Document:

exv4w1

 

Exhibit 4.1

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: January 13, 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 January 13, 2009, 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)

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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

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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. 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

               (c) Mechanics of Conversion.

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	 	 	(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 product of (I) the
sum of the number of shares of Common Stock not issued to the Holder

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	 	 	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

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	 	 	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

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	 	 	in excess 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 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

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	 	 	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 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

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	 	 	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;
	 
	 	 	(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.

10

 

              (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

11

 

Entity for purposes of this Section 5(b).

               (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

12

 

such shares of Common Stock been held by the Holder
upon the consummation of such
Corporate Event or (ii) in lieu of the shares of Common Stock otherwise
receivable upon such conversion, such securities or other assets received by
the holders of Common Stock in connection with the consummation of such
Corporate Event in such amounts as the Holder would have been entitled to
receive had this 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

13

 

	 	 	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.
	 
	 	 	(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

14

 

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

15

 

               (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 January 13, 2006, 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

16

 

of
effectiveness of delivery of a written notice election (the “Prepayment
Notice”), the
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

17

 

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 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

18

 

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 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.

19

 

               (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 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

20

 

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 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,

21

 

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.

          (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.

22

 

               (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 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.

23

 

          (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.

          (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

24

 

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.

          (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

25

 

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 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.

26

 

     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.

               (b) Payments. Whenever any payment of cash is to be made by the

27

 

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

28

 

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.

               “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

29

 

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 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

30

 

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 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

31

 

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.

                    (f) “Interest Conversion Price” means, with respect to any Interest

32

 

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.

                    (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

33

 

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]

34

 

     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:	 	/s/ Thomas M. Brandt, Jr.
	 	 	 	 	

	 	 	 	 	Thomas M. Brandt, Jr.
	 	 	 	 	Senior Vice
President and
Chief Financial Officer

35

 

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:	 	 
	 	 	

	 	 	 
	Aggregate Conversion Amount to be converted:	 	 
	 	 	

Please confirm the following information:

	 	 	 
	Conversion Price:	 	 
	 	 	

	 	 	 
	Number of shares of Common Stock to be issued:	 	 
	 	 	

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

	 	 	 
	Issue to:	 	 
	 	 	

	 	 	

	 	 	

	 	 	 
	Facsimile Number:	 	 
	 	 	

	 	 	 
	Authorization:	 	 
	 	 	

	 	 	 
	By:	 	 
	 	 	

	 	 	 
	 	Title:	 
	 	 	

	 	 	 
	Dated:	 	 
	 	 	

	 	 	 
	Account Number:	 	 
	 	 	

	     (if electronic book entry transfer)

	 	 	 
	Transaction Code Number:	 	 
	 	 	

	     (if electronic book entry transfer)	 	 

36

 

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:	 	 
	 	 	
 
	 	

37exv4w2

 

EXHIBIT 4.2

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-5
	Number of Shares:	 	
12,231
	Date of Issuance:	 	
January 13, 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, 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),
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”).

     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)

1

 

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.

          (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

2

 

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.

          (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

3

 

		
	 	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 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

4

 

		
	 	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
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

5

 

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.

6

 

		
	 	     (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 

7

 

		
	 	obtainable upon exercise of the SPA Warrants then
outstanding 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 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:

8

 

          (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 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

9

 

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 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).

10

 

     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 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.

11

 

          (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 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

12

 

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.

     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.

13

 

          (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.

          (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 January 13,
2007.

          (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

14

 

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 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

 

     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:	 	/s/ Thomas M. Brandt, Jr.
	 	 	 	 	

	 	 	 	 	Thomas M. Brandt, Jr.
	 	 	 	 	Senior Vice
President and
Chief Financial Officer

16

 

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___

	 	 	 	 	 	 	 
	 	 	

	 	 	Name of Registered Holder
	 	 	 	 	 	 	 
	 	 	
By:
	 	 	 	 
	 	 	 	 	
	 	 
	 	 	 	 	Name:	 	 
	 	 	 	 	Title:	 	 

17

 

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:
	 	 	 	 
	 	 	 	 	
	 	 
	 	 	 	 	Name:	 	 
	 	 	 	 	Title:	 	 

18

 

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-4
	Number of Shares:	 	
40,316
	Date of Issuance:	 	
January 13, 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, 033 GROWTH INTERNATIONAL FUND LTD., 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),
Forty-Thousand Three Hundred And Sixteen (40,316) 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”).

     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)

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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.

          (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

2

 

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.

          (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

3

 

		
	 	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 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

4

 

		
	 	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
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

5

 

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.

6

 

		
	 	     (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

7

 

		
	 	obtainable upon exercise of the SPA Warrants then outstanding
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 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:

8

 

          (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 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

9

 

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 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).

10

 

     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 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.

11

 

          (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 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

12

 

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.

     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.

13

 

          (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.

          (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 January 13,
2007.

          (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

14

 

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 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

 

     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:	 	/s/ Thomas M. Brandt, Jr.
	 	 	 	 	

	 	 	 	 	Thomas M. Brandt, Jr.
	 	 	 	 	Senior Vice
President and
Chief Financial Officer

16

 

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___

	 	 	 	 	 	 	 
	 	 	

	 	 	Name of Registered Holder
	 	 	 	 	 	 	 
	 	 	
By:	 	 	 	 
	 	 	 	 	
	 	 
	 	 	 	 	Name:	 	 
	 	 	 	 	Title:	 	 

17

 

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:	 	 
	 	 	 	 	

	 	 	 	 	Name:
	 	 	 	 	Title:

18

 

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-3
	Number of Shares:	 	
25,752
	Date of Issuance:	 	
January 13, 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, 033 GROWTH PARTNERS II, 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),
Twenty-Five Thousand Seven Hundred And Fifty-Two (25,752) 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”).

     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

1

 

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.

          (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

2

 

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.

          (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

3

 

		
	 	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 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

4

 

		
	 	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
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:

5

 

		
	 	     (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.

		
	 	     (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

6

 

		
	 	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 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.

7

 

		
	 	     (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 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

8

 

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 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

9

 

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 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

10

 

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 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.

11

 

     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.

     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

12

 

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.

          (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.

13

 

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

          (f)
“Expiration Date” means January 13,
2007.

          (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
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]

14

 

     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:	 	/s/ Thomas M. Brandt, Jr.
	 	 	 	 	

	 	 	 	 	Thomas M. Brandt, Jr.
	 	 	 	 	Senior Vice
President and
Chief Financial Officer

15

 

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___

	 	 	 	 	 	 	 
	 	 	
	 	 
	 	 	Name of Registered Holder
	 	 	 	 	 	 	 
	 	 	
By:	 	 	 	 
	 	 	 	 	
	 	 
	 	 	 	 	Name:	 	 
	 	 	 	 	Title:	 	 

16

 

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:	 	 
	 	 	 	 	

	 	 	 	 	Name:
	 	 	 	 	Title:

17

 

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-2
	Number of Shares:	 	
92,237
	Date of Issuance:	 	
January 13, 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, 033 GROWTH PARTNERS I, 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),
Ninety-Two Thousand Two Hundred And Thirty-Seven (92,237) 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”).

     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

1

 

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.

          (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

2

 

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.

          (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

3

 

		
	 	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 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

4

 

		
	 	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
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:

5

 

		
	 	     (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.

		
	 	     (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

6

 

		
	 	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 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.

7

 

		
	 	     (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 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

8

 

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 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

9

 

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 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

10

 

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 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.

11

 

     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.

     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

12

 

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.

          (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.

13

 

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

          (f)
“Expiration Date” means January 13,
2007.

          (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
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]

14

 

     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:	 	/s/ Thomas M. Brandt, Jr.
	 	 	 	 	

	 	 	 	 	Thomas M. Brandt, Jr.
	 	 	 	 	Senior Vice
President and
Chief Financial Officer

15

 

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___

	 	 	 	 	 
	 	 	 	 	 
	 	 	

Name of Registered Holder
	 	 	
 	 	 
	 	 	
By:	 	 
	 	 	 	 	

	 	 	 	 	Name:
	 	 	 	 	Title:

16

 

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:	 	 
	 	 	 	 	

	 	 	 	 	Name:
	 	 	 	 	Title:

17

 

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-1
	Number of Shares:	 	
170,536
	Date of Issuance:	 	
January 13, 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, 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) 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”).

     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

1

 

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.

          (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

2

 

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.

          (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

3

 

		
	 	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 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

4

 

		
	 	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
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:

5

 

		
	 	     (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.
	 
	 	     (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

6

 

		
	 	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 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.

7

 

		
	 	     (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 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

8

 

          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 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

9

 

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 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

10

 

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 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.

11

 

     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.

     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

12

 

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.

          (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.

13

 

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

          (f)
“Expiration Date” means January 13,
2007.

          (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
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]

14

 

     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:	 	/s/ Thomas M. Brandt, Jr.
	 	 	 	 	

	 	 	 	 	Thomas M. Brandt, Jr.
	 	 	 	 	Senior Vice
President and
Chief Financial Officer

15

 

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___

	 	 	 	 	 
	 	 	

	 	 	
Name of Registered Holder
	 	 	 	 	 
	 	 	
By:	 	 
	 	 	 	 	

	 	 	 	 	Name:
	 	 	 	 	Title:

16

 

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:	 	 
	 	 	 	 	

	 	 	 	 	Name:
	 	 	 	 	Title:

17

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