness” of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all obligations issued,
undertaken or assumed as the deferred purchase price of property or services
(other than trade payables entered into in the ordinary course of business),
(C) all reimbursement or payment obligations with respect to letters of credit,
surety bonds and other similar instruments, (D) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or
businesses, (E) all indebtedness created or arising under any conditional sale
or other title retention agreement, or incurred as financing, in either case
with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a capital
lease, and (G) all indebtedness referred to in clauses (A) through (F) above
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by any Person, even though the
Person which owns such assets or property has not assumed or become liable for
the payment of such indebtedness, and (H) all Contingent Obligations in respect
of indebtedness or obligations of others of the kinds referred to in clauses
(A) through (G) above; (y) “Contingent Obligation” means, as to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to any indebtedness, lease, dividend or other obligation of another
Person if the primary purpose or intent of the Person incurring such liability,
or the primary effect thereof, is to provide assurance to the obligee of such
liability that such liability will be paid or discharged, or that any agreements
relating thereto will be complied with, or that the holders of such liability
will be protected (in whole or in part) against loss with respect thereto; and
(z) “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

          (r) Absence of Litigation. There is no action, suit, proceeding,
inquiry or investigation before or by the Principal Market, any court, public
board, government agency, self-regulatory organization or body pending or, to
the knowledge of the Company, threatened against or affecting the Company, the
Common Stock or any of the Company’s Subsidiaries or any of the Company’s or the
Company’s Subsidiaries’ officers or directors in their capacities as such which
could reasonably be expected to have a Material Adverse Effect, except as set
forth in Schedule 3(r) of the Disclosure Schedule or as disclosed in the SEC
Documents.

          (s) Insurance. The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as the Company believes to be reasonable and customary in
the businesses in which the Company and its Subsidiaries are engaged. Neither
the Company nor, to the knowledge of the Company, any such Subsidiary has been
refused any insurance coverage sought or for which it has applied. Except as set
forth on Schedule 3(s) of the Disclosure Schedule, the Company has no knowledge
of any facts or circumstances which could reasonably be expected to prevent the
Company and the Subsidiaries from renewing its respective existing insurance
coverage as and

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when such coverage expires or to prevent the Company or the Subsidiaries from
obtaining similar coverage from similar insurers as may be necessary to continue
its respective businesses at a cost that would not reasonably be expected to
have a Material Adverse Effect.

          (t) Employee Relations. (i) Neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or employs any
member of a union. No executive officer of the Company (as defined in Rule
501(f) of the 1933 Act) has notified the Company that such officer intends to
leave the Company or otherwise terminate such officer’s employment with the
Company. No executive officer of the Company, to the knowledge of the Company,
is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and, to the Company’s knowledge, the continued employment
of each such executive officer as of the date hereof does not subject the
Company or any of its Subsidiaries to any liability with respect to any of the
foregoing matters.

               (ii) The Company and its Subsidiaries are in compliance with all
federal, state, local and foreign laws and regulations respecting employment and
employment practices, terms and conditions of employment and wages and hours,
except where failure to be in compliance would not, either individually or in
the aggregate, reasonably be expected to result in a Material Adverse Effect.

          (u) Title. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all material liens,
encumbrances and defects except such as are described in Schedule 3(u) of the
Disclosure Schedule or such as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and any of its Subsidiaries. Except as set
forth on Schedule 3(u) of the Disclosure Schedule, any real property and
facilities held under lease by the Company and any of its Subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not materially interfere with the use made and proposed
to be made of such property and buildings by the Company and its Subsidiaries.

          (v) Intellectual Property Rights. The Company and its Subsidiaries own
or possess adequate rights or licenses to use all material (i) trademarks,
(ii) trade names, (iii) service marks, (iv) service mark registrations, (v)
service names, (vi) patents, (vii) patent rights, (viii) copyrights, (ix)
inventions, (x) licenses, (xi) approvals, (xii) governmental authorizations,
(xiii) trade secrets and (xiv) other intellectual property rights used to
conduct their respective businesses as now conducted (“Intellectual Property
Rights”). Except as set forth in Schedule 3(v) of the Disclosure Schedule, none
of the Company’s Intellectual Property Rights have expired or terminated, or are
expected to expire or terminate, within three (3) years from the date of this
Agreement and to the knowledge of the Company, neither the Company or its
Subsidiaries is infringing the intellectual property rights of others. Except as
set forth in Schedule 3(v) of the Disclosure Schedule, there is no claim, action
or proceeding being made or brought, or to the knowledge of the Company, being
threatened, against the Company or its Subsidiaries regarding its Intellectual
Property Rights which would reasonably be expected to

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have a Material Adverse Effect. Except as set forth on Schedule 3(v) of the
Disclosure Schedule, the Company is unaware of any facts or circumstances which
might give rise to any of the foregoing infringements or claims, actions or
proceedings. The Company and its Subsidiaries have taken such security measures,
which the Company believes are reasonable and customary in the businesses the
Company and its Subsidiaries are engaged, to protect the secrecy,
confidentiality and value of all of their intellectual properties.

          (w) Subsidiary Rights. The Company has the unrestricted right to vote,
and (subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of its material Subsidiaries.

          (x) Tax Status. Except as would not be reasonably expected to have a
Material Adverse Effect, the Company and each of its Subsidiaries (i) has made
or filed all federal and state income tax returns, (ii) has made or filed all
other tax returns, reports and declarations required by any jurisdiction to
which it is subject except where the failure to make or file such other tax
returns, reports and declarations would not cause a Material Adverse Effect,
(iii) has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iv) has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. Except as would not be reasonably expected to have a Material Adverse
Effect, there are no unpaid taxes in any material amount claimed to be due by
the taxing authority of any jurisdiction, and the officers of the Company know
of no basis for any such claim.

          (y) Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of consolidated financial statements
in conformity with generally accepted accounting principles and to maintain
asset and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference.

          (z) Disclosure. The Company confirms that after giving effect to the
8-K Filing (as defined below) neither it nor, to its knowledge, any officer,
director or agent of the Company has provided any of the Buyers or their
respective agents or counsel with any information that in the Company’s
reasonable determination constitutes material, nonpublic information. The
Company understands and confirms that each of the Buyers will rely on the
foregoing representations in effecting transactions in securities of the
Company. All disclosure provided to the Buyers regarding the Company, its
business and the transactions contemplated hereby, including the Schedules to
this Agreement, furnished by or on behalf of the Company are true and correct in
all material respects and do not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading. The Company acknowledges and agrees that no Buyer makes or has made
any representations or warranties with respect to the

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transactions contemplated hereby other than those specifically set forth in the
Transaction Documents.

          (aa) Form S-3 Eligibility. The Company is eligible to register shares
of Common Stock for resale by the Buyers under Form S-3 promulgated under the
1933 Act.

     4. COVENANTS.

          (a) Reasonable Best Efforts. Each party shall use its reasonable best
efforts timely to satisfy each of the conditions to be satisfied by it as
provided in Sections 6 and 7 of this Agreement.

          (b) Reporting Status. Until the later of (i) the date on which the
Investors (as defined in the Registration Rights Agreement) shall have sold all
the Common Shares, the Conversion Shares, the Repayment Shares, the Interest
Shares and Warrant Shares and none of the Debentures or the Warrants is
outstanding, or (ii) the second anniversary of the date hereof (the “Reporting
Period”), the Company shall file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would otherwise permit such termination.

          (c) Financial Information. The Company agrees to send the following to
each Investor during the Reporting Period (i) unless the following are filed
with the SEC through EDGAR, within three (3) Business Days after the filing
thereof with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly
Reports on Form 10-Q, any Current Reports on Form 8-K and any registration
statements (other than on Form S-8) or amendments filed pursuant to the 1933 Act
and (ii) copies of any notices and other information made available or given to
the public stockholders of the Company generally, contemporaneously with the
making available or giving thereof to such stockholders.

          (d) Listing. The Company shall, in accordance with the Transaction
Documents, secure the listing of all of the Registrable Securities (as defined
in the Registration Rights Agreement) upon each national securities exchange and
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents. The Company shall maintain the Common Stock’s
authorization for quotation on the Principal Market or the Nasdaq National
Market. Neither the Company nor any of its Subsidiaries shall take any action
which would be reasonably expected to result in the delisting or suspension of
the Common Stock on the Principal Market. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section 4(d).

          (e) Fees. The Company shall reimburse the Buyers in the aggregate
amount of $40,000 for the Buyers’ reasonable expenses incurred in connection
with the preparation, execution and performance of this Agreement and the
transactions contemplated hereunder, which amount will be net funded from the
Debenture Purchase Price of Riverview Group LLC at the Closing. The Company
shall be responsible for the payment of any placement agent’s fees,

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financial advisory fees, or broker’s commissions (with respect to any Person
retained by the Company, but not for such fees or commission for any Person
engaged by any Buyer), relating to or arising out of the transactions
contemplated hereby, including, without limitation, any fees or commissions
payable to the Agent. The Company shall pay, and hold each Buyer harmless
against, any liability, loss or expense (including, without limitation,
reasonable attorney’s fees and out-of-pocket expenses) arising in connection
with any claim relating to any such payment. The Buyer shall be responsible for
the payment of any placement agent’s fees, financial advisory fees, or broker’s
commissions, retained by the Buyer or its Affiliates (not for such fees or
commissions for any Person engaged by the Company), relating to or arising out
of the transactions contemplated hereby. The Buyer shall pay, and hold the
Company harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in
connection with any claim relating to any such payment. Except as otherwise set
forth in this Agreement or in the Transaction Documents, each party to this
Agreement shall bear its own expenses in connection with the sale of the
Securities to the Buyers.

          (f) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by an Investor (as defined in the Registration Rights
Agreement) in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Investor effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document, including, without limitation, Section 2(f) hereof; provided that an
Investor and its pledgee shall be required to comply with the provisions of
Section 2(f) hereof in order to effect a sale, transfer or assignment of
Securities to such pledgee. The Company hereby agrees to execute and deliver
such documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by an Investor.

          (g) Disclosure of Transactions and Other Material Information. On or
before 8:30 a.m., New York Time, on December 22, 2003, the Company shall file a
Current Report on Form 8-K describing the terms of the transactions contemplated
by the Transaction Documents in the form required by the 1934 Act, and attaching
the material Transaction Documents (including, without limitation, this
Agreement, the form of Debenture, the form of Warrant and the Registration
Rights Agreement) as exhibits to such filing (including all attachments, the
“8-K Filing”). As of the filing of the 8-K Filing with the SEC, unless required
pursuant to Section 3(i) of the Registration Rights Agreement, no Buyer shall be
in possession of any material, nonpublic information received from the Company,
any of its Subsidiaries or any of its respective officers, directors, employees
or agents, that is not disclosed in the 8-K Filing. Unless required pursuant to
Section 3(i) of the Registration Rights Agreement, the Company shall not, and
shall use its reasonable best efforts to cause each of its Subsidiaries and its
and each of their respective officers, directors, employees and agents, not to,
provide any Buyer with any material, nonpublic information regarding the Company
or any of its Subsidiaries from and after the filing of the 8-K Filing with the
SEC without the express written consent of such Buyer. Subject to the foregoing,
neither the Company nor any Buyer shall issue any press releases or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public

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disclosure with respect to such transactions (i) in substantial conformity with
the 8-K Filing and (ii) as is required by applicable law and regulations
(provided that in the case of clause (i) each Buyer shall be consulted by the
Company in connection with any such press release or other public disclosure
prior to its release).

          (h) Additional Debentures; Variable Securities; Additional
Registration Statement. For so long as any Buyer beneficially owns any
Debentures, the Company will not issue any Debentures and the Company shall not
issue any other securities that would cause a breach or default under the
Debentures. For long as any Debentures remain outstanding, the Company shall
not, in any manner, issue or sell any rights, warrants or options to subscribe
for or purchase Common Stock or directly or indirectly convertible into or
exchangeable or exercisable for Common Stock at a price which varies or may vary
with the market price of the Common Stock, including by way of one or more
reset(s) to any fixed price unless the conversion, exchange or exercise price of
any such security cannot be less than the then applicable Conversion Price (as
defined in the Debentures) with respect to the Common Stock under any into which
any Debenture is convertible. Until such time as the Registration Statement (as
defined in the Registration Rights Agreement) is declared effective by the SEC,
the Company will not file a registration statement under the 1933 Act relating
to securities that are not the Securities, other than a registration statement
on Form S-8 in order to register increases in the shares underlying equity
incentive or stock option plans in existence as of the date of this Agreement.

          (i) Corporate Existence. So long as any Buyer beneficially owns
greater than ten percent of the Debentures issued hereunder, the Company shall
maintain its corporate existence and shall not sell all or substantially all of
the Company’s assets, except in the event of a merger or consolidation or sale
of all or substantially all of the Company’s assets in compliance with the terms
of the Debentures.

          (j) Conduct of Business. The business of the Company and its
Subsidiaries shall not be conducted in violation of any law, ordinance or
regulation of any governmental entity, except where such violations would not
reasonably be expected to result, either individually or in the aggregate, in a
Material Adverse Effect.

          (k) Right of Participation.

               (i) For a period of 18 months following the Closing Date, the
Company shall not issue, sell or exchange, agree or obligate itself to issue,
sell or exchange or reserve or set aside for issuance, sale or exchange (a
“Future Issuance”), (A) any shares of Common Stock, (B) any other equity
security of the Company, including without limitation shares of preferred stock,
(C) any debt security of the Company (other than debt with no equity feature),
including without limitation any debt security which by its terms is convertible
into or exchangeable for any equity security of the Company, (D) any security of
the Company that is a combination of debt and equity, or (E) any option, warrant
or other right to subscribe for, purchase or otherwise acquire any such equity
security or any such debt security of the Company, unless in each case the
Company shall have first offered to sell (in the case of public offerings, to
the extent permitted by the SEC and other applicable laws, as reasonably
determined by the Company upon consultation with counsel) the Offered Securities
(as defined)

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to the Buyers (in all respects upon identical terms and conditions, including,
without limitations, unit price and interest rates) as follows: The Company
shall offer to sell to each Buyer (1) that portion of the Offered Securities as
the amount of Securities acquired by such Buyer at the Closing bears to the
total amount of Securities acquired by all Buyers at the Closing (the “Basic
Amount”), and (2) such additional portion of the Offered Securities as such
Buyer shall indicate it will purchase should the other Buyers subscribe for less
than their Basic Amounts (the “Undersubscription Amount”), at a price and on
such other terms as shall have been specified by the Company in writing
delivered to such Buyer (the “Offer”), which Offer by its terms shall remain
open and irrevocable for a period of 10 days from receipt of the Offer. “Offered
Securities” means the aggregate amount of the securities being issued or sold in
the Future Issuance less any Securities offered to other stockholders of the
Company pursuant to agreements existing as of the date hereof and set forth on
Schedule 3(p) of the Disclosure Schedule; provided, however, that with respect
to Future Issuances that are underwritten public offerings, “Offered Securities”
means the Buyers’ pro rata share of the aggregate amount of securities being
issued or sold in such Future Issuance, calculated on a fully diluted basis
assuming the full conversion of the Debentures and exercise of the Warrants and
all other Options and Convertible Securities then outstanding.

               (ii) Notice of each Buyer’s intention to accept, in whole or in
part, any Offer made pursuant to Section 4(k)(i) shall be evidenced by a writing
signed by such Buyer and delivered to the Company prior to the end of the 10-day
period of such Offer, setting forth such of the Buyer’s Basic Amount as such
Buyer elects to purchase (the “Notice of Acceptance”).

               (iii) Permitted Sales of Refused Securities. If Notices of
Acceptance are not given in a timely fashion by the Buyers in respect of all the
Offered Securities, the Company shall have 120 days from the expiration of the
period set forth in Section 4(k)(i) to close the sale of all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by the
Buyers (the “Refused Securities”) (as well as the other securities proposed to
be issued in a Future Issuance) to any other Person or Persons, but only for
cash and otherwise in all respects upon terms and conditions, including, without
limitation, unit price and interest rates, which are no more favorable, in the
aggregate, to such other Person or Persons or less favorable to the Company than
those set forth in the Offer.

               (iv) Reduction in Amount of Offered Securities. If the Company
shall propose to sell less than all the Refused Securities (any such sale to be
in the manner and on the terms specified in Section 4(k)(iii) above), then each
Buyer may, at its sole option and in its sole discretion, reduce the number or
other units of the Offered Securities specified in its Notice of Acceptance to
an amount which shall be not less than the amount of the Offered Securities
which such Buyer elected to purchase pursuant to Section 4(k)(ii) multiplied by
a fraction, (A) the numerator of which shall be the amount of Offered Securities
which the Company actually proposes to sell, and (B) the denominator of which
shall be the amount of all Offered Securities. In the event that any Buyer so
elects to reduce the number or amount of Offered Securities specified in its
Notice of Acceptance, the Company may not sell or otherwise dispose of more than
the reduced amount of the Offered Securities until such securities have been
offered to the Buyers in accordance with Section 4(k).

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               (v) Closing. Upon each closing under this Section 4(k), which
shall include full payment to the Company, the Buyer shall purchase from the
Company, and the Company shall sell to the Buyer the number of Offered
Securities specified in the Notices of Acceptance, as reduced pursuant to
Section 4(k)(iv) if the Buyers have so elected, upon the terms and conditions
specified in the Offer. The purchase by the Buyers of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the Company
and the Buyers of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to the Company and the Buyers and
their respective counsel, provided that such purchase agreement shall not
contain terms more favorable than any terms originally stipulated in connection
with the Offered Securities.

               (vi) Further Sale. In each case, any securities proposed to be
issued in a Future Issuance that are not purchased by the Buyers or other Person
or Persons in accordance with Section 4 may not be sold or otherwise disposed of
until they are again offered to the Buyers to the same extent, and under the
procedures specified in, Section 4(k).

               (vii) Exception. The rights of the Buyers under this Section 4(k)
shall not apply to: (A) Common Stock issued as a stock dividend to all holders
of Common Stock or upon any subdivision or combination of shares of Common
Stock, (B) Securities issued to a Buyer pursuant to terms of the Debentures or
upon exercise of the Warrants or issued upon conversion or exercise of any other
currently outstanding securities of the Company pursuant to the terms of such
securities, (C) pursuant to a bona fide firm commitment underwritten public
offering with a nationally recognized underwriter which generates gross proceeds
to the Company in excess of $20,000,000 (other than an “at the market offering”
as defined in Rule 415(a)(4) under the 1933 Act and “equity lines”), (D) in
connection with any employee benefit plan which has been approved by the Board
of Directors of the Company, pursuant to which the Company’s securities may be
issued to any employee, officer or director of, or consultant or other service
provider to, the Company for services provided to the Company, (E) securities
issued not primarily for capital raising purposes and in connection with bona
fide, arm’s length strategic partnerships, acquisitions or joint ventures
(including, without limitation, licenses, licensors, customer and vendors) in
which there is a significant commercial relationship with the Company, and
(F) with the prior written approval of a majority in interest of the Buyers,
which will not be unreasonably withheld, conditioned or delayed (collectively,
“Excluded Securities”).

          (l) Disclosures. Concurrently with or prior to the 8-K Filing, the
Company shall make a reasonable determination and shall publicly disclose all
material, nonpublic information provided to the Buyers, including, without
limitation, any material information relating to the Aether Acquisition (as
defined below).

          (m) Proxy Statement. The Company shall provide each stockholder
entitled to vote at the next meeting of stockholders of the Company (the
“Stockholder Meeting”), which shall be called and held not later than June 30,
2004 if the SEC does not review the Company’s preliminary proxy materials and
not later than September 30, 2004 in the event of such an SEC review (the
“Stockholder Meeting Deadline”), a proxy statement, substantially in the form
which has been previously reviewed by the Buyers and a counsel of their choice
(at Buyers’

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expense, soliciting each such stockholder’s affirmative vote at the Stockholder
Meeting for approval of the Company’s issuance of all of the Securities as
described in the Transaction Documents in accordance with and as required by
applicable law and the rules and regulations of the Principal Market (such
affirmative approval of the Resolutions being referred to herein as the
“Stockholder Approval”), and the Company shall use its best efforts to solicit
its stockholders’ approval of the foregoing and to cause the Board of Directors
of the Company to recommend to the stockholders that they approve the foregoing.
The Company shall be obligated to seek to obtain the Stockholder Approval by the
Stockholder Meeting Deadline. Notwithstanding the foregoing, the Company may, at
its option, attempt to secure the Stockholder Approval via written consent
without the Stockholder Meeting. The Company represents and warrants that the
affirmative vote of a majority of the votes entitled to be cast at the
Stockholder Meeting is all that is required for the Stockholder Approval.

     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

          (a) Register. The Company shall maintain at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to each holder of Debentures or Warrants), a register for the Debentures
and the Warrants, in which the Company shall record the name and address of the
Person in whose name the Debentures and the Warrants have been issued (including
the name and address of each transferee), the principal amount of Debentures
held by such Person and the number of Warrant Shares issuable upon exercise of
the Warrants held by such Person. The Company shall keep the register open and
available at all times during normal business hours for inspection of any Buyer
or its legal representatives.

          (b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in the name of each Buyer or its
respective nominee(s), for the Conversion Shares, the Repayment Shares, the
Interest Shares and the Warrant Shares in such amounts as specified from time to
time by each Buyer to the Company upon issuance of the Repayment Shares or
Interest Shares or conversion of the Debentures or exercise of the Warrants in
the form of Exhibit F attached hereto (the "Irrevocable Transfer Agent
Instructions”). The Company agrees that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 5(b), and
stop transfer instructions to give effect to Section 2(g) hereof, except as
required by applicable law, will be given by the Company to its transfer agent,
and that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
other Transaction Documents, subject to applicable securities laws. If a Buyer
effects a sale, assignment or transfer of the Securities in accordance with
Section 2(f), the Company shall permit the transfer and shall promptly instruct
its transfer agent to issue one or more certificates or credit shares to the
applicable balance accounts at DTC in such name and in such denominations as
specified by such Buyer to effect such sale, transfer or assignment, subject to
applicable federal and state securities laws and the terms and conditions of the
Transaction Documents. In the event that such sale, assignment or transfer
involves Conversion Shares, Repayment Shares, Interest Shares or Warrant Shares
sold, assigned or transferred pursuant to an effective registration statement or
pursuant to Rule 144, the transfer agent shall issue such Securities to the
Buyer, assignee or transferee, as the case may be, without any restrictive
legend. The Company acknowledges that a breach by it of its obligations

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hereunder will cause irreparable harm to a Buyer. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 5(b) will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 5(b), that a
Buyer shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required.

     6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

          The obligation of the Company hereunder to issue and sell the Common
Shares, the Debentures and the related Warrants to each Buyer at the Closing is
subject to the satisfaction, at or before the Closing Date, of each of the
following conditions, provided that these conditions are for the Company’s sole
benefit and may be waived by the Company at any time in its sole discretion by
providing each Buyer with prior written notice thereof:

          (a) Such Buyer shall have executed each of the Transaction Documents
to which it is a party and delivered the same to the Company.

          (b) Such Buyer and each other Buyer shall have delivered to the
Company the Common Share Purchase Price and, if applicable, the Debenture
Purchase Price (less, in the case of The Riverview Group LLC, the amounts
withheld pursuant to Section 4(e)) for the Common Shares and the related
Warrants and, if applicable, the Debentures, being purchased by such Buyer and
each other Buyer at the Closing by wire transfer of immediately available funds
pursuant to the wire instructions provided by the Company.

          (c) The representations and warranties of such Buyer shall be true and
correct in all material respects (except for representations and warranties that
are qualified by materiality, which shall be true and correct in all respects)
as of the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date),
and such Buyer shall have performed, satisfied and complied in all material
respects (except for covenants, agreements and conditions that are qualified by
materiality, which shall be complied with in all respects) with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Buyer at or prior to the Closing Date. The Company
shall have received a certificate, executed by an authorized officer of such
Buyer, dated as of the Closing Date, to the foregoing effect in the form
attached hereto as Exhibit I-1.

     7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

     The obligation of each Buyer hereunder to purchase the Common Shares, the
Debentures, if applicable, and the related Warrants at the Closing is subject to
the satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer’s sole benefit and
may be waived by such Buyer at any time in its sole discretion by providing the
Company with prior written notice thereof:

     (a) The Company shall have executed and delivered to such Buyer (i) each of
the Transaction Documents, (ii) the certificates for the Common Shares (in such
denominations

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as such Buyer shall request), (iii) if applicable, the Debentures (in such
principal amounts as such Buyer shall request) and (iv) the related Warrants (in
such amounts as such Buyer shall request), in each case as being purchased by
such Buyer at the Closing pursuant to this Agreement.

          (b) Such Buyer shall have received the opinion of Piper Rudnick LLP,
the Company’s counsel, dated as of the Closing Date, in substantially the form
of Exhibit G attached hereto.

          (c) The Company shall have delivered to such Buyer a copy of the
Irrevocable Transfer Agent Instructions, in the form of Exhibit F attached
hereto, which instructions shall have been delivered to and acknowledged in
writing by the Company’s transfer agent.

          (d) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company Maryland State
Department of Assessments and Taxation (the “MDSDAT”), as of a date within 10
days of the Closing Date.

          (e) The Company shall have delivered to such Buyer a certified copy of
the Articles of Incorporation as certified by the MDSDAT within 10 days of the
Closing Date.

          (f) The Company shall have delivered to such Buyer a certificate,
executed by the Secretary of the Company and dated as of the Closing Date, as to
(i) the resolutions consistent with Section 3(b) as adopted by the Company’s
Board of Directors in a form reasonably acceptable to such Buyer (the
“Resolutions”), (ii) the Articles of Incorporation and (iii) the Bylaws, each as
in effect at the Closing, in the form attached hereto as Exhibit H.

          (g) The representations and warranties of the Company shall be true
and correct in all material respects (except for representations and warranties
that are qualified by materiality, which shall be true and correct in all
respects) as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date) and the Company shall have performed, satisfied and complied in all
material respects (except for covenants, agreements and conditions that are
qualified by materiality, which shall be complied with in all respects) with the
covenants, agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by the Company at or prior to the Closing
Date. Such Buyer shall have received a certificate, executed by the Chief
Executive Officer of the Company, dated as of the Closing Date, to the foregoing
effect in the form attached hereto as Exhibit I-2.

          (h) The Company shall have delivered to such Buyer a letter from the
Company’s transfer agent certifying the number of shares of Common Stock
outstanding as of a date within five days of the Closing Date.

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          (i) The Common Stock (i) shall be designated for quotation or listed
on the Principal Market and (ii) shall not have been suspended, as of the
Closing Date, by the SEC or the Principal Market from trading on the Principal
Market nor shall suspension by the SEC or the Principal Market have been
threatened, as of the Closing Date, either (A) in writing by the SEC or the
Principal Market or (B) by falling below the minimum listing maintenance
requirements of the Principal Market.

          (j) The Company shall have obtained all governmental, regulatory or
third party consents and approvals, if any, necessary for the sale of the Common
Shares, the Debentures and the Warrants.

          (k) The Voting Agreement shall have been executed and delivered to the
Buyers by the shareholders party thereto as of the date hereof.

          (l) The consummation of the acquisition contemplated by and set forth
in that certain Purchase Agreement by and among Aether Systems, Inc., a Delaware
corporation, TSYS Acquisition Corp., a Maryland corporation, and the Company,
dated December 18, 2003 (the Aether Acquisition”), shall have occurred prior to
or simultaneous with the Closing.

     8. TERMINATION. In the event that the Closing shall not have occurred with
respect to a Buyer on or before January 31, 2004 due to the Company’s or such
Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above
(and the nonbreaching party’s failure to waive such unsatisfied condition(s)),
the nonbreaching party shall have the option to terminate this Agreement with
respect to such breaching party at the close of business on such date without
liability of any party to any other party; provided, however, this if this
Agreement is terminated by the Buyer as a nonbreaching party to this Agreement
pursuant to this Section 8, the Company shall remain obligated to reimburse the
non-breaching Buyers for the expenses described in Section 4(e) above.

     9. MISCELLANEOUS.

          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by the internal laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdictions) that would cause the application
of the laws of any jurisdictions other than the State of New York. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such

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service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

          (b) Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.

          (c) Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.

          (d) Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.

          (e) Entire Agreement; Amendments. This Agreement and the documents
referenced herein and the non-disclosure agreement previously entered into by
the parties hereto supersede all other prior oral or written agreements between
the Buyers, the Company, their affiliates and Persons acting on their behalf
with respect to the matters discussed herein, and this Agreement and the
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be amended other than by an
instrument in writing signed by the Company and the holders of a majority of the
Common Shares, or, if prior to the Closing Date, the Company and the Buyers
listed on the Schedule of Buyers as being obligated to purchase at least a
majority of the Common Shares, and any amendment to this Agreement made in
conformity with the provisions of this Section 9(e) shall be binding on all
Buyers and holders of Common Shares and Debentures, as applicable. No provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought. No such amendment shall be effective to the
extent that it applies to less than all of the Buyers. No consideration shall be
offered or paid to any Person to amend or consent to a waiver or modification of
any provision of any of the Transaction Documents unless the same consideration
also is offered to all of the parties to the Transaction Documents, holders of
Common Shares, the Debentures or holders of the Warrants, as the case may be.

          (f) Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt,

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when sent by facsimile (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
Business Day after deposit with an overnight courier service, in each case
properly addressed to the party to receive the same. The addresses and facsimile
numbers for such communications shall be:

  If to the Company:

       TeleCommunication Systems, Inc.
     275 West Street, Suite 400
     Annapolis, Maryland 21401
     Telephone:     (410) 263-7616
     Facsimile:      (410) 263-7617
     Attention:      Thomas M. Brandt, Jr.

       with a copy (which shall not constitute notice) to:

       Piper Rudnick LLP
     6225 Smith Avenue
     Baltimore, Maryland 21209-3600
     Telephone:     (410) 580-3000
     Facsimile:      (410) 580-3001
     Attention:       Wilbert H. Sirota, Esq.

  If to the Transfer Agent:

       American Stock Transfer & Trust Company
     59 Maiden Lane
     New York, New York 10038
     Telephone:    (718) 921-8206
     Facsimile:     (718) 921-8336
     Attention:    

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers, or to such other address and/or facsimile number and/or to the
attention of such other Person as the recipient party has specified by written
notice given to each other party five (5) days prior to the effectiveness of
such change. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be rebuttable
evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

          (g) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Common Shares, the Debentures or the Warrants.
The Company shall not assign this

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Agreement or any rights or obligations hereunder without the prior written
consent of the holders of a majority of the Common Shares, including by merger
or consolidation, except pursuant to a Change of Control (as defined in
Section 5 of the Debentures) with respect to which the Company is in compliance
with Section 5 of the Debentures and Section 4(b) of the Warrants. A Buyer may
assign some or all of its rights hereunder without the consent of the Company,
in which event such assignee shall be deemed to be a Buyer hereunder with
respect to such assigned rights.

          (h) No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.

          (i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
9 shall survive the Closing. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

          (j) Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

          (k) Indemnification. In consideration of each Buyer’s execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall, assuming Buyer and its Indemnitees have complied
with all of the terms and conditions of the Transaction Documents, defend,
protect, indemnify and hold harmless each Buyer and each other holder of the
Securities and all of their stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons’ agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”) from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the
“Indemnified Liabilities”), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents,
(b) any material breach of any covenant, agreement or obligation of the Company
contained in the Transaction Documents or (c) any cause of action, suit or claim
brought or made against such Indemnitee by a third party (including for these
purposes a derivative action brought on behalf of the Company) and arising out
of or resulting from (i) the execution, delivery, performance or enforcement of
the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (ii) any transaction financed or to be financed
in whole or in part, directly or indirectly, with the proceeds of the issuance
of the Securities or (iii) the status of the Buyer or holder of the Securities
as an investor in the Company other than in connection with affirmative actions
taken

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by the Buyer which are not pursuant to or contemplated by the Transaction
Documents. To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. The foregoing indemnification obligations set
forth in this Section 9(k) shall not apply to any Indemnified Liability that is
judicially determined on the merits to have been caused primarily by the gross
negligence, bad faith, willful misfeasance, or reckless disregard of obligations
or duties on the part of the Buyer or its Indemnitees. Except as otherwise set
forth herein, the mechanics and procedures with respect to the rights and
obligations under this Section 9(k) shall be the same as those set forth in
Section 6 of the Registration Rights Agreement.

          (l) No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.

          (m) Remedies. Each Buyer and each holder of the Securities shall have
all rights and remedies set forth in the Transaction Documents and all rights
and remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law. Any Person having any rights under any provision of this Agreement shall be
entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law. Furthermore, the
Company recognizes that in the event that it fails to perform, observe, or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Buyers. The Company
therefore agrees that the Buyers shall be entitled to seek temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages and without posting a bond or other security.

          (n) Payment Set Aside. To the extent that the Company makes a payment
or payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.

          (o) Independent Nature of Buyers’ Obligations and Rights. The
obligations of each Buyer under any Transaction Document are several and not
joint with the obligations of any other Buyer, and no Buyer shall be responsible
in any way for the performance of the obligations of any other Buyer under any
Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be
deemed to constitute the Buyers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Buyers are
in any way acting in concert or as a group

28

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

 

with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Buyer confirms that it has independently
participated in the negotiation of the transaction contemplated hereby with the
advice of its own counsel and advisors. Each Buyer shall be entitled to
independently protect and enforce its rights, including, without limitations,
the rights arising out of this Agreement or out of any other Transaction
Documents, and it shall not be necessary for any other Buyer to be joined as an
additional party in any proceeding for such purpose.

[Signature Page Follows]

29

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

 

     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

              COMPANY:   BUYER:               TELECOMMUNICATION SYSTEMS, INC.  
THE RIVERVIEW GROUP LLC               By:   /s/ Maurice Tosé   By:   /s/ Terry
Feeney    

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

     

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

                  Name: Maurice Tosé
Title: Chief Executive Officer       Name: Terry Feeney
Title: Chief Operating Officer

 

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

 

     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

                BUYER:                   033 GROWTH PARTNERS I, L.P.            
      By:   /s/ Lawrence C. Longo, Jr.            

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

            Name: Lawrence C. Longo, Jr.             Title: Chief Operating
Officer                       033 GROWTH PARTNERS II, L.P.                   By:
  /s/ Lawrence C. Longo, Jr.            

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

            Name: Lawrence C. Longo, Jr.             Title: Chief Operating
Officer                       033 GROWTH INTERNATIONAL FUND, LTD.              
    By:   /s/ Lawrence C. Longo, Jr.            

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

            Name: Lawrence C. Longo, Jr.             Title: Chief Operating
Officer                       OYSTER POND PARTNERS, L.P.                   By:  
/s/ Lawrence C. Longo, Jr.            

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

            Name: Lawrence C. Longo, Jr.             Title: Chief Operating
Officer    

 

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

 

SCHEDULE OF BUYERS

                                  (1)   (2)   (3)   (4)   (5)   (6)            
Aggregate Principal                 Number of Common   Amount of   Number  
Legal Representative's Buyer   Address and Facsimile Number   Shares  
Debentures   of Warrants   Address and Facsimile Number

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

 

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

 

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

 

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

 

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

 

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

The Riverview Group
LLC   666 Fifth Avenue, 8th Floor New York, New York 10103 Attention: Daniel
Cardella Facsimile: (212) 977-1667 Telephone: (212) 841-4100 Residence: Delaware
 
682,144

  $
15,000,000

 
170,536

  Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 Attention:
Eleazer Klein, Esq. Facsimile: (212) 593-5955 Telephone: (212) 756-2000   033
Growth Partners I, L.P.   c/o 033 Asset Management, LLC 125 High Street,
Suite 1405 Olive Street Towers Boston, MA 02110 Attention: Larry Longo
Facsimile: (617) 371-2002 Telephone: (617) 371-2015 Residence: Delaware  
368,951

  $
0

 
92,237

      033 Growth Partners II, L.P.   c/o 033 Asset Management, LLC 125 High
Street, Suite 1405 Olive Street Towers Boston, MA 02110 Attention: Larry Longo
Facsimile: (617) 371-2002 Telephone: (617) 371-2015 Residence: Delaware  
103,009

  $
0

 
25,752

   

 

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

 

                                  (1)   (2)   (3)   (4)   (5)   (6)            
Aggregate Principal                 Number of Common   Amount of   Number  
Legal Representative's Buyer   Address and Facsimile Number   Shares  
Debentures   of Warrants   Address and Facsimile Number

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

 

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

 

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

 

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

 

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

 

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

033 Growth International Fund, Ltd.   c/o 033 Asset Management, LLC 125 High
Street, Suite 1405 Olive Street Towers Boston, MA 02110 Attention: Larry Longo
Facsimile: (617) 371-2002 Telephone: (617) 371-2015 Residence: Bermuda  
161,262

  $
0

 
40,316

          c/o 033 Asset Management, LLC 125 High Street, Suite 1405 Olive Street
Towers Boston, MA 02110 Attention: Larry Longo                            
Oyster Pond Partners, L.P.   Facsimile: (617) 371-2002 Telephone: (617) 371-2015
Residence: Delaware  
48,922

  $
0

 
12,231

   

 

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

 

EXHIBITS

     
Exhibit A
 
Form of Debentures
Exhibit B
 
Form of Warrants
Exhibit C
 
Form of Registration Rights Agreement
Exhibit D
 
Disclosure Schedules
Exhibit E
 
Form of Voting Agreement
Exhibit F
 
Form of Irrevocable Transfer Agent Instructions
Exhibit G
 
Form of Company Counsel Opinion
Exhibit H
 
Form of Secretary's Certificate
Exhibit I-1
 
Form of Buyer Officer's Certificate
Exhibit I-2
 
Form of Company Officer's Certificate

 

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

 

EXHIBIT A

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY ONLY BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (B) AN OPINION OF
COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (C) RULE 144(K) UNDER SAID ACT AND, IN EACH CASE,
IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES. ANY TRANSFEREE OF THIS DEBENTURE SHOULD CAREFULLY REVIEW THE TERMS
OF THIS DEBENTURE, INCLUDING SECTIONS 3(c)(iii) AND 18(a) HEREOF. THE PRINCIPAL
AMOUNT REPRESENTED BY THIS DEBENTURE AND, ACCORDINGLY, THE SECURITIES ISSUABLE
UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
PURSUANT TO SECTION 3(c)(iii) OF THIS DEBENTURE.

SUBORDINATED CONVERTIBLE DEBENTURE

Issuance Date:    , 2004   Principal: U.S. $15,000,000

     FOR VALUE RECEIVED, TeleCommunication Systems, Inc., a Maryland corporation
(the “Company”), hereby promises to pay to the order of THE RIVERVIEW GROUP LLC
or registered assigns (“Holder”) the amount set out above as the Principal (as
reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “Principal”) when due, whether upon the Maturity Date (as defined
below), acceleration, redemption or otherwise (in each case in accordance with
the terms hereof) and to pay interest (“Interest”) in the manner set forth
herein on any outstanding Principal at the rate of 3.00% per annum, subject to
periodic adjustment pursuant to Section 2 (the “Interest Rate”), from the date
set out above as the Issuance Date (the “Issuance Date”) until the same becomes
due and payable, whether upon an Interest Date (as defined below), the Maturity
Date, acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof). This Subordinated Convertible Debenture
(including all Subordinated Convertible Debentures issued in exchange, transfer
or replacement hereof, this “Debenture”) is one of an issue of Subordinated
Convertible Debentures (collectively, the “Debentures” and such other
Subordinated Convertible Debentures, the “Other Debentures”) issued on the
Issuance Date pursuant to the Securities Purchase Agreement (as defined below).
Certain capitalized terms are defined in Section 28.

 

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

 

     (1) MATURITY. On the Maturity Date, the Holder shall surrender this
Debenture to the Company and the Company shall pay to the Holder an amount in
cash or, at the option of the Company (subject to the satisfaction of the
conditions set forth in this Section 1), in shares of Common Stock (“Repayment
Shares”), or a combination of cash and Repayment Shares, representing all
outstanding Principal, accrued and unpaid Interest and accrued and unpaid Late
Charges, if any; provided that the Principal, accrued and unpaid Interest and
accrued and unpaid Late Charges, if any payable on the Maturity Date may be
payable in Repayment Shares (subject to the proviso set forth below) only if the
Company delivers written notice of such election (“Maturity Date Payment
Election Notice”) to each holder of the Debentures at least 15 Trading Days
prior to the Maturity Date (a “Maturity Payment Election Date”). The “Original
Maturity Date” shall be                          , 20091, as extended at the
option of the Holder (i) in the event that, and for so long as, an Event of
Default (as defined in Section 4(a)) shall have occurred and be continuing or
any event shall have occurred and be continuing which with the passage of time
and the failure to cure would result in an Event of Default and (ii) through the
date that is ten days after the consummation of a Change of Control (as defined
in Section 5(a)) in the event that a Change of Control is publicly announced or
a Change of Control Notice (as defined in Section 5(a)) is delivered prior to
the Maturity Date (as such Original Maturity Date may be extended pursuant to
clause (i) or (ii) above, the “Maturity Date”). Payments to be made on the
Maturity Date in Repayment Shares shall be paid in a number of fully paid and
nonassessable shares (rounded to the nearest whole share in accordance with
Section 3(a)) of Common Stock equal to the quotient of (a) the Principal,
accrued and unpaid Interest and accrued and unpaid Late Charges, if any, payable
and (b) the Maturity Date Conversion Price on the Maturity Date. If any
Repayment Shares are to be paid on the Maturity Date, then the Company shall
(X) provided that the Company’s transfer agent (the “Transfer Agent”) is
participating in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer Program, credit such aggregate number of Repayment Shares to which the
Holder shall be entitled to the Holder’s or its designee’s balance account with
DTC through its Deposit Withdrawal Agent Commission system or (Y) if the
Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver on the Maturity Date, to such address as
specified at least two Business Days prior to the Maturity Date by the Holder in
writing to the Company, a certificate, registered in the name of the Holder or
its designee, for the number of Repayment Shares to which the Holder shall be
entitled. Notwithstanding the foregoing, the Company shall not be entitled to
make any payment due on the Maturity Date in Repayment Shares and shall be
required to make all of such payment in cash on the Maturity Date if, unless
consented to in writing by the Holder, (x) any event constituting an Event of
Default or an event that with the passage of time and assuming it were not cured
would constitute an Event of Default has occurred and is continuing on the
applicable Maturity Payment Election Date or the Maturity Date, (y) (i) the
Registration Statement (as defined in the Registration Rights Agreement)
covering the Repayment Shares is not effective and available for the resale of
all of the Registrable Securities (as defined in the Registration Rights
Agreement) relating to this Debenture on the Maturity Payment Election Date or
on the Maturity Date and (ii)

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

1   Insert fifth (5th) anniversary of Issuance Date

2

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

 

the Holder is not able to sell all of the Registrable Securities held by them
pursuant to Rule 144(k) or (z) the Company has not obtained the Stockholder
Approval (as defined in the Securities Purchase Agreement). The Company shall
pay any and all taxes (other than income taxes which shall be payable by the
Holder) that may be payable with respect to the issuance and delivery of
Repayment Shares. If the Company elects to pay the amounts due on the Maturity
Date by a combination of cash and Repayment Shares, then any conversions made by
the holder prior to the Maturity Date shall be applied first to the amount of
Repayment Shares which the Company has elected to pay and then against the
amount to be paid by cash under the Maturity Date Payment Election Notice.

     (2) INTEREST; INTEREST RATE. Interest on this Debenture shall commence
accruing on the Issuance Date and shall be computed on the basis of a 365-day
year and actual days elapsed and shall be payable in arrears on the first day of
each Semi-Annual Period during the period beginning on the Issuance Date and
ending on, and including, the Maturity Date (each, an “Interest Date”) with the
first Interest Date being July 1, 2004. Interest shall be payable on each
Interest Date, at the option of the Company, (i) in cash, (ii) by way of
inclusion in the Conversion Amount in accordance with Section 3(b)(i), or
(iii) subject to the satisfaction of the conditions set forth in this Section 2,
in shares of Common Stock (“Interest Shares”); provided, that the Interest which
accrued during any period shall be payable in Interest Shares only if the
Company delivers written notice of such election (“Interest Election Notice”) to
each holder of the Debentures at least ten (10) Trading Days prior to the
Interest Date (an “Interest Election Date”). Interest to be paid on an Interest
Date in Interest Shares shall be paid in a number of fully paid and
nonassessable shares (rounded to the nearest whole share in accordance with
Section 3(a)) of Common Stock equal to the quotient of (a) the Interest payable
on such debt and (b) the Interest Conversion Price on the applicable Interest
Date. If any Interest Shares are to be paid on an Interest Date, then the
Company shall (X) provided that the Transfer Agent is participating in the DTC
Fast Automated Securities Transfer Program, credit such aggregate number of
Interest Shares to which the Holder shall be entitled to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and deliver on the applicable
Interest Date, to such address as specified at least two Business Days prior to
the applicable Interest Date by the Holder in writing to the Company, a
certificate, registered in the name of the Holder or its designee, for the
number of Interest Shares to which the Holder shall be entitled. Notwithstanding
the foregoing, the Company shall not be entitled to pay Interest in Interest
Shares and shall be required to pay such Interest in cash on the applicable
Interest Date if, unless consented to in writing by the Holder, (x) any event
constituting an Event of Default or an event that with the passage of time and
assuming it were not cured would constitute an Event of Default has occurred and
is continuing on the applicable Interest Election Date or the Interest Date, (y)
(i) the Registration Statement (as defined in the Registration Rights Agreement)
covering the Interest Shares is not effective and available for the resale of
all of the Registrable Securities (as defined in the Registration Rights
Agreement) relating to this Debenture on the Interest Election Date or on the
Interest Date and (ii) the Holder is not able to sell all of the Registrable
Securities held by them pursuant to Rule 144(k) or (z) the

3

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

 

Company has not obtained the Stockholder Approval. Prior to the payment of
Interest on an Interest Date, Interest on this Debenture shall accrue at the
Interest Rate and be payable by way of inclusion of the Interest in the
Conversion Amount in accordance with Section 3(b)(i). From and after the
occurrence of an Event of Default, the Interest Rate shall be increased to 12%.
In the event that such Event of Default is subsequently cured or waived, the
adjustment referred to in the preceding sentence shall cease to be effective as
of the date of such cure or waiver; provided that the Interest as calculated at
such increased rate during the continuance of such Event of Default shall
continue to apply to the extent relating to the days after the occurrence of
such Event of Default through and including the date of cure and waiver of such
Event of Default. The Company shall pay any and all taxes (other than income
taxes which shall be payable by the Holder) that may be payable with respect to
the issuance and delivery of Interest Shares.

     (3) CONVERSION OF DEBENTURES. This Debenture shall be convertible into
shares of the Company’s Class A common stock, par value $0.01 per share (the
“Common Stock”), on the terms and conditions set forth in this Section 3.

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

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

(i) “Conversion Amount” means the sum of (A) the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, (B) accrued and unpaid Interest with respect to such Principal and
(C) accrued and unpaid Late Charges with respect to such Principal and Interest.

(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or
other date of determination, and subject to adjustment as provided herein,
$5.3753

4

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

 

          (c) Mechanics of Conversion.

(i) Optional Conversion. To convert any Conversion Amount into shares of Common
Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to 9:30 a.m., New York
Time, on such date, a copy of an executed notice of conversion in the form
attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if
required by Section 3(c)(iii), surrender this Debenture to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an
indemnification undertaking with respect to this Debenture in the case of its
loss, theft or destruction). On or before the first Business Day following the
date of receipt of a Conversion Notice, the Company shall transmit by facsimile
a confirmation of receipt of such Conversion Notice to the Holder and the
Transfer Agent (a “Confirmation Receipt”). On or before the third Business Day
following the date of receipt of a Conversion Notice (the “Share Delivery
Date”), the Company shall (X) credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system
or (Y) if the Transfer Agent is not participating in DTC Fast Automated
Securities Transfer Program, issue and deliver to the address as specified in
the Conversion Notice, a certificate, registered in the name of the Holder or
its designee, for the number of shares of Common Stock to which the Holder shall
be entitled. If this Debenture is physically surrendered for conversion as
required by Section 3(c)(iii) and the outstanding Principal of this Debenture at
the time of such conversion is greater than the Principal portion of the
Conversion Amount being converted, then the Company shall as soon as practicable
and in no event later than three Business Days after receipt of this Debenture
and at its own expense, issue and deliver to the holder a new Debenture (in
accordance with Section 18(d)) representing the outstanding Principal not
converted. The Person or Persons entitled to receive the shares of Common Stock
issuable upon a conversion of this Debenture shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on the Conversion
Date. All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount of this Debenture
required to be converted on the Mandatory Conversion Date.

(ii) Company’s Failure to Timely Convert. Subject to Section 3(d), if the
Company shall fail to issue a certificate to the Holder or credit the Holder’s
balance account with DTC for the number of shares of Common Stock to which the
Holder is entitled upon conversion of any Conversion Amount on or prior to the
date which is five Business Days after the Conversion Date, provided, that if
the Company shall not have timely delivered a Confirmation Receipt, the Holder
shall have retransmitted by facsimile its Conversion Notice on or prior to the
date which is three Business Days after the Conversion Date (a “Conversion
Failure”), then (A) the Company shall pay damages to the Holder for each date of
such Conversion Failure in an amount equal to 1.0% of the

5

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

 

product of (I) the sum of the number of shares of Common Stock not issued to the
Holder on or prior to the Share Delivery Date and to which the Holder is
entitled, and (II) the Weighted Average Price of the Common Stock on the Share
Delivery Date and (B) the Holder, upon written notice to the Company, may void
its Conversion Notice with respect to, and retain or have returned, as the case
may be, any portion of this Debenture that has not been converted pursuant to
such Conversion Notice; provided that the voiding of a Conversion Notice shall
not affect the Company’s obligations to make any payments which have accrued
prior to the date of such notice pursuant to this Section 3(c)(ii) or otherwise.

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

(iv) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Debentures for the same
Conversion Date and the Company can convert some, but not all, of such portions
of the Debentures submitted for conversion, the Company, subject to
Section 3(d), shall convert from each holder of Debentures electing to have
Debentures converted on such date a pro rata amount of such holder’s portion of
its Debentures submitted for conversion based on the principal amount of
Debentures submitted for conversion on such date by such holder relative to the
aggregate principal amount of all Debentures submitted for conversion on such
date. In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Debenture, the
Company shall issue to the Holder the number of shares of Common Stock not in
dispute and resolve such dispute in accordance with Section 23, and failure to
convert the amount in dispute shall not constitute a default during pendency of
dispute.

          (d) Limitations on Conversions.

(i) Beneficial Ownership. Notwithstanding anything to the contrary set forth in
this Debenture, the Company shall not effect any conversion of this Debenture,
and the Holder of this Debenture shall neither solicit the conversion nor have
the right to convert any portion of this Debenture pursuant to Section 3, to the
extent that after giving effect to such conversion, the Holder (together with
the Holder’s affiliates) would beneficially own in excess of 9.99% of the number
of shares of Common Stock outstanding

6

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

 

immediately after giving effect to such conversion. For purposes of the
foregoing sentence, such Holder (together with such Holder’s affiliates) shall
be deemed to beneficially own of the shares of Common Stock issuable upon
conversion of this Debenture with respect to which the determination of such
sentence is being made, but shall not be deemed to beneficially own shares of
Common Stock which would be issuable upon (A) conversion of the remaining,
nonconverted portion of this Debenture and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Debentures or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. For purposes of this
Section 3(d)(i), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock,
on any determination date, as reflected in (x) the Company’s Form 10-Q or Form
10-K most recently filed, (y) a more recent public announcement by the Company
or (z) any other notice by the Company setting forth the number of shares of
Common Stock outstanding provided pursuant to the next sentence. For any reason
at any time, upon the written request of the Holder, the Company shall within
two Business Days confirm orally and in writing to the Holder the number of
shares of Common Stock then outstanding. In any case, the number of outstanding
shares of Common Stock shall be determined after giving effect to the conversion
or exercise of securities of the Company, including this Debenture, by the
Holder or its affiliates since the date as of which such number of outstanding
shares of Common Stock was reported. Any Conversion Notice requesting a
conversion that, after giving effect to such conversion, would result in a
violation of this Section 3(d)(i) shall be null and void as to the portion of
such Conversion Notice that would be in violation of this Section 3(d)(i) as if
never delivered to the Company.

(ii) Principal Market Regulation. Notwithstanding anything to the contrary set
forth in this Debenture, the Company shall not be obligated to issue any shares
of Common Stock upon conversion of this Debenture if the issuance of such shares
of Common Stock (individually or together with all other shares of Common Stock
issued or issuable now or in the future pursuant to (i) this Debentures,
(ii) the other Debentures issued by the Company pursuant to the Securities
Purchase Agreement, (iii) the Warrants issued pursuant to the Securities
Purchase Agreement, or (iv) the Securities Purchase Agreement) would exceed that
number of shares of Common Stock which the Company may issue upon conversion of
this Debenture without triggering the stockholder approval requirements of Rule
4350(i) under the rules of the Principal Market (the “Exchange Cap”), except
that such limitation shall not apply in the event that the Company (A) obtains
the approval of its stockholders as required by the applicable rules of the
Principal Market and in accordance with applicable law for issuances of Common
Stock in excess the threshold amount in such rule or (B) obtains a written
opinion from outside

7

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

 

counsel to the Company that such approval is not required, which opinion shall
be reasonably satisfactory to the holders of the Debentures representing at
least a majority of the principal amounts of the Debentures then outstanding.
Until such approval or written opinion is obtained, no purchaser of the
Debentures, Warrants or shares of Common Stock pursuant to the Securities
Purchase Agreement (the “Purchasers”) shall be issued, upon conversion of
Debentures or exercise of the Warrants, shares of Common Stock in an amount
greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Debentures initially issued to
such Purchaser pursuant to the Securities Purchase Agreement and the denominator
of which is the aggregate principal amount of all Debentures initially issued to
the Purchasers pursuant to the Securities Purchase Agreement (with respect to
each Purchaser, the “Exchange Cap Allocation”). In the event that any Purchaser
shall sell or otherwise transfer any of such Purchaser’s Debentures, the
transferee shall be allocated a pro rata portion of such Purchaser’s Exchange
Cap Allocation, and the restrictions of the prior sentence shall apply to such
transferee with respect to the portion of the Exchange Cap Allocation allocated
to such transferee. In the event that any holder of Debentures shall convert all
of such holder’s Debentures into a number of shares of Common Stock which, in
the aggregate, is less than such holder’s Exchange Cap Allocation, then the
difference between such holder’s Exchange Cap Allocation and the number of
shares of Common Stock actually issued to such holder shall be allocated to the
respective Exchange Cap Allocations of the remaining holders of Debentures on a
pro rata basis in proportion to the aggregate principal amount of the Debentures
then held by each such holder. Any Conversion Notice requesting a conversion
that, after giving effect to such conversion, would result in a violation of
this Section 3(d) shall be null and void as to the portion of such Conversion
Notice that would be in violation of this Section 3(d) as if never delivered to
the Company.

          (4) RIGHTS UPON EVENT OF DEFAULT.

               (a) Event of Default. Each of the following events shall
constitute an “Event of Default”:

(i) the failure of the applicable Registration Statement required to be filed
pursuant to the Registration Rights Agreement to be declared effective by the
SEC on or prior to the date that is 60 days after the applicable Effectiveness
Deadline (as defined in the Registration Rights Agreement), or, while the
applicable Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of
the applicable Registration Statement lapses for any reason (including, without
limitation, the issuance of a stop order) or is unavailable to any holder of the
Debentures for sale of all of such holder’s Registrable Securities (as defined
in the Registration Rights Agreement) in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability continues for a
period of more than

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an aggregate of 20 Trading Days in any 365-day period (other than days during an
Allowable Grace Period (as defined in the Registration Rights Agreement));

(ii) the suspension from trading or failure of the Common Stock to be listed on
the Principal Market, The Nasdaq SmallCap Market or The New York Stock Exchange,
Inc. for a period of 10 consecutive Trading Days or for more than an aggregate
of 20 Trading Days in any 365-day period;

(iii) the Company’s (A) failure to cure a Conversion Failure by delivery of the
required number of shares of Common Stock within ten (10) Business Days after
the applicable Conversion Date or (B) written notice to any holder of the
Debentures, including by way of public announcement or through any of its
agents, at any time, of its express intention not to comply with a request for
conversion of any Debentures into shares of Common Stock that is tendered in
accordance with the provisions of the Debentures;

(iv) at any time following the 20th consecutive Business Day that the Holder’s
Authorized Share Allocation is less than the number of shares of Common Stock
that the Holder would be entitled to receive upon a conversion of the full
Conversion Amount of this Debenture (without regard to any limitations on
conversion set forth in Section 3(d)(i) or otherwise);

(v) the Company’s failure to pay to the Holder any amount of Principal,
Interest, Late Charges or other amounts when and as due under this Debenture or
any other Transaction Document (as defined in the Securities Purchase
Agreement), certificate or other instrument delivered in connection with the
transactions contemplated hereby and thereby to which the Holder is a party,
except, in the case of a failure to pay Interest and Late Charges when and as
due, in which case only if such failure continues for a period of at least seven
Business Days after the Company has received notice of such failure to pay from
the Holder;

(vi) any redemption of or acceleration prior to maturity of any material
Indebtedness (as defined in Section 3(s) of the Securities Purchase Agreement)
of the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) other than with respect to any Other Debentures;

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

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

(ix) a final non-appealable judgment or judgments for the payment of money
aggregating in excess of $1,500,000 are rendered against the Company or any of
its Subsidiaries and which judgments are not, within 60 days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not discharged
within 60 days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a creditworthy party
shall not be included in calculating the $1,500,000 amount set forth above so
long as the Company provides the Holder a written statement from such insurer or
indemnity provider (which written statement shall be reasonably satisfactory to
the Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within 30 days of the issuance of such judgment;

(x) the Company breaches, in any material respect, any representation, warranty,
covenant or other term or condition of this Debenture or any other Transaction
Document, certificate or other instrument delivered in connection with the
transactions contemplated thereby and hereby to which the Holder is a party,
except, in the case of a breach of covenant which is curable, only if such
breach continues for a period of at least ten (10) consecutive Business Days of
the Company’s receipt of notice of same; or

(xi) any breach or failure in any respect to comply with Section 14 of this
Debenture.

               (b) Redemption Right. Promptly after the Company becomes aware of
the occurrence of an Event of Default with respect to this Debenture or any
Other Debenture, the Company shall deliver written notice thereof via facsimile
and overnight courier (an “Event of Default Notice”) to the Holder. At any time
after the earlier of the Holder’s receipt of an Event of Default Notice and the
Holder becoming aware of an Event of Default, the Holder may require the Company
to redeem all or any portion of this Debenture by delivering written notice
thereof (the “Event of Default Redemption Notice”) to the Company, which Event
of Default Redemption Notice shall indicate the facts constituting the Event of
Default and the portion of this Debenture the Holder is electing to redeem. Each
portion of this Debenture subject to redemption by the Company pursuant to this
Section 4(b) shall be redeemed by the Company at a price equal to the product of
(x) the Conversion Amount to be redeemed and (y) the Redemption Premium (the
“Event of Default Redemption Price”). Redemptions required by this Section 4(b)
shall be made in accordance with the provisions of Section 11.

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          (5) RIGHTS UPON CHANGE OF CONTROL.

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

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

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

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

No sooner than 15 days nor later than 10 days prior to the consummation of a
Change of Control, but in any event not prior to the public announcement of such
Change of Control, the Company shall deliver written notice thereof via
facsimile and overnight courier to the Holder (a “Change of Control Notice”).

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

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               (c) Redemption Right. At any time during the period beginning
after the Holder’s receipt of a Change of Control Notice and ending on the date
of the consummation of such Change of Control (or, in the event a Change of
Control Notice is not delivered at least 10 days prior to a Change of Control,
at any time on or after the date which is 10 days prior to a Change of Control
and ending 10 days after the consummation of such Change of Control), the Holder
may require the Company to redeem all or any portion of this Debenture by
delivering written notice thereof (“Change of Control Redemption Notice”) to the
Company, which Change of Control Redemption Notice shall indicate the Conversion
Amount the Holder is electing to redeem. The portion of this Debenture subject
to redemption pursuant to this Section 5(c) shall be redeemed by the Company at
a price equal to the greater of (i) the product of (x) the Conversion Amount
being redeemed and (y) the quotient determined by dividing (A) the Weighted
Average Price of the Common Stock for the full Trading Day immediately following
the public announcement of such proposed Change of Control by (B) the Conversion
Price and (ii) 125% of the Conversion Amount being redeemed (the “Change of
Control Redemption Price”). Redemptions required by this Section 5(c) shall be
made in accordance with the provisions of Section 11 and shall have priority to
payments to stockholders in connection with a Change of Control.

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

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

               (b) Other Corporate Events. Prior to the consummation of any
recapitalization, reorganization, consolidation, merger, spin-off or other
business combination (other than a Change of Control) pursuant to which holders
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right
to receive upon a conversion of this Debenture, (i) in addition to the shares of
Common Stock receivable upon such conversion, such securities or other assets to
which the Holder would have been entitled with respect to such shares of Common
Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event or (ii) in lieu of the shares of Common
Stock otherwise receivable upon such conversion, such securities or other assets
received by the holders of Common Stock in

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connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Debenture initially been
issued with conversion rights for the form of such consideration (as opposed to
shares of Common Stock) at a conversion rate for such consideration commensurate
with the Conversion Rate. Provision made pursuant to the preceding sentence
shall be in a form and substance satisfactory to the holders of Debentures
representing at least a majority of the aggregate principal amount of the
Debentures then outstanding.

          (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

               (a) Adjustment of Conversion Price upon Issuance of Common Stock.
If and whenever on or after the Issuance Date, the Company issues or sells, or
in accordance with this Section 7(a) is deemed to have issued or sold, any
shares of Common Stock (including the issuance or sale of shares of Common Stock
owned or held by or for the account of the Company, but excluding shares of
Common Stock issued or deemed to have been issued or sold by the Company in
connection with any Excluded Security) for a consideration per share (the “New
Securities Issuance Price”) less than a price (the “Applicable Price”) equal to
the Conversion Price in effect immediately prior to such issue or sale (the
foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance,
the Conversion Price then in effect shall be reduced to an amount equal to the
greater of (x) the New Securities Issuance Price and (y) $2.50 (subject to
adjustment for any stock split, stock dividend, stock combination or other
similar transaction after the Issuance Date) (the “Price Floor”). For purposes
of determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:

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

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

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

(iv) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $.01. If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be

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deemed to be the gross amount received by the Company therefor. If any Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Company will be the Weighted Average Price of such securities on
the date of receipt. If any Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any merger
in which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be. The fair value of
any consideration other than cash or securities will be determined jointly by
the Company and the holders of Debentures representing at least a majority of
the principal amounts of the Debentures, unless the Board of Directors of the
Company shall have obtained a fairness opinion from an independent financial
advisor in which case the fair value shall be as stated in such fairness
opinion. If, in the absence of a fairness opinion, such parties are unable to
reach agreement within ten days after the occurrence of an event requiring
valuation (the “Valuation Event”), the fair value of such consideration will be
determined in accordance with Section 23 hereof.

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

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

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

          (8) COMPANY’S RIGHT OF MANDATORY CONVERSION AND PREPAYMENT; HOLDER’S
RIGHT TO REQUIRE REPAYMENT.

               (a) (i) Mandatory Conversion. If at any time from and after
                     , 20062, the arithmetic average of the Weighted Average
Price of the Common Stock exceeds 200% of the Conversion Price as of the
Issuance Date (subject to adjustments pursuant to the terms and conditions of
this Debenture) for each of any 30 consecutive Trading Days (the “Mandatory
Conversion Measuring Period”) and the Conditions to Mandatory Conversion (as set
forth in Section 8(c)) are satisfied or waived in writing by the Holder, the
Company shall have the right to require the Holder to convert all or any such
portion of the Conversion Amount of this Debenture designated in the Mandatory
Conversion Notice into fully paid, validly issued and nonassessable shares of
Common Stock in accordance with Section 3(c) hereof at the Conversion Rate as of
the Mandatory Conversion Date (as defined below) (a “Mandatory Conversion”). The
Company may exercise its right to require conversion under this Section 8(a) by
delivering within not more than fifteen (15) Trading Days following the end of
such Mandatory Conversion Measuring Period a written notice thereof by facsimile
and overnight courier to all, but not less than all, of the holders of
Debentures and the Transfer Agent (the “Mandatory Conversion Notice” and the
date all of the holders received such notice is referred to as the “Mandatory
Conversion Notice Date”). The Mandatory Conversion Notice shall be irrevocable.

                  (ii) Prepayment. Notwithstanding anything to the contrary
contained in this Agreement, at any time after the Company has completed a
Qualified Public Offering and as long as the Conditions to Optional Prepayment
(as defined in Section 8(a)(iii) below) are satisfied or waived in writing by
the Holder, the Company shall have the right to prepay all or any such portion
of the outstanding Principal (the “Prepayment Portion”) for an amount in cash
equal to 120% of the sum of the Prepayment Portion plus all accrued and unpaid
Interest and accrued and unpaid Late Charges thereon, if any (such amount, the
“Prepayment Premium Amount”). The Company may exercise its rights to prepay the
Debenture as set forth hereunder by delivering written notice to the Holder at
least twenty (20) Trading Days and no more than sixty (60) Trading Days prior to
the effectiveness of such election indicating the date of effectiveness of
delivery of a written notice election (the “Prepayment Notice”), the

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    2 Insert second (2nd) anniversary of Issuance Date

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Prepayment Portion, and the Prepayment Premium Amount (the date of effectiveness
being referred to as the “Prepayment Effectiveness Date”). The Company shall
deliver payment of the Prepayment Premium Amount on the applicable Prepayment
Effectiveness Date by wire transfer of immediately available funds or by
delivery of a certified check. A prepayment election hereunder shall be
irrevocable unless waived by the Holder.

                  (iii) Conditions to Optional Prepayment. For purposes of this
Section 8, “Conditions to Optional Prepayment” means the following conditions:
(i) during the period commencing on the date of delivery of a Prepayment Notice
under Section 8(a)(ii) above and the date of actual payment of the applicable
Prepayment Premium Amount (such period, the “Optional Prepayment Period”), the
Company shall have delivered shares of Common Stock upon any conversion of
Conversion Amounts on a timely basis as set forth in Section 3(c)(i) and
delivered shares of Common Stock upon exercise of any Warrants or on a timely
basis as set forth in Section 1(a) of the Warrants; (ii) on each day during the
Optional Prepayment Period, the Common Stock shall be listed on the Principal
Market, The Nasdaq SmallCap Market or The New York Stock Exchange, Inc. and
delisting or suspension by such market or exchange shall not have been
threatened either (A) in writing by such market or exchange or (B) by falling
below the minimum listing maintenance requirements of such market or exchange;
(iii) during the Optional Prepayment Period, there shall not have occurred
(x) the public announcement of a pending, proposed or intended Change of Control
which has not been abandoned, terminated or consummated, or (y) an Event of
Default; (iv) on each day of the Optional Prepayment Period either (x) the
Registration Statement or Registration Statements required pursuant to the
Registration Rights Agreement shall be effective and available for the sale for
all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Common Stock issuable upon
conversion of the Debentures and shares of Common Stock issuable upon exercise
of the Warrants shall be eligible for sale without restriction and without the
need for registration under any applicable federal or state securities laws; and
(v) the Company otherwise shall have been in material compliance with and shall
not have breached, in any material respect, any provision, covenant,
representation or warranty of the Securities Purchase Agreement, the
Registration Rights Agreement, the Warrants, any of the Debentures or any other
Transaction Document (as defined in the Securities Purchase Agreement).

          (b) Pro Rata Conversion/Prepayment Requirement. If the Company elects
to cause a conversion of all or any portion of the Conversion Amount of this
Debenture pursuant to Section 8(a)(i) or to prepay this Debenture in accordance
with Section 8(a)(ii), then it must simultaneously take the same action with
respect to the Other Debentures. If the Company elects to cause the conversion
of this Debenture pursuant to Section 8(a) (or similar provisions under the
Other Debentures), with respect to less than all of the Conversion Amounts of
the Debentures then outstanding (or similar provisions under the Other
Debentures) or elects to prepay less than all of the Conversion Amounts of the
Debentures then outstanding in accordance with Section 8(a)(ii), then the
Company shall require conversion of or prepay a Conversion Amount from each of
the holders of the Debentures equal to the product of (I) the aggregate
Conversion Amount of Debentures which the Company has elected to cause to be

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converted pursuant to Section 8(a)(i) or to prepay pursuant to Section 8(a)(ii),
multiplied by (II) the fraction, the numerator of which is the sum of the
aggregate principal amount of the Debentures purchased by such holder pursuant
to the Securities Purchase Agreement and the denominator of which is the sum of
the aggregate principal amount of the Debentures then outstanding and purchased
by all holders pursuant to the Securities Purchase Agreement (such fraction with
respect to each holder is referred to as its “Allocation Percentage,” and such
amount with respect to each holder is referred to as its “Pro Rata Amount”). In
the event that the initial holder of any Debentures shall sell or otherwise
transfer any of such holder’s Debentures, the transferee shall be allocated a
pro rata portion of such holder’s Allocation Percentage. The Mandatory
Conversion Notice shall state (i) the Trading Day selected for the Mandatory
Conversion in accordance with Section 8(a), which Trading Day shall be at least
10 Business Days but not more than 60 Business Days following the Mandatory
Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the aggregate
Conversion Amount of the Debentures which the Company has elected to be subject
to mandatory conversion from all of the holders of the Debentures pursuant to
this Section 8 (and analogous provisions under the Other Debentures), (iii) each
holder’s Pro Rata Amount of the Conversion Amount of the Debentures the Company
has elected to cause to be converted pursuant to this Section 8 (and analogous
provisions under the Other Debentures) and (iv) the number of shares of Common
Stock to be issued to such Holder as of the Mandatory Conversion Date. All
Conversion Amounts converted by the Holder after the Mandatory Conversion Notice
Date shall reduce the Conversion Amount of this Debenture required to be
converted on the Mandatory Conversion Date or permitted to be prepaid on the
Prepayment Effectiveness Date. If the Company has elected a Mandatory
Conversion, the mechanics of conversion set forth in Section 3(c) shall apply,
to the extent applicable, as if the Company and the Transfer Agent had received
from the Holder on the Mandatory Conversion Date a Conversion Notice with
respect to the Conversion Amount being converted pursuant to the Mandatory
Conversion.

          (c) Conditions to Mandatory Conversion. For purposes of this
Section 8, “Conditions to Mandatory Conversion” means the following conditions:
(i) during the Mandatory Conversion Measuring Period, the Company shall have
delivered shares of Common Stock upon any conversion of Conversion Amounts on a
timely basis as set forth in Section 3(c)(i) and delivered shares of Common
Stock upon exercise of any Warrants or on a timely basis as set forth in Section
1(a) of the Warrants; (ii) on each day during the period beginning on the first
Trading Day of the Mandatory Conversion Measuring Period and ending on and
including the Mandatory Conversion Date, the Common Stock shall be listed on the
Principal Market, The Nasdaq SmallCap Market or The New York Stock Exchange,
Inc. and delisting or suspension by such market or exchange shall not have been
threatened either (A) in writing by such market or exchange or (B) by falling
below the minimum listing maintenance requirements of such market or exchange;
(iii) during the Mandatory Conversion Measuring Period, there shall not have
occurred (x) the public announcement of a pending, proposed or intended Change
of Control which has not been abandoned, terminated or consummated, or (y) an
Event of Default; (iv) on each day of the period beginning on the date of
delivery of the Mandatory Conversion Notice and ending on the Mandatory
Conversion Date either (x) the Registration Statement or

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Registration Statements required pursuant to the Registration Rights Agreement
shall be effective and available for the sale for all of the Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) all shares of Common Stock issuable upon conversion of the Debentures and
shares of Common Stock issuable upon exercise of the Warrants shall be eligible
for sale without restriction and without the need for registration under any
applicable federal or state securities laws; (v) on each day of the period
beginning on the Mandatory Conversion Date and ending thirty Trading Days
thereafter either (x) the Registration Statements required pursuant to the
Registration Rights Agreement shall be expected to be effective and available
for the sale of at least all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) all shares of Common Stock
issuable upon conversion of the Debentures and shares of Common Stock issuable
upon exercise of the Warrants shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state
securities laws; and (vi) the Company otherwise shall have been in material
compliance with and shall not have breached, in any material respect, any
provision, covenant, representation or warranty of any Transaction Document.

          (d) Holder’s Right to Require Redemption. If the Weighted Average
Price of the Common Stock is less than the Conversion Price on either the ten
consecutive Trading Days immediately preceding the second anniversary or third
anniversary of the Issuance Date, the Holder shall have the right, in its sole
discretion, to require that the Company redeem all or any portion of the
Conversion Amount of this Debenture (a “Holder Optional Redemption”) by
delivering written notice thereof (a “Holder Optional Redemption Notice”) to the
Company within thirty days after the second anniversary or third anniversary of
the Issuance Date, as applicable, which Holder Redemption Notice shall indicate
the Conversion Amount the Holder is electing to redeem. The portion of this
Debenture subject to redemption pursuant to this Section 8(d) shall be redeemed
by the Company in cash at a price equal to the Conversion Amount being redeemed
(the “Holder Optional Redemption Price”). Redemptions required by this Section
8(d) shall be made in accordance with the provisions of Section 11.

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

     (10) RESERVATION OF AUTHORIZED SHARES.

          (a) Reservation. The Company shall initially reserve out of its
authorized and unissued Common Stock a number of shares of Common Stock for each
of the Debentures equal to 150% of the Conversion Rate with respect to the
Conversion Amount of each such Debenture as of the Issuance Date. Thereafter,
the Company, so long as any of the

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Debentures are outstanding, shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Debentures, 130% of the number of
shares of Common Stock as shall from time to time be necessary to effect the
conversion of all of the Debentures then outstanding; provided that at no time
shall the number of shares of Common Stock so reserved be less than the number
of shares required to be reserved by the previous sentence (the “Required
Reserve Amount”). The initial number of shares of Common Stock reserved for
conversions of the Debentures and each increase in the number of shares so
reserved shall be allocated pro rata among the holders of the Debentures based
on the principal amount of the Debentures held by each holder at the time of
Issuance Date or increase in the number of reserved shares, as the case may be
(the “Authorized Share Allocation”). In the event that a holder shall sell or
otherwise transfer any of such holder’s Debentures, each transferee shall be
allocated a pro rata portion of such holder’s Authorized Share Allocation. Any
shares of Common Stock reserved and allocated to any Person which ceases to hold
any Debentures shall be allocated to the remaining holders of Debentures, pro
rata based on the principal amount of the Debentures then held by such holders.

          (b) Insufficient Authorized Shares. If at any time while any of the
Debentures remain outstanding the Company does not have a sufficient number of
authorized and unreserved shares of Common Stock to satisfy its obligation to
reserve for issuance upon conversion of the Debentures at least a number of
shares of Common Stock equal to the Required Reserve Amount (an “Authorized
Share Failure”), then the Company shall immediately take all action necessary to
increase the Company’s authorized shares of Common Stock to an amount sufficient
to allow the Company to reserve the Required Reserve Amount for the Debentures
then outstanding. Without limiting the generality of the foregoing sentence, as
soon as reasonably practicable after the date of the occurrence of an Authorized
Share Failure, but in no event later than 90 days after the occurrence of such
Authorized Share Failure, the Company shall hold a meeting of its stockholders
for the approval of an increase in the number of authorized shares of Common
Stock. In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its best efforts to solicit its
stockholders’ approval of such increase in authorized shares of Common Stock and
to cause its board of directors to recommend to the stockholders that they
approve such proposal.

     (11) HOLDER’S REDEMPTIONS.

          (a) Mechanics. In the event that the Holder has sent a Redemption
Notice to the Company pursuant to Section 4(b) or Section 5(c), the Holder shall
promptly submit this Debenture to the Company. The Company shall deliver the
applicable Event of Default Redemption Price to the Holder within 10 Business
Days after the Company’s receipt of the Holder’s Event of Default Redemption
Notice. If the Holder has submitted a Change of Control Redemption Notice in
accordance with Section 5(c), the Company shall deliver the applicable Change of
Control Redemption Price to the Holder concurrently with the consummation of
such Change of Control if such notice is received prior to the consummation of
such Change of Control and within five Business Days after the Company’s receipt
of such

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notice otherwise. In the event that the Holder has sent a Holder Optional
Redemption Notice pursuant to Section 8(d), the Company shall deliver the Holder
Optional Redemption Price within 45 days after the Company’s receipt of the
Holder Optional Redemption Notice and upon receipt of such payment, the Holder
shall promptly deliver this Debenture to the Company. In the event of a
redemption of less than all of the Conversion Amount of this Debenture, the
Company shall promptly cause to be issued and delivered to the Holder a new
Debenture (in accordance with Section 18(d)) representing the outstanding
Principal which has not been redeemed. In the event that the Company does not
pay the Redemption Price or Holder Optional Redemption to the Holder (or deliver
any Common Stock to be issued pursuant to a Company Redemption Share Notice)
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price (and issues any Common Stock required pursuant
to a Company Redemption Share Notice) in full, the Holder shall have the option,
in lieu of redemption, to require the Company to promptly return to the Holder
all or any portion of this Debenture representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (or any
Common Stock required to be issued pursuant to a Company Redemption Share
Notice) (together with any Late Charges thereon) has not been paid. Upon the
Company’s receipt of such notice, (x) the Redemption Notice shall be null and
void with respect to such Conversion Amount, (y) the Company shall immediately
return this Debenture, or issue a new Debenture (in accordance with
Section 18(d)) to the Holder representing such Conversion Amount and (z) the
Conversion Price of this Debenture or such new Debentures shall be adjusted to
the lesser of (A) the Conversion Price as in effect on the date on which the
Redemption Notice is voided and (B) the greater of (I) the Price Floor and
(II) the Weighted Average Price, on the date on which the Redemption Notice is
voided. The Holder’s delivery of a notice voiding a Redemption Notice and
exercise of its rights following such notice shall not affect the Company’s
obligations to make any payments of Late Charges which have accrued prior to the
date of such notice with respect to the Conversion Amount subject to such
notice.

          (b) Redemption by Other Holders. Upon the Company’s receipt of notice
from any of the holders of the Other Debentures for redemption or repayment as a
result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b) (each, an “Other Redemption Notice”), the
Company shall immediately forward to the Holder by facsimile a copy of such
notice. The Holder shall have five Business Days from receipt of such facsimile
copy of such Other Redemption Notice to deliver a Redemption Notice. If the
Company receives a Redemption Notice and one or more Other Redemption Notices
during such five Business Day period and the Company is unable to redeem all
principal, interest and other amounts designated in such Redemption Notice and
such Other Redemption Notices, then the Company shall redeem a pro rata amount
from each holder of the Debentures (including the Holder) based on the principal
amount of the Debentures submitted for redemption pursuant to such Redemption
Notice and such Other Redemption Notices received by the Company during such
five Business Day period.

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     (12) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the
Debentures have been converted, redeemed or otherwise satisfied in accordance
with their terms, the Company shall not, directly or indirectly, redeem,
repurchase or declare or pay any cash dividend or distribution on its capital
stock, other than the repurchase of restricted stock from terminated employees
or the redemption of any shares of preferred stock or payment of dividends or
redemptions required to be paid pursuant to the terms of any securities existing
on the date hereof, without the prior express written consent of the holders of
Debentures representing at least a majority of the aggregate principal amount of
the Debentures then outstanding.

     (13) VOTING RIGHTS. The Holder shall have no voting rights as the holder of
this Debenture, except as required by law and as expressly provided in this
Debenture.

     (14) RANK; ADDITIONAL INDEBTEDNESS; LIENS.

          (a) Rank. All payments due under this Debenture (a) shall rank pari
passu with all Other Debentures and (b) shall be senior to all other
Indebtedness of the Company and its Subsidiaries, other than Permitted Senior
and Pari Passu Indebtedness (as defined below), except as otherwise provided in
the last sentence of the definition of “Senior Debt” set forth in Section 28(b).

          (b) Incurrence of Indebtedness. So long as this Debenture is
outstanding, the Company shall not, and the Company shall not permit any of its
Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to
exist any Indebtedness, other than (i) the Indebtedness evidenced by this
Debenture and the Other Debentures and (ii) Permitted Indebtedness. As used
herein, “Permitted Indebtedness” means (A) an aggregate amount of Indebtedness
that is senior or pari passu in right of payment to the Debentures
(collectively, “Permitted Senior and Pari Passu Indebtedness”) not to exceed at
any one time $25,000,000 and (B) Permitted Subordinated Indebtedness. “Permitted
Subordinated Indebtedness” means Indebtedness that (x) is made expressly
subordinate in right of payment to the Indebtedness evidenced by this Debenture
and the Other Debentures on terms reasonably satisfactory to the holders of
Debentures representing not less than a majority of the aggregate principal
amount of the then outstanding Debentures and (y) does not provide at any time
for the payment, prepayment, repayment, repurchase or defeasance, directly or
indirectly, of any principal or premium, if any, thereon until at least 91 days
after the Maturity Date.

          (c) Existence of Liens. So long as this Debenture is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, allow or suffer to exist any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, “Liens”) other than Permitted Liens. As used herein,
“Permitted Liens” means (i) Liens incurred to secure Permitted Senior and Pari

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Passu Indebtedness, (ii) statutory Liens for current taxes not yet due,
(iii) purchase money Liens on equipment or other property acquired or held by
the Company or any of its Subsidiaries in the ordinary course of its business to
secure the purchase price of such equipment or Indebtedness incurred solely for
the purpose of financing the acquisition of such equipment or Liens existing on
such equipment at the time of its acquisition; provided,however, that no such
Lien shall extend to or cover any other property of the Company or any of its
Subsidiaries; and (iv) other Liens imposed by law (such a materialmen’s,
mechanics’, carriers’, worker’s and repairman’s Liens).

     (d) Restricted Payments. The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness that is not, to the extent expressly permitted by this
Debenture, expressly made senior in right of payment of the Debentures, the
Other Debentures, whether by way of payment in respect of principal of (or
premium, if any) or interest on, such Indebtedness if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.

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

          (16) VOTE TO ISSUE, OR CHANGE THE TERMS OF, DEBENTURES. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of Debentures representing not less
than a majority of the aggregate principal amount of the then outstanding
Debentures, shall be required for any change or amendment to this Debenture or
the Other Debentures. Any election by the holders of Debentures representing at
least a majority of the aggregate principal amount of the Debentures then
outstanding shall bind the holders of all Debentures then outstanding.

          (17) TRANSFER. This Debenture may be offered, sold, assigned or
transferred by the Holder without the consent of the Company, subject only to
the provisions of Section 2(f) of the Securities Purchase Agreement.

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          (18) REISSUANCE OF THIS DEBENTURE.

          (a) Transfer. If this Debenture is to be transferred, the Holder shall
surrender this Debenture to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Debenture (in accordance
with Section 18(d)), registered as the Holder may request, representing the
outstanding Principal being transferred by the Holder and, if less then the
entire outstanding Principal is being transferred, a new Debenture (in
accordance with Section 18(d)) to the Holder representing the outstanding
Principal not being transferred. The Holder and any assignee, by acceptance of
this Debenture, acknowledge and agree that, by reason of the provisions of
Section 3(c)(iii) and this Section 18(a), following conversion or redemption of
any portion of this Debenture, the outstanding Principal represented by this
Debenture may be less than the Principal stated on the face of this Debenture.

          (b) Lost, Stolen or Mutilated Debenture. Upon receipt by the Company
of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Debenture, and, in the case of loss, theft or
destruction, of any indemnification undertaking by the Holder to the Company in
customary form and, in the case of mutilation, upon surrender and cancellation
of this Debenture, the Company shall execute and deliver to the Holder a new
Debenture (in accordance with Section 18(d)) representing the outstanding
Principal.

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

          (d) Issuance of New Debentures. Whenever the Company is required to
issue a new Debenture pursuant to the terms of this Debenture, such new
Debenture (i) shall be of like tenor with this Debenture, (ii) shall represent,
as indicated on the face of such new Debenture, the Principal remaining
outstanding (or in the case of a new Debenture being issued pursuant to Section
18(a) or Section 18(c), the Principal designated by the Holder which, when added
to the principal represented by the other new Debentures issued in connection
with such issuance, does not exceed the Principal remaining outstanding under
this Debenture immediately prior to such issuance of new Debentures),
(iii) shall have an issuance date, as indicated on the face of such new
Debenture, which is the same as the Issuance Date of this Debenture, (iv) shall
have the same rights and conditions as this Debenture, and (v) shall represent
accrued but unpaid Interest and Late Charges on the Principal and Interest of
this Debenture, from the Issuance Date.

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     (19) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Debenture shall be cumulative
and in addition to all other remedies available under this Debenture or any
other Transaction Document, at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
parties’ right to pursue actual and consequential damages for any failure by the
other party hereto to comply with the terms of this Debenture; provided,
however, that in no event shall any party recover more than once for the same
losses or damages. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the
event of any such breach or threatened breach, the Holder shall be entitled to
seek, in addition to all other available remedies, an injunction restraining any
breach without the necessity of showing economic loss and without any bond or
other security being required.

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

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

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

     (23) DISPUTE RESOLUTION. In the case of a dispute as to the determination
of the Redemption Price or the arithmetic calculation of the Conversion Rate or
the Redemption Price, the Company shall submit the disputed determinations or
arithmetic calculations via facsimile within one Business Day of receipt of the
Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are
unable to agree upon such determination or calculation within one Business Day
of

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such disputed determination or arithmetic calculation being submitted to the
Holder, then the Company shall, within one Business Day submit via facsimile
(a) the disputed determination of the Weighted Average Price to an independent,
reputable investment bank selected by the Company and approved by the Holder or
(b) the disputed arithmetic calculation of the Conversion Rate or the Redemption
Price to the Company’s independent, outside accountant. The Company, at the
Company’s expense, shall cause the investment bank or the accountant, as the
case may be, to perform the determinations or calculations and notify the
Company and the Holder of the results no later than five Business Days from the
time it receives the disputed determinations or calculations. Such investment
bank’s or accountant’s determination or calculation, as the case may be, shall
be binding upon all parties absent demonstrable error.

     (24) NOTICES; PAYMENTS.

     (a) Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
an overnight courier service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:

     If to the Company:

TeleCommunication Systems, Inc.
275 West Street, Suite 400
Annapolis, Maryland 21401
Telephone: (410) 263-7616
Facsimile: (410) 263-7617
Attention: Thomas M. Brandt, Jr.

 

with a copy (which shall not constitute notice) to:

 

Piper Rudnick LLP
6225 Smith Avenue
Baltimore, Maryland 21209-3600
Telephone: (410) 580-3000
Facsimile: (410) 580-3001
Attention: Wilbert H. Sirota, Esq.

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If to the Holder:

 

The Riverview Group LLC
666 Fifth Avenue, 8th Floor
New York, New York 10103
Facsimile: (212) 977-1667
Telephone: (212) 841-4100
Attention: Daniel Cardella

 

with a copy (which shall not constitute notice) to:

 

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Facsimile: (212) 593-5955
Telephone: (212) 756-2000
Attention: Eleazer Klein, Esq.

or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or
(C) provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.

          The Company shall provide the Holder with prompt written notice of all
actions taken pursuant to this Debenture, including in reasonable detail a
description of such action and the reason therefore. Without limiting the
generality of the foregoing, the Company will give written notice to the Holder
(i) within three Business Days upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least the same number of days prior to the date on which
the Company provides notice to any other Person who has the right to receive
notice of such an event (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any Change
of Control, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to the Holder. Notwithstanding the foregoing, Section
4(i) of the Securities Purchase Agreement shall apply to all notices given
pursuant to this Debenture.

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          (b) Payments. Whenever any payment of cash is to be made by the
Company to any Person pursuant to this Debenture, such payment shall be made in
lawful money of the United States of America by a check drawn on the account of
the Company and sent via overnight courier service to such Person at such
address as previously provided to the Company in writing (which address, in the
case of each of the Purchasers, shall initially be as set forth on the Schedule
of Buyers attached to the Securities Purchase Agreement); provided that the
Holder may elect to receive a payment of cash via wire transfer of immediately
available funds by providing the Company with written notice at least two
Business Days prior to the due date of such payment setting out such request and
the Holder’s wire transfer instructions. Whenever any amount expressed to be due
by the terms of this Debenture is due on any day which is not a Business Day,
the same shall instead be due on the next succeeding day which is a Business Day
and, in the case of any Interest Date which is not the date on which this
Debenture is paid in full, the extension of the due date thereof shall not be
taken into account for purposes of determining the amount of Interest due on
such date. Any amount of Principal or other amounts required to be paid under
the Transaction Documents (as defined in the Securities Purchase Agreement)
other than Interest which is not paid when due shall result in a late charge
being incurred and payable by the Company in an amount equal to interest on such
amount at the rate of 12% per annum from the date such amount was due until the
same is paid in full (“Late Charge”).

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

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

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

     (28) SUBORDINATION. To the extent there is any conflict between the
provisions of this Section 28 and the other provisions of this Debenture, the
provisions of this Section 28 shall control. By its acceptance of this
Debenture, Holder and any subsequent holder hereof agrees to the terms and
conditions of this Section 28.

          (a) Holder subordinates any security interest or lien that Holder may
have in or in the future obtain in any property of the Company as security for
the indebtedness evidenced by this Debenture (the “Subordinated Debt”) to any
security interest or lien that any

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Senior Debt Holder (as hereinafter defined) may have in or in the future obtain
in any property of the Company as security for any Senior Debt (as hereinafter
defined). Notwithstanding the respective dates of attachment or perfection of
any security interest of Holder and the security interest of any Senior Debt
Holder, the security interest of each Senior Debt Holder in the property of the
Company securing the Senior Debt shall at all times be prior to the security
interest of Holder in the property of the Company securing the Subordinated
Debt. Nothing in this Section 28 shall be construed as any Senior Debt Holder’s
consent for Holder to take a security interest or lien in any property of the
Company.

          (b) All of the Subordinated Debt is subordinated in right of payment
to all of the Senior Debt, whether now existing or hereafter arising, including,
without limitation, all interest accruing after the commencement by or against
the Company of any bankruptcy, reorganization or similar proceeding. As used
herein, the following terms shall have the respective meanings set forth below:

          “Debt Incurrence Notice” means a written notice delivered by the
Company to the Holder promptly following the incurrence by the Company of any
Senior Debt after the date hereof, which notice shall (i) set forth the name of
the holder or holders of such Senior Debt, the principal amount of such Senior
Debt, the maturity date of such Senior Debt and any collateral securing such
Senior Debt, and (ii) shall include a certification by the Company that as of
the date of such notice, after giving effect to the incurrence of the Senior
Debt described therein, the aggregate principal amount of all indebtedness
ranking senior to or pari passu with the Subordinated Debt does not exceed
$25,000,000.

          “Senior Debt” means (i) all “Obligations” as defined in the SVB Loan
Agreement, (ii) the indebtedness set forth in Schedule 28(b) hereto and (iii)
any indebtedness incurred after the date hereof which has been identified to the
Holder in a Debt Incurrence Notice as constituting Senior Debt, provided that,
the aggregate principal amount of the obligations and other indebtedness
described in clauses (i), (ii) and (iii), together with the aggregate principal
amount of all other indebtedness ranking senior to or pari passu with the
Subordinated Debt, shall not exceed $25,000,000. Any indebtedness or other
obligation excluded from the definition of Senior Debt pursuant to the proviso
to the preceding sentence shall rank pari passu with the Subordinated Debt,
provided that nothing herein shall be deemed to (A) waive any rights the Holder
may have against the Company or any other party as a result of a breach of
Section 14(b) hereof or the failure of a certification in any Debt Incurrence
Notice to be true and correct, or (B) limit the effectiveness of any agreement
pursuant to which any indebtedness or other obligation excluded from the
definition of Senior Debt is made subordinate to the Subordinated Debt.

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          “Senior Debt Holder” means (i) Silicon Valley Bank and its successor
and assigns, (ii) the holders of the indebtedness described in Schedule 28(b)
hereto and their respective successors and assigns, and (iii) any person
identified to the Holder in a Debt Incurrence Notice as the holder of Senior
Debt, together with their respective successors and assigns, so long as each
such person described in clauses (i), (ii) and (iii) continues to be a holder of
Senior Debt.

          “Senior Event of Default” means an event of default under any Senior
Debt, including an “Event of Default” as defined in the SVB Loan Agreement.

          “SVB Loan Agreement” means that certain Amended and Restated Loan and
Security Agreement dated July                    , 2003, by and between Silicon
Valley Bank and the Company, as amended, modified, restated, substituted,
extended and renewed at any time and from time to time.

          (c) Holder will not demand or receive from the Company (and the
Company will not pay to Holder) all or any part of the Subordinated Debt, by way
of payment, prepayment, setoff, lawsuit or otherwise, nor will Holder exercise
any remedy with respect to any of the Senior Debt Holders’ collateral, nor will
Holder commence, or cause to commence, prosecute or participate in any
administrative, legal or equitable action against the Company with respect to
the Subordinated Debt (provided that, subject to the priorities set forth in
this Section 28, the Holder may join and participate in, but not initiate, any
bankruptcy proceeding with respect to the Company so long as the Holder does not
interfere with any action taken by any Senior Debt Holder in such proceeding
consistent with the terms set forth in this Section 28) for so long as any
portion of the Senior Debt remains outstanding, provided,however, that (i) the
Holder may receive, and the Company may pay (A) the outstanding principal under
this Debenture on the Maturity Date or on such earlier date on which the Senior
Debt has been accelerated (provided such acceleration has not been rescinded) or
is required to be redeemed pursuant to this Debenture, and (B) interest
hereunder in the stated amounts and on the stated dates of payment hereof
(without regard to any amendment to such stated amounts or stated dates effected
after the date hereof), and (ii) the Holder may exercise any rights or remedies
it may have against the Company during the continuance of an Event of Default
hereunder, unless at the time of the making such payment or exercise of rights
and remedies, a Senior Debt Holder shall have sent the Holder a written notice
(in accordance with the Section 24 hereof) certifying that any Senior Event of
Default shall have occurred and is continuing with respect to the Senior Debt
owing to such Senior Debt Holder and (x) fewer than 180 days shall have elapsed
since the date of such notice (the “Standstill Period”), or (y) such Senior Debt
has matured and has not been paid or such Senior Debt Holder shall have
accelerated the maturity of such Senior Debt by reason of the occurrence of such
Senior Event of Default and, in either such case, such Senior Debt Holder is
diligently and in good faith seeking to exercise its remedies against the
Company and its collateral. The Holder agrees that any Event of Default arising
hereunder solely as the result of a Senior Event of Default under, or the
acceleration or mandatory redemption of, any

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Senior Debt, shall be deemed cured in the event that such Senior Event of
Default under such Senior Debt is cured or waived in writing or such
acceleration or mandatory redemption of such Senior Debt is rescinded in
writing. Any blockage of payments and exercise of remedies pursuant to this
paragraph (c) (a “Blockage Event”) shall immediately end on the earliest to
occur of (1) the date that the Senior Event of Default giving rise to such
Blockage Event shall have been cured or waived in writing, (2) the Senior Debt
owing to such Senior Debt Holder shall have been paid in full and (3) except as
set forth in clause (y) above, the applicable Standstill Period shall have
expired, it being understood that no exercise of remedies shall be commenced
with respect to an Event of Default deemed cured in accordance with the
preceding sentence. There shall be at least 90 consecutive days during which no
Standstill Period is in effect during any period of 360 consecutive days. If at
any time following a Blockage Event, the Holder is no longer prohibited from
receiving any payments with respect to the Subordinated Debt, the Holder shall
be entitled to receive all payments with respect to the Subordinated Debt that
have been blocked, and any late payment charges, together with any default
interest to the extent provided for by this Debenture. Nothing in this
Section 28 shall prohibit Holder from converting all or any part of the
Subordinated Debt into equity securities of the Company or from receiving and
retaining any notes or securities distributed by the Company to its creditors in
connection with a bankruptcy proceeding.

          (d) Holder shall promptly deliver to the Senior Debt Holders in the
form received (except for endorsement or assignment by Holder where required by
the Senior Debt Holders) for application to the Senior Debt any payment,
distribution, security or proceeds received by Holder with respect to the
Subordinated Debt other than in accordance with this Section 28, provided that
the Holder shall be entitled to deposit any such payment with any court in the
event that the Holder shall not have received written instructions from all
Senior Debt Holders as to the disposition of any such amount.

          (e) In the event of the Company’s insolvency, reorganization or any
case or proceeding under any bankruptcy or insolvency law or laws relating to
the relief of debtors, the provisions of this Section 28 shall remain in full
force and effect, and the Senior Debt Holders’ claim against the Company and the
estate of the Company shall be paid in full to the extent provided herein before
any payment is made to Holder.

          (f) For so long as any of the Senior Debt remains unpaid, Holder
authorizes any Senior Debt Holder in any bankruptcy, insolvency or similar
proceeding involving the Company to file the appropriate claim or claims in
respect of the Subordinated Debt on behalf of Holder if Holder does not do so
prior to 30 days before the expiration of the time to file claims in such
proceeding.

          (g) This Section 28 shall remain effective for so long as the Company
owes any portion of the Senior Debt to any Senior Debt Holder. If, at any time
after payment in full of the Senior Debt any payments of the Senior Debt must be
disgorged by a Senior Debt Holder for any reason (including, without limitation,
the bankruptcy of the Company) this Section 28 and the

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relative rights and priorities set forth herein shall be reinstated as to all
such disgorged payments as though such payments had not been made and Holder
shall immediately pay over to such Senior Debt Holder (subject to the proviso to
paragraph (d) above) all payments received with respect to the Subordinated Debt
to the extent that such payments would have been prohibited hereunder. At any
time and from time to time, without notice to Holder, any Senior Debt Holder may
take such actions with respect to the Senior Debt owing to it as such Senior
Debt Holder, in its sole discretion, may deem appropriate (subject to any
consent rights of the Company), including, without limitation, terminating
advances to the Company, increasing the principal amount (but without any
corresponding change in the definition of “Senior Debt” as set forth herein),
extending the time of payment, increasing applicable interest rates, renewing,
compromising or otherwise amending the terms of any documents affecting such
Senior Debt and any collateral securing such Senior Debt, and enforcing or
failing to enforce any rights against the Company or any other person. No such
action or inaction shall impair or otherwise affect such Senior Debt Holder’s
rights hereunder.

          (h) The provisions of this Section 28 shall be binding on, and inure
to the benefit of, the Holder, the Senior Debt Holders and their respective
successors and assigns, and, if the Company refinances a portion of the Senior
Debt with any person, such person shall be deemed a successor of such Senior
Debt Holder for purposes of this Section 28.

          (i) The provisions of this Section 28 may be amended only by written
instrument signed by Holder, each Senior Debt Holder and the Company.

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

               (a) “Approved Stock Plan” means any employee benefit plan which
has been approved by the Board of Directors of the Company, pursuant to which
the Company’s securities may be issued to any employee, officer, director or
other service provider to the Company for services provided to the Company.

               (b) “Bloomberg” means Bloomberg Financial Markets.

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

               (d) “Convertible Securities” means any stock or securities (other
than Options) directly or indirectly convertible into or exercisable or
exchangeable for Common Stock.

               (e) “Excluded Securities” shall have the meaning given to it in
the Securities Purchase Agreement.

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               (f) “Interest Conversion Price” means, with respect to any
Interest Date, that price which shall be computed as 90% of the arithmetic
average of the Weighted Average Price of the Common Stock on each of the five
consecutive Trading Days immediately preceding such Interest Date. All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction during such period.

               (g) “Maturity Date Conversion Price” means that price which shall
be computed as 90% of the arithmetic average of the Weighted Average Price of
the Common Stock on each of the five consecutive Trading Days immediately
preceding the Maturity Date. All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other similar
transaction during such period.

               (h) “Options” means any rights, warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.

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

               (j) “Principal Market” means the Nasdaq National Market.

               (k) “Qualified Public Offering” means a firm commitment
underwritten offering of Common Stock by the Company after the Issuance Date
pursuant to an effective registration statement under the Securities Act of
1933, as amended, that yields net proceeds to the Company of not less than
$50,000,000.

               (l) “Redemption Premium” means 120% in the case of the Events of
Default described in Section 4(a).

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

               (n) “SEC” means the United States Securities and Exchange
Commission.

               (o) “Securities Purchase Agreement” means that certain securities
purchase agreement between the Company and the initial holders of the Debentures
pursuant to which the Company issued the Debentures.

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               (p) “Semi-Annual Period” means each of: the period beginning on
and including January 1 and ending on and including June 30; and the period
beginning on and including July 1 and ending on and including December 31.

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

               (r) “Warrants” has the meaning ascribed to such term in the
Securities Purchase Agreement, and shall include all warrants issued in exchange
therefor or replacement thereof.

               (s) “Weighted Average Price” means, for any security as of any
date, the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30:01 a.m., New York Time (or
such other time as the Principal Market publicly announces is the official open
of trading), and ending at 4:00:00 p.m., New York Time (or such other time as
the Principal Market publicly announces is the official close of trading) as
reported by Bloomberg through its “Volume at Price” functions, or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 23. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

[Signature Page Follows]

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

              TELECOMMUNICATION SYSTEMS, INC.               By:            

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        Maurice B. Tosé         Chief Executive Officer

 

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EXHIBIT I

TELECOMMUNICATION SYSTEMS, INC.
CONVERSION NOTICE

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

After giving effect to the conversion of the Aggregate Conversion Amount of
Debentures requested to be converted pursuant hereto, the undersigned will not
be the beneficial owner of 10% or more of the outstanding Common Stock
(determined as set forth in Section 3(d)(i) of the Debenture).

                  Date of Conversion:                

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                  Aggregate Conversion Amount to be converted:                

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Please confirm the following information:

                  Conversion Price:                

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                  Number of shares of Common Stock to be issued:                

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Please issue the Common Stock into which the Debenture is being converted in the
following name and to the following address:

                          Issue to:                        

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                          Facsimile Number:                        

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                          Authorization:                        

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                          By:                        

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                                      Title:                        

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      Dated:        

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                  Account Number:                

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    (if electronic book entry transfer)                   Transaction Code
Number:                

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    (if electronic book entry transfer)

 

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ACKNOWLEDGMENT

     The Company hereby acknowledges this Conversion Notice and hereby directs
American Stock Transfer & Trust Company to issue the above indicated number of
shares of Class A Common Stock in accordance with the Transfer Agent
Instructions dated                     , 2004 from the Company and acknowledged
and agreed to by American Stock Transfer & Trust Company.

              TELECOMMUNICATION SYSTEMS, INC.               By:            

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EXHIBIT B

[FORM OF WARRANT]

NEITHER THE ISSUANCE AND SALE OF THIS WARRANT NOR THE SECURITIES INTO WHICH THIS
WARRANT IS EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY ONLY BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED PURSUANT TO (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (C) RULE 144(K)
UNDER SAID ACT AND, IN EACH CASE, IN COMPLIANCE WITH APPLICABLE STATE SECURITIES
LAWS OR BLUE SKY LAWS. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

TELECOMMUNICATION SYSTEMS, INC.

WARRANT TO PURCHASE COMMON STOCK

Warrant No.: W-_
Number of Shares: [                     ]
Date of Issuance:                     , 2004 (“Issuance Date”)

TeleCommunication Systems, Inc., a Maryland corporation (the “Company”), hereby
certifies that, for Ten United States Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, [THE RIVERVIEW GROUP LLC][033 GROWTH PARTNERS I, L.P.][033 GROWTH
PARTNERS II, L.P.][033 GROWTH INTERNATIONAL FUND LTD.][OYSTER POND PARTNERS,
L.P.], the registered holder hereof or its permitted assigns, is entitled,
subject to the terms set forth below, to purchase from the Company, at the
Exercise Price (as defined below) then in effect, upon surrender of this Warrant
to Purchase Common Stock (including all Warrants to Purchase Common Stock issued
in exchange, transfer or replacement hereof, the “Warrant”), at any time or
times on or after the date hereof, but not after 5:30 P.M., New York Time, on
the Expiration Date (as defined below), [One Hundred Seventy Thousand Five
Hundred And Thirty-Six (170,536)][Ninety-Two Thousand Two Hundred And
Thirty-Seven (92,237)][Twenty-Five Thousand Seven Hundred And Fifty-Two
(25,752)][Forty-Thousand Three Hundred And Sixteen (40,316)][Twelve Thousand Two
Hundred And Thirty-One (12,231)] fully paid nonassessable shares of Common Stock
(as defined below) (the “Warrant Shares”). Except as otherwise defined herein,
capitalized terms in this Warrant shall have the meanings set forth in
Section 15. This Warrant is one of the Warrants to Purchase Common Stock (the
“SPA Warrants”) issued pursuant to Section 1 of that certain Securities Purchase
Agreement, dated as of December 18, 2003 (the “Initial Issuance Date”), among
the Company and the purchasers (the “Purchasers”) referred to therein (the
“Securities Purchase Agreement”).

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     1. EXERCISE OF WARRANT.

          (a) Mechanics of Exercise. Subject to the terms and conditions hereof
(including, without limitation, the limitations set forth in Section 1(f)), this
Warrant may be exercised by the holder hereof on any day from and after the date
hereof, in whole or in part, by (i) delivery by the holder to the Company of a
written notice, in the form attached hereto as Exhibit A (the “Exercise
Notice”), of such holder’s election to exercise this Warrant and (ii)
(A) payment to the Company of an amount equal to the applicable Exercise Price
multiplied by the number of Warrant Shares as to which this Warrant is being
exercised (the “Aggregate Exercise Price”) in certified funds or by wire
transfer of immediately available funds or (B) if applicable, by notifying the
Company that this Warrant is being exercised pursuant to a Cashless Exercise (as
defined in Section 1(d)) and (iii) the surrender to a common carrier for
overnight delivery to the Company, on or as soon as practicable following the
date the holder of this Warrant delivers the Exercise Notice to the Company,
delivery of this Warrant to the Company (or an indemnification undertaking with
respect to this Warrant in the case of its loss, theft or destruction).
Following the date on which the Company has received each of the Exercise
Notice, the Aggregate Exercise Price (or notice of a Cashless Exercise) and this
Warrant (or an indemnification undertaking with respect to this Warrant in the
case of its loss, theft or destruction) (the “Exercise Delivery Documents”), the
Company shall (X) provided that the Company’s transfer agent (the “Transfer
Agent”) is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program, on or before the third Business Day thereafter
credit such aggregate number of shares of Common Stock to which the holder of
this Warrant is entitled pursuant to such exercise to the holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, on or before the fifth Business Day
thereafter issue and deliver to the address specified in the Exercise Notice, a
certificate, registered in the name of the holder of this Warrant or its
designee, for the number of shares of Common Stock to which the holder of this
Warrant is entitled pursuant to such exercise. Upon delivery of the Exercise
Notice, this Warrant and the Aggregate Exercise Price referred to in clause
(ii)(A) above or notification to the Company of a Cashless Exercise referred to
in Section 1(d), the holder of this Warrant shall be deemed for all corporate
purposes to have become the holder of record of the Warrant Shares with respect
to which this Warrant has been exercised as of the date of the Exercise Notice,
irrespective of the date of delivery of the certificates evidencing such Warrant
Shares. If the number of Warrant Shares represented by this Warrant submitted
for exercise pursuant to this Section 1(a) is greater than the number of Warrant
Shares being acquired upon an exercise, then the Company shall as soon as
practicable and in no event later than five (5) Business Days after any exercise
and at its own expense, issue a new Warrant (in accordance with Section 7(d))
representing the right to purchase the number of Warrant Shares purchasable
immediately prior to such exercise under this Warrant, less the number of
Warrant Shares with respect to which this Warrant is exercised. No fractional
shares of Common Stock are to be issued upon the exercise of this Warrant, but
rather the number of shares of Common Stock to be issued shall be rounded up to
the nearest whole number. The Company shall pay any and all taxes, including
without limitation, all documentary stamp, transfer or similar taxes, or other
incidental expense that may be payable with respect to the issuance and delivery
of Warrant Shares upon exercise of this Warrant.

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          (b) Exercise Price. For purposes of this Warrant, “Exercise Price”
means $6.50, subject to adjustment as provided herein.

          (c) Company’s Failure to Timely Deliver Securities. Subject to Section
1(f), if the Company shall fail for any reason or for no reason to issue to the
holder, as provided in Section 1(a) above, a certificate for the number of
shares of Common Stock to which the holder is entitled or to credit the holder’s
balance account with DTC for such number of shares of Common Stock to which the
holder is entitled upon the holder’s exercise of this Warrant, the Company shall
pay as additional damages in cash to such holder on each day thereafter until
the Company has cured such failure, an amount equal to 1.0% of the product of
(A) the sum of the number of shares of Common Stock not issued to the holder on
a timely basis and to which the holder is entitled and (B) the difference, but
only if a positive number, between the Weighted Average Price of the Common
Stock on the trading day immediately preceding the last possible date which the
Company could have issued such Common Stock to the holder without violating
Section 1(a) and the Exercise Price. Notwithstanding the foregoing, the Company
shall not be obligated to make such payment of the Common Stock in the event the
dispute resolution provisions of Section 12 are being utilized. In addition, the
holder, upon written notice to the Company, may void its Exercise Notice with
respect to, and have returned, any portion of this Warrant that has not been
exercised pursuant to such Exercise Notice; provided that the voiding of an
Exercise Notice shall negate the Company’s obligations to make any payments
which have accrued prior to the date of such notice pursuant to this Section
1(c) or otherwise.

          (d) Cashless Exercise. The holder of this Warrant may, in its sole
discretion, exercise this Warrant in whole or in part and, in lieu of making the
cash payment otherwise contemplated to be made to the Company upon such exercise
in payment of the Aggregate Exercise Price, elect instead to receive upon such
exercise the “Net Number” of shares of Common Stock determined according to the
following formula (a “Cashless Exercise”):

                  Net Number =   (A x B) — (A x C)             B    

          For purposes of the foregoing formula:

A= the total number of shares with respect to which this Warrant is then being
exercised.

B= the Weighted Average Price of the Common Stock (as reported by Bloomberg) on
the date immediately preceding the date of the Exercise Notice.

C= the Exercise Price then in effect for the applicable Warrant Shares at the
time of such exercise.

          (e) Disputes. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the Warrant Shares, the Company
shall promptly issue to the holder the number of Warrant Shares that are not
disputed and such dispute shall be resolved in accordance with Section 12.

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          (f) Limitations on Exercises.

     (i) Beneficial Ownership. The Company shall not effect the exercise of this
Warrant, and no Person (as defined below) who is a holder of this Warrant shall
have the right to exercise this Warrant, to the extent that after giving effect
to such exercise, such Person (together with such Person’s affiliates) would
beneficially own in excess of 9.99% of the shares of the Common Stock
outstanding immediately after giving effect to such exercise. For purposes of
the foregoing sentence, such Person (together with such Person’s affiliates)
shall be deemed to beneficially own of the shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination in such
sentence is being made, but shall not be deemed to beneficially own shares of
Common Stock which would be issuable upon (i) exercise of the remaining,
unexercised portion of this Warrant and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
beneficially owned by such Person and its affiliates (including, without
limitation, any convertible notes or convertible preferred stock or warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes of
this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Warrant, in determining the number of outstanding shares of Common Stock
a holder may rely on the number of outstanding shares of Common Stock, on any
determination date, as reflected in (1) the Company’s Form 10-Q, Form 10-K most
recently filed, (2) a more recent public announcement by the Company or (3) any
other notice by the Company setting forth the number of shares of Common Stock
outstanding provided pursuant to the next sentence. For any reason at any time,
upon the written request of the holder of this Warrant, the Company shall within
two (2) Business Days confirm in writing to the holder of this Warrant the
number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including the SPA
Securities and the SPA Warrants, by the holder of this Warrant and its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.

     (ii) Principal Market Regulation. The Company shall not be obligated to
issue any shares of Common Stock upon exercise of this Warrant if the issuance
of such shares of Common Stock (individually or together with all other shares
of Common Stock issued or issuable now or in the future, pursuant to (i) this
Warrant, (ii) the Debentures issued by the Company pursuant to the Securities
Purchase Agreement, (iii) the other Warrants issued pursuant to the Securities
Purchase Agreement, or (iv) the Securities Purchase Agreement) would exceed that
number of shares of Common Stock which the Company may issue (including, as
applicable, any shares of Common Stock issued upon conversion of or as payment
of any interest under the SPA Securities) without triggering the stockholder
approval requirements set forth in Rule 4350(i) under the rules of the

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Principal Market (the “Exchange Cap”), except that such limitation shall not
apply in the event that the Company (A) obtains the approval of its shareholders
as required by the applicable rules of the Principal Market and in accordance
with applicable law for issuances of Common Stock in excess of the threshold
amount in such rule or (B) obtains a written opinion from outside counsel to the
Company that such approval is not required, which opinion shall be reasonably
satisfactory to the holders of the SPA Warrants representing at least a majority
of the shares of Common Stock underlying the SPA Warrants then outstanding.
Until such approval is obtained, no Purchaser shall be issued, upon exercise of
any SPA Warrants, shares of Common Stock in an amount greater than the product
of the Exchange Cap multiplied by a fraction, the numerator of which is the sum
of the number of Common Shares and the number of Conversion Shares and Warrant
Shares underlying the SPA Securities and the SPA Warrants issued to such
Purchaser pursuant to the Securities Purchase Agreement on the Issuance Date and
the denominator of which is the sum of the number of Common Shares and the
number of Conversion Shares and Warrant Shares underlying the SPA Securities and
the SPA Warrants issued to all the Purchasers pursuant to the Securities
Purchase Agreement on the Issuance Date (with respect to each Purchaser, the
“Exchange Cap Allocation”). In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser’s SPA Warrants, the transferee shall be
allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with
respect to the portion of the Exchange Cap Allocation allocated to such
transferee. In the event that any holder of SPA Warrants shall exercise all of
such holder’s SPA Warrants into a number of shares of Common Stock which, in the
aggregate, is less than such holder’s Exchange Cap Allocation, then the
difference between such holder’s Exchange Cap Allocation and the number of
shares of Common Stock actually issued to such holder shall be allocated to the
respective Exchange Cap Allocations of the remaining holders of SPA Warrants on
a pro rata basis in proportion to the shares of Common Stock underlying the SPA
Warrants then held by each such holder.

     2. Adjustment of Exercise Price and Number of Warrant Shares. The Exercise
Price and the number of Warrant Shares shall be adjusted from time to time as
follows:

          (a) Adjustment upon Issuance of Common Stock. If and whenever on or
after the date of issuance of this Warrant the Company issues or sells, or in
accordance with this Section 2 is deemed to have issued or sold, any shares of
Common Stock (including the issuance or sale of shares of Common Stock owned or
held by or for the account of the Company, but excluding shares of Common Stock
issued or deemed to have been issued by the Company in connection with any
Excluded Security) for a consideration per share (the “New Securities Issuance
Price”) less than a price (the “Applicable Price”) equal to the Exercise Price
in effect immediately prior to such issue or sale or deemed issuance or sale
(the foregoing a “Dilutive Issuance”), then immediately after such Dilutive
Issuance, the Exercise Price then in effect shall be reduced to an amount equal
to the greater of (x) the New Securities Issuance Price and (y) $2.50 (subject
to adjustment for any stock split, stock dividend, stock combination or other

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similar transaction after the Issuance Date), and the number of Warrant Shares
shall be adjusted to the number of shares of Common Stock determined by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares acquirable upon exercise of this Warrant
immediately prior to such adjustment and dividing the product thereof by the New
Securities Issuance Price. For purposes of determining the adjusted Exercise
Price under this Section 2(a), the following shall be applicable:

     (i) Issuance of Options. If the Company in any manner grants any Options,
other than Excluded Securities, and the lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or upon
conversion, exercise or exchange of any Convertible Securities issuable upon
exercise of any such Option is less than the Applicable Price, then, solely for
purposes of this Section 2, such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 2(a)(i), the “lowest price per share for which one share of Common Stock
is issuable upon exercise of such Options or upon conversion, exercise or
exchange of such Convertible Securities” shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the granting or sale of the
Option, upon exercise of the Option and upon conversion, exercise or exchange of
any Convertible Security issuable upon exercise of such Option. No further
adjustment of the Exercise Price or number of Warrant Shares shall be made upon
the actual issuance of such Common Stock or of such Convertible Securities upon
the exercise of such Options or upon the actual issuance of such Common Stock
upon conversion, exercise or exchange of such Convertible Securities.

     (ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities, other than Excluded Securities, and
the lowest price per share for which one share of Common Stock is issuable upon
the conversion, exercise or exchange thereof is less than the Applicable Price,
then, solely for purposes of this Section 2, such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the issuance or sale of such Convertible Securities for such price per
share. For the purposes of this Section 2(a)(ii), the “lowest price per share
for which one share of Common Stock is issuable upon the conversion, exercise or
exchange” shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon conversion,
exercise or exchange of such Convertible Security. No further adjustment of the
Exercise Price or number of Warrant Shares shall be made upon the actual
issuance of such Common Stock upon conversion, exercise or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of this
Warrant has been or is to be made pursuant to other provisions of this
Section 2(a), no further adjustment of the Exercise Price or number of Warrant
Shares shall be made by reason of such issue or sale.

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     (iii) Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exercise or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or exercisable
or exchangeable for Common Stock increases or decreases at any time, the
Exercise Price and the number of Warrant Shares in effect at the time of such
increase or decrease shall be adjusted to the Exercise Price and the number of
Warrant Shares which would have been in effect at such time had such Options or
Convertible Securities provided for such increased or decreased purchase price,
additional consideration or increased or decreased conversion rate, as the case
may be, at the time initially granted, issued or sold. For purposes of this
Section 2(a)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the date of issuance of this Warrant are increased or
decreased in the manner described in the immediately preceding sentence, then
such Option or Convertible Security and the Common Stock deemed issuable upon
exercise, conversion or exchange thereof shall be deemed to have been issued as
of the date of such increase or decrease. No adjustment pursuant to this Section
2(a) shall be made if such adjustment would result in an increase of the
Exercise Price to an Exercise Price greater than the Exercise Price in effect on
the Issuance Date (as adjusted for any stock splits, reverse stock splits, stock
dividends, stock combinations and similar transactions after the Issuance Date)
then in effect or a decrease in the number of Warrant Shares to a number less
than the number of Warrant Shares (as adjusted for any stock splits, reverse
stock splits, stock dividends, stock combinations and similar transactions after
the Issuance Date) then issuable hereunder.

     (iv) Calculation of Consideration Received. If case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $0.01. If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the net
amount received by the Company therefor. If any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of such consideration received by the Company will be the fair value
of such consideration, except where such consideration consists of securities,
in which case the amount of consideration received by the Company will be the
Weighted Average Price of such security on the date of receipt. If any Common
Stock, Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is the
surviving entity, the amount of consideration therefor will be deemed to be the
fair value of such portion of the net assets and business of the non-surviving
entity as is attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other than
cash or securities will be determined jointly by the Board of Directors of the
Company and the holders of SPA Warrants representing at least a majority of the
shares of Common Stock obtainable upon exercise of the SPA Warrants then
outstanding unless the Board

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of Directors of the Company shall have obtained a fairness opinion from an
independent financial advisor in which case the fair value shall be as stated in
such fairness opinion. If, in the absence of a fairness opinion, such parties
are unable to reach agreement within 10 days after the occurrence of an event
requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined in accordance with Section 12 hereof.

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

          (b) Adjustment upon Subdivision or Combination of Common Stock. If the
Company at any time after the date of issuance of this Warrant subdivides (by
any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision will
be proportionately reduced and the number of Warrant Shares will be
proportionately increased. If the Company at any time after the date of issuance
of this Warrant combines (by combination, reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Exercise Price in effect immediately prior to such combination
will be proportionately increased and the number of Warrant Shares will be
proportionately decreased. Any adjustment under this Section 2(b) shall become
effective at the close of business on the date the subdivision or combination
becomes effective.

          (c) Other Events. If any event occurs of the type contemplated by the
provisions of this Section 2 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company’s
Board of Directors, in their reasonable discretion, will make an appropriate
adjustment in the Exercise Price and the number of Warrant Shares so as to
protect the rights of the holder of this Warrant; provided that no such
adjustment pursuant to this Section 2(c) will increase the Exercise Price or
decrease the number of Warrant Shares as otherwise determined pursuant to this
Section 2.

     3. RIGHTS UPON DISTRIBUTION OF ASSETS. In addition to any adjustments
pursuant to Section 2 above, if the Company shall declare or make any dividend
or other distribution of its assets (or rights to acquire its assets) to holders
of Common Stock, by way of return of capital or otherwise (including, without
limitation, any distribution of cash, stock or other securities, property or
options by way of a dividend, spin off, reclassification, corporate
rearrangement or other similar transaction) (a “Distribution”), at any time
after the issuance of this Warrant, then, in each such case:

          (a) any Exercise Price in effect immediately prior to the close of
business on the record date fixed for the determination of holders of Common
Stock entitled to receive the

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Distribution shall be reduced, effective as of the close of business on such
record date, to a price determined by multiplying such Exercise Price by a
fraction of which (i) the numerator shall be the Weighted Average Price of the
Common Stock on the trading day immediately preceding such record date minus the
value of the Distribution (as determined in good faith by the Company’s Board of
Directors) applicable to one share of Common Stock, and (ii) the denominator
shall be the Weighted Average Price of the Common Stock on the trading day
immediately preceding such record date; and

          (b) the number of Warrant Shares shall be increased to a number of
shares equal to the number of shares of Common Stock obtainable immediately
prior to the close of business on the record date fixed for the determination of
holders of Common Stock entitled to receive the Distribution multiplied by the
reciprocal of the fraction set forth in the immediately preceding paragraph (a);
provided that in the event that the Distribution is of common stock (“Other
Common Stock”) of a company whose common stock is traded on a national
securities exchange or a national automated quotation system, then the holder of
this Warrant may elect to receive a warrant to purchase Other Common Stock in
lieu of an increase in the number of Warrant Shares, the terms of which shall be
identical to those of this Warrant, except that such warrant shall be
exercisable into the number of shares of Other Common Stock that would have been
payable to the holder of this Warrant pursuant to the Distribution had the
holder exercised this Warrant immediately prior to such record date and with an
aggregate exercise price equal to the product of the amount by which the
exercise price of this Warrant was decreased with respect to the Distribution
pursuant to the terms of the immediately preceding paragraph (a) and the number
of Warrant Shares calculated in accordance with the first part of this paragraph
(b).

     4. PURCHASE RIGHTS; ORGANIC CHANGE.

          (a) Purchase Rights. In addition to any adjustments pursuant to
Section 2 above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
“Purchase Rights”), then the holder of this Warrant will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete exercise of this Warrant
(without regard to any limitations on the exercise of this Warrant) immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights.

          (b) Organic Change. Any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Company’s assets to another Person or other transaction, in each case which is
effected in such a way that holders of Common Stock are entitled to receive
securities or assets with respect to or in exchange for Common Stock is referred
to herein as an “Organic Change.” Prior to the consummation of any (i) sale of
all or substantially all of the Company’s assets to an acquiring Person or
(ii) other Organic Change following which the Company is not a surviving entity,
the Company will secure from the Person purchasing such assets or the Person
issuing the securities or providing the assets in such Organic Change (in each
case, the “Acquiring Entity”) a written agreement (in form and substance
reasonably satisfactory to the holders of SPA Warrants representing at least a
majority

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of the shares of Common Stock obtainable upon exercise of the SPA Warrants then
outstanding) to deliver to the holder of this Warrant in exchange for this
Warrant, a security of the Acquiring Entity evidenced by a written instrument
substantially similar in form and substance to this Warrant and reasonably
satisfactory to the holder of this Warrant (including, an adjusted exercise
price equal to the value for the Common Stock reflected by the terms of such
consolidation, merger or sale, and exercisable for a corresponding number of
shares of Common Stock acquirable and receivable upon exercise of this Warrant
(without regard to any limitations on the exercise of this Warrant), if the
value so reflected is less than the Exercise Price in effect immediately prior
to such consolidation, merger or sale). In the event that an Acquiring Entity is
directly or indirectly controlled by a company or entity whose common stock or
similar equity interest is listed, designated or quoted on a securities exchange
or trading market, the holder of this Warrant may elect to treat such Person as
the Acquiring Entity for purposes of this Section 4(b). Prior to the
consummation of any other Organic Change, the Company shall be required to make
appropriate provision (in form and substance reasonably satisfactory to the
holders of SPA Warrants representing at least a majority of the shares of Common
Stock obtainable upon exercise of the SPA Warrants then outstanding) to insure
that the holder of this Warrant thereafter will have the right to acquire and
receive in lieu of or in addition to (as the case may be) the shares of Common
Stock immediately theretofore acquirable and receivable upon the exercise of
this Warrant (without regard to any limitations on the exercise of this Warrant
including those set forth in Sections 1(f)(i) and 1(f)(ii) of this Warrant),
such shares of stock, securities or assets that would have been issued or
payable in such Organic Change with respect to or in exchange for the number of
shares of Common Stock which would have been acquirable and receivable upon the
exercise of this Warrant as of the date of such Organic Change (without regard
to any limitations on the exercise of this Warrant including those set forth in
Sections 1(f)(i) and 1(f)(ii) of this Warrant).

     5. NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at all
times in good faith carry out all the provisions of this Warrant and take all
action as may be required to protect the rights of the holder of this Warrant.
Without limiting the generality of the foregoing, the Company (i) will not
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the Exercise Price then in effect, (ii) will take
all such actions as may be necessary or appropriate in order that the Company
may validly and legally issue fully paid and nonassessable shares of Common
Stock upon the exercise of this Warrant, and (iii) will, so long as any of the
SPA Warrants are outstanding, take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the exercise of the SPA Warrants, 150% of the number of
shares of Common Stock as shall from time to time be necessary to effect the
exercise of the SPA Warrants then outstanding (without regard to any limitations
on exercise).

     6. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. No holder, solely in such
Person’s capacity as a holder, of this Warrant shall be entitled to vote or
receive dividends or be deemed the holder of shares of the Company for any
purpose, nor shall anything contained in this Warrant be construed to confer
upon the holder hereof, solely in such Person’s

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capacity as a holder of this Warrant, any of the rights of a shareholder of the
Company or any right to vote, give or withhold consent to any corporate action
(whether any reorganization, issue of stock, reclassification of stock,
consolidation, merger, conveyance or otherwise), receive notice of meetings,
receive dividends or subscription rights, or otherwise, prior to the issuance to
the holder of this Warrant of the Warrant Shares which such Person is then
entitled to receive upon the due exercise of this Warrant. In addition, nothing
contained in this Warrant shall be construed as imposing any liabilities on such
holder to purchase any securities (upon exercise of this Warrant or otherwise)
or as a stockholder of the Company, whether such liabilities are asserted by the
Company or by creditors of the Company. Notwithstanding this Section 6, the
Company will provide the holder of this Warrant with copies of the same notices
and other information given to the Company’s public stockholders of the Company
generally, contemporaneously with the giving thereof to the Company’s public
stockholders.

     7. REISSUANCE OF WARRANTS.

          (a) Transfer of Warrant. Subject to Section 2(g) of the Securities
Purchase Agreement, if this Warrant is to be transferred, the holder shall
surrender this Warrant to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the holder of this Warrant a new Warrant (in
accordance with Section 7(d)), registered as the holder of this Warrant may
request, representing the right to purchase the number of Warrant Shares being
transferred by the Holder and, if less then the total number of Warrant Shares
then underlying this Warrant is being transferred, a new Warrant (in accordance
with Section 7(d)) to the holder of this Warrant representing the right to
purchase the number of Warrant Shares not being transferred.

          (b) Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant, and, in the case of loss, theft or destruction,
of any indemnification undertaking by the holder of this Warrant to the Company
in customary form, in the case of mutilation, upon surrender and cancellation of
this Warrant, the Company shall execute and deliver to the Holder a new Warrant
(in accordance with Section 7(d)) representing the right to purchase the Warrant
Shares then underlying this Warrant.

          (c) Warrant Exchangeable for Multiple Warrants. This Warrant is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Warrant or Warrants (in accordance with Section 7(d))
representing in the aggregate the right to purchase the number of Warrant Shares
then underlying this Warrant, and each such new Warrant will represent the right
to purchase such portion of such Warrant Shares as is designated by the holder
of this Warrant at the time of such surrender; provided, however, that no
Warrants for fractional shares of Common Stock shall be given.

          (d) Issuance of New Warrants. Whenever the Company is required to
issue a new Warrant pursuant to the terms of this Warrant, such new Warrant
(i) shall be of like tenor with this Warrant, (ii) shall represent, as indicated
on the face of such new Warrant, the right to purchase the Warrant Shares then
underlying this Warrant (or in the case of a new Warrant being issued pursuant
to Section 7(a) or Section 7(c), the Warrant Shares designated by the holder of
this Warrant which, when added to the number of shares of Common Stock
underlying the other new Warrants issued in connection with such issuance, does
not exceed the number of Warrant

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Shares then underlying this Warrant), (iii) shall have an issuance date, as
indicated on the face of such new Warrant which is the same as the Issuance
Date, and (iv) shall have the same rights and conditions as this Warrant.

     8. NOTICES. Whenever notice is required to be given under this Warrant,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
holder of this Warrant with prompt written notice of all actions taken pursuant
to this Warrant, including in reasonable detail a description of such action and
the reason therefore. Without limiting the generality of the foregoing, the
Company will give written notice to the holder of this Warrant (i) reasonably
promptly upon any adjustment of the Exercise Price, setting forth in reasonable
detail, and certifying, the calculation of such adjustment and (ii) at least the
same number of days prior to the date on which the Company provides notice to
any other Person who has the right to receive notice of such an event (A) with
respect to any dividend or distribution upon the Common Stock, (B) with respect
to any grants, issues or sales of any Options, Convertible Securities or rights
to purchase stock, warrants, securities or other property to holders of Common
Stock (other than, in each case, Excluded Securities) or (C) for determining
rights to vote with respect to any Change of Control (as defined in the SPA
Securities), dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder. Notwithstanding the foregoing,
Section 4(j) of the Securities Purchase Agreement shall apply to all notices
given pursuant to this Warrant.

     9. AMENDMENT AND WAIVER. Except as otherwise provided herein, the
provisions of this Warrant may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the holders of SPA
Warrants representing at least a majority of the shares of Common Stock
obtainable upon exercise of the SPA Warrants then outstanding; provided that no
such action may increase the exercise price of this Warrant or decrease the
number of shares or class of stock obtainable upon exercise of this Warrant
without the written consent of the holder of this Warrant. No such amendment
shall be effective to the extent that it applies to less than all of the holders
of the SPA Warrants then outstanding.

     10. GOVERNING LAW. This Warrant shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Warrant shall be governed by, (i) with
respect to matters relating to the issuance of securities pursuant to this
Warrant, the internal laws of the State of Maryland and (ii) with respect to all
other matters, the internal laws of the State of New York, in each case without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of New York, the State of Maryland or any other jurisdictions) that
would cause the application of the laws of any jurisdictions other than the
State of New York or the State of Maryland, as the case may be.

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

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     12. DISPUTE RESOLUTION. In the case of a dispute as to the determination of
the Exercise Price or the arithmetic calculation of the Warrant Shares, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within three Business Days of receipt of the Exercise Notice giving
rise to such dispute, as the case may be, to the holder of this Warrant. If the
holder of this Warrant and the Company are unable to agree upon such
determination or calculation of the Exercise Price or the Warrant Shares within
three Business Days of such disputed determination or arithmetic calculation
being submitted to the Holder, then the Company shall, within two Business Days
submit via facsimile (a) the disputed determination of the Exercise Price to an
independent, reputable investment bank selected by the Company and approved by
the holder of this Warrant, which approval shall not be unreasonably withheld or
delayed, or (b) the disputed arithmetic calculation of the Warrant Shares to the
Company’s independent, outside accountant. The Company shall cause the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than ten Business Days from the time it receives the disputed
determinations or calculations. Such investment bank’s or accountant’s
determination or calculation, as the case may be, shall be binding upon all
parties absent demonstrable error.

     13. REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The
remedies provided in this Warrant shall be cumulative and in addition to all
other remedies available under this Warrant, the Securities Purchase Agreement,
the SPA Securities and the Registration Rights Agreement, at law or in equity
(including a decree of specific performance and/or other injunctive relief), and
nothing herein shall limit the right of the holder of this Warrant right to
pursue actual damages for any failure by the Company to comply with the terms of
this Warrant. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holder of this Warrant and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the holder of
this Warrant shall be entitled, in addition to all other available remedies, to
an injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.

     14. TRANSFER. This Warrant may be offered for sale, sold, transferred or
assigned without the consent of the Company, except as may otherwise be required
by Section 2(f) of the Securities Purchase Agreement.

     15. CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms
shall have the following meanings:

          (a) “Bloomberg” means Bloomberg Financial Markets.

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

13

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          (c) “Common Stock” means (i) the Company’s Class A common stock, par
value $0.01 per share, and (ii) any capital stock into which such Common Stock
shall have been changed or any capital stock resulting from a reclassification
of such Common Stock.

          (d) “Convertible Securities” means any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for Common Stock.

          (e) “Excluded Securities” shall have the meaning given to it in the
Securities Purchase Agreement.

          (f) “Expiration Date” means _______________, 20071.

          (g) “Options” means any rights, warrants or options to subscribe for
or purchase Convertible Securities or Common Stock.

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

          (i) “Principal Market” means the Nasdaq National Market or in the
event that the Company is no longer listed with the Nasdaq National Market, the
market or exchange on which the Common Stock is then listed and traded, which
only may be either The New York Stock Exchange, Inc. or the American Stock
Exchange.

          (j) “Registration Rights Agreement” means that certain registration
rights agreement between the Company and the Purchasers.

          (k) “SPA Securities” means the subordinated convertible debentures
issued pursuant to the Securities Purchase Agreement.

          (l) “Weighted Average Price” means, for any security as of any date,
the dollar volume-weighted average price for such security on the Principal
Market during the period beginning at 9:30:01 a.m., New York Time (or such other
time as the Principal Market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as
reported by Bloomberg through its “Volume at Price” functions, or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price cannot be
calculated for a security on a

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1   Insert third anniversary of Issuance Date.

14

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particular date on any of the foregoing bases, the Weighted Average Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the Holder. If the Company and the holder of this Warrant are
unable to agree upon the fair market value of such security, then such dispute
shall be resolved pursuant to Section 12. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.

[Signature Page Follows]

15

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

                  TELECOMMUNICATION SYSTEMS, INC                   By:          
     

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            Name:             Title:    

 

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EXHIBIT A

EXERCISE NOTICE
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT TO PURCHASE COMMON STOCK

TELECOMMUNICATION SYSTEMS, INC.

     The undersigned holder hereby exercises the right to purchase    of the
shares of Common Stock (“Warrant Shares”) of TeleCommunication Systems, Inc., a
Maryland corporation (the “Company”), evidenced by the attached Warrant to
Purchase Common Stock (the “Warrant”). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

     After giving effect to the exercise of the Warrant Shares requested to be
converted pursuant hereto, the undersigned will not be the beneficial owner of
10% or more of the outstanding Common Stock (determined as set forth in Section
1(f)(i) of the Warrant).

     1. Form of Exercise Price. The Holder intends that payment of the Exercise
Price shall be made as:

____________ a “Cash Exercise” with respect to _________________ Warrant Shares;
and/or                                                                             
          

____________ a “Cashless Exercise” with respect to _______________ Warrant
Shares.

     [Insert this paragraph (2) in the event that the holder has not elected a
Cashless Exercise in accordance with the terms of the Warrant as to all of the
Warrant Shares to be issued pursuant hereto] 2. Payment of Exercise Price. The
holder is hereby delivering to the Company payment in the amount of
$_______________ representing the Aggregate Exercise Price for such Warrant
Shares not subject to a Cashless Exercise in accordance with the terms of the
Warrant.

     3. Delivery of Warrant Shares. The Company shall deliver to the
holder _______________ Warrant Shares in accordance with the terms of the
Warrant.

Date: _______________ __, 200___

                 

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Name of Registered Holder                   By:                

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

            Name:             Title:    

 

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ACKNOWLEDGMENT

     The Company hereby acknowledges this Exercise Notice and hereby directs
American Stock Transfer & Trust Co. to issue the above indicated number of
shares of Common Stock in accordance with the Transfer Agent Instructions dated
_______________, 2004 from the Company and acknowledged and agreed to by
American Stock Transfer & Trust Co.

                  TELECOMMUNICATION SYSTEMS, INC                   By:          
     

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            Name:             Title:    

 

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EXHIBIT C

REGISTRATION RIGHTS AGREEMENT

      REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of December 18,
2003, by and among TeleCommunication Systems, Inc. a Maryland corporation, with
headquarters located at 275 West Street, Annapolis, Maryland 21401 (the
“Company”), and the investors listed on the Schedule of Buyers attached hereto
(each, a “Buyer” and collectively, the “Buyers”).

      WHEREAS:

      A. In connection with the Securities Purchase Agreement by and among the
parties hereto dated as of as of the date hereof (the “Securities Purchase
Agreement”), the Company has agreed, upon the terms and subject to the
conditions of the Securities Purchase Agreement, to issue and sell on the
Closing Date (as defined in the Securities Purchase Agreement) (i) to certain
Buyers, subordinated convertible debentures of the Company (the “Debentures”)
which shall be convertible into shares of the Company’s Class A Common Stock,
par value $.01 per share (the “Common Stock”) (such Common Stock issuable upon
conversion of the Debentures, the “Conversion Shares”) in accordance with the
terms of the Debentures, (ii) shares of Common Stock (the “Common Shares”), and
(iii) warrants (the “Warrants”) which will be exercisable to purchase shares of
Common Stock (such Common Stock issuable upon exercise of the Warrants, the
“Warrant Shares”).

      B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the “1933 Act”).

      NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each of the Buyers
hereby agree as follows:

      1. Definitions.

      As used in this Agreement, the following terms shall have the following
meanings:

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

         b. “Investor” means a Buyer, any transferee or assignee thereof to whom
a Buyer assigns its rights under this Agreement and who agrees to become bound
by the provisions of this Agreement in accordance with Section 9 and any
transferee or assignee thereof to whom a transferee or assignee assigns its
rights under this Agreement and who agrees to become bound by the provisions of
this Agreement in accordance with Section 9.

 

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         c. “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and governmental or any department or agency thereof.

         d. “register,” “registered,” and “registration” refer to a registration
of Registrable Shares effected by preparing and filing the Registration
Statement (as defined below) in compliance with the 1933 Act and pursuant to
Rule 415 under the 1933 Act or any successor rule providing for offering
securities on a continuous or delayed basis (“Rule 415”), and the declaration or
ordering of effectiveness of such Registration Statement(s) by the United States
Securities and Exchange Commission (the “SEC”).

         e. “Registrable Securities” means (i) the Common Shares, (ii) the
Conversion Shares, (iii) the Interest Shares (as defined in the Debentures)
issued or issuable under the Debentures, (iv) the Repayment Shares (as defined
in the Debentures) issued or issuable under the Debentures, (v) the Warrant
Shares and (vi) any shares of capital stock issued or issuable with respect to
the Common Shares, the Debentures, the Conversion Shares, the Interest Shares,
the Repayment Shares, the Warrant Shares or the Warrants as a result of any
stock split, stock dividend, recapitalization, exchange or similar event or
otherwise, without regard to any limitations on conversions of the Debentures or
exercise of the Warrants.

         f. “Registration Statement” means a registration statement of the
Company filed under the 1933 Act covering the Registrable Securities.

         Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement.

      2. Registration.

         a. Mandatory Registration. The Company shall prepare, and, as soon as
practicable but in no event later than 30 days after the Closing Date (the
“Filing Deadline”), file with the SEC a Registration Statement on Form S-3
covering the resale of all of the Registrable Securities. In the event that Form
S-3 is unavailable for such a registration, the Company shall use such other
form as is available for such a registration, subject to the provisions of
Section 2(d). The Registration Statement prepared pursuant hereto shall register
for resale at least that number of shares equal to 150% of the maximum number of
Registrable Securities as of the Business Day immediately preceding the date of
filing of such Registration Statement, subject to adjustment as provided in
Section 2(e). The Registration Statement shall contain (except if otherwise
directed by the holders of at least a majority of the then outstanding
Registrable Securities (a “Majority in Interest”) and subject to applicable laws
and the rules and regulations of the SEC) the “Selling Shareholders” section in
substantially the form attached hereto as Exhibit B and the “Plan of
Distribution” in substantially the form attached hereto as Exhibit B. The
Company shall use its reasonable best efforts to have the Registration Statement
declared effective by the SEC as soon as practicable, but in no event later than
the date which is (i) in the event that the Registration Statement is not
subject to a full review by the SEC, 60 days after the Closing Date or (ii) in
the event that the Registration Statement is subject to a full review by the
SEC, 100 days after the Closing Date (the “Effectiveness Deadline”); provided,

 

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however, that the Company shall not be deemed to have breached this Section 2(a)
if it fails to meet the dates set forth herein solely as a result of
unreasonable actions by Legal Counsel (as defined below). Subject only to the
obligations set forth in Section 2(e) below and the Company’s obligations to
file any post-effective amendments to the Registration Statement, the Company
shall be required to file a Registration Statement only once.

         b. Allocation of Registrable Securities. The initial number of
Registrable Securities included in the Registration Statement and each increase
in the number of Registrable Securities included therein pursuant to Section
2(e) shall be allocated pro rata among the Investors based on the number of
Registrable Securities held by each Investor at the time the Registration
Statement covering such initial number of Registrable Securities or increase
thereof is declared effective by the SEC. In the event that an Investor sells or
otherwise transfers any of such Investor’s Registrable Securities, each
transferee shall be allocated a pro rata portion of the then remaining number of
Registrable Securities included in such Registration Statement for such
transferor. Any shares of Common Stock included in a Registration Statement and
which remain allocated to any Person which ceases to hold any Registrable
Securities covered by such Registration Statement shall be allocated to the
remaining Investors, pro rata based on the number of Registrable Securities then
held by such Investors which are covered by such Registration Statement. In no
event shall the Company include any securities other than Registrable Securities
on any Registration Statement without the prior written consent of a Majority in
Interest.

         c. Legal Counsel. Subject to Section 5 hereof, the Investors holding at
least a Majority in Interest shall have the right to select one legal counsel to
review, as provided in Section 3(c), any registration pursuant to this Section 2
(“Legal Counsel”), which shall initially be Schulte Roth & Zabel LLP or such
other counsel as thereafter designated by a Majority in Interest.

         d. Ineligibility for Form S-3. In the event that Form S-3 is not
available for the registration of the resale of Registrable Securities
hereunder, the Company shall (i) register the resale of the Registrable
Securities on another appropriate form reasonably acceptable to the holders of
at least a Majority in Interest and (ii) undertake to register the Registrable
Securities on Form S-3 as soon as such form is available, provided that the
Company shall maintain the effectiveness of the Registration Statement then in
effect until such time as a Registration Statement on Form S-3 covering the
Registrable Securities has been declared effective by the SEC.

         e. Sufficient Number of Shares Registered. In the event the number of
shares available under a Registration Statement filed pursuant to Section 2(a)
is insufficient to cover all of the Registrable Securities required to be
covered by such Registration Statement or an Investor’s allocated portion of the
Registrable Securities pursuant to Section 2(b), the Company shall, if permitted
by applicable law and the rules and regulations of the SEC, amend the applicable
Registration Statement, or file a new Registration Statement (on the short form
available therefor, if applicable), or both, so as to cover at least 150% of the
number of such Registrable Securities as of the Business Day immediately
preceding the date of the filing of such amendment or new Registration
Statement, in each case, as soon as practicable, but in any

 

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event not later than thirty (30) Business Days after the Company becomes aware
of the necessity therefor arises. The Company shall use its reasonable best
efforts to cause such amendment and/or new Registration Statement to become
effective as soon as reasonably practicable following the filing thereof. For
purposes of the foregoing provision, the number of shares available under a
Registration Statement shall be deemed “insufficient to cover all of the
Registrable Securities” if at any time the number of shares of Common Stock
available for resale under such Registration Statement is less than 130% of the
number of Registrable Securities issued and issuable upon conversion of the
Debentures and exercise of the Warrants excluding Registrable Securities which
have been sold or transferred pursuant to such Registration Statement. The
calculation set forth in the foregoing sentence shall be made without regard to
any limitations on the conversion of the Debentures or the exercise of the
Warrants and such calculation shall assume that the Debentures and the Warrants
are convertible or exercisable into shares of Common Stock and the maximum
number of Interest Shares under the Debentures, based on the then outstanding
principal amount of the Debentures and assuming such principal amount remains
outstanding through the Maturity Date (as defined in the Debentures) and
assuming no conversions or redemptions of the Debentures prior to the Maturity
Date, are issuable at the then prevailing Interest Conversion Price (as defined
in the Debentures), the Conversion Rate (as defined in the Debentures) or
Warrant Exercise Price (as defined in the Warrants), as applicable.

         f. Effect of Failure to File and Obtain and Maintain Effectiveness of
Registration Statement. If (i) a Registration Statement covering all the
Registrable Securities required to be covered thereby and required to be filed
by the Company pursuant to this Agreement is (A) not filed with the SEC on or
before the Filing Deadline (a “Filing Failure”) or (B) not declared effective by
the SEC on or before the Effectiveness Deadline (an “Effectiveness Failure”) or
(ii) on any day after such Registration Statement has been declared effective by
the SEC sales of all the Registrable Securities required to be included on such
Registration Statement cannot be made (other than during an Allowable Grace
Period (as defined in Section 3(r)) pursuant to such Registration Statement
(including, without limitation, because of a failure to keep such Registration
Statement effective, to disclose such information as is necessary for sales to
be made pursuant to such Registration Statement or to register sufficient shares
of Common Stock)(a “Maintenance Failure”), then, as partial relief for the
damages to any holder by reason of any resulting delay in or reduction of its
ability to sell the underlying shares of Common Stock (which remedy shall not be
exclusive of any other remedies available at law or in equity), the Company
shall pay to each holder of Registrable Securities relating to such Registration
Statement: on the earlier of (A) the last day of each 30 day period after a
Filing Failure, an Effectiveness Failure and the initial day of a Maintenance
Failure, as the case may be until such event is cured, or (B) on the third
Business Day after any such Filing Failure, Effectiveness Failure or Maintenance
Failure is cured, an amount in cash equal to the product of (x) the aggregate
then outstanding Principal (as defined in the Debentures) of such Investor’s
Debentures convertible into Conversion Shares included in such Registration
Statement plus the aggregate Common Share Purchase Price (as defined in the
Securities Purchase Agreement) of such Investor’s Common Shares included in such
Registration Statement, multiplied by (y) 0.02, provided, however, that such
payment shall apply on a pro-rata basis for any portion of a 30 day period prior
to the cure of a Filing Failure, Effectiveness Failure or Maintenance Failure as
applicable; and, provided further, that any payment made pursuant to clause
(B) of this sentence

 

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shall relieve the Company of its obligation to make any payment pursuant to
clause (A) of this sentence with respect to the first thirty day period
following such Filing Failure, Effectiveness Failure or Maintenance Failure. The
payments to which a holder shall be entitled pursuant to this Section 2(f) are
referred to herein as “Registration Delay Payments.” Registration Delay Payments
shall be paid on the earlier of (I) the last day of the calendar month during
which such Registration Delay Payments are incurred and (II) the third Business
Day after the event or failure giving rise to the Registration Delay Payments is
cured. In the event the Company fails to make any Registration Delay Payments
pursuant to this Section 2(f) in a timely manner, such Registration Delay
Payments shall bear interest at the rate of 1.5% per month, or such lower
maximum amount as is permitted by law, (prorated for partial months) until paid
in full.

      3. Related Obligations.

      At such time as the Company is obligated to file a Registration Statement
with the SEC pursuant to Section 2(a), 2(d) or 2(e), the Company will use its
best efforts to effect the registration of the Registrable Securities in
accordance with the intended method of disposition thereof and, pursuant
thereto, the Company shall have the following obligations:

         a. The Company shall submit to the SEC, within two (2) Business Days
after the Company learns that no review of the Registration Statement will be
made by the staff of the SEC or that the staff of the SEC has no further
comments on a particular Registration Statement, as the case may be, a request
for acceleration of effectiveness of such Registration Statement to a time and
date not later than two (2) Business Days after the submission of such request.
The Company shall keep the Registration Statement effective at all times until
the earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities covered by such Registration Statement pursuant to Rule
144(k) (or successor thereto) promulgated under the 1933 Act or (ii) the date on
which the Investors shall have sold all the Registrable Securities covered by
such Registration Statement (the “Registration Period”). The Company shall
ensure that each Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein (in the case of
prospectuses, in the light of the circumstances in which they were made) not
misleading; provided that the foregoing shall not apply to information provided
in writing by any Investor.

         b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as the Company determines may be necessary to keep such
Registration Statement effective at all times during the Registration Period,
and, during such period, comply with the provisions of the 1933 Act with respect
to the disposition of all Registrable Securities of the Company covered by such
Registration Statement. In the case of amendments and supplements to a
Registration Statement which are required to be filed pursuant to this Agreement
(including pursuant to this Section 3(b)) by reason of the Company filing a
report on Form 10-K, Form 10-Q or Form 8-K or any analogous report under the
Securities Exchange Act of 1934, as amended (the “1934 Act”), the Company shall
have

 

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incorporated such report by reference into such Registration Statement, if
applicable, or shall file such amendments or supplements with the SEC on the
same day on which the 1934 Act report is filed which created the requirement for
the Company to amend or supplement such Registration Statement.

         c. The Company shall (A) permit Legal Counsel to review and comment
upon (i) a Registration Statement at least four (4) Business Days prior to its
filing with the SEC and (ii) all amendments and supplements to all Registration
Statements that do not contain any material non-public information (except for
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K and any similar or successor reports) within two Business Days prior
to their filing with the SEC, and (B) not file any Registration Statement or
amendment or supplement thereto in a form to which the Investors holding a
majority of the Registrable Securities reasonably objects. The Company shall not
submit a request for acceleration of the effectiveness of a Registration
Statement or any amendment or supplement thereto in the event a Majority in
Interest shall have reasonably objected thereto prior to the Company’s
submission of a request to accelerate, which consent shall not be unreasonably
withheld, conditioned or delayed. The Company shall furnish to Legal Counsel,
without charge, (i) copies of any correspondence from the SEC or the staff of
the SEC to the Company or its representatives relating to any Registration
Statement, but to the extent any such correspondence contains material
non-public information, it shall not be delivered to any of the Buyers, and
(ii) upon the effectiveness of any Registration Statement, one copy of the
prospectus included in such Registration Statement and all amendments and
supplements thereto.

         d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge,
(i) promptly after the same is prepared and filed with the SEC and not otherwise
available on the EDGAR system, one copy of such Registration Statement and any
amendment(s) thereto (including financial statements and schedules), all
documents (including exhibits) incorporated therein by reference, and not
otherwise available on the EDGAR system, and each preliminary prospectus, and
(ii) upon the effectiveness of any Registration Statement, ten (10) copies of
the prospectus included in such Registration Statement and all amendments and
supplements thereto (or such other number of copies as such Investor may
reasonably request).

         e. The Company shall use its reasonable best efforts to (i) register
and qualify, unless an exemption from registration and qualification applies,
the resale by the Investors of the Registrable Securities covered by a
Registration Statement under such other securities or “blue sky” laws of such
jurisdictions in the United States as the Investor may reasonably request,
(ii) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (x) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(e), (y) subject itself to general taxation in any such jurisdiction,
or (z) file a

 

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general consent to service of process in any such jurisdiction. The Company
shall promptly notify Legal Counsel and each Investor who holds Registrable
Securities of the receipt by the Company of any notification with respect to the
suspension of the registration or qualification of any of the Registrable
Securities for sale under the securities or “blue sky” laws of any jurisdiction
in the United States or its receipt of actual notice of the initiation or
threatening of any proceeding for such purpose.

         f. The Company shall notify Legal Counsel and each Investor in writing
of the happening of any event, as promptly as practicable after becoming aware
of such event, as a result of which the prospectus included in a Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading (provided that in no event shall such notice contain any
material, nonpublic information), and, subject to Section 3(r), promptly prepare
a supplement or amendment to such Registration Statement or file a Current
Report on Form 8-K to correct such untrue statement or omission, and deliver ten
(10) copies of such supplement or amendment to Legal Counsel and each Investor
(or such other number of copies as Legal Counsel or such Investor may reasonably
request). The Company shall also promptly notify Legal Counsel and each Investor
in writing (i) when a prospectus or any prospectus supplement or post-effective
amendment has been filed, and when a Registration Statement or any
post-effective amendment has become effective (notification of such
effectiveness shall be delivered to Legal Counsel and each Investor by facsimile
on the same day of such effectiveness and by overnight mail), (ii) of any
request by the SEC for amendments or supplements to a Registration Statement or
related prospectus or related information, and (iii) of the Company’s reasonable
determination that a post-effective amendment to a Registration Statement would
be appropriate.

         g. The Company shall use its reasonable best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, or the suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify Legal Counsel and each Investor who
holds Registrable Securities being sold of the issuance of such order and the
resolution thereof or its receipt of actual notice of the initiation or threat
of any proceeding for such purpose.

         h. If any Investor is required under applicable securities law to be
described in the Registration Statement as an underwriter, at the reasonable
request of such Investor, the Company shall use its reasonable best efforts to
obtain and furnish to such Investor, on the date of effectiveness of the
Registration Statement (i) a “comfort letter”, dated such date, from the
Company’s independent certified public accountants in form and substance as is
customarily given by independent certified public accountants in “comfort
letters” to underwriters in underwritten public offerings, addressed to the
Investors, and (ii) an opinion, dated as of such date, of counsel representing
the Company for purposes of such Registration Statement, in form, scope and
substance as is customarily given in an underwritten public offering, addressed
to the Investors.

 

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         i. In order to avail itself of any due diligence defense that may be
necessary, upon the written request of one Investor (as may be designated by the
holders of at least a majority of the Registrable Securities) in connection with
any Investor’s due diligence requirements, if any, the Company shall make
available for inspection by (i) any Investor, (ii) Legal Counsel and (iii) one
firm of accountants or other agents retained by the Investors (collectively, the
“Inspectors”), all relevant and customary financial and other records, pertinent
corporate documents and properties of the Company (the “Records”), and use its
reasonable best efforts to have its officers, directors, employees, accountants
and counsel supply all relevant information reasonably requested by the
Inspectors; provided, however, that each Inspector shall agree in writing (in a
form reasonably acceptable to the Company) to hold in strict confidence and
shall not make any disclosure (except to an Investor) or use of any Record or
other information which the Company determines in good faith to be confidential,
and of which determination the Inspectors are so notified, unless (a) after
consulting with the Company and its counsel, the parties determine that the
disclosure of such Records is necessary to avoid or correct a misstatement or
omission in any Registration Statement or is otherwise required under the 1933
Act, (b) the release of such Records is ordered pursuant to a final,
non-appealable subpoena or order from a court or government body of competent
jurisdiction, or (c) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement of which the Inspector has knowledge. Each Investor agrees that
it shall, upon learning that disclosure of such Records is sought in or by a
court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein (or in any other
confidentiality agreement between the Company and any Investor) shall be deemed
to limit the Investors’ ability to sell Registrable Securities in a manner which
is otherwise consistent with applicable laws and regulations.

         j. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company in writing unless
(i) disclosure of such information is necessary or desirable to comply with
federal or state laws or applicable rules and regulations of NASDAQ or any other
relevant market or exchange, (ii) the disclosure of such information is
necessary or desirable to avoid or correct a misstatement or omission in any
Registration Statement, (iii) the release of such information is ordered
pursuant to a subpoena or other final, non-appealable order from a court or
governmental body of competent jurisdiction, or (iv) such information has been
made generally available to the public other than by disclosure in violation of
this Agreement or any other agreement of which the Company has knowledge. The
Company agrees that it shall, upon learning that disclosure of such information
concerning an Investor is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt written notice to
such Investor and allow such Investor, at the Investor’s expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information. Notwithstanding anything to the contrary set forth
herein, the obligations of confidentiality contained herein, as they relate to
the transactions contemplated by this Agreement, shall not apply to the tax
structure or tax treatment of the transactions contemplated by this Agreement
and each party hereto (and any employee, representative, or agent of any party
hereto) may disclose to any and all persons. without limitation of any kind, the
“tax structure” and “tax treatment” of the transactions

 

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contemplated by this Agreement and all material of any kind (including opinions
or other tax analyses) that are provided to any party hereto relating to such
tax treatment and tax structure. The preceding sentence is intended to cause the
transactions contemplated by this Agreement not to have been offered under
conditions of confidentiality for purposes of Section 1.6011-4(b)(3~ (or any
successor provision) of the Treasury Regulations promulgated under Section 6011
of the Internal Revenue Code of 1986. as amended from time to time, or any
successor law. In addition. each party hereto acknowledges that it has no
proprietary or exclusive rights to any tax matter to tax idea related to the
transactions contemplated by this Agreement.

         k. The Company shall use its reasonable best efforts to cause all the
Registrable Securities covered by a Registration Statement to be listed on each
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange. The Company shall
pay all fees and expenses in connection with satisfying its obligation under
this Section 3(k).

         l. If requested by a Majority in Interest, the Company shall cooperate
with the Investors who hold Registrable Securities being offered pursuant to a
Registration Statement that has been declared effective by the SEC and, to the
extent applicable, facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legend) representing the Registrable
Securities to be offered pursuant to a Registration Statement that has been
declared effective by the SEC and enable such certificates to be in such
denominations or amounts, as the case may be, as the Investors may reasonably
request and registered in such names as the Investors may request.

         m. If requested by an Investor, the Company shall (i) as soon as
practicable incorporate in a prospectus supplement or post-effective amendment
such information as an Investor reasonably requests in writing to be included
therein relating to the sale and distribution of Registrable Securities,
including, without limitation, information with respect to the number of
Registrable Securities being offered or sold, the purchase price being paid
therefor and any other terms of the offering of the Registrable Securities to be
sold in such offering; and (ii) as soon as practicable make all required filings
of such prospectus supplement or post-effective amendment after being notified
of such matters to be incorporated in such prospectus supplement or
post-effective amendment.

         n. The Company shall use its reasonable best efforts to cause the
Registrable Securities covered by a Registration Statement to be registered with
or approved by such other governmental agencies or authorities with respect to
all applicable state securities or blue sky laws as may be necessary to
consummate the disposition of such Registrable Securities.

         o. The Company shall make generally available to its security holders
as soon as practical, but not later than ninety (90) days after the close of the
period covered thereby, an earning statement (in form complying with, and in the
manner provided by, the provisions of Rule 158 under the 1933 Act) covering a
twelve-month period beginning not later than the first day of the Company’s
fiscal quarter next following the effective date of a Registration Statement.

 

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         p. The Company shall otherwise use its reasonable best efforts to
comply with all applicable rules and regulations of the SEC in connection with
any registration hereunder.

         q. Within two (2) Business Days after a Registration Statement which
covers Registrable Securities is declared effective by the SEC, the Company
shall deliver to the transfer agent for such Registrable Securities (with copies
to the Investors whose Registrable Securities are included in such Registration
Statement) confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.

         r. Notwithstanding anything to the contrary herein, at any time after
the Registration Statement has been declared effective by the SEC, the Company
may delay the disclosure of material non-public information concerning the
Company the disclosure of which at the time is not, in the good faith opinion of
the Board of Directors of the Company, in the best interest of the Company (a
“Grace Period”); provided, that the Company shall promptly (i) notify the
Investors in writing of the existence of material non-public information giving
rise to a Grace Period (provided that in each notice the Company will not
disclose the content of such material non-public information to the Investors)
and the date on which the Grace Period will begin, and (ii) notify the Investors
in writing of the date on which the Grace Period ends; and, provided further,
that no Grace Period shall exceed twenty (20) consecutive days and during any
three hundred sixty five (365) day period such Grace Periods shall not exceed an
aggregate of forty-five (45) days and the first day of any Grace Period must be
at least two (2) Business Days after the last day of any prior Grace Period
(each, an “Allowable Grace Period”). For purposes of determining the length of a
Grace Period above, the Grace Period shall begin on and include the date the
Investors receive the notice referred to in clause (i) and shall end on and
include the later of the date the Investors receive the notice referred to in
clause (ii) and the date referred to in such notice. The provisions of Section
3(f) hereof shall not be applicable during the period of any Allowable Grace
Period. Upon expiration of the Grace Period, the Company shall again be bound by
the first sentence of Section 3(f) with respect to the information giving rise
thereto unless such material non-public information is no longer applicable.
Each Investor agrees, subject to the permitted disclosures similar to those set
forth in Section 3(j), to keep confidential any information provided by the
Company pursuant to this Section 3(r) until the Company shall have made public
disclosure of such information within the meaning of Rule 101(e) of
Regulation FD promulgated under the 1934 Act. Notwithstanding anything to the
contrary, the Company shall cause its transfer agent to deliver unlegended
shares of Common Stock to a transferee of an Investor in accordance with the
terms of the Securities Purchase Agreement in connection with any sale of
Registrable Securities with respect to which an Investor has entered into a
contract for sale, and delivered a copy of the prospectus included as part of
the applicable Registration Statement, prior to the Investor’s receipt of the
notice of a Grace Period and for which the Investor has not yet settled.

      4. Obligations Of The Investors.

         a. At least seven (7) Business Days prior to the first anticipated
filing date of a Registration Statement, the Company shall notify each Investor
in writing of the information the Company requires from each such Investor if
such Investor elects to have any of

 

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such Investor’s Registrable Securities included in such Registration Statement.
It shall be a condition precedent to the obligations of the Company to complete
the registration pursuant to this Agreement with respect to the Registrable
Securities of a particular Investor that such Investor shall furnish, in a
manner consistent with the last sentence of this Section 4(a), to the Company
such information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect and maintain the effectiveness of the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request. All
information provided to the Company by an Investor pursuant to the prior
sentence or pursuant to Section 3(m) hereof shall be in writing, and such
writing shall expressly acknowledge that the information is being provided for
use in connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto.

         b. Each Investor, by such Investor’s acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor’s election to exclude all of such Investor’s Registrable
Securities from such Registration Statement.

         c. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g) or
the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor’s receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(g) or the
first sentence of 3(f) or receipt of notice from the Company that no supplement
or amendment is required.

         d. The Investors shall use their reasonable best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration under this Agreement.

      5. Expenses of Registration.

      All reasonable expenses, other than underwriting discounts and commissions
(all of which shall be borne by the Investors), incurred in connection with the
performance of the Company’s obligations hereunder and under the transactions
contemplated hereby, including registrations, filings or qualifications pursuant
to Sections 2 and 3, including, without limitation, all registration, listing
and qualifications fees, printers and accounting fees, and fees and
disbursements of counsel for the Company shall be paid by the Company. The
Company shall also reimburse the Investors for the fees and disbursements of
Legal Counsel in connection with registration, filing or qualification pursuant
to Sections 2 and 3 of this Agreement which amount shall be limited to $5,000
for each Registration Statement.

 

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      6. Indemnification.

      In the event any Registrable Securities are included in a Registration
Statement under this Agreement:

         a. To the fullest extent permitted by law, the Company will, and hereby
does, indemnify, hold harmless and defend each Investor, the directors,
officers, partners, employees, agents, representatives of, and each Person, if
any, who controls any Investor within the meaning of the 1933 Act or the 1934
Act (each, an “Indemnified Person”), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys’
fees, amounts paid in settlement or expenses, joint or several (collectively,
“Claims”), incurred in investigating, preparing or defending any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing by
or before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto (“Indemnified Damages”), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other “blue sky” laws of any jurisdiction in which Registrable Securities are
offered (“Blue Sky Filing”), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided that the foregoing shall not apply to
information provided in writing by any Investor, (ii) any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus if used prior to the effective date of such Registration Statement,
or contained in the final prospectus (as amended or supplemented, if the Company
files any amendment thereof or supplement thereto with the SEC) or the omission
or alleged omission to state therein any material fact necessary to make the
statements made therein, in the light of the circumstances under which the
statements therein were made, not misleading, (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement or (iv) any material violation
of this Agreement (the matters in the foregoing clauses (i) through (iv) being,
collectively, “Violations”). Subject to Section 6(c), the Company shall
reimburse the Indemnified Persons, promptly as such expenses are incurred and
are due and payable, for any reasonable legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (w) shall not apply to a Claim by an
Indemnified Person arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person for such Indemnified Person expressly for use
in connection with the preparation of the Registration Statement, preliminary or
final prospectus or in any such amendment thereof or supplement thereto, if such
prospectus was timely made available by the Company pursuant to Section 3(d);
(x) shall not inure to the benefit of any such Indemnified Person from whom the
Person asserting any such Claim purchased the Registrable Securities that are
the subject thereof (or to the benefit of any Person controlling such Person) if
the untrue

 

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statement or omission of material fact was contained in a preliminary prospectus
and was corrected in the prospectus, as then amended or supplemented, and if
such prospectus was timely made available by the Company pursuant to
Section 3(d), and the Indemnified Person was promptly advised in writing not to
use the incorrect prospectus prior to the use giving rise to a violation and
such Indemnified Person, notwithstanding such advice, used it or failed to
deliver the correct prospectus as required by the 1933 Act and such correct
prospectus was timely made available pursuant to Section 3(d); (y) shall not be
available to the extent such Claim is based on a failure of the Investor to
deliver or to cause to be delivered the prospectus made available by the
Company, including a corrected prospectus, if such prospectus or corrected
prospectus was timely made available by the Company pursuant to Section 3(d);
and (z) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld or delayed, and which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to the Company of a release from all liability and losses in respect to such
Claim or litigation. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9.

         b. In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same manner
as is set forth in Section 6(a), the Company, the directors, officers,
employees, agents, representatives and each Person, if any, who controls the
Company within the meaning of the 1933 Act or the 1934 Act (each, an
“Indemnified Party”), against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement or any post-effective amendment thereof or
supplement thereto or any prospectus contained therein; and, subject to Section
6(c), such Investor will reimburse any legal or other expenses reasonably
incurred by an Indemnified Party in connection with investigating or defending
any such Claim as promptly as such expenses are incurred and are due and
payable; provided, however, that the indemnity agreement contained in this
Section 6(b) and the agreement with respect to contribution contained in
Section 7 shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Investor, which
consent shall not be unreasonably withheld or delayed, and which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to the Investor of a release from all liability and losses in respect to such
Claim or litigation; provided, further, however, that an Investor shall be
liable under this Section 6(b) for only that amount of a Claim or Indemnified
Damages as does not exceed the net proceeds to such Investor as a result of the
sale of Registrable Securities pursuant to such Registration Statement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Indemnified Party and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.

 

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         c. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim, such
Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is
to be made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
selected by the indemnifying party and reasonably satisfactory to the
Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the reasonable fees and expenses of not more than
one counsel for such Indemnified Person or Indemnified Party to be paid by the
indemnifying party, if, in the reasonable opinion of the Indemnified Person or
the Indemnified Party, as the case may be, the representation by such counsel of
the Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. In the case of an Indemnified Person, legal counsel
referred to in the immediately preceding sentence shall be selected by a
Majority in Interest to which the Claim relates. The Indemnified Party or
Indemnified Person shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or Claim by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnified Party or Indemnified Person which
relates to such action or Claim. The indemnifying party shall keep the
Indemnified Party or Indemnified Person fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its prior written consent, provided, however, that
the indemnifying party shall not unreasonably withhold, delay or condition its
consent. No indemnifying party shall, without the prior written consent of the
Indemnified Party or Indemnified Person, consent to entry of any judgment or
enter into any settlement or other compromise which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party or Indemnified Person of a release from all liability and
losses in respect to such Claim or litigation. Following indemnification as
provided for hereunder, the indemnifying party shall be subrogated to all rights
of the Indemnified Party or Indemnified Person with respect to all third
parties, firms or corporations relating to the matter for which indemnification
has been made. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action.

         d. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred;
provided that the indemnifying party shall make payment of all Indemnified
Damages within thirty (30) Business Days of the date on which it receives notice
of the amount of such Indemnified Damages.

 

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         e. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.

      7. Contribution.

      To the extent any indemnification by an indemnifying party is prohibited
or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no contribution shall be made under circumstances the maker would not have
been liable for indemnification under the fault standards set forth in
Section 6, (ii) no Person involved in the sale of Registrable Securities which
Person is guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) in connection with such sale shall be entitled to
contribution from any Person involved in such sale of Registrable Securities who
was not guilty of fraudulent misrepresentation; and (iii) contribution by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities
pursuant to such Registration Statement.

      8. Reports Under The 1934 Act.

      With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration (“Rule 144”), the Company agrees to:

         a. make and keep public information available, as those terms are
understood and defined in Rule 144;

         b. file with the SEC in a timely manner all reports and other documents
required of the Company under the 1934 Act so long as the Company remains
subject to such requirements and the filing of such reports and other documents
is required for the applicable provisions of Rule 144; and

         c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company, if
true, that it has complied with the reporting requirements of Rule 144, (ii) to
the extent not otherwise available through the EDGAR filing system, a copy of
the most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company, and (iii) such other information as may
be reasonably requested to permit the Investors to sell such securities pursuant
to Rule 144 without registration.

      9. Assignment of Registration Rights.

      The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of such Investor’s Registrable
Securities if: (i)

 

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the Investor agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.

      10. Amendment of Registration Rights.

      Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with the written consent of the Company and Investors
who then hold at least a majority of the Registrable Securities. Any amendment
or waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company. No such amendment shall be effective to the extent
that it applies to less than all of the holders of the Registrable Securities.
No consideration shall be offered or paid to any Person to amend or consent to a
waiver or modification of any provision of any of this Agreement unless the same
consideration also is offered to all of the parties to this Agreement.

      11. Miscellaneous.

         a. A Person is deemed to be a holder of Registrable Securities whenever
such Person owns or is deemed to own of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more Persons with respect to the same Registrable Securities, the Company shall
act upon the basis of instructions, notice or election received from the record
owner of such Registrable Securities.

         b. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one Business Day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:

 

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  If to the Company:

  TeleCommunication Systems, Inc.
275 West Street, Suite 400
Annapolis, Maryland 21401
Telephone: (410) 263-7616
Facsimile: (410) 263-7617
Attention: Thomas M. Brandt, Jr.

  with a copy (which shall not constitute notice) to:

  Piper Rudnick LLP
6225 Smith Avenue
Baltimore, Maryland 21209
Telephone: (410) 580-3000
Facsimile: (410) 580-3001
Attention: Wilbert H. Sirota, Esq.

  If to Legal Counsel:

  Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 756-2000
Facsimile: (212) 593-5955
Attention: Eleazer Klein, Esq.

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers attached hereto, with copies to such Buyer’s representatives as set forth
on the Schedule of Buyers, or to such other address and/or facsimile number
and/or to the attention of such other Person as the recipient party has
specified by written notice given to each other party five (5) days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

               c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.

 

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               d. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. Each party hereby irrevocably
submits to the non- exclusive jurisdiction of the state and federal courts
sitting in the City of New York, Borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.

               e. This Agreement, the Securities Purchase Agreement, the
Debentures, the Warrants and the instruments referenced herein and therein
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and thereof; provided, however, that the Investors
obligations under any non-disclosure agreement entered into with the Company
prior to the date hereof shall not be obviated hereby. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein and therein. This Agreement, the Securities Purchase
Agreement, the Debentures, the Warrants and the instruments referenced herein
and therein supersede all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof and thereof.

               f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.

               g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

               h. This Agreement may be executed in identical counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by

 

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facsimile transmission of a copy of this Agreement bearing the signature of the
party so delivering this Agreement.

               i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as any other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.

               j. All consents and other determinations required to be made by
the Investors pursuant to this Agreement shall be made, unless otherwise
specified in this Agreement, by Investors holding at least a majority of the
Registrable Securities, determined as if all the Warrants then outstanding have
been exercised for Registrable Securities without regard to any limitations on
exercises of the Warrants.

               k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.

               l. This Agreement is intended for the benefit of the parties
hereto and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.

               m. This Agreement shall terminate and be of no further effect on
the date on which the Investors shall have sold or can sell pursuant to Rule
144(k) all of the Registrable Securities.

* * * * * *

 

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     IN WITNESS WHEREOF, the parties have caused their respective signature page
to this Registration Rights Agreement to be duly executed as of day and year
first above written.

                      COMPANY:   BUYERS:                       TELECOMMUNICATION
SYSTEMS, INC.   THE RIVERVIEW GROUP LLC                       By:       By:    
           

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            Name:       Name:             Title:       Title:        

 

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     IN WITNESS WHEREOF, the parties have caused their respective signature page
to this Registration Rights Agreement to be duly executed as of day and year
first above written.

              BUYERS:               033 GROWTH PARTNERS I, L.P.              
By:            

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        Name:         Title:               033 GROWTH PARTNERS II, L.P.        
      By:            

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        Name:         Title:               033 GROWTH INTERNATIONAL FUND, LTD.  
            By:            

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        Name:         Title:               OYSTER POND PARTNERS, L.P.          
    By:            

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        Name:         Title:

 

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SCHEDULE OF BUYERS

              Investor Address   Investor's Representative's Address Investor  
and Facsimile Number   and Facsimile Number

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The Riverview Group LLC   666 Fifth Avenue, 8th Floor
New York, New York 10103
Attention: Daniel Cardella
Facsimile: (212) 977-1667
Telephone: (212) 841-4100   Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Attention: Eleazer Klein, Esq.
Facsimile: (212) 593-5955
Telephone: (212) 756-2000           033 Growth Partners I, L.P.   c/o 033 Asset
Management, LLC
125 High Street, Suite 1405
Olive Street Towers
Boston, MA 02110
Attention: Larry Longo
Facsimile: (617) 371-2002
Telephone: (617) 371-2015               033 Growth Partners II, L.P.   c/o 033
Asset Management, LLC
125 High Street, Suite 1405
Olive Street Towers
Boston, MA 02110
Attention: Larry Longo
Facsimile: (617) 371-2002
Telephone: (617) 371-2015               033 Growth International Fund, Ltd.  
c/o 033 Asset Management, LLC
125 High Street, Suite 1405
Olive Street Towers
Boston, MA 02110
Attention: Larry Longo
Facsimile: (617) 371-2002
Telephone: (617) 371-2015               Oyster Pond Partners, L.P.   c/o 033
Asset Management, LLC
125 High Street, Suite 1405
Olive Street Towers
Boston, MA 02110
Attention: Larry Longo
Facsimile: (617) 371-2002
Telephone: (617) 371-2015    

 

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EXHIBIT A

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038

Attn: [                   ]

     Re: TeleCommunication Systems, Inc.

Ladies and Gentlemen:

     We are counsel to TeleCommunication Systems, Inc., a Maryland corporation
(the “Company”), and have represented the Company in connection with the
preparation of a Registration Statement (the “Registration Statement”) on Form
S-3 (File No. 333-                   ) which was filed with the Securities and
Exchange Commission (the “SEC”) on [INSERT FILING DATE]. The Registration
Statement covers the resale of [                   ] shares of common stock of
the Company (the “Shares”) by the selling stockholders listed therein.

     In connection with the foregoing, we advise you that a member of the SEC’s
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the Securities Act of 1933, as
amended, at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and
we have no knowledge, after telephonic inquiry of a member of the SEC’s staff,
that any stop order suspending its effectiveness has been issued or that any
proceedings for that purpose are pending before, or threatened by, the SEC and
the Shares are available for resale under the 1933 Act pursuant to the
Registration Statement.

  Very truly yours,

  [ISSUER’S COUNSEL]

  By:                                      

CC: [LIST NAMES OF HOLDERS]

 

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EXHIBIT B

SELLING STOCKHOLDERS

     The shares of common stock being offered by the selling stockholders were
issued to the selling stockholders and are issuable upon conversion of the
convertible debentures and upon exercise of the warrants. For additional
information regarding the shares of common stock issued, the convertible
debentures and warrants, see “Private Placement of Common Stock, Convertible
Debentures and Warrants” above. We are registering the shares of common stock in
order to permit the selling stockholders to offer the shares for resale from
time to time. Except for the ownership of the common stock, convertible
debentures and the warrants, the selling stockholders have not had any material
relationship with us within the past three years.

     The table below lists the selling stockholders and other information
regarding the beneficial ownership of the shares of common stock by each of the
selling stockholders. The second column lists the number of shares of common
stock beneficially owned by each selling stockholder, based on its ownership of
the common stock, convertible debentures and the warrants, as of                
   , 200_, assuming conversion of all convertible debentures and exercise of the
warrants held by the selling stockholders on that date, without regard to any
limitations on conversions or exercise.

     The third column lists the shares of common stock being offered by this
prospectus by the selling stockholders.

     In accordance with the terms of registration rights agreements with the
holders of the common stock, the convertible debentures and the warrants, this
prospectus generally covers the resale of at least 150% of that number of shares
of common stock equal to the number of shares of common stock issued to the
selling stockholders, issuable upon conversion of the convertible debentures and
upon exercise of the related warrants, determined as if the outstanding
convertible debentures and warrants were converted or exercised, as applicable,
in full, in each case, as of the Business Day immediately preceding the date
this registration statement was initially filed with the SEC. Because the
conversion price of the convertible debentures and the exercise price of the
warrants may be adjusted, the number of shares that will actually be issued may
be more or less than the number of shares being offered by this prospectus. The
fourth column assumes the sale of all of the shares offered by the selling
stockholders pursuant to this prospectus.

     Under the terms of the convertible debentures and the warrants, a selling
stockholder may not convert the convertible debentures, or exercise the
warrants, to the extent such conversion or exercise would cause such selling
stockholder, together with its affiliates, to beneficially own a number of
shares of common stock which would exceed 9.99% of our then outstanding shares
of common stock following such conversion or exercise, excluding for purposes of
such determination shares of common stock issuable upon conversion of the
convertible debentures which have not been converted and upon exercise of the
warrants which have not been exercised. The number of shares in the second
column does not reflect this limitation. The selling stockholders may sell all,
some or none of their shares in this offering. See “Plan of Distribution.”

 

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                                      Maximum Number of         Number of Shares
  Shares to be Sold   Number of Shares     Owned Prior to   Pursuant to this  
Owned After Name of Selling Stockholder   Offering   Prospectus   Offering

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The Riverview Group LLC (1)
    [___]       [___]       [0]  
033 Growth Partners I, L.P. (2)
    [___]       [___]       [0]  
033 Growth Partners II, L.P. (2)
                       
033 Growth International Fund, Ltd. (2)
                       
Oyster Pond Partners, L.P. (2)
                       

(1)   The sole member of Riverview is Millennium Holding Group, L.P.
(“Holding”). Millennium Management LLC (“Millennium Management”) is the general
partner of Holding and consequently has voting control and investment discretion
over securities held by Holding and by Riverview. Israel A. Englander is the
sole managing member of Millennium Management. As a result, Mr. Englander may be
considered the beneficial owner of any shares deemed to be beneficially held by
Millennium Management. Each of Holding, Millennium Management and Mr. Englander
disclaims any beneficial ownership of the shares owned by Riverview.

(2)   TO COME

 

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PLAN OF DISTRIBUTION

     We are registering the shares of common stock issued to the selling
stockholders and issuable upon conversion of the convertible debentures and upon
exercise of the warrants to permit the resale of these shares of common stock by
the holders of the common stock, the convertible debentures and the warrants
from time to time after the date of this prospectus. We will not receive any of
the proceeds from the sale by the selling stockholders of the shares of common
stock. We will bear all fees and expenses incident to our obligation to register
the shares of common stock.

     The selling stockholders may sell all or a portion of the shares of common
stock beneficially owned by them and offered hereby from time to time directly
or through one or more underwriters, broker-dealers or agents. If the shares of
common stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,

•   on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale;

•   in the over-the-counter market;

•   in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;

•   through the writing of options, whether such options are listed on an
options exchange or otherwise;

•   ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

•   block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;

•   purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;

•   an exchange distribution in accordance with the rules of the applicable
exchange;

•   privately negotiated transactions;

•   short sales;

•   broker-dealers may agree with the selling securityholders to sell a
specified number of such shares at a stipulated price per share;

•   a combination of any such methods of sale; and

 

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•   any other method permitted pursuant to applicable law.

     If the selling stockholders effect such transactions by selling shares of
common stock to or through underwriters, broker-dealers or agents, such
underwriters, broker-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of the shares of common stock for whom they may act
as agent or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, broker-dealers or agents may be in
excess of those customary in the types of transactions involved). In connection
with sales of the shares of common stock or otherwise, the selling stockholders
may enter into hedging transactions with broker-dealers, which may in turn
engage in short sales of the shares of common stock in the course of hedging in
positions they assume. The selling stockholders may also sell shares of common
stock short and deliver shares of common stock covered by this prospectus to
close out short positions. The selling stockholders may also loan or pledge
shares of common stock to broker-dealers that in turn may sell such shares.

     The selling stockholders may pledge or grant a security interest in some or
all of the convertible debentures, warrants or shares of common stock owned by
them and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time pursuant to this prospectus or any amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of
1933, as amended, amending, if necessary, the list of selling stockholders to
include the pledgee, transferee or other successors in interest as selling
stockholders under this prospectus. The selling stockholders also may transfer
and donate the shares of common stock in other circumstances in which case the
transferees, donees, pledgees or other successors in interest will be the
selling beneficial owners for purposes of this prospectus.

     The selling stockholders and any broker-dealer participating in the
distribution of the shares of common stock may be deemed to be “underwriters”
within the meaning of the Securities Act, and any commission paid, or any
discounts or concessions allowed to, any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. At the time a
particular offering of the shares of common stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of shares of common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
stockholders and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.

     Under the securities laws of some states, the shares of common stock may be
sold in such states only through registered or licensed brokers or dealers. In
addition, in some states the shares of common stock may not be sold unless such
shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.

     There can be no assurance that any selling stockholder will sell any or all
of the shares of common stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.

 

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     The selling stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder, including,
without limitation, Regulation M of the Exchange Act, which may limit the timing
of purchases and sales of any of the shares of common stock by the selling
stockholders and any other participating person. Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of common
stock to engage in market-making activities with respect to the shares of common
stock. All of the foregoing may affect the marketability of the shares of common
stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.

     We will pay all expenses of the registration of the shares of common stock
pursuant to the registration rights agreement, estimated to be $[ ] in total,
including, without limitation, Securities and Exchange Commission filing fees
and expenses of compliance with state securities or “blue sky” laws; provided,
however, that a selling stockholder will pay all underwriting discounts and
selling commissions, if any. We will indemnify the selling stockholders against
liabilities, including some liabilities under the Securities Act, in accordance
with the registration rights agreements, or the selling stockholders will be
entitled to contribution. We may be indemnified by the selling stockholders
against civil liabilities, including liabilities under the Securities Act, that
may arise from any written information furnished to us by the selling
stockholder specifically for use in this prospectus, in accordance with the
related registration rights agreements, or we may be entitled to contribution.

     Once sold under the shelf registration statement, of which this prospectus
forms a part, the shares of common stock will be freely tradable in the hands of
persons other than our affiliates.

 

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EXHIBIT E

VOTING AGREEMENT

     VOTING AGREEMENT, dated as of December 18, 2003 (this “Agreement”), by and
among TeleCommunication Systems, Inc., a Maryland corporation (the “Company”),
and Maurice B. Tosé (the “Stockholder”).

     WHEREAS, the Company and certain investors (each, an “Investor”, and
collectively, the “Investors”) have entered into a (i) Securities Purchase
Agreement, dated as of the date hereof (the “Securities Purchase Agreement”),
pursuant to which, among other things, the Company has agreed to issue and sell
to the Investors and the Investors have agreed to purchase, shares of Class A
Common Stock, par value $0.01 per share, of the Company (“Common Stock”), and
warrants to acquire shares of Common Stock, and the Company has agreed to issue
and sell to certain Investors an aggregate of $15 million of subordinated
convertible debentures of the Company (the “Debentures”), which Debentures are
convertible into shares of Common Stock;

     WHEREAS, as of the date hereof, Stockholder owns 318,000 shares of Common
Stock (disregarding the potential for conversion of Class B Common Stock into
Common Stock) and 9,292,235 shares of Class B common stock, par value $0.01 per
share, of the Company (the “Class B Common Stock”), which represents in the
aggregate (i) approximately 1.5% of the total issued and outstanding Common
Stock of the Company (ii) 97.8% of the total issued and outstanding shares for
Class B Common Stock, and (iii) approximately 55.9% of the total voting power of
the Company; and under Rule 13d-3 (“Rule 13d-3”) promulgated under the
Securities Exchange Act of 1934, as amended, the Stockholder is deemed to
beneficially own 173,995 shares of Common Stock owned by Teresa M.S. Layden, the
Stockholder’s wife, 173,995 shares of Common Stock held in a trust for the
benefit of the Stockholder’s and Ms. Layden’s extended family, and 215,753
shares of Class B Common Stock held in a trust for the benefit of the
Stockholder’s and Ms. Layden’s children, which the Stockholder is deemed to
beneficially own pursuant to Rule 13d-3.

     WHEREAS, as a condition to the willingness of the Investors to enter into
the Securities Purchase Agreement and to consummate the transactions
contemplated thereby (collectively, the “Transaction”), the Investors have
required that the Stockholder agree, and in order to induce the Investors to
enter into the Securities Purchase Agreement, the Stockholder has agreed, to
enter into this Agreement with respect to all the Common Stock and Class B
Common Stock now owned and which may hereafter be acquired by the Stockholder
and any other securities, if any, which Stockholder is currently entitled to
vote, or after the date hererof, becomes entitled to vote, at any meeting of
stockholders of the Company (the “Other Securities”).

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:

1

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ARTICLE I

VOTING AGREEMENT OF THE STOCKHOLDER

     SECTION 1.01. Voting Agreement. Subject to the last sentence of this
Section 1.01, Stockholder hereby agrees that at any meeting of the stockholders
of the Company, however called, and in any action by written consent of the
Company’s stockholders, Stockholder shall vote the Common Stock, Class B Common
Stock and the Other Securities: (a) in favor of the Stockholder Approval (as
defined in the Securities Purchase Agreement) as described in Section 4(m) of
the Securities Purchase Agreement; and (b) against any proposal or any other
corporate action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the Company
under the Securities Purchase Agreement or which could result in any of the
conditions to the Company’s obligations under the Securities Purchase Agreement
not being fulfilled. The Stockholder acknowledges receipt and review of a copy
of the Securities Purchase Agreement and the other Transaction Documents (as
defined in the Securities Purchase Agreement). The obligations of the
Stockholder under this Section 1.01 shall terminate immediately following the
occurrence of the Stockholder Approval.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER

     Stockholder hereby represents and warrants, severally but not jointly, to
each of the Investors as follows:

     SECTION 2.01. Authority Relative to This Agreement. Stockholder has all
necessary power and authority to execute and deliver this Agreement, to perform
his or its obligations hereunder and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by Stockholder and
constitutes a legal, valid and binding obligation of Stockholder, enforceable
against such Stockholder in accordance with its terms, except (a) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or similar laws now or
hereafter in effect relating to, or affecting generally the enforcement of
creditors’ and other obligees’ rights, (b) where the remedy of specific
performance or other forms of equitable relief may be subject to certain
equitable defenses and principles and to the discretion of the court before
which the proceeding may be brought, and (c) where rights to indemnity and
contribution thereunder may be limited by applicable law and public policy.

     SECTION 2.02. No Conflict. (a) The execution and delivery of this Agreement
by Stockholder does not, and the performance of this Agreement by Stockholder
shall not, (i) conflict with or violate any federal, state or local law,
statute, ordinance, rule, regulation, order, judgment or decree applicable to
Stockholder or by which the Common Stock, Class B Common Stock or the Other
Securities owned by Stockholder are bound or affected or (ii) result in any
breach of or constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the Common Stock, Class B Common
Stock or the Other Securities owned by Stockholder pursuant to, any note,

2

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bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Stockholder is a party or
by which Stockholder or the Common Stock, Class B Common Stock or Other
Securities owned by Stockholder are bound.

     (b) The execution and delivery of this Agreement by Stockholder does not,
and the performance of this Agreement by Stockholder shall not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental entity by Stockholder.

     SECTION 2.03. Title to the Stock. As of the date hereof, Stockholder is the
owner of the number of shares of Common Stock and Class B Common Stock set forth
opposite its name on Appendix A attached hereto, entitled to vote, without
restriction, on all matters brought before holders of capital stock of the
Company, which Common Stock and Class B Common Stock represent on the date
hereof the percentage of the outstanding stock and voting power of the Company
set forth on such Appendix. Such Common Stock and Class B Common Stock are all
the securities of the Company owned, either of record or beneficially, by
Stockholder, except for (a) stock options and restricted shares disclosed in the
Company’s proxy statement for its 2003 annual meeting of stockholders,
(b) 173,995 shares of Common Stock owned by Teresa M.S. Layden, the
Stockholder’s wife, (c) 173,995 shares of Common Stock held in a trust for the
benefit of the Stockholder’s and Ms. Layden’s extended family, and (d) 215,753
shares of Class B Common Stock held in a trust for the benefit of the
Stockholder’s and Ms. Layden’s children. None of such shares referred to in
clauses (a) (b) (c) and (d) above are included in Appendix A attached hereto.
Such Common Stock and Class B Common Stock are owned free and clear of all
security interests, liens, claims, pledges, options, rights of first refusal,
agreements, limitations on such Stockholder’s voting rights, charges and other
encumbrances of any nature whatsoever, except that (x) Stockholder has
established a “10b5-1” non-discretionary plan with respect to 480,000 of the
shares of Class B Common Stock listed on Appendix A, (y) Stockholder has pledged
an aggregate of 7,930,068 of the shares of Class B Common Stock pursuant to
certain pledge agreements. No Stockholder has appointed or granted any proxy,
which appointment or grant is still effective, with respect to the Common Stock
or Class B Common Stock or Other Securities owned by the Stockholder.

ARTICLE III

COVENANTS

     SECTION 3.01. No Disposition or Encumbrance of Stock. (a) Stockholder
hereby covenants and agrees that, except as contemplated by this Agreement,
Stockholder shall not offer or agree to sell, transfer, tender, assign,
hypothecate or otherwise dispose of, grant a proxy or power of attorney with
respect to, or create or permit to exist any security interest, lien, claim,
pledge, option, right of first refusal, agreement, limitation on Stockholder’s
voting rights, charge or other encumbrance of any nature whatsoever
(“Encumbrance”) with respect to the Common Stock, Class B Common Stock or Other
Securities, directly or indirectly, initiate, solicit or encourage any person to
take actions which could reasonably be expected to lead to the occurrence of any
of the foregoing; provided, however, that Stockholder may assign, sell or
transfer any Common Stock, Class B Common Stock or Other Securities provided
that any such recipient of the Common Stock, Class B Common Stock or Other
Securities has delivered to the Company and each Investor a written agreement in
a form reasonably satisfactory to the

3

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Investors that the recipient shall be bound by, and the Common Stock, Class B
Common Stock and/or Other Securities so transferred, assigned or sold shall
remain subject to this Agreement

     (b) Stockholder hereby covenants and agrees that, Stockholder shall not
convert any Class B Common Stock into shares of Common Stock.

     (c) Notwithstanding anything to the contrary in clause (a) or (b) above,
Stockholder may freely convert, sell, transfer, tender, assign, hypothecate or
otherwise dispose of, grant a proxy or power of attorney with respect to, or
create or permit to exist any Encumbrance with respect to, the Common Stock,
Class B Common Stock or Other Securities held by Stockholder; provided that
after any such conversion, sale, transfer, tender, assignment, hypothecation or
other disposition, grant or encumbrance Stockholder retains the power to cast at
least 50.1% of the votes entitled to be cast at any meeting of the Company’s
stockholders and any action by written consent of the Company’s stockholders in
favor of the Stockholder Approval.

     SECTION 3.02. Company Cooperation. The Company hereby covenants and agrees
that it will not, and each Stockholder irrevocably and unconditionally
acknowledges and agrees that the Company will not (and waives any rights against
the Company in relation thereto), recognize any Encumbrance or agreement on any
of the Common Stock, Class B Common Stock or Other Securities subject to this
Agreement unless the provisions of Section 3.01 have been complied with. The
Company agrees to use its reasonable best efforts to ensure that at any time in
which any Stockholder Approval is required pursuant to Section 4(m) of the
Securities Purchase Agreement, it will cause holders of Common Stock, Class B
Common Stock or Other Securities representing the percentage of outstanding
capital stock required to vote in favor of the Transaction in order for the
Company to comply with its obligations under Section 4(m) of the Securities
Purchase Agreement to become party to and bound by the terms and conditions of
this Agreement and the Common Stock, Class B Common Stock and Other Securities
held by such holders to be subject to the terms and conditions of this
Agreement.

ARTICLE IV

MISCELLANEOUS

     SECTION 4.01. Further Assurances. Stockholder will execute and deliver such
further documents and instruments and take all further action as may be
reasonably necessary in order to consummate the transactions contemplated
hereby.

     SECTION 4.02. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that any Investor (without
being joined by any other Investor) shall be entitled to specific performance of
the terms hereof, in addition to any other remedy at law or in equity. Any
Investor shall be entitled to its reasonable attorneys’ fees in any action
brought to enforce this Agreement in which it is the prevailing party.

     SECTION 4.03. Entire Agreement. This Agreement constitutes the entire
agreement among the Company and the Stockholder (other than the Securities
Purchase Agreement and the other Transaction Documents) with respect to the
subject matter hereof and

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supersedes all prior agreements and understandings, both written and oral, among
the Company and the Stockholder with respect to the subject matter hereof.

     SECTION 4.04. Amendment. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.

     SECTION 4.05. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of this Agreement is not affected in any manner materially adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that the
terms of this Agreement remain as originally contemplated to the fullest extent
possible.

     SECTION 4.06. Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
the internal laws of the State of Maryland, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of Maryland or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of Maryland. The parties hereby agree that
all actions or proceedings arising directly or indirectly from or in connection
with this Agreement shall be litigated only in the Supreme Court of the State of
New York or the United States District Court for the Southern District of New
York located in New York County, New York. The parties consent to the
jurisdiction and venue of the foregoing courts and consent that any process or
notice of motion or other application to any of said courts or a judge thereof
may be served inside or outside the State of New York or the Southern District
of New York by registered mail, return receipt requested, directed to the party
being served at its address set forth on the signature ages to this Agreement
(and service so made shall be deemed complete three (3) days after the same has
been posted as aforesaid) or by personal service or in such other manner as may
be permissible under the rules of said courts. Each of the Company and each
Stockholder irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action, or proceeding brought in such a court and any claim that
suit, action, or proceeding has been brought in an inconvenient forum. EACH
PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

     SECTION 4.07. Third-Party Beneficiaries. The Investors shall be intended
third party beneficiaries of this Agreement to the same extent as if they were
parties hereto, and shall be entitled to enforce the provisions hereof.

     SECTION 4.08. Termination. This Agreement shall terminate immediately
following the occurrence of the Stockholder Approval or upon the mutual consent
of the Stockholder and the Investors.

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     IN WITNESS WHEREOF, each Stockholder and the Company has duly executed this
Agreement.

              THE COMPANY:               TELECOMMUNICATION SYSTEMS, INC.        
      By:            

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        Name:         Title: Dated: December 18, 2003             Address:   275
West Street, Suite 400,
Annapolis, Maryland 21401

 

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              STOCKHOLDER:           Dated: December 18, 2003  

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    Maurice B. Tosé               Address:   1299 Magnolia Ave.
Annapolis, MD 21403

 

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APPENDIX A

                                                              Voting Percentage
    Class A Common   Class B Common   Percentage of Stock   of Stock Stockholder
  Stock Owned   Stock Owned   Outstanding   Outstanding

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Maurice B. Tosé1
    318,000       9,292,235       30.6 %     55.9 %

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1   Excludes 272,050 shares of Class A Common Stock issuable upon the exercise
of stock options exercisable within 60 days of April 30, 2003 and 120,000 shares
of restricted Class A Common Stock. Under Rule 13d-3 the Stockholder is deemed
to beneficially own 173,995 shares of Class A Common Stock owned by Teresa M.S.
Layden, the Stockholder’s wife, 173,995 shares of Class A Common Stock held in a
trust for the benefit of the Stockholder’s and Ms. Layden#s extended family, and
215,753 shares of Class B Common Stock held in a trust for the benefit of the
Stockholder’s and Ms. Layden#s children. The Stockholder disclaims beneficial
ownership of all of these shares and such shares are excluded from this
Appendix.