SUBORDINATED CONVERTIBLE DEBENTURE

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

     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”).

               (c) Mechanics of Conversion.

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               (d) Limitations on Conversions.

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              (4) RIGHTS UPON EVENT OF DEFAULT.

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

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

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              (5) RIGHTS UPON CHANGE OF CONTROL.

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

               (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

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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

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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:

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

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

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

               (a)     (i) Mandatory Conversion. If at any time from and after 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

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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

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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

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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.

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               (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

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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,

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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.

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               (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.

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          (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

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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

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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:

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     If to the Holder:

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

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

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

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

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

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

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

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

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

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

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

               “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

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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

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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

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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

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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

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including July 1 and ending on and including December 31.

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

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

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

[Signature Page Follows]

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

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EXHIBIT I

TELECOMMUNICATION SYSTEMS, INC.
CONVERSION NOTICE

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

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

Please confirm the following information:

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

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ACKNOWLEDGMENT

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

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