SC 13D

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 13D

Under the Securities Exchange Act of 1934
(Amendment No. )*

ImageWare Systems, Inc.

(Name of Issuer)

Common Shares, par value $0.01 per share

(Title of Class of Securities)

45245S 10 8

(Cusip Number)

Marvin I. Friedman
L.F. Global Holdings, LLC
12230 El Camino Real, Suite 220
San Diego, California 92130
(858) 509-8820

(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)

June 16, 2003

(Date of Event Which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. o

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 for other parties to whom copies are to be sent.

^* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

CUSIP No. 45245S 10 8
	1.	Name of Reporting Person: L.F. Global Holdings, LLC			I.R.S. Identification Nos. of above persons (entities only): 33-0775952
	2.	Check the Appropriate Box if a Member of a Group (See Instructions):
		(a)	o
		(b)	x
	3.	SEC Use Only:
	4.	Source of Funds (See Instructions): OO
	5.	Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e): o
	6.	Citizenship or Place of Organization: California
Number of Shares Beneficially Owned by Each Reporting Person With
			7.	Sole Voting Power: 2,327,848*
			8.	Shared Voting Power: 0
			9.	Sole Dispositive Power: 2,327,848*
			10.	Shared Dispositive Power: 0
	11.	Aggregate Amount Beneficially Owned by Each Reporting Person: 2,327,848*
	12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions): o
	13.	Percent of Class Represented by Amount in Row (11): 29.78%**
	14.	Type of Reporting Person (See Instructions): OO

•     Pursuant to Rule 13d-3, Determination of Beneficial Ownership, this number represents the maximum number of Common Shares the Reporting Person could acquire assuming (i) conversion of the entire principal amount of the LF Note; (ii) conversion of the entire principal amount of the Closing Note; and (iii) exercise in full of the LF Warrant (each as defined herein below and subject to certain adjustments set forth in the Consent Agreement and/or the Purchased Securities (collectively such Common Shares are sometimes referred to herein as the “Purchased Shares”) (see Items 1 and 4 below).

•     Represents the percentage obtained by dividing (i) the number of Purchased Shares by (ii) the sum of (a) the number of Common Shares outstanding as of May 6, 2003, as reported in the Company’s Quarterly Report on Form 10-QSB filed with the Commission on May 15, 2003, and (b) the number of Purchased Shares. (see footnote * above)

CUSIP No. 45245S 10 8
	1.	Name of Reporting Person: L.F. Global Investments, LLC			I.R.S. Identification Nos. of above persons (entities only): 33-0663884
	2.	Check the Appropriate Box if a Member of a Group (See Instructions):
		(a)	o
		(b)	x
	3.	SEC Use Only:
	4.	Source of Funds (See Instructions): AF
	5.	Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e): o
	6.	Citizenship or Place of Organization: California
Number of Shares Beneficially Owned by Each Reporting Person With
			7.	Sole Voting Power: 2,327,848*
			8.	Shared Voting Power: 0
			9.	Sole Dispositive Power: 2,327,848*
			10.	Shared Dispositive Power: 0
	11.	Aggregate Amount Beneficially Owned by Each Reporting Person: 2,327,848*
	12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions): o
	13.	Percent of Class Represented by Amount in Row (11): 29.78%**
	14.	Type of Reporting Person (See Instructions): OO

•     Pursuant to Rule 13d-3, Determination of Beneficial Ownership, this number represents the maximum number of Common Shares the Reporting Person could acquire assuming (i) conversion of the entire principal amount of the LF Note; (ii) conversion of the entire principal amount of the Closing Note; and (iii) exercise in full of the LF Warrant (each as defined herein below and subject to certain adjustments set forth in the Consent Agreement and/or the Purchased Securities (collectively such Common Shares are sometimes referred to herein as the “Purchased Shares”) (see Items 1 and 4 below).

•     Represents the percentage obtained by dividing (i) the number of Purchased Shares by (ii) the sum of (a) the number of Common Shares outstanding as of May 6, 2003, as reported in the Company’s Quarterly Report on Form 10-QSB filed with the Commission on May 15, 2003, and (b) the number of Purchased Shares. (see footnote * above)

CUSIP No. 45245S 10 8
	1.	Name of Reporting Person: Marvin I. Friedman			I.R.S. Identification Nos. of above persons (entities only):
	2.	Check the Appropriate Box if a Member of a Group (See Instructions):
		(a)	o
		(b)	x
	3.	SEC Use Only:
	4.	Source of Funds (See Instructions): AF
	5.	Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e): o
	6.	Citizenship or Place of Organization:
Number of Shares Beneficially Owned by Each Reporting Person With
			7.	Sole Voting Power:
			8.	Shared Voting Power: 2,327,848*
			9.	Sole Dispositive Power:
			10.	Shared Dispositive Power: 2,327,848*
	11.	Aggregate Amount Beneficially Owned by Each Reporting Person: 2,327,848*
	12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions): o
	13.	Percent of Class Represented by Amount in Row (11): 29.78%**
	14.	Type of Reporting Person (See Instructions): IN

•     Pursuant to Rule 13d-3, Determination of Beneficial Ownership, this number represents the maximum number of Common Shares the Reporting Person could acquire assuming (i) conversion of the entire principal amount of the LF Note; (ii) conversion of the entire principal amount of the Closing Note; and (iii) exercise in full of the LF Warrant (each as defined herein below and subject to certain adjustments set forth in the Consent Agreement and/or the Purchased Securities (collectively such Common Shares are sometimes referred to herein as the “Purchased Shares”) (see Items 1 and 4 below).

•     Represents the percentage obtained by dividing (i) the number of Purchased Shares by (ii) the sum of (a) the number of Common Shares outstanding as of May 6, 2003, as reported in the Company’s Quarterly Report on Form 10-QSB filed with the Commission on May 15, 2003, and (b) the number of Purchased Shares. (see footnote * above)

CUSIP No. 45245S 10 8
	1.	Name of Reporting Person: Milton Lohr			I.R.S. Identification Nos. of above persons (entities only):
	2.	Check the Appropriate Box if a Member of a Group (See Instructions):
		(a)	o
		(b)	x
	3.	SEC Use Only:
	4.	Source of Funds (See Instructions): AF
	5.	Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e): o
	6.	Citizenship or Place of Organization: United States
Number of Shares Beneficially Owned by Each Reporting Person With
			7.	Sole Voting Power:
			8.	Shared Voting Power: 2,327,848*
			9.	Sole Dispositive Power:
			10.	Shared Dispositive Power: 2,327,848*
	11.	Aggregate Amount Beneficially Owned by Each Reporting Person: 2,327,848*
	12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions): o
	13.	Percent of Class Represented by Amount in Row (11): 29.78%**
	14.	Type of Reporting Person (See Instructions): IN

•     Pursuant to Rule 13d-3, Determination of Beneficial Ownership, this number represents the maximum number of Common Shares the Reporting Person could acquire assuming (i) conversion of the entire principal amount of the LF Note; (ii) conversion of the entire principal amount of the Closing Note; and (iii) exercise in full of the LF Warrant (each as defined herein below and subject to certain adjustments set forth in the Consent Agreement and/or the Purchased Securities (collectively such Common Shares are sometimes referred to herein as the “Purchased Shares”) (see Items 1 and 4 below).

•     Represents the percentage obtained by dividing (i) the number of Purchased Shares by (ii) the sum of (a) the number of Common Shares outstanding as of May 6, 2003, as reported in the Company’s Quarterly Report on Form 10-QSB filed with the Commission on May 15, 2003, and (b) the number of Purchased Shares. (see footnote * above)

TABLE OF CONTENTS

	Item 1. Security and Issuer
	Item 2. Identity and Background
	Item 3. Source and Amount of Funds or Other Consideration
	Item 4. Purpose of Transaction
	Item 5. Interest in Securities of the Issuer
	Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer
	Item 7. Material to be Filed as Exhibits
SIGNATURES
EXHIBIT 1
EXHIBIT 2
EXHIBIT 3
EXHIBIT 4
EXHIBIT 5
EXHIBIT 6
EXHIBIT 7
EXHIBIT 8
EXHIBIT 9

CUSIP No. 45245S 10 8 SCHEDULE 13D

Item 1. Security and Issuer

     This statement on Schedule 13D (this “Statement”) relates to the common stock, par value $0.01 per share (the “Common Shares”), of ImageWare Systems, Inc., a California corporation (“ImageWare” or the “Company”). The principal executive offices of ImageWare are located at 10883 Thornmint Road, San Diego, California 92127. This Statement is being filed by the Reporting Persons (as defined below) to report the acquisition by L.F. Global Holdings, LLC, of securities exercisable for or convertible into more than 5% of the Common Shares of the Company, and, as a result of such acquisition, each of the Reporting Persons may be deemed the beneficial owner of more than 5% of the Common Shares of the Company. Such acquisition is made pursuant to the purchase by L.F. Global Holdings, LLC, and Laurus Master Fund, Ltd. (“Laurus”), of certain outstanding loans to the Company from Perseus 2000, L.L.C. (“Perseus”), and the concurrent advancement to the Company of approximately $1,088,000 to pay costs associated with the transaction and as additional working capital.

Item 2. Identity and Background

          (a), (b), (c) and (f). This Statement is being filed on behalf of the following persons (collectively the “Reporting Persons”):

               (i) L.F. Global Holdings, LLC, a California limited liability company (the “Purchaser”);

               (ii) L.F. Global Investments, LLC, a California limited liability company (“LF Investments”);

               (iii) Mr. Marvin I. Friedman (“Mr. Friedman”); and

               (iv) Mr. Milton Lohr (“Mr. Lohr”).

          The Purchaser was formed to engage in the acquiring, holding and disposing of investments in various businesses.

          Mr. Friedman and Mr. Lohr are Managing Members of LF Investments. LF Investments, which was formed to engage in the acquiring, holding, disposing and management of various forms of investments in various businesses, is the manager and investor in Purchaser. Mr. Friedman and Mr. Lohr are United States citizens. Mr. Friedman and Mr. Lohr are included as Reporting Persons in this Statement solely because of their control of LF Investments and thereby the Purchaser.

          The business address of the Purchaser, LF Investments, Mr. Friedman and Mr. Lohr is 12230 El Camino Real, Suite 220, San Diego, California 92130.

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CUSIP No. 45245S 10 8 SCHEDULE 13D

          (d) During the last five years, neither Reporting Person has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).

          (e) During the last five years, neither Reporting Person has been party to a civil proceeding of a judicial or administrative body of competent jurisdiction which resulted in a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities law or finding any violations with respect to such laws.

Item 3. Source and Amount of Funds or Other Consideration

     The source of the $2,650,000 purchase price for the Purchased Securities (defined below) was capital contributions from members of the Purchaser (see Item 4 below).

Item 4. Purpose of Transaction

     Except as disclosed herein, the Reporting Persons have acquired the Purchased Securities (defined below) and are holding them for investment purposes only.

     Pursuant to a Consent to Assignment and Amendment Agreement, dated as of June 13, 2003 (the “Consent Agreement,” a copy of which is attached hereto as Exhibit 1 and incorporated by reference herein), by and between the Company, Laurus and the Purchaser, this transaction involves the Purchaser and Laurus’s joint purchase of the Promissory Note (defined below) and Purchaser’s advance of additional working capital to the Company.

     As of June 6, 2003, the Company was indebted to Perseus or assignee (“Lender”) in the amount of $3,066,504, with daily accrual of interest of $1,111.42 (collectively “Existing Debt”). Such Existing Debt was evidenced by: (i) Note and Warrant Purchase Agreement entered into between Company and Lender and dated as of May 22, 2002; (ii) Pledge and Security Agreement entered into between Company and Lender and dated as of May 22, 2002; (iii) Registration Rights Agreement entered into between Company and Lender and dated as of May 22, 2002; (iv) Senior Secured Convertible Promissory Note in the original amount of $2,000,000.00 entered into between Company and Lender and dated as of May 22, 2002; and (v) Demand Promissory Note in the original amount of $500,000.00 entered into between the Company and Lender and dated as of September 23, 2002 (collectively “Promissory Note”). The Promissory Note was specifically exclusive of that certain Warrant to Purchase Common Stock issued in favor of Lender by Company and dated as of May 22, 2002, which warrant was retained by Perseus.

     The Purchaser and Laurus purchased the Existing Debt represented by the Promissory Note from Lender in consideration of the payment of $3,063,170.05 plus per diem interest accruing on the Promissory Note after June 3, 2003 until June 13, 2003 to Perseus. The Company concurrently therewith retired the Promissory Note and issued the Laurus Note (defined below) and the LF Note (defined below), which collectively constitute the Recast Promissory Note (defined below).

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CUSIP No. 45245S 10 8 SCHEDULE 13D

     Concurrent with the purchase of the Promissory Note by Purchaser and Laurus, Purchaser advanced the Company the sum of approximately $1,088,000 to pay costs associated with the transaction and as additional working capital (“Additional Advance”). The Additional Advance was included by the Company within the principal balance of the LF Note (defined below).

     Pursuant to the Consent Agreement, the Company caused the Promissory Note to be amended and restated such that two serial notes, one to Purchaser in the sum of $2,650,000 (“LF Note”) and the second to Laurus in the sum of $1,500,000 (“Laurus Note”) were issued to amend, restate and replace the Promissory Note (collectively “Recast Promissory Note”). The LF Note and Laurus Note are convertible into shares of Common Stock of the Company at a price of $2.11 per share. Further, the Company executed a warrant to Purchaser exercisable for 1,021,687 Common Shares at a price of $2.11 per share (“LF Warrant”), and a warrant to Laurus exercisable for 578,313 Common Shares at a price of $2.11 per share (“Laurus Warrant”). In lieu of closing fees due Purchaser under the Consent Agreement, Company issued Purchaser a convertible note in the principal amount of $106,000 (“Closing Note”), which may be converted into 50,237 shares of the Company’s Common Stock under the terms of the Closing Note (collectively with the LF Note and LF Warrant, the “Purchased Securities”).

     In connection with the purchase of the Promissory Note, Purchaser and Laurus entered into an Intercreditor Agreement, dated June 13, 2003 (attached hereto as Exhibit 8 and incorporated herein by reference), pursuant to which Purchaser agreed to subordinate its debt to the obligation owed to Laurus and granted Laurus an option to purchase the LF Note and a portion of the warrants held by Purchaser (“Laurus Call Right”). If exercised, the Laurus Call Right will be in consideration of payment by Laurus to Purchaser of: (i) an amount in cash equal to the unpaid principal amount of the LF Note, together with pro rata accrued but unpaid interest, due Purchaser under the LF Note, and (ii) a distribution by Purchaser to Laurus of 221,687 warrants issued to Purchaser under the LF Warrant.

     Further, pursuant to the Intercreditor Agreement, under certain circumstances Purchaser has the option to acquire the Laurus Note and a portion of the warrants held by Laurus (“LF Default Call Option”). If exercised, such LF Default Call Option will be in consideration of payment by Purchaser to Laurus of: (i) an amount in cash equal to the $1,500,000 principal amount of the Laurus Note together with pro rata accrued but unpaid interest due under the Laurus Note, (ii) the pro rata prepayment privilege payment then due under the Laurus Note, and (iii) a distribution by Laurus to Purchaser of 289,157 warrants issued to Laurus under the Laurus Warrant.

     The aggregate purchase price for the Purchased Securities was $2,650,000.

     The actual number of shares acquirable upon conversion or exercise of the Purchased Securities, and the actual conversion and exercise prices thereof, are subject to certain adjustments that could result in a substantial increase in the number of Purchased Securities and a substantial reduction in such conversion and exercise prices. The LF Note and Closing Note contain provisions providing the Purchaser with full ratchet antidilution protection in the event of certain issuances or deemed issuances of Common Shares by the Company at a price per share below the conversion price in the LF Note and Closing Note. The LF Warrant also contains provisions providing the Purchaser with full ratchet antidilution protection in the event of certain

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CUSIP No. 45245S 10 8 SCHEDULE 13D

issuances or deemed issuances of Common Shares by the Company at a price per share below the conversion price in the LF Note and Closing Note. (See Exhibits 2 and 3 hereto).

     Pursuant to the terms of the Consent Agreement, the Company will, without causing an increase in the size of Company’s Board of Directors, appoint Milton Lohr, Kenneth Widder and James Chadwick to the Company’s Board of Directors, one of whom shall be appointed as soon as reasonably practical and the other two no later than the Company’s next annual meeting.

     Security for the Company’s obligations under the Consent Agreement, including under the LF Note and the Closing Note, consists of all collateral described in the Pledge and Security Agreement between Company and Perseus, dated as May 22, 2002 (the “Pledge and Security Agreement,” a copy of which is attached hereto as Exhibit 5 and incorporated by reference herein), pursuant to which the Company granted to Perseus a first priority security interest in all of the Company’s assets and properties, including, but not limited to, all outstanding shares of capital stock of each of its United States subsidiaries and 66 2/3% of the shares of capital stock of each of its foreign subsidiaries. Additionally, the Company’s subsidiary, ImageWare Systems ID Group, Inc., entered into a similar security agreement with Perseus (“Subsidiary Pledge and Security Agreement”)(collectively with the Pledge and Security Agreement, the “Pledge and Security Agreements”), which grants a first priority security interest in all of its assets and properties as well as guaranteeing performance of the Company’s obligations under the Consent Agreement. Pursuant to an Assignment dated June 13, 2003 (the “Assignment”), executed by Perseus in favor of Purchaser and Laurus (a copy of which is attached hereto as Exhibit 9 and incorporated by reference herein), Perseus assigned all right, title and interest in the Pledge and Security Agreements to Purchaser and Laurus.

     The foregoing summary is qualified in its entirety by reference to the actual Consent Agreement, and the forms of each of the Notes and Warrants, the Assignment and the Pledge and Security Agreements attached hereto as Exhibits.

     Depending upon the Purchaser’s evaluation of the Company’s business and prospects, and upon future developments (including, but not limited to, the market value of the Common Shares, availability of funds, alternative uses of funds, and money, stock market and general economic conditions), the Purchaser may from time to time exercise its rights to acquire some or all of the Purchased Shares or purchase additional Common Shares or other securities of the Company, make additional loans to the Company, dispose of all or a portion of any of the Purchased Shares or other Common Shares acquired, or cease to acquire or purchase any Common Shares or other securities of the Company. Any purchase of Common Shares or other securities of the Company (other than acquisitions of the Purchased Shares) may be in open market or privately negotiated transactions or otherwise.

     The Reporting Persons plan to work closely with the Company to identify strategic opportunities for the Company’s growth as the security technology industry undergoes consolidation, which could include the possibility of pursuing a merger, purchase or sale of assets, reorganization, consolidation or other business combination transaction involving the Company and other companies.

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CUSIP No. 45245S 10 8 SCHEDULE 13D

     Except as described herein, none of the Reporting Persons has formulated any plans, proposals or otherwise that relate to or would otherwise result in any matter required to be disclosed pursuant to paragraphs (a) through (j) of Item 4 of Schedule 13D.

Item 5. Interest in Securities of the Issuer

     (a)  As described above, on June 16, 2003, the Company issued to the Purchaser the LF Note, LF Warrant and Closing Note, which are convertible into or exercisable for, in the aggregate, up to 2,327,848 Common Shares (subject to adjustment as set forth therein (see Item 4 above and Exhibits 1, 2 and 3 hereof)).

          Accordingly, each of the Reporting Persons may be deemed to beneficially own an aggregate of 2,327,848 Common Shares, which, based on calculations made in accordance with Rule 13d-3 and (excluding the Purchased Shares) there being 5,489,390 Common Shares outstanding on May 6, 2003 as disclosed by the Company in its Quarterly Report in Form 10-QSB filed with the Commission on May 15, 2003, represents approximately 29.78% of the outstanding Common Shares (after assuming the full conversion by the Reporting Persons of the entire principal amount of the LF Note and Closing Note, and the exercise in full of the LF Warrant).

     (b)  (i) The Purchaser may be deemed to have sole power to direct the voting and disposition of the 2,327,848 Common Shares beneficially owned by the Purchaser.

          (ii) By virtue of the relationships between and among the Reporting Persons described in Item 2 of this Statement, Mr. Friedman and Mr. Lohr may be deemed to have the power to direct the voting and disposition of the 2,327,848 Common Shares beneficially owned by the Purchaser.

     (c)  No Reporting Person nor, to the best knowledge of each Reporting Person, any person identified in Item 2 hereof, beneficially owns any Common Shares or has effected any transaction in Common Shares during the preceding 60 days.

     (d)  The members of the Purchaser have the right to participate in the receipt of dividends from, or proceeds from the sale of, the Purchased Shares (or Purchased Securities) held for the account of the Purchaser in accordance with their membership interests in the Purchaser.

     (e)  Paragraph (e) of Item 5 of Schedule 13D is not applicable to this filing.

Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer

     Purchaser acquired all rights of Perseus evidenced by: (i) a Note and Warrant Purchase Agreement entered into between Company and Lender and dated as of May 22, 2002; (ii) Pledge

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CUSIP No. 45245S 10 8 SCHEDULE 13D

and Security Agreements entered into between Company and Lender and dated as of May 22, 2002; and (iii) the Registration Rights Agreement entered into between Company and Perseus and dated as of May 22, 2002.

     In connection with the purchase of the Promissory Note, Purchaser and Laurus entered into an Intercreditor Agreement pursuant to which Purchaser agreed to subordinate its debt to the obligation owed to Laurus and granted Laurus an option to purchase the LF Note and a portion of the warrants held by Purchaser. (See Exhibit 8.) Under certain circumstances, Purchaser has the option to acquire the Laurus Note and a portion of the warrants held by Laurus. (See Exhibit 8.)

     Except as described in this Schedule 13D, as set forth in the Consent Agreement, a copy of which is attached hereto as Exhibit 1, and as set forth in the Registration Rights Agreement, a copy of which is attached hereto as Exhibit 4 and incorporated herein by reference, and as set forth in the Intercreditor Agreement, a copy of which is attached hereto as Exhibit 8 and incorporated herein by reference, to the best knowledge of each Reporting Person, there exist no contracts, arrangements, understandings or relationships (legal or otherwise) among the persons named in Item 2 hereof and between such persons and any person with respect to any securities of the Company, including but not limited to transfer or voting of any securities of the Company, finder’s fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies.

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CUSIP No. 45245S 10 8 SCHEDULE 13D

Item 7. Material to be Filed as Exhibits

     Exhibit 1. Consent to Assignment and Amendment Agreement, dated as of June 13, 2003, by and between the Company, Purchaser and Laurus (without exhibits).

     Exhibit 2. Form of Senior Secured Convertible Promissory Note issued by the Company to the Purchaser.

     Exhibit 3. Form of Warrant to Purchase Common Shares of the Company issued by the Company to the Purchaser.

     Exhibit 4. Registration Rights Agreement, dated as May 22, 2002, by and between the Company and Perseus.

     Exhibit 5. Pledge and Security Agreements, dated as May 22, 2002, by and between the Company and its subsidiary and Perseus (without exhibits), with amendments.

     Exhibit 6. Joint Filing Agreement, dated as of June 24, 2003, by and between the Purchaser, LF Investments, Mr. Friedman and Mr. Lohr.

     Exhibit 7. Power of Attorney, dated June 13, 2003, by and between the Purchaser, LF Investments, Mr. Friedman and Mr. Lohr.

     Exhibit 8. Intercreditor Agreement, dated as of June 13, 2003, by and between Laurus and Purchaser.

     Exhibit 9. Assignment (without exhibits), dated as of June 13, 2003, executed by Perseus in favor of Purchaser and Laurus.

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CUSIP No. 45245S 10 8 SCHEDULE 13D

SIGNATURES

          After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete, and correct. These signatures are executed by Robert W. Blanchard, Esq., attorney-in-fact for the Reporting Parties under the Power of Attorney dated June 13, 2003, attached hereto as Exhibit 7 and incorporated herein by reference.

		L.F. GLOBAL HOLDINGS, LLC
Date:	June 26, 2003
			By: Robert W. Blanchard, Esq.
		L.F. GLOBAL INVESTMENTS, LLC
Date:	June 26, 2003	By:
			By: Robert W. Blanchard, Esq.
		MARVIN I. FRIEDMAN
Date:	June 26, 2003
			By: Robert W. Blanchard, Esq.
		MILTON LOHR
Date:	June 26, 2003
			By: Robert W. Blanchard, Esq.

Attention: Intentional misstatements or omissions of fact constitute Federal criminal violations (See 18 U.S.C. 1001)

8 EX-1 3 a91106orexv1.txt EXHIBIT 1 EXHIBIT 1 CONSENT TO ASSIGNMENT AND AMENDMENT AGREEMENT This Consent to Assignment and Amendment Agreement ("Agreement") is made by and among ImageWare Systems, Inc. ("Company"), and L.F. Global Holdings, LLC ("LF"), and Laurus Master Fund, Ltd. ("Laurus")(collectively, "Purchaser") as of June 13, 2003 ("Agreement Date"). RECITALS A. By this Agreement the parties intend to acknowledge the assignment by Perseus 2000, L.L.C., a Delaware limited liability company ("Perseus") of the Promissory Notes (defined below) to Purchaser and Purchaser's anticipated amendment of the Note Purchase Agreement (defined below) to enable Purchaser's acquisition of additional notes from Company. B. As of June 6, 2003, the Company is indebted to Perseus or assignee ("Lender") under the Promissory Notes in the amount of $3,063,170.05, with daily accrual of interest of $1,111.42 (collectively "Existing Debt"). C. Such Existing Debt is evidenced by: (i) a Note and Warrant Purchase Agreement entered into between Company and Lender and dated as of May 22, 2002 ("Note Purchase Agreement"); (ii) Pledge and Security Agreement entered into between Company and Lender and dated as of May 22, 2002 ("Company Security Agreement"); (iii) Registration Rights Agreement entered into between Company and Lender and dated as of May 22, 2002 ("Rights Agreement"); (iv) the Pledge and Security Agreement entered into between ImageWare Systems ID Group, Inc., a Delaware corporation, and Assignor and dated as of May 22, 2002 ("Subsidiary Security Agreement"); (v) Senior Secured Convertible Promissory Note in the original principal amount of $2,000,000.00 executed by Company in favor of Lender and dated as of May 22, 2002 ("Senior Note"); and (vi) Demand Promissory Note in the original amount of $500,000.00 executed by the Company in favor of Lender and dated as of September 23, 2002 ("Demand Note" and, collectively with the Senior Note, referred to herein as "Promissory Notes"). The Company Security Agreement and Subsidiary Security Agreement are referred to herein as the "Pledge Agreements." D. Collateral for the Promissory Notes consists of by a perfected first lien against: (i) all of the assets of Company and its subsidiary ImageWare Systems ID Group, Inc.; (ii) all of the outstanding shares of capital stock of each of the Company's United States subsidiaries; and (iii) sixty-six and two-thirds percent (66.67%) of all of the outstanding shares of Company's foreign subsidiaries (collectively "Collateral"). E. The Purchaser will purchase the Existing Debt represented by the Promissory Notes from Perseus at Closing (defined below), pursuant to the Purchase and Sale Agreement entered into by and among Perseus and Purchaser, and the Company concurrently therewith will retire the Promissory Notes and issue the Laurus Note (defined below) and the LF Note (defined below), which collectively shall constitute the Recast Promissory Notes (defined below). 1 E. For purposes of this Agreement, the Closing Date shall be the date on which the parties execute their agreement to purchase the Promissory Note and contribute the Additional Advance ("Closing"). F. At Closing Laurus will be obligated to fund an amount equal to $1,500,000.00 ("Initial Laurus Investment"). Such Initial Laurus Investment will be funded at Closing by wire transfer to Dechert, LLP, as escrow agent for the benefit of Perseus as partial payment for the purchase of the Promissory Notes, which Initial Laurus Investment shall be evidenced by the Laurus Note (defined below). G. At Closing LF will be obligated to fund an amount equal to $2,650,000.00 ("Initial LF Investment"). Such Initial LF Investment will be funded at Closing by wire transfer to: (i) Perseus as partial payment for the purchase of the Promissory Note; and (ii) the balance to Company which Initial LF Investment shall be evidenced by the LF Note (defined below). AGREEMENT NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Assignment of Promissory Notes. Company hereby consents to the assignment, transfer and conveyance to Purchaser of all of Lender's right, title and interest in and to the Promissory Notes and related rights and agrees that Purchasers shall each be entitled to the same benefits and protections as Perseus as purchaser of the Promissory Notes under the Note Purchase Agreement and each and every document and agreement entered into or delivered in connection therewith. Purchaser agrees that Company shall be entitled to the same benefits and protections under the Promissory Notes and each and every document and agreement entered into or delivered in connection therewith to the extent not altered herein. 2. Additional Capital Advances. Concurrent with the execution of this Agreement, LF shall advance to Company the sum of approximately $1,088,000 as additional working capital ("Additional Advance"). The Additional Advance shall be included by the Company within the principal balance of the LF Note (defined below). The proceeds of the Additional Advance shall be used by Company to (i) pay costs associated with this transaction; and (ii) for general ongoing working capital for the Company. 3. Amendment of Note Purchase Agreement. The Note Purchase Agreement is hereby amended to provide that concurrently with the execution of this Agreement, Purchaser shall have the right under the Section 1(b) thereof to make the Additional Advance and acquire an Additional Note up to an aggregate principal amount of approximately $1,088,000.00, on the terms set forth in Section 1 of the Note Purchase Agreement, subject to the terms of this Agreement. 2 4. Promissory Note Recast. 4.1 In consideration of the Additional Advance and the amendments to the Promissory Notes provided for herein, the parties acknowledge that the Company shall: 4.1.1 Upon delivery to escrow of the original Promissory Notes, cause the Promissory Notes to be reissued such that two serial notes in the total combined amount of the Initial LF Investment in the form and content of Exhibit A attached hereto ("LF Note") and the Initial Laurus Investment in the form and content of Exhibit B attached hereto ("Laurus Note"), which reissued promissory notes when issued by the Company will amend, restate and replace the Promissory Notes and evidence the additional advance (collectively "Recast Promissory Notes"); 4.1.2 Cause, no later than ninety (90) days following Closing, all shares which may be issued pursuant to the conversion of Recast Promissory Notes and the exercise of the Purchaser's Warrants and the Warrant issued pursuant to the Note Purchase Agreement to be registered pursuant to the Rights Agreement and declared effective by the Securities and Exchange Commission, including the shares underlying the Purchaser's Warrants described below; 4.1.3 Without causing an increase in the size of Company's Board of Directors, appoint Milton Lohr, Kenneth Widder and James Chadwick to the Company's Board of Directors, one of whom shall be appointed as soon as reasonably practical and the other two no later than the Company's next annual meeting, which appointments shall be in lieu of the requirements set forth in Section 4(f) of the Note Purchase Agreement; 4.1.4 In lieu of the "Additional Warrant" provided for in Section 1(b)(i), issue in favor of Purchaser six (6) year warrants to purchase 1,600,000 shares of common stock of Company ("Purchaser's Warrants") exercisable at $2.11 per share in the form and content of Exhibit C attached hereto; 4.1.5 Pay Laurus a closing fee in cash in an amount equal to four percent (4.0%) of the Initial Laurus Investment ("Closing Fee"). Additionally, Company will deliver to LF a convertible note in the form of the LF Note in the principal amount equal to four percent (4.0%) of the Initial LF Investment ("LF Closing Fee"); 4.1.6 Reimburse Purchaser for all closing costs of Purchaser to a maximum of $25,000 upon request and presentation of invoices from third party service providers for costs incurred by Purchaser. Company will be responsible for its own closing costs; 4.1.7 Limit the amount of permitted borrowings by Company's German subsidiary to an amount no greater than that outstanding as of the date of Closing; and 4.1.8 Take such good faith actions as are reasonably required to secure the consent of Company's shareholders required to effectuate this transaction, if any, at 3 Company's next annual meeting and to include within its proxy materials a solicitation of the same at Company's expense and at such other times as may be required. 5. AMEX Application. Immediately following the Closing, the Company will file an application for the listing of additional shares with the American Stock Exchange as required by the American Stock Exchange Listing Standards, Policies and Requirements. In the event that as a condition to approving such application, the American Stock Exchange requires one or more modification s to the terms and conditions of the Transaction Documents (as defined in the Recast Promissory Notes), the Company, LF and Laurus will all work together reasonably and in good faith to effect such modifications to the Transaction Documents, with a view towards preserving the overall economic terms and conditions contained in the Transaction Documents.] 6. Representations and Warranties. Except as set forth in the schedule of exceptions delivered to Purchaser concurrent with the execution of this Agreement, the Company hereby makes and reaffirms all representations, warranties, and covenants set forth in Section 2 and 4 of the Note Purchase Agreement and as set forth in the Pledge Agreements as if made on the date hereof. Further, under this Agreement the Company shall deliver to Purchaser an opinion of counsel to the Company, encompassing in form and substance the matters set forth in Exhibit F to the Note Purchase Agreement and each other certificate or document required by Section 1 of the Note Purchase Agreement in connection with the closing of the acquisition or an Additional Note. Purchaser, each as to itself, hereby makes and reaffirms all representations and warranties set forth in Section 3 of the Note Purchase Agreement as if made by and as to such Purchaser on the date hereof. 7. Additional Remedies. If either party violates any of the terms of this Agreement, in addition to any remedies in law, equity or otherwise, the non-violating party may restrain such violation in any court of law and may interpose this Agreement as a defense in any action by the violating party. 8. Waivers. No waiver shall be deemed to be made by any party of any of their respective rights hereunder unless it is in writing and signed by the waiving party. Each such waiver shall be a waiver only with respect to the specific instance involved and shall in no way impair the rights of the waiving party or the obligations of the other party to the waiving party in any other respect at any other time. 9. Third Party Beneficiaries. This Agreement is solely for the benefit of the Company, Laurus, LF and their respective successors and assigns, and no any other persons or entities are intended to be third party beneficiaries hereunder or to have any right, benefit, priority or interest under, or because of the existence of, or to have any right to enforce, this Agreement. 10. Notices. For the purposes of this Agreement, written notices shall be sent by U.S. certified mail, return receipt requested, postage prepaid; or by personal delivery; or by facsimile confirmed by the recipient; and addressed to the notified party at its address set forth below its signature line, or such other address specified by the party with like notice. Notices shall be deemed received three (3) business days after deposit in the U.S. mail, if sent by first class mail; 4 upon the date set forth in the return receipt, if by certified mail; on the day of confirmation of delivery by the recipient, if by facsimile; or on the day of transmittal by personal delivery. 11. Costs and Attorneys' Fees. In the event that any party hereto shall institute any litigation or other proceeding arising out of or relating to this Agreement, the prevailing party therein shall be entitled to recover its reasonable attorney's fees and costs incurred in connection therewith. 12. Mediation/Arbitration. The parties mutually agree that any claim or controversy arising out of or relating to this Agreement shall be resolved by first submitting to mediation under the rules of the American Arbitration Association, and should a resolution not be reached, by submitting to binding arbitration administered by the American Arbitration Association in accordance with its Arbitration Rules in San Diego, California and shall be governed by the laws of the State of California, including, but not limited to, California Code of Civil Procedure Section 1283.05 relating to depositions and discovery, and judgment on the award rendered by the arbitrator(s) may be entered in any court in San Diego County having jurisdiction thereof. The arbitrator shall have the authority to order such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute, consistent with the expedited nature of arbitration. 13. Governing Law. This Agreement has been delivered and accepted at and shall be deemed to have been made in the State of New York, and shall be interpreted, and the rights and liabilities of the parties hereto determined, in accordance with the internal laws of the State of New York. 14. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties' respective successors and assigns, subject to the provisions hereof. 15. Integrated Agreement. This Agreement sets forth the entire understanding of the parties with respect to the within matters and may not be modified or amended except upon a writing signed by all parties. 16. Authority. Each of the signatories hereto certifies that such party has all necessary authority to execute this Agreement. 17. Counterparts. This Agreement may be executed in one or more counterparts, each one of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. 5 "LAURUS" Laurus Master Fund, Ltd., a Cayman Islands Corporation By:__________________________________________ Name: ______________________________________ Title: ___________________________________ Address for notices: 152 West 57th Street Fourth Floor New York, NY 10019 Facsimile: (212) 541-4434 Attention: John E. Tucker, Esq. "LF" L.F. Global Holdings, LLC, a California limited liability company By: ____________________________________ Name: Marvin Friedman Title: Managing Member Address for notices: 12230 El Camino Real, Suite 220 San Diego, CA 92130 Facsimile:______________ Attention: Marvin Friedman "COMPANY" ImageWare Systems, Inc., a California corporation. By: ______________________________ Name: S. James Miller, Jr. Title: Chairman and Chief Executive Officer Address for notices: 10883 Thornmint Road San Diego, CA 92127 6 Facsimile: ____________________ Attention: S. James Miller, Jr. 7 EX-2 4 a91106orexv2.txt EXHIBIT 2 EXHIBIT 2 SENIOR SECURED CONVERTIBLE PROMISSORY NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH SUCH STATE SECURITIES LAWS, IN COMPLIANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION AND/OR COMPLIANCE IS NOT REQUIRED. $2,650,000.00 June 13, 2003 San Diego, California FOR VALUE RECEIVED, IMAGEWARE SYSTEMS, INC., a California corporation (the "Company"), promises to pay to the order of L.F. Global Holdings, LLC (the "Lender") or its registered assigns (the "Holder"), the principal sum of Two Million Six Hundred Fifty Thousand Dollars ($2,650,000.00), or such lesser amount as shall then equal the outstanding principal amount hereof, together with interest thereon at a rate equal to 12.5% per annum, compounding quarterly and computed on the basis of a year consisting of 360 days and four quarterly periods each consisting of 90 days. All unpaid principal, together with any accrued but unpaid interest and other amounts payable hereunder, shall be due and payable on the earlier of (i) May 22, 2005 (the "Maturity Date"); or (ii) when such amounts are declared due and payable by the Holder or made automatically due and payable upon or after (A) the occurrence of an Event of Default (as defined below), (B) the liquidation or dissolution of the Company, (C) any merger, consolidation, reorganization or other business combination involving the Company, in which the stockholders of the Company immediately prior thereto do not own, directly or indirectly, outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving entity in such merger, consolidation or similar transaction, (D) the sale of all, or substantially all, of the assets of the Company, or (E) the sale of voting securities of the Company to any person (or group of persons acting in concert) that results in such person (or group of persons) (together with their affiliates) owning more than 50% of the outstanding voting securities of the Company. Interest on this Note shall be payable in arrears on each January 1, April 1, July 1, and October 1 after the date of issuance of this Note as follows: (a) through the payment due January 1, 2004, and so long as no uncured Event of Default exists, interest, at the election of the Company and subject to shareholder approval as provided in this Note, may be paid by the issuance of an additional senior secured convertible promissory note identical in all respects to this Note except that it shall have a principal amount equal to such interest payment; or if not so paid shall be payable in lawful money of the United States of America and (b) thereafter shall be payable in lawful money of the United States of America. This Note, along with the Senior Secured Convertible Promissory Note dated June 13, 2003, between Company and Laurus Master Fund, Ltd. ("Laurus") (the "Laurus Note"), shall amend and restate the note issued pursuant to the Note and Warrant Purchase Agreement (the "Purchase Agreement") dated as of May 22, 2002 by and between the Company and Perseus 2000, L.L.C. This Note is amended and restated pursuant to the Consent to Assignment and Amendment Agreement dated as of June 13, 2003, by and between Company, Lender and Laurus ("Consent Agreement"). The following is a statement of the rights of the Holder and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees: 1. Definitions. Capitalized terms defined in the Purchase Agreement and used herein without definition have the same meaning herein as in the Purchase Agreement. In addition, as used in this Note, the following capitalized terms have the following meanings: (a) "Business Day" means any day other than a Saturday, Sunday or other day on which the national or state banks located in the State of New York, State of California or the District of Columbia are authorized to be closed. (b) "Common Stock" means the common stock, par value $0.01 per share, of the Company. (c) "Company Notes" means any of this Note, the Laurus Note or any note issued in payment of Closing Fees (as defined in the Consent Agreement) or interest on any Company Note. (d) "Obligations" means the principal, interest and other amounts payable under this Note. (e) "Transaction Documents" shall mean each of the Company Notes, the Purchase Agreement, the Registration Rights Agreement, the Pledge and Security Agreements securing the Company Notes, as amended, the Company's Officer's Certificate dated June 13, 2003, the Purchaser's Warrants (as defined in the Consent Agreement) and the Consent Agreement. 2. Events of Default. The occurrence of any of the following shall constitute an "Event of Default" under this Note: (a) Failure to Pay. The Company shall fail to pay when due any principal payment on this Note or any interest or other payment required under the terms of this Note or any other Transaction Document if such nonpayment is not cured by the Company within five (5) days immediately after the date on which such payment became due and payable; or (b) Breaches of Representations and Warranties. Any representation or warranty made by the Company herein or in any of the other Transaction Documents shall prove false or misleading in any material respect when made or deemed made; or 2 (c) Breaches of Other Covenants. The Company shall fail to observe or to perform any other material covenant, obligation, condition or agreement contained in this Note or the other Transaction Documents, other than those specified in Section 2(a) hereof, and such failure shall continue for thirty (30) days after written notice thereof is delivered to the Company; or (d) Cross-Default. The Company or any of its subsidiaries shall default under (i) any Company Note or (ii) any other bond, debenture, note or other evidence of indebtedness for money borrowed, under any guarantee or under any mortgage, or indenture pursuant to which there shall be issued or by which there shall be secured or evidenced any indebtedness for money borrowed by the Company or any of its subsidiaries, whether such indebtedness now exists or shall hereafter be created, which default (other than a default under a Company Note) shall have resulted in indebtedness of at least $100,000 being due and payable prior to the date on which it would otherwise become due and payable and shall not have been cured by the Company or waived by the lender; or (e) Undischarged Judgment. One or more judgments for the payment of money in an amount in excess of $100,000 in the aggregate, outstanding at any one time, shall be rendered against the Company or any of its subsidiaries (or any combination thereof) and shall remain undischarged for a period of thirty (30) consecutive days during which execution shall not be effectively stayed, or any action is legally taken by a judgment creditor to levy upon any such judgment; or (f) Voluntary Bankruptcy or Insolvency Proceedings. The Company (and any subsidiary thereof) shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it or (vii) take any action for the purpose of effecting any of the foregoing; or (g) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company (and any subsidiary thereof) or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company (and any subsidiary thereof) or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered, or such case or proceeding shall not be dismissed, discharged or stayed within ninety (90) days of commencement. 3 3. Rights of Holder Upon Default. (a) Upon the occurrence or existence of any Event of Default (other than an Event of Default referred to in Sections 2(f) or 2(g) hereof) and at any time thereafter during the continuance of such Event of Default, the Holder may declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. Upon the occurrence or existence of any Event of Default described in Sections 2(f) or 2(g) hereof, immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, the Holder may exercise any other right, power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both. (b) In addition to the rights of the Holder specified in subsection (a) of this Section 3, on the date an Event of Default under this Note occurs, the interest rate on this Note shall increase, from that date forward, to the lesser of 15% and the maximum legally permissible interest rate, with such interest payable solely in lawful money of the United States. 4. Seniority; Collateral. To secure the Company's payment and performance of the Obligations and to secure the Company's prompt, full and faithful performance and observance of all of the provisions under this Note and the other Transaction Documents, the Company hereby grants the Holder the rights set forth in the Pledge and Security Agreement. The security interest granted by the Company under the Pledge and Security Agreement securing the indebtedness evidenced by this Note, including all Obligations, is senior to all other liens, security interests or encumbrances securing any other indebtedness of the Company, subject only to Permitted Liens (as defined in the Pledge and Security Agreement) to the extent such Permitted Liens by their express terms or applicable law have priority equal or superior to such security interest. 5. Prepayment and Effect on Conversion Rights. This Note may be prepaid as a whole or in part at any time prior to the Maturity Date at the election of the Company upon at least thirty (30) days prior written notice to the Holder (the "Prepayment Notice Period"); provided that any such prepayment shall include a prepayment premium equal to a percentage of the amount of principal so prepaid, as determined by the date of such prepayment, as follows: 4

PREPAYMENT DATE PREPAYMENT PREMIUM % - --------------- -------------------- May 22, 2003 - August 22, 2003 5% August 22, 2003 - November 22, 2003 4% November 22, 2003 - February 22, 2004 3% February 22, 2004 - May 22, 2004 2% May 22, 2004 - August 22, 2004 1% August 22, 2004 or later 0%

Any such prepayment shall be applied first to the payment of expenses due under this Note, second to any prepayment premium, third to interest accrued on the portion of this Note so prepaid and fourth, if the amount of prepayment exceeds the amount of all such expenses, prepayment penalties and accrued interest, to the payment of principal of this Note. Notwithstanding the foregoing or anything to the contrary herein, any such election to prepay the Note shall not extinguish or otherwise effect the conversion rights set forth in Section 6 hereof with respect to the amount of principal so elected to prepaid until after the expiration of the Prepayment Notice Period. 6. Conversion. (a) Conversion by Holder. At any time, and from time to time, the Holder may, at its sole and exclusive option, convert all or any part of the principal and accrued interest outstanding under this Note into shares of Common Stock at a conversion price per share of Common Stock equal to $2.11 ("Conversion Shares"), subject to adjustment as provided in Section 7 hereof (the "Conversion Price"). (b) Transfer of Shares. The Company shall cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by crediting the account of the Holder's designated broker with the Depository Trust Corporation ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business days after receipt by the Company of the Notice of Conversion (as defined below) (the "Delivery Date"), unless in the reasonable opinion of Company's counsel such Conversion Shares must bear a restrictive legend to be issued in compliance with the Securities Act of 1933, as amended, in which case, certificates shall be delivered to Holder on or before the Delivery Date. (c) Conversion by Company. At any time following the date hereof, the Company may, at its sole and exclusive option, convert all of the principal and accrued interest outstanding under this Note into shares of Common Stock at a conversion price per share of Common Stock equal to the Conversion Price, provided that each of the following two conditions is satisfied: (i) the volume weighted average price of the Company's Common Stock, as reported by Bloomberg Financial LP (or, in the event that such price is not available from Bloomberg Financial LP, a comparable nationally recognized financial reporting service), using the VAP function for the fifteen trading days immediately prior to the date on which the Company provides the Conversion Notice (as defined below), is equal to or greater than $12.93 and (ii) the 5 Company's aggregate EBITDA for the two full calendar quarters immediately preceding the date on which the Company provides the Conversion Notice, as set forth in the Company's Forms 10-QSB or 10-Q and/or 10-KSB or 10-K filed with the United States Securities and Exchange Commission for such calendar quarters, is equal to or greater than $3,750,000. If the Company elects to exercise its conversion right pursuant to this Section 6(b), it shall provide the Holder with written notice of such election at least five (5) but no more than ten (10) Business Days prior to the date of such conversion (the "Conversion Notice") together with evidence reasonably establishing that all conditions precedent to such conversion have been satisfied. (d) Mechanics and Effect of Conversion. No fractional shares of Common Stock shall be issued upon conversion of this Note. Upon the conversion of all of the principal outstanding under this Note, in lieu of the Company issuing any fractional shares to the Holder, the Company shall pay to the Holder the amount of outstanding principal that is not so converted in cash. On partial conversion of this Note, the Company shall issue to the Holder (i) the shares of Common Stock into which a portion of this Note is converted and (ii) a new senior secured convertible promissory note having identical terms to this Note, except that the principal amount thereof shall equal the difference between (A) the principal amount of this Note immediately prior to such conversion minus (B) the portion of such principal amount converted into Common Stock. Upon conversion of this Note pursuant to this Section 6, the Holder shall surrender this Note, duly endorsed, at the principal office of the Company. At its expense, the Company shall, as soon as practicable thereafter, issue and deliver to such Holder at such principal office a certificate or certificates for the number of shares of Common Stock, to which the Holder shall be entitled upon such conversion (bearing such legends as are required by the Purchase Agreement and applicable state and federal securities laws in the opinion of counsel to the Company), together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note. Upon full conversion of this Note, the Company shall be forever released from all its obligations and liabilities under this Note. (e) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of capital stock, solely for the purpose of effecting the conversion of this Note, such number of its shares of capital stock of the Company as shall from time to time be sufficient to effect the conversion of this Note; and if at any time the number of authorized but unissued shares of capital stock of the Company shall not be sufficient to effect the conversion of this Note, the Company hereby covenants and agrees to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of capital stock to such number of shares as shall be sufficient for such purpose. (f) Payment of Expenses and Taxes on Conversion. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, execution, issuance and delivery of stock certificates and new promissory notes pursuant to this Section 6 hereof, except that, in the event such stock certificates or new promissory notes shall be registered in a name or names other than the name of the 6 holder of this Note, funds sufficient to pay all stock transfer fees, which shall be payable upon the execution and delivery of such stock certificate or certificates or new promissory notes, shall be paid by the holder hereof to the Company at the time of delivering this Note to the Company upon conversion. 7. Conversion Price Adjustments. (a) Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after June 13, 2003 effect a stock split or subdivision of the outstanding Common Stock, the Conversion Price in effect immediately before that subdivision shall be proportionately decreased, and, conversely, if the Company shall at any time or from time to time after June 13, 2003 combine the outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 7(a) shall become effective at the close of business on the date the stock split, subdivision or combination becomes effective. (b) Adjustment for Common Stock Dividends and Distributions. If the Company at any time or from time to time after June 13, 2003 issues, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable solely in additional shares of Common Stock, the Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price by a fraction (i) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is the sum of the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 7(b) to reflect the actual payment of such dividend or distribution. (c) Adjustments for Other Dividends and Distributions. If the Company at any time or from time to time after June 13, 2003 issues, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company other than shares of Common Stock or in other property, in each such event provision shall be made so that the Holder of this Note shall receive upon conversion hereof, in addition to the number of shares of Common Stock receivable hereupon, the amount of securities of the Company or other property which such Holder would have received had this Note been converted into Common Stock on the date of such event and had it thereafter, during the period from the date of such event to and including the conversion date, retained such securities or other property receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this Section 7 with respect to the rights of the Holders 7 of this Note or with respect to such other securities or other property by their terms. As used herein, the term "other property" does not include cash. (d) Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after June 13, 2003, the Common Stock issuable upon the conversion of this Note is changed into the same or a different number of shares of any class or series of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 7), then in any such event the Holder shall have the right thereafter to convert this Note into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the number of shares of Common Stock into which this Note could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. (e) Sale of Shares Below Conversion Price. Subject to obtaining shareholder approval, if required, pursuant to subsection (iv) below: (i) If at any time or from time to time after June 13, 2003, the Company issues or sells, or is deemed by the provisions of clause (iii) of this Section 7(e) to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than a subdivision or combination of shares of Common Stock or as a dividend or other distribution of Common Stock as provided for elsewhere in this Section 7, for an Effective Price (as hereinafter defined) less than the then effective Conversion Price, then and in each such case the then existing Conversion Price shall be reduced as of the close of business on the date of such issue or sale to a price equal to the lowest such Effective Price. (ii) For the purpose of making any adjustment required under this Section 7(e): (A) "Additional Shares of Common Stock" means all shares of Common Stock issued by the Company, whether or not subsequently reacquired or retired by the Company, or capital stock of the Company issued upon the exercise or conversion of Convertible Securities outstanding on June 13, 2003, other than shares of Common Stock issued or issuable: (1) to employees, officers or directors of the Company, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Company's Board of Directors; (2) pursuant to any rights, agreements, options or warrants outstanding as of the date hereof and disclosed in writing to the Holder; and stock issued pursuant to any such rights or agreements granted after the date hereof; 8 (3) in connection with any stock split, stock dividend or recapitalization by the Company; (4) upon conversion of any Company Notes or the Company's Series B Preferred Stock or upon exercise or conversion of the Purchaser's Warrants or the Warrants issued pursuant to the Purchase Agreement; (5) for consideration other than cash pursuant to a merger, consolidation, strategic alliance, acquisition or similar business combination approved by the Board of Directors; (6) pursuant to any equipment leasing, real property leasing or loan arrangement, or debt financing from a bank or similar financial or lending institution approved by the Company's Board of Directors, the principal purpose of which is not to raise equity capital; or (7) by the Company in connection with joint ventures, manufacturing, marketing or distribution arrangements or technology transfer or development arrangements; provided that such strategic transactions and the issuance of shares in connection therewith have been approved by the Company's Board of Directors and the principal purpose thereof is not to raise equity capital. (B) "Aggregate Consideration Received" by the Company for any issue or sale of securities shall (1) to the extent it consists of cash, be computed at the gross amount of cash received by the Company before deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Company in connection with such issue or sale and without deduction of any expenses payable by the Company, (2) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors of the Company, and (3) if Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors of the Company to be allocable to such Additional Shares of Common Stock or Convertible Securities. (C) "Convertible Securities" means stock or other securities (including options, warrants and other rights) of the Company ultimately convertible into shares of Common Stock. (D) "Effective Price" of Additional Shares of Common Stock means the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under this Section 7(e), into the Aggregate Consideration Received, or deemed to have been received by the Company for such issue under this Section 7(e), for such Additional Shares of Common Stock. 9 (iii) For the purpose of making any adjustment to the Conversion Price required under this Section 7(e), if the Company issues or sells any Convertible Securities and if the Effective Price of the shares of Common Stock issuable upon conversion of the Convertible Securities is less than the Conversion Price then in effect, the Company shall be deemed to have issued at the time of the issuance of such Convertible Securities that number of Additional Shares of Common Stock equal to the maximum number of shares of Common Stock issuable upon conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such Convertible Securities, plus the minimum amounts of consideration, if any, payable to the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof; provided that: (A) if the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, the Company shall be deemed to have received the minimum amounts of consideration without reference to such clauses; (B) if the minimum amount of consideration payable to the Company upon the conversion of Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; (C) if the minimum amount of consideration payable to the Company upon the conversion of Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to the Company upon the conversion of Convertible Securities; and (D) no further adjustment of the Conversion Price, adjusted or subject to adjustment upon the issuance of such Convertible Securities, shall be made as a result of the actual issuance of shares of Common Stock on the conversion of any such Convertible Securities. If the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Price adjusted upon the issuance of such Convertible Securities shall be readjusted to the Conversion Price which would have been in effect had an adjustment been made on the basis that the only shares of Common Stock so issued were the shares of Common Stock, if any, actually issued or sold on the exercise of such rights of conversion of such Convertible Securities, and such shares of Common Stock, if any, were issued or sold for the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities, provided that such readjustment shall not apply to prior conversions of this Note. (iv) Notwithstanding anything to the contrary in this Note, unless and until the Company obtains shareholder approval, interest shall not be paid in 10 kind and no adjustment will be made under Subsection 7(e)(i) of this Note if such adjustment would cause the maximum number of shares of Common Stock issuable pursuant to this Note, any other Company Note, the Purchaser Warrants and the warrants issued pursuant to the Purchase Agreement (collectively the "Convertible Securities"), to exceed the maximum number of shares of Common Stock that the Company is permitted to issue, without such shareholder approval, pursuant to and in compliance with the American Stock Exchange Listing Standards, Policies and Requirements, or any successor provisions so long as the Common Stock is listed on such Exchange or a successor exchange. (f) Certificate of Adjustment. In each case of an adjustment or readjustment of the Conversion Price for the number of shares of Common Stock or other securities issuable upon conversion of this Note, the Company, at its own expense, shall cause its Treasurer to compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to the Holder at the Holder's address as shown in the Company's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based. No adjustment in the Conversion Price shall be required to be made unless it would result in an increase or decrease of at least one cent, but any adjustments not made because of this sentence shall be carried forward and taken into account in any subsequent adjustment otherwise required hereunder. (g) Notices of Record Date. Upon (i) the establishment by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, any merger or consolidation of the Company with or into any other Company, or any transfer of all or substantially all the assets of the Company to any other person or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall mail to the Holder at least 20 days prior to the record date specified therein a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities), shall be entitled to exchange their shares of Common Stock (or other securities), for securities or other property deliverable upon such reorganization, reclassification transfer, consolidation, merger, dissolution, liquidation or winding up. (h) No Impairment. The Company shall not amend its Articles of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or 11 appropriate in order to protect the conversion rights of the Holders of this Note against dilution or other impairment as provided herein. 8. Successors and Assigns. Subject to the restrictions on transfer described in Sections 10 and 11 hereof, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties. 9. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the Holder. 10. Transfer of this Note or Securities Issuable on Conversion Hereof. This Note may not be transferred in violation of any restrictive legend set forth hereon. Each new Note issued upon transfer of this Note or securities issuable on conversion of this Note shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Subject to the foregoing, transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company. Prior to presentation of this Note for registration of transfer, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to the contrary. 11. Assignment by the Company. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company, without the prior written consent of the Holder. 12. Treatment of Note. To the extent permitted by generally accepted accounting principles, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities. 13. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier, personal delivery or facsimile transmission at the respective addresses or facsimile number of the parties as set forth in or otherwise designated by either party pursuant to the Purchase Agreement or on the register maintained by the Company. Any party hereto may by notice so given change its address or facsimile number for future notice hereunder. Notice shall conclusively be deemed to have been given when received. 12 14. Expenses; Waivers. If action is instituted to collect this Note, the Company promises to pay all costs and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred in connection with such action. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument. 15. Governing Law; Exclusive Jurisdiction; Jury Waiver. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of New York. IN THE EVENT OF ANY DISPUTE AMONG OR BETWEEN ANY OF THE PARTIES TO THIS NOTE ARISING OUT OF THE TERMS OF THIS NOTE, THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR RESOLUTION OF SUCH DISPUTE, AND AGREE NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION OR SEEK TO TRANSFER ANY ACTION RELATING TO SUCH DISPUTE TO ANY OTHER JURISDICTION. THE COMPANY AND THE HOLDER AGREE TO ACCEPT SERVICE OF PROCESS PURSUANT TO THE PROCEDURES SET FORTH IN SECTION 13. The parties hereto waive all right to trial by jury in any action or proceeding to enforce or defend any rights under this NOTE. [signature appears on following page] 13 IN WITNESS WHEREOF, the Company has caused this Note to be amended and restated as of the date first written above. IMAGEWARE SYSTEMS, INC. By:__________________________ Name: S. James Miller, Jr. Title: Chairman, CEO and President 14 EX-3 5 a91106orexv3.txt EXHIBIT 3 EXHIBIT 3 THE SECURITIES EVIDENCED BY THIS WARRANT CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD, TRANSFERRED, OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF SUCH SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. No.: WARRANT TO PURCHASE COMMON STOCK OF IMAGEWARE SYSTEMS, INC. (void after June 13, 2009) 1. Issuance of Warrant. FOR VALUE RECEIVED, on and after the date of issuance of this Warrant, and subject to the terms and conditions herein set forth, the Holder (as defined below) is entitled to purchase from ImageWare Systems, Inc., a California corporation (the "Company"), at any time before 5:00 p.m. New York time on June 13, 2009 (the "Termination Date"), at a price per share equal to the Warrant Price (as defined below and subject to adjustment as described below), the Warrant Stock (as defined below and subject to adjustment as described below) upon exercise of this warrant (this "Warrant") pursuant to Section 6 hereof. 2. Definitions. As used in this Warrant, the following terms have the definitions ascribed to them below: (a) "Business Day" means any day other than a Saturday, Sunday or other day on which the national or state banks located in the State of New York or the State of California or the District of Columbia are authorized to be closed. (b) "Common Stock" means the common stock, par value $0.01 per share, of the Company. (c) "Holder" means ______________________, or its assigns. (d) "Purchase Agreement" means the Note and Warrant Purchase Agreement dated as of May 22, 2002 by and between the Company and Perseus 2000,L.L.C., as amended. (e) "Company Notes" means all Notes issued to L.F. Global Holdings, LLC ("LF"), and Laurus Master Fund, Ltd. ("Laurus"), pursuant to the Consent to Assignment and Amendment Agreement by and among LF, Laurus and the Company dated June 13, 2003 (the "Consent Agreement"). (f) "Warrant Price" means $2.11 per share, subject to adjustment as described in Section 3 below. (g) "Warrant Stock" means the shares of Common Stock (or other securities) purchasable upon exercise of this Warrant or issuable upon conversion of this Warrant. The total number of shares to be issued upon the exercise of this Warrant shall be _______, subject to adjustment as described in Section 3 below. 3. Adjustments and Notices. The Warrant Price and the number of shares of Warrant Stock shall be subject to adjustment from time to time in accordance with this Section 3. (a) Subdivision, Stock Dividends or Combinations. In case the Company shall at any time subdivide the outstanding shares of Common Stock or shall issue a stock dividend with respect to the Common Stock, the Warrant Price in effect immediately prior to such subdivision or the issuance of such dividend shall be proportionately decreased, and in case the Company shall at any time combine the outstanding shares of the Common Stock, the Warrant Price in effect immediately prior to such combination shall be proportionately increased, in each case effective at the close of business on the date of such subdivision, dividend or combination, as the case may be. (b) Reclassification, Exchange, Substitution, In-Kind Distribution. Upon any reclassifications, exchange, substitution or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant or upon the payment of a dividend in securities or property other than shares of Common Stock, the Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that the Holder would have received if this Warrant had been exercised or converted immediately before the record date for such reclassification, exchange, substitution, or other event or immediately prior to the record date for such dividend. The Company or its successor shall promptly issue to the Holder a new warrant for such new securities or other property. The new warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise or conversion of the new warrant. The provisions of this Section 3(b) shall similarly apply to successive reclassifications, exchanges, substitutions, or other events and successive dividends. As used in this Section 3(b), the term "property" shall not include cash. (c) Reorganization, Merger etc. In case of any (i) merger or consolidation of the Company into or with another corporation where the Company is not the surviving corporation, (ii) sale, transfer or lease (but not including a transfer or lease by pledge or mortgage to a bona fide lender) of all or substantially all of the assets of the Company or (iii) sale by the Company's shareholders of 50% or more of the Company's outstanding securities in one or more related transactions, the Company, or such successor or purchasing 2 corporation, as the case may be, shall, as a condition to closing any such reorganization, merger or sale, duly execute and deliver to the Holder hereof a new warrant so that the Holder shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise or conversion of the unexercised or unconverted portion of this Warrant, and in lieu of the shares of the Common Stock theretofore issuable upon exercise or conversion of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reorganization, merger or sale by the Holder of the number of shares of Common Stock then purchasable under this Warrant. Such new warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. The provisions of this subparagraph (c) shall similarly apply to successive reorganizations, mergers and sales. (d) Dilutive Issuances. (i) Subject to obtaining shareholder approval, if required, pursuant to subsection (vii) below, if the Company, at any time or from time to time after the date hereof, shall issue any Additional Stock (as defined below) without consideration or for an Effective Price less than the Warrant Price in effect immediately prior to the issuance of such Additional Stock, other than a subdivision or combination of shares of Common Stock or as a dividend or other distribution of Common Stock as provided for elsewhere in this Warrant, then and in each such case the then existing Warrant Price shall be reduced as of the close of business on the date of such issue or sale to a price equal to the lowest such Effective Price. "Effective Price" of Additional Stock means the quotient determined by dividing the total number of shares of Additional Stock issued or sold, or deemed to have been issued or sold by the Company under this Section, into the aggregate consideration received, or deemed to have been received by the Company for such issue under this Section, for such Additional Stock. (ii) In the case of the issuance of Common Stock for cash, the consideration received therefor shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the company for any underwriting or otherwise in connection with the issuance and sale thereof. (iii) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash received therefor shall be deemed to be the fair value thereof as reasonably determined by the Board of Directors of the Company in its good faith judgment irrespective of any accounting treatment. (iv) In the case of the issuance, whether before, on or after the date hereof, of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (which are not excluded from the definition of Additional Stock), the following provisions shall apply: (A) The aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in clauses (ii) or (iii)), if any, received by the Company upon the issuance of such options or rights plus the 3 minimum purchase price provided in such options or rights (without taking into account potential anti-dilution adjustments) for the Common Stock covered thereby. (B) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in clauses (ii) or (iii)). (C) In the event of any change in the number of shares of Common Stock deliverable or any increase in the consideration payable to the Company upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Warrant Price obtained with respect to the adjustment that was made upon the issuance of such options, rights or securities, and any subsequent adjustments based thereon, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (D) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Warrant Price obtained with respect to the adjustment which was made upon the issuance of such options, rights or securities or options or rights related to such securities, and any subsequent adjustments based thereon, shall be recomputed to reflect the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities shall continue to be deemed to be issued. (E) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to clauses (iv)(A) and (iv)(B) of this Section 3(d) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either clause (iv)(C) or (iv)(D) of this Section 3(d). 4 (v) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to clause (iv) of this Section 3(d)) by the Company after the date hereof other than shares of Common Stock issued or issuable: (A) to employees, officers or directors of the Company, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Company's Board of Directors; (B) pursuant to any rights, agreements, options or warrants outstanding as of the date hereof and disclosed in writing to the Holder; and stock issued pursuant to any such rights or agreements granted after the date hereof; (C) in connection with any stock split, stock dividend or recapitalization by the Company; (D) upon conversion of any Company Notes or the Company's Series B Preferred Stock or upon exercise or conversion of the Purchaser's Warrants or the Warrants issued pursuant to the Purchase Agreement; (E) shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued for consideration other than cash pursuant to a merger, consolidation, strategic alliance, acquisition or similar business combination approved by the Board of Directors; (F) pursuant to any equipment leasing, real property leasing or loan arrangement, or debt financing from a bank or similar financial or lending institution approved by the Company's Board of Directors, the principal purpose of which is not to raise equity capital; or (G) by the Company in connection with joint ventures, manufacturing, marketing or distribution arrangements or technology transfer or development arrangements; provided that such strategic transactions and the issuance of shares in connection therewith have been approved by the Company's Board of Directors and the principal purpose thereof is not to raise equity capital. (vi) "Common Stock Equivalent Share" means with respect to any security that is ultimately convertible into shares of Common Stock or ultimately exercisable for shares of Common Stock, the total number of shares of Common Stock that may be acquired upon full exercise of all such rights. (vii) Notwithstanding anything to the contrary in this Warrant, unless and until the Company obtains shareholder approval, no adjustment will be made under Subsection (d)(i) above if such adjustment would cause the maximum number of shares of Common Stock issuable pursuant to the Company Notes, Purchaser's Warrants (as defined in Consent Agreement) and the warrants issued pursuant to the Purchase Agreement (collectively the "Convertible Securities"), to exceed the maximum number of shares of Common Stock that 5 the Company is permitted to issue, without such shareholder approval, pursuant to and in compliance with the American Stock Exchange Listing Standards, Policies and Requirements, or any successor provisions, so long as the Common Stock is listed on such Exchange or a successor exchange. (e) Certificate of Adjustment. In each case of an adjustment or readjustment of the Warrant Price, the Company, at its own expense, shall cause its Chief Financial Officer to compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to the Holder. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based. No adjustment of the Warrant Price shall be required to be made unless it would result in an increase or decrease of at least one cent, but any adjustments not made because of this sentence shall be carried forward and taken into account in any subsequent adjustment otherwise required hereunder. (f) Adjustment to Number of Shares of Warrant Stock. In the event the Warrant Price is adjusted under any provision of this Section 3, the number of shares of Warrant Stock shall be simultaneously adjusted by multiplying the number of shares of Warrant Stock by a fraction, the numerator of which is the Warrant Price in effect immediately prior to such adjustment and the denominator of which is the Warrant Price in effect immediately after such adjustment. (g) No Impairment. The Company shall not, by amendment of its Articles of Incorporation or through a 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 to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out all of the provisions of this Section 3 and in taking all such action as may be necessary or appropriate to protect the Holder's rights under this Section 3 against impairment. If the Company takes any action affecting the Common Stock or any other event occurs as to which the provisions of this Section 3 are not strictly applicable or if strictly applicable would not fairly protect the Holder's rights under this Warrant, then the Board of Directors of the Company shall make an adjustment in the number and/or class of shares available under this Warrant, the Warrant Price, or the application of such provisions, so as to protect the Holder's rights under this Warrant as aforesaid. The adjustment will be such as will give the Holder upon exercise for the same aggregate Warrant Price the same number, class and kind of securities the Holder would have owned had the Warrant been exercised prior to the occurrence of event requiring adjustment and had the Holder continued to hold such securities until after the occurrence of such event. (h) Fractional Shares. No fractional shares shall be issuable upon exercise or conversion of the Warrant and the number of shares to be issued shall be rounded down to the nearest whole share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying the Holder an amount computed by multiplying the fractional interest by the fair market value of a full share. 6 4. No Shareholder Rights. This Warrant, by itself, as distinguished from any shares purchased hereunder, shall not entitle its Holder to any of the rights of a shareholder of the Company. 5. Reservation of Stock. On and after the date hereof, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Warrant Stock upon the exercise or conversion of this Warrant. Issuance of this Warrant shall constitute full authority to the Company's officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Warrant Stock issuable upon the exercise or conversion of this Warrant. 6. Exercise of Warrant. This Warrant may be exercised as a whole or part by the Holder, at any time after the date hereof prior to the termination of this Warrant, by the surrender of this Warrant, together with the Notice of Exercise and Investment Representation Statement in the forms attached hereto as Attachments 1 and 2, respectively, duly completed and executed at the principal office of the Company, specifying the portion of the Warrant to be exercised and accompanied by payment in full of the Warrant Price in cash or by check with respect to the shares of Warrant Stock being purchased. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Warrant Stock issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Warrant Stock issuable upon such exercise. If this Warrant shall be exercised for less than the total number of shares of Warrant Stock then issuable upon exercise, promptly after surrender of this Warrant upon such exercise, the Company will execute and deliver a new warrant, dated the date hereof, evidencing the right of the Holder to the balance of this Warrant Stock purchasable hereunder upon the same terms and conditions set forth herein. 7. Conversion. In lieu of exercising this Warrant or any portion hereof, at any time the Holder hereof shall have the right to convert this Warrant or any portion hereof into Warrant Stock by executing and delivering to the Company at its principal office the written Notice of Conversion and Investment Representation Statement in the forms attached hereto as Attachments 2 and 3, specifying the portion of the Warrant to be converted, and accompanied by this Warrant. The number of shares of Warrant Stock to be issued to Holder upon such conversion shall be computed using the following formula: X=(P)(Y)(A-B)/A where X = the number of shares of Common Stock to be issued to the Holder for the portion of the Warrant being converted. P = the portion of the Warrant being converted expressed as a decimal fraction. Y = the total number of shares of Common Stock issuable upon exercise of the Warrant in full. 7 A = the fair market value of one share of Warrant Stock which means (i) the fair market value of the Warrant Stock as of the last Business Day immediately prior to the date the notice of conversion is received by the Company, as reported in the principal market for such securities or, if no such market exists, as determined in good faith by the Company's Board of Directors, or (ii) if this Warrant is being converted in conjunction with a public offering of stock the price to the public per share pursuant to the offering. B = the Warrant Price on the date of conversion. Any portion of this Warrant that is converted shall be immediately canceled. This Warrant or any portion hereof shall be deemed to have been converted immediately prior to the close of business on the date of its surrender for conversion as provided above, and the person entitled to receive the shares of Warrant Stock issuable upon such conversion shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Warrant Stock issuable upon such conversion. If the Warrant shall be converted for less than the total number of shares of Warrant Stock then issuable upon conversion, promptly after surrender of the Warrant upon such conversion, the Company will execute and deliver a new warrant, dated the date hereof, evidencing the right of the Holder to the balance of the Warrant Stock purchasable hereunder upon the same terms and conditions set forth herein. If this Warrant is converted, as a whole or in part, after the occurrence of an event as to which Section 3(c) is applicable, the Holder shall receive the consideration contemplated by Section 3(c) in lieu of Common Stock of the Company. 8. Transfer of Warrant. This Warrant may be transferred or assigned by the Holder hereof in whole or in part, provided that the transferor provides, at the Company's request, an opinion of counsel satisfactory to the Company that such transfer does not require registration under the Securities Act and the securities laws applicable with respect to any other applicable jurisdiction. 9. Termination. This Warrant shall terminate on 5:00 p.m. New York time on the Termination Date. 10. Miscellaneous. This Warrant shall be governed by the laws of the State of New York, as such laws are applied to contracts to be entered into and performed entirely in New York by New York residents. In the event of any dispute among the Holder and the Company arising out of the terms of this Warrant, the parties hereby consent to the exclusive jurisdiction of the federal and state courts located in the State of New York for resolution of such dispute, and agree not to contest such exclusive jurisdiction or seek to transfer any action relating to such dispute to any other jurisdiction. The headings in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed or waived orally, but only by an instrument in writing signed by the Company and the Holder of this Warrant. All notices and other communications from the 8 Company to the Holder of this Warrant shall be delivered personally or by facsimile transmission or mailed by first class mail, postage prepaid, to the address or facsimile number furnished to the Company in writing by the last Holder of this Warrant who shall have furnished an address or facsimile number to the Company in writing, and if mailed shall be deemed given three days after deposit in the United States mail. ISSUED: June 13, 2003 IMAGEWARE SYSTEMS, INC. By:__________________________________ Name: S. James Miller, Jr. Title: Chairman, CEO and President 9 ATTACHMENT 1 NOTICE OF EXERCISE TO: ___________________ 1. The undersigned hereby elects to purchase _______________ shares of the Warrant Stock of ImageWare Systems, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. 2. Please issue a certificate or certificates representing said shares of Warrant Stock in the name of the undersigned or in such other name as is specified below: ________________________________ (Name) ________________________________ (Address) _______________________________________ ___________________________________ (Date) (Name of Warrant Holder) By:________________________________ Title:______________________________ ATTACHMENT 2 INVESTMENT REPRESENTATION STATEMENT Shares of the Common Stock (as defined in the attached Warrant) of ImageWare Systems, Inc. In connection with the purchase of the above-listed securities, the undersigned hereby represents to ImageWare Systems, Inc. (the "Company") as follows: (a) The securities to be received upon the exercise of the Warrant (the "Securities") will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and the undersigned has no present intention of selling, granting participation in or otherwise distributing the same, but subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control. By executing this statement, the undersigned further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations to such person or to any third person, with respect to any Securities issuable upon exercise of the Warrant. (b) The undersigned understands that the Securities issuable upon exercise of the Warrant at the time of issuance may not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, on the ground that the issuance of such securities is exempt pursuant to Section 4(2) of the Securities Act and state law exemptions relating to offers and sales not by means of a public offering, and that the Company's reliance on such exemptions is predicated on the undersigned's representations set forth herein. (c) The undersigned agrees that in no event will it make a disposition of any Securities acquired upon the exercise of the Warrant unless and until (i) it shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (ii) it shall have furnished the Company with an opinion of counsel satisfactory to the Company and Company's counsel to the effect that (A) appropriate action necessary for compliance with the Securities Act and any applicable state securities laws has been taken or an exemption from the registration requirements of the Securities Act and such laws is available, and (B) the proposed transfer will not violate any of said laws. (d) The undersigned acknowledges that an investment in the Company is highly speculative and represents that it is able to fend for itself in the transactions contemplated by this statement, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investments, and has the ability to bear the economic risks (including the risk of a total loss) of its investment. The undersigned represents that it has had the opportunity to ask questions of the Company concerning the Company's business and assets and to obtain any additional information which it considered necessary to verify the accuracy of or to amplify the Company's disclosures, and has had all questions which have been asked by it satisfactorily answered by the Company. The undersigned represents that it is an "accredited investor" within the meaning of Regulation D of the Securities Act. (e) The undersigned acknowledges that the Securities issuable upon exercise or conversion of the Warrant must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. The undersigned is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold from the Company or any affiliate of the Company, the sale being through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of shares being sold during any three month period not exceeding specified limitations. Dated:________________________ _____________________________________ (Typed or Printed Name) By:__________________________________ (Signature) _____________________________________ (Title) - 2 - ATTACHMENT 3 NOTICE OF CONVERSION TO: _____________________ 1. The undersigned hereby elects to acquire _______________ shares of the Warrant Stock of ImageWare Systems, Inc. pursuant to the terms of the attached Warrant, by conversion of _________ percent (_____%) of the Warrant. 2. Please issue a certificate or certificates representing said shares of Warrant Stock in the name of the undersigned or in such other name as is specified below: ______________________________ (Name) _________________________________ (Address) ____________________________________ ___________________________________ (Date) (Name of Warrant Holder) By:_________________________________ Title:______________________________ (Title and signature of authorized person) EX-4 6 a91106orexv4.txt EXHIBIT 4 EXHIBIT 4 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of May 22, 2002 by and between ImageWare Systems, Inc., a California corporation (the "Company"), and Perseus 2000, L.L.C., a Delaware limited liability company (the "Investor"). R E C I T A L S A. The Investor has made an investment in the Company by acquiring senior secured convertible promissory notes of the Company (the "Notes") convertible into shares of the Company's common stock (the "Common Stock") and warrants to acquire shares of Common Stock (the "Warrants") (collectively, the Notes and Warrants together, the "Securities"). B. In connection with such purchase of the Securities, and to induce the Investor to consummate such purchase of the Securities, the Company has agreed to enter into this Agreement and to grant to the Investor the rights set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, the Investor and the Company (collectively, the Parties") agree as follows: 1. Definitions. For purposes of this Statement: "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute. "Holder" means (i) the Investor, (ii) the partners, members or stockholders of the Investor collectively provided that such partners, members or stockholders act through the Investor or its successor and (iii) any person or entity to whom the Investor or any person or entity identified in clause (ii) of this definition sells, transfers or assigns 25% or more of the Registrable Securities issued pursuant to the Purchase Agreement, any Note or any Warrant, other than in a sale pursuant to Rule 144 under the Securities Act or a registration effected pursuant to this Agreement. "Register," "registered," and "registration" refer to an underwritten registration effected by preparing and filing with the Securities and Exchange Commission (the "Commission") a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering by the Commission of effectiveness of such registration statement or document. "Registration Expenses" means all expenses in connection with the Company's performance of or compliance with its obligations under this Agreement, including, without limitation, all (i) registration, qualification and filing fees; (ii) fees, costs and expenses of compliance with securities or blue sky laws (including reasonable fees, expenses and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Exhibit4.Registration Rights Agreement Registrable Securities under the laws of such jurisdictions as the managing underwriter or underwriters in a registration may designate, subject to the limitation as set forth in subsection (h) of Section 5 hereof); (iii) printing expenses; (iv) messenger, telephone and delivery expenses; (v) fees, expenses and disbursements of counsel for the Company and of all independent certified public accountants retained by the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance); (vi) Securities Act liability insurance if the Company so desires; (vii) fees, expenses and disbursements of any other individuals or entities retained by the Company in connection with the registration of the Registrable Securities; (viii) fees, costs and expenses incurred in connection with the listing of the Registrable Securities on each national securities exchange or automated quotation system on which the Company has made application for the listing of its Common Stock; and (ix) internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties and expenses of any annual audit). Registration Expenses shall not include selling commissions, discounts or other compensation paid to underwriters or other agents or brokers to effect the sale of Registrable Securities, or counsel fees and any other expenses incurred by Holders in connection with any registration that are not specified in the immediately preceding sentence. "Registrable Securities" means any shares of Common Stock of the Company owned by any Holder or that may be acquired by any Holder upon the conversion of any convertible security or the exercise of any warrant, option or other right owned by any Holder, but only to the extent such shares constitute "restricted securities" under Rule 144 under the Securities Act. "Requestor" means the Holder or Holders requesting the registration in question. Actions taken by the Requestor shall be taken by those Holders making such request who hold a majority of the Registrable Securities held by such Holders. "Securities Act" means the Securities Act of 1933, as amended, or any successor statute. 2. Demand Registrations. (a) Request for Registration. If at any time after the date hereof one or more Holders who in the aggregate hold at least 25% of the Registrable Securities submits a written request (a "Demand Notice") to the Company that the Company register Registrable Securities under and in accordance with the Securities Act (a "Demand Registration"), then the Company shall: (i) within five days after receipt of such Demand Notice, give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use diligent efforts to effect such registration as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holders joining in such request as are - 2 - specified in written requests received by the Company within 20 days after the date the Company mails the written notice referred to in clause (i) above. Notwithstanding the foregoing, if the Company shall furnish to the Holders a certificate signed by the president of the Company stating that in the good faith judgment of the board of directors of the Company, it would be seriously detrimental to the Company or its stockholders for a registration statement to be filed on or before the date filing would be required in connection with any Demand Registration and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing or delay its effectiveness for a reasonable period not to exceed 90 days provided that such right shall not be exercised more than once with respect to a request for registration hereunder during any period of twelve consecutive months. The Company will pay all Registration Expenses in connection with such withdrawn request for registration. Notwithstanding the foregoing, the Company shall not be required to effect any registration (i) requested within less than 120 days after the filing of another registration filed by the Company in which all of the Registrable Securities requested to be included in such registration by participating Holders were so included; or, (ii)(A) if Perseus has not exercised the Perseus Option in full, after the Company has filed and effected one registration pursuant to this Section 2 in which all of the Registrable Securities requested to be included in such registration by participating Holders were so included and such registration has been declared or ordered effective; (B) if Perseus has exercised the Perseus Option in full, after the Company has filed and effected two registrations pursuant to this Section 2 in which all of the Registrable Securities requested to be included in each such registration by participating Holders were so included and each such registration has been declared or ordered effective; or (C) if Perseus has exercised the Perseus Option in part but less than in full, after the Company has filed and effected two registrations pursuant to this Section 2 in which all of the Registrable Securities requested to be included in each such registration by participating Holders were so included and each such registration has been declared or ordered effective; provided, however, that in the case of the second registration filed and effected pursuant to this subclause (C), the Company shall be required to register only those Registrable Securities acquired pursuant to such partial exercise of the Perseus Option. (b) Underwriting. In connection with any registration under this Section 2, if the Requestors intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2(a). In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. The Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement with one or more underwriters selected by the Requestors having terms and conditions customary for such agreements (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 2, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the number of Registrable Securities to be included in such registration. The Company shall so advise all Holders distributing Registrable Securities through such underwriting, and the number of Registrable - 3 - Securities that may be included in the registration and underwriting shall be allocated in proportion, as nearly as practicable, to the respective amounts of Registrable Securities required to be included (determined without regard to any requirement of a request to be included in such registration) in such registration held by all Holders at the time of filing the registration statement. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder to the nearest 100 shares. (c) Shelf Registration. If at the time the Company registers Registrable Securities under the Securities Act pursuant to this Section 2, the sale or other disposition of such Registrable Securities by the Holders may be made pursuant to a registration statement on Form S-3 (or any successor form that permits the incorporation by reference of future filings by the Company under the Exchange Act), and such registration statement, unless otherwise directed by the Requestor, shall be filed as a "shelf" registration statement pursuant to Rule 415 under the Securities Act (or any successor rule). Any such shelf registration shall cover the disposition of all Registrable Securities in one or more underwritten offerings, block transactions, broker transactions, at-market transactions and in such other manner or manners as may be specified by the Requestor. Except as provided in Section 5(b) hereof, the Company shall use its reasonable best efforts to keep such "shelf" registration continuously effective as long as the delivery of a prospectus is required under the Securities Act in connection with the disposition of the Registrable Securities registered thereby and in furtherance of such obligation, shall supplement or amend such registration statement if, as and when required by the rules, regulations and instructions applicable to the form used by the Company for such registration or by the Securities Act or by any other rules and regulations thereunder applicable to shelf registrations. Upon their receipt of a certificate signed by the president of the Company in accordance with the procedure set forth in the penultimate paragraph of Section 2(a) hereof, the Holders will refrain from making any sales of Registrable Securities under the shelf registration statement for a period of up to 90 days; provided that this right to cause the Holders to refrain from making sales shall not be exercised by the Company more than twice, or for an aggregate period of more than 90 days, in any twelve-month period (counting as a permitted exercise any exercise by the Company of its right to defer the filing or delay its effectiveness of a registration statement under the penultimate paragraph of Section 2(a)). 3. Company Registration. (a) Notice of Registration. If at any time or from time to time, the Company shall determine to register any of its capital stock, whether or not for its own account, other than a registration relating to employee benefit plans or a registration effected on Form S-4, the Company shall: (i) provide to each Holder written notice thereof at least ten days prior to the filing of the registration statement by the Company in connection with such registration; and (ii) include in such registration, and in any underwriting involved therein, all those Registrable Securities specified in a written request by each Holder received by the Company within five days after the Company mails the written notice referred to above, subject to the provisions of Section 3(b) below. - 4 - (b) Underwriting. The right of any Holder to registration pursuant to this Section 3 shall be conditioned upon the participation by such Holder in the underwriting arrangements specified by the Company in connection with such registration and the inclusion of the Registrable Securities of such Holder in such underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall (together with the Company) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company and take all other actions, and deliver such opinions and certifications, as may be reasonably requested by such managing underwriter. Notwithstanding any other provision of this Section 3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the number of Registrable Securities to be included in such registration. The Company shall so advise all Holders distributing Registrable Securities through such underwriting, and there shall be excluded from such registration and underwriting, to the extent necessary to satisfy such limitation, first shares held by the Holders and, thereafter, to the extent necessary, shares which the Company wishes to register for its own account. As among the Holders as a group, the number of Registrable Securities that may be included in the registration and underwriting shall be allocated in proportion, as nearly as practicable, to the respective amounts of Registrable Securities required to be included (determined without regard to any requirement of a request to be included in such registration) in such registration held by all Holders at the time of filing the registration statement. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder to the nearest 100 shares. (c) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3 whether or not any Holder has elected to include Registrable Securities in such registration. 4. Expense of Registration. All Registration Expenses incurred in connection with the registration and other obligations of the Company pursuant to Sections 2, 3 and 5 shall be borne by the Company, and all underwriting discounts and selling commissions incurred in connection with any such registrations shall be borne by the Holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Sections 2, 3 or 5, the request of which has been subsequently withdrawn by the Holders unless the withdrawal is based upon material adverse information concerning the Company of which the Holders were not aware at the time of such request. 5. Registration Procedures. If and whenever the Company is required by the provisions of this Agreement to effect the registration of Registrable Securities, the Company shall: (a) promptly prepare and file with the Commission a registration statement with respect to such Registrable Securities on any form that may be utilized by the Company and that shall permit the disposition of the Registrable Securities in accordance with the intended method or methods of disposition thereof, and use its reasonable diligent efforts to cause such registration statement to become effective as promptly as practicable and remain effective thereafter as provided herein, provided that prior to filing a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after - 5 - the initial filing of any registration statement, the Company will furnish to each of the Investor whose Registrable Securities are covered by such registration statement, their counsel and the underwriters copies of all such documents proposed to be filed sufficiently in advance of filing to provide them with a reasonable opportunity to review such documents and comment thereon; (b) prepare and file with the Commission such amendments (including post-effective amendments) and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities covered by such registration statement, including such amendments (including post-effective amendments) and supplements as may be necessary to reflect the intended method of disposition by the prospective seller or sellers of such Registrable Securities, provided that except in the case of a shelf registration under Section 2(c) such registration statement need not be kept effective and current for longer than 120 days subsequent to the effective date of such registration statement; (c) subject to receiving reasonable assurances of confidentiality, for a reasonable period after the filing of such registration statement, and throughout each period during which the Company is required to keep a registration effective, make available for inspection by the selling holders of Registrable Securities being offered, and any underwriters, and their respective counsel, such financial and other information and books and records of the Company, and cause the officers, directors, employees, counsel and independent certified public accountants of the Company to respond to such inquiries as shall be reasonably necessary, in the judgment of such counsel, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; (d) promptly notify the selling holders of Registrable Securities and any underwriters and confirm such advice in writing, (i) when such registration statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (ii) of any comments by the Commission, by the National Association of Securities Dealers Inc. ("NASD"), and by the blue sky or securities commissioner or regulator of any state with respect thereto or any request by any such entity for amendments or supplements to such registration statement or prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation or threatening of any proceedings for that purpose, (iv) if at any time the representations and warranties of the Company cease to be true and correct in all material respects, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, or (vi) at any time when a prospectus is required to be delivered under the Securities Act, that such registration statement, prospectus, prospectus amendment or supplement or post-effective amendment, or any document incorporated by reference in any of the foregoing, contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; - 6 - (e) furnish to each selling holder of Registrable Securities being offered, and any underwriters, prospectuses or amendments or supplements thereto, in such quantities as they may reasonably request and as soon as practicable, that update previous prospectuses or amendments or supplements thereto; (f) use reasonable diligent efforts to (i) register or qualify the Registrable Securities to be included in a registration statement hereunder under such other securities laws or blue sky laws of such jurisdictions within the United States of America as any selling holder of such Registrable Securities or any underwriter of the securities being sold shall reasonably request, (ii) keep such registrations or qualifications in effect for so long as the registration statement remains in effect and (iii) take any and all such actions as may be reasonably necessary or advisable to enable such holder or underwriter to consummate the disposition in such jurisdictions of such Registrable Securities owned by such holder; provided, however, that the Company shall not be required for any such purpose to (x) qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 5(f), (y) subject itself to taxation in any such jurisdiction or (z) consent to general service of process in any such jurisdiction; (g) cause all such Registrable Securities to be listed or accepted for quotation on each securities exchange or automated quotation system on which the Company's Common Stock then trades; and (h) otherwise use reasonable diligent efforts to comply with all applicable provisions of the Securities Act, and rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of at least twelve months which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder. 6. Indemnification. In the event any of the Registrable Securities are included in a registration statement under this Agreement: (a) to the extent permitted by law, the Company will indemnify each Holder who participates in such registration, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement or prospectus, or any amendment or supplement thereto, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance (each, a "Violation"), and the Company will reimburse each such Holder, each of its officers and directors and partners and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably - 7 - incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any Violation which occurs in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder or underwriter and stated to be specially for use therein, and provided further, that the indemnity agreement described in this Section 6(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and its legal counsel and independent accountants, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein. (c) Each party entitled to indemnification under this Section 6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought provided that failure to give such prompt notice shall not relieve the Indemnifying Party of its obligations hereunder unless it is materially prejudiced thereby, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld). Such Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be that of such Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees and expenses or (ii) the Indemnifying Party shall have failed to assume the defense of such action or proceeding and employ counsel reasonably satisfactory to such Indemnified Party in any such action or proceeding or (iii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party and such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to such Indemnified Party which are different from - 8 - or additional to those available to the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing of an election to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party, it being understood, however, that the Indemnifying Party then shall have the right to employ separate counsel at its own expense and to participate in the defense thereof, and shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all Indemnified Parties, which firm shall be designated in writing by a majority of the Indemnified Parties who are eligible to select such counsel). No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnified Party may consent to entry of any judgment or enter into any settlement without the prior written consent of the Indemnifying Party. (d) If the indemnification provided for in this Section 6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying the Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party with respect to such loss, liability, claim, damage or expenses in the proportion that is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 7. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, after such time as a public market exists for the Common Stock, the Company shall use reasonably diligent efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, beginning 90 days after the Company registers a class of securities under Section 12 of the Exchange Act or completes a registered offering under the Securities Act; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and - 9 - (c) Furnish to any Holder promptly upon request a written statement as to its compliance with the reporting requirements of Rule 144 (at any time after 90 days after the Company completes a registered offering under the Securities Act), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), and a copy of the most recent annual or quarterly report of the Company. 8. Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Agreement after the earlier of (a) five years after the date hereof and (b) the date all Registrable Securities held by such Holder may be sold in a single three-month period under Rule 144 under the Securities Act. 9. Information To Be Provided by the Holders. Each Holder whose Registrable Securities are included in any registration pursuant to this Agreement shall furnish the Company such information regarding such Holder and the distribution proposed by such Holder as may be reasonably requested in writing by the Company and as shall be required in connection with such registration or the registration or qualification of such securities under any applicable state securities law. 10. "Stand-Off" Agreement. Each Holder, if requested by the managing underwriter of a registered public offering of securities by the Company, shall agree not to sell or otherwise transfer or dispose of any Registrable Securities or other securities of the Company then held by such Holder for a specified period of time that is customary under the circumstances (not to exceed 180 days) following the effective date of the registration statement for such offering, provided that (a) no such agreement shall be required unless the other principal stockholders of the Company enter into a similar agreement covering the same period of time and (b) such agreement shall contain terms customary for such agreements. The Company may impose stop transfer instructions to enforce any required agreement of the Holders under this Section 10. 11. Miscellaneous. (a) Notices. All notices, requests and other communications hereunder shall be in writing and shall be deemed to have been duly given at the time of receipt if delivered by hand or by facsimile transmission or three days after being mailed, registered or certified mail, return receipt requested, with postage prepaid, to the address or facsimile number (as the case may be) listed below the signature of each Party on such Party's signature page hereto if any Party shall have designated a different address or facsimile number by notice to the other Parties given as provided above, then to the last address or facsimile number so designated. (b) Severability. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed and interpreted in such manner as to be effective and valid under applicable law. (c) Waiver or Modification. Any amendment or modification of this Agreement shall be effective only if evidenced by a written instrument executed by the Company and by Investor that hold a majority of the total Registrable Securities. - 10 - (d) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the principles of conflicts of laws thereof. (e) Attorneys' Fees. In the event of any dispute involving the terms hereof, the prevailing parties shall be entitled to collect legal fees and expenses from the other party to the dispute. (f) Further Assurances. Each Party agrees to act in accordance herewith and not to take any action that is designed to avoid the intention hereof. (g) Successors and Assigns. This Agreement and the rights and obligations of the Parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. (h) Defined Terms. Certain defined terms used herein and not otherwise defined herein shall have them meanings ascribed to such terms in the Note and Warrant Purchase Agreement, dated as of May 22, 2002, by and between the Company and the Investor (the "Purchase Agreement"). [Remainder of page intentionally left blank] [signatures appear on following pages] - 11 - [COMPANY SIGNATURE PAGE] IN WITNESS WHEREOF, the undersigned Party has executed this Agreement as of the day and year first above written. IMAGEWARE SYSTEMS, INC. By:________________________________________ Name: S. James Miller, Jr. Title: Chairman, CEO and President ADDRESS FOR NOTICE: ImageWare Systems, Inc. 10883 Thornmint Road San Diego, California 92127 Attention: S. James Miller, Jr., Chairman, CEO and President Facsimile: (858) 673-0291 with a copy to: Cooley Godward LLP 4401 Eastgate Mall San Diego, California 92121-1909 Attention: M. Wainwright Fishburn, Jr.. Facsimile: (858) 550-6420 - 12 - [INVESTOR SIGNATURE PAGE] IN WITNESS WHEREOF, the undersigned Investor has executed this Agreement as of the day and year first above written. PERSEUS 2000, L.L.C. By:________________________________________ Name: Ray E. Newton III Title: Managing Director ADDRESS FOR NOTICE: Perseus 2000, L.L.C. 2099 Pennsylvania Ave., N.W. Suite 900 Washington, D.C. 20006-1813 Attention: Chip Newton, Managing Director Facsimile: (202) 429-0588 with a copy to: Arnold & Porter 1600 Tysons Boulevard; Suite 900 McLean, Virginia 22102-4865 Attention: Robert B. Ott, Esq. Facsimile: (703) 720-7399 - 13 - EX-5 7 a91106orexv5.txt EXHIBIT 5 EXHIBIT 5 PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT is entered into as of May 22, 2002 (as from time to time amended, modified, restated, supplemented and in effect, this "Security Agreement"), by and between ImageWare Systems, Inc., a California corporation ("Grantor"), in favor of Perseus 2000, L.L.C., a Delaware limited liability company (the "Secured Party"), as agent for itself and the other holders from time to time of the Notes (as defined below) (collectively, the "Note Holders"). RECITALS A. Grantor and the Secured Party have entered into a Note and Warrant Purchase Agreement dated as of May 22, 2002 (the "Purchase Agreement") pursuant to which Grantor has issued to the Secured Party Senior Secured Convertible Promissory Notes dated of even date herewith in the aggregate principal amount of Two Million Dollars ($2,000,000) (together with any Senior Secured Convertible Promissory Notes issued in payment of interest on any Note and any Additional Notes issued at the Additional Closing, each, a "Note" and collectively, the "Notes"). The purchase and sale of the Notes is governed by the Purchase Agreement. B. In order to induce the Secured Party to make the loan evidenced by the Notes, and in consideration therefor, Grantor has agreed to pledge, collaterally assign and grant to the Secured Party, as agent for itself and any other future Note Holders, a perfected lien on and security interest in all of Grantor's assets and properties (including, but not limited to, all outstanding shares of capital stock of each subsidiary of Grantor, except as otherwise provided herein), whether now or hereafter existing, owned or acquired, all pursuant to the terms of this Security Agreement in order to secure (i) the due and punctual payment of (A) any current or future principal and interest (including, without limitation, interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Notes, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, and (B) all other monetary obligations, including but not limited to, fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding regardless of whether allowed or allowable in such proceeding), of Grantor now or hereafter due under the Notes or this Security Agreement, and (ii) the due and punctual performance of all covenants, agreements, obligations and liabilities of Grantor now or hereafter due under or pursuant to the Notes, the Purchase Agreement or this Security Agreement (collectively, the "Obligations"). C. It is a condition precedent to the making of the loan evidenced by the Notes that Grantor execute and deliver this Security Agreement. NOW, THEREFORE, for and in consideration of the covenants and provisions set forth herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor agrees as follows: Exhibit5. Pledge and Security Agreement1 ARTICLE 1 SECURITY INTEREST 1.1 Grant of Security Interest. As security for the Obligations, Grantor hereby collaterally assigns, pledges and grants a continuing and unconditional security interest to the Secured Party, its successors and assigns, in and to all of the following: (a) all equipment (including all "Equipment" as defined in Section 9102(a)(33) of the Uniform Commercial Code as in effect from time to time in the State of California (such code, together with any other successor or applicable adoption of the Uniform Commercial Code in any applicable jurisdiction, the "Code")) machinery, vehicles, fixtures, improvements, supplies, office furniture, fixed assets, all as now owned or hereafter acquired by Grantor or in which Grantor has or hereafter acquires any interest, and any items substituted therefor as replacements and any additions or accessions thereto; (b) all goods (including all "Goods" as defined in Section 9102(a)(44) of the Code) and all inventory (including all "Inventory" as defined in Section 9102(a)(48) of the Code) of Grantor, now owned or hereafter acquired by Grantor or in which Grantor has or hereafter acquires any interest, including but not limited to, raw materials, scrap inventory, work in process, products, packaging materials, finished goods, all documents of title, chattel paper and other instruments covering the same and all substitutions therefor and additions thereto (all of the property described in this clause (b) being hereinafter collectively referred to as "Inventory"); (c) all present and future accounts in which Grantor has or hereafter acquires any interest (including all "Accounts" as defined in Section 9102(a)(2) of the Code), contract rights (including all rights to receive payments and other rights under all equipment and other leasing contracts) and rights to payment and rights or accounts receivable evidencing or representing indebtedness due or to become due Grantor on account of goods sold or leased or services rendered, claims, instruments and other general intangibles (including tax refunds, royalties and all other rights to the payment of money of every nature and description), including but not limited to, any such right evidenced by chattel paper, and all liens, securities, guaranties, remedies, security interests and privileges pertaining thereto (all of the property described in this clause (c) being hereinafter collectively referred to as "Accounts"); (d) all investment property now owned or hereafter acquired by Grantor (including all "Investment Property" as defined in Section 9102(a)(49) of the Code), including, without limitation, all securities (certificated and uncertificated), securities accounts, securities entitlements, commodity contracts and commodity accounts, excluding any of the foregoing also excluded by the immediately following paragraph (e); (e) (i) all of the shares of capital stock of whatever class of the Issuers, now owned or hereafter acquired by Grantor, together with in each case the - 2 - certificates representing the same and 66 2/3% of the shares of capital stock of whatever class of the Foreign Issuers, now owned or hereafter acquired by Grantor, together with in each case the certificates representing the same (collectively, the "Pledged Stock"); (ii) all shares, securities, moneys or property representing a dividend on, or a distribution or return of capital in respect of any of the Pledged Stock, resulting from a split-up, revision, reclassification or other like change of any of the Pledged Stock or otherwise received in exchange for any of the Pledged Stock and all Equity Rights issued to the holders of, or otherwise in respect of, any of the Pledged Stock; and (iii) without affecting the obligations of Grantor under any provision prohibiting such action under any loan document, in the event of any consolidation or merger in which any Issuer is not the surviving corporation, all shares of each class of the capital stock of the successor corporation (unless such successor corporation is Grantor itself) formed by or resulting from such consolidation or merger (collectively, and together with the property described in clauses (i) and (ii) above, the "Stock Collateral"); (f) all general intangibles now owned or hereafter acquired by Grantor or in which Grantor has or hereafter acquires any interest (including all "General Intangibles" as defined in Section 9102(a)(42) of the Code), including but not limited to, payment intangibles (including all "Payment Intangibles" as defined in Section 9102(a)(61) of the Code), choses in action and causes of action and all licenses and permits (to the extent the collateral assignment of such licenses and permits is not prohibited by applicable law), contract rights (including but not limited to all rights under all Material Contracts (as defined in the Purchase Agreement) and all rights to receive payments and other rights under all equipment and other leasing contracts, instruments and documents owned or used by Grantor, and any goodwill relating thereto); (g) all other property owned by Grantor or in which Grantor has or hereafter acquires any interest, wherever located, and of whatever kind or nature, tangible or intangible, including all Intellectual Property; (h) all insurance policies of any kind maintained in effect by Grantor, now existing or hereafter acquired, under which any of the property referred to in clauses (a) through (f) above is insured, including but not limited to, any proceeds payable to Grantor pursuant to such policies; (i) all moneys, cash collateral, chattel paper (including all "Chattel Paper" as defined in Section 9102(a)(11) of the Code), checks, notes, bills of exchange, documents of title, money orders, negotiable instruments, commercial paper, and other securities, letters of credit (including all "Letter-of-Credit Rights" as defined in Section 9102(a)(51) of the Code), supporting obligations (including all "Supporting Obligations" as defined in Section 9102(a)(77) of the Code), instruments (including all "Instruments" as define in Section 9102(a)(47) of the Code), documents (including all "Documents" as defined in Section 9102(a)(30) of the Code), deposit accounts (including - 3 - all "Deposit Accounts" as defined in Section 9102(a)(29) of the Code), deposits and credits from time to time whether or not in the possession of or under the control of the Secured Party; and (j) any consideration received when all or any part of the property referred to in clauses (a) through (i) above is sold, transferred, exchanged, leased, collected or otherwise disposed of, or any value received as a consequence of possession thereof, including but not limited to, all products, proceeds (including all "Proceeds" as defined in Section 9102(a)(64) of the Code), cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements or other documents, insurance proceeds or proceeds of other proceeds now or hereafter owned by Grantor or in which Grantor has an interest. The property set forth in clauses (a) through (j) of the preceding sentence, together with property of a similar nature which Grantor hereafter owns or in which Grantor hereafter acquires any interest, is referred to herein as the "Collateral." As used in this Security Agreement, the following terms shall have the following meanings: "Copyright Collateral" shall mean all Copyrights, whether now owned or hereafter acquired by Grantor. "Copyrights" shall mean, collectively, (a) all copyrights, copyright registrations and applications for copyright registrations, (b) all renewals and extensions of all copyrights, copyright registrations and applications for copyright registration and (c) all rights, now existing or hereafter coming into existence, (i) to all income, royalties, damages and other payments (including in respect of all past, present or future infringements) now or hereafter due or payable under or with respect to any of the foregoing, (ii) to sue for all past, present and future infringements with respect to any of the foregoing and (iii) otherwise accruing under or pertaining to any of the foregoing throughout the world. "Equity Rights" shall mean, with respect to any person, any outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including any stockholders' or voting trust arrangements) for the issuance, sale, registration or voting of, or outstanding securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such person. "Foreign Issuers" shall mean, collectively, each subsidiary of Grantor organized under the laws of any jurisdiction outside of the United States of America, directly or indirectly, that is the issuer of any shares of capital stock now owned or hereafter acquired by Grantor. "Issuers" shall mean, collectively, each subsidiary of Grantor organized under the laws of any jurisdiction within the United States of America, directly or indirectly, that is the issuer of any shares of capital stock now owned or hereafter acquired by Grantor. - 4 - "Intellectual Property" shall mean all Copyright Collateral, all Patent Collateral and all Trademark Collateral, together with (a) all inventions, processes, production methods, proprietary information, know-how and trade secrets; (b) all licenses or user or other agreements granted to Grantor with respect to any of the foregoing, in each case whether now or hereafter owned or used, including all licenses or other agreements with respect to the Copyright Collateral, the Patent Collateral or the Trademark Collateral listed; (c) all information, customer lists, identification of suppliers, data, plans, blueprints, specifications, designs, drawings, recorded knowledge, surveys, engineering reports, test reports, manuals, materials standards, processing standards, performance standards, catalogs, computer and automatic machinery software and programs; (d) all field repair data, sales data and other information relating to sales or service of products now or hereafter manufactured; (e) all accounting information and all media in which or on which any information or knowledge or data or records may be recorded or stored and all computer programs used for the compilation or printout of such information, knowledge, records or data; (f) all governmental approvals now held or hereafter obtained by Grantor in respect of any of the foregoing; and (g) all causes of action, claims and warranties now owned or hereafter acquired by Grantor in respect of any of the foregoing. It is understood that Intellectual Property shall include all of the foregoing owned or acquired by Grantor on a worldwide basis. "Patent Collateral" shall mean all Patents, whether now owned or hereafter acquired by Grantor. "Patents" shall mean, collectively, (a) all patents and patent applications, (b) all reissues, divisions, continuations, renewals, extensions and continuations-in-part of all patents or patent applications and (c) all rights, now existing or hereafter coming into existence, (i) to all income, royalties, damages, and other payments (including in respect of all past, present and future infringements) now or hereafter due or payable under or with respect to any of the foregoing, (ii) to sue for all past, present and future infringements with respect to any of the foregoing and (iii) otherwise accruing under or pertaining to any of the foregoing throughout the world, including all inventions and improvements described or discussed in all such patents and patent applications. "Permitted Liens" shall mean (a) any and all liens or security interests granted by Grantor or its subsidiaries existing on the date hereof and described in Schedule C attached hereto; (b) liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings if adequate reserves with respect to such liens are maintained on the books of Grantor in accordance with GAAP; (c) liens (i) upon or in any equipment acquired or held by Grantor to secure the purchase price or lease of such equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, or (ii) existing on such equipment at the time of its acquisition; provided that in each of (i) and (ii) above, (A) the lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment and (B) the principal amount of such indebtedness secured by any such lien shall at no time exceed the fair market value of such equipment at the time it was acquired; (d) liens arising from judgments, decrees or attachments to the extent and only so long as such judgment, decree or - 5 - attachment has not caused or resulted in an Event of Default; (e) leases, subleases, licenses and sublicenses granted to others in the ordinary course of Grantor's business not interfering in any material respect with the conduct of the business of Grantor and not materially detracting from the value of the Collateral; (f) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar liens affecting real property not interfering in any material respect with the ordinary conduct of business of Grantor and not materially detracting from the value of the property subject to such lien; (g) liens incurred or deposits made in the ordinary course of Grantor's business in connection with worker's compensation, unemployment insurance, social security and other like laws; (h) liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (i) carriers', warehousemen's, materialmen's, mechanics', landlords', repairmen's, employees' or other like liens arising in the ordinary course of business which are not delinquent or which are being contested in good faith by appropriate proceedings; and (j) liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution. "Trademark Collateral" shall mean all Trademarks, whether now owned or hereafter acquired by Grantor. Notwithstanding the foregoing, the Trademark Collateral shall not include any Trademark which would be rendered invalid, abandoned, void or unenforceable by reason of its being included as part of the Trademark Collateral. "Trademarks" shall mean, collectively, (a) all trade names, trademarks and service marks, logos, trademark and service mark registrations and applications for trademark and service mark registrations, (b) all renewals and extensions of any of the foregoing and (c) all rights, now existing or hereafter coming into existence, (i) to all income, royalties, damages and other payments (including in respect of all past, present and future infringements) now or hereafter due or payable under or with respect to any of the foregoing, (ii) to sue for all past, present and future infringements with respect to any of the foregoing and (iii) otherwise accruing under or pertaining to any of the foregoing throughout the world, together, in each case, with the product lines and goodwill of the business connected with the use of, or otherwise symbolized by, each such trade name, trademark and service mark. 1.2 Perfection of Security Interests. (a) Grantor hereby authorizes the Secured Party to file a financing statement or financing statements (the "Financing Statement") describing the Collateral in any and all jurisdictions where, and with any and all governmental authorities with whom, the Secured Party reasonably deems such filing to be necessary or appropriate including, without limitation, the jurisdiction of the debtor's location for purposes of the Code, the United States Patent and Trademark Office and the United States Copyright Office. Grantor will reimburse the Secured Party for any and all reasonable costs, charges and expenses (including reasonable fees of counsel) incurred in connection with such filings. For purposes of this Section 1.2(a), the Financing Statements shall be deemed to include any amendment, modification, assignment, continuation statement or - 6 - other similar instrument consistent with the rights granted to the Secured Party under this Security Agreement and the Purchase Agreement. (b) Grantor shall have possession of the Collateral, except where as expressly otherwise provided in this Security Agreement or where the Secured Party chooses to perfect its security interest by possession in addition to the filing of a Financing Statement. Where Collateral is in the possession of a third party, Grantor will join with the Secured Party in notifying the third party of the Secured Party's security interest therein and obtaining an acknowledgement from the third party that it is holding the Collateral for the benefit of the Secured Party. (c) Grantor will cooperate with the Secured Party in obtaining control (including "Control" as contemplated by Section 9312(b) of the Code) with respect to Collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper. (d) Grantor will not create any chattel paper without a legend on such chattel paper reasonably acceptable to the Secured Party indicating that the Secured Party has a secured interest in such Chattel Paper. (e) Grantor shall, upon the Grantor's acquiring, or otherwise becoming entitled to the benefits of, any Copyright (or copyrightable material), Patent (or patentable invention), Trademark (or associated goodwill) or other Intellectual Property or upon or prior to Grantor's filing, either directly or through any agent, licensee or other designee, of any application with any governmental authority for any Copyright, Patent, Trademark, or other Intellectual Property, in each case after the date hereof, execute and deliver such contracts, agreements and other instruments as the Secured Party may reasonably request to evidence, validate, perfect and establish the priority of the security interest granted by this Security Agreement in such and any related Intellectual Property. (f) Grantor shall deliver and pledge to the Secured Party any and all certificates representing the Pledged Stock, accompanied by undated stock powers duly executed in blank. (g) Grantor shall upon the acquisition after the date hereof by Grantor of any Stock Collateral, promptly either (x) transfer and deliver to the Secured Party all such Stock Collateral (together with the certificates representing such Stock Collateral securities duly endorsed in blank or accompanied by undated stock powers duly executed in blank) or (y) take such other action as the Secured Party shall deem reasonably necessary or appropriate to perfect, and establish the priority of, the security interest granted by this Security Agreement in such Stock Collateral. 1.3 Intellectual Property. For the purpose of enabling and to the extent necessary to enable the Secured Party to exercise its rights, remedies, powers and privileges under Article 4 at such time or times as the Secured Party shall be lawfully entitled to exercise such rights, remedies, powers and privileges, and for no other purpose, Grantor hereby grants to the Secured Party, to the extent assignable, an - 7 - irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to Grantor) to use, assign, license or sublicense any of the Intellectual Property of Grantor, together with reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout of such items. Such license shall terminate upon full and final payment, performance or other satisfaction of the Obligations. 1.4 Special Provisions Relating to Stock Collateral. (a) So long as no Event of Default shall have occurred and be continuing, Grantor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Stock Collateral for all purposes not inconsistent with the terms of any loan document; provided, that Grantor agrees that it will not vote the Stock Collateral in any manner that is inconsistent with the terms of any loan document. (b) So long as no Event of Default shall have occurred and be continuing, Grantor shall be entitled to receive and retain any dividends on the Stock Collateral paid in cash out of earned surplus. (c) If any Event of Default shall have occurred and be continuing, and whether or not the Secured Party exercises any available right to declare any Obligation due and payable or seeks or pursues any other right, remedy, power or privilege available to it under applicable law, this Security Agreement or any other loan document, all dividends and other distributions on the Stock Collateral shall be paid directly to the Secured Party, subject to the terms of this Security Agreement. ARTICLE 2 REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties. Grantor represents and warrants as of the date hereof that: (a) Grantor has absolute, good and marketable title to all the Collateral, wherever and whenever acquired, free and clear of any lien, except for Permitted Liens, and Grantor has not filed, nor is there on record, a financing statement under the Code (or similar statement or instrument of registration under the law of any jurisdiction) covering any Collateral except as permitted by the Purchase Agreement and except for Permitted Liens; (b) Schedule A hereto lists, as to Grantor, (i) Grantor's chief executive office and other place(s) of business, (ii) Grantor's legal organizational structure and its jurisdiction of incorporation, (iii) the address where records relating to the Collateral are maintained, (iv) any other location of any other equipment and goods (other than mobile goods) included in the Collateral, (v) location of leased facilities and name of lessor/sublessor and (vi) any fictitious names used by Grantor. - 8 - (c) Grantor has paid or will pay when due all taxes, fees, assessments and other charges now or hereafter imposed upon the Collateral except for any tax, fee, assessment or other charge the validity of which is being contested in good faith by appropriate proceedings and so long as Grantor has set aside on its books adequate reserves with respect thereto; (d) as a result of the execution and delivery of this Security Agreement and upon the filing of any financing statements or other documents necessary to assure, preserve and perfect the security interest created hereby and to the extent a lien may be perfected by filing a financing statement, the Secured Party shall have a valid, perfected, enforceable lien on, and a continuing security interest in, the Collateral, enforceable and superior as such as against creditors and purchasers (other than purchasers of Inventory in the ordinary course of business) and as against any owner of real property where any of the equipment or Inventory is located and as against any purchaser of such real property and any present or future creditor obtaining a mortgage or other lien on such real property, and such lien shall be superior and prior to all other liens, subject, in each case, only to Permitted Liens to the extent such Permitted Liens by statute have priority equal to or greater than such security interest; (e) the amount that has been represented by Grantor to the Secured Party as owing by all obligors (such obligors being hereinafter referred to as the "Account Debtors") in the aggregate with respect to Accounts has not materially deviated from the correct amount actually and unconditionally owing at such time by such Account Debtors subject to set off, return and similar rights arising in the ordinary course of business; all Accounts represent bona fide transactions completed in accordance with the terms and provisions contained in the invoices and other documents evidencing the same; as of the date hereof, there are no material setoffs, counterclaims or disputes existing or asserted with respect to Accounts subject to set off, return and similar rights arising in the ordinary course of business, and Grantor has not made any agreement with any Account Debtor for any material deduction therefrom except set-off and claims arising in the ordinary course of business; to Grantor's knowledge, all Account Debtors have the capacity to contract and are solvent; to Grantor's knowledge the goods giving rise to Accounts are not subject to any lien, claim or encumbrance except set-off and claims arising in the ordinary course of business, except in favor of the Secured Party and except for Permitted Liens and as permitted by the Purchase Agreement; and, except as set forth herein, Grantor does not have knowledge of any fact or circumstances which would impair the validity or collectability of Accounts; (f) except as disclosed on Schedule 2.1(f), none of the Collateral is held by a third party in any location as assignee, trustee, bailee, consignee or in any similar capacity; and (g) The Pledged Stock evidenced by the certificates described in Section 1.1(e) hereof (i) is duly authorized, validly existing, fully paid and nonassessable, and none of such Pledged Stock is subject to any contractual restriction, or any restriction under the charter or by-laws of the respective Issuer or Foreign Issuer of such Pledged Stock, upon the transfer of such Pledged Stock (except for any such restriction contained - 9 - in any loan document); and (ii) constitutes all of the issued and outstanding shares of capital stock of any class of the Issuers, and approximately 66 2/3% of the issued and outstanding shares of capital stock of any class of the Foreign Issuers, beneficially owned by Grantor on the date hereof (whether or not registered in the name of Grantor), and Schedule B correctly identifies, as of the date hereof, the respective Issuers or Foreign Issuers of such Pledged Stock and the respective class of the shares comprising such Pledged Stock and the respective number (and registered owners of) of the shares evidenced by each such certificate. 2.2 Survival. All representations, warranties and agreements of Grantor contained in this Security Agreement shall survive the execution, delivery and performance of this Security Agreement until the termination of this Security Agreement pursuant to Section 6.5 hereof. ARTICLE 3 COVENANTS 3.1 Covenants. Grantor hereby covenants and agrees with the Secured Party that so long as this Security Agreement shall remain in effect or any Obligations shall remain unpaid or unperformed: (a) Grantor shall promptly give written notice to the Secured Party of any levy or attachment, execution or other process against any of the Collateral; (b) at Grantor's own cost and expense, Grantor shall take any and all actions reasonably necessary or desirable to defend the Collateral against the claims and demands of all persons other than the Secured Party, and to defend the security interest of the Secured Party in the Collateral and the priority thereof against any lien of any nature, except in each case for Permitted Liens; (c) Grantor shall keep all tangible Collateral properly insured and in good order and repair (normal wear and tear excepted) and immediately notify the Secured Party of any event causing any material loss, damage or depreciation in value of the Collateral in the aggregate and of the extent of such loss, damage or depreciation; (d) Grantor shall mark any Collateral that is chattel paper with a legend showing the Secured Party's lien and security interest therein; (e) Grantor shall: (i) furnish to the Secured Party from time to time (but, unless an Event of Default shall have occurred and be continuing, no more frequently than quarterly) statements and schedules further identifying and describing the Copyright Collateral, the Patent Collateral and the Trademark Collateral and such other reports in connection with the Copyright Collateral, the Patent Collateral and the Trademark Collateral, as the Secured Party may reasonably request, all in reasonable detail; - 10 - (ii) prior to filing, either directly or through an agent, licensee or other designee, any application for any Copyright, Patent or Trademark, furnish to the Secured Party prompt notice of such proposed filing; and (iii) promptly give written notice to the Secured Party of any other change in the intellectual property rights material to its businesses. (f) Grantor shall: (i) (either itself or through licensees) for each Trademark, (A) to the extent consistent with past practice and good business judgment, continue to use such Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force and effect free from any claim of abandonment for nonuse, (B) maintain as in the past the quality of products and services offered under such Trademark, (C) employ such Trademark with the appropriate notice of registration and (D) not (and not permit any licensee or sublicensee to) do any act or knowingly omit to do any act whereby any Trademark material to the conduct of its business may become invalidated, except in each case as Grantor's business or products may change over time as may be consistent with good business judgment; (ii) (either itself or through licensees) not do any act or knowingly omit to do any act whereby any Patent material to the conduct of its business may become abandoned or dedicated; (iii) notify the Secured Party immediately if it knows or has reason to know that any Intellectual Property material to the conduct of its business may become abandoned or dedicated, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding before any governmental authority) regarding Grantor's ownership of any Intellectual Property material to its business, its right to copyright, patent or register the same (as the case may be), or its right to keep, use and maintain the same; (iv) take all necessary steps that are consistent with good business practices in any proceeding before any appropriate governmental authority to maintain and pursue each application relating to any Intellectual Property (and to obtain the relevant registrations) and to maintain each registration material to the conduct of its business, including payment of maintenance fees, filing of applications for renewal, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings; (v) in the event that any Intellectual Property material to the conduct of its business is infringed, misappropriated or diluted by a third party, Grantor shall notify the Secured Party within (10) days after it learns of such event and shall, if consistent with good business practice, promptly sue for infringement, misappropriation or dilution, seek temporary restraints and preliminary injunctive relief to the extent practicable, seek to recover any and all damages for such infringement, misappropriation - 11 - or dilution and take such other actions as are appropriate under the circumstances and in Grantor's good faith business judgment to protect such Collateral; (vi) shall, through counsel selected by Grantor and reasonably acceptable to the Secured Party, prosecute diligently any application for any Intellectual Property pending as of the date of this Security Agreement or thereafter made until the termination of this Security Agreement, make application on uncopyrighted but copyrightable material, unpatented but patentable inventions and unregistered but registrable Trademarks and preserve and maintain all rights in applications for any Intellectual Property; provided, however, that Grantor shall have no obligation to make any such application if making such application would be unnecessary or imprudent in the good faith business judgment of Grantor. Any expenses incurred in connection with such an application shall be borne by Grantor. Grantor shall not abandon any right to file a application for any Intellectual Property or any pending application in the United States without the consent of the Secured Party, which consent shall not be unreasonably withheld; and (vii) after the occurrence and through the continuance of an Event of Default, the Secured Party shall have the right but shall in no way be obligated to bring suit in its own name to enforce the Copyrights, Patents and Trademarks and any license under such Intellectual Property, in which event Grantor shall, at the request of the Secured Party , do any and all lawful acts and execute and deliver any and all proper documents required by the Secured party in aid of such enforcement action. (g) Grantor shall cause the Stock Collateral to constitute at all times 100% of the total number of shares of each class of capital stock of each Issuer and 66 2/3% of the total number of shares of each class of capital stock of each Foreign Issuer then outstanding and shall not permit any such Issuer or Foreign Issuer to issue any shares of capital stock other than to Grantor. Grantor shall cause all such shares to be duly authorized, validly issued, fully paid and nonassessable and to be free of any contractual restriction or any restriction under the charter or bylaws of the respective Issuer of such Stock Collateral, upon the transfer of such Stock Collateral (except for any such restriction contained in any loan document). (h) Grantor shall not: (i) amend or terminate any material contract or other document or instrument constituting part of the Collateral, except for transactions in the ordinary course of business; (ii) voluntarily or involuntarily exchange, lease, sell, transfer or otherwise dispose of any Collateral other than for fair value in the ordinary course of business; (iii) make any compromise, settlement, discharge or adjustment or grant any extension of time for payment with respect to any Account or any lien, - 12 - guaranty or remedy pertaining thereto, except for transactions in the ordinary course of business; (iv) change its name or use any fictitious or trade name, other than in accordance with Section 6.1 hereof; (v) change the location of its chief executive office, other than in accordance with Section 6.1 hereof; (vi) permit any of the Collateral (other than Collateral that constitutes goods that are mobile and that are of a type normally used in more than one jurisdiction or otherwise in the ordinary course of business (including, without limitation, sales and shipments of inventory in the ordinary course of business)) to be removed from or located in any place not identified as the location of such Collateral to the Secured Party, as the case may be, except after written notice to and with written consent of the Secured Party and compliance with such procedures as the Secured Party reasonably may impose to prevent any interruptions or discontinuity in the security interest granted pursuant to this Security Agreement; or (vii) voluntarily grant, incur or allow to exist any lien or security interest on or in any of the Collateral which lien or security interest shall be equal or superior in priority to the security interests granted in this Security Agreement, except for Permitted Liens to the extent such Permitted Liens by their express terms or applicable law have priority equal or greater than the security interests granted pursuant to this Security Agreement. ARTICLE 4 REMEDIAL MATTERS 4.1 Event of Default. An "Event of Default" shall exist hereunder (a) if an event of default shall occur under any of the Notes, (b) upon the filing of a voluntary or involuntary petition for bankruptcy, insolvency, receivership or similar event involving Grantor and, in the case of an involuntary petition, an order for relief is not entered or such petition or proceeding shall not be dismissed, discharged or stayed within ninety (90) days of commencement, or (c) if Grantor shall breach in any material respect any agreement contained herein or otherwise default in any material respect in the observance or performance of any of the covenants, terms, conditions or agreements on the part of Grantor contained in this Security Agreement and, with respect to non-monetary covenants, terms, conditions or agreements, such non observance or non performance continues for a period of thirty (30) days after the earlier of (i) written notice from the Secured Party of such default or (ii) actual knowledge of Grantor of such default. 4.2 Powers of Attorney. (a) Grantor hereby irrevocably appoints the Secured Party (and any officer or agent of the Secured Party) as its true and lawful attorney-in-fact, with power of substitution for and in the name of the Secured Party or otherwise, for the use and - 13 - benefit of the Secured Party, effective upon the occurrence and during the continuance of an Event of Default: (i) to receive, endorse the name of Grantor upon and deliver any notes, acceptances, checks, drafts, money orders or other evidences of payment that may come into the possession of the Secured Party with respect to the Collateral; (ii) to cause Grantor's mail to be transferred to the Secured Party's own offices and to receive and open all mail addressed to Grantor for the purposes of removing any such notes, acceptances, checks, drafts, money orders or other evidences of payment; (iii) to demand, collect and receive payment in respect of the Collateral and to apply any such payments directly to the payment of the Obligations in accordance with Section 4.5 hereof; (iv) to receive and give discharges and releases of all or any of the Collateral; (v) to commence and prosecute any and all suits, actions or proceedings at law or in equity in any court of competent jurisdiction, to collect or otherwise realize on all or any part of the Collateral or to enforce any rights in respect thereof; (vi) to sign the name of Grantor on any invoice or bill of lading relating to any of the Collateral; (vii) to send verification of any Accounts to any Account Debtor or customer; (viii) to notify any Account Debtor or other obligor of Grantor with respect to any Collateral to make payment to the Secured Party; (ix) to settle, compromise, compound, adjust or defend any actions, suits or proceedings relating or pertaining to all or any of the Collateral; (x) to take any action for purposes of carrying out of the terms of this Security Agreement; (xi) to enforce all of Grantor's rights and powers under and pursuant to any and all agreements with respect to the Collateral; and (xii) generally, to sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with all or any of the Collateral, and to do all other acts and things necessary to carry out this Security Agreement, as fully and completely as though the Secured Party were the absolute owner of the Collateral for all purposes; provided, however, nothing herein contained shall be construed as requiring or obligating the Secured Party to make any commitment or to make any inquiry as to the - 14 - nature or sufficiency of any payment received by the Secured Party, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby; and, provided further, that Secured Party shall in all cases act in material compliance with all applicable laws. It is understood and agreed that the power of attorney granted to the Secured Party for the purposes set forth above in this Section 4.2 is coupled with an interest and is irrevocable until the payment, performance or other satisfaction of all of the Obligations, and each Grantor hereby ratifies all actions taken by its attorney-in-fact by virtue hereof. The provisions of this Section 4.2 shall in no event relieve Grantor of any of its obligations hereunder or under any of the other Security Documents with respect to the Collateral or any part thereof or impose any obligation on the Secured Party to proceed in any particular manner with respect to the Collateral or any part thereof, or in any way limit the exercise by the Secured Party of any other or further right which it may have on the date of this Security Agreement or hereafter, whether hereunder, under any of the other Security Documents, by law or otherwise. (b) Beyond the duty of the Secured Party to exercise reasonable care in the custody of any Collateral in its possession and to comply with the Code, the Secured Party shall not, under any circumstance or in any event whatsoever, have any liability for any part of the Collateral, nor shall the Secured Party have any liability for any error or omission or delivery of any kind incurred in the good faith settlement, collection or payment of any of the Collateral or any monies received in payment therefor or for any damages resulting therefrom, nor shall this Security Agreement impose upon the Secured Party any obligation to perform any obligation with respect to the Collateral. The costs of collection, notification and enforcement, including but not limited to, reasonable attorneys' fees and reasonable out-of-pocket expenses, shall be borne solely by Grantor whether the same are incurred by Grantor or the Secured Party. Grantor agrees to indemnify, defend and hold the Secured Party harmless from and against any and all other claims, demands, losses, judgments and liabilities (including, but not limited to, liabilities for penalties) of any nature, and to reimburse the Secured Party for all reasonable costs and expenses, including but not limited to reasonable attorneys' fees and expenses, arising from this Security Agreement or the exercise of any right or remedy granted to the Secured Party hereunder other than those incurred solely as a result of the gross negligence and willful misconduct of the Secured Party. In no event shall the Secured Party be liable for any matter or thing in connection with this Security Agreement other than to account for moneys actually received by the Secured Party in accordance with the terms hereof, and matters arising out of the gross negligence or willful misconduct of the Secured Party. 4.3 Collections. Upon the occurrence and during the continuance of an Event of Default, the Secured Party may, in its sole discretion, in its name or in the name of Grantor, or otherwise, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to any of the Collateral, but shall be under no obligation to do so, or (b) extend the time of payment, arrange for - 15 - payment in installments, or otherwise modify the term of, or release, any of the Collateral, without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, Grantor, other than to discharge Grantor in so doing with respect to liabilities of Grantor to the extent that the liabilities are paid or repaid. After the occurrence and during the continuance of an Event of Default, any money, checks, notes, bills, drafts, or commercial paper received by Grantor shall be held in trust for the Secured Party and any other secured party having rights thereto senior to the Secured Party and shall be promptly turned over to the Secured Party or any other secured party having rights thereto senior to the Secured Party as their interest shall appear. Upon the occurrence and during the continuance of an Event of Default, the Secured Party may make such payments and take such actions as the Secured Party, in its sole discretion, deems necessary to protect its security interest in the Collateral or the value thereof, and the Secured Party is hereby unconditionally and irrevocably authorized (without limiting the general nature of the authority hereinabove conferred) to pay, purchase, contest or compromise any liens which in the judgment of the Secured Party appear to be equal to, prior to or superior to its security interest in the Collateral and any liens not expressly permitted by this Security Agreement. 4.4 Possession; Sale of Collateral. (a) Upon the occurrence and during the continuance of an Event of Default, the Secured Party may, subject to the rights of any other secured party having rights senior to those of the Secured Party: (i) require Grantor to assemble the tangible assets that comprise part of the Collateral and make them available to the Secured Party at any place or places reasonably designated by the Secured Party; (ii) to the extent permitted by applicable law, with or without notice or demand for performance and without liability for trespass, enter any premises where the Collateral may be located and peaceably take possession of the same, and may demand and receive such possession from any person who has possession thereof, and may take such measures as it may deem necessary or proper for the care or protection thereof (including, but not limited to, the right to remove all or any portion of the Collateral); and (iii) with or without taking such possession may sell or cause to be sold, in one or more sales or parcels, for cash, on credit or for future delivery, without assumption of any credit risk, all or any portion of the Collateral, at public or private sale or at any broker's board or any securities exchange, without demand of performance or notice of intention to sell or of time or place of sale, except ten (10) business days' written notice to Grantor of the time and place of such sale or sales (and such other notices as may be required by applicable statute, if any, and which cannot be waived), which Grantor hereby expressly acknowledges is commercially reasonable. In the event of any sale, license or other disposition of any of the Trademark Collateral, the goodwill connected with and symbolized by the Trademark Collateral subject to such disposition shall be included, and Grantor shall supply to the Secured Party or its designee, for inclusion in such sale, assignment or other disposition, all Intellectual Property relating to such Trademark Collateral. The Secured Party shall have no obligation to clean-up or otherwise prepare any Collateral for sale. The Collateral may be sold or disposed of for cash, upon credit or for future delivery as the Secured Party shall deem appropriate. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the - 16 - part of Grantor, and Grantor hereby waives (to the extent permitted by law) all rights of redemption, stay and appraisal that Grantor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Secured Party may (in its sole and absolute discretion) determine. The Secured Party shall not be obligated to make any sale of any Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. The Secured Party may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any disposition of the Collateral. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Secured Party until the sale price is paid by the purchaser or purchasers thereof. The Secured Party shall not incur any liability for the failure to collect or realize upon any or all of the Collateral or for any delay in doing so and, in case of any such failure, shall not be under any obligation to take any action with respect thereto; provided, such Collateral may be sold again upon like notice. If any Collateral is sold upon credit, Grantor will be credited only with payments actually made by the purchaser, received by the Secured Party and applied to the Obligations in accordance with Section 4.5 In the event the purchasers fail to pay for the Collateral, the Secured Party may resell the Collateral. At any public sale made pursuant to this Section 4.4, the Secured Party may bid for or purchase, free from any right of redemption, stay or appraisal and all rights of marshalling, the Collateral and any other security for the Obligations or otherwise on the part of Grantor (all said rights being also hereby waived and released by Grantor to the fullest extent permitted by law) or any part thereof offered for sale and may make payment on account thereof by using any claim then due and payable to the Secured Party from Grantor as a credit against the purchase price, and the Secured Party may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to Grantor therefor. For purposes hereof, a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof; the Secured Party shall be free to carry out such sale pursuant to such agreement, and Grantor shall not be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Secured Party shall have entered into such an agreement, all Events of Default shall have been remedied and any obligations to the Secured Party shall have been paid in full. As an alternative to exercising the power of sale herein conferred upon it, the Secured Party may proceed by a suit or suits at law or in equity to foreclose this Security Agreement and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. In any such action, the Secured Party shall be entitled to the appointment of a receiver without notice, to peaceably take possession of all or any portion of the Collateral and to exercise such powers as the court shall confer upon the receiver. Notwithstanding the foregoing, if an Event of Default shall occur and be - 17 - continuing, the Secured Party shall be entitled to apply, without notice to Grantor, any cash or cash items constituting Collateral in their possession to payment of the Obligations in accordance with the provisions of Section 4.5 hereof. (b) If an Event of Default shall occur and be continuing, the Secured Party shall, in addition to exercising any and all rights and remedies afforded to it hereunder, have all the rights and remedies of a secured party under all applicable provisions of law, including but not limited to, the Code. (c) Grantor agrees that notwithstanding anything to the contrary contained in this Security Agreement, Grantor shall remain liable under each contract or other agreement giving rise to Accounts and General Intangibles and all other contracts or agreements constituting part of the Collateral and the Secured Party shall not have any obligation or liability in respect thereof. (d) After the occurrence and during the continuance of an Event of Default, upon the Secured Party's request, but subject to the rights of any other secured party having rights senior to those of the Secured Party, Grantor shall deliver to the Secured Party all original and other documents evidencing and relating to the sale and delivery of Inventory or Accounts, including but not limited to, all original orders, invoices and shipping receipts. After the occurrence and during the continuance of an Event of Default, Grantor shall also furnish to the Secured Party, promptly upon the request of the Secured Party, such reports, reconciliations and aging balances regarding Accounts as the Secured Party may request from time to time. 4.5 Application of Proceeds. The proceeds of any sale of Collateral pursuant to this Security Agreement or otherwise, as well as any Collateral consisting of cash, shall be applied after receipt by the Secured Party as follows, subject to the rights of any other secured party having rights senior to those of the Secured Party: First, to the payment of all reasonable costs, fees and expenses of the Secured Party and its agents, representatives and attorneys incurred in connection with such sale or with the retaking, holding, handling, preparing for sale (or other disposition) of the Collateral or otherwise in connection with the Notes, this Security Agreement or any of the Obligations, including but not limited to, the reasonable fees and expenses of the Secured Party's agents and attorneys' and court costs (whether at trial, appellate or administrative levels), if any, incurred by the Secured Party in so doing; Second, to the payment of the outstanding principal balance and accrued interest and fees on the Obligations in such order as the Secured Party may determine; - 18 - Third, to pay all other amounts payable by Grantor under the Notes and any other Obligations; and Fourth, to Grantor or to such other person as a court may direct. 4.6 Authority of Secured Party. The Secured Party shall have and be entitled to exercise all such powers hereunder as are specifically delegated to the Secured Party by the terms hereof, together with such powers as are reasonably incidental thereto. The Secured Party may execute any of its duties hereunder by or through its agents or employees and shall be entitled to retain counsel and to act in reliance upon the advice of such counsel concerning all matters pertaining to its duties hereunder. 4.7 Certain Waivers; Grantor Not Discharged. Grantor expressly and irrevocably waives (to the extent permitted by applicable law) presentment, demand of payment and protest of nonpayment in respect of its Obligations under this Security Agreement. The obligations and duties of Grantor hereunder are irrevocable, absolute, and unconditional and shall not be discharged, impaired or otherwise affected by (a) the failure of the Secured Party to assert any claim or demand or to enforce any right or remedy against Grantor or any grantee under the provisions of this Security Agreement or any grantee or any waiver, consent, extension, indulgence or other action or inaction in respect thereof, (b) any extension or renewal of any part of the Obligations, (c) any rescission, waiver, amendment or modification of any of the terms or provisions of any agreement related to this Security Agreement, (d) the release of any liens on or security interests in any part of the Collateral or the release, sale or exchange of or failure to foreclose against any security held by or for the benefit of the Secured Party for payment or performance of the Obligations, (e) the bankruptcy, insolvency or reorganization of Grantor or any grantee or any other persons, (f) any change, restructuring or termination of the corporate structure or existence of Grantor or any grantee or any restructuring or refinancing of all or any portion of the Obligations, or (g) any other event which under law would discharge the obligations of a surety. 4.8 Transfer of Security Interest. The Secured Party may transfer to any other person all or any part of the liens and security interests granted hereby, and all or any part of the Collateral which may be in the Secured Party's possession after the occurrence and during the continuance of an Event of Default or to a successor Secured Party at any time. Upon such transfer, the transferee shall be vested with all the rights and powers of the Secured Party hereunder with respect to such of the Collateral as is so transferred, but, with respect to any of the Collateral not so transferred, the Secured Party shall retain all of their rights and powers (whether given to it in this Security Agreement, or otherwise). The Secured Party or any of them may, at any time, assign their rights as the secured party hereunder to any person, in the Secured Party's discretion, and upon notice to Grantor, but without any requirement for consent or approval by or from Grantor, and any such assignment shall be valid and binding upon Grantor, as fully as it had expressly approved the same. - 19 - ARTICLE 5 SECURED PARTY'S INTERESTS 5.1 Pro Rata Interests. The security interests and other rights granted or reserved to the Secured Party and its successors and assigns under this Security Agreement (the "Contractual Rights") and the other rights available to the Secured Party under applicable law by reason of the existence of this Security Agreement and the attachment and perfection of the security interests created under this Security Agreement (the "Statutory Rights") are for the pro rata benefit of the Note Holders according to the interest in the outstanding principal amount of the Notes held by each Note Holder, respectively, expressed as a percentage of the aggregate outstanding principal amount of all Notes, and shall be held by the Note Holders in such percentages, regardless of the time or order of the attachment or perfection of their respective security interests or the time and manner of filing of their respective deeds of trust, financing statements or assignments thereof and regardless of which, if any, Note Holder may hold possession of the Collateral. All recoveries attributable to enforcement of Contractual Rights or Statutory Rights, or both, shall be shared ratably by the Note Holders according to their respective pro rata interests as provided in this Security Agreement. 5.2 Grantor Obligations. The provisions of this Article 5 are for the purpose of defining the relative rights of the Note Holders with respect to the Collateral and the exercise of Contractual Rights and Statutory Rights. Nothing herein shall impair the obligations of Grantor, which are absolute and unconditional, to pay and perform the Obligations as and when due. No provision of this Security Agreement shall be construed to prevent any Note Holder from exercising remedies that may otherwise be available to it. ARTICLE 6 MISCELLANEOUS 6.1 Further Assurances. Grantor agrees, at its expense, to do such further things, to execute, acknowledge, deliver and cause to be duly filed all such further instruments and documents and take all such actions as the Secured Party may from time to time reasonably request for the better assuming and preserving of the security interests and the rights and remedies created hereby, including but not limited to, the execution and delivery of such additional conveyances, assignments, agreements and instruments, the payment of any fees and taxes required in connection with the execution and delivery of this Security Agreement, the granting of the security interests created hereby and the execution, filing and recordation of any financing statements (including fixture filings) or other documents as the Secured Party may deem reasonably necessary for the perfection of the security interests granted hereunder. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other instrument, such note or instrument shall be immediately pledged and delivered to the Secured Party, duly endorsed in a manner reasonably satisfactory to the Secured Party, subject to the rights of any other secured party having rights senior to the Secured Party. If at any time Grantor shall take and perfect a security interest in any property to secure payment and performance of an Account, Grantor, upon the request of the Secured Party, - 20 - shall promptly assign such security interest to the Secured Party, subject to the rights of any other secured party having rights senior to the Secured Party. Grantor agrees to notify the Secured Party thirty (30) days prior to any change (a) in its corporate name, (b) in its jurisdiction of incorporation or organization, (c) in the location of its chief executive office, (d) in its chief place of business, or (e) in the office or offices where it keeps its records relating to the Collateral. Grantor agrees that, after the occurrence and during the continuance of an Event of Default, it shall upon request of the Secured Party, take any and all actions, to the extent permitted by applicable law, at its own expense, to obtain the approval of any governmental authority for any action or transaction contemplated by this Security Agreement which is then required by law, and specifically, without limitation, upon request of the Secured Party, to prepare, sign and file with any governmental authority Grantor's portion of any application or applications for consent to the assignment of licenses held by Grantor, or for consent to the possession and sale of any of the Collateral by or on behalf of the Secured Party. Grantor further agrees that it shall at all times, at its own expense and cost, keep accurate and complete records with respect to the Collateral, including but not limited to, a record of all payments and proceeds received in connection therewith or as a result of the sale thereof and of all credits granted, and agrees that the Secured Party or its representatives shall have the right at any reasonable time and from time to time to call at Grantor's place or places of business to inspect the Collateral and to examine or cause to be examined all of the books, records, journals and other data relating to the Collateral and to make extracts therefrom or copies thereof as are reasonably requested; provided that such inspections shall occur no more often than quarterly unless an Event of Default has occurred and is continuing. 6.2 Effectiveness. This Security Agreement shall take effect immediately upon execution by Grantor. 6.3 Indemnity; Reimbursement of the Secured Party; Deficiency. In connection with the Collateral, this Security Agreement and the administration and enforcement or exercise of any right or remedy granted to the Secured Party hereunder, Grantor agrees, subject to the limitations set forth hereafter (a) to indemnify, defend and hold harmless the Secured Party from and against any and all claims, demands, losses, judgments and liabilities (including but not limited to, liabilities for penalties) of whatever nature, relating thereto or resulting therefrom, and (b) to reimburse the Secured Party for all reasonable costs and expenses, including but not limited to, the reasonable fees and disbursements of attorneys, relating thereto or resulting therefrom. The foregoing indemnity agreement includes all reasonable costs incurred by the Secured Party in connection with any litigation relating to the Collateral whether or not the Secured Party shall be a party to such litigation, including but not limited to, the reasonable fees and disbursements of attorneys for the Secured Party, and any out-of-pocket costs incurred by the Secured Party in appearing as a witness or in otherwise complying with legal process served upon it. The obligations in this Section 6.3 do not apply to any claims for indemnity, defense, or reimbursement that arise from the gross negligence or willful misconduct of the Secured Party. In no event shall the Secured Party be liable, in the absence of gross negligence or willful misconduct on its part, for any matter or thing in connection with this Security Agreement other than - 21 - to account for moneys actually received by it in accordance with the terms hereof. All indemnities contained in this Section 6.3 and elsewhere in this Security Agreement shall survive the expiration or earlier termination of this Security Agreement. After application of the proceeds by the Secured Party pursuant to Section 4.5 hereof, Grantor shall remain liable to the Secured Party for any deficiency. 6.4 Continuing Lien. It is the intent of the parties hereto that (a) this Security Agreement shall constitute a continuing agreement as to any and all future, as well as existing transactions, between Grantor and the Secured Party under or in connection with the Note or otherwise relating to any other Obligation, and (b) the security interest provided for herein shall attach to after-acquired as well as existing Collateral. 6.5 Termination. Upon payment, performance or other satisfaction in full of the Notes and all other Obligations and all other amounts due in connection therewith and termination of all commitments relating thereto, the Secured Party shall reassign, redeliver and release (or cause to be so reassigned, redelivered and released), without recourse upon or warranty by the Secured Party, and at the sole expense of Grantor, to Grantor, against receipt therefor, such of the Collateral (if any) as shall not have been sold or otherwise applied by the Secured Party pursuant to the terms hereof and not theretofore reassigned, redelivered and released to Grantor, together with appropriate instruments of reassignment and release. 6.6 Notices. All notices, requests and other communications hereunder shall be in writing and shall be deemed to have been duly given at the time of receipt if delivered by hand or by facsimile transmission (with receipt of successful and full transmission) or three days after being mailed, registered or certified mail, return receipt requested, with postage prepaid to the applicable parties hereto at the address stated below or if any party shall have designated a different address or facsimile number by notice to the other party given as provided above, then to the last address or facsimile number so designated. If to Grantor: Image Ware Systems, Inc. 10883 Thornmint Road San Diego, California 2127 Attention: S. James Miller, Jr., Chairman, CEO and President Facsimile: (858) 673-0291 with a copy to: Cooley Godward LLP 4401 Eastgate Mall San Diego, California 92121-1909 Attention: M. Wainwright Fishburn, Jr., Esq. Facsimile: (858) 550-6420 - 22 - If to Secured Party: Perseus 2000, L.L.C. 2099 Pennsylvania Ave., N.W. Suite 900 Washington, D.C. 20006-1813 Attention: Chip Newton, Managing Director Facsimile: (202) 429-0588 with a copy to: Arnold & Porter 1600 Tysons Boulevard; Suite 900 McLean, Virginia 22102-4865 Attention: Robert B. Ott, Esq. Facsimile: (703) 720-7399 6.7 Successors and Assigns. Whenever in this Security Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, and all covenants, promises and agreements by or on behalf of the Secured Party that are contained in this Security Agreement shall bind and inure to the benefit of its respective successors and assigns. Grantor may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Secured Party. 6.8 APPLICABLE LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE WITHOUT REFERENCE TO ITS CONFLICTS OF LAW RULES THAT MIGHT REFER THE GOVERNANCE OR CONSTRUCTION OF THIS SECURITY AGREEMENT TO THE LAW OF ANOTHER JURISDICTION (EXCEPT WHEN THE CODE OR OTHER APPLICABLE LAW WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION). THE PARTIES HERETO AGREE THAT THE APPROPRIATE AND EXCLUSIVE FORUM FOR ANY DISPUTES ARISING OUT OF THIS SECURITY AGREEMENT SOLELY BETWEEN THE GRANTOR AND THE SECURED PARTY SHALL BE THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND THE PARTIES HERETO IRREVOCABLY CONSENT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS, AND AGREE TO COMPLY WITH ALL REQUIREMENTS NECESSARY TO GIVE SUCH COURTS JURISDICTION. THE PARTIES HERETO FURTHER AGREE THAT THE PARITIES WILL NOT BRING SUIT WITH RESPECT TO ANY DISPUTES ARISING OF THIS SECURITY AGREEMENT EXCEPT AS EXPRESSLY SET FORTH BELOW FOR THE EXECUTION OR ENFORCEMENT OF JUDGEMENT, IN ANY JURISDICTION OTHER THAN THE ABOVE SPECIFIED COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY ACTION OR PROCEEDING HEREUNDER - 23 - BY THE MAILING OF COPIES THEREOF BY REGISTERED MAIL OR CERTIFIED AIRMAIL, POSTAGE PREPAID, TO THE ADDRESS SPECIFIED IN SECTION 6.6 HEREOF. THE FOREGOING SHALL NOT LIMIT THE RIGHTS OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO OBTAIN EXECUTION OF JUDGMENT IN ANY OTHER JURISDICTION. THE PARTIES FURTHER AGREE, TO THE EXTENT PERMITTED BY LAW, THAT FINAL AND UNAPPEALABLE JUDGMENT AGAINST ANY OF THEM IN ANY ACTION OR PROCEEDING CONTEMPLATED ABOVE SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE OF THE UNITED STATES BY SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT OF INDEBTEDNESS. 6.9 Waivers. No failure or delay of the Secured Party in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or future exercise thereof or the exercise of any other right or power. The rights and remedies of the Secured Party hereunder are cumulative and not exclusive of any rights or remedies which it would otherwise have. No waiver of any provision of this Security Agreement or consent to any departure by Grantor therefrom shall in any event be effective unless the same shall be authorized as provided in Section 6.10, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on Grantor in any case shall entitle Grantor to any other or further notice or demand in similar or other circumstances. 6.10 Amendments. Neither this Security Agreement nor any provision hereof may be amended or modified except pursuant to an agreement or agreements in writing entered into by Grantor and the Secured Party. 6.11 Severability. In the event any one or more of the provisions contained in this Security Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not in any way be affected or impaired thereby. 6.12 Counterparts. This Security Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one contract, and shall become effective when copies hereof which, when taken together, bear the signatures of each of the parties hereto shall be delivered or mailed to the Secured Party. 6.13 Headings. Article and Section headings used herein are for convenience of reference only and are not to affect the construction of, or to be taken into consideration in interpreting, this Security Agreement. 6.14 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR - 24 - PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN CONNECTION WITH THIS SECURITY AGREEMENT AND AGREE THAT ANY SUCH ACTION SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE TERMS AND PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS SECURITY AGREEMENT. [signatures appear on following page] - 25 - IN WITNESS WHEREOF, Grantor has executed this Security Agreement as of the date first above written. IMAGEWARE SYSTEMS, INC. By:____________________________________ Name: S. James Miller, Jr. Title: Chairman, CEO and President ACKNOWLEDGED: PERSEUS 2000, L.L.C. By:____________________________________ Name: Ray E. Newton III Title: Managing Director [Signature Page to Security Agreement] SCHEDULE A Pursuant to Section 2.1(b), the following information is disclosed:

CHIEF EXECUTIVE OTHER PLACE(S) OF JURISDICTION OF COLLATERAL EQUIPMENT AND LOCATION OF GRANTOR OFFICE BUSINESS INCORPORATION LOCATION GOODS LOCATION LEASED FACILITIES - ------------- ------------------- ----------------- --------------- -------------- --------------- -------------------- IMAGEWARE 10883 Thornmint Rd California 10883 10883 Thornmint 10883 SYSTEMS, INC. San Diego, CA 92127 Thornmint Rd., Rd., San Diego, Thornmint Rd., San Diego, CA CA 92127 San Diego, CA 92127 92127

SCHEDULE B PLEDGED STOCK 1,629,665 shares of no par Common Stock of XImage Corporation, a California corporation, certificate #57 1,000 shares of Common Stock, $0.0001 par value per share, o fImageWare Systems ID Group, Inc., a Delaware corporation, certificate #C-11 66 shares of I.W. Systems Canada Company - ULC, an entity formed under the laws of Nova Scotia, Canada, Common Stock 5 shares of Digital Imaging International GmbH, an entity formed under the laws of Germany, Common Stock 66,666 shares of Digital Imaging Asia Pacific Pte. Ltd., an entity formed under the laws of Singapore, Common Stock 1 share of no par Common Stock of G&A Imaging, Inc., a Nevada corporation, certificate #C- 90,000 Series A Common Shares, $0.01 par value per share, of ImageWare Digital Photography Systems, LLC, a Nevada limited liability company, certificate of membership interest #8 100,000 Series A Common Shares, $0.01 par value per share, of E-Focus West LLC, a Nevada limited liability company, certificate of membership interest #2 SCHEDULE C Security interests granted by German subsidiary Digital Imaging International GmbH in favor of Deutsche Bank AG on accounts receivable from goods delivered and services rendered Security interest granted by Grantor in favor of American Contractors Indemnity Company on certificate of deposit #0192-600-003 originally issued by Imperial Bank for which the underlying obligations have been satisfied but the UCC financing statement has not yet been terminated. SCHEDULE 2.1(f) (i) immaterial amount of boxed products kept off-site for packaging and shipping at: ICON 399 River Road Hudson, MA 01749 (ii) copies of software (i.e., originals located at chief executive office and other locations listed on Schedule A) located with the following software escrow services: (A) Lincoln-Parry SoftEscrow 400 Inverness Drive South, Suite 200 Englewood, CO 80112 (B) DSI Technology Escrow Services, Inc. 9265 Sky Park Court, Suite 202 San Diego, CA 92123 (iii) server for web hosting of EPIWEB services located at: Magma Communications 195 Colonade Road South, Unit 2 Nepean, Ontario, CANADA K2K-7Q3 PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT is entered into as of May 22, 2002 (as from time to time amended, modified, restated, supplemented and in effect, this "Security Agreement"), by and between ImageWare Systems ID Group, Inc., a Delaware corporation ("Grantor"), in favor of Perseus 2000, L.L.C., a Delaware limited liability company (the "Secured Party"), as agent for itself and the other holders from time to time of the Notes (as defined below) (collectively, the "Note Holders"). RECITALS A. The Secured Party and ImageWare Systems, Inc., Grantor's parent corporation ("Parent"), have entered into a Note and Warrant Purchase Agreement dated as of May 22, 2002 (the "Purchase Agreement") pursuant to which Parent has issued to the Secured Party Senior Secured Convertible Promissory Notes dated of even date herewith in the aggregate principal amount of Two Million Dollars ($2,000,000) (together with any Senior Secured Convertible Promissory Notes issued in payment of interest on any Note and any Additional Notes issued at the Additional Closing, each, a "Note" and collectively, the "Notes"). The purchase and sale of the Notes is governed by the Purchase Agreement. B. In order to induce the Secured Party to make the loan evidenced by the Notes, and in consideration therefor, Grantor has agreed to pledge, collaterally assign and grant to the Secured Party, as agent for itself and any other future Note Holders, a perfected lien on and security interest in all of Grantor's assets and properties (including, but not limited to, all outstanding shares of capital stock of each subsidiary of Grantor, except as otherwise provided herein), whether now or hereafter existing, owned or acquired, all pursuant to the terms of this Security Agreement in order to secure (i) the due and punctual payment of (A) any current or future principal and interest (including, without limitation, interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Notes, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, and (B) all other monetary obligations, including but not limited to, fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding regardless of whether allowed or allowable in such proceeding), of Parent now or hereafter due under the Notes or of Grantor under this Security Agreement, and (ii) the due and punctual performance of all covenants, agreements, obligations and liabilities of Parent now or hereafter due under or pursuant to the Notes or the Purchase Agreement or of Grantor under this Security Agreement (collectively, the "Obligations"). Grantor has also agreed to guarantee the Obligations in accordance with the terms of this Security Agreement. C. It is a condition precedent to the making of the loan evidenced by the Notes that Grantor execute and deliver this Security Agreement. NOW, THEREFORE, for and in consideration of the covenants and provisions set forth herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor agrees as follows: ARTICLE 1 SECURITY INTEREST 1.1 Grant of Security Interest. As security for the Obligations, Grantor hereby collaterally assigns, pledges and grants a continuing and unconditional security interest to the Secured Party, its successors and assigns, in and to all of the following: (a) all equipment (including all "Equipment" as defined in Section 9-102(a)(33) of the Uniform Commercial Code as in effect from time to time in the State of New York (such code, together with any other successor or applicable adoption of the Uniform Commercial Code in any applicable jurisdiction, the "Code")) machinery, vehicles, fixtures, improvements, supplies, office furniture, fixed assets, all as now owned or hereafter acquired by Grantor or in which Grantor has or hereafter acquires any interest, and any items substituted therefor as replacements and any additions or accessions thereto; (b) all goods (including all "Goods" as defined in Section 9-102(a)(44) of the Code) and all inventory (including all "Inventory" as defined in Section 9-102(a)(48) of the Code) of Grantor, now owned or hereafter acquired by Grantor or in which Grantor has or hereafter acquires any interest, including but not limited to, raw materials, scrap inventory, work in process, products, packaging materials, finished goods, all documents of title, chattel paper and other instruments covering the same and all substitutions therefor and additions thereto (all of the property described in this clause (b) being hereinafter collectively referred to as "Inventory"); (c) all present and future accounts in which Grantor has or hereafter acquires any interest (including all "Accounts" as defined in Section 9-102(a)(2) of the Code), contract rights (including all rights to receive payments and other rights under all equipment and other leasing contracts) and rights to payment and rights or accounts receivable evidencing or representing indebtedness due or to become due Grantor on account of goods sold or leased or services rendered, claims, instruments and other general intangibles (including tax refunds, royalties and all other rights to the payment of money of every nature and description), including but not limited to, any such right evidenced by chattel paper, and all liens, securities, guaranties, remedies, security interests and privileges pertaining thereto (all of the property described in this clause (c) being hereinafter collectively referred to as "Accounts"); (d) all investment property now owned or hereafter acquired by Grantor (including all "Investment Property" as defined in Section 9-102(a)(49) of the Code), including, without limitation, all securities (certificated and uncertificated), securities accounts, securities entitlements, commodity contracts and commodity - 2 - accounts, excluding any of the foregoing also excluded by the immediately following paragraph (e); (e) (i) all of the shares of capital stock of whatever class of the Issuers, now owned or hereafter acquired by Grantor, together with in each case the certificates representing the same and 66 2/3% of the shares of capital stock of whatever class of the Foreign Issuers, now owned or hereafter acquired by Grantor, together with in each case the certificates representing the same (collectively, the "Pledged Stock"); (ii) all shares, securities, moneys or property representing a dividend on, or a distribution or return of capital in respect of any of the Pledged Stock, resulting from a split-up, revision, reclassification or other like change of any of the Pledged Stock or otherwise received in exchange for any of the Pledged Stock and all Equity Rights issued to the holders of, or otherwise in respect of, any of the Pledged Stock; and (iii) without affecting the obligations of Grantor under any provision prohibiting such action under any loan document, in the event of any consolidation or merger in which any Issuer is not the surviving corporation, all shares of each class of the capital stock of the successor corporation (unless such successor corporation is Grantor itself) formed by or resulting from such consolidation or merger (collectively, and together with the property described in clauses (i) and (ii) above, the "Stock Collateral"); (f) all general intangibles now owned or hereafter acquired by Grantor or in which Grantor has or hereafter acquires any interest (including all "General Intangibles" as defined in Section 9-102(a)(42) of the Code), including but not limited to, payment intangibles (including all "Payment Intangibles" as defined in Section 9-102(a)(61) of the Code), choses in action and causes of action and all licenses and permits (to the extent the collateral assignment of such licenses and permits is not prohibited by applicable law), contract rights (including but not limited to all rights to receive payments and other rights under all equipment and other leasing contracts, instruments and documents owned or used by Grantor, and any goodwill relating thereto); (g) all other property owned by Grantor or in which Grantor has or hereafter acquires any interest, wherever located, and of whatever kind or nature, tangible or intangible, including all Intellectual Property; (h) all insurance policies of any kind maintained in effect by Grantor, now existing or hereafter acquired, under which any of the property referred to in clauses (a) through (f) above is insured, including but not limited to, any proceeds payable to Grantor pursuant to such policies; (i) all moneys, cash collateral, chattel paper (including all "Chattel Paper" as defined in Section 9-102(a)(11) of the Code), checks, notes, bills of exchange, documents of title, money orders, negotiable instruments, commercial paper, and other securities, letters of credit (including all "Letter-of-Credit Rights" as defined in - 3 - Section 9-102(a)(51) of the Code), supporting obligations (including all "Supporting Obligations" as defined in Section 9-102(a)(77) of the Code), instruments (including all "Instruments" as define in Section 9-102(a)(47) of the Code), documents (including all "Documents" as defined in Section 9-102(a)(30) of the Code), deposit accounts (including all "Deposit Accounts" as defined in Section 9-102(a)(29) of the Code), deposits and credits from time to time whether or not in the possession of or under the control of the Secured Party; and (j) any consideration received when all or any part of the property referred to in clauses (a) through (i) above is sold, transferred, exchanged, leased, collected or otherwise disposed of, or any value received as a consequence of possession thereof, including but not limited to, all products, proceeds (including all "Proceeds" as defined in Section 9-102(a)(64) of the Code), cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements or other documents, insurance proceeds or proceeds of other proceeds now or hereafter owned by Grantor or in which Grantor has an interest. The property set forth in clauses (a) through (j) of the preceding sentence, together with property of a similar nature which Grantor hereafter owns or in which Grantor hereafter acquires any interest, is referred to herein as the "Collateral." As used in this Security Agreement, the following terms shall have the following meanings: "Copyright Collateral" shall mean all Copyrights, whether now owned or hereafter acquired by Grantor. "Copyrights" shall mean, collectively, (a) all copyrights, copyright registrations and applications for copyright registrations, (b) all renewals and extensions of all copyrights, copyright registrations and applications for copyright registration and (c) all rights, now existing or hereafter coming into existence, (i) to all income, royalties, damages and other payments (including in respect of all past, present or future infringements) now or hereafter due or payable under or with respect to any of the foregoing, (ii) to sue for all past, present and future infringements with respect to any of the foregoing and (iii) otherwise accruing under or pertaining to any of the foregoing throughout the world. "Equity Rights" shall mean, with respect to any person, any outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including any stockholders' or voting trust arrangements) for the issuance, sale, registration or voting of, or outstanding securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such person. "Foreign Issuers" shall mean, collectively, each subsidiary of Grantor organized under the laws of any jurisdiction outside of the United States of America, directly or - 4 - indirectly, that is the issuer of any shares of capital stock now owned or hereafter acquired by Grantor. "Issuers" shall mean, collectively, each subsidiary of Grantor organized under the laws of any jurisdiction within the United States of America, directly or indirectly, that is the issuer of any shares of capital stock now owned or hereafter acquired by Grantor. "Intellectual Property" shall mean all Copyright Collateral, all Patent Collateral and all Trademark Collateral, including without limitation, the proprietary assets listed under Grantor's name in Section 2(k) of the Disclosure Schedule to the Purchase Agreement, as they pertain to Grantor, together with (a) all inventions, processes, production methods, proprietary information, know-how and trade secrets; (b) all licenses or user or other agreements granted to Grantor with respect to any of the foregoing, in each case whether now or hereafter owned or used, including all licenses or other agreements with respect to the Copyright Collateral, the Patent Collateral or the Trademark Collateral listed; (c) all information, customer lists, identification of suppliers, data, plans, blueprints, specifications, designs, drawings, recorded knowledge, surveys, engineering reports, test reports, manuals, materials standards, processing standards, performance standards, catalogs, computer and automatic machinery software and programs; (d) all field repair data, sales data and other information relating to sales or service of products now or hereafter manufactured; (e) all accounting information and all media in which or on which any information or knowledge or data or records may be recorded or stored and all computer programs used for the compilation or printout of such information, knowledge, records or data; (f) all governmental approvals now held or hereafter obtained by Grantor in respect of any of the foregoing; and (g) all causes of action, claims and warranties now owned or hereafter acquired by Grantor in respect of any of the foregoing. It is understood that Intellectual Property shall include all of the foregoing owned or acquired by Grantor on a worldwide basis. "Patent Collateral" shall mean all Patents, whether now owned or hereafter acquired by Grantor. "Patents" shall mean, collectively, (a) all patents and patent applications, (b) all reissues, divisions, continuations, renewals, extensions and continuations-in-part of all patents or patent applications and (c) all rights, now existing or hereafter coming into existence, (i) to all income, royalties, damages, and other payments (including in respect of all past, present and future infringements) now or hereafter due or payable under or with respect to any of the foregoing, (ii) to sue for all past, present and future infringements with respect to any of the foregoing and (iii) otherwise accruing under or pertaining to any of the foregoing throughout the world, including all inventions and improvements described or discussed in all such patents and patent applications. "Permitted Liens" shall mean (a) liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings if adequate reserves with respect to such liens are maintained on the books of Grantor in accordance with GAAP; (b) liens (i) upon or in any equipment acquired or held by Grantor to secure the purchase price or lease of such equipment or - 5 - indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, or (ii) existing on such equipment at the time of its acquisition; provided that in each of (i) and (ii) above, (A) the lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment and (B) the principal amount of such indebtedness secured by any such lien shall at no time exceed the fair market value of such equipment at the time it was acquired; (c) liens arising from judgments, decrees or attachments to the extent and only so long as such judgment, decree or attachment has not caused or resulted in an Event of Default; (d) leases, subleases, licenses and sublicenses granted to others in the ordinary course of Grantor's business not interfering in any material respect with the conduct of the business of Grantor and not materially detracting from the value of the Collateral; (e) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar liens affecting real property not interfering in any material respect with the ordinary conduct of business of Grantor and not materially detracting from the value of the property subject to such lien; (f) liens incurred or deposits made in the ordinary course of Grantor's business in connection with worker's compensation, unemployment insurance, social security and other like laws; (g) liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (h) carriers', warehousemen's, materialmen's, mechanics', landlords', repairmen's, employees' or other like liens arising in the ordinary course of business which are not delinquent or which are being contested in good faith by appropriate proceedings; and (i) liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution. "Trademark Collateral" shall mean all Trademarks, whether now owned or hereafter acquired by Grantor. Notwithstanding the foregoing, the Trademark Collateral shall not include any Trademark which would be rendered invalid, abandoned, void or unenforceable by reason of its being included as part of the Trademark Collateral. "Trademarks" shall mean, collectively, (a) all trade names, trademarks and service marks, logos, trademark and service mark registrations and applications for trademark and service mark registrations, (b) all renewals and extensions of any of the foregoing and (c) all rights, now existing or hereafter coming into existence, (i) to all income, royalties, damages and other payments (including in respect of all past, present and future infringements) now or hereafter due or payable under or with respect to any of the foregoing, (ii) to sue for all past, present and future infringements with respect to any of the foregoing and (iii) otherwise accruing under or pertaining to any of the foregoing throughout the world, together, in each case, with the product lines and goodwill of the business connected with the use of, or otherwise symbolized by, each such trade name, trademark and service mark. 1.2 Perfection of Security Interests. (a) Grantor hereby authorizes the Secured Party to file a financing statement or financing statements (the "Financing Statement") describing the Collateral in any and all jurisdictions where, and with any and all governmental authorities with - 6 - whom, the Secured Party reasonably deems such filing to be necessary or appropriate including, without limitation, the jurisdiction of the debtor's location for purposes of the Code, the United States Patent and Trademark Office and the United States Copyright Office. Grantor will reimburse the Secured Party for any and all reasonable costs, charges and expenses (including reasonable fees of counsel) incurred in connection with such filings. For purposes of this Section 1.2(a), the Financing Statements shall be deemed to include any amendment, modification, assignment, continuation statement or other similar instrument consistent with the rights granted to the Secured Party under this Security Agreement and the Purchase Agreement. (b) Grantor shall have possession of the Collateral, except where as expressly otherwise provided in this Security Agreement or where the Secured Party chooses to perfect its security interest by possession in addition to the filing of a Financing Statement. Where Collateral is in the possession of a third party, Grantor will join with the Secured Party in notifying the third party of the Secured Party's security interest therein and obtaining an acknowledgement from the third party that it is holding the Collateral for the benefit of the Secured Party. (c) Grantor will cooperate with the Secured Party in obtaining control (including "Control" as contemplated by Section 9-312(b) of the Code) with respect to Collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper. (d) Grantor will not create any chattel paper without a legend on such chattel paper reasonably acceptable to the Secured Party indicating that the Secured Party has a secured interest in such Chattel Paper. (e) Grantor shall, upon the Grantor's acquiring, or otherwise becoming entitled to the benefits of, any Copyright (or copyrightable material), Patent (or patentable invention), Trademark (or associated goodwill) or other Intellectual Property or upon or prior to Grantor's filing, either directly or through any agent, licensee or other designee, of any application with any governmental authority for any Copyright, Patent, Trademark, or other Intellectual Property, in each case after the date hereof, execute and deliver such contracts, agreements and other instruments as the Secured Party may reasonably request to evidence, validate, perfect and establish the priority of the security interest granted by this Security Agreement in such and any related Intellectual Property. (f) Grantor shall deliver and pledge to the Secured Party any and all certificates representing the Pledged Stock, accompanied by undated stock powers duly executed in blank. (g) Grantor shall upon the acquisition after the date hereof by Grantor of any Stock Collateral, promptly either (x) transfer and deliver to the Secured Party all such Stock Collateral (together with the certificates representing such Stock Collateral securities duly endorsed in blank or accompanied by undated stock powers duly executed in blank) or (y) take such other action as the Secured Party shall deem reasonably - 7 - necessary or appropriate to perfect, and establish the priority of, the security interest granted by this Security Agreement in such Stock Collateral. 1.3 Intellectual Property. For the purpose of enabling and to the extent necessary to enable the Secured Party to exercise its rights, remedies, powers and privileges under Article 4 at such time or times as the Secured Party shall be lawfully entitled to exercise such rights, remedies, powers and privileges, and for no other purpose, Grantor hereby grants to the Secured Party, to the extent assignable, an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to Grantor) to use, assign, license or sublicense any of the Intellectual Property of Grantor, together with reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout of such items. Such license shall terminate upon full and final payment, performance or other satisfaction of the Obligations. 1.4 Special Provisions Relating to Stock Collateral. (a) So long as no Event of Default shall have occurred and be continuing, Grantor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Stock Collateral for all purposes not inconsistent with the terms of any loan document; provided, that Grantor agrees that it will not vote the Stock Collateral in any manner that is inconsistent with the terms of any loan document. (b) So long as no Event of Default shall have occurred and be continuing, Grantor shall be entitled to receive and retain any dividends on the Stock Collateral paid in cash out of earned surplus. (c) If any Event of Default shall have occurred and be continuing, and whether or not the Secured Party exercises any available right to declare any Obligation due and payable or seeks or pursues any other right, remedy, power or privilege available to it under applicable law, this Security Agreement or any other loan document, all dividends and other distributions on the Stock Collateral shall be paid directly to the Secured Party, subject to the terms of this Security Agreement. ARTICLE 2 REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties. Grantor represents and warrants as of the date hereof that: (a) Grantor has absolute, good and marketable title to all the Collateral, wherever and whenever acquired, free and clear of any lien, except for Permitted Liens, and Grantor has not filed, nor is there on record, a financing statement under the Code (or similar statement or instrument of registration under the law of any jurisdiction) covering any Collateral except for Permitted Liens; - 8 - (b) Schedule A hereto lists, as to Grantor, (i) Grantor's chief executive office and other place(s) of business, (ii) Grantor's legal organizational structure and its jurisdiction of incorporation, (iii) the address where records relating to the Collateral are maintained, (iv) any other location of any other equipment and goods (other than mobile goods) included in the Collateral, (v) location of leased facilities and name of lessor/sublessor and (vi) any fictitious names used by Grantor. (c) Grantor has paid or will pay when due all taxes, fees, assessments and other charges now or hereafter imposed upon the Collateral except for any tax, fee, assessment or other charge the validity of which is being contested in good faith by appropriate proceedings and so long as Grantor has set aside on its books adequate reserves with respect thereto; (d) as a result of the execution and delivery of this Security Agreement and upon the filing of any financing statements or other documents necessary to assure, preserve and perfect the security interest created hereby and to the extent a lien may be perfected by filing a financing statement, the Secured Party shall have a valid, perfected, enforceable lien on, and a continuing security interest in, the Collateral, enforceable and superior as such as against creditors and purchasers (other than purchasers of Inventory in the ordinary course of business) and as against any owner of real property where any of the equipment or Inventory is located and as against any purchaser of such real property and any present or future creditor obtaining a mortgage or other lien on such real property, and such lien shall be superior and prior to all other liens, subject, in each case, only to Permitted Liens to the extent such Permitted Liens by statute have priority equal to or greater than such security interest; (e) the amount that has been represented by Grantor to the Secured Party as owing by all obligors (such obligors being hereinafter referred to as the "Account Debtors") in the aggregate with respect to Accounts has not materially deviated from the correct amount actually and unconditionally owing at such time by such Account Debtors subject to set off, return and similar rights arising in the ordinary course of business; all Accounts represent bona fide transactions completed in accordance with the terms and provisions contained in the invoices and other documents evidencing the same; as of the date hereof, there are no material setoffs, counterclaims or disputes existing or asserted with respect to Accounts subject to set off, return and similar rights arising in the ordinary course of business, and Grantor has not made any agreement with any Account Debtor for any material deduction therefrom except set-off and claims arising in the ordinary course of business; to Grantor's knowledge, all Account Debtors have the capacity to contract and are solvent; to Grantor's knowledge the goods giving rise to Accounts are not subject to any lien, claim or encumbrance except set-off and claims arising in the ordinary course of business, except in favor of the Secured Party and except for Permitted Liens and as permitted by the Purchase Agreement; and, except as set forth herein, Grantor does not have knowledge of any fact or circumstances which would impair the validity or collectability of Accounts; (f) none of the Collateral is held by a third party in any location as assignee, trustee, bailee, consignee or in any similar capacity; and - 9 - (g) The Pledged Stock evidenced by the certificates described in Section 1.1(e) hereof (i) is duly authorized, validly existing, fully paid and nonassessable, and none of such Pledged Stock is subject to any contractual restriction, or any restriction under the charter or by-laws of the respective Issuer or Foreign Issuer of such Pledged Stock, upon the transfer of such Pledged Stock (except for any such restriction contained in any loan document); and (ii) constitutes all of the issued and outstanding shares of capital stock of any class of the Issuers or Foreign Issuers beneficially owned by Grantor on the date hereof (whether or not registered in the name of Grantor), and Schedule B correctly identifies, as of the date hereof, the respective Issuers or Foreign Issuers of such Pledged Stock, the respective class and par value of the shares comprising such Pledged Stock and the respective number (and registered owners of) of the shares evidenced by each such certificate. 2.2 Survival. All representations, warranties and agreements of Grantor contained in this Security Agreement shall survive the execution, delivery and performance of this Security Agreement until the termination of this Security Agreement pursuant to Section 7.5 hereof. ARTICLE 3 COVENANTS 3.1 Covenants. Grantor hereby covenants and agrees with the Secured Party that so long as this Security Agreement shall remain in effect or any Obligations shall remain unpaid or unperformed: (a) Grantor shall promptly give written notice to the Secured Party of any levy or attachment, execution or other process against any of the Collateral; (b) at Grantor's own cost and expense, Grantor shall take any and all actions reasonably necessary or desirable to defend the Collateral against the claims and demands of all persons other than the Secured Party, and to defend the security interest of the Secured Party in the Collateral and the priority thereof against any lien of any nature, except in each case for Permitted Liens; (c) Grantor shall keep all tangible Collateral properly insured and in good order and repair (normal wear and tear excepted) and immediately notify the Secured Party of any event causing any material loss, damage or depreciation in value of the Collateral in the aggregate and of the extent of such loss, damage or depreciation; (d) Grantor shall mark any Collateral that is chattel paper with a legend showing the Secured Party's lien and security interest therein; (e) Grantor shall: (i) furnish to the Secured Party from time to time (but, unless an Event of Default shall have occurred and be continuing, no more frequently than quarterly) statements and schedules further identifying and describing the Copyright - 10 - Collateral, the Patent Collateral and the Trademark Collateral and such other reports in connection with the Copyright Collateral, the Patent Collateral and the Trademark Collateral, as the Secured Party may reasonably request, all in reasonable detail; (ii) prior to filing, either directly or through an agent, licensee or other designee, any application for any Copyright, Patent or Trademark, furnish to the Secured Party prompt notice of such proposed filing; and (iii) promptly give written notice to the Secured Party of any other change in the intellectual property rights material to its businesses. (f) Grantor shall: (i) (either itself or through licensees) for each Trademark, (A) to the extent consistent with past practice and good business judgment, continue to use such Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force and effect free from any claim of abandonment for nonuse, (B) maintain as in the past the quality of products and services offered under such Trademark, (C) employ such Trademark with the appropriate notice of registration and (D) not (and not permit any licensee or sublicensee to) do any act or knowingly omit to do any act whereby any Trademark material to the conduct of its business may become invalidated, except in each case as Grantor's business or products may change over time as may be consistent with good business judgment; (ii) (either itself or through licensees) not do any act or knowingly omit to do any act whereby any Patent material to the conduct of its business may become abandoned or dedicated; (iii) notify the Secured Party immediately if it knows or has reason to know that any Intellectual Property material to the conduct of its business may become abandoned or dedicated, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding before any governmental authority) regarding Grantor's ownership of any Intellectual Property material to its business, its right to copyright, patent or register the same (as the case may be), or its right to keep, use and maintain the same; (iv) take all necessary steps that are consistent with good business practices in any proceeding before any appropriate governmental authority to maintain and pursue each application relating to any Intellectual Property (and to obtain the relevant registrations) and to maintain each registration material to the conduct of its business, including payment of maintenance fees, filing of applications for renewal, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings; (v) in the event that any Intellectual Property material to the conduct of its business is infringed, misappropriated or diluted by a third party, Grantor shall notify the Secured Party within (10) days after it learns of such event and shall, if - 11 - consistent with good business practice, promptly sue for infringement, misappropriation or dilution, seek temporary restraints and preliminary injunctive relief to the extent practicable, seek to recover any and all damages for such infringement, misappropriation or dilution and take such other actions as are appropriate under the circumstances and in Grantor's good faith business judgment to protect such Collateral; (vi) shall, through counsel selected by Grantor and reasonably acceptable to the Secured Party, prosecute diligently any application for any Intellectual Property pending as of the date of this Security Agreement or thereafter made until the termination of this Security Agreement, make application on uncopyrighted but copyrightable material, unpatented but patentable inventions and unregistered but registrable Trademarks and preserve and maintain all rights in applications for any Intellectual Property; provided, however, that Grantor shall have no obligation to make any such application if making such application would be unnecessary or imprudent in the good faith business judgment of Grantor. Any expenses incurred in connection with such an application shall be borne by Grantor. Grantor shall not abandon any right to file a application for any Intellectual Property or any pending application in the United States without the consent of the Secured Party, which consent shall not be unreasonably withheld; and (vii) after the occurrence and through the continuance of an Event of Default, the Secured Party shall have the right but shall in no way be obligated to bring suit in its own name to enforce the Copyrights, Patents and Trademarks and any license under such Intellectual Property, in which event Grantor shall, at the request of the Secured Party , do any and all lawful acts and execute and deliver any and all proper documents required by the Secured party in aid of such enforcement action. (g) Grantor shall cause the Stock Collateral to constitute at all times 100% of the total number of shares of each class of capital stock of each Issuer and 66 2/3% of the total number of shares of each class of capital stock of each Foreign Issuer then outstanding and shall not permit any such Issuer or Foreign Issuer to issue any shares of capital stock other than to Grantor. Grantor shall cause all such shares to be duly authorized, validly issued, fully paid and nonassessable and to be free of any contractual restriction or any restriction under the charter or bylaws of the respective Issuer of such Stock Collateral, upon the transfer of such Stock Collateral (except for any such restriction contained in any loan document). (h) Grantor shall not: (i) amend or terminate any material contract or other document or instrument constituting part of the Collateral, except for transactions in the ordinary course of business; (ii) voluntarily or involuntarily exchange, lease, sell, transfer or otherwise dispose of any Collateral other than for fair value in the ordinary course of business; - 12 - (iii) make any compromise, settlement, discharge or adjustment or grant any extension of time for payment with respect to any Account or any lien, guaranty or remedy pertaining thereto, except for transactions in the ordinary course of business; (iv) change its name or use any fictitious or trade name, other than in accordance with Section 7.1 hereof; (v) change the location of its chief executive office, other than in accordance with Section 7.1 hereof; (vi) permit any of the Collateral (other than Collateral that constitutes goods that are mobile and that are of a type normally used in more than one jurisdiction or otherwise in the ordinary course of business (including, without limitation, sales and shipments of inventory in the ordinary course of business)) to be removed from or located in any place not identified as the location of such Collateral to the Secured Party, as the case may be, except after written notice to and with written consent of the Secured Party and compliance with such procedures as the Secured Party reasonably may impose to prevent any interruptions or discontinuity in the security interest granted pursuant to this Security Agreement; or (vii) voluntarily grant, incur or allow to exist any lien or security interest on or in any of the Collateral which lien or security interest shall be equal or superior in priority to the security interests granted in this Security Agreement, except for Permitted Liens to the extent such Permitted Liens by their express terms or applicable law have priority equal or greater than the security interests granted pursuant to this Security Agreement. ARTICLE 4 REMEDIAL MATTERS 4.1 Event of Default. An "Event of Default" shall exist hereunder (a) if an event of default shall occur under any of the Notes, (b) upon the filing of a voluntary or involuntary petition for bankruptcy, insolvency, receivership or similar event involving Grantor and, in the case of an involuntary petition, an order for relief is not entered or such petition or proceeding shall not be dismissed, discharged or stayed within ninety (90) days of commencement, or (c) if Grantor shall breach in any material respect any agreement contained herein or otherwise default in any material respect in the observance or performance of any of the covenants, terms, conditions or agreements on the part of Grantor contained in this Security Agreement and, with respect to non-monetary covenants, terms, conditions or agreements, such non observance or non performance continues for a period of thirty (30) days after the earlier of (i) written notice from the Secured Party of such default or (ii) actual knowledge of Grantor of such default. - 13 - 4.2 Powers of Attorney. (a) Grantor hereby irrevocably appoints the Secured Party (and any officer or agent of the Secured Party) as its true and lawful attorney-in-fact, with power of substitution for and in the name of the Secured Party or otherwise, for the use and benefit of the Secured Party, effective upon the occurrence and during the continuance of an Event of Default: (i) to receive, endorse the name of Grantor upon and deliver any notes, acceptances, checks, drafts, money orders or other evidences of payment that may come into the possession of the Secured Party with respect to the Collateral; (ii) to cause Grantor's mail to be transferred to the Secured Party's own offices and to receive and open all mail addressed to Grantor for the purposes of removing any such notes, acceptances, checks, drafts, money orders or other evidences of payment; (iii) to demand, collect and receive payment in respect of the Collateral and to apply any such payments directly to the payment of the Obligations in accordance with Section 4.5 hereof; (iv) to receive and give discharges and releases of all or any of the Collateral; (v) to commence and prosecute any and all suits, actions or proceedings at law or in equity in any court of competent jurisdiction, to collect or otherwise realize on all or any part of the Collateral or to enforce any rights in respect thereof; (vi) to sign the name of Grantor on any invoice or bill of lading relating to any of the Collateral; (vii) to send verification of any Accounts to any Account Debtor or customer; (viii) to notify any Account Debtor or other obligor of Grantor with respect to any Collateral to make payment to the Secured Party; (ix) to settle, compromise, compound, adjust or defend any actions, suits or proceedings relating or pertaining to all or any of the Collateral; (x) to take any action for purposes of carrying out of the terms of this Security Agreement; (xi) to enforce all of Grantor's rights and powers under and pursuant to any and all agreements with respect to the Collateral; and - 14 - (xii) generally, to sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with all or any of the Collateral, and to do all other acts and things necessary to carry out this Security Agreement, as fully and completely as though the Secured Party were the absolute owner of the Collateral for all purposes; provided, however, nothing herein contained shall be construed as requiring or obligating the Secured Party to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Secured Party, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby; and, provided further, that Secured Party shall in all cases act in material compliance with all applicable laws. It is understood and agreed that the power of attorney granted to the Secured Party for the purposes set forth above in this Section 4.2 is coupled with an interest and is irrevocable until the payment, performance or other satisfaction of all of the Obligations, and each Grantor hereby ratifies all actions taken by its attorney-in-fact by virtue hereof. The provisions of this Section 4.2 shall in no event relieve Grantor of any of its obligations hereunder or under any of the other Security Documents with respect to the Collateral or any part thereof or impose any obligation on the Secured Party to proceed in any particular manner with respect to the Collateral or any part thereof, or in any way limit the exercise by the Secured Party of any other or further right which it may have on the date of this Security Agreement or hereafter, whether hereunder, under any of the other Security Documents, by law or otherwise. (b) Beyond the duty of the Secured Party to exercise reasonable care in the custody of any Collateral in its possession and to comply with the Code, the Secured Party shall not, under any circumstance or in any event whatsoever, have any liability for any part of the Collateral, nor shall the Secured Party have any liability for any error or omission or delivery of any kind incurred in the good faith settlement, collection or payment of any of the Collateral or any monies received in payment therefor or for any damages resulting therefrom, nor shall this Security Agreement impose upon the Secured Party any obligation to perform any obligation with respect to the Collateral. The costs of collection, notification and enforcement, including but not limited to, reasonable attorneys' fees and reasonable out-of-pocket expenses, shall be borne solely by Grantor whether the same are incurred by Grantor or the Secured Party. Grantor agrees to indemnify, defend and hold the Secured Party harmless from and against any and all other claims, demands, losses, judgments and liabilities (including, but not limited to, liabilities for penalties) of any nature, and to reimburse the Secured Party for all reasonable costs and expenses, including but not limited to reasonable attorneys' fees and expenses, arising from this Security Agreement or the exercise of any right or remedy granted to the Secured Party hereunder other than those incurred solely as a result of the gross negligence and willful misconduct of the Secured Party. In no event shall the Secured Party be liable for any matter or thing in connection with this Security Agreement other than to account for moneys actually received by the Secured Party in accordance with the terms hereof, and matters arising out of the gross negligence or willful misconduct of the Secured Party. - 15 - 4.3 Collections. Upon the occurrence and during the continuance of an Event of Default, the Secured Party may, in its sole discretion, in its name or in the name of Grantor, or otherwise, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to any of the Collateral, but shall be under no obligation to do so, or (b) extend the time of payment, arrange for payment in installments, or otherwise modify the term of, or release, any of the Collateral, without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, Grantor, other than to discharge Grantor in so doing with respect to liabilities of Grantor to the extent that the liabilities are paid or repaid. After the occurrence and during the continuance of an Event of Default, any money, checks, notes, bills, drafts, or commercial paper received by Grantor shall be held in trust for the Secured Party and any other secured party having rights thereto senior to the Secured Party and shall be promptly turned over to the Secured Party or any other secured party having rights thereto senior to the Secured Party as their interest shall appear. Upon the occurrence and during the continuance of an Event of Default, the Secured Party may make such payments and take such actions as the Secured Party, in its sole discretion, deems necessary to protect its security interest in the Collateral or the value thereof, and the Secured Party is hereby unconditionally and irrevocably authorized (without limiting the general nature of the authority hereinabove conferred) to pay, purchase, contest or compromise any liens which in the judgment of the Secured Party appear to be equal to, prior to or superior to its security interest in the Collateral and any liens not expressly permitted by this Security Agreement. 4.4 Possession; Sale of Collateral. (a) Upon the occurrence and during the continuance of an Event of Default, the Secured Party may, subject to the rights of any other secured party having rights senior to those of the Secured Party: (i) require Grantor to assemble the tangible assets that comprise part of the Collateral and make them available to the Secured Party at any place or places reasonably designated by the Secured Party; (ii) to the extent permitted by applicable law, with or without notice or demand for performance and without liability for trespass, enter any premises where the Collateral may be located and peaceably take possession of the same, and may demand and receive such possession from any person who has possession thereof, and may take such measures as it may deem necessary or proper for the care or protection thereof (including, but not limited to, the right to remove all or any portion of the Collateral); and (iii) with or without taking such possession may sell or cause to be sold, in one or more sales or parcels, for cash, on credit or for future delivery, without assumption of any credit risk, all or any portion of the Collateral, at public or private sale or at any broker's board or any securities exchange, without demand of performance or notice of intention to sell or of time or place of sale, except ten (10) business days' written notice to Grantor of the time and place of such sale or sales (and such other notices as may be required by applicable statute, if any, and which cannot be waived), which Grantor hereby expressly acknowledges is commercially reasonable. In the event of any sale, license or other disposition of any of the Trademark Collateral, the goodwill connected with and symbolized by the Trademark Collateral subject to such disposition shall be included, and - 16 - Grantor shall supply to the Secured Party or its designee, for inclusion in such sale, assignment or other disposition, all Intellectual Property relating to such Trademark Collateral. The Secured Party shall have no obligation to clean-up or otherwise prepare any Collateral for sale. The Collateral may be sold or disposed of for cash, upon credit or for future delivery as the Secured Party shall deem appropriate. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by law) all rights of redemption, stay and appraisal that Grantor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Secured Party may (in its sole and absolute discretion) determine. The Secured Party shall not be obligated to make any sale of any Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. The Secured Party may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any disposition of the Collateral. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Secured Party until the sale price is paid by the purchaser or purchasers thereof. The Secured Party shall not incur any liability for the failure to collect or realize upon any or all of the Collateral or for any delay in doing so and, in case of any such failure, shall not be under any obligation to take any action with respect thereto; provided, such Collateral may be sold again upon like notice. If any Collateral is sold upon credit, Grantor will be credited only with payments actually made by the purchaser, received by the Secured Party and applied to the Obligations in accordance with Section 4.5 In the event the purchasers fail to pay for the Collateral, the Secured Party may resell the Collateral. At any public sale made pursuant to this Section 4.4, the Secured Party may bid for or purchase, free from any right of redemption, stay or appraisal and all rights of marshalling, the Collateral and any other security for the Obligations or otherwise on the part of Grantor (all said rights being also hereby waived and released by Grantor to the fullest extent permitted by law) or any part thereof offered for sale and may make payment on account thereof by using any claim then due and payable to the Secured Party from Grantor as a credit against the purchase price, and the Secured Party may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to Grantor therefor. For purposes hereof, a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof; the Secured Party shall be free to carry out such sale pursuant to such agreement, and Grantor shall not be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Secured Party shall have entered into such an agreement, all Events of Default shall have been remedied and any obligations to the Secured Party shall have been paid in full. As an alternative to exercising the power of sale herein conferred upon it, the Secured Party may proceed by a suit or suits at law or in equity to foreclose this Security Agreement - 17 - and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. In any such action, the Secured Party shall be entitled to the appointment of a receiver without notice, to peaceably take possession of all or any portion of the Collateral and to exercise such powers as the court shall confer upon the receiver. Notwithstanding the foregoing, if an Event of Default shall occur and be continuing, the Secured Party shall be entitled to apply, without notice to Grantor, any cash or cash items constituting Collateral in their possession to payment of the Obligations in accordance with the provisions of Section 4.5 hereof. (b) If an Event of Default shall occur and be continuing, the Secured Party shall, in addition to exercising any and all rights and remedies afforded to it hereunder, have all the rights and remedies of a secured party under all applicable provisions of law, including but not limited to, the Code. (c) Grantor agrees that notwithstanding anything to the contrary contained in this Security Agreement, Grantor shall remain liable under each contract or other agreement giving rise to Accounts and General Intangibles and all other contracts or agreements constituting part of the Collateral and the Secured Party shall not have any obligation or liability in respect thereof. (d) After the occurrence and during the continuance of an Event of Default, upon the Secured Party's request, but subject to the rights of any other secured party having rights senior to those of the Secured Party, Grantor shall deliver to the Secured Party all original and other documents evidencing and relating to the sale and delivery of Inventory or Accounts, including but not limited to, all original orders, invoices and shipping receipts. After the occurrence and during the continuance of an Event of Default, Grantor shall also furnish to the Secured Party, promptly upon the request of the Secured Party, such reports, reconciliations and aging balances regarding Accounts as the Secured Party may request from time to time. 4.5 Application of Proceeds. The proceeds of any sale of Collateral pursuant to this Security Agreement or otherwise, as well as any Collateral consisting of cash, shall be applied after receipt by the Secured Party as follows, subject to the rights of any other secured party having rights senior to those of the Secured Party: First, to the payment of all reasonable costs, fees and expenses of the Secured Party and its agents, representatives and attorneys incurred in connection with such sale or with the retaking, holding, handling, preparing for sale (or other disposition) of the Collateral or otherwise in connection with the Notes, this Security Agreement or any of the Obligations, including but not limited to, the reasonable fees and expenses of the Secured Party's agents and attorneys' and court costs (whether at trial, appellate or administrative levels), if any, incurred by the Secured Party in so doing; - 18 - Second, to the payment of the outstanding principal balance and accrued interest and fees on the Obligations in such order as the Secured Party may determine; Third, to pay all other amounts payable by Parent under the Notes and payable by Parent or Grantor under any other Obligations; and Fourth, to Grantor or to such other person as a court may direct. 4.6 Authority of Secured Party. The Secured Party shall have and be entitled to exercise all such powers hereunder as are specifically delegated to the Secured Party by the terms hereof, together with such powers as are reasonably incidental thereto. The Secured Party may execute any of its duties hereunder by or through its agents or employees and shall be entitled to retain counsel and to act in reliance upon the advice of such counsel concerning all matters pertaining to its duties hereunder. 4.7 Certain Waivers; Grantor Not Discharged. Grantor expressly and irrevocably waives (to the extent permitted by applicable law) presentment, demand of payment and protest of nonpayment in respect of its Obligations under this Security Agreement. The obligations and duties of Grantor hereunder are irrevocable, absolute, and unconditional and shall not be discharged, impaired or otherwise affected by (a) the failure of the Secured Party to assert any claim or demand or to enforce any right or remedy against Grantor or any grantee under the provisions of this Security Agreement or any grantee or any waiver, consent, extension, indulgence or other action or inaction in respect thereof, (b) any extension or renewal of any part of the Obligations, (c) any rescission, waiver, amendment or modification of any of the terms or provisions of any agreement related to this Security Agreement, (d) the release of any liens on or security interests in any part of the Collateral or the release, sale or exchange of or failure to foreclose against any security held by or for the benefit of the Secured Party for payment or performance of the Obligations, (e) the bankruptcy, insolvency or reorganization of Grantor or any grantee or any other persons, (f) any change, restructuring or termination of the corporate structure or existence of Grantor or any grantee or any restructuring or refinancing of all or any portion of the Obligations, or (g) any other event which under law would discharge the obligations of a surety. 4.8 Transfer of Security Interest. The Secured Party may transfer to any other person all or any part of the liens and security interests granted hereby, and all or any part of the Collateral which may be in the Secured Party's possession after the occurrence and during the continuance of an Event of Default or to a successor Secured Party at any time. Upon such transfer, the transferee shall be vested with all the rights and powers of the Secured Party hereunder with respect to such of the Collateral as is so transferred, but, with respect to any of the Collateral not so transferred, the Secured Party shall retain all of their rights and powers (whether given to it in this Security Agreement, or otherwise). The Secured Party or any of them may, at any time, assign their rights as the secured party hereunder to any person, in the Secured Party's discretion, and upon notice - 19 - to Grantor, but without any requirement for consent or approval by or from Grantor, and any such assignment shall be valid and binding upon Grantor, as fully as it had expressly approved the same. ARTICLE 5 SECURED PARTY'S INTERESTS 5.1 Pro Rata Interests. The security interests and other rights granted or reserved to the Secured Party and its successors and assigns under this Security Agreement (the "Contractual Rights") and the other rights available to the Secured Party under applicable law by reason of the existence of this Security Agreement and the attachment and perfection of the security interests created under this Security Agreement (the "Statutory Rights") are for the pro rata benefit of the Note Holders according to the interest in the outstanding principal amount of the Notes held by each Note Holder, respectively, expressed as a percentage of the aggregate outstanding principal amount of all Notes, and shall be held by the Note Holders in such percentages, regardless of the time or order of the attachment or perfection of their respective security interests or the time and manner of filing of their respective deeds of trust, financing statements or assignments thereof and regardless of which, if any, Note Holder may hold possession of the Collateral. All recoveries attributable to enforcement of Contractual Rights or Statutory Rights, or both, shall be shared ratably by the Note Holders according to their respective pro rata interests as provided in this Security Agreement. 5.2 Grantor Obligations. The provisions of this Article 5 are for the purpose of defining the relative rights of the Note Holders with respect to the Collateral and the exercise of Contractual Rights and Statutory Rights. Nothing herein shall impair the obligations of Grantor, which are absolute and unconditional, to pay and perform the Obligations as and when due. No provision of this Security Agreement shall be construed to prevent any Note Holder from exercising remedies that may otherwise be available to it. ARTICLE 6 GUARANTEE 6.1 Guarantee. Grantor hereby guarantees to Secured Party and each Note Holder and their respective successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Notes and all other amounts from time to time owing to Secured Party or each Note Holder by Parent under the Purchase Agreement or any other Transaction Document (as such term is defined in the Purchase Agreement), in each case strictly in accordance with the terms thereof (such obligations being herein collectively called the "Guaranteed Obligations"). Grantor hereby further agrees that if Parent shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, Grantor will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due - 20 - (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. 6.2 Obligations Unconditional. The obligations of Grantor under Section 6.1 are absolute and unconditional irrespective of the validity, regularity or enforceability of the obligations of Parent under the Transaction Documents or any other agreement or instrument referred to herein or therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor (other than the defense that the Guaranteed Obligations have been paid in full), it being the intent of this Article 6 that the obligations of Grantor hereunder shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of Grantor hereunder, which shall remain absolute and unconditional as described above: (a) at any time or from time to time, without notice to Grantor, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (b) any of the acts mentioned in any of the provisions of the Transaction Documents or any other agreement or instrument referred to herein or therein shall be done or omitted; (c) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under the Transaction Documents or any other agreement or instrument referred to herein or therein shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; or (d) any lien or security interest granted to, or in favor of, the Secured Party or any Note Holder or Note Holders as security for any of the Guaranteed Obligations shall fail to be perfected. Grantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that Secured Party or any Note Holder exhaust any right, power or remedy or proceed against Parent under the Transaction Documents or any other agreement or instrument referred to herein or therein, or against any other person or entity under any other guarantee of, or security for, any of the Guaranteed Obligations. 6.3 Reinstatement. The obligations of Grantor under this Article 6 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of Parent in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a - 21 - result of any proceedings in bankruptcy or reorganization or otherwise and Grantor agrees that it will indemnify the Secured Party and each Note Holder on demand for all reasonable costs and expenses (including, without limitation, fees of counsel) incurred by the Secured Party or such Note Holder in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 6.4 Subrogation. Grantor hereby agrees that until the payment and satisfaction in full of all Guaranteed Obligations under the Transaction Documents it shall not exercise any right or remedy arising by reason of any performance by it of its guarantee in Section 6.1, whether by subrogation or otherwise, against Parent or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed Obligations. 6.5 Remedies. Grantor agrees that the obligations of Parent under the Notes may be declared to be or may become forthwith due and payable as provided in each Note for purposes of Section 6.1 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against Parent and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by Parent) shall forthwith become due and payable by Grantor for purposes of said Section 6.1. 6.6 Continuing Guarantee. The guarantee in this Article 6 is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. ARTICLE 7 MISCELLANEOUS 7.1 Further Assurances. Grantor agrees, at its expense, to do such further things, to execute, acknowledge, deliver and cause to be duly filed all such further instruments and documents and take all such actions as the Secured Party may from time to time reasonably request for the better assuming and preserving of the security interests and the rights and remedies created hereby, including but not limited to, the execution and delivery of such additional conveyances, assignments, agreements and instruments, the payment of any fees and taxes required in connection with the execution and delivery of this Security Agreement, the granting of the security interests created hereby and the execution, filing and recordation of any financing statements (including fixture filings) or other documents as the Secured Party may deem reasonably necessary for the perfection of the security interests granted hereunder. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other instrument, such note or instrument shall be immediately pledged and delivered to the Secured Party, duly endorsed in a manner reasonably satisfactory to the Secured Party, subject to the rights of any other secured party having rights senior to the Secured Party. If at any time Grantor shall take and perfect a security interest in any property to secure payment and performance of an Account, Grantor, upon the request of the Secured Party, - 22 - shall promptly assign such security interest to the Secured Party, subject to the rights of any other secured party having rights senior to the Secured Party. Grantor agrees to notify the Secured Party thirty (30) days prior to any change (a) in its corporate name, (b) in its jurisdiction of incorporation or organization, (c) in the location of its chief executive office, (d) in its chief place of business, or (e) in the office or offices where it keeps its records relating to the Collateral. Grantor agrees that, after the occurrence and during the continuance of an Event of Default, it shall upon request of the Secured Party, take any and all actions, to the extent permitted by applicable law, at its own expense, to obtain the approval of any governmental authority for any action or transaction contemplated by this Security Agreement which is then required by law, and specifically, without limitation, upon request of the Secured Party, to prepare, sign and file with any governmental authority Grantor's portion of any application or applications for consent to the assignment of licenses held by Grantor, or for consent to the possession and sale of any of the Collateral by or on behalf of the Secured Party. Grantor further agrees that it shall at all times, at its own expense and cost, keep accurate and complete records with respect to the Collateral, including but not limited to, a record of all payments and proceeds received in connection therewith or as a result of the sale thereof and of all credits granted, and agrees that the Secured Party or its representatives shall have the right at any reasonable time and from time to time to call at Grantor's place or places of business to inspect the Collateral and to examine or cause to be examined all of the books, records, journals and other data relating to the Collateral and to make extracts therefrom or copies thereof as are reasonably requested; provided that such inspections shall occur no more often than quarterly unless an Event of Default has occurred and is continuing. 7.2 Effectiveness. This Security Agreement shall take effect immediately upon execution by Grantor. 7.3 Indemnity; Reimbursement of the Secured Party; Deficiency. In connection with the Collateral, this Security Agreement and the administration and enforcement or exercise of any right or remedy granted to the Secured Party hereunder, Grantor agrees, subject to the limitations set forth hereafter (a) to indemnify, defend and hold harmless the Secured Party from and against any and all claims, demands, losses, judgments and liabilities (including but not limited to, liabilities for penalties) of whatever nature, relating thereto or resulting therefrom, and (b) to reimburse the Secured Party for all reasonable costs and expenses, including but not limited to, the reasonable fees and disbursements of attorneys, relating thereto or resulting therefrom. The foregoing indemnity agreement includes all reasonable costs incurred by the Secured Party in connection with any litigation relating to the Collateral whether or not the Secured Party shall be a party to such litigation, including but not limited to, the reasonable fees and disbursements of attorneys for the Secured Party, and any out-of-pocket costs incurred by the Secured Party in appearing as a witness or in otherwise complying with legal process served upon it. The obligations in this Section 7.3 do not apply to any claims for indemnity, defense, or reimbursement that arise from the gross negligence or willful misconduct of the Secured Party. In no event shall the Secured Party be liable, in the absence of gross negligence or willful misconduct on its part, for any matter or thing in connection with this Security Agreement other than - 23 - to account for moneys actually received by it in accordance with the terms hereof. All indemnities contained in this Section 7.3 and elsewhere in this Security Agreement shall survive the expiration or earlier termination of this Security Agreement. After application of the proceeds by the Secured Party pursuant to Section 4.5 hereof, Grantor shall remain liable to the Secured Party for any deficiency. 7.4 Continuing Lien. It is the intent of the parties hereto that (a) this Security Agreement shall constitute a continuing agreement as to any and all future, as well as existing transactions, between Grantor and the Secured Party under or in connection with the Note or otherwise relating to any other Obligation, and (b) the security interest provided for herein shall attach to after-acquired as well as existing Collateral. 7.5 Termination. Upon payment, performance or other satisfaction in full of the Notes and all other Obligations and all other amounts due in connection therewith and termination of all commitments relating thereto, the Secured Party shall reassign, redeliver and release (or cause to be so reassigned, redelivered and released), without recourse upon or warranty by the Secured Party, and at the sole expense of Grantor, to Grantor, against receipt therefor, such of the Collateral (if any) as shall not have been sold or otherwise applied by the Secured Party pursuant to the terms hereof and not theretofore reassigned, redelivered and released to Grantor, together with appropriate instruments of reassignment and release. 7.6 Notices. All notices, requests and other communications hereunder shall be in writing and shall be deemed to have been duly given at the time of receipt if delivered by hand or by facsimile transmission (with receipt of successful and full transmission) or three days after being mailed, registered or certified mail, return receipt requested, with postage prepaid to the applicable parties hereto at the address stated below or if any party shall have designated a different address or facsimile number by notice to the other party given as provided above, then to the last address or facsimile number so designated. If to Grantor: Image Ware Systems, Inc. 10883 Thornmint Road San Diego, California 92127 Attention: S. James Miller, Jr., Chairman, CEO and President Facsimile: (858) 673-0291 with a copy to: Cooley Godward LLP 4401 Eastgate Mall San Diego, California 92121-1909 Attention: M. Wainwright Fishburn, Jr., Esq. Facsimile: (858) 550-6420 - 24 - If to Secured Party: Perseus 2000, L.L.C. 2099 Pennsylvania Ave., N.W. Suite 900 Washington, D.C. 20006-1813 Attention: Chip Newton, Managing Director Facsimile: (202) 429-0588 with a copy to: Arnold & Porter 1600 Tysons Boulevard; Suite 900 McLean, Virginia 22102-4865 Attention: Robert B. Ott, Esq. Facsimile: (703) 720-7399 7.7 Successors and Assigns. Whenever in this Security Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, and all covenants, promises and agreements by or on behalf of the Secured Party that are contained in this Security Agreement shall bind and inure to the benefit of its respective successors and assigns. Grantor may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Secured Party. 7.8 APPLICABLE LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE WITHOUT REFERENCE TO ITS CONFLICTS OF LAW RULES THAT MIGHT REFER THE GOVERNANCE OR CONSTRUCTION OF THIS SECURITY AGREEMENT TO THE LAW OF ANOTHER JURISDICTION (EXCEPT WHEN THE CODE OR OTHER APPLICABLE LAW WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION). THE PARTIES HERETO AGREE THAT THE APPROPRIATE AND EXCLUSIVE FORUM FOR ANY DISPUTES ARISING OUT OF THIS SECURITY AGREEMENT SOLELY BETWEEN SECURED PARTY AND GRANTOR SHALL BE THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND THE PARTIES HERETO IRREVOCABLY CONSENT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS, AND AGREE TO COMPLY WITH ALL REQUIREMENTS NECESSARY TO GIVE SUCH COURTS JURISDICTION. THE PARTIES HERETO FURTHER AGREE THAT THE PARITIES WILL NOT BRING SUIT WITH RESPECT TO ANY DISPUTES ARISING OF THIS SECURITY AGREEMENT EXCEPT AS EXPRESSLY SET FORTH BELOW FOR THE EXECUTION OR ENFORCEMENT OF JUDGEMENT, IN ANY JURISDICTION OTHER THAN THE ABOVE SPECIFIED COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY ACTION OR PROCEEDING HEREUNDER BY THE MAILING OF COPIES - 25 - THEREOF BY REGISTERED MAIL OR CERTIFIED AIRMAIL, POSTAGE PREPAID, TO THE ADDRESS SPECIFIED IN SECTION 7.6 HEREOF. THE FOREGOING SHALL NOT LIMIT THE RIGHTS OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO OBTAIN EXECUTION OF JUDGMENT IN ANY OTHER JURISDICTION. THE PARTIES FURTHER AGREE, TO THE EXTENT PERMITTED BY LAW, THAT FINAL AND UNAPPEALABLE JUDGMENT AGAINST ANY OF THEM IN ANY ACTION OR PROCEEDING CONTEMPLATED ABOVE SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE OF THE UNITED STATES BY SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT OF INDEBTEDNESS. 7.9 Waivers. No failure or delay of the Secured Party in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or future exercise thereof or the exercise of any other right or power. The rights and remedies of the Secured Party hereunder are cumulative and not exclusive of any rights or remedies which it would otherwise have. No waiver of any provision of this Security Agreement or consent to any departure by Grantor therefrom shall in any event be effective unless the same shall be authorized as provided in Section 7.10, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on Grantor in any case shall entitle Grantor to any other or further notice or demand in similar or other circumstances. 7.10 Amendments. Neither this Security Agreement nor any provision hereof may be amended or modified except pursuant to an agreement or agreements in writing entered into by Grantor and the Secured Party. 7.11 Severability. In the event any one or more of the provisions contained in this Security Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not in any way be affected or impaired thereby. 7.12 Counterparts. This Security Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one contract, and shall become effective when copies hereof which, when taken together, bear the signatures of each of the parties hereto shall be delivered or mailed to the Secured Party. 7.13 Headings. Article and Section headings used herein are for convenience of reference only and are not to affect the construction of, or to be taken into consideration in interpreting, this Security Agreement. 7.14 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR - 26 - PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN CONNECTION WITH THIS SECURITY AGREEMENT AND AGREE THAT ANY SUCH ACTION SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE TERMS AND PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS SECURITY AGREEMENT. [signatures appear on following page] - 27 - IN WITNESS WHEREOF, Grantor has executed this Security Agreement as of the date first above written. IMAGEWARE SYSTEMS ID GROUP, INC. By: _____________________________________ Name: S. James Miller, Jr. Title: Chairman, CEO and President ACKNOWLEDGED: PERSEUS 2000, L.L.C. By: _____________________________________ Name: Ray E. Newton III Title: Managing Director [Signature Page to Security Agreement] SCHEDULE A Pursuant to Section 2.1(b), the following information is disclosed:

CHIEF EXECUTIVE OTHER PLACE(S) OF JURISDICTION OF GRANTOR OFFICE BUSINESS INCORPORATION COLLATERAL LOCATION - -------------------- -------------------- ----------------------- --------------- ----------------------- ImageWare Systems ID 10883 Thornmint Road 7001-A Pelham Rd. Delaware 7001-A Pelham Rd. Group, Inc. San Diego, CA 92127 Greenville, SC 29615 Greenville, SC 29615 33 Boston Post Rd. West 33 Boston Post Rd. West Suite 270 Suite 270 Marlborough, MA 01752 Marlborough, MA 01752

EQUIPMENT AND LOCATION OF LEASED GRANTOR GOODS LOCATION FACILITIES - -------------------- ----------------------- ----------------------- ImageWare Systems ID 7001-A Pelham Rd. 7001-A Pelham Rd. Group, Inc. Greenville, SC 29615 Greenville, SC 29615 33 Boston Post Rd. West 33 Boston Post Rd. West Suite 270 Suite 270 Marlborough, MA 01752 Marlborough, MA 01752

SCHEDULE B None - 30 - EX-6 8 a91106orexv6.txt EXHIBIT 6 EXHIBIT 6 JOINT FILING AGREEMENT Each of the undersigned hereby acknowledges and agrees, in compliance with the provisions of Rule 13d-1(k)(1) promulgated under the Securities Exchange Act of 1934, as amended, that the Schedule 13D to which this agreement is attached as Exhibit 6, and any amendments thereto, will be filed with the Securities and Exchange Commission jointly on behalf of each of the undersigned. These signatures are executed by Robert W. Blanchard, Esq., attorney-in-fact for the Reporting Parties under the Power of Attorney dated June 13, 2003, attached to the aforementioned Schedule 13D as Exhibit 7. This agreement may be executed in one or more counterparts. Dated: June 24, 2003 MARVIN I. FRIEDMAN ________________________________________ By: Robert W. Blanchard, Esq. MILTON LOHR ________________________________________ By: Robert W. Blanchard, Esq. L.F. GLOBAL HOLDINGS, LLC ________________________________________ By: Robert W. Blanchard, Esq. L.F. GLOBAL INVESTMENTS, LLC _______________________________________ By: Robert W. Blanchard, Esq. EX-7 9 a91106orexv7.txt EXHIBIT 7 EXHIBIT 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert W. Blanchard and/or Joseph C. Alter, his attorney-in-fact, each with the power of substitution, for him, in any and all capacities, to sign any Form 3, Form 4, Form 5, Schedule 13d, or other report of beneficial ownership relating to the securities of ImageWare Systems, Inc., or any successor, and to file the same, with exhibits thereto and other documents in connection therewith as needed, with the Securities and Exchange Commission, hereby ratifying and conforming all that each the attorney in-fact, or his substitute may do or cause to be done by virtue hereof. SIGNATURE DATE L.F. Global Investments, LLC June 12, 2003 By: ___________________________________ Marvin Friedman L.F. Global Holdings, LLC June 12, 2003 _________________________________________ By: Marvin Friedman _______________________________________ June 12, 2003 Marvin Friedman _______________________________________ June 12, 2003 Milton Lohr EX-8 10 a91106orexv8.txt EXHIBIT 8 EXHIBIT 8 INTERCREDITOR AGREEMENT This Intercreditor Agreement ("Agreement") dated as of June 13, 2003, is made and entered into by and between Laurus Master Fund, Ltd., a Cayman Islands corporation ("Laurus"), and L.F. Global Holdings, LLC, a California limited liability company ("LF") (together, the "Purchaser"), to determine the parties' respective rights, remedies and interests with respect to ImageWare Systems, Inc., a California corporation ("Company"). RECITALS A. Under this Agreement, the parties intend to clarify their respective rights in connection with the purchase of the Promissory Note (defined below) and LF's advance of additional working capital to the Company. B. As of June 6, 2003, the Company is indebted to Perseus 2000, L.L.C., a Delaware limited liability company ("Perseus") or assignee ("Lender") in the amount of $3,066,504, with daily accrual of interest of $1,111.42 (collectively "Existing Debt"). C. Such Existing Debt is evidenced by: (i) a Note and Warrant Purchase Agreement entered into between Company and Lender and dated as of May 22, 2002; (ii) Pledge and Security Agreement entered into between Company and Lender and dated as of May 22, 2002; (iii) Registration Rights Agreement entered into between Company and Lender and dated as of May 22, 2002; (iv) Senior Secured Convertible Promissory Note in the original amount of $2,000,000.00 entered into between Company and Lender and dated as of May 22, 2002; and (v) Demand Promissory Note in the original amount of $500,000.00 entered into between the Company and Lender and dated as of September 23, 2002 (collectively "Promissory Note"). The Promissory Note is specifically exclusive of that certain Warrant to Purchase Common Stock issued in favor of Lender by Company and dated as of May 22, 2002, which warrant shall be retained by Perseus. D. Collateral for the Promissory Note consists of all collateral described in: (i) the Pledge and Security Agreement entered into between Company and Perseus dated as of May 22, 2002; and (ii) the Pledge and Security Agreement entered into between ImageWare Systems ID Group, Inc., a Delaware corporation, and Perseus dated as of May 22, 2002 (collectively "Collateral"). E. The Purchaser will purchase the Existing Debt represented by the Promissory Note from Lender at Closing (defined below) in consideration of the payment of $3,063,170.05 in good funds plus per diem interest accruing on the Promissory Note after June 3, 2003 until the date of Closing (defined below) to Perseus, and shall cause the Company concurrently therewith to retire the Promissory Note and issue the Laurus Note (defined below) and the LF Note (defined below), which collectively shall constitute the Recast Promissory Note (defined below). F. Concurrent with the closing of the purchase of the Promissory Note by Purchaser, LF shall advance Company the sum of approximately $1,088,000 to pay costs associated with this transaction and as additional working capital ("Additional Advance"). The Additional Advance shall be included by the Company within the principal balance of the LF Note (defined below). The proceeds of the Additional Advance shall be used by Company to (i) pay costs associated with this transaction; and (ii) for general ongoing working capital for the Company. G. For purposes of this Agreement, the Closing Date shall be the date on which the parties execute and deliver their agreement and concurrently close the purchase of the Promissory Note and contribute the Additional Advance ("Closing"). H. At Closing Laurus will be obligated to fund an amount equal to $1,500,000.00 ("Initial Laurus Investment"). Such Initial Laurus Investment will be funded at Closing by wire transfer to Perseus as partial payment for the purchase of the Promissory Note, which Initial Laurus Investment shall be evidenced by the Laurus Note (defined below). I. At Closing LF will be obligated to fund an amount equal to $2,650,000.00 ("Initial LF Investment"). Such Initial LF Investment will be funded at Closing by wire transfer to: (i) Perseus as partial payment for the purchase of the Promissory Note; and (ii) the balance to Company which Initial LF Investment shall be evidenced by the LF Note (defined below). J. Concurrent with Closing LF will cause the Company to: (1) pay Laurus a closing fee in cash in an amount equal to four percent (4.0%) of the Initial Laurus Investment ("Closing Fee"), and (2) pay LF a closing fee in an amount equal to four percent (4.0%) of the Initial LF Investment through an increase in the principal amount of the LF Note (as defined below) or paid in-kind by delivery of a separate note ("LF Closing Fee Note"). K. All closing costs of Purchaser to a maximum of $25,000.00 shall be reimbursed Purchaser by Company upon request and presentation of invoices from third party service providers for costs incurred by Purchaser, which if less than all such costs incurred shall be divided pro rata between LF and Laurus. Company will be responsible for its own closing costs. AGREEMENT NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, Laurus and LF hereby agree as follows: 1. LF Subordination. The Initial LF Investment as evidenced by the LF Note (defined below) and Closing Fee Note will be subordinate to the Initial Laurus Investment as evidenced by the Laurus Note (defined below), such that in the event of any liquidation of Collateral or retirement of the Promissory Note, the Initial Laurus Investment together with pro rata accrued but unpaid interest due Laurus pursuant to the Laurus Note (defined below) will be returned to Laurus prior to distributions to LF on account of any liquidation of Collateral or retirement of the LF Note (defined below) and Closing Fee Note ("LF Subordination"). 2 Such LF Subordination shall be evidenced by this Agreement between LF and Laurus, which Agreement and LF Subordination shall remain in effect for so long as the Laurus Note (defined below) is outstanding. 2. Laurus Call Right. Laurus shall have the right and option (but not the obligation) to purchase the Initial LF Investment, including the LF Closing Fee Note and any interest paid in-kind up to close of business on July 11, 2003 ("Call Right"). Such Call Right, if exercised, shall be in consideration of payment by Laurus to LF prior to close of business on July 11, 2003 of: 2.1 an amount in cash equal to the unpaid principal amount of the LF Note, together with pro rata accrued but unpaid interest (including any interest paid in-kind) due LF pursuant to the LF Note (defined below); and 2.2 a distribution by LF to Laurus of the Purchaser Warrants (defined below) issued to LF, which exceed 800,000 Purchaser Warrants which are to be retained by LF. 3. Promissory Note Recast. 3.1 Concurrent with Closing, LF on behalf of Purchaser shall use its best efforts to cause the Company to: 3.1.1 Cause the Promissory Note to be amended and restated such that two serial notes in the total combined amount of the Initial LF Investment ("LF Note") and the Initial Laurus Investment ("Laurus Note") are issued on identical terms to the Promissory Note, except as noted herein, each serial note being issued respectively in favor of LF and Laurus in the original principal amount of their respective initial investments, which recast promissory notes when issued by the Company will amend, restate and replace the Promissory Note (collectively "Recast Promissory Note"); 3.1.2 Allow all of the interest owing LF and Laurus on the LF Note and Laurus Note through December 31, 2003, at the option of LF, to be converted from a cash obligation of Company to a payment-in-kind obligation of Company as provided for in the Recast Promissory Note (it being expressly understood that all interest owing Laurus on the Laurus Note shall always be payable to Laurus monthly in cash after December 31, 2003 even if LF elects thereafter to continue to allow for payment-in-kind interest on the LF Note); 3.1.3 Cause, no later than ninety (90) days following Closing, all shares which may be issued in connection with the Promissory Note, including Purchaser's Warrants, pursuant to the Registration Rights Agreement entered into between Company and Lender and dated as of May 22, 2002 to be registered and declared effective by the Securities and Exchange Commission; 3.1.4 Extend the maturity date of the Promissory Note until May 22, 2005; 3 3.1.5 Limit the amount of permitted borrowings by Company's German subsidiary to an amount no greater than that outstanding as of the date of Closing; 3.1.6 Provide (to the extent not so provided in the Promissory Note) "full ratchet" anti-dilution protection to Purchaser in the Notes and Purchaser's Warrants; 3.1.7 Allow for all amounts outstanding under the Laurus Note and/or the LF Note to be convertible into shares of Company's common stock at $2.11 per share; and 3.1.8 Increase the number of seats on Company's Board of Directors which can be filled by Purchaser from one, as currently set forth in the Promissory Note, to three (collectively "Promissory Note Recast"). 3.2 Concurrent with the Promissory Note Recast, LF will use its best efforts to cause the Company to: 3.2.1 Issue in favor of Purchaser warrants to purchase 1,600,000 shares of common stock of Company at a strike price of $2.11 and for a term of six (6) years and otherwise containing reasonable and customary terms ("Purchaser's Warrants"); 3.2.2 Elect to Company's Board of Directors Milton Lohr, Dr. Kenneth Widder, and James Chadwick as Purchaser's representatives; and 3.2.3 Take such good faith actions as are reasonably required to secure the consent of Company's shareholders required to effectuate this transaction, if any, at Company's next annual meeting and to include within its proxy materials a solicitation of the same at Company's expense and at such other times as may be required. 4. Profit Distributions. 4.1 In the event that Laurus does not exercise the Call Right, profits, if any from the joint conversion in full of the Recast Promissory Note into common shares of Company's stock and exercise in full of Purchaser's Warrants, shall be divided between LF and Laurus on the following basis: profits (exclusive of accrued but unpaid interest as provided for in the Recast Promissory Note), if any, shall be distributed to Laurus in an amount equal to Laurus' pro rata share exclusive of profits, if any, which may be attributable to interest due Laurus pursuant to the Laurus Note and the Closing Fee due Laurus as well as interest or the LF Closing Fee Note due LF, which interest and/or LF Closing Fee Note was, at the option of LF, paid to LF either in cash or as payment-in-kind (such interest and/or securities flowing therefrom being the exclusive property of LF) less twenty-five percent (25%), with the balance of profits (exclusive of accrued but unpaid interest as provided for in the Recast Promissory Note), if any, distributed to LF. 4 By way of example, if Laurus invested $1.5 million and LF invested $2.65 million, profits of $3.0 million (after return of capital to both LF and Laurus) would be distributed $813,253.01 to Laurus and $2,186,746.99 to LF. 4.2 In the event that Laurus: (i) does not exercise the Call Right, and (ii) exercises its conversion rights under the Laurus Note independent and in advance of LF exercising any of its conversion rights under the LF Note, twenty-five percent (25%) of the profits, if any, from the conversion of the Laurus Note into common shares of Company's stock and exercise of Purchaser's Warrants, shall be paid by Laurus to LF as follows: on the date on which Laurus has fully recovered the Laurus Initial Investment together with accrued but unpaid interest to the date of conversion, it will transfer into trust for the benefit of LF twenty-five percent (25%) of its then remaining shares of Company's common stock, or cash profits as applicable, the profits from the sale of which shall be held in trust for LF by Laurus ("LF Escrow") for a period of up to eighteen (18) months ("LF Tail Period") for the benefit of LF. If by the termination of the LF Tail Period, LF has still not converted the LF Note and liquidated its as converted Company common stock, the funds held in the LF Escrow will be released by Laurus to LF and neither LF nor Laurus will have any additional obligation to the other. If during the LF Tail Period LF does convert any portion of the LF Note and has liquidated its as converted Company common stock, then in that event Laurus shall be entitled to retain all amounts in the LF Escrow, if the profits attributable to LF (exclusive of accrued interest) from the as converted LF Note on a pro rata basis exceed one hundred and twenty-five percent (125%) of the profits realized by Laurus. If the profits realized by LF from the as converted LF Note on an as converted basis during the LF Tail Period are less than one hundred and twenty-five percent (125%) of the profits realized by Laurus, Laurus shall immediately distribute to LF the amounts in the LF Escrow. 5. Conversion Stand-Off. Notwithstanding the foregoing, if Laurus shall exercise the Call Right then Laurus shall be entitled to retain one-hundred percent (100%) of all proceeds from the conversion and sale of the Recast Promissory Note and all of Laurus' portion of Purchasers Warrants 5.1 Laurus agrees that it will not exercise its conversion rights under the Laurus Note before February 28, 2004 so long as: (i) LF agrees not to exercise its conversion rights under the LF Note during the same period, and (ii) the holder of the existing $600,000.00 convertible debt of the Company has not converted such into common stock of the Company. 5.2 After February 28, 2004, or if: (i) LF exercises its conversion rights prior to that date, or (ii) the holder of the existing $600,000.00 convertible debt of the Company has exercised its conversion rights prior to that date, Laurus may elect to convert the Laurus Note on sixty (60) days prior written notice to LF during which time LF will have the right to purchase the Laurus Note on terms agreed to by LF and Laurus, and sell the shares underlying the conversion of the Laurus Note (absent a purchase of the Laurus Note by LF during such sixty (60) day period) independent of LF, but subject to the Profit Distributions section of this 5 Agreement. In such event, and provided LF has not converted the LF Note into common shares of the Company, Laurus shall be free to liquidate its as converted shares into the market while, to the extent possible, attempting to maintain an orderly market in the Company's shares. 6. Optional Advances to Company. Following closing, each of Laurus and LF may elect to advance additional amounts to Company as provided for in the Laurus Note and LF Note, respectively. To the extent that Laurus has exercised the Call Right, LF will be obligated to advance Company in a single or series of advances, up to the first $1,500,000.00 ("Additional Initial Advance") subject to Laurus' right of first refusal to participate equally in such Additional Initial Advance. To the extent that Laurus does not exercise the Call Right it will have no obligation to participate in any additional advances LF may decide in its sole discretion to make to Company pursuant to the terms of the Recast Promissory Note. Such Additional Initial Advance, if any, shall be recoverable from an event of liquidation of Collateral or retirement of the Laurus Note on a pari passu basis with other amounts then owing under the Laurus Note and shall not be subject to the LF Subordination. Profits, if any, attributable to the Additional Initial Advance, if any, shall be divided pro rata between LF and Laurus in proportion to the amount, if any, contributed by each to the Additional Initial Advance. 7. Investment Decisions. Unless Laurus shall have exercised the Call Right, and for so long as the Laurus Promissory Note is not in default past any applicable cure periods, if any, LF shall make all non-economic decisions regarding the Recast Promissory Note on behalf of Purchaser, and be entitled to vote all shares of Company's common stock held by Purchaser (collectively "Investment Decisions"). In the event that the Laurus Note is in default past any applicable cure periods, and for so long as such uncured default continues, LF shall relinquish its right to make the Investment Decisions, and such decisions regarding the Recast Promissory Note shall be made jointly by LF and Laurus. Each party agrees that it will not take unilateral action to enforce the Recast Promissory Note or any document securing the Recast Promissory Note without the consent and agreement of the other party; provided, if after reasonable efforts have been made by a party to reach agreement and no agreement has been reached, either party, provided such party is not in default under this Agreement, may unilaterally take reasonable actions to enforce the Recast Promissory Note held by such party and any document securing such note after having provided the other party with thirty (30) days prior written notice of the action to be taken. Provided reasonable steps are taken to give the other party advance notice, no advance notice shall be required if immediate action is reasonably necessary to preserve the value of any collateral or the ability to foreclose on such collateral. 6 8. LF Default Call Option. 8.1 In the event that the Call Right is not exercised, LF shall have a right and option to purchase the Initial Laurus Investment at any time that in the joint good faith opinion of LF and Laurus, either: 8.1.1 The Recast Promissory Note is in material default past any applicable cure periods such that the principal balance then owed pursuant to the Recast Promissory Note is in jeopardy of not being repaid; 8.1.2 The Company has either through its actions, or those of third-party creditors, been placed in either a voluntary or involuntary bankruptcy proceeding; or 8.1.3 The Company is known to LF to be taking such actions as can be reasonably viewed as preparatory for a bankruptcy filing ("LF Default Call Option"). 8.2 Such LF Default Call Option if exercised shall be in consideration of payment by LF to Laurus of: 8.2.1 An amount in cash equal to the Initial Laurus Investment together with pro rata accrued but unpaid interest due Laurus pursuant to the Laurus Note; 8.2.2 The pro rata prepayment privilege payment then due under the Laurus Note; and 8.2.3 Laurus shall distribute to LF of fifty percent (50%) of Purchaser's Warrants issued to Laurus. 9. Right of First Refusal to Purchase As Converted Shares. LF shall be granted the right of first refusal to purchase any shares of Company's common stock which Laurus may own as a result of a conversion of all or a portion of the Laurus Note or exercise of Laurus' interest in Purchaser's Warrants if such sale involves a block of Company's stock in excess of 50,000 shares. Such right of first refusal shall be afforded LF by way of private purchase on twenty-four (24) hours notice from Laurus. 10. Additional Remedies. If either party violates any of the terms of this Agreement, in addition to any remedies in law, equity or otherwise, the non-violating party may restrain such violation in any court of law and may interpose this Agreement as a defense in any action by the violating party. 7 11. Waivers. No waiver shall be deemed to be made by Laurus or LF of any of their respective rights hereunder unless it is in writing and signed by the waiving party. Each such waiver shall be a waiver only with respect to the specific instance involved and shall in no way impair the rights of the waiving party or the obligations of the other party to the waiving party in any other respect at any other time. 12. Third Party Beneficiaries. This Agreement is solely for the benefit of Laurus, LF and their respective successors and assigns, and neither Company nor any other persons or entities are intended to be third party beneficiaries hereunder or to have any right, benefit, priority or interest under, or because of the existence of, or to have any right to enforce, this Agreement. Laurus and LF shall have the right to modify or terminate this Agreement at any time without notice to or approval of Company or any other person or entity. 13. Notices. For the purposes of this Agreement, written notices shall be sent by U.S. certified mail, return receipt requested, postage prepaid; or by personal delivery; or by facsimile confirmed by the recipient; and addressed to the notified party at its address set forth below its signature line, or such other address specified by the party with like notice. Notices shall be deemed received three (3) business days after deposit in the U.S. mail, if sent by first class mail; upon the date set forth in the return receipt, if by certified mail; on the day of confirmation of delivery by the recipient, if by facsimile; or on the day of transmittal by personal delivery. 14. Costs and Attorneys' Fees. In the event that any party hereto shall institute any litigation or other proceeding arising out of or relating to this Agreement, the prevailing party therein shall be entitled to recover its reasonable attorney's fees and costs incurred in connection therewith. 15. Mediation/Arbitration. The parties mutually agree that any claim or controversy arising out of or relating to this Agreement shall be resolved by first submitting to mediation under the rules of the American Arbitration Association, and should a resolution not be reached, by submitting to binding arbitration administered by the American Arbitration Association in accordance with its Arbitration Rules in San Diego, California and shall be governed by the laws of the State of California, including, but not limited to, California Code of Civil Procedure Section 1283.05 relating to depositions and discovery, and judgment on the award rendered by the arbitrator(s) may be entered in any court in San Diego County having jurisdiction thereof. The arbitrator shall have the authority to order such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute, consistent with the expedited nature of arbitration. 16. Governing Law. This Agreement has been delivered and accepted at and shall be deemed to have been made in the State of New York, and shall be interpreted, and the rights and liabilities of the parties hereto determined, in accordance with the internal laws of the State of New York. 17. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties' respective successors and assigns, subject to the provisions hereof. 8 18. Integrated Agreement. This Agreement sets forth the entire understanding of the parties with respect to the within matters and may not be modified or amended except upon a writing signed by all parties. 19. Authority. Each of the signatories hereto certifies that such party has all necessary authority to execute this Agreement. 20. Counterparts. This Agreement may be executed in one or more counterparts, each one of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. (Signatures on following page) 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. "LAURUS" Laurus Master Fund, Ltd., a Cayman Islands Corporation By: ______________________________________ Name: ___________________________________ Title: ___________________________________ Address for notices: 152 West 57th Street Fourth Floor New York, NY 10019 Facsimile: (212) 541-4434 Attention: John E. Tucker, Esq. "LF" L.F. Global Holdings, LLC, a California limited liability company By: ____________________________________ Name: Marvin Friedman Title: Managing Member Address for notices: 12230 El Camino Real, Suite 220 San Diego, CA 92130 Facsimile: (858) 509-8830 Attention: Marvin Friedman 10 ACKNOWLEDGMENT ImageWare Systems, Inc., a California corporation, the Borrower referred to in the foregoing Purchase and Sale Agreement (the "Agreement"), acknowledges that it has received a copy of the Agreement and consents to it Dated: June 13, 2003 IMAGEWARE SYSTEMS, INC., A California Corporation By: ______________________________ Name: S. James Miller, Jr. Title: Chairman & Chief Executive Officer 11 EX-9 11 a91106orexv9.txt EXHIBIT 9 EXHIBIT 9 ASSIGNMENT FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, Perseus 2000, L.L.C., a Delaware limited liability company ("Assignor"), hereby sells, assigns, transfers and conveys, upon the terms and subject to the conditions set forth in that certain Purchase and Sale Agreement dated as of the date hereof by and between the Assignor and Assignees (as defined below), to L.F. Global Holding, LLC, a California limited liability company and Laurus Master Fund, Ltd., a Cayman Islands corporation (collectively "Assignees"), all of its right, title and interest in and to the following: (1) Senior Secured Convertible Promissory Note in the principal amount of $2,000,000.00 executed by ImageWare Systems, Inc., a California corporation ("Company") in favor of Assignor dated May 22, 2002; (2) Demand Promissory Note in the principal amount of $500,000.00 executed by the Company in favor of Assignor dated as of September 23, 2002; (3) the Pledge and Security Agreement entered into by and between Company and Assignor dated as of May 22, 2002, together with any and all collateral described therein, including without limitation, the intellectual property set forth on Exhibit BKF-1 attached hereto; and (4) the Pledge and Security Agreement entered into by and between ImageWare Systems ID Group, Inc., a Delaware corporation, and Assignor dated as of May 22, 2002, together with any and all collateral described therein, including without limitation, the intellectual property set forth on Exhibit BKF-2 attached hereto. This assignment shall be binding on and inure to the benefit of the parties thereto, their heirs, executors, administrators, successors in interest and assigns. IN WITNESS WHEREOF, the undersigned has executed the within instrument effective as of June 13, 2003. ASSIGNOR: Perseus 2000, L.L.C., a Delaware limited liability company By: ________________________________ Name: Title: STATE OF ______________ ) ) ss COUNTY OF _____________ ) On this ____ day of ________, 2003, before me, _________________, Notary Public, personally appeared ____________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal (Seal) ________________________________ SIGNATURE OF NOTARY PUBLIC -----END PRIVACY-ENHANCED MESSAGE-----

EX-1

                                                                       EXHIBIT 1

                  CONSENT TO ASSIGNMENT AND AMENDMENT AGREEMENT

         This Consent to Assignment and Amendment Agreement ("Agreement") is
made by and among ImageWare Systems, Inc. ("Company"), and L.F. Global Holdings,
LLC ("LF"), and Laurus Master Fund, Ltd. ("Laurus")(collectively, "Purchaser")
as of June 13, 2003 ("Agreement Date").

                                    RECITALS

         A.       By this Agreement the parties intend to acknowledge the
assignment by Perseus 2000, L.L.C., a Delaware limited liability company
("Perseus") of the Promissory Notes (defined below) to Purchaser and Purchaser's
anticipated amendment of the Note Purchase Agreement (defined below) to enable
Purchaser's acquisition of additional notes from Company.

         B.       As of June 6, 2003, the Company is indebted to Perseus or
assignee ("Lender") under the Promissory Notes in the amount of $3,063,170.05,
with daily accrual of interest of $1,111.42 (collectively "Existing Debt").

         C.       Such Existing Debt is evidenced by: (i) a Note and Warrant
Purchase Agreement entered into between Company and Lender and dated as of May
22, 2002 ("Note Purchase Agreement"); (ii) Pledge and Security Agreement entered
into between Company and Lender and dated as of May 22, 2002 ("Company Security
Agreement"); (iii) Registration Rights Agreement entered into between Company
and Lender and dated as of May 22, 2002 ("Rights Agreement"); (iv) the Pledge
and Security Agreement entered into between ImageWare Systems ID Group, Inc., a
Delaware corporation, and Assignor and dated as of May 22, 2002 ("Subsidiary
Security Agreement"); (v) Senior Secured Convertible Promissory Note in the
original principal amount of $2,000,000.00 executed by Company in favor of
Lender and dated as of May 22, 2002 ("Senior Note"); and (vi) Demand Promissory
Note in the original amount of $500,000.00 executed by the Company in favor of
Lender and dated as of September 23, 2002 ("Demand Note" and, collectively with
the Senior Note, referred to herein as "Promissory Notes"). The Company Security
Agreement and Subsidiary Security Agreement are referred to herein as the
"Pledge Agreements."

         D.       Collateral for the Promissory Notes consists of by a perfected
first lien against: (i) all of the assets of Company and its subsidiary
ImageWare Systems ID Group, Inc.; (ii) all of the outstanding shares of capital
stock of each of the Company's United States subsidiaries; and (iii) sixty-six
and two-thirds percent (66.67%) of all of the outstanding shares of Company's
foreign subsidiaries (collectively "Collateral").

         E.       The Purchaser will purchase the Existing Debt represented by
the Promissory Notes from Perseus at Closing (defined below), pursuant to the
Purchase and Sale Agreement entered into by and among Perseus and Purchaser, and
the Company concurrently therewith will retire the Promissory Notes and issue
the Laurus Note (defined below) and the LF Note (defined below), which
collectively shall constitute the Recast Promissory Notes (defined below).

                                       1



         E.       For purposes of this Agreement, the Closing Date shall be the
date on which the parties execute their agreement to purchase the Promissory
Note and contribute the Additional Advance ("Closing").

         F.       At Closing Laurus will be obligated to fund an amount equal to
$1,500,000.00 ("Initial Laurus Investment"). Such Initial Laurus Investment will
be funded at Closing by wire transfer to Dechert, LLP, as escrow agent for the
benefit of Perseus as partial payment for the purchase of the Promissory Notes,
which Initial Laurus Investment shall be evidenced by the Laurus Note (defined
below).

         G.       At Closing LF will be obligated to fund an amount equal to
$2,650,000.00 ("Initial LF Investment"). Such Initial LF Investment will be
funded at Closing by wire transfer to: (i) Perseus as partial payment for the
purchase of the Promissory Note; and (ii) the balance to Company which Initial
LF Investment shall be evidenced by the LF Note (defined below).

                                    AGREEMENT

         NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, the parties hereby agree as follows:

         1.       Assignment of Promissory Notes. Company hereby consents to the
assignment, transfer and conveyance to Purchaser of all of Lender's right, title
and interest in and to the Promissory Notes and related rights and agrees that
Purchasers shall each be entitled to the same benefits and protections as
Perseus as purchaser of the Promissory Notes under the Note Purchase Agreement
and each and every document and agreement entered into or delivered in
connection therewith. Purchaser agrees that Company shall be entitled to the
same benefits and protections under the Promissory Notes and each and every
document and agreement entered into or delivered in connection therewith to the
extent not altered herein.

         2.       Additional Capital Advances. Concurrent with the execution of
this Agreement, LF shall advance to Company the sum of approximately $1,088,000
as additional working capital ("Additional Advance"). The Additional Advance
shall be included by the Company within the principal balance of the LF Note
(defined below). The proceeds of the Additional Advance shall be used by Company
to (i) pay costs associated with this transaction; and (ii) for general ongoing
working capital for the Company.

         3.       Amendment of Note Purchase Agreement. The Note Purchase
Agreement is hereby amended to provide that concurrently with the execution of
this Agreement, Purchaser shall have the right under the Section 1(b) thereof to
make the Additional Advance and acquire an Additional Note up to an aggregate
principal amount of approximately $1,088,000.00, on the terms set forth in
Section 1 of the Note Purchase Agreement, subject to the terms of this
Agreement.

                                       2



         4.       Promissory Note Recast.

                  4.1      In consideration of the Additional Advance and the
amendments to the Promissory Notes provided for herein, the parties acknowledge
that the Company shall:

                           4.1.1    Upon delivery to escrow of the original
Promissory Notes, cause the Promissory Notes to be reissued such that two serial
notes in the total combined amount of the Initial LF Investment in the form and
content of Exhibit A attached hereto ("LF Note") and the Initial Laurus
Investment in the form and content of Exhibit B attached hereto ("Laurus Note"),
which reissued promissory notes when issued by the Company will amend, restate
and replace the Promissory Notes and evidence the additional advance
(collectively "Recast Promissory Notes");

                           4.1.2    Cause, no later than ninety (90) days
following Closing, all shares which may be issued pursuant to the conversion of
Recast Promissory Notes and the exercise of the Purchaser's Warrants and the
Warrant issued pursuant to the Note Purchase Agreement to be registered pursuant
to the Rights Agreement and declared effective by the Securities and Exchange
Commission, including the shares underlying the Purchaser's Warrants described
below;

                           4.1.3    Without causing an increase in the size of
Company's Board of Directors, appoint Milton Lohr, Kenneth Widder and James
Chadwick to the Company's Board of Directors, one of whom shall be appointed as
soon as reasonably practical and the other two no later than the Company's next
annual meeting, which appointments shall be in lieu of the requirements set
forth in Section 4(f) of the Note Purchase Agreement;

                           4.1.4    In lieu of the "Additional Warrant" provided
for in Section 1(b)(i), issue in favor of Purchaser six (6) year warrants to
purchase 1,600,000 shares of common stock of Company ("Purchaser's Warrants")
exercisable at $2.11 per share in the form and content of Exhibit C attached
hereto;

                           4.1.5    Pay Laurus a closing fee in cash in an
amount equal to four percent (4.0%) of the Initial Laurus Investment ("Closing
Fee"). Additionally, Company will deliver to LF a convertible note in the form
of the LF Note in the principal amount equal to four percent (4.0%) of the
Initial LF Investment ("LF Closing Fee");

                           4.1.6    Reimburse Purchaser for all closing costs of
Purchaser to a maximum of $25,000 upon request and presentation of invoices from
third party service providers for costs incurred by Purchaser. Company will be
responsible for its own closing costs;

                           4.1.7    Limit the amount of permitted borrowings by
Company's German subsidiary to an amount no greater than that outstanding as of
the date of Closing; and

                           4.1.8    Take such good faith actions as are
reasonably required to secure the consent of Company's shareholders required to
effectuate this transaction, if any, at

                                       3



Company's next annual meeting and to include within its proxy materials a
solicitation of the same at Company's expense and at such other times as may be
required.

         5.       AMEX Application. Immediately following the Closing, the
Company will file an application for the listing of additional shares with the
American Stock Exchange as required by the American Stock Exchange Listing
Standards, Policies and Requirements. In the event that as a condition to
approving such application, the American Stock Exchange requires one or more
modification s to the terms and conditions of the Transaction Documents (as
defined in the Recast Promissory Notes), the Company, LF and Laurus will all
work together reasonably and in good faith to effect such modifications to the
Transaction Documents, with a view towards preserving the overall economic terms
and conditions contained in the Transaction Documents.]

         6.       Representations and Warranties. Except as set forth in the
schedule of exceptions delivered to Purchaser concurrent with the execution of
this Agreement, the Company hereby makes and reaffirms all representations,
warranties, and covenants set forth in Section 2 and 4 of the Note Purchase
Agreement and as set forth in the Pledge Agreements as if made on the date
hereof. Further, under this Agreement the Company shall deliver to Purchaser an
opinion of counsel to the Company, encompassing in form and substance the
matters set forth in Exhibit F to the Note Purchase Agreement and each other
certificate or document required by Section 1 of the Note Purchase Agreement in
connection with the closing of the acquisition or an Additional Note. Purchaser,
each as to itself, hereby makes and reaffirms all representations and warranties
set forth in Section 3 of the Note Purchase Agreement as if made by and as to
such Purchaser on the date hereof.

         7.       Additional Remedies. If either party violates any of the terms
of this Agreement, in addition to any remedies in law, equity or otherwise, the
non-violating party may restrain such violation in any court of law and may
interpose this Agreement as a defense in any action by the violating party.

         8.       Waivers. No waiver shall be deemed to be made by any party of
any of their respective rights hereunder unless it is in writing and signed by
the waiving party. Each such waiver shall be a waiver only with respect to the
specific instance involved and shall in no way impair the rights of the waiving
party or the obligations of the other party to the waiving party in any other
respect at any other time.

         9.       Third Party Beneficiaries. This Agreement is solely for the
benefit of the Company, Laurus, LF and their respective successors and assigns,
and no any other persons or entities are intended to be third party
beneficiaries hereunder or to have any right, benefit, priority or interest
under, or because of the existence of, or to have any right to enforce, this
Agreement.

         10.      Notices. For the purposes of this Agreement, written notices
shall be sent by U.S. certified mail, return receipt requested, postage prepaid;
or by personal delivery; or by facsimile confirmed by the recipient; and
addressed to the notified party at its address set forth below its signature
line, or such other address specified by the party with like notice. Notices
shall be deemed received three (3) business days after deposit in the U.S. mail,
if sent by first class mail;

                                       4



upon the date set forth in the return receipt, if by certified mail; on the day
of confirmation of delivery by the recipient, if by facsimile; or on the day of
transmittal by personal delivery.

         11.      Costs and Attorneys' Fees. In the event that any party hereto
shall institute any litigation or other proceeding arising out of or relating to
this Agreement, the prevailing party therein shall be entitled to recover its
reasonable attorney's fees and costs incurred in connection therewith.

         12.      Mediation/Arbitration. The parties mutually agree that any
claim or controversy arising out of or relating to this Agreement shall be
resolved by first submitting to mediation under the rules of the American
Arbitration Association, and should a resolution not be reached, by submitting
to binding arbitration administered by the American Arbitration Association in
accordance with its Arbitration Rules in San Diego, California and shall be
governed by the laws of the State of California, including, but not limited to,
California Code of Civil Procedure Section 1283.05 relating to depositions and
discovery, and judgment on the award rendered by the arbitrator(s) may be
entered in any court in San Diego County having jurisdiction thereof. The
arbitrator shall have the authority to order such discovery, by way of
deposition, interrogatory, document production, or otherwise, as the arbitrator
considers necessary to a full and fair exploration of the issues in dispute,
consistent with the expedited nature of arbitration.

         13.      Governing Law. This Agreement has been delivered and accepted
at and shall be deemed to have been made in the State of New York, and shall be
interpreted, and the rights and liabilities of the parties hereto determined, in
accordance with the internal laws of the State of New York.

         14.      Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties' respective successors and
assigns, subject to the provisions hereof.

         15.      Integrated Agreement. This Agreement sets forth the entire
understanding of the parties with respect to the within matters and may not be
modified or amended except upon a writing signed by all parties.

         16.      Authority. Each of the signatories hereto certifies that such
party has all necessary authority to execute this Agreement.

         17.      Counterparts. This Agreement may be executed in one or more
counterparts, each one of which when so executed shall be deemed to be an
original, and all of which taken together shall constitute one and the same
agreement.

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.

                                       5



"LAURUS"

Laurus Master Fund, Ltd.,
a Cayman Islands Corporation

By:__________________________________________
Name:  ______________________________________
Title:    ___________________________________

Address for notices:       152 West 57th Street
                           Fourth Floor
                           New York, NY 10019
                           Facsimile: (212) 541-4434
                           Attention: John E. Tucker, Esq.

"LF"

L.F. Global Holdings, LLC,
a California limited liability company

By: ____________________________________
Name:  Marvin Friedman
Title:    Managing Member

Address for notices:       12230 El Camino Real, Suite 220
                           San Diego, CA 92130
                           Facsimile:______________
                           Attention: Marvin Friedman

"COMPANY"

ImageWare Systems, Inc.,
a California corporation.

By:  ______________________________
Name: S. James Miller, Jr.
Title: Chairman and Chief Executive Officer

Address for notices:       10883 Thornmint Road
                           San Diego, CA 92127

                                       6



                           Facsimile: ____________________
                           Attention: S. James Miller, Jr.

                                       7

EX-2

                                                                       EXHIBIT 2

                   SENIOR SECURED CONVERTIBLE PROMISSORY NOTE

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE
SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND COMPLIANCE WITH SUCH STATE SECURITIES LAWS, IN
COMPLIANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL OR
OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION AND/OR
COMPLIANCE IS NOT REQUIRED.

$2,650,000.00                                                      June 13, 2003
                                                           San Diego, California

         FOR VALUE RECEIVED, IMAGEWARE SYSTEMS, INC., a California corporation
(the "Company"), promises to pay to the order of L.F. Global Holdings, LLC (the
"Lender") or its registered assigns (the "Holder"), the principal sum of Two
Million Six Hundred Fifty Thousand Dollars ($2,650,000.00), or such lesser
amount as shall then equal the outstanding principal amount hereof, together
with interest thereon at a rate equal to 12.5% per annum, compounding quarterly
and computed on the basis of a year consisting of 360 days and four quarterly
periods each consisting of 90 days. All unpaid principal, together with any
accrued but unpaid interest and other amounts payable hereunder, shall be due
and payable on the earlier of (i) May 22, 2005 (the "Maturity Date"); or (ii)
when such amounts are declared due and payable by the Holder or made
automatically due and payable upon or after (A) the occurrence of an Event of
Default (as defined below), (B) the liquidation or dissolution of the Company,
(C) any merger, consolidation, reorganization or other business combination
involving the Company, in which the stockholders of the Company immediately
prior thereto do not own, directly or indirectly, outstanding voting securities
representing more than fifty percent (50%) of the combined outstanding voting
power of the surviving entity in such merger, consolidation or similar
transaction, (D) the sale of all, or substantially all, of the assets of the
Company, or (E) the sale of voting securities of the Company to any person (or
group of persons acting in concert) that results in such person (or group of
persons) (together with their affiliates) owning more than 50% of the
outstanding voting securities of the Company. Interest on this Note shall be
payable in arrears on each January 1, April 1, July 1, and October 1 after the
date of issuance of this Note as follows: (a) through the payment due January 1,
2004, and so long as no uncured Event of Default exists, interest, at the
election of the Company and subject to shareholder approval as provided in this
Note, may be paid by the issuance of an additional senior secured convertible
promissory note identical in all respects to this Note except that it shall have
a principal amount equal to such interest payment; or if not so paid shall be
payable in lawful money of the United States of America and (b) thereafter shall
be payable in lawful money of the United States of America.

         This Note, along with the Senior Secured Convertible Promissory Note
dated June 13, 2003, between Company and Laurus Master Fund, Ltd. ("Laurus")
(the "Laurus





Note"), shall amend and restate the note issued pursuant to the Note and Warrant
Purchase Agreement (the "Purchase Agreement") dated as of May 22, 2002 by and
between the Company and Perseus 2000, L.L.C. This Note is amended and restated
pursuant to the Consent to Assignment and Amendment Agreement dated as of June
13, 2003, by and between Company, Lender and Laurus ("Consent Agreement").

         The following is a statement of the rights of the Holder and the
conditions to which this Note is subject, and to which the Holder hereof, by the
acceptance of this Note, agrees:

         1.       Definitions. Capitalized terms defined in the Purchase
Agreement and used herein without definition have the same meaning herein as in
the Purchase Agreement. In addition, as used in this Note, the following
capitalized terms have the following meanings:

                  (a)      "Business Day" means any day other than a Saturday,
Sunday or other day on which the national or state banks located in the State of
New York, State of California or the District of Columbia are authorized to be
closed.

                  (b)      "Common Stock" means the common stock, par value
$0.01 per share, of the Company.

                  (c)      "Company Notes" means any of this Note, the Laurus
Note or any note issued in payment of Closing Fees (as defined in the Consent
Agreement) or interest on any Company Note.

                  (d)      "Obligations" means the principal, interest and other
amounts payable under this Note.

                  (e)      "Transaction Documents" shall mean each of the
Company Notes, the Purchase Agreement, the Registration Rights Agreement, the
Pledge and Security Agreements securing the Company Notes, as amended, the
Company's Officer's Certificate dated June 13, 2003, the Purchaser's Warrants
(as defined in the Consent Agreement) and the Consent Agreement.

         2.       Events of Default. The occurrence of any of the following
shall constitute an "Event of Default" under this Note:

                  (a)      Failure to Pay. The Company shall fail to pay when
due any principal payment on this Note or any interest or other payment required
under the terms of this Note or any other Transaction Document if such
nonpayment is not cured by the Company within five (5) days immediately after
the date on which such payment became due and payable; or

                  (b)      Breaches of Representations and Warranties. Any
representation or warranty made by the Company herein or in any of the other
Transaction Documents shall prove false or misleading in any material respect
when made or deemed made; or

                                       2




                  (c)      Breaches of Other Covenants. The Company shall fail
to observe or to perform any other material covenant, obligation, condition or
agreement contained in this Note or the other Transaction Documents, other than
those specified in Section 2(a) hereof, and such failure shall continue for
thirty (30) days after written notice thereof is delivered to the Company; or

                  (d)      Cross-Default. The Company or any of its subsidiaries
shall default under (i) any Company Note or (ii) any other bond, debenture, note
or other evidence of indebtedness for money borrowed, under any guarantee or
under any mortgage, or indenture pursuant to which there shall be issued or by
which there shall be secured or evidenced any indebtedness for money borrowed by
the Company or any of its subsidiaries, whether such indebtedness now exists or
shall hereafter be created, which default (other than a default under a Company
Note) shall have resulted in indebtedness of at least $100,000 being due and
payable prior to the date on which it would otherwise become due and payable and
shall not have been cured by the Company or waived by the lender; or

                  (e)      Undischarged Judgment. One or more judgments for the
payment of money in an amount in excess of $100,000 in the aggregate,
outstanding at any one time, shall be rendered against the Company or any of its
subsidiaries (or any combination thereof) and shall remain undischarged for a
period of thirty (30) consecutive days during which execution shall not be
effectively stayed, or any action is legally taken by a judgment creditor to
levy upon any such judgment; or

                  (f)      Voluntary Bankruptcy or Insolvency Proceedings. The
Company (and any subsidiary thereof) shall (i) apply for or consent to the
appointment of a receiver, trustee, liquidator or custodian of itself or of all
or a substantial part of its property, (ii) be unable, or admit in writing its
inability, to pay its debts generally as they mature, (iii) make a general
assignment for the benefit of its or any of its creditors, (iv) be dissolved or
liquidated in full or in part, (v) become insolvent (as such term may be defined
or interpreted under any applicable statute), (vi) commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it or (vii) take any
action for the purpose of effecting any of the foregoing; or

                  (g)      Involuntary Bankruptcy or Insolvency Proceedings.
Proceedings for the appointment of a receiver, trustee, liquidator or custodian
of the Company (and any subsidiary thereof) or of all or a substantial part of
the property thereof, or an involuntary case or other proceedings seeking
liquidation, reorganization or other relief with respect to the Company (and any
subsidiary thereof) or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect shall be commenced and an order for
relief entered, or such case or proceeding shall not be dismissed, discharged or
stayed within ninety (90) days of commencement.

                                       3




         3.       Rights of Holder Upon Default.

                  (a)      Upon the occurrence or existence of any Event of
Default (other than an Event of Default referred to in Sections 2(f) or 2(g)
hereof) and at any time thereafter during the continuance of such Event of
Default, the Holder may declare all outstanding Obligations payable by the
Company hereunder to be immediately due and payable without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived, anything contained herein or in the other Transaction Documents to the
contrary notwithstanding. Upon the occurrence or existence of any Event of
Default described in Sections 2(f) or 2(g) hereof, immediately and without
notice, all outstanding Obligations payable by the Company hereunder shall
automatically become immediately due and payable, without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived, anything contained herein or in the other Transaction Documents to the
contrary notwithstanding. In addition to the foregoing remedies, upon the
occurrence or existence of any Event of Default, the Holder may exercise any
other right, power or remedy granted to it by the Transaction Documents or
otherwise permitted to it by law, either by suit in equity or by action at law,
or both.

                  (b)      In addition to the rights of the Holder specified in
subsection (a) of this Section 3, on the date an Event of Default under this
Note occurs, the interest rate on this Note shall increase, from that date
forward, to the lesser of 15% and the maximum legally permissible interest rate,
with such interest payable solely in lawful money of the United States.

         4.       Seniority; Collateral. To secure the Company's payment and
performance of the Obligations and to secure the Company's prompt, full and
faithful performance and observance of all of the provisions under this Note and
the other Transaction Documents, the Company hereby grants the Holder the rights
set forth in the Pledge and Security Agreement. The security interest granted by
the Company under the Pledge and Security Agreement securing the indebtedness
evidenced by this Note, including all Obligations, is senior to all other liens,
security interests or encumbrances securing any other indebtedness of the
Company, subject only to Permitted Liens (as defined in the Pledge and Security
Agreement) to the extent such Permitted Liens by their express terms or
applicable law have priority equal or superior to such security interest.

         5.       Prepayment and Effect on Conversion Rights. This Note may be
prepaid as a whole or in part at any time prior to the Maturity Date at the
election of the Company upon at least thirty (30) days prior written notice to
the Holder (the "Prepayment Notice Period"); provided that any such prepayment
shall include a prepayment premium equal to a percentage of the amount of
principal so prepaid, as determined by the date of such prepayment, as follows:

                                       4






PREPAYMENT DATE                          PREPAYMENT PREMIUM %
- ---------------                          --------------------
                                      
May 22, 2003 - August 22, 2003                   5%
August 22, 2003 - November 22, 2003              4%
November 22, 2003 - February 22, 2004            3%
February 22, 2004 - May 22, 2004                 2%
May 22, 2004 - August 22, 2004                   1%
August 22, 2004 or later                         0%


Any such prepayment shall be applied first to the payment of expenses due under
this Note, second to any prepayment premium, third to interest accrued on the
portion of this Note so prepaid and fourth, if the amount of prepayment exceeds
the amount of all such expenses, prepayment penalties and accrued interest, to
the payment of principal of this Note. Notwithstanding the foregoing or anything
to the contrary herein, any such election to prepay the Note shall not
extinguish or otherwise effect the conversion rights set forth in Section 6
hereof with respect to the amount of principal so elected to prepaid until after
the expiration of the Prepayment Notice Period.

         6.       Conversion.

                  (a)      Conversion by Holder. At any time, and from time to
time, the Holder may, at its sole and exclusive option, convert all or any part
of the principal and accrued interest outstanding under this Note into shares of
Common Stock at a conversion price per share of Common Stock equal to $2.11
("Conversion Shares"), subject to adjustment as provided in Section 7 hereof
(the "Conversion Price").

                  (b)      Transfer of Shares. The Company shall cause the
transfer agent to transmit the certificates representing the Conversion Shares
to the Holder by crediting the account of the Holder's designated broker with
the Depository Trust Corporation ("DTC") through its Deposit Withdrawal Agent
Commission ("DWAC") system within three (3) business days after receipt by the
Company of the Notice of Conversion (as defined below) (the "Delivery Date"),
unless in the reasonable opinion of Company's counsel such Conversion Shares
must bear a restrictive legend to be issued in compliance with the Securities
Act of 1933, as amended, in which case, certificates shall be delivered to
Holder on or before the Delivery Date.

                  (c)      Conversion by Company. At any time following the date
hereof, the Company may, at its sole and exclusive option, convert all of the
principal and accrued interest outstanding under this Note into shares of Common
Stock at a conversion price per share of Common Stock equal to the Conversion
Price, provided that each of the following two conditions is satisfied: (i) the
volume weighted average price of the Company's Common Stock, as reported by
Bloomberg Financial LP (or, in the event that such price is not available from
Bloomberg Financial LP, a comparable nationally recognized financial reporting
service), using the VAP function for the fifteen trading days immediately prior
to the date on which the Company provides the Conversion Notice (as defined
below), is equal to or greater than $12.93 and (ii) the

                                       5




Company's aggregate EBITDA for the two full calendar quarters immediately
preceding the date on which the Company provides the Conversion Notice, as set
forth in the Company's Forms 10-QSB or 10-Q and/or 10-KSB or 10-K filed with the
United States Securities and Exchange Commission for such calendar quarters, is
equal to or greater than $3,750,000. If the Company elects to exercise its
conversion right pursuant to this Section 6(b), it shall provide the Holder with
written notice of such election at least five (5) but no more than ten (10)
Business Days prior to the date of such conversion (the "Conversion Notice")
together with evidence reasonably establishing that all conditions precedent to
such conversion have been satisfied.

                  (d)      Mechanics and Effect of Conversion. No fractional
shares of Common Stock shall be issued upon conversion of this Note. Upon the
conversion of all of the principal outstanding under this Note, in lieu of the
Company issuing any fractional shares to the Holder, the Company shall pay to
the Holder the amount of outstanding principal that is not so converted in cash.
On partial conversion of this Note, the Company shall issue to the Holder (i)
the shares of Common Stock into which a portion of this Note is converted and
(ii) a new senior secured convertible promissory note having identical terms to
this Note, except that the principal amount thereof shall equal the difference
between (A) the principal amount of this Note immediately prior to such
conversion minus (B) the portion of such principal amount converted into Common
Stock. Upon conversion of this Note pursuant to this Section 6, the Holder shall
surrender this Note, duly endorsed, at the principal office of the Company. At
its expense, the Company shall, as soon as practicable thereafter, issue and
deliver to such Holder at such principal office a certificate or certificates
for the number of shares of Common Stock, to which the Holder shall be entitled
upon such conversion (bearing such legends as are required by the Purchase
Agreement and applicable state and federal securities laws in the opinion of
counsel to the Company), together with any other securities and property to
which the Holder is entitled upon such conversion under the terms of this Note.
Upon full conversion of this Note, the Company shall be forever released from
all its obligations and liabilities under this Note.

                  (e)      Reservation of Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of capital stock, solely for the purpose of effecting the
conversion of this Note, such number of its shares of capital stock of the
Company as shall from time to time be sufficient to effect the conversion of
this Note; and if at any time the number of authorized but unissued shares of
capital stock of the Company shall not be sufficient to effect the conversion of
this Note, the Company hereby covenants and agrees to take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of capital stock to such number of shares as shall be
sufficient for such purpose.

                  (f)      Payment of Expenses and Taxes on Conversion. The
Company shall pay all expenses, taxes and other charges payable in connection
with the preparation, execution, issuance and delivery of stock certificates and
new promissory notes pursuant to this Section 6 hereof, except that, in the
event such stock certificates or new promissory notes shall be registered in a
name or names other than the name of the

                                       6




holder of this Note, funds sufficient to pay all stock transfer fees, which
shall be payable upon the execution and delivery of such stock certificate or
certificates or new promissory notes, shall be paid by the holder hereof to the
Company at the time of delivering this Note to the Company upon conversion.

         7.       Conversion Price Adjustments.

                  (a)      Adjustment for Stock Splits and Combinations. If the
Company shall at any time or from time to time after June 13, 2003 effect a
stock split or subdivision of the outstanding Common Stock, the Conversion Price
in effect immediately before that subdivision shall be proportionately
decreased, and, conversely, if the Company shall at any time or from time to
time after June 13, 2003 combine the outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
Section 7(a) shall become effective at the close of business on the date the
stock split, subdivision or combination becomes effective.

                  (b)      Adjustment for Common Stock Dividends and
Distributions. If the Company at any time or from time to time after June 13,
2003 issues, or fixes a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution payable solely in
additional shares of Common Stock, the Conversion Price that is then in effect
shall be decreased as of the time of such issuance or, in the event such record
date is fixed, as of the close of business on such record date, by multiplying
the Conversion Price by a fraction (i) the numerator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date, and (ii) the
denominator of which is the sum of the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of Common Stock
issuable in payment of such dividend or distribution; provided, however, that if
such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Conversion Price
shall be recomputed accordingly as of the close of business on such record date
and thereafter the Conversion Price shall be adjusted pursuant to this Section
7(b) to reflect the actual payment of such dividend or distribution.

                  (c)      Adjustments for Other Dividends and Distributions. If
the Company at any time or from time to time after June 13, 2003 issues, or
fixes a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock or in other property, in each such event
provision shall be made so that the Holder of this Note shall receive upon
conversion hereof, in addition to the number of shares of Common Stock
receivable hereupon, the amount of securities of the Company or other property
which such Holder would have received had this Note been converted into Common
Stock on the date of such event and had it thereafter, during the period from
the date of such event to and including the conversion date, retained such
securities or other property receivable by it as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section 7 with respect to the rights of the Holders

                                       7




of this Note or with respect to such other securities or other property by their
terms. As used herein, the term "other property" does not include cash.

                  (d)      Adjustment for Reclassification, Exchange and
Substitution. If at any time or from time to time after June 13, 2003, the
Common Stock issuable upon the conversion of this Note is changed into the same
or a different number of shares of any class or series of stock, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 7), then
in any such event the Holder shall have the right thereafter to convert this
Note into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the number of shares of Common Stock into which this Note could have
been converted immediately prior to such recapitalization, reclassification or
change, all subject to further adjustment as provided herein or with respect to
such other securities or property by the terms thereof.

                  (e)      Sale of Shares Below Conversion Price. Subject to
obtaining shareholder approval, if required, pursuant to subsection (iv) below:

                           (i)      If at any time or from time to time after
June 13, 2003, the Company issues or sells, or is deemed by the provisions of
clause (iii) of this Section 7(e) to have issued or sold, Additional Shares of
Common Stock (as hereinafter defined), other than a subdivision or combination
of shares of Common Stock or as a dividend or other distribution of Common Stock
as provided for elsewhere in this Section 7, for an Effective Price (as
hereinafter defined) less than the then effective Conversion Price, then and in
each such case the then existing Conversion Price shall be reduced as of the
close of business on the date of such issue or sale to a price equal to the
lowest such Effective Price.

                           (ii)     For the purpose of making any adjustment
required under this Section 7(e):

                                    (A) "Additional Shares of Common Stock"
means all shares of Common Stock issued by the Company, whether or not
subsequently reacquired or retired by the Company, or capital stock of the
Company issued upon the exercise or conversion of Convertible Securities
outstanding on June 13, 2003, other than shares of Common Stock issued or
issuable:

                                        (1)  to employees, officers or directors
of the Company, pursuant to stock purchase or stock option plans or other
arrangements that are approved by the Company's Board of Directors;

                                        (2)  pursuant to any rights, agreements,
options or warrants outstanding as of the date hereof and disclosed in writing
to the Holder; and stock issued pursuant to any such rights or agreements
granted after the date hereof;

                                       8




                                        (3)  in connection with any stock split,
stock dividend or recapitalization by the Company;

                                        (4)  upon conversion of any Company
Notes or the Company's Series B Preferred Stock or upon exercise or conversion
of the Purchaser's Warrants or the Warrants issued pursuant to the Purchase
Agreement;

                                        (5)  for consideration other than cash
pursuant to a merger, consolidation, strategic alliance, acquisition or similar
business combination approved by the Board of Directors;

                                        (6)  pursuant to any equipment leasing,
real property leasing or loan arrangement, or debt financing from a bank or
similar financial or lending institution approved by the Company's Board of
Directors, the principal purpose of which is not to raise equity capital; or

                                        (7)  by the Company in connection with
joint ventures, manufacturing, marketing or distribution arrangements or
technology transfer or development arrangements; provided that such strategic
transactions and the issuance of shares in connection therewith have been
approved by the Company's Board of Directors and the principal purpose thereof
is not to raise equity capital.

                                    (B) "Aggregate Consideration Received" by
the Company for any issue or sale of securities shall (1) to the extent it
consists of cash, be computed at the gross amount of cash received by the
Company before deduction of any underwriting or similar commissions,
compensation or concessions paid or allowed by the Company in connection with
such issue or sale and without deduction of any expenses payable by the Company,
(2) to the extent it consists of property other than cash, be computed at the
fair value of that property as determined in good faith by the Board of
Directors of the Company, and (3) if Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration which covers both,
be computed as the portion of the consideration so received that may be
reasonably determined in good faith by the Board of Directors of the Company to
be allocable to such Additional Shares of Common Stock or Convertible
Securities.

                                    (C) "Convertible Securities" means stock
or other securities (including options, warrants and other rights) of the
Company ultimately convertible into shares of Common Stock.

                                    (D) "Effective Price" of Additional Shares
of Common Stock means the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold by the Company under this Section 7(e), into the Aggregate Consideration
Received, or deemed to have been received by the Company for such issue under
this Section 7(e), for such Additional Shares of Common Stock.

                                       9




                           (iii)    For the purpose of making any adjustment to
the Conversion Price required under this Section 7(e), if the Company issues or
sells any Convertible Securities and if the Effective Price of the shares of
Common Stock issuable upon conversion of the Convertible Securities is less than
the Conversion Price then in effect, the Company shall be deemed to have issued
at the time of the issuance of such Convertible Securities that number of
Additional Shares of Common Stock equal to the maximum number of shares of
Common Stock issuable upon conversion thereof and to have received as
consideration for the issuance of such shares an amount equal to the total
amount of the consideration, if any, received by the Company for the issuance of
such Convertible Securities, plus the minimum amounts of consideration, if any,
payable to the Company (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) upon the conversion thereof; provided
that:

                                    (A)      if the minimum amounts of such
consideration cannot be ascertained, but are a function of antidilution or
similar protective clauses, the Company shall be deemed to have received the
minimum amounts of consideration without reference to such clauses;

                                    (B)      if the minimum amount of
consideration payable to the Company upon the conversion of Convertible
Securities is reduced over time or on the occurrence or non-occurrence of
specified events other than by reason of antidilution adjustments, the Effective
Price shall be recalculated using the figure to which such minimum amount of
consideration is reduced;

                                    (C)      if the minimum amount of
consideration payable to the Company upon the conversion of Convertible
Securities is subsequently increased, the Effective Price shall be again
recalculated using the increased minimum amount of consideration payable to the
Company upon the conversion of Convertible Securities; and

                                    (D)      no further adjustment of the
Conversion Price, adjusted or subject to adjustment upon the issuance of such
Convertible Securities, shall be made as a result of the actual issuance of
shares of Common Stock on the conversion of any such Convertible Securities. If
the conversion privilege represented by any such Convertible Securities shall
expire without having been exercised, the Conversion Price adjusted upon the
issuance of such Convertible Securities shall be readjusted to the Conversion
Price which would have been in effect had an adjustment been made on the basis
that the only shares of Common Stock so issued were the shares of Common Stock,
if any, actually issued or sold on the exercise of such rights of conversion of
such Convertible Securities, and such shares of Common Stock, if any, were
issued or sold for the consideration received for issuing or selling the
Convertible Securities actually converted, plus the consideration, if any,
actually received by the Company (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) on the conversion of such
Convertible Securities, provided that such readjustment shall not apply to prior
conversions of this Note.

                           (iv)     Notwithstanding anything to the contrary in
this Note, unless and until the Company obtains shareholder approval, interest
shall not be paid in

                                       10




kind and no adjustment will be made under Subsection 7(e)(i) of this Note if
such adjustment would cause the maximum number of shares of Common Stock
issuable pursuant to this Note, any other Company Note, the Purchaser Warrants
and the warrants issued pursuant to the Purchase Agreement (collectively the
"Convertible Securities"), to exceed the maximum number of shares of Common
Stock that the Company is permitted to issue, without such shareholder approval,
pursuant to and in compliance with the American Stock Exchange Listing
Standards, Policies and Requirements, or any successor provisions so long as the
Common Stock is listed on such Exchange or a successor exchange.

                  (f)      Certificate of Adjustment. In each case of an
adjustment or readjustment of the Conversion Price for the number of shares of
Common Stock or other securities issuable upon conversion of this Note, the
Company, at its own expense, shall cause its Treasurer to compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to the Holder at the Holder's
address as shown in the Company's books. The certificate shall set forth such
adjustment or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based. No adjustment in the Conversion Price shall
be required to be made unless it would result in an increase or decrease of at
least one cent, but any adjustments not made because of this sentence shall be
carried forward and taken into account in any subsequent adjustment otherwise
required hereunder.

                  (g)      Notices of Record Date. Upon (i) the establishment by
the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or (ii) any capital reorganization of the
Company, any reclassification or recapitalization of the capital stock of the
Company, any merger or consolidation of the Company with or into any other
Company, or any transfer of all or substantially all the assets of the Company
to any other person or any voluntary or involuntary dissolution, liquidation or
winding up of the Company, the Company shall mail to the Holder at least 20 days
prior to the record date specified therein a notice specifying (A) the date on
which any such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (B) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and (C) the date, if any, that is to be fixed as to when the holders of record
of Common Stock (or other securities), shall be entitled to exchange their
shares of Common Stock (or other securities), for securities or other property
deliverable upon such reorganization, reclassification transfer, consolidation,
merger, dissolution, liquidation or winding up.

                  (h)      No Impairment. The Company shall not amend its
Articles of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or

                                       11




appropriate in order to protect the conversion rights of the Holders of this
Note against dilution or other impairment as provided herein.

         8.       Successors and Assigns. Subject to the restrictions on
transfer described in Sections 10 and 11 hereof, the rights and obligations of
the Company and the Holder of this Note shall be binding upon and benefit the
successors, assigns, heirs, administrators and transferees of the parties.

         9.       Waiver and Amendment. Any provision of this Note may be
amended, waived or modified upon the written consent of the Company and the
Holder.

         10.      Transfer of this Note or Securities Issuable on Conversion
Hereof. This Note may not be transferred in violation of any restrictive legend
set forth hereon. Each new Note issued upon transfer of this Note or securities
issuable on conversion of this Note shall bear a legend as to the applicable
restrictions on transferability in order to ensure compliance with the
Securities Act, unless in the opinion of counsel for the Company such legend is
not required in order to ensure compliance with the Securities Act. The Company
may issue stop transfer instructions to its transfer agent in connection with
such restrictions. Subject to the foregoing, transfers of this Note shall be
registered upon registration books maintained for such purpose by or on behalf
of the Company. Prior to presentation of this Note for registration of transfer,
the Company shall treat the registered holder hereof as the owner and holder of
this Note for the purpose of receiving all payments of principal and interest
hereon and for all other purposes whatsoever, whether or not this Note shall be
overdue and the Company shall not be affected by notice to the contrary.

         11.      Assignment by the Company. Neither this Note nor any of the
rights, interests or obligations hereunder may be assigned, by operation of law
or otherwise, in whole or in part, by the Company, without the prior written
consent of the Holder.

         12.      Treatment of Note. To the extent permitted by generally
accepted accounting principles, the Company will treat, account and report the
Note as debt and not equity for accounting purposes and with respect to any
returns filed with federal, state or local tax authorities.

         13.      Notices. Any notice, request or other communication required
or permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier, personal delivery or facsimile
transmission at the respective addresses or facsimile number of the parties as
set forth in or otherwise designated by either party pursuant to the Purchase
Agreement or on the register maintained by the Company. Any party hereto may by
notice so given change its address or facsimile number for future notice
hereunder. Notice shall conclusively be deemed to have been given when received.

                                       12




         14.      Expenses; Waivers. If action is instituted to collect this
Note, the Company promises to pay all costs and expenses, including, without
limitation, reasonable attorneys' fees and costs, incurred in connection with
such action. The Company hereby waives notice of default, presentment or demand
for payment, protest or notice of nonpayment or dishonor and all other notices
or demands relative to this instrument.

         15.      Governing Law; Exclusive Jurisdiction; Jury Waiver. This Note
and all actions arising out of or in connection with this Note shall be governed
by and construed in accordance with the laws of the State of New York. IN THE
EVENT OF ANY DISPUTE AMONG OR BETWEEN ANY OF THE PARTIES TO THIS NOTE ARISING
OUT OF THE TERMS OF THIS NOTE, THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE
JURISDICTION OF THE COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK,
OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR
RESOLUTION OF SUCH DISPUTE, AND AGREE NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION
OR SEEK TO TRANSFER ANY ACTION RELATING TO SUCH DISPUTE TO ANY OTHER
JURISDICTION. THE COMPANY AND THE HOLDER AGREE TO ACCEPT SERVICE OF PROCESS
PURSUANT TO THE PROCEDURES SET FORTH IN SECTION 13. The parties hereto waive all
right to trial by jury in any action or proceeding to enforce or defend any
rights under this NOTE.

                      [signature appears on following page]

                                       13




         IN WITNESS WHEREOF, the Company has caused this Note to be amended and
restated as of the date first written above.

                                      IMAGEWARE SYSTEMS, INC.

                                      By:__________________________
                                           Name:  S. James Miller, Jr.
                                           Title: Chairman, CEO and President

                                       14

EX-3

                                                                       EXHIBIT 3

THE SECURITIES EVIDENCED BY THIS WARRANT CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT
BE SOLD, TRANSFERRED, OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF SUCH SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.

No.:

                                     WARRANT
                            TO PURCHASE COMMON STOCK
                                       OF
                             IMAGEWARE SYSTEMS, INC.

                           (void after June 13, 2009)

         1.       Issuance of Warrant. FOR VALUE RECEIVED, on and after the date
of issuance of this Warrant, and subject to the terms and conditions herein set
forth, the Holder (as defined below) is entitled to purchase from ImageWare
Systems, Inc., a California corporation (the "Company"), at any time before 5:00
p.m. New York time on June 13, 2009 (the "Termination Date"), at a price per
share equal to the Warrant Price (as defined below and subject to adjustment as
described below), the Warrant Stock (as defined below and subject to adjustment
as described below) upon exercise of this warrant (this "Warrant") pursuant to
Section 6 hereof.

         2.       Definitions. As used in this Warrant, the following terms have
the definitions ascribed to them below:

                  (a)      "Business Day" means any day other than a Saturday,
Sunday or other day on which the national or state banks located in the State of
New York or the State of California or the District of Columbia are authorized
to be closed.

                  (b)      "Common Stock" means the common stock, par value
$0.01 per share, of the Company.

                  (c)      "Holder" means ______________________, or its
assigns.

                  (d)      "Purchase Agreement" means the Note and Warrant
Purchase Agreement dated as of May 22, 2002 by and between the Company and
Perseus 2000,L.L.C., as amended.



                  (e)      "Company Notes" means all Notes issued to L.F. Global
Holdings, LLC ("LF"), and Laurus Master Fund, Ltd. ("Laurus"), pursuant to the
Consent to Assignment and Amendment Agreement by and among LF, Laurus and the
Company dated June 13, 2003 (the "Consent Agreement").

                  (f)      "Warrant Price" means $2.11 per share, subject to
adjustment as described in Section 3 below.

                  (g)      "Warrant Stock" means the shares of Common Stock (or
other securities) purchasable upon exercise of this Warrant or issuable upon
conversion of this Warrant. The total number of shares to be issued upon the
exercise of this Warrant shall be _______, subject to adjustment as described in
Section 3 below.

         3.       Adjustments and Notices. The Warrant Price and the number of
shares of Warrant Stock shall be subject to adjustment from time to time in
accordance with this Section 3.

                  (a)      Subdivision, Stock Dividends or Combinations. In case
the Company shall at any time subdivide the outstanding shares of Common Stock
or shall issue a stock dividend with respect to the Common Stock, the Warrant
Price in effect immediately prior to such subdivision or the issuance of such
dividend shall be proportionately decreased, and in case the Company shall at
any time combine the outstanding shares of the Common Stock, the Warrant Price
in effect immediately prior to such combination shall be proportionately
increased, in each case effective at the close of business on the date of such
subdivision, dividend or combination, as the case may be.

                  (b)      Reclassification, Exchange, Substitution, In-Kind
Distribution. Upon any reclassifications, exchange, substitution or other event
that results in a change of the number and/or class of the securities issuable
upon exercise or conversion of this Warrant or upon the payment of a dividend in
securities or property other than shares of Common Stock, the Holder shall be
entitled to receive, upon exercise or conversion of this Warrant, the number and
kind of securities and property that the Holder would have received if this
Warrant had been exercised or converted immediately before the record date for
such reclassification, exchange, substitution, or other event or immediately
prior to the record date for such dividend. The Company or its successor shall
promptly issue to the Holder a new warrant for such new securities or other
property. The new warrant shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
3 including, without limitation, adjustments to the Warrant Price and to the
number of securities or property issuable upon exercise or conversion of the new
warrant. The provisions of this Section 3(b) shall similarly apply to successive
reclassifications, exchanges, substitutions, or other events and successive
dividends. As used in this Section 3(b), the term "property" shall not include
cash.

                  (c)      Reorganization, Merger etc. In case of any (i) merger
or consolidation of the Company into or with another corporation where the
Company is not the surviving corporation, (ii) sale, transfer or lease (but not
including a transfer or lease by pledge or mortgage to a bona fide lender) of
all or substantially all of the assets of the Company or (iii) sale by the
Company's shareholders of 50% or more of the Company's outstanding securities in
one or more related transactions, the Company, or such successor or purchasing

                                       2



corporation, as the case may be, shall, as a condition to closing any such
reorganization, merger or sale, duly execute and deliver to the Holder hereof a
new warrant so that the Holder shall have the right to receive, at a total
purchase price not to exceed that payable upon the exercise or conversion of the
unexercised or unconverted portion of this Warrant, and in lieu of the shares of
the Common Stock theretofore issuable upon exercise or conversion of this
Warrant, the kind and amount of shares of stock, other securities, money and
property receivable upon such reorganization, merger or sale by the Holder of
the number of shares of Common Stock then purchasable under this Warrant. Such
new warrant shall provide for adjustments that shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 3. The
provisions of this subparagraph (c) shall similarly apply to successive
reorganizations, mergers and sales.

                  (d)      Dilutive Issuances. (i) Subject to obtaining
shareholder approval, if required, pursuant to subsection (vii) below, if the
Company, at any time or from time to time after the date hereof, shall issue any
Additional Stock (as defined below) without consideration or for an Effective
Price less than the Warrant Price in effect immediately prior to the issuance of
such Additional Stock, other than a subdivision or combination of shares of
Common Stock or as a dividend or other distribution of Common Stock as provided
for elsewhere in this Warrant, then and in each such case the then existing
Warrant Price shall be reduced as of the close of business on the date of such
issue or sale to a price equal to the lowest such Effective Price. "Effective
Price" of Additional Stock means the quotient determined by dividing the total
number of shares of Additional Stock issued or sold, or deemed to have been
issued or sold by the Company under this Section, into the aggregate
consideration received, or deemed to have been received by the Company for such
issue under this Section, for such Additional Stock.

                           (ii)     In the case of the issuance of Common Stock
for cash, the consideration received therefor shall be deemed to be the amount
of cash paid therefor before deducting any reasonable discounts, commissions or
other expenses allowed, paid or incurred by the company for any underwriting or
otherwise in connection with the issuance and sale thereof.

                           (iii)    In the case of the issuance of Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash received therefor shall be deemed to be the fair value thereof as
reasonably determined by the Board of Directors of the Company in its good faith
judgment irrespective of any accounting treatment.

                           (iv)     In the case of the issuance, whether before,
on or after the date hereof, of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities (which are not excluded from the definition of
Additional Stock), the following provisions shall apply:

                                    (A)      The aggregate maximum number of
shares of Common Stock deliverable upon exercise of such options to purchase or
rights to subscribe for Common Stock shall be deemed to have been issued at the
time such options or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in clauses (ii) or (iii)), if
any, received by the Company upon the issuance of such options or rights plus
the

                                       3



minimum purchase price provided in such options or rights (without taking into
account potential anti-dilution adjustments) for the Common Stock covered
thereby.

                                    (B)      The aggregate maximum number of
shares of Common Stock deliverable upon conversion of or in exchange for any
such convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration, if any, received by
the corporation for any such securities and related options or rights (excluding
any cash received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the Company upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in clauses (ii) or (iii)).

                                    (C)      In the event of any change in the
number of shares of Common Stock deliverable or any increase in the
consideration payable to the Company upon exercise of such options or rights or
upon conversion of or in exchange for such convertible or exchangeable
securities, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Warrant Price obtained with respect to the
adjustment that was made upon the issuance of such options, rights or
securities, and any subsequent adjustments based thereon, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.

                                    (D)      Upon the expiration of any such
options or rights, the termination of any such rights to convert or exchange or
the expiration of any options or rights related to such convertible or
exchangeable securities, the Warrant Price obtained with respect to the
adjustment which was made upon the issuance of such options, rights or
securities or options or rights related to such securities, and any subsequent
adjustments based thereon, shall be recomputed to reflect the issuance of only
the number of shares of Common Stock actually issued upon the exercise of such
options or rights, upon the conversion or exchange of such securities or upon
the exercise of the options or rights related to such securities. Upon the
expiration of any such options or rights, the termination of any such rights to
convert or exchange or the expiration of any options or rights related to such
convertible or exchangeable securities, only the number of shares of Common
Stock actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the options or
rights related to such securities shall continue to be deemed to be issued.

                                    (E)      The number of shares of Common
Stock deemed issued and the consideration deemed paid therefor pursuant to
clauses (iv)(A) and (iv)(B) of this Section 3(d) shall be appropriately adjusted
to reflect any change, termination or expiration of the type described in either
clause (iv)(C) or (iv)(D) of this Section 3(d).

                                       4



                           (v)      "Additional Stock" shall mean any shares of
Common Stock issued (or deemed to have been issued pursuant to clause (iv) of
this Section 3(d)) by the Company after the date hereof other than shares of
Common Stock issued or issuable:

                                    (A)      to employees, officers or directors
of the Company, pursuant to stock purchase or stock option plans or other
arrangements that are approved by the Company's Board of Directors;

                                    (B)      pursuant to any rights, agreements,
options or warrants outstanding as of the date hereof and disclosed in writing
to the Holder; and stock issued pursuant to any such rights or agreements
granted after the date hereof;

                                    (C)      in connection with any stock split,
stock dividend or recapitalization by the Company;

                                    (D)      upon conversion of any Company
Notes or the Company's Series B Preferred Stock or upon exercise or conversion
of the Purchaser's Warrants or the Warrants issued pursuant to the Purchase
Agreement;

                                    (E)      shares of Common Stock (and/or
options, warrants or other Common Stock purchase rights issued pursuant to such
options, warrants or other rights) issued for consideration other than cash
pursuant to a merger, consolidation, strategic alliance, acquisition or similar
business combination approved by the Board of Directors;

                                    (F)      pursuant to any equipment leasing,
real property leasing or loan arrangement, or debt financing from a bank or
similar financial or lending institution approved by the Company's Board of
Directors, the principal purpose of which is not to raise equity capital; or

                                    (G)      by the Company in connection with
joint ventures, manufacturing, marketing or distribution arrangements or
technology transfer or development arrangements; provided that such strategic
transactions and the issuance of shares in connection therewith have been
approved by the Company's Board of Directors and the principal purpose thereof
is not to raise equity capital.

                           (vi)     "Common Stock Equivalent Share" means with
respect to any security that is ultimately convertible into shares of Common
Stock or ultimately exercisable for shares of Common Stock, the total number of
shares of Common Stock that may be acquired upon full exercise of all such
rights.

                           (vii)    Notwithstanding anything to the contrary in
this Warrant, unless and until the Company obtains shareholder approval, no
adjustment will be made under Subsection (d)(i) above if such adjustment would
cause the maximum number of shares of Common Stock issuable pursuant to the
Company Notes, Purchaser's Warrants (as defined in Consent Agreement) and the
warrants issued pursuant to the Purchase Agreement (collectively the
"Convertible Securities"), to exceed the maximum number of shares of Common
Stock that

                                       5



the Company is permitted to issue, without such shareholder approval, pursuant
to and in compliance with the American Stock Exchange Listing Standards,
Policies and Requirements, or any successor provisions, so long as the Common
Stock is listed on such Exchange or a successor exchange.

                  (e)      Certificate of Adjustment. In each case of an
adjustment or readjustment of the Warrant Price, the Company, at its own
expense, shall cause its Chief Financial Officer to compute such adjustment or
readjustment in accordance with the provisions hereof and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to the Holder. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based. No adjustment of the Warrant Price
shall be required to be made unless it would result in an increase or decrease
of at least one cent, but any adjustments not made because of this sentence
shall be carried forward and taken into account in any subsequent adjustment
otherwise required hereunder.

                  (f)      Adjustment to Number of Shares of Warrant Stock. In
the event the Warrant Price is adjusted under any provision of this Section 3,
the number of shares of Warrant Stock shall be simultaneously adjusted by
multiplying the number of shares of Warrant Stock by a fraction, the numerator
of which is the Warrant Price in effect immediately prior to such adjustment and
the denominator of which is the Warrant Price in effect immediately after such
adjustment.

                  (g)      No Impairment. The Company shall not, by amendment of
its Articles of Incorporation or through a 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 to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out all of the provisions of
this Section 3 and in taking all such action as may be necessary or appropriate
to protect the Holder's rights under this Section 3 against impairment. If the
Company takes any action affecting the Common Stock or any other event occurs as
to which the provisions of this Section 3 are not strictly applicable or if
strictly applicable would not fairly protect the Holder's rights under this
Warrant, then the Board of Directors of the Company shall make an adjustment in
the number and/or class of shares available under this Warrant, the Warrant
Price, or the application of such provisions, so as to protect the Holder's
rights under this Warrant as aforesaid. The adjustment will be such as will give
the Holder upon exercise for the same aggregate Warrant Price the same number,
class and kind of securities the Holder would have owned had the Warrant been
exercised prior to the occurrence of event requiring adjustment and had the
Holder continued to hold such securities until after the occurrence of such
event.

                  (h)      Fractional Shares. No fractional shares shall be
issuable upon exercise or conversion of the Warrant and the number of shares to
be issued shall be rounded down to the nearest whole share. If a fractional
share interest arises upon any exercise or conversion of the Warrant, the
Company shall eliminate such fractional share interest by paying the Holder an
amount computed by multiplying the fractional interest by the fair market value
of a full share.

                                       6



         4.       No Shareholder Rights. This Warrant, by itself, as
distinguished from any shares purchased hereunder, shall not entitle its Holder
to any of the rights of a shareholder of the Company.

         5.       Reservation of Stock. On and after the date hereof, the
Company will reserve from its authorized and unissued Common Stock a sufficient
number of shares to provide for the issuance of Warrant Stock upon the exercise
or conversion of this Warrant. Issuance of this Warrant shall constitute full
authority to the Company's officers who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates for shares of
Warrant Stock issuable upon the exercise or conversion of this Warrant.

         6.       Exercise of Warrant. This Warrant may be exercised as a whole
or part by the Holder, at any time after the date hereof prior to the
termination of this Warrant, by the surrender of this Warrant, together with the
Notice of Exercise and Investment Representation Statement in the forms attached
hereto as Attachments 1 and 2, respectively, duly completed and executed at the
principal office of the Company, specifying the portion of the Warrant to be
exercised and accompanied by payment in full of the Warrant Price in cash or by
check with respect to the shares of Warrant Stock being purchased. This Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the date of its surrender for exercise as provided above, and the
person entitled to receive the shares of Warrant Stock issuable upon such
exercise shall be treated for all purposes as the holder of such shares of
record as of the close of business on such date. As promptly as practicable
after such date, the Company shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
full shares of Warrant Stock issuable upon such exercise. If this Warrant shall
be exercised for less than the total number of shares of Warrant Stock then
issuable upon exercise, promptly after surrender of this Warrant upon such
exercise, the Company will execute and deliver a new warrant, dated the date
hereof, evidencing the right of the Holder to the balance of this Warrant Stock
purchasable hereunder upon the same terms and conditions set forth herein.

         7.       Conversion. In lieu of exercising this Warrant or any portion
hereof, at any time the Holder hereof shall have the right to convert this
Warrant or any portion hereof into Warrant Stock by executing and delivering to
the Company at its principal office the written Notice of Conversion and
Investment Representation Statement in the forms attached hereto as Attachments
2 and 3, specifying the portion of the Warrant to be converted, and accompanied
by this Warrant. The number of shares of Warrant Stock to be issued to Holder
upon such conversion shall be computed using the following formula:

                                 X=(P)(Y)(A-B)/A

         where X =         the number of shares of Common Stock to be issued
                           to the Holder for the portion of the Warrant being
                           converted.

                           P =      the portion of the Warrant being converted
                                    expressed as a decimal fraction.

                           Y =      the total number of shares of Common Stock
                                    issuable upon exercise of the Warrant in
                                    full.

                                       7



                           A =      the fair market value of one share of
                                    Warrant Stock which means (i) the fair
                                    market value of the Warrant Stock as of the
                                    last Business Day immediately prior to the
                                    date the notice of conversion is received by
                                    the Company, as reported in the principal
                                    market for such securities or, if no such
                                    market exists, as determined in good faith
                                    by the Company's Board of Directors, or (ii)
                                    if this Warrant is being converted in
                                    conjunction with a public offering of stock
                                    the price to the public per share pursuant
                                    to the offering.

                           B =      the Warrant Price on the date of conversion.

Any portion of this Warrant that is converted shall be immediately canceled.
This Warrant or any portion hereof shall be deemed to have been converted
immediately prior to the close of business on the date of its surrender for
conversion as provided above, and the person entitled to receive the shares of
Warrant Stock issuable upon such conversion shall be treated for all purposes as
the holder of such shares of record as of the close of business on such date. As
promptly as practicable after such date, the Company shall issue and deliver to
the person or persons entitled to receive the same a certificate or certificates
for the number of full shares of Warrant Stock issuable upon such conversion. If
the Warrant shall be converted for less than the total number of shares of
Warrant Stock then issuable upon conversion, promptly after surrender of the
Warrant upon such conversion, the Company will execute and deliver a new
warrant, dated the date hereof, evidencing the right of the Holder to the
balance of the Warrant Stock purchasable hereunder upon the same terms and
conditions set forth herein. If this Warrant is converted, as a whole or in
part, after the occurrence of an event as to which Section 3(c) is applicable,
the Holder shall receive the consideration contemplated by Section 3(c) in lieu
of Common Stock of the Company.

         8.       Transfer of Warrant. This Warrant may be transferred or
assigned by the Holder hereof in whole or in part, provided that the transferor
provides, at the Company's request, an opinion of counsel satisfactory to the
Company that such transfer does not require registration under the Securities
Act and the securities laws applicable with respect to any other applicable
jurisdiction.

         9.       Termination. This Warrant shall terminate on 5:00 p.m. New
York time on the Termination Date.

         10.      Miscellaneous. This Warrant shall be governed by the laws of
the State of New York, as such laws are applied to contracts to be entered into
and performed entirely in New York by New York residents. In the event of any
dispute among the Holder and the Company arising out of the terms of this
Warrant, the parties hereby consent to the exclusive jurisdiction of the federal
and state courts located in the State of New York for resolution of such
dispute, and agree not to contest such exclusive jurisdiction or seek to
transfer any action relating to such dispute to any other jurisdiction. The
headings in this Warrant are for purposes of convenience and reference only, and
shall not be deemed to constitute a part hereof. Neither this Warrant nor any
term hereof may be changed or waived orally, but only by an instrument in
writing signed by the Company and the Holder of this Warrant. All notices and
other communications from the

                                       8



Company to the Holder of this Warrant shall be delivered personally or by
facsimile transmission or mailed by first class mail, postage prepaid, to the
address or facsimile number furnished to the Company in writing by the last
Holder of this Warrant who shall have furnished an address or facsimile number
to the Company in writing, and if mailed shall be deemed given three days after
deposit in the United States mail.

         ISSUED: June 13, 2003

                                       IMAGEWARE SYSTEMS, INC.

                                       By:__________________________________

                                       Name:  S. James Miller, Jr.

                                       Title: Chairman, CEO and President

                                       9



                                  ATTACHMENT 1

NOTICE OF EXERCISE

TO:      ___________________

         1.       The undersigned hereby elects to purchase _______________
shares of the Warrant Stock of ImageWare Systems, Inc. pursuant to the terms of
the attached Warrant, and tenders herewith payment of the purchase price in
full, together with all applicable transfer taxes, if any.

         2.       Please issue a certificate or certificates representing said
shares of Warrant Stock in the name of the undersigned or in such other name as
is specified below:

                         ________________________________
                                     (Name)

                         ________________________________
                                    (Address)

_______________________________________     ___________________________________
(Date)                                      (Name of Warrant Holder)

                                            By:________________________________

                                            Title:______________________________



                                  ATTACHMENT 2

                       INVESTMENT REPRESENTATION STATEMENT

                           Shares of the Common Stock
                     (as defined in the attached Warrant) of
                             ImageWare Systems, Inc.

         In connection with the purchase of the above-listed securities, the
undersigned hereby represents to ImageWare Systems, Inc. (the "Company") as
follows:

         (a)      The securities to be received upon the exercise of the Warrant
(the "Securities") will be acquired for investment for its own account, not as a
nominee or agent, and not with a view to the sale or distribution of any part
thereof, and the undersigned has no present intention of selling, granting
participation in or otherwise distributing the same, but subject, nevertheless,
to any requirement of law that the disposition of its property shall at all
times be within its control. By executing this statement, the undersigned
further represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer, or grant participations to such
person or to any third person, with respect to any Securities issuable upon
exercise of the Warrant.

         (b)      The undersigned understands that the Securities issuable upon
exercise of the Warrant at the time of issuance may not be registered under the
Securities Act of 1933, as amended (the "Securities Act"), and applicable state
securities laws, on the ground that the issuance of such securities is exempt
pursuant to Section 4(2) of the Securities Act and state law exemptions relating
to offers and sales not by means of a public offering, and that the Company's
reliance on such exemptions is predicated on the undersigned's representations
set forth herein.

         (c)      The undersigned agrees that in no event will it make a
disposition of any Securities acquired upon the exercise of the Warrant unless
and until (i) it shall have notified the Company of the proposed disposition and
shall have furnished the Company with a statement of the circumstances
surrounding the proposed disposition, and (ii) it shall have furnished the
Company with an opinion of counsel satisfactory to the Company and Company's
counsel to the effect that (A) appropriate action necessary for compliance with
the Securities Act and any applicable state securities laws has been taken or an
exemption from the registration requirements of the Securities Act and such laws
is available, and (B) the proposed transfer will not violate any of said laws.

         (d)      The undersigned acknowledges that an investment in the Company
is highly speculative and represents that it is able to fend for itself in the
transactions contemplated by this statement, has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of its investments, and has the ability to bear the economic risks
(including the risk of a total loss) of its investment. The undersigned
represents that it has had the opportunity to ask questions of the Company
concerning the Company's business and assets and to obtain any additional
information which it considered necessary to verify the accuracy of or to
amplify the Company's disclosures, and has had all questions which have been



asked by it satisfactorily answered by the Company. The undersigned represents
that it is an "accredited investor" within the meaning of Regulation D of the
Securities Act.

         (e)      The undersigned acknowledges that the Securities issuable upon
exercise or conversion of the Warrant must be held indefinitely unless
subsequently registered under the Securities Act or an exemption from such
registration is available. The undersigned is aware of the provisions of Rule
144 promulgated under the Securities Act which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, the existence of a public market for
the shares, the availability of certain current public information about the
Company, the resale occurring not less than one year after a party has purchased
and paid for the security to be sold from the Company or any affiliate of the
Company, the sale being through a "broker's transaction" or in transactions
directly with a "market maker" (as provided by Rule 144(f)) and the number of
shares being sold during any three month period not exceeding specified
limitations.

         Dated:________________________

                                           _____________________________________
                                           (Typed or Printed Name)

                                           By:__________________________________
                                                (Signature)
                                           _____________________________________
                                           (Title)

                                      - 2 -



                                  ATTACHMENT 3

NOTICE OF CONVERSION

TO:      _____________________

         1.       The undersigned hereby elects to acquire _______________
shares of the Warrant Stock of ImageWare Systems, Inc. pursuant to the terms of
the attached Warrant, by conversion of _________ percent (_____%) of the
Warrant.

         2.       Please issue a certificate or certificates representing said
shares of Warrant Stock in the name of the undersigned or in such other name as
is specified below:

                         ______________________________
                                     (Name)

                        _________________________________
                                    (Address)

____________________________________      ___________________________________
(Date)                                   (Name of Warrant Holder)

                                         By:_________________________________

                                         Title:______________________________
                                             (Title and signature of authorized
                                              person)

EX-4

                                                                       EXHIBIT 4

                          REGISTRATION RIGHTS AGREEMENT

         REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of May 22,
2002 by and between ImageWare Systems, Inc., a California corporation (the
"Company"), and Perseus 2000, L.L.C., a Delaware limited liability company (the
"Investor").

                                 R E C I T A L S

         A.       The Investor has made an investment in the Company by
acquiring senior secured convertible promissory notes of the Company (the
"Notes") convertible into shares of the Company's common stock (the "Common
Stock") and warrants to acquire shares of Common Stock (the "Warrants")
(collectively, the Notes and Warrants together, the "Securities").

         B.       In connection with such purchase of the Securities, and to
induce the Investor to consummate such purchase of the Securities, the Company
has agreed to enter into this Agreement and to grant to the Investor the rights
set forth herein.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, the Investor and the Company
(collectively, the Parties") agree as follows:

         1. Definitions. For purposes of this Statement:

                  "Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute.

                  "Holder" means (i) the Investor, (ii) the partners, members or
stockholders of the Investor collectively provided that such partners, members
or stockholders act through the Investor or its successor and (iii) any person
or entity to whom the Investor or any person or entity identified in clause (ii)
of this definition sells, transfers or assigns 25% or more of the Registrable
Securities issued pursuant to the Purchase Agreement, any Note or any Warrant,
other than in a sale pursuant to Rule 144 under the Securities Act or a
registration effected pursuant to this Agreement.

                  "Register," "registered," and "registration" refer to an
underwritten registration effected by preparing and filing with the Securities
and Exchange Commission (the "Commission") a registration statement or similar
document in compliance with the Securities Act, and the declaration or ordering
by the Commission of effectiveness of such registration statement or document.

                  "Registration Expenses" means all expenses in connection with
the Company's performance of or compliance with its obligations under this
Agreement, including, without limitation, all (i) registration, qualification
and filing fees; (ii) fees, costs and expenses of compliance with securities or
blue sky laws (including reasonable fees, expenses and disbursements of counsel
for the underwriters in connection with blue sky qualifications of the

Exhibit4.Registration Rights Agreement


Registrable Securities under the laws of such jurisdictions as the managing
underwriter or underwriters in a registration may designate, subject to the
limitation as set forth in subsection (h) of Section 5 hereof); (iii) printing
expenses; (iv) messenger, telephone and delivery expenses; (v) fees, expenses
and disbursements of counsel for the Company and of all independent certified
public accountants retained by the Company (including the expenses of any
special audit and "cold comfort" letters required by or incident to such
performance); (vi) Securities Act liability insurance if the Company so desires;
(vii) fees, expenses and disbursements of any other individuals or entities
retained by the Company in connection with the registration of the Registrable
Securities; (viii) fees, costs and expenses incurred in connection with the
listing of the Registrable Securities on each national securities exchange or
automated quotation system on which the Company has made application for the
listing of its Common Stock; and (ix) internal expenses of the Company
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties and expenses of any annual
audit). Registration Expenses shall not include selling commissions, discounts
or other compensation paid to underwriters or other agents or brokers to effect
the sale of Registrable Securities, or counsel fees and any other expenses
incurred by Holders in connection with any registration that are not specified
in the immediately preceding sentence.

                  "Registrable Securities" means any shares of Common Stock of
the Company owned by any Holder or that may be acquired by any Holder upon the
conversion of any convertible security or the exercise of any warrant, option or
other right owned by any Holder, but only to the extent such shares constitute
"restricted securities" under Rule 144 under the Securities Act.

                  "Requestor" means the Holder or Holders requesting the
registration in question. Actions taken by the Requestor shall be taken by those
Holders making such request who hold a majority of the Registrable Securities
held by such Holders.

                  "Securities Act" means the Securities Act of 1933, as amended,
or any successor statute.

         2. Demand Registrations.

                  (a)      Request for Registration. If at any time after the
date hereof one or more Holders who in the aggregate hold at least 25% of the
Registrable Securities submits a written request (a "Demand Notice") to the
Company that the Company register Registrable Securities under and in accordance
with the Securities Act (a "Demand Registration"), then the Company shall:

                           (i)      within five days after receipt of such
Demand Notice, give written notice of the proposed registration to all other
Holders; and

                           (ii)     as soon as practicable, use diligent efforts
to effect such registration as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holders joining in such request as are

                                      - 2 -



specified in written requests received by the Company within 20 days after the
date the Company mails the written notice referred to in clause (i) above.

                  Notwithstanding the foregoing, if the Company shall furnish to
the Holders a certificate signed by the president of the Company stating that in
the good faith judgment of the board of directors of the Company, it would be
seriously detrimental to the Company or its stockholders for a registration
statement to be filed on or before the date filing would be required in
connection with any Demand Registration and it is therefore essential to defer
the filing of such registration statement, the Company shall have the right to
defer such filing or delay its effectiveness for a reasonable period not to
exceed 90 days provided that such right shall not be exercised more than once
with respect to a request for registration hereunder during any period of twelve
consecutive months. The Company will pay all Registration Expenses in connection
with such withdrawn request for registration.

                  Notwithstanding the foregoing, the Company shall not be
required to effect any registration (i) requested within less than 120 days
after the filing of another registration filed by the Company in which all of
the Registrable Securities requested to be included in such registration by
participating Holders were so included; or, (ii)(A) if Perseus has not exercised
the Perseus Option in full, after the Company has filed and effected one
registration pursuant to this Section 2 in which all of the Registrable
Securities requested to be included in such registration by participating
Holders were so included and such registration has been declared or ordered
effective; (B) if Perseus has exercised the Perseus Option in full, after the
Company has filed and effected two registrations pursuant to this Section 2 in
which all of the Registrable Securities requested to be included in each such
registration by participating Holders were so included and each such
registration has been declared or ordered effective; or (C) if Perseus has
exercised the Perseus Option in part but less than in full, after the Company
has filed and effected two registrations pursuant to this Section 2 in which all
of the Registrable Securities requested to be included in each such registration
by participating Holders were so included and each such registration has been
declared or ordered effective; provided, however, that in the case of the second
registration filed and effected pursuant to this subclause (C), the Company
shall be required to register only those Registrable Securities acquired
pursuant to such partial exercise of the Perseus Option.

                  (b) Underwriting. In connection with any registration under
this Section 2, if the Requestors intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to Section 2(a). In
such event, the right of any Holder to include its Registrable Securities in
such registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. The Holders proposing to distribute
their securities through such underwriting shall enter into an underwriting
agreement with one or more underwriters selected by the Requestors having terms
and conditions customary for such agreements (which underwriter or underwriters
shall be reasonably acceptable to the Company). Notwithstanding any other
provision of this Section 2, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the number of Registrable
Securities to be included in such registration. The Company shall so advise all
Holders distributing Registrable Securities through such underwriting, and the
number of Registrable

                                      - 3 -



Securities that may be included in the registration and underwriting shall be
allocated in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities required to be included (determined without regard to any
requirement of a request to be included in such registration) in such
registration held by all Holders at the time of filing the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any Holder
to the nearest 100 shares.

                  (c) Shelf Registration. If at the time the Company registers
Registrable Securities under the Securities Act pursuant to this Section 2, the
sale or other disposition of such Registrable Securities by the Holders may be
made pursuant to a registration statement on Form S-3 (or any successor form
that permits the incorporation by reference of future filings by the Company
under the Exchange Act), and such registration statement, unless otherwise
directed by the Requestor, shall be filed as a "shelf" registration statement
pursuant to Rule 415 under the Securities Act (or any successor rule). Any such
shelf registration shall cover the disposition of all Registrable Securities in
one or more underwritten offerings, block transactions, broker transactions,
at-market transactions and in such other manner or manners as may be specified
by the Requestor. Except as provided in Section 5(b) hereof, the Company shall
use its reasonable best efforts to keep such "shelf" registration continuously
effective as long as the delivery of a prospectus is required under the
Securities Act in connection with the disposition of the Registrable Securities
registered thereby and in furtherance of such obligation, shall supplement or
amend such registration statement if, as and when required by the rules,
regulations and instructions applicable to the form used by the Company for such
registration or by the Securities Act or by any other rules and regulations
thereunder applicable to shelf registrations. Upon their receipt of a
certificate signed by the president of the Company in accordance with the
procedure set forth in the penultimate paragraph of Section 2(a) hereof, the
Holders will refrain from making any sales of Registrable Securities under the
shelf registration statement for a period of up to 90 days; provided that this
right to cause the Holders to refrain from making sales shall not be exercised
by the Company more than twice, or for an aggregate period of more than 90 days,
in any twelve-month period (counting as a permitted exercise any exercise by the
Company of its right to defer the filing or delay its effectiveness of a
registration statement under the penultimate paragraph of Section 2(a)).

         3. Company Registration.

                  (a)      Notice of Registration. If at any time or from time
to time, the Company shall determine to register any of its capital stock,
whether or not for its own account, other than a registration relating to
employee benefit plans or a registration effected on Form S-4, the Company
shall:

                           (i)      provide to each Holder written notice
thereof at least ten days prior to the filing of the registration statement by
the Company in connection with such registration; and

                           (ii)     include in such registration, and in any
underwriting involved therein, all those Registrable Securities specified in a
written request by each Holder received by the Company within five days after
the Company mails the written notice referred to above, subject to the
provisions of Section 3(b) below.

                                      - 4 -



                  (b)      Underwriting. The right of any Holder to registration
pursuant to this Section 3 shall be conditioned upon the participation by such
Holder in the underwriting arrangements specified by the Company in connection
with such registration and the inclusion of the Registrable Securities of such
Holder in such underwriting to the extent provided herein. All Holders proposing
to distribute their Registrable Securities through such underwriting shall
(together with the Company) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the Company
and take all other actions, and deliver such opinions and certifications, as may
be reasonably requested by such managing underwriter. Notwithstanding any other
provision of this Section 3, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the number of Registrable
Securities to be included in such registration. The Company shall so advise all
Holders distributing Registrable Securities through such underwriting, and there
shall be excluded from such registration and underwriting, to the extent
necessary to satisfy such limitation, first shares held by the Holders and,
thereafter, to the extent necessary, shares which the Company wishes to register
for its own account. As among the Holders as a group, the number of Registrable
Securities that may be included in the registration and underwriting shall be
allocated in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities required to be included (determined without regard to any
requirement of a request to be included in such registration) in such
registration held by all Holders at the time of filing the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any Holder
to the nearest 100 shares.

                  (c)      Right to Terminate Registration. The Company shall
have the right to terminate or withdraw any registration initiated by it under
this Section 3 whether or not any Holder has elected to include Registrable
Securities in such registration.

         4. Expense of Registration. All Registration Expenses incurred in
connection with the registration and other obligations of the Company pursuant
to Sections 2, 3 and 5 shall be borne by the Company, and all underwriting
discounts and selling commissions incurred in connection with any such
registrations shall be borne by the Holders of the securities so registered pro
rata on the basis of the number of shares so registered. The Company shall not,
however, be required to pay for expenses of any registration proceeding begun
pursuant to Sections 2, 3 or 5, the request of which has been subsequently
withdrawn by the Holders unless the withdrawal is based upon material adverse
information concerning the Company of which the Holders were not aware at the
time of such request.

         5. Registration Procedures. If and whenever the Company is required by
the provisions of this Agreement to effect the registration of Registrable
Securities, the Company shall:

                  (a) promptly prepare and file with the Commission a
registration statement with respect to such Registrable Securities on any form
that may be utilized by the Company and that shall permit the disposition of the
Registrable Securities in accordance with the intended method or methods of
disposition thereof, and use its reasonable diligent efforts to cause such
registration statement to become effective as promptly as practicable and remain
effective thereafter as provided herein, provided that prior to filing a
registration statement or prospectus or any amendments or supplements thereto,
including documents incorporated by reference after

                                      - 5 -



the initial filing of any registration statement, the Company will furnish to
each of the Investor whose Registrable Securities are covered by such
registration statement, their counsel and the underwriters copies of all such
documents proposed to be filed sufficiently in advance of filing to provide them
with a reasonable opportunity to review such documents and comment thereon;

                  (b) prepare and file with the Commission such amendments
(including post-effective amendments) and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to
keep such registration statement effective and current and to comply with the
provisions of the Securities Act with respect to the sale or other disposition
of all Registrable Securities covered by such registration statement, including
such amendments (including post-effective amendments) and supplements as may be
necessary to reflect the intended method of disposition by the prospective
seller or sellers of such Registrable Securities, provided that except in the
case of a shelf registration under Section 2(c) such registration statement need
not be kept effective and current for longer than 120 days subsequent to the
effective date of such registration statement;

                  (c) subject to receiving reasonable assurances of
confidentiality, for a reasonable period after the filing of such registration
statement, and throughout each period during which the Company is required to
keep a registration effective, make available for inspection by the selling
holders of Registrable Securities being offered, and any underwriters, and their
respective counsel, such financial and other information and books and records
of the Company, and cause the officers, directors, employees, counsel and
independent certified public accountants of the Company to respond to such
inquiries as shall be reasonably necessary, in the judgment of such counsel, to
conduct a reasonable investigation within the meaning of Section 11 of the
Securities Act;

                  (d) promptly notify the selling holders of Registrable
Securities and any underwriters and confirm such advice in writing, (i) when
such registration statement or the prospectus included therein or any prospectus
amendment or supplement or post-effective amendment has been filed, and, with
respect to such registration statement or any post-effective amendment, when the
same has become effective, (ii) of any comments by the Commission, by the
National Association of Securities Dealers Inc. ("NASD"), and by the blue sky or
securities commissioner or regulator of any state with respect thereto or any
request by any such entity for amendments or supplements to such registration
statement or prospectus or for additional information, (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of such
registration statement or the initiation or threatening of any proceedings for
that purpose, (iv) if at any time the representations and warranties of the
Company cease to be true and correct in all material respects, (v) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, or (vi) at any
time when a prospectus is required to be delivered under the Securities Act,
that such registration statement, prospectus, prospectus amendment or supplement
or post-effective amendment, or any document incorporated by reference in any of
the foregoing, contains an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading;

                                      - 6 -



                  (e) furnish to each selling holder of Registrable Securities
being offered, and any underwriters, prospectuses or amendments or supplements
thereto, in such quantities as they may reasonably request and as soon as
practicable, that update previous prospectuses or amendments or supplements
thereto;

                  (f) use reasonable diligent efforts to (i) register or qualify
the Registrable Securities to be included in a registration statement hereunder
under such other securities laws or blue sky laws of such jurisdictions within
the United States of America as any selling holder of such Registrable
Securities or any underwriter of the securities being sold shall reasonably
request, (ii) keep such registrations or qualifications in effect for so long as
the registration statement remains in effect and (iii) take any and all such
actions as may be reasonably necessary or advisable to enable such holder or
underwriter to consummate the disposition in such jurisdictions of such
Registrable Securities owned by such holder; provided, however, that the Company
shall not be required for any such purpose to (x) qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would not
otherwise be required to qualify but for the requirements of this Section 5(f),
(y) subject itself to taxation in any such jurisdiction or (z) consent to
general service of process in any such jurisdiction;

                  (g) cause all such Registrable Securities to be listed or
accepted for quotation on each securities exchange or automated quotation system
on which the Company's Common Stock then trades; and

                  (h) otherwise use reasonable diligent efforts to comply with
all applicable provisions of the Securities Act, and rules and regulations of
the Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering a period of at least
twelve months which shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder.

         6.       Indemnification. In the event any of the Registrable
Securities are included in a registration statement under this Agreement:

                  (a) to the extent permitted by law, the Company will indemnify
each Holder who participates in such registration, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, and each underwriter, if any, and
each person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement or prospectus, or any amendment or
supplement thereto, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company in connection
with any such registration, qualification or compliance (each, a "Violation"),
and the Company will reimburse each such Holder, each of its officers and
directors and partners and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, for any legal and
any other expenses reasonably

                                     - 7 -



incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any Violation which occurs in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder or underwriter and stated
to be specially for use therein, and provided further, that the indemnity
agreement described in this Section 6(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld.

                  (b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers and its legal counsel and independent accountants,
each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such underwriter
within the meaning of Section 15 of the Securities Act, and each other such
Holder, each of its officers and directors and each person controlling such
Holder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statement therein not misleading, and will reimburse the Company, such Holders,
such directors, officers, persons, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein.

                  (c) Each party entitled to indemnification under this Section
6 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought provided
that failure to give such prompt notice shall not relieve the Indemnifying Party
of its obligations hereunder unless it is materially prejudiced thereby, and
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld). Such Indemnified Party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall be that of such Indemnified Party unless
(i) the Indemnifying Party has agreed to pay such fees and expenses or (ii) the
Indemnifying Party shall have failed to assume the defense of such action or
proceeding and employ counsel reasonably satisfactory to such Indemnified Party
in any such action or proceeding or (iii) the named parties to any such action
or proceeding (including any impleaded parties) include both such Indemnified
Party and the Indemnifying Party and such Indemnified Party shall have been
advised by counsel that there may be one or more legal defenses available to
such Indemnified Party which are different from

                                     - 8 -



or additional to those available to the Indemnifying Party (in which case, if
such Indemnified Party notifies the Indemnifying Party in writing of an election
to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense of such action
or proceeding on behalf of such Indemnified Party, it being understood, however,
that the Indemnifying Party then shall have the right to employ separate counsel
at its own expense and to participate in the defense thereof, and shall not, in
connection with any one such action or proceeding or separate but substantially
similar or related actions or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys at any time for
all Indemnified Parties, which firm shall be designated in writing by a majority
of the Indemnified Parties who are eligible to select such counsel). No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. No
Indemnified Party may consent to entry of any judgment or enter into any
settlement without the prior written consent of the Indemnifying Party.

                  (d) If the indemnification provided for in this Section 6 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred to
herein, then the Indemnifying Party, in lieu of indemnifying the Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
with respect to such loss, liability, claim, damage or expenses in the
proportion that is appropriate to reflect the relative fault of the Indemnifying
Party and the Indemnified Party in connection with the statements or omissions
that resulted in such loss, liability, claim, damage, or expense, as well as any
other relevant equitable considerations. The relative fault of the Indemnifying
Party and the Indemnified Party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.

         7.       Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public without
registration, after such time as a public market exists for the Common Stock,
the Company shall use reasonably diligent efforts to:

                  (a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, beginning 90
days after the Company registers a class of securities under Section 12 of the
Exchange Act or completes a registered offering under the Securities Act;

                  (b) File with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and

                                     - 9 -



                  (c) Furnish to any Holder promptly upon request a written
statement as to its compliance with the reporting requirements of Rule 144 (at
any time after 90 days after the Company completes a registered offering under
the Securities Act), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), and a copy of the
most recent annual or quarterly report of the Company.

         8.       Termination of Registration Rights. No Holder shall be
entitled to exercise any right provided for in this Agreement after the earlier
of (a) five years after the date hereof and (b) the date all Registrable
Securities held by such Holder may be sold in a single three-month period under
Rule 144 under the Securities Act.

         9.       Information To Be Provided by the Holders. Each Holder whose
Registrable Securities are included in any registration pursuant to this
Agreement shall furnish the Company such information regarding such Holder and
the distribution proposed by such Holder as may be reasonably requested in
writing by the Company and as shall be required in connection with such
registration or the registration or qualification of such securities under any
applicable state securities law.

         10.      "Stand-Off" Agreement. Each Holder, if requested by the
managing underwriter of a registered public offering of securities by the
Company, shall agree not to sell or otherwise transfer or dispose of any
Registrable Securities or other securities of the Company then held by such
Holder for a specified period of time that is customary under the circumstances
(not to exceed 180 days) following the effective date of the registration
statement for such offering, provided that (a) no such agreement shall be
required unless the other principal stockholders of the Company enter into a
similar agreement covering the same period of time and (b) such agreement shall
contain terms customary for such agreements. The Company may impose stop
transfer instructions to enforce any required agreement of the Holders under
this Section 10.

         11.      Miscellaneous.

                  (a) Notices. All notices, requests and other communications
hereunder shall be in writing and shall be deemed to have been duly given at the
time of receipt if delivered by hand or by facsimile transmission or three days
after being mailed, registered or certified mail, return receipt requested, with
postage prepaid, to the address or facsimile number (as the case may be) listed
below the signature of each Party on such Party's signature page hereto if any
Party shall have designated a different address or facsimile number by notice to
the other Parties given as provided above, then to the last address or facsimile
number so designated.

                  (b) Severability. In the event one or more of the provisions
of this Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed and interpreted in such manner as to be effective and valid
under applicable law.

                  (c) Waiver or Modification. Any amendment or modification of
this Agreement shall be effective only if evidenced by a written instrument
executed by the Company and by Investor that hold a majority of the total
Registrable Securities.

                                     - 10 -



                  (d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
the principles of conflicts of laws thereof.

                  (e) Attorneys' Fees. In the event of any dispute involving the
terms hereof, the prevailing parties shall be entitled to collect legal fees and
expenses from the other party to the dispute.

                  (f) Further Assurances. Each Party agrees to act in accordance
herewith and not to take any action that is designed to avoid the intention
hereof.

                  (g) Successors and Assigns. This Agreement and the rights and
obligations of the Parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.

                  (h) Defined Terms. Certain defined terms used herein and not
otherwise defined herein shall have them meanings ascribed to such terms in the
Note and Warrant Purchase Agreement, dated as of May 22, 2002, by and between
the Company and the Investor (the "Purchase Agreement").

                  [Remainder of page intentionally left blank]

                     [signatures appear on following pages]

                                     - 11 -



                            [COMPANY SIGNATURE PAGE]

         IN WITNESS WHEREOF, the undersigned Party has executed this Agreement
as of the day and year first above written.

                                     IMAGEWARE SYSTEMS, INC.

                                     By:________________________________________

                                        Name: S. James Miller, Jr.

                                        Title:   Chairman, CEO and President

                                     ADDRESS FOR NOTICE:

                                     ImageWare Systems, Inc.
                                     10883 Thornmint Road
                                     San Diego, California 92127
                                     Attention: S. James Miller, Jr.,
                                                Chairman, CEO and President
                                     Facsimile: (858) 673-0291

                                     with a copy to:

                                     Cooley Godward LLP
                                     4401 Eastgate Mall
                                     San Diego, California 92121-1909
                                     Attention: M. Wainwright Fishburn, Jr..
                                     Facsimile: (858) 550-6420

                                     - 12 -



                            [INVESTOR SIGNATURE PAGE]

         IN WITNESS WHEREOF, the undersigned Investor has executed this
Agreement as of the day and year first above written.

                                     PERSEUS 2000, L.L.C.

                                     By:________________________________________

                                        Name:  Ray E. Newton III

                                        Title: Managing Director

                                     ADDRESS FOR NOTICE:

                                     Perseus 2000, L.L.C.
                                     2099 Pennsylvania Ave., N.W.
                                     Suite 900
                                     Washington, D.C. 20006-1813
                                     Attention:   Chip Newton, Managing Director
                                     Facsimile:   (202) 429-0588

                                     with a copy to:

                                     Arnold & Porter
                                     1600 Tysons Boulevard; Suite 900
                                     McLean, Virginia 22102-4865
                                     Attention: Robert B. Ott, Esq.
                                     Facsimile: (703) 720-7399

                                     - 13 -

EX-5

                                                                       EXHIBIT 5

                          PLEDGE AND SECURITY AGREEMENT

         THIS PLEDGE AND SECURITY AGREEMENT is entered into as of May 22, 2002
(as from time to time amended, modified, restated, supplemented and in effect,
this "Security Agreement"), by and between ImageWare Systems, Inc., a California
corporation ("Grantor"), in favor of Perseus 2000, L.L.C., a Delaware limited
liability company (the "Secured Party"), as agent for itself and the other
holders from time to time of the Notes (as defined below) (collectively, the
"Note Holders").

                                    RECITALS

         A.       Grantor and the Secured Party have entered into a Note and
Warrant Purchase Agreement dated as of May 22, 2002 (the "Purchase Agreement")
pursuant to which Grantor has issued to the Secured Party Senior Secured
Convertible Promissory Notes dated of even date herewith in the aggregate
principal amount of Two Million Dollars ($2,000,000) (together with any Senior
Secured Convertible Promissory Notes issued in payment of interest on any Note
and any Additional Notes issued at the Additional Closing, each, a "Note" and
collectively, the "Notes"). The purchase and sale of the Notes is governed by
the Purchase Agreement.

         B.       In order to induce the Secured Party to make the loan
evidenced by the Notes, and in consideration therefor, Grantor has agreed to
pledge, collaterally assign and grant to the Secured Party, as agent for itself
and any other future Note Holders, a perfected lien on and security interest in
all of Grantor's assets and properties (including, but not limited to, all
outstanding shares of capital stock of each subsidiary of Grantor, except as
otherwise provided herein), whether now or hereafter existing, owned or
acquired, all pursuant to the terms of this Security Agreement in order to
secure (i) the due and punctual payment of (A) any current or future principal
and interest (including, without limitation, interest accruing during the
pendency of any bankruptcy, insolvency, receivership or other similar
proceeding, regardless of whether allowed or allowable in such proceeding) on
the Notes, when and as due, whether at maturity, by acceleration, upon one or
more dates set for prepayment or otherwise, and (B) all other monetary
obligations, including but not limited to, fees, costs, expenses and
indemnities, whether primary, secondary, direct, contingent, fixed or otherwise
(including monetary obligations incurred during the pendency of any bankruptcy,
insolvency, receivership or other similar proceeding regardless of whether
allowed or allowable in such proceeding), of Grantor now or hereafter due under
the Notes or this Security Agreement, and (ii) the due and punctual performance
of all covenants, agreements, obligations and liabilities of Grantor now or
hereafter due under or pursuant to the Notes, the Purchase Agreement or this
Security Agreement (collectively, the "Obligations").

         C.       It is a condition precedent to the making of the loan
evidenced by the Notes that Grantor execute and deliver this Security Agreement.

         NOW, THEREFORE, for and in consideration of the covenants and
provisions set forth herein, and for other valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Grantor agrees as follows:

Exhibit5. Pledge and Security Agreement1



                                    ARTICLE 1

                                SECURITY INTEREST

         1.1      Grant of Security Interest. As security for the Obligations,
Grantor hereby collaterally assigns, pledges and grants a continuing and
unconditional security interest to the Secured Party, its successors and
assigns, in and to all of the following:

                  (a)      all equipment (including all "Equipment" as defined
in Section 9102(a)(33) of the Uniform Commercial Code as in effect from time to
time in the State of California (such code, together with any other successor or
applicable adoption of the Uniform Commercial Code in any applicable
jurisdiction, the "Code")) machinery, vehicles, fixtures, improvements,
supplies, office furniture, fixed assets, all as now owned or hereafter acquired
by Grantor or in which Grantor has or hereafter acquires any interest, and any
items substituted therefor as replacements and any additions or accessions
thereto;

                  (b)      all goods (including all "Goods" as defined in
Section 9102(a)(44) of the Code) and all inventory (including all "Inventory" as
defined in Section 9102(a)(48) of the Code) of Grantor, now owned or hereafter
acquired by Grantor or in which Grantor has or hereafter acquires any interest,
including but not limited to, raw materials, scrap inventory, work in process,
products, packaging materials, finished goods, all documents of title, chattel
paper and other instruments covering the same and all substitutions therefor and
additions thereto (all of the property described in this clause (b) being
hereinafter collectively referred to as "Inventory");

                  (c)      all present and future accounts in which Grantor has
or hereafter acquires any interest (including all "Accounts" as defined in
Section 9102(a)(2) of the Code), contract rights (including all rights to
receive payments and other rights under all equipment and other leasing
contracts) and rights to payment and rights or accounts receivable evidencing or
representing indebtedness due or to become due Grantor on account of goods sold
or leased or services rendered, claims, instruments and other general
intangibles (including tax refunds, royalties and all other rights to the
payment of money of every nature and description), including but not limited to,
any such right evidenced by chattel paper, and all liens, securities,
guaranties, remedies, security interests and privileges pertaining thereto (all
of the property described in this clause (c) being hereinafter collectively
referred to as "Accounts");

                  (d)      all investment property now owned or hereafter
acquired by Grantor (including all "Investment Property" as defined in Section
9102(a)(49) of the Code), including, without limitation, all securities
(certificated and uncertificated), securities accounts, securities entitlements,
commodity contracts and commodity accounts, excluding any of the foregoing also
excluded by the immediately following paragraph (e);

                  (e)      (i)      all of the shares of capital stock of
whatever class of the Issuers, now owned or hereafter acquired by Grantor,
together with in each case the

                                     - 2 -



certificates representing the same and 66 2/3% of the shares of capital stock of
whatever class of the Foreign Issuers, now owned or hereafter acquired by
Grantor, together with in each case the certificates representing the same
(collectively, the "Pledged Stock");

                           (ii)     all shares, securities, moneys or property
representing a dividend on, or a distribution or return of capital in respect of
any of the Pledged Stock, resulting from a split-up, revision, reclassification
or other like change of any of the Pledged Stock or otherwise received in
exchange for any of the Pledged Stock and all Equity Rights issued to the
holders of, or otherwise in respect of, any of the Pledged Stock; and

                           (iii)    without affecting the obligations of Grantor
under any provision prohibiting such action under any loan document, in the
event of any consolidation or merger in which any Issuer is not the surviving
corporation, all shares of each class of the capital stock of the successor
corporation (unless such successor corporation is Grantor itself) formed by or
resulting from such consolidation or merger (collectively, and together with the
property described in clauses (i) and (ii) above, the "Stock Collateral");

                  (f)      all general intangibles now owned or hereafter
acquired by Grantor or in which Grantor has or hereafter acquires any interest
(including all "General Intangibles" as defined in Section 9102(a)(42) of the
Code), including but not limited to, payment intangibles (including all "Payment
Intangibles" as defined in Section 9102(a)(61) of the Code), choses in action
and causes of action and all licenses and permits (to the extent the collateral
assignment of such licenses and permits is not prohibited by applicable law),
contract rights (including but not limited to all rights under all Material
Contracts (as defined in the Purchase Agreement) and all rights to receive
payments and other rights under all equipment and other leasing contracts,
instruments and documents owned or used by Grantor, and any goodwill relating
thereto);

                  (g)      all other property owned by Grantor or in which
Grantor has or hereafter acquires any interest, wherever located, and of
whatever kind or nature, tangible or intangible, including all Intellectual
Property;

                  (h)      all insurance policies of any kind maintained in
effect by Grantor, now existing or hereafter acquired, under which any of the
property referred to in clauses (a) through (f) above is insured, including but
not limited to, any proceeds payable to Grantor pursuant to such policies;

                  (i)      all moneys, cash collateral, chattel paper (including
all "Chattel Paper" as defined in Section 9102(a)(11) of the Code), checks,
notes, bills of exchange, documents of title, money orders, negotiable
instruments, commercial paper, and other securities, letters of credit
(including all "Letter-of-Credit Rights" as defined in Section 9102(a)(51) of
the Code), supporting obligations (including all "Supporting Obligations" as
defined in Section 9102(a)(77) of the Code), instruments (including all
"Instruments" as define in Section 9102(a)(47) of the Code), documents
(including all "Documents" as defined in Section 9102(a)(30) of the Code),
deposit accounts (including

                                     - 3 -



all "Deposit Accounts" as defined in Section 9102(a)(29) of the Code), deposits
and credits from time to time whether or not in the possession of or under the
control of the Secured Party; and

                  (j)      any consideration received when all or any part of
the property referred to in clauses (a) through (i) above is sold, transferred,
exchanged, leased, collected or otherwise disposed of, or any value received as
a consequence of possession thereof, including but not limited to, all products,
proceeds (including

all "Proceeds" as defined in Section 9102(a)(64) of the Code), cash, negotiable
instruments and other instruments for the payment of money, chattel paper,
security agreements or other documents, insurance proceeds or proceeds of other
proceeds now or hereafter owned by Grantor or in which Grantor has an interest.

         The property set forth in clauses (a) through (j) of the preceding
sentence, together with property of a similar nature which Grantor hereafter
owns or in which Grantor hereafter acquires any interest, is referred to herein
as the "Collateral."

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

         "Copyright Collateral" shall mean all Copyrights, whether now owned or
hereafter acquired by Grantor.

         "Copyrights" shall mean, collectively, (a) all copyrights, copyright
registrations and applications for copyright registrations, (b) all renewals and
extensions of all copyrights, copyright registrations and applications for
copyright registration and (c) all rights, now existing or hereafter coming into
existence, (i) to all income, royalties, damages and other payments (including
in respect of all past, present or future infringements) now or hereafter due or
payable under or with respect to any of the foregoing, (ii) to sue for all past,
present and future infringements with respect to any of the foregoing and (iii)
otherwise accruing under or pertaining to any of the foregoing throughout the
world.

         "Equity Rights" shall mean, with respect to any person, any outstanding
subscriptions, options, warrants, commitments, preemptive rights or agreements
of any kind (including any stockholders' or voting trust arrangements) for the
issuance, sale, registration or voting of, or outstanding securities convertible
into, any additional shares of capital stock of any class, or partnership or
other ownership interests of any type in, such person.

         "Foreign Issuers" shall mean, collectively, each subsidiary of Grantor
organized under the laws of any jurisdiction outside of the United States of
America, directly or indirectly, that is the issuer of any shares of capital
stock now owned or hereafter acquired by Grantor.

         "Issuers" shall mean, collectively, each subsidiary of Grantor
organized under the laws of any jurisdiction within the United States of
America, directly or indirectly, that is the issuer of any shares of capital
stock now owned or hereafter acquired by Grantor.

                                     - 4 -



         "Intellectual Property" shall mean all Copyright Collateral, all Patent
Collateral and all Trademark Collateral, together with (a) all inventions,
processes, production methods, proprietary information, know-how and trade
secrets; (b) all licenses or user or other agreements granted to Grantor with
respect to any of the foregoing, in each case whether now or hereafter owned or
used, including all licenses or other agreements with respect to the Copyright
Collateral, the Patent Collateral or the Trademark Collateral listed; (c) all
information, customer lists, identification of suppliers, data, plans,
blueprints, specifications, designs, drawings, recorded knowledge, surveys,
engineering reports, test reports, manuals, materials standards, processing
standards, performance standards, catalogs, computer and automatic machinery
software and programs; (d) all field repair data, sales data and other
information relating to sales or service of products now or hereafter
manufactured; (e) all accounting information and all media in which or on which
any information or knowledge or data or records may be recorded or stored and
all computer programs used for the compilation or printout of such information,
knowledge, records or data; (f) all governmental approvals now held or hereafter
obtained by Grantor in respect of any of the foregoing; and (g) all causes of
action, claims and warranties now owned or hereafter acquired by Grantor in
respect of any of the foregoing. It is understood that Intellectual Property
shall include all of the foregoing owned or acquired by Grantor on a worldwide
basis.

         "Patent Collateral" shall mean all Patents, whether now owned or
hereafter acquired by Grantor.

         "Patents" shall mean, collectively, (a) all patents and patent
applications, (b) all reissues, divisions, continuations, renewals, extensions
and continuations-in-part of all patents or patent applications and (c) all
rights, now existing or hereafter coming into existence, (i) to all income,
royalties, damages, and other payments (including in respect of all past,
present and future infringements) now or hereafter due or payable under or with
respect to any of the foregoing, (ii) to sue for all past, present and future
infringements with respect to any of the foregoing and (iii) otherwise accruing
under or pertaining to any of the foregoing throughout the world, including all
inventions and improvements described or discussed in all such patents and
patent applications.

         "Permitted Liens" shall mean (a) any and all liens or security
interests granted by Grantor or its subsidiaries existing on the date hereof and
described in Schedule C attached hereto; (b) liens for taxes, fees, assessments
or other governmental charges or levies, either not delinquent or being
contested in good faith by appropriate proceedings if adequate reserves with
respect to such liens are maintained on the books of Grantor in accordance with
GAAP; (c) liens (i) upon or in any equipment acquired or held by Grantor to
secure the purchase price or lease of such equipment or indebtedness incurred
solely for the purpose of financing the acquisition or lease of such equipment,
or (ii) existing on such equipment at the time of its acquisition; provided that
in each of (i) and (ii) above, (A) the lien is confined solely to the property
so acquired and improvements thereon, and the proceeds of such equipment and (B)
the principal amount of such indebtedness secured by any such lien shall at no
time exceed the fair market value of such equipment at the time it was acquired;
(d) liens arising from judgments, decrees or attachments to the extent and only
so long as such judgment, decree or

                                     - 5 -



attachment has not caused or resulted in an Event of Default; (e) leases,
subleases, licenses and sublicenses granted to others in the ordinary course of
Grantor's business not interfering in any material respect with the conduct of
the business of Grantor and not materially detracting from the value of the
Collateral; (f) easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar liens affecting real
property not interfering in any material respect with the ordinary conduct of
business of Grantor and not materially detracting from the value of the property
subject to such lien; (g) liens incurred or deposits made in the ordinary course
of Grantor's business in connection with worker's compensation, unemployment
insurance, social security and other like laws; (h) liens in favor of customs
and revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (i) carriers',
warehousemen's, materialmen's, mechanics', landlords', repairmen's, employees'
or other like liens arising in the ordinary course of business which are not
delinquent or which are being contested in good faith by appropriate
proceedings; and (j) liens arising solely by virtue of any statutory or common
law provision relating to banker's liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a creditor
depository institution.

         "Trademark Collateral" shall mean all Trademarks, whether now owned or
hereafter acquired by Grantor. Notwithstanding the foregoing, the Trademark
Collateral shall not include any Trademark which would be rendered invalid,
abandoned, void or unenforceable by reason of its being included as part of the
Trademark Collateral.

         "Trademarks" shall mean, collectively, (a) all trade names, trademarks
and service marks, logos, trademark and service mark registrations and
applications for trademark and service mark registrations, (b) all renewals and
extensions of any of the foregoing and (c) all rights, now existing or hereafter
coming into existence, (i) to all income, royalties, damages and other payments
(including in respect of all past, present and future infringements) now or
hereafter due or payable under or with respect to any of the foregoing, (ii) to
sue for all past, present and future infringements with respect to any of the
foregoing and (iii) otherwise accruing under or pertaining to any of the
foregoing throughout the world, together, in each case, with the product lines
and goodwill of the business connected with the use of, or otherwise symbolized
by, each such trade name, trademark and service mark.

         1.2      Perfection of Security Interests.

                  (a)      Grantor hereby authorizes the Secured Party to file a
financing statement or financing statements (the "Financing Statement")
describing the Collateral in any and all jurisdictions where, and with any and
all governmental authorities with whom, the Secured Party reasonably deems such
filing to be necessary or appropriate including, without limitation, the
jurisdiction of the debtor's location for purposes of the Code, the United
States Patent and Trademark Office and the United States Copyright Office.
Grantor will reimburse the Secured Party for any and all reasonable costs,
charges and expenses (including reasonable fees of counsel) incurred in
connection with such filings. For purposes of this Section 1.2(a), the Financing
Statements shall be deemed to include any amendment, modification, assignment,
continuation statement or

                                     - 6 -



other similar instrument consistent with the rights granted to the Secured Party
under this Security Agreement and the Purchase Agreement.

                  (b)      Grantor shall have possession of the Collateral,
except where as expressly otherwise provided in this Security Agreement or where
the Secured Party chooses to perfect its security interest by possession in
addition to the filing of a Financing Statement. Where Collateral is in the
possession of a third party, Grantor will join with the Secured Party in
notifying the third party of the Secured Party's security interest therein and
obtaining an acknowledgement from the third party that it is holding the
Collateral for the benefit of the Secured Party.

                  (c)      Grantor will cooperate with the Secured Party in
obtaining control (including "Control" as contemplated by Section 9312(b) of the
Code) with respect to Collateral consisting of deposit accounts, investment
property, letter of credit rights and electronic chattel paper.

                  (d)      Grantor will not create any chattel paper without a
legend on such chattel paper reasonably acceptable to the Secured Party
indicating that the Secured Party has a secured interest in such Chattel Paper.

                  (e)      Grantor shall, upon the Grantor's acquiring, or
otherwise becoming entitled to the benefits of, any Copyright (or copyrightable
material), Patent (or patentable invention), Trademark (or associated goodwill)
or other Intellectual Property or upon or prior to Grantor's filing, either
directly or through any agent, licensee or other designee, of any application
with any governmental authority for any Copyright, Patent, Trademark, or other
Intellectual Property, in each case after the date hereof, execute and deliver
such contracts, agreements and other instruments as the Secured Party may
reasonably request to evidence, validate, perfect and establish the priority of
the security interest granted by this Security Agreement in such and any related
Intellectual Property.

                  (f)      Grantor shall deliver and pledge to the Secured Party
any and all certificates representing the Pledged Stock, accompanied by undated
stock powers duly executed in blank.

                  (g)      Grantor shall upon the acquisition after the date
hereof by Grantor of any Stock Collateral, promptly either (x) transfer and
deliver to the Secured Party all such Stock Collateral (together with the
certificates representing such Stock Collateral securities duly endorsed in
blank or accompanied by undated stock powers duly executed in blank) or (y) take
such other action as the Secured Party shall deem reasonably necessary or
appropriate to perfect, and establish the priority of, the security interest
granted by this Security Agreement in such Stock Collateral.

         1.3      Intellectual Property. For the purpose of enabling and to the
extent necessary to enable the Secured Party to exercise its rights, remedies,
powers and privileges under Article 4 at such time or times as the Secured Party
shall be lawfully entitled to exercise such rights, remedies, powers and
privileges, and for no other purpose, Grantor hereby grants to the Secured
Party, to the extent assignable, an

                                     - 7 -



irrevocable, nonexclusive license (exercisable without payment of royalty or
other compensation to Grantor) to use, assign, license or sublicense any of the
Intellectual Property of Grantor, together with reasonable access to all media
in which any of the licensed items may be recorded or stored and to all computer
programs used for the compilation or printout of such items. Such license shall
terminate upon full and final payment, performance or other satisfaction of the
Obligations.

         1.4      Special Provisions Relating to Stock Collateral.

                  (a)      So long as no Event of Default shall have occurred
and be continuing, Grantor shall have the right to exercise all voting,
consensual and other powers of ownership pertaining to the Stock Collateral for
all purposes not inconsistent with the terms of any loan document; provided,
that Grantor agrees that it will not vote the Stock Collateral in any manner
that is inconsistent with the terms of any loan document.

                  (b)      So long as no Event of Default shall have occurred
and be continuing, Grantor shall be entitled to receive and retain any dividends
on the Stock Collateral paid in cash out of earned surplus.

                  (c)      If any Event of Default shall have occurred and be
continuing, and whether or not the Secured Party exercises any available right
to declare any Obligation due and payable or seeks or pursues any other right,
remedy, power or privilege available to it under applicable law, this Security
Agreement or any other loan document, all dividends and other distributions on
the Stock Collateral shall be paid directly to the Secured Party, subject to the
terms of this Security Agreement.

                                   ARTICLE 2
                         REPRESENTATIONS AND WARRANTIES

         2.1      Representations and Warranties. Grantor represents and
warrants as of the date hereof that:

                  (a)      Grantor has absolute, good and marketable title to
all the Collateral, wherever and whenever acquired, free and clear of any lien,
except for Permitted Liens, and Grantor has not filed, nor is there on record, a
financing statement under the Code (or similar statement or instrument of
registration under the law of any jurisdiction) covering any Collateral except
as permitted by the Purchase Agreement and except for Permitted Liens;

                  (b)      Schedule A hereto lists, as to Grantor, (i) Grantor's
chief executive office and other place(s) of business, (ii) Grantor's legal
organizational structure and its jurisdiction of incorporation, (iii) the
address where records relating to the Collateral are maintained, (iv) any other
location of any other equipment and goods (other than mobile goods) included in
the Collateral, (v) location of leased facilities and name of lessor/sublessor
and (vi) any fictitious names used by Grantor.

                                     - 8 -



                  (c)      Grantor has paid or will pay when due all taxes,
fees, assessments and other charges now or hereafter imposed upon the Collateral
except for any tax, fee, assessment or other charge the validity of which is
being contested in good faith by appropriate proceedings and so long as Grantor
has set aside on its books adequate reserves with respect thereto;

                  (d)      as a result of the execution and delivery of this
Security Agreement and upon the filing of any financing statements or other
documents necessary to assure, preserve and perfect the security interest
created hereby and to the extent a lien may be perfected by filing a financing
statement, the Secured Party shall have a valid, perfected, enforceable lien on,
and a continuing security interest in, the Collateral, enforceable and superior
as such as against creditors and purchasers (other than purchasers of Inventory
in the ordinary course of business) and as against any owner of real property
where any of the equipment or Inventory is located and as against any purchaser
of such real property and any present or future creditor obtaining a mortgage or
other lien on such real property, and such lien shall be superior and prior to
all other liens, subject, in each case, only to Permitted Liens to the extent
such Permitted Liens by statute have priority equal to or greater than such
security interest;

                  (e)      the amount that has been represented by Grantor to
the Secured Party as owing by all obligors (such obligors being hereinafter
referred to as the "Account Debtors") in the aggregate with respect to Accounts
has not materially deviated from the correct amount actually and unconditionally
owing at such time by such Account Debtors subject to set off, return and
similar rights arising in the ordinary course of business; all Accounts
represent bona fide transactions completed in accordance with the terms and
provisions contained in the invoices and other documents evidencing the same; as
of the date hereof, there are no material setoffs, counterclaims or disputes
existing or asserted with respect to Accounts subject to set off, return and
similar rights arising in the ordinary course of business, and Grantor has not
made any agreement with any Account Debtor for any material deduction therefrom
except set-off and claims arising in the ordinary course of business; to
Grantor's knowledge, all Account Debtors have the capacity to contract and are
solvent; to Grantor's knowledge the goods giving rise to Accounts are not
subject to any lien, claim or encumbrance except set-off and claims arising in
the ordinary course of business, except in favor of the Secured Party and except
for Permitted Liens and as permitted by the Purchase Agreement; and, except as
set forth herein, Grantor does not have knowledge of any fact or circumstances
which would impair the validity or collectability of Accounts;

                  (f)      except as disclosed on Schedule 2.1(f), none of the
Collateral is held by a third party in any location as assignee, trustee,
bailee, consignee or in any similar capacity; and

                  (g)      The Pledged Stock evidenced by the certificates
described in Section 1.1(e) hereof (i) is duly authorized, validly existing,
fully paid and nonassessable, and none of such Pledged Stock is subject to any
contractual restriction, or any restriction under the charter or by-laws of the
respective Issuer or Foreign Issuer of such Pledged Stock, upon the transfer of
such Pledged Stock (except for any such restriction contained

                                     - 9 -



in any loan document); and (ii) constitutes all of the issued and outstanding
shares of capital stock of any class of the Issuers, and approximately 66 2/3%
of the issued and outstanding shares of capital stock of any class of the
Foreign Issuers, beneficially owned by Grantor on the date hereof (whether or
not registered in the name of Grantor), and Schedule B correctly identifies, as
of the date hereof, the respective Issuers or Foreign Issuers of such Pledged
Stock and the respective class of the shares comprising such Pledged Stock and
the respective number (and registered owners of) of the shares evidenced by each
such certificate.

         2.2      Survival. All representations, warranties and agreements of
Grantor contained in this Security Agreement shall survive the execution,
delivery and performance of this Security Agreement until the termination of
this Security Agreement pursuant to Section 6.5 hereof.

                                    ARTICLE 3
                                    COVENANTS

         3.1      Covenants. Grantor hereby covenants and agrees with the
Secured Party that so long as this Security Agreement shall remain in effect or
any Obligations shall remain unpaid or unperformed:

                  (a)      Grantor shall promptly give written notice to the
Secured Party of any levy or attachment, execution or other process against any
of the Collateral;

                  (b)      at Grantor's own cost and expense, Grantor shall take
any and all actions reasonably necessary or desirable to defend the Collateral
against the claims and demands of all persons other than the Secured Party, and
to defend the security interest of the Secured Party in the Collateral and the
priority thereof against any lien of any nature, except in each case for
Permitted Liens;

                  (c)      Grantor shall keep all tangible Collateral properly
insured and in good order and repair (normal wear and tear excepted) and
immediately notify the Secured Party of any event causing any material loss,
damage or depreciation in value of the Collateral in the aggregate and of the
extent of such loss, damage or depreciation;

                  (d)      Grantor shall mark any Collateral that is chattel
paper with a legend showing the Secured Party's lien and security interest
therein;

                  (e)      Grantor shall:

                           (i)      furnish to the Secured Party from time to
time (but, unless an Event of Default shall have occurred and be continuing, no
more frequently than quarterly) statements and schedules further identifying and
describing the Copyright Collateral, the Patent Collateral and the Trademark
Collateral and such other reports in connection with the Copyright Collateral,
the Patent Collateral and the Trademark Collateral, as the Secured Party may
reasonably request, all in reasonable detail;

                                     - 10 -



                           (ii)     prior to filing, either directly or through
an agent, licensee or other designee, any application for any Copyright, Patent
or Trademark, furnish to the Secured Party prompt notice of such proposed
filing; and

                           (iii)    promptly give written notice to the Secured
Party of any other change in the intellectual property rights material to its
businesses.

                  (f)      Grantor shall:

                           (i)      (either itself or through licensees) for
each Trademark, (A) to the extent consistent with past practice and good
business judgment, continue to use such Trademark on each and every trademark
class of goods applicable to its current line as reflected in its current
catalogs, brochures and price lists in order to maintain such Trademark in full
force and effect free from any claim of abandonment for nonuse, (B) maintain as
in the past the quality of products and services offered under such Trademark,
(C) employ such Trademark with the appropriate notice of registration and (D)
not (and not permit any licensee or sublicensee to) do any act or knowingly omit
to do any act whereby any Trademark material to the conduct of its business may
become invalidated, except in each case as Grantor's business or products may
change over time as may be consistent with good business judgment;

                           (ii)     (either itself or through licensees) not do
any act or knowingly omit to do any act whereby any Patent material to the
conduct of its business may become abandoned or dedicated;

                           (iii)    notify the Secured Party immediately if it
knows or has reason to know that any Intellectual Property material to the
conduct of its business may become abandoned or dedicated, or of any adverse
determination or development (including the institution of, or any such
determination or development in, any proceeding before any governmental
authority) regarding Grantor's ownership of any Intellectual Property material
to its business, its right to copyright, patent or register the same (as the
case may be), or its right to keep, use and maintain the same;

                           (iv)     take all necessary steps that are consistent
with good business practices in any proceeding before any appropriate
governmental authority to maintain and pursue each application relating to any
Intellectual Property (and to obtain the relevant registrations) and to maintain
each registration material to the conduct of its business, including payment of
maintenance fees, filing of applications for renewal, affidavits of use,
affidavits of incontestability and opposition, interference and cancellation
proceedings;

                           (v)      in the event that any Intellectual Property
material to the conduct of its business is infringed, misappropriated or diluted
by a third party, Grantor shall notify the Secured Party within (10) days after
it learns of such event and shall, if consistent with good business practice,
promptly sue for infringement, misappropriation or dilution, seek temporary
restraints and preliminary injunctive relief to the extent practicable, seek to
recover any and all damages for such infringement, misappropriation

                                     - 11 -



or dilution and take such other actions as are appropriate under the
circumstances and in Grantor's good faith business judgment to protect such
Collateral;

                           (vi)     shall, through counsel selected by Grantor
and reasonably acceptable to the Secured Party, prosecute diligently any
application for any Intellectual Property pending as of the date of this
Security Agreement or thereafter made until the termination of this Security
Agreement, make application on uncopyrighted but copyrightable material,
unpatented but patentable inventions and unregistered but registrable Trademarks
and preserve and maintain all rights in applications for any Intellectual
Property; provided, however, that Grantor shall have no obligation to make any
such application if making such application would be unnecessary or imprudent in
the good faith business judgment of Grantor. Any expenses incurred in connection
with such an application shall be borne by Grantor. Grantor shall not abandon
any right to file a application for any Intellectual Property or any pending
application in the United States without the consent of the Secured Party, which
consent shall not be unreasonably withheld; and

                           (vii)    after the occurrence and through the
continuance of an Event of Default, the Secured Party shall have the right but
shall in no way be obligated to bring suit in its own name to enforce the
Copyrights, Patents and Trademarks and any license under such Intellectual
Property, in which event Grantor shall, at the request of the Secured Party , do
any and all lawful acts and execute and deliver any and all proper documents
required by the Secured party in aid of such enforcement action.

                  (g)      Grantor shall cause the Stock Collateral to
constitute at all times 100% of the total number of shares of each class of
capital stock of each Issuer and 66 2/3% of the total number of shares of each
class of capital stock of each Foreign Issuer then outstanding and shall not
permit any such Issuer or Foreign Issuer to issue any shares of capital stock
other than to Grantor. Grantor shall cause all such shares to be duly
authorized, validly issued, fully paid and nonassessable and to be free of any
contractual restriction or any restriction under the charter or bylaws of the
respective Issuer of such Stock Collateral, upon the transfer of such Stock
Collateral (except for any such restriction contained in any loan document).

                  (h)      Grantor shall not:

                           (i)      amend or terminate any material contract or
other document or instrument constituting part of the Collateral, except for
transactions in the ordinary course of business;

                           (ii)     voluntarily or involuntarily exchange,
lease, sell, transfer or otherwise dispose of any Collateral other than for fair
value in the ordinary course of business;

                           (iii)    make any compromise, settlement, discharge
or adjustment or grant any extension of time for payment with respect to any
Account or any lien,

                                     - 12 -



guaranty or remedy pertaining thereto, except for transactions in the ordinary
course of business;

                           (iv)     change its name or use any fictitious or
trade name, other than in accordance with Section 6.1 hereof;

                           (v)      change the location of its chief executive
office, other than in accordance with Section 6.1 hereof;

                           (vi)     permit any of the Collateral (other than
Collateral that constitutes goods that are mobile and that are of a type
normally used in more than one jurisdiction or otherwise in the ordinary course
of business (including, without limitation, sales and shipments of inventory in
the ordinary course of business)) to be removed from or located in any place not
identified as the location of such Collateral to the Secured Party, as the case
may be, except after written notice to and with written consent of the Secured
Party and compliance with such procedures as the Secured Party reasonably may
impose to prevent any interruptions or discontinuity in the security interest
granted pursuant to this Security Agreement; or

                           (vii)    voluntarily grant, incur or allow to exist
any lien or security interest on or in any of the Collateral which lien or
security interest shall be equal or superior in priority to the security
interests granted in this Security Agreement, except for Permitted Liens to the
extent such Permitted Liens by their express terms or applicable law have
priority equal or greater than the security interests granted pursuant to this
Security Agreement.

                                    ARTICLE 4
                                REMEDIAL MATTERS

         4.1      Event of Default. An "Event of Default" shall exist hereunder
(a) if an event of default shall occur under any of the Notes, (b) upon the
filing of a voluntary or involuntary petition for bankruptcy, insolvency,
receivership or similar event involving Grantor and, in the case of an
involuntary petition, an order for relief is not entered or such petition or
proceeding shall not be dismissed, discharged or stayed within ninety (90) days
of commencement, or (c) if Grantor shall breach in any material respect any
agreement contained herein or otherwise default in any material respect in the
observance or performance of any of the covenants, terms, conditions or
agreements on the part of Grantor contained in this Security Agreement and, with
respect to non-monetary covenants, terms, conditions or agreements, such non
observance or non performance continues for a period of thirty (30) days after
the earlier of (i) written notice from the Secured Party of such default or (ii)
actual knowledge of Grantor of such default.

         4.2      Powers of Attorney.

                  (a)      Grantor hereby irrevocably appoints the Secured Party
(and any officer or agent of the Secured Party) as its true and lawful
attorney-in-fact, with power of substitution for and in the name of the Secured
Party or otherwise, for the use and

                                     - 13 -



benefit of the Secured Party, effective upon the occurrence and during the
continuance of an Event of Default:

                           (i)      to receive, endorse the name of Grantor upon
and deliver any notes, acceptances, checks, drafts, money orders or other
evidences of payment that may come into the possession of the Secured Party with
respect to the Collateral;

                           (ii)     to cause Grantor's mail to be transferred to
the Secured Party's own offices and to receive and open all mail addressed to
Grantor for the purposes of removing any such notes, acceptances, checks,
drafts, money orders or other evidences of payment;

                           (iii)    to demand, collect and receive payment in
respect of the Collateral and to apply any such payments directly to the payment
of the Obligations in accordance with Section 4.5 hereof;

                           (iv)     to receive and give discharges and releases
of all or any of the Collateral;

                           (v)      to commence and prosecute any and all suits,
actions or proceedings at law or in equity in any court of competent
jurisdiction, to collect or otherwise realize on all or any part of the
Collateral or to enforce any rights in respect thereof;

                           (vi)     to sign the name of Grantor on any invoice
or bill of lading relating to any of the Collateral;

                           (vii)    to send verification of any Accounts to any
Account Debtor or customer;

                           (viii)   to notify any Account Debtor or other
obligor of Grantor with respect to any Collateral to make payment to the Secured
Party;

                           (ix)     to settle, compromise, compound, adjust or
defend any actions, suits or proceedings relating or pertaining to all or any of
the Collateral;

                           (x)      to take any action for purposes of carrying
out of the terms of this Security Agreement;

                           (xi)     to enforce all of Grantor's rights and
powers under and pursuant to any and all agreements with respect to the
Collateral; and

                           (xii)    generally, to sell, assign, transfer,
pledge, make any agreement with respect to or otherwise deal with all or any of
the Collateral, and to do all other acts and things necessary to carry out this
Security Agreement, as fully and completely as though the Secured Party were the
absolute owner of the Collateral for all purposes; provided, however, nothing
herein contained shall be construed as requiring or obligating the Secured Party
to make any commitment or to make any inquiry as to the

                                     - 14 -



nature or sufficiency of any payment received by the Secured Party, or to
present or file any claim or notice, or to take any action with respect to the
Collateral or any part thereof or the moneys due or to become due in respect
thereof or any property covered thereby; and, provided further, that Secured
Party shall in all cases act in material compliance with all applicable laws.

         It is understood and agreed that the power of attorney granted to the
Secured Party for the purposes set forth above in this Section 4.2 is coupled
with an interest and is irrevocable until the payment, performance or other
satisfaction of all of the Obligations, and each Grantor hereby ratifies all
actions taken by its attorney-in-fact by virtue hereof. The provisions of this
Section 4.2 shall in no event relieve Grantor of any of its obligations
hereunder or under any of the other Security Documents with respect to the
Collateral or any part thereof or impose any obligation on the Secured Party to
proceed in any particular manner with respect to the Collateral or any part
thereof, or in any way limit the exercise by the Secured Party of any other or
further right which it may have on the date of this Security Agreement or
hereafter, whether hereunder, under any of the other Security Documents, by law
or otherwise.

                  (b)      Beyond the duty of the Secured Party to exercise
reasonable care in the custody of any Collateral in its possession and to comply
with the Code, the Secured Party shall not, under any circumstance or in any
event whatsoever, have any liability for any part of the Collateral, nor shall
the Secured Party have any liability for any error or omission or delivery of
any kind incurred in the good faith settlement, collection or payment of any of
the Collateral or any monies received in payment therefor or for any damages
resulting therefrom, nor shall this Security Agreement impose upon the Secured
Party any obligation to perform any obligation with respect to the Collateral.
The costs of collection, notification and enforcement, including but not limited
to, reasonable attorneys' fees and reasonable out-of-pocket expenses, shall be
borne solely by Grantor whether the same are incurred by Grantor or the Secured
Party. Grantor agrees to indemnify, defend and hold the Secured Party harmless
from and against any and all other claims, demands, losses, judgments and
liabilities (including, but not limited to, liabilities for penalties) of any
nature, and to reimburse the Secured Party for all reasonable costs and
expenses, including but not limited to reasonable attorneys' fees and expenses,
arising from this Security Agreement or the exercise of any right or remedy
granted to the Secured Party hereunder other than those incurred solely as a
result of the gross negligence and willful misconduct of the Secured Party. In
no event shall the Secured Party be liable for any matter or thing in connection
with this Security Agreement other than to account for moneys actually received
by the Secured Party in accordance with the terms hereof, and matters arising
out of the gross negligence or willful misconduct of the Secured Party.

         4.3      Collections. Upon the occurrence and during the continuance of
an Event of Default, the Secured Party may, in its sole discretion, in its name
or in the name of Grantor, or otherwise, (a) demand, sue for, collect or receive
any money or property at any time payable or receivable on account of or in
exchange for, or make any compromise or settlement deemed desirable with respect
to any of the Collateral, but shall be under no obligation to do so, or (b)
extend the time of payment, arrange for

                                     - 15 -



payment in installments, or otherwise modify the term of, or release, any of the
Collateral, without thereby incurring responsibility to, or discharging or
otherwise affecting any liability of, Grantor, other than to discharge Grantor
in so doing with respect to liabilities of Grantor to the extent that the
liabilities are paid or repaid. After the occurrence and during the continuance
of an Event of Default, any money, checks, notes, bills, drafts, or commercial
paper received by Grantor shall be held in trust for the Secured Party and any
other secured party having rights thereto senior to the Secured Party and shall
be promptly turned over to the Secured Party or any other secured party having
rights thereto senior to the Secured Party as their interest shall appear. Upon
the occurrence and during the continuance of an Event of Default, the Secured
Party may make such payments and take such actions as the Secured Party, in its
sole discretion, deems necessary to protect its security interest in the
Collateral or the value thereof, and the Secured Party is hereby unconditionally
and irrevocably authorized (without limiting the general nature of the authority
hereinabove conferred) to pay, purchase, contest or compromise any liens which
in the judgment of the Secured Party appear to be equal to, prior to or superior
to its security interest in the Collateral and any liens not expressly permitted
by this Security Agreement.

         4.4      Possession; Sale of Collateral.

                  (a)      Upon the occurrence and during the continuance of an
Event of Default, the Secured Party may, subject to the rights of any other
secured party having rights senior to those of the Secured Party: (i) require
Grantor to assemble the tangible assets that comprise part of the Collateral and
make them available to the Secured Party at any place or places reasonably
designated by the Secured Party; (ii) to the extent permitted by applicable law,
with or without notice or demand for performance and without liability for
trespass, enter any premises where the Collateral may be located and peaceably
take possession of the same, and may demand and receive such possession from any
person who has possession thereof, and may take such measures as it may deem
necessary or proper for the care or protection thereof (including, but not
limited to, the right to remove all or any portion of the Collateral); and (iii)
with or without taking such possession may sell or cause to be sold, in one or
more sales or parcels, for cash, on credit or for future delivery, without
assumption of any credit risk, all or any portion of the Collateral, at public
or private sale or at any broker's board or any securities exchange, without
demand of performance or notice of intention to sell or of time or place of
sale, except ten (10) business days' written notice to Grantor of the time and
place of such sale or sales (and such other notices as may be required by
applicable statute, if any, and which cannot be waived), which Grantor hereby
expressly acknowledges is commercially reasonable. In the event of any sale,
license or other disposition of any of the Trademark Collateral, the goodwill
connected with and symbolized by the Trademark Collateral subject to such
disposition shall be included, and Grantor shall supply to the Secured Party or
its designee, for inclusion in such sale, assignment or other disposition, all
Intellectual Property relating to such Trademark Collateral. The Secured Party
shall have no obligation to clean-up or otherwise prepare any Collateral for
sale. The Collateral may be sold or disposed of for cash, upon credit or for
future delivery as the Secured Party shall deem appropriate. Each such purchaser
at any such sale shall hold the property sold absolutely, free from any claim or
right on the

                                     - 16 -



part of Grantor, and Grantor hereby waives (to the extent permitted by law) all
rights of redemption, stay and appraisal that Grantor now has or may at any time
in the future have under any rule of law or statute now existing or hereafter
enacted. At any such sale, the Collateral, or portion thereof, to be sold may be
sold in one lot as an entirety or in separate parcels, as the Secured Party may
(in its sole and absolute discretion) determine. The Secured Party shall not be
obligated to make any sale of any Collateral if it shall determine not to do so,
regardless of the fact that notice of sale of such Collateral shall have been
given. The Secured Party may, without notice or publication, adjourn any public
or private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for sale, and such sale may, without
further notice, be made at the time and place to which the same was so
adjourned. The Secured Party may comply with any applicable state or federal law
requirements in connection with a disposition of the Collateral and compliance
will not be considered adversely to affect the commercial reasonableness of any
disposition of the Collateral. In case any sale of all or any part of the
Collateral is made on credit or for future delivery, the Collateral so sold may
be retained by the Secured Party until the sale price is paid by the purchaser
or purchasers thereof. The Secured Party shall not incur any liability for the
failure to collect or realize upon any or all of the Collateral or for any delay
in doing so and, in case of any such failure, shall not be under any obligation
to take any action with respect thereto; provided, such Collateral may be sold
again upon like notice. If any Collateral is sold upon credit, Grantor will be
credited only with payments actually made by the purchaser, received by the
Secured Party and applied to the Obligations in accordance with Section 4.5 In
the event the purchasers fail to pay for the Collateral, the Secured Party may
resell the Collateral. At any public sale made pursuant to this Section 4.4, the
Secured Party may bid for or purchase, free from any right of redemption, stay
or appraisal and all rights of marshalling, the Collateral and any other
security for the Obligations or otherwise on the part of Grantor (all said
rights being also hereby waived and released by Grantor to the fullest extent
permitted by law) or any part thereof offered for sale and may make payment on
account thereof by using any claim then due and payable to the Secured Party
from Grantor as a credit against the purchase price, and the Secured Party may,
upon compliance with the terms of sale, hold, retain and dispose of such
property without further accountability to Grantor therefor. For purposes
hereof, a written agreement to purchase the Collateral or any portion thereof
shall be treated as a sale thereof; the Secured Party shall be free to carry out
such sale pursuant to such agreement, and Grantor shall not be entitled to the
return of the Collateral or any portion thereof subject thereto, notwithstanding
the fact that after the Secured Party shall have entered into such an agreement,
all Events of Default shall have been remedied and any obligations to the
Secured Party shall have been paid in full. As an alternative to exercising the
power of sale herein conferred upon it, the Secured Party may proceed by a suit
or suits at law or in equity to foreclose this Security Agreement and to sell
the Collateral or any portion thereof pursuant to a judgment or decree of a
court or courts having competent jurisdiction or pursuant to a proceeding by a
court-appointed receiver. In any such action, the Secured Party shall be
entitled to the appointment of a receiver without notice, to peaceably take
possession of all or any portion of the Collateral and to exercise such powers
as the court shall confer upon the receiver. Notwithstanding the foregoing, if
an Event of Default shall occur and be

                                     - 17 -



continuing, the Secured Party shall be entitled to apply, without notice to
Grantor, any cash or cash items constituting Collateral in their possession to
payment of the Obligations in accordance with the provisions of Section 4.5
hereof.

                  (b)      If an Event of Default shall occur and be continuing,
the Secured Party shall, in addition to exercising any and all rights and
remedies afforded to it hereunder, have all the rights and remedies of a secured
party under all applicable provisions of law, including but not limited to, the
Code.

                  (c)      Grantor agrees that notwithstanding anything to the
contrary contained in this Security Agreement, Grantor shall remain liable under
each contract or other agreement giving rise to Accounts and General Intangibles
and all other contracts or agreements constituting part of the Collateral and
the Secured Party shall not have any obligation or liability in respect thereof.

                  (d)      After the occurrence and during the continuance of an
Event of Default, upon the Secured Party's request, but subject to the rights of
any other secured party having rights senior to those of the Secured Party,
Grantor shall deliver to the Secured Party all original and other documents
evidencing and relating to the sale and delivery of Inventory or Accounts,
including but not limited to, all original orders, invoices and shipping
receipts. After the occurrence and during the continuance of an Event of
Default, Grantor shall also furnish to the Secured Party, promptly upon the
request of the Secured Party, such reports, reconciliations and aging balances
regarding Accounts as the Secured Party may request from time to time.

         4.5      Application of Proceeds. The proceeds of any sale of
Collateral pursuant to this Security Agreement or otherwise, as well as any
Collateral consisting of cash, shall be applied after receipt by the Secured
Party as follows, subject to the rights of any other secured party having rights
senior to those of the Secured Party:

                           First, to the payment of all reasonable costs, fees
                  and expenses of the Secured Party and its agents,
                  representatives and attorneys incurred in connection with such
                  sale or with the retaking, holding, handling, preparing for
                  sale (or other disposition) of the Collateral or otherwise in
                  connection with the Notes, this Security Agreement or any of
                  the Obligations, including but not limited to, the reasonable
                  fees and expenses of the Secured Party's agents and attorneys'
                  and court costs (whether at trial, appellate or administrative
                  levels), if any, incurred by the Secured Party in so doing;

                           Second, to the payment of the outstanding principal
                  balance and accrued interest and fees on the Obligations in
                  such order as the Secured Party may determine;

                                     - 18 -



                           Third, to pay all other amounts payable by Grantor
                  under the Notes and any other Obligations; and

                           Fourth, to Grantor or to such other person as a court
                  may direct.

         4.6      Authority of Secured Party. The Secured Party shall have and
be entitled to exercise all such powers hereunder as are specifically delegated
to the Secured Party by the terms hereof, together with such powers as are
reasonably incidental thereto. The Secured Party may execute any of its duties
hereunder by or through its agents or employees and shall be entitled to retain
counsel and to act in reliance upon the advice of such counsel concerning all
matters pertaining to its duties hereunder.

         4.7      Certain Waivers; Grantor Not Discharged. Grantor expressly and
irrevocably waives (to the extent permitted by applicable law) presentment,
demand of payment and protest of nonpayment in respect of its Obligations under
this Security Agreement. The obligations and duties of Grantor hereunder are
irrevocable, absolute, and unconditional and shall not be discharged, impaired
or otherwise affected by (a) the failure of the Secured Party to assert any
claim or demand or to enforce any right or remedy against Grantor or any grantee
under the provisions of this Security Agreement or any grantee or any waiver,
consent, extension, indulgence or other action or inaction in respect thereof,
(b) any extension or renewal of any part of the Obligations, (c) any rescission,
waiver, amendment or modification of any of the terms or provisions of any
agreement related to this Security Agreement, (d) the release of any liens on or
security interests in any part of the Collateral or the release, sale or
exchange of or failure to foreclose against any security held by or for the
benefit of the Secured Party for payment or performance of the Obligations, (e)
the bankruptcy, insolvency or reorganization of Grantor or any grantee or any
other persons, (f) any change, restructuring or termination of the corporate
structure or existence of Grantor or any grantee or any restructuring or
refinancing of all or any portion of the Obligations, or (g) any other event
which under law would discharge the obligations of a surety.

         4.8      Transfer of Security Interest. The Secured Party may transfer
to any other person all or any part of the liens and security interests granted
hereby, and all or any part of the Collateral which may be in the Secured
Party's possession after the occurrence and during the continuance of an Event
of Default or to a successor Secured Party at any time. Upon such transfer, the
transferee shall be vested with all the rights and powers of the Secured Party
hereunder with respect to such of the Collateral as is so transferred, but, with
respect to any of the Collateral not so transferred, the Secured Party shall
retain all of their rights and powers (whether given to it in this Security
Agreement, or otherwise). The Secured Party or any of them may, at any time,
assign their rights as the secured party hereunder to any person, in the Secured
Party's discretion, and upon notice to Grantor, but without any requirement for
consent or approval by or from Grantor, and any such assignment shall be valid
and binding upon Grantor, as fully as it had expressly approved the same.

                                     - 19 -



                                    ARTICLE 5
                            SECURED PARTY'S INTERESTS

         5.1      Pro Rata Interests. The security interests and other rights
granted or reserved to the Secured Party and its successors and assigns under
this Security Agreement (the "Contractual Rights") and the other rights
available to the Secured Party under applicable law by reason of the existence
of this Security Agreement and the attachment and perfection of the security
interests created under this Security Agreement (the "Statutory Rights") are for
the pro rata benefit of the Note Holders according to the interest in the
outstanding principal amount of the Notes held by each Note Holder,
respectively, expressed as a percentage of the aggregate outstanding principal
amount of all Notes, and shall be held by the Note Holders in such percentages,
regardless of the time or order of the attachment or perfection of their
respective security interests or the time and manner of filing of their
respective deeds of trust, financing statements or assignments thereof and
regardless of which, if any, Note Holder may hold possession of the Collateral.
All recoveries attributable to enforcement of Contractual Rights or Statutory
Rights, or both, shall be shared ratably by the Note Holders according to their
respective pro rata interests as provided in this Security Agreement.

         5.2      Grantor Obligations. The provisions of this Article 5 are for
the purpose of defining the relative rights of the Note Holders with respect to
the Collateral and the exercise of Contractual Rights and Statutory Rights.
Nothing herein shall impair the obligations of Grantor, which are absolute and
unconditional, to pay and perform the Obligations as and when due. No provision
of this Security Agreement shall be construed to prevent any Note Holder from
exercising remedies that may otherwise be available to it.

                                    ARTICLE 6
                                  MISCELLANEOUS

         6.1      Further Assurances. Grantor agrees, at its expense, to do such
further things, to execute, acknowledge, deliver and cause to be duly filed all
such further instruments and documents and take all such actions as the Secured
Party may from time to time reasonably request for the better assuming and
preserving of the security interests and the rights and remedies created hereby,
including but not limited to, the execution and delivery of such additional
conveyances, assignments, agreements and instruments, the payment of any fees
and taxes required in connection with the execution and delivery of this
Security Agreement, the granting of the security interests created hereby and
the execution, filing and recordation of any financing statements (including
fixture filings) or other documents as the Secured Party may deem reasonably
necessary for the perfection of the security interests granted hereunder. If any
amount payable under or in connection with any of the Collateral shall be or
become evidenced by any promissory note or other instrument, such note or
instrument shall be immediately pledged and delivered to the Secured Party, duly
endorsed in a manner reasonably satisfactory to the Secured Party, subject to
the rights of any other secured party having rights senior to the Secured Party.
If at any time Grantor shall take and perfect a security interest in any
property to secure payment and performance of an Account, Grantor, upon the
request of the Secured Party,

                                     - 20 -



shall promptly assign such security interest to the Secured Party, subject to
the rights of any other secured party having rights senior to the Secured Party.
Grantor agrees to notify the Secured Party thirty (30) days prior to any change
(a) in its corporate name, (b) in its jurisdiction of incorporation or
organization, (c) in the location of its chief executive office, (d) in its
chief place of business, or (e) in the office or offices where it keeps its
records relating to the Collateral. Grantor agrees that, after the occurrence
and during the continuance of an Event of Default, it shall upon request of the
Secured Party, take any and all actions, to the extent permitted by applicable
law, at its own expense, to obtain the approval of any governmental authority
for any action or transaction contemplated by this Security Agreement which is
then required by law, and specifically, without limitation, upon request of the
Secured Party, to prepare, sign and file with any governmental authority
Grantor's portion of any application or applications for consent to the
assignment of licenses held by Grantor, or for consent to the possession and
sale of any of the Collateral by or on behalf of the Secured Party. Grantor
further agrees that it shall at all times, at its own expense and cost, keep
accurate and complete records with respect to the Collateral, including but not
limited to, a record of all payments and proceeds received in connection
therewith or as a result of the sale thereof and of all credits granted, and
agrees that the Secured Party or its representatives shall have the right at any
reasonable time and from time to time to call at Grantor's place or places of
business to inspect the Collateral and to examine or cause to be examined all of
the books, records, journals and other data relating to the Collateral and to
make extracts therefrom or copies thereof as are reasonably requested; provided
that such inspections shall occur no more often than quarterly unless an Event
of Default has occurred and is continuing.

         6.2      Effectiveness. This Security Agreement shall take effect
immediately upon execution by Grantor.

         6.3      Indemnity; Reimbursement of the Secured Party; Deficiency. In
connection with the Collateral, this Security Agreement and the administration
and enforcement or exercise of any right or remedy granted to the Secured Party
hereunder, Grantor agrees, subject to the limitations set forth hereafter (a) to
indemnify, defend and hold harmless the Secured Party from and against any and
all claims, demands, losses, judgments and liabilities (including but not
limited to, liabilities for penalties) of whatever nature, relating thereto or
resulting therefrom, and (b) to reimburse the Secured Party for all reasonable
costs and expenses, including but not limited to, the reasonable fees and
disbursements of attorneys, relating thereto or resulting therefrom. The
foregoing indemnity agreement includes all reasonable costs incurred by the
Secured Party in connection with any litigation relating to the Collateral
whether or not the Secured Party shall be a party to such litigation, including
but not limited to, the reasonable fees and disbursements of attorneys for the
Secured Party, and any out-of-pocket costs incurred by the Secured Party in
appearing as a witness or in otherwise complying with legal process served upon
it. The obligations in this Section 6.3 do not apply to any claims for
indemnity, defense, or reimbursement that arise from the gross negligence or
willful misconduct of the Secured Party. In no event shall the Secured Party be
liable, in the absence of gross negligence or willful misconduct on its part,
for any matter or thing in connection with this Security Agreement other than

                                     - 21 -



to account for moneys actually received by it in accordance with the terms
hereof. All indemnities contained in this Section 6.3 and elsewhere in this
Security Agreement shall survive the expiration or earlier termination of this
Security Agreement. After application of the proceeds by the Secured Party
pursuant to Section 4.5 hereof, Grantor shall remain liable to the Secured Party
for any deficiency.

         6.4      Continuing Lien. It is the intent of the parties hereto that
(a) this Security Agreement shall constitute a continuing agreement as to any
and all future, as well as existing transactions, between Grantor and the
Secured Party under or in connection with the Note or otherwise relating to any
other Obligation, and (b) the security interest provided for herein shall attach
to after-acquired as well as existing Collateral.

         6.5      Termination. Upon payment, performance or other satisfaction
in full of the Notes and all other Obligations and all other amounts due in
connection therewith and termination of all commitments relating thereto, the
Secured Party shall reassign, redeliver and release (or cause to be so
reassigned, redelivered and released), without recourse upon or warranty by the
Secured Party, and at the sole expense of Grantor, to Grantor, against receipt
therefor, such of the Collateral (if any) as shall not have been sold or
otherwise applied by the Secured Party pursuant to the terms hereof and not
theretofore reassigned, redelivered and released to Grantor, together with
appropriate instruments of reassignment and release.

         6.6      Notices. All notices, requests and other communications
hereunder shall be in writing and shall be deemed to have been duly given at the
time of receipt if delivered by hand or by facsimile transmission (with receipt
of successful and full transmission) or three days after being mailed,
registered or certified mail, return receipt requested, with postage prepaid to
the applicable parties hereto at the address stated below or if any party shall
have designated a different address or facsimile number by notice to the other
party given as provided above, then to the last address or facsimile number so
designated.

                  If to Grantor:

                           Image Ware Systems, Inc.
                           10883 Thornmint Road
                           San Diego, California 2127
                           Attention:       S. James Miller, Jr.,
                                            Chairman, CEO and President
                           Facsimile:       (858) 673-0291

                  with a copy to:

                           Cooley Godward LLP
                           4401 Eastgate Mall
                           San Diego, California 92121-1909
                           Attention:       M. Wainwright Fishburn, Jr., Esq.
                           Facsimile:       (858) 550-6420

                                     - 22 -



                  If to Secured Party:

                           Perseus 2000, L.L.C.
                           2099 Pennsylvania Ave., N.W.
                           Suite 900
                           Washington, D.C. 20006-1813
                           Attention:  Chip Newton, Managing Director
                           Facsimile:  (202) 429-0588

                  with a copy to:

                           Arnold & Porter
                           1600 Tysons Boulevard; Suite 900
                           McLean, Virginia  22102-4865
                           Attention:       Robert B. Ott, Esq.
                           Facsimile:       (703) 720-7399

         6.7      Successors and Assigns. Whenever in this Security Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and assigns of such party, and all covenants, promises
and agreements by or on behalf of the Secured Party that are contained in this
Security Agreement shall bind and inure to the benefit of its respective
successors and assigns. Grantor may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of the Secured Party.

         6.8      APPLICABLE LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY,
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE WITHOUT REFERENCE
TO ITS CONFLICTS OF LAW RULES THAT MIGHT REFER THE GOVERNANCE OR CONSTRUCTION OF
THIS SECURITY AGREEMENT TO THE LAW OF ANOTHER JURISDICTION (EXCEPT WHEN THE CODE
OR OTHER APPLICABLE LAW WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION). THE PARTIES HERETO AGREE THAT THE APPROPRIATE AND EXCLUSIVE FORUM
FOR ANY DISPUTES ARISING OUT OF THIS SECURITY AGREEMENT SOLELY BETWEEN THE
GRANTOR AND THE SECURED PARTY SHALL BE THE COURTS OF THE STATE OF NEW YORK
LOCATED IN THE BOROUGH OF MANHATTAN OR IN THE UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF NEW YORK, AND THE PARTIES HERETO IRREVOCABLY CONSENT TO
THE EXCLUSIVE JURISDICTION OF SUCH COURTS, AND AGREE TO COMPLY WITH ALL
REQUIREMENTS NECESSARY TO GIVE SUCH COURTS JURISDICTION. THE PARTIES HERETO
FURTHER AGREE THAT THE PARITIES WILL NOT BRING SUIT WITH RESPECT TO ANY DISPUTES
ARISING OF THIS SECURITY AGREEMENT EXCEPT AS EXPRESSLY SET FORTH BELOW FOR THE
EXECUTION OR ENFORCEMENT OF JUDGEMENT, IN ANY JURISDICTION OTHER THAN THE ABOVE
SPECIFIED COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY CONSENTS TO THE SERVICE
OF PROCESS IN ANY ACTION OR PROCEEDING HEREUNDER

                                     - 23 -



BY THE MAILING OF COPIES THEREOF BY REGISTERED MAIL OR CERTIFIED AIRMAIL,
POSTAGE PREPAID, TO THE ADDRESS SPECIFIED IN SECTION 6.6 HEREOF. THE FOREGOING
SHALL NOT LIMIT THE RIGHTS OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR TO OBTAIN EXECUTION OF JUDGMENT IN ANY OTHER
JURISDICTION. THE PARTIES FURTHER AGREE, TO THE EXTENT PERMITTED BY LAW, THAT
FINAL AND UNAPPEALABLE JUDGMENT AGAINST ANY OF THEM IN ANY ACTION OR PROCEEDING
CONTEMPLATED ABOVE SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER
JURISDICTION WITHIN OR OUTSIDE OF THE UNITED STATES BY SUIT ON THE JUDGMENT, A
CERTIFIED COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT
OF INDEBTEDNESS.

         6.9      Waivers. No failure or delay of the Secured Party in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or future exercise thereof or the exercise of any other right
or power. The rights and remedies of the Secured Party hereunder are cumulative
and not exclusive of any rights or remedies which it would otherwise have. No
waiver of any provision of this Security Agreement or consent to any departure
by Grantor therefrom shall in any event be effective unless the same shall be
authorized as provided in Section 6.10, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice to or demand on Grantor in any case shall entitle Grantor to any other or
further notice or demand in similar or other circumstances.

         6.10     Amendments. Neither this Security Agreement nor any provision
hereof may be amended or modified except pursuant to an agreement or agreements
in writing entered into by Grantor and the Secured Party.

         6.11     Severability. In the event any one or more of the provisions
contained in this Security Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein or therein shall not in any way be
affected or impaired thereby.

         6.12     Counterparts. This Security Agreement may be executed in two
or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one contract, and shall become
effective when copies hereof which, when taken together, bear the signatures of
each of the parties hereto shall be delivered or mailed to the Secured Party.

         6.13     Headings. Article and Section headings used herein are for
convenience of reference only and are not to affect the construction of, or to
be taken into consideration in interpreting, this Security Agreement.

         6.14     WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY EXPRESSLY
WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR

                                     - 24 -



PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN
CONNECTION WITH THIS SECURITY AGREEMENT AND AGREE THAT ANY SUCH ACTION SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE TERMS AND PROVISIONS OF THIS
SECTION CONSTITUTE A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS
SECURITY AGREEMENT.

                      [signatures appear on following page]

                                     - 25 -



         IN WITNESS WHEREOF, Grantor has executed this Security Agreement as of
the date first above written.

                                   IMAGEWARE SYSTEMS, INC.

                                   By:____________________________________
                                      Name:  S. James Miller, Jr.
                                      Title: Chairman, CEO and President

                                   ACKNOWLEDGED:

                                   PERSEUS 2000, L.L.C.

                                   By:____________________________________
                                      Name:   Ray E. Newton III
                                      Title:  Managing Director

                     [Signature Page to Security Agreement]



                                   SCHEDULE A

Pursuant to Section 2.1(b), the following information is disclosed:



                 CHIEF EXECUTIVE    OTHER PLACE(S) OF  JURISDICTION OF    COLLATERAL    EQUIPMENT AND        LOCATION OF
   GRANTOR           OFFICE             BUSINESS        INCORPORATION      LOCATION     GOODS LOCATION    LEASED FACILITIES
- -------------  -------------------  -----------------  ---------------  --------------  ---------------  --------------------
                                                                                       
IMAGEWARE      10883 Thornmint Rd                         California    10883           10883 Thornmint  10883
SYSTEMS, INC.  San Diego, CA 92127                                      Thornmint Rd.,  Rd., San Diego,  Thornmint Rd.,
                                                                        San Diego, CA   CA 92127         San Diego, CA
                                                                        92127                            92127




                                   SCHEDULE B

                                  PLEDGED STOCK

1,629,665 shares of no par Common Stock of XImage Corporation, a California
         corporation, certificate #57

1,000 shares of Common Stock, $0.0001 par value per share, o fImageWare Systems
         ID Group, Inc., a Delaware corporation, certificate #C-11

66  shares of I.W. Systems Canada Company - ULC, an entity formed under the laws
         of Nova Scotia, Canada, Common Stock

5 shares of Digital Imaging International GmbH, an entity formed under the laws
         of Germany, Common Stock

66,666 shares of Digital Imaging Asia Pacific Pte. Ltd., an entity formed
         under the laws of Singapore,  Common Stock

1 share of no par Common Stock of G&A Imaging, Inc., a Nevada corporation,
         certificate #C-

90,000 Series A Common Shares, $0.01 par value per share, of ImageWare Digital
         Photography Systems, LLC, a Nevada limited liability company,
         certificate of membership interest #8

100,000 Series A Common Shares, $0.01 par value per share, of E-Focus West LLC,
         a Nevada limited liability company, certificate of membership
         interest #2



                                   SCHEDULE C

Security interests granted by German subsidiary Digital Imaging International
GmbH in favor of Deutsche Bank AG on accounts receivable from goods delivered
and services rendered

         Security interest granted by Grantor in favor of American Contractors
Indemnity Company on certificate of deposit #0192-600-003 originally issued by
Imperial Bank for which the underlying obligations have been satisfied but the
UCC financing statement has not yet been terminated.



                                 SCHEDULE 2.1(f)

(i)   immaterial amount of boxed products kept off-site for packaging and
      shipping at:

         ICON
         399 River Road
         Hudson, MA  01749

(ii)  copies of software (i.e., originals located at chief executive office and
      other locations listed on Schedule A) located with the following software
      escrow services:

         (A)      Lincoln-Parry SoftEscrow
                  400 Inverness Drive South, Suite 200
                  Englewood, CO 80112

         (B)      DSI Technology Escrow Services, Inc.
                  9265 Sky Park Court, Suite 202
                  San Diego, CA 92123

(iii) server for web hosting of EPIWEB services located at:

         Magma Communications
         195 Colonade Road South, Unit 2
         Nepean, Ontario, CANADA  K2K-7Q3



                          PLEDGE AND SECURITY AGREEMENT

         THIS PLEDGE AND SECURITY AGREEMENT is entered into as of May 22, 2002
(as from time to time amended, modified, restated, supplemented and in effect,
this "Security Agreement"), by and between ImageWare Systems ID Group, Inc., a
Delaware corporation ("Grantor"), in favor of Perseus 2000, L.L.C., a Delaware
limited liability company (the "Secured Party"), as agent for itself and the
other holders from time to time of the Notes (as defined below) (collectively,
the "Note Holders").

                                    RECITALS

         A.       The Secured Party and ImageWare Systems, Inc., Grantor's
parent corporation ("Parent"), have entered into a Note and Warrant Purchase
Agreement dated as of May 22, 2002 (the "Purchase Agreement") pursuant to which
Parent has issued to the Secured Party Senior Secured Convertible Promissory
Notes dated of even date herewith in the aggregate principal amount of Two
Million Dollars ($2,000,000) (together with any Senior Secured Convertible
Promissory Notes issued in payment of interest on any Note and any Additional
Notes issued at the Additional Closing, each, a "Note" and collectively, the
"Notes"). The purchase and sale of the Notes is governed by the Purchase
Agreement.

         B.       In order to induce the Secured Party to make the loan
evidenced by the Notes, and in consideration therefor, Grantor has agreed to
pledge, collaterally assign and grant to the Secured Party, as agent for itself
and any other future Note Holders, a perfected lien on and security interest in
all of Grantor's assets and properties (including, but not limited to, all
outstanding shares of capital stock of each subsidiary of Grantor, except as
otherwise provided herein), whether now or hereafter existing, owned or
acquired, all pursuant to the terms of this Security Agreement in order to
secure (i) the due and punctual payment of (A) any current or future principal
and interest (including, without limitation, interest accruing during the
pendency of any bankruptcy, insolvency, receivership or other similar
proceeding, regardless of whether allowed or allowable in such proceeding) on
the Notes, when and as due, whether at maturity, by acceleration, upon one or
more dates set for prepayment or otherwise, and (B) all other monetary
obligations, including but not limited to, fees, costs, expenses and
indemnities, whether primary, secondary, direct, contingent, fixed or otherwise
(including monetary obligations incurred during the pendency of any bankruptcy,
insolvency, receivership or other similar proceeding regardless of whether
allowed or allowable in such proceeding), of Parent now or hereafter due under
the Notes or of Grantor under this Security Agreement, and (ii) the due and
punctual performance of all covenants, agreements, obligations and liabilities
of Parent now or hereafter due under or pursuant to the Notes or the Purchase
Agreement or of Grantor under this Security Agreement (collectively, the
"Obligations"). Grantor has also agreed to guarantee the Obligations in
accordance with the terms of this Security Agreement.

         C.       It is a condition precedent to the making of the loan
evidenced by the Notes that Grantor execute and deliver this Security Agreement.



         NOW, THEREFORE, for and in consideration of the covenants and
provisions set forth herein, and for other valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Grantor agrees as follows:

                                   ARTICLE 1

                                SECURITY INTEREST

         1.1      Grant of Security Interest. As security for the Obligations,
Grantor hereby collaterally assigns, pledges and grants a continuing and
unconditional security interest to the Secured Party, its successors and
assigns, in and to all of the following:

                  (a)      all equipment (including all "Equipment" as defined
in Section 9-102(a)(33) of the Uniform Commercial Code as in effect from time to
time in the State of New York (such code, together with any other successor or
applicable adoption of the Uniform Commercial Code in any applicable
jurisdiction, the "Code")) machinery, vehicles, fixtures, improvements,
supplies, office furniture, fixed assets, all as now owned or hereafter acquired
by Grantor or in which Grantor has or hereafter acquires any interest, and any
items substituted therefor as replacements and any additions or accessions
thereto;

                  (b)      all goods (including all "Goods" as defined in
Section 9-102(a)(44) of the Code) and all inventory (including all "Inventory"
as defined in Section 9-102(a)(48) of the Code) of Grantor, now owned or
hereafter acquired by Grantor or in which Grantor has or hereafter acquires any
interest, including but not limited to, raw materials, scrap inventory, work in
process, products, packaging materials, finished goods, all documents of title,
chattel paper and other instruments covering the same and all substitutions
therefor and additions thereto (all of the property described in this clause (b)
being hereinafter collectively referred to as "Inventory");

                  (c)      all present and future accounts in which Grantor has
or hereafter acquires any interest (including all "Accounts" as defined in
Section 9-102(a)(2) of the Code), contract rights (including all rights to
receive payments and other rights under all equipment and other leasing
contracts) and rights to payment and rights or accounts receivable evidencing or
representing indebtedness due or to become due Grantor on account of goods sold
or leased or services rendered, claims, instruments and other general
intangibles (including tax refunds, royalties and all other rights to the
payment of money of every nature and description), including but not limited to,
any such right evidenced by chattel paper, and all liens, securities,
guaranties, remedies, security interests and privileges pertaining thereto (all
of the property described in this clause (c) being hereinafter collectively
referred to as "Accounts");

                  (d)      all investment property now owned or hereafter
acquired by Grantor (including all "Investment Property" as defined in Section
9-102(a)(49) of the Code), including, without limitation, all securities
(certificated and uncertificated), securities accounts, securities entitlements,
commodity contracts and commodity

                                     - 2 -



accounts, excluding any of the foregoing also excluded by the immediately
following paragraph (e);

                  (e)      (i)      all of the shares of capital stock of
whatever class of the Issuers, now owned or hereafter acquired by Grantor,
together with in each case the certificates representing the same and 66 2/3% of
the shares of capital stock of whatever class of the Foreign Issuers, now owned
or hereafter acquired by Grantor, together with in each case the certificates
representing the same (collectively, the "Pledged Stock");

                           (ii)     all shares, securities, moneys or property
representing a dividend on, or a distribution or return of capital in respect of
any of the Pledged Stock, resulting from a split-up, revision, reclassification
or other like change of any of the Pledged Stock or otherwise received in
exchange for any of the Pledged Stock and all Equity Rights issued to the
holders of, or otherwise in respect of, any of the Pledged Stock; and

                           (iii)    without affecting the obligations of Grantor
under any provision prohibiting such action under any loan document, in the
event of any consolidation or merger in which any Issuer is not the surviving
corporation, all shares of each class of the capital stock of the successor
corporation (unless such successor corporation is Grantor itself) formed by or
resulting from such consolidation or merger (collectively, and together with the
property described in clauses (i) and (ii) above, the "Stock Collateral");

                  (f)      all general intangibles now owned or hereafter
acquired by Grantor or in which Grantor has or hereafter acquires any interest
(including all "General Intangibles" as defined in Section 9-102(a)(42) of the
Code), including but not limited to, payment intangibles (including all "Payment
Intangibles" as defined in Section 9-102(a)(61) of the Code), choses in action
and causes of action and all licenses and permits (to the extent the collateral
assignment of such licenses and permits is not prohibited by applicable law),
contract rights (including but not limited to all rights to receive payments and
other rights under all equipment and other leasing contracts, instruments and
documents owned or used by Grantor, and any goodwill relating thereto);

                  (g)      all other property owned by Grantor or in which
Grantor has or hereafter acquires any interest, wherever located, and of
whatever kind or nature, tangible or intangible, including all Intellectual
Property;

                  (h)      all insurance policies of any kind maintained in
effect by Grantor, now existing or hereafter acquired, under which any of the
property referred to in clauses (a) through (f) above is insured, including but
not limited to, any proceeds payable to Grantor pursuant to such policies;

                  (i)      all moneys, cash collateral, chattel paper (including
all "Chattel Paper" as defined in Section 9-102(a)(11) of the Code), checks,
notes, bills of exchange, documents of title, money orders, negotiable
instruments, commercial paper, and other securities, letters of credit
(including all "Letter-of-Credit Rights" as defined in

                                     - 3 -



Section 9-102(a)(51) of the Code), supporting obligations (including all
"Supporting Obligations" as defined in Section 9-102(a)(77) of the Code),
instruments (including all "Instruments" as define in Section 9-102(a)(47) of
the Code), documents (including all "Documents" as defined in Section
9-102(a)(30) of the Code), deposit accounts (including all "Deposit Accounts" as
defined in Section 9-102(a)(29) of the Code), deposits and credits from time to
time whether or not in the possession of or under the control of the Secured
Party; and

                  (j)      any consideration received when all or any part of
the property referred to in clauses (a) through (i) above is sold, transferred,
exchanged, leased, collected or otherwise disposed of, or any value received as
a consequence of possession thereof, including but not limited to, all products,
proceeds (including all "Proceeds" as defined in Section 9-102(a)(64) of the
Code), cash, negotiable instruments and other instruments for the payment of
money, chattel paper, security agreements or other documents, insurance proceeds
or proceeds of other proceeds now or hereafter owned by Grantor or in which
Grantor has an interest.

           The property set forth in clauses (a) through (j) of the preceding
sentence, together with property of a similar nature which Grantor hereafter
owns or in which Grantor hereafter acquires any interest, is referred to herein
as the "Collateral."

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

         "Copyright Collateral" shall mean all Copyrights, whether now owned or
hereafter acquired by Grantor.

         "Copyrights" shall mean, collectively, (a) all copyrights, copyright
registrations and applications for copyright registrations, (b) all renewals and
extensions of all copyrights, copyright registrations and applications for
copyright registration and (c) all rights, now existing or hereafter coming into
existence, (i) to all income, royalties, damages and other payments (including
in respect of all past, present or future infringements) now or hereafter due or
payable under or with respect to any of the foregoing, (ii) to sue for all past,
present and future infringements with respect to any of the foregoing and (iii)
otherwise accruing under or pertaining to any of the foregoing throughout the
world.

         "Equity Rights" shall mean, with respect to any person, any outstanding
subscriptions, options, warrants, commitments, preemptive rights or agreements
of any kind (including any stockholders' or voting trust arrangements) for the
issuance, sale, registration or voting of, or outstanding securities convertible
into, any additional shares of capital stock of any class, or partnership or
other ownership interests of any type in, such person.

         "Foreign Issuers" shall mean, collectively, each subsidiary of Grantor
organized under the laws of any jurisdiction outside of the United States of
America, directly or

                                     - 4 -



indirectly, that is the issuer of any shares of capital stock now owned or
hereafter acquired by Grantor.

         "Issuers" shall mean, collectively, each subsidiary of Grantor
organized under the laws of any jurisdiction within the United States of
America, directly or indirectly, that is the issuer of any shares of capital
stock now owned or hereafter acquired by Grantor.

         "Intellectual Property" shall mean all Copyright Collateral, all Patent
Collateral and all Trademark Collateral, including without limitation, the
proprietary assets listed under Grantor's name in Section 2(k) of the Disclosure
Schedule to the Purchase Agreement, as they pertain to Grantor, together with
(a) all inventions, processes, production methods, proprietary information,
know-how and trade secrets; (b) all licenses or user or other agreements granted
to Grantor with respect to any of the foregoing, in each case whether now or
hereafter owned or used, including all licenses or other agreements with respect
to the Copyright Collateral, the Patent Collateral or the Trademark Collateral
listed; (c) all information, customer lists, identification of suppliers, data,
plans, blueprints, specifications, designs, drawings, recorded knowledge,
surveys, engineering reports, test reports, manuals, materials standards,
processing standards, performance standards, catalogs, computer and automatic
machinery software and programs; (d) all field repair data, sales data and other
information relating to sales or service of products now or hereafter
manufactured; (e) all accounting information and all media in which or on which
any information or knowledge or data or records may be recorded or stored and
all computer programs used for the compilation or printout of such information,
knowledge, records or data; (f) all governmental approvals now held or hereafter
obtained by Grantor in respect of any of the foregoing; and (g) all causes of
action, claims and warranties now owned or hereafter acquired by Grantor in
respect of any of the foregoing. It is understood that Intellectual Property
shall include all of the foregoing owned or acquired by Grantor on a worldwide
basis.

         "Patent Collateral" shall mean all Patents, whether now owned or
hereafter acquired by Grantor.

         "Patents" shall mean, collectively, (a) all patents and patent
applications, (b) all reissues, divisions, continuations, renewals, extensions
and continuations-in-part of all patents or patent applications and (c) all
rights, now existing or hereafter coming into existence, (i) to all income,
royalties, damages, and other payments (including in respect of all past,
present and future infringements) now or hereafter due or payable under or with
respect to any of the foregoing, (ii) to sue for all past, present and future
infringements with respect to any of the foregoing and (iii) otherwise accruing
under or pertaining to any of the foregoing throughout the world, including all
inventions and improvements described or discussed in all such patents and
patent applications.

         "Permitted Liens" shall mean (a) liens for taxes, fees, assessments or
other governmental charges or levies, either not delinquent or being contested
in good faith by appropriate proceedings if adequate reserves with respect to
such liens are maintained on the books of Grantor in accordance with GAAP; (b)
liens (i) upon or in any equipment acquired or held by Grantor to secure the
purchase price or lease of such equipment or

                                     - 5 -



indebtedness incurred solely for the purpose of financing the acquisition or
lease of such equipment, or (ii) existing on such equipment at the time of its
acquisition; provided that in each of (i) and (ii) above, (A) the lien is
confined solely to the property so acquired and improvements thereon, and the
proceeds of such equipment and (B) the principal amount of such indebtedness
secured by any such lien shall at no time exceed the fair market value of such
equipment at the time it was acquired; (c) liens arising from judgments, decrees
or attachments to the extent and only so long as such judgment, decree or
attachment has not caused or resulted in an Event of Default; (d) leases,
subleases, licenses and sublicenses granted to others in the ordinary course of
Grantor's business not interfering in any material respect with the conduct of
the business of Grantor and not materially detracting from the value of the
Collateral; (e) easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar liens affecting real
property not interfering in any material respect with the ordinary conduct of
business of Grantor and not materially detracting from the value of the property
subject to such lien; (f) liens incurred or deposits made in the ordinary course
of Grantor's business in connection with worker's compensation, unemployment
insurance, social security and other like laws; (g) liens in favor of customs
and revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (h) carriers',
warehousemen's, materialmen's, mechanics', landlords', repairmen's, employees'
or other like liens arising in the ordinary course of business which are not
delinquent or which are being contested in good faith by appropriate
proceedings; and (i) liens arising solely by virtue of any statutory or common
law provision relating to banker's liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a creditor
depository institution.

         "Trademark Collateral" shall mean all Trademarks, whether now owned or
hereafter acquired by Grantor. Notwithstanding the foregoing, the Trademark
Collateral shall not include any Trademark which would be rendered invalid,
abandoned, void or unenforceable by reason of its being included as part of the
Trademark Collateral.

         "Trademarks" shall mean, collectively, (a) all trade names, trademarks
and service marks, logos, trademark and service mark registrations and
applications for trademark and service mark registrations, (b) all renewals and
extensions of any of the foregoing and (c) all rights, now existing or hereafter
coming into existence, (i) to all income, royalties, damages and other payments
(including in respect of all past, present and future infringements) now or
hereafter due or payable under or with respect to any of the foregoing, (ii) to
sue for all past, present and future infringements with respect to any of the
foregoing and (iii) otherwise accruing under or pertaining to any of the
foregoing throughout the world, together, in each case, with the product lines
and goodwill of the business connected with the use of, or otherwise symbolized
by, each such trade name, trademark and service mark.

         1.2      Perfection of Security Interests.

                  (a)      Grantor hereby authorizes the Secured Party to file a
financing statement or financing statements (the "Financing Statement")
describing the Collateral in any and all jurisdictions where, and with any and
all governmental authorities with

                                     - 6 -



whom, the Secured Party reasonably deems such filing to be necessary or
appropriate including, without limitation, the jurisdiction of the debtor's
location for purposes of the Code, the United States Patent and Trademark Office
and the United States Copyright Office. Grantor will reimburse the Secured Party
for any and all reasonable costs, charges and expenses (including reasonable
fees of counsel) incurred in connection with such filings. For purposes of this
Section 1.2(a), the Financing Statements shall be deemed to include any
amendment, modification, assignment, continuation statement or other similar
instrument consistent with the rights granted to the Secured Party under this
Security Agreement and the Purchase Agreement.

                  (b)      Grantor shall have possession of the Collateral,
except where as expressly otherwise provided in this Security Agreement or where
the Secured Party chooses to perfect its security interest by possession in
addition to the filing of a Financing Statement. Where Collateral is in the
possession of a third party, Grantor will join with the Secured Party in
notifying the third party of the Secured Party's security interest therein and
obtaining an acknowledgement from the third party that it is holding the
Collateral for the benefit of the Secured Party.

                  (c)      Grantor will cooperate with the Secured Party in
obtaining control (including "Control" as contemplated by Section 9-312(b) of
the Code) with respect to Collateral consisting of deposit accounts, investment
property, letter of credit rights and electronic chattel paper.

                  (d)      Grantor will not create any chattel paper without a
legend on such chattel paper reasonably acceptable to the Secured Party
indicating that the Secured Party has a secured interest in such Chattel Paper.

                  (e)      Grantor shall, upon the Grantor's acquiring, or
otherwise becoming entitled to the benefits of, any Copyright (or copyrightable
material), Patent (or patentable invention), Trademark (or associated goodwill)
or other Intellectual Property or upon or prior to Grantor's filing, either
directly or through any agent, licensee or other designee, of any application
with any governmental authority for any Copyright, Patent, Trademark, or other
Intellectual Property, in each case after the date hereof, execute and deliver
such contracts, agreements and other instruments as the Secured Party may
reasonably request to evidence, validate, perfect and establish the priority of
the security interest granted by this Security Agreement in such and any related
Intellectual Property.

                  (f)      Grantor shall deliver and pledge to the Secured Party
any and all certificates representing the Pledged Stock, accompanied by undated
stock powers duly executed in blank.

                  (g)      Grantor shall upon the acquisition after the date
hereof by Grantor of any Stock Collateral, promptly either (x) transfer and
deliver to the Secured Party all such Stock Collateral (together with the
certificates representing such Stock Collateral securities duly endorsed in
blank or accompanied by undated stock powers duly executed in blank) or (y) take
such other action as the Secured Party shall deem reasonably

                                     - 7 -



necessary or appropriate to perfect, and establish the priority of, the security
interest granted by this Security Agreement in such Stock Collateral.

         1.3      Intellectual Property. For the purpose of enabling and to the
extent necessary to enable the Secured Party to exercise its rights, remedies,
powers and privileges under Article 4 at such time or times as the Secured Party
shall be lawfully entitled to exercise such rights, remedies, powers and
privileges, and for no other purpose, Grantor hereby grants to the Secured
Party, to the extent assignable, an irrevocable, nonexclusive license
(exercisable without payment of royalty or other compensation to Grantor) to
use, assign, license or sublicense any of the Intellectual Property of Grantor,
together with reasonable access to all media in which any of the licensed items
may be recorded or stored and to all computer programs used for the compilation
or printout of such items. Such license shall terminate upon full and final
payment, performance or other satisfaction of the Obligations.

         1.4      Special Provisions Relating to Stock Collateral.

                  (a)      So long as no Event of Default shall have occurred
and be continuing, Grantor shall have the right to exercise all voting,
consensual and other powers of ownership pertaining to the Stock Collateral for
all purposes not inconsistent with the terms of any loan document; provided,
that Grantor agrees that it will not vote the Stock Collateral in any manner
that is inconsistent with the terms of any loan document.

                  (b)      So long as no Event of Default shall have occurred
and be continuing, Grantor shall be entitled to receive and retain any dividends
on the Stock Collateral paid in cash out of earned surplus.

                  (c)      If any Event of Default shall have occurred and be
continuing, and whether or not the Secured Party exercises any available right
to declare any Obligation due and payable or seeks or pursues any other right,
remedy, power or privilege available to it under applicable law, this Security
Agreement or any other loan document, all dividends and other distributions on
the Stock Collateral shall be paid directly to the Secured Party, subject to the
terms of this Security Agreement.

                                   ARTICLE 2
                         REPRESENTATIONS AND WARRANTIES

         2.1      Representations and Warranties. Grantor represents and
warrants as of the date hereof that:

                  (a)      Grantor has absolute, good and marketable title to
all the Collateral, wherever and whenever acquired, free and clear of any lien,
except for Permitted Liens, and Grantor has not filed, nor is there on record, a
financing statement under the Code (or similar statement or instrument of
registration under the law of any jurisdiction) covering any Collateral except
for Permitted Liens;

                                     - 8 -



                  (b)      Schedule A hereto lists, as to Grantor, (i) Grantor's
chief executive office and other place(s) of business, (ii) Grantor's legal
organizational structure and its jurisdiction of incorporation, (iii) the
address where records relating to the Collateral are maintained, (iv) any other
location of any other equipment and goods (other than mobile goods) included in
the Collateral, (v) location of leased facilities and name of lessor/sublessor
and (vi) any fictitious names used by Grantor.

                  (c)      Grantor has paid or will pay when due all taxes,
fees, assessments and other charges now or hereafter imposed upon the Collateral
except for any tax, fee, assessment or other charge the validity of which is
being contested in good faith by appropriate proceedings and so long as Grantor
has set aside on its books adequate reserves with respect thereto;

                  (d)      as a result of the execution and delivery of this
Security Agreement and upon the filing of any financing statements or other
documents necessary to assure, preserve and perfect the security interest
created hereby and to the extent a lien may be perfected by filing a financing
statement, the Secured Party shall have a valid, perfected, enforceable lien on,
and a continuing security interest in, the Collateral, enforceable and superior
as such as against creditors and purchasers (other than purchasers of Inventory
in the ordinary course of business) and as against any owner of real property
where any of the equipment or Inventory is located and as against any purchaser
of such real property and any present or future creditor obtaining a mortgage or
other lien on such real property, and such lien shall be superior and prior to
all other liens, subject, in each case, only to Permitted Liens to the extent
such Permitted Liens by statute have priority equal to or greater than such
security interest;

                  (e)      the amount that has been represented by Grantor to
the Secured Party as owing by all obligors (such obligors being hereinafter
referred to as the "Account Debtors") in the aggregate with respect to Accounts
has not materially deviated from the correct amount actually and unconditionally
owing at such time by such Account Debtors subject to set off, return and
similar rights arising in the ordinary course of business; all Accounts
represent bona fide transactions completed in accordance with the terms and
provisions contained in the invoices and other documents evidencing the same; as
of the date hereof, there are no material setoffs, counterclaims or disputes
existing or asserted with respect to Accounts subject to set off, return and
similar rights arising in the ordinary course of business, and Grantor has not
made any agreement with any Account Debtor for any material deduction therefrom
except set-off and claims arising in the ordinary course of business; to
Grantor's knowledge, all Account Debtors have the capacity to contract and are
solvent; to Grantor's knowledge the goods giving rise to Accounts are not
subject to any lien, claim or encumbrance except set-off and claims arising in
the ordinary course of business, except in favor of the Secured Party and except
for Permitted Liens and as permitted by the Purchase Agreement; and, except as
set forth herein, Grantor does not have knowledge of any fact or circumstances
which would impair the validity or collectability of Accounts;

                  (f)      none of the Collateral is held by a third party in
any location as assignee, trustee, bailee, consignee or in any similar capacity;
and

                                     - 9 -



                  (g)      The Pledged Stock evidenced by the certificates
described in Section 1.1(e) hereof (i) is duly authorized, validly existing,
fully paid and nonassessable, and none of such Pledged Stock is subject to any
contractual restriction, or any restriction under the charter or by-laws of the
respective Issuer or Foreign Issuer of such Pledged Stock, upon the transfer of
such Pledged Stock (except for any such restriction contained in any loan
document); and (ii) constitutes all of the issued and outstanding shares of
capital stock of any class of the Issuers or Foreign Issuers beneficially owned
by Grantor on the date hereof (whether or not registered in the name of
Grantor), and Schedule B correctly identifies, as of the date hereof, the
respective Issuers or Foreign Issuers of such Pledged Stock, the respective
class and par value of the shares comprising such Pledged Stock and the
respective number (and registered owners of) of the shares evidenced by each
such certificate.

         2.2      Survival. All representations, warranties and agreements of
Grantor contained in this Security Agreement shall survive the execution,
delivery and performance of this Security Agreement until the termination of
this Security Agreement pursuant to Section 7.5 hereof.

                                    ARTICLE 3
                                    COVENANTS

         3.1      Covenants. Grantor hereby covenants and agrees with the
Secured Party that so long as this Security Agreement shall remain in effect or
any Obligations shall remain unpaid or unperformed:

                  (a)      Grantor shall promptly give written notice to the
Secured Party of any levy or attachment, execution or other process against any
of the Collateral;

                  (b)      at Grantor's own cost and expense, Grantor shall take
any and all actions reasonably necessary or desirable to defend the Collateral
against the claims and demands of all persons other than the Secured Party, and
to defend the security interest of the Secured Party in the Collateral and the
priority thereof against any lien of any nature, except in each case for
Permitted Liens;

                  (c)      Grantor shall keep all tangible Collateral properly
insured and in good order and repair (normal wear and tear excepted) and
immediately notify the Secured Party of any event causing any material loss,
damage or depreciation in value of the Collateral in the aggregate and of the
extent of such loss, damage or depreciation;

                  (d)      Grantor shall mark any Collateral that is chattel
paper with a legend showing the Secured Party's lien and security interest
therein;

                  (e)      Grantor shall:

                           (i) furnish to the Secured Party from time to time
(but, unless an Event of Default shall have occurred and be continuing, no more
frequently than quarterly) statements and schedules further identifying and
describing the Copyright
                                     - 10 -



Collateral, the Patent Collateral and the Trademark Collateral and such other
reports in connection with the Copyright Collateral, the Patent Collateral and
the Trademark Collateral, as the Secured Party may reasonably request, all in
reasonable detail;

                           (ii)     prior to filing, either directly or through
an agent, licensee or other designee, any application for any Copyright, Patent
or Trademark, furnish to the Secured Party prompt notice of such proposed
filing; and

                           (iii)    promptly give written notice to the Secured
Party of any other change in the intellectual property rights material to its
businesses.

                  (f)      Grantor shall:

                           (i)      (either itself or through licensees) for
each Trademark, (A) to the extent consistent with past practice and good
business judgment, continue to use such Trademark on each and every trademark
class of goods applicable to its current line as reflected in its current
catalogs, brochures and price lists in order to maintain such Trademark in full
force and effect free from any claim of abandonment for nonuse, (B) maintain as
in the past the quality of products and services offered under such Trademark,
(C) employ such Trademark with the appropriate notice of registration and (D)
not (and not permit any licensee or sublicensee to) do any act or knowingly omit
to do any act whereby any Trademark material to the conduct of its business may
become invalidated, except in each case as Grantor's business or products may
change over time as may be consistent with good business judgment;

                           (ii)     (either itself or through licensees) not do
any act or knowingly omit to do any act whereby any Patent material to the
conduct of its business may become abandoned or dedicated;

                           (iii)    notify the Secured Party immediately if it
knows or has reason to know that any Intellectual Property material to the
conduct of its business may become abandoned or dedicated, or of any adverse
determination or development (including the institution of, or any such
determination or development in, any proceeding before any governmental
authority) regarding Grantor's ownership of any Intellectual Property material
to its business, its right to copyright, patent or register the same (as the
case may be), or its right to keep, use and maintain the same;

                           (iv)     take all necessary steps that are consistent
with good business practices in any proceeding before any appropriate
governmental authority to maintain and pursue each application relating to any
Intellectual Property (and to obtain the relevant registrations) and to maintain
each registration material to the conduct of its business, including payment of
maintenance fees, filing of applications for renewal, affidavits of use,
affidavits of incontestability and opposition, interference and cancellation
proceedings;

                           (v)      in the event that any Intellectual Property
material to the conduct of its business is infringed, misappropriated or diluted
by a third party, Grantor shall notify the Secured Party within (10) days after
it learns of such event and shall, if

                                     - 11 -



consistent with good business practice, promptly sue for infringement,
misappropriation or dilution, seek temporary restraints and preliminary
injunctive relief to the extent practicable, seek to recover any and all damages
for such infringement, misappropriation or dilution and take such other actions
as are appropriate under the circumstances and in Grantor's good faith business
judgment to protect such Collateral;

                           (vi)     shall, through counsel selected by Grantor
and reasonably acceptable to the Secured Party, prosecute diligently any
application for any Intellectual Property pending as of the date of this
Security Agreement or thereafter made until the termination of this Security
Agreement, make application on uncopyrighted but copyrightable material,
unpatented but patentable inventions and unregistered but registrable Trademarks
and preserve and maintain all rights in applications for any Intellectual
Property; provided, however, that Grantor shall have no obligation to make any
such application if making such application would be unnecessary or imprudent in
the good faith business judgment of Grantor. Any expenses incurred in connection
with such an application shall be borne by Grantor. Grantor shall not abandon
any right to file a application for any Intellectual Property or any pending
application in the United States without the consent of the Secured Party, which
consent shall not be unreasonably withheld; and

                           (vii)    after the occurrence and through the
continuance of an Event of Default, the Secured Party shall have the right but
shall in no way be obligated to bring suit in its own name to enforce the
Copyrights, Patents and Trademarks and any license under such Intellectual
Property, in which event Grantor shall, at the request of the Secured Party , do
any and all lawful acts and execute and deliver any and all proper documents
required by the Secured party in aid of such enforcement action.

                  (g)      Grantor shall cause the Stock Collateral to
constitute at all times 100% of the total number of shares of each class of
capital stock of each Issuer and 66 2/3% of the total number of shares of each
class of capital stock of each Foreign Issuer then outstanding and shall not
permit any such Issuer or Foreign Issuer to issue any shares of capital stock
other than to Grantor. Grantor shall cause all such shares to be duly
authorized, validly issued, fully paid and nonassessable and to be free of any
contractual restriction or any restriction under the charter or bylaws of the
respective Issuer of such Stock Collateral, upon the transfer of such Stock
Collateral (except for any such restriction contained in any loan document).

                  (h)      Grantor shall not:

                           (i)      amend or terminate any material contract or
other document or instrument constituting part of the Collateral, except for
transactions in the ordinary course of business;

                           (ii)     voluntarily or involuntarily exchange,
lease, sell, transfer or otherwise dispose of any Collateral other than for fair
value in the ordinary course of business;

                                     - 12 -



                           (iii)    make any compromise, settlement, discharge
or adjustment or grant any extension of time for payment with respect to any
Account or any lien, guaranty or remedy pertaining thereto, except for
transactions in the ordinary course of business;

                           (iv)     change its name or use any fictitious or
trade name, other than in accordance with Section 7.1 hereof;

                           (v)      change the location of its chief executive
office, other than in accordance with Section 7.1 hereof;

                           (vi)     permit any of the Collateral (other than
Collateral that constitutes goods that are mobile and that are of a type
normally used in more than one jurisdiction or otherwise in the ordinary course
of business (including, without limitation, sales and shipments of inventory in
the ordinary course of business)) to be removed from or located in any place not
identified as the location of such Collateral to the Secured Party, as the case
may be, except after written notice to and with written consent of the Secured
Party and compliance with such procedures as the Secured Party reasonably may
impose to prevent any interruptions or discontinuity in the security interest
granted pursuant to this Security Agreement; or

                           (vii)    voluntarily grant, incur or allow to exist
any lien or security interest on or in any of the Collateral which lien or
security interest shall be equal or superior in priority to the security
interests granted in this Security Agreement, except for Permitted Liens to the
extent such Permitted Liens by their express terms or applicable law have
priority equal or greater than the security interests granted pursuant to this
Security Agreement.

                                   ARTICLE 4
                                REMEDIAL MATTERS

         4.1      Event of Default. An "Event of Default" shall exist hereunder
(a) if an event of default shall occur under any of the Notes, (b) upon the
filing of a voluntary or involuntary petition for bankruptcy, insolvency,
receivership or similar event involving Grantor and, in the case of an
involuntary petition, an order for relief is not entered or such petition or
proceeding shall not be dismissed, discharged or stayed within ninety (90) days
of commencement, or (c) if Grantor shall breach in any material respect any
agreement contained herein or otherwise default in any material respect in the
observance or performance of any of the covenants, terms, conditions or
agreements on the part of Grantor contained in this Security Agreement and, with
respect to non-monetary covenants, terms, conditions or agreements, such non
observance or non performance continues for a period of thirty (30) days after
the earlier of (i) written notice from the Secured Party of such default or (ii)
actual knowledge of Grantor of such default.

                                     - 13 -



         4.2      Powers of Attorney.

                  (a)      Grantor hereby irrevocably appoints the Secured Party
(and any officer or agent of the Secured Party) as its true and lawful
attorney-in-fact, with power of substitution for and in the name of the Secured
Party or otherwise, for the use and benefit of the Secured Party, effective upon
the occurrence and during the continuance of an Event of Default:

                           (i)      to receive, endorse the name of Grantor upon
and deliver any notes, acceptances, checks, drafts, money orders or other
evidences of payment that may come into the possession of the Secured Party with
respect to the Collateral;

                           (ii)     to cause Grantor's mail to be transferred to
the Secured Party's own offices and to receive and open all mail addressed to
Grantor for the purposes of removing any such notes, acceptances, checks,
drafts, money orders or other evidences of payment;

                           (iii)    to demand, collect and receive payment in
respect of the Collateral and to apply any such payments directly to the payment
of the Obligations in accordance with Section 4.5 hereof;

                           (iv)     to receive and give discharges and releases
of all or any of the Collateral;

                           (v)      to commence and prosecute any and all suits,
actions or proceedings at law or in equity in any court of competent
jurisdiction, to collect or otherwise realize on all or any part of the
Collateral or to enforce any rights in respect thereof;

                           (vi)     to sign the name of Grantor on any invoice
or bill of lading relating to any of the Collateral;

                           (vii)    to send verification of any Accounts to any
Account Debtor or customer;

                           (viii)   to notify any Account Debtor or other
obligor of Grantor with respect to any Collateral to make payment to the Secured
Party;

                           (ix)     to settle, compromise, compound, adjust or
defend any actions, suits or proceedings relating or pertaining to all or any of
the Collateral;

                           (x)      to take any action for purposes of carrying
out of the terms of this Security Agreement;

                           (xi)     to enforce all of Grantor's rights and
powers under and pursuant to any and all agreements with respect to the
Collateral; and

                                     - 14 -



                           (xii)    generally, to sell, assign, transfer,
pledge, make any agreement with respect to or otherwise deal with all or any of
the Collateral, and to do all other acts and things necessary to carry out this
Security Agreement, as fully and completely as though the Secured Party were the
absolute owner of the Collateral for all purposes; provided, however, nothing
herein contained shall be construed as requiring or obligating the Secured Party
to make any commitment or to make any inquiry as to the nature or sufficiency of
any payment received by the Secured Party, or to present or file any claim or
notice, or to take any action with respect to the Collateral or any part thereof
or the moneys due or to become due in respect thereof or any property covered
thereby; and, provided further, that Secured Party shall in all cases act in
material compliance with all applicable laws.

         It is understood and agreed that the power of attorney granted to the
Secured Party for the purposes set forth above in this Section 4.2 is coupled
with an interest and is irrevocable until the payment, performance or other
satisfaction of all of the Obligations, and each Grantor hereby ratifies all
actions taken by its attorney-in-fact by virtue hereof. The provisions of this
Section 4.2 shall in no event relieve Grantor of any of its obligations
hereunder or under any of the other Security Documents with respect to the
Collateral or any part thereof or impose any obligation on the Secured Party to
proceed in any particular manner with respect to the Collateral or any part
thereof, or in any way limit the exercise by the Secured Party of any other or
further right which it may have on the date of this Security Agreement or
hereafter, whether hereunder, under any of the other Security Documents, by law
or otherwise.

                  (b)      Beyond the duty of the Secured Party to exercise
reasonable care in the custody of any Collateral in its possession and to comply
with the Code, the Secured Party shall not, under any circumstance or in any
event whatsoever, have any liability for any part of the Collateral, nor shall
the Secured Party have any liability for any error or omission or delivery of
any kind incurred in the good faith settlement, collection or payment of any of
the Collateral or any monies received in payment therefor or for any damages
resulting therefrom, nor shall this Security Agreement impose upon the Secured
Party any obligation to perform any obligation with respect to the Collateral.
The costs of collection, notification and enforcement, including but not limited
to, reasonable attorneys' fees and reasonable out-of-pocket expenses, shall be
borne solely by Grantor whether the same are incurred by Grantor or the Secured
Party. Grantor agrees to indemnify, defend and hold the Secured Party harmless
from and against any and all other claims, demands, losses, judgments and
liabilities (including, but not limited to, liabilities for penalties) of any
nature, and to reimburse the Secured Party for all reasonable costs and
expenses, including but not limited to reasonable attorneys' fees and expenses,
arising from this Security Agreement or the exercise of any right or remedy
granted to the Secured Party hereunder other than those incurred solely as a
result of the gross negligence and willful misconduct of the Secured Party. In
no event shall the Secured Party be liable for any matter or thing in connection
with this Security Agreement other than to account for moneys actually received
by the Secured Party in accordance with the terms hereof, and matters arising
out of the gross negligence or willful misconduct of the Secured Party.

                                     - 15 -



         4.3      Collections. Upon the occurrence and during the continuance of
an Event of Default, the Secured Party may, in its sole discretion, in its name
or in the name of Grantor, or otherwise, (a) demand, sue for, collect or receive
any money or property at any time payable or receivable on account of or in
exchange for, or make any compromise or settlement deemed desirable with respect
to any of the Collateral, but shall be under no obligation to do so, or (b)
extend the time of payment, arrange for payment in installments, or otherwise
modify the term of, or release, any of the Collateral, without thereby incurring
responsibility to, or discharging or otherwise affecting any liability of,
Grantor, other than to discharge Grantor in so doing with respect to liabilities
of Grantor to the extent that the liabilities are paid or repaid. After the
occurrence and during the continuance of an Event of Default, any money, checks,
notes, bills, drafts, or commercial paper received by Grantor shall be held in
trust for the Secured Party and any other secured party having rights thereto
senior to the Secured Party and shall be promptly turned over to the Secured
Party or any other secured party having rights thereto senior to the Secured
Party as their interest shall appear. Upon the occurrence and during the
continuance of an Event of Default, the Secured Party may make such payments and
take such actions as the Secured Party, in its sole discretion, deems necessary
to protect its security interest in the Collateral or the value thereof, and the
Secured Party is hereby unconditionally and irrevocably authorized (without
limiting the general nature of the authority hereinabove conferred) to pay,
purchase, contest or compromise any liens which in the judgment of the Secured
Party appear to be equal to, prior to or superior to its security interest in
the Collateral and any liens not expressly permitted by this Security Agreement.

         4.4      Possession; Sale of Collateral.

                  (a)      Upon the occurrence and during the continuance of an
Event of Default, the Secured Party may, subject to the rights of any other
secured party having rights senior to those of the Secured Party: (i) require
Grantor to assemble the tangible assets that comprise part of the Collateral and
make them available to the Secured Party at any place or places reasonably
designated by the Secured Party; (ii) to the extent permitted by applicable law,
with or without notice or demand for performance and without liability for
trespass, enter any premises where the Collateral may be located and peaceably
take possession of the same, and may demand and receive such possession from any
person who has possession thereof, and may take such measures as it may deem
necessary or proper for the care or protection thereof (including, but not
limited to, the right to remove all or any portion of the Collateral); and (iii)
with or without taking such possession may sell or cause to be sold, in one or
more sales or parcels, for cash, on credit or for future delivery, without
assumption of any credit risk, all or any portion of the Collateral, at public
or private sale or at any broker's board or any securities exchange, without
demand of performance or notice of intention to sell or of time or place of
sale, except ten (10) business days' written notice to Grantor of the time and
place of such sale or sales (and such other notices as may be required by
applicable statute, if any, and which cannot be waived), which Grantor hereby
expressly acknowledges is commercially reasonable. In the event of any sale,
license or other disposition of any of the Trademark Collateral, the goodwill
connected with and symbolized by the Trademark Collateral subject to such
disposition shall be included, and

                                     - 16 -



Grantor shall supply to the Secured Party or its designee, for inclusion in such
sale, assignment or other disposition, all Intellectual Property relating to
such Trademark Collateral. The Secured Party shall have no obligation to
clean-up or otherwise prepare any Collateral for sale. The Collateral may be
sold or disposed of for cash, upon credit or for future delivery as the Secured
Party shall deem appropriate. Each such purchaser at any such sale shall hold
the property sold absolutely, free from any claim or right on the part of
Grantor, and Grantor hereby waives (to the extent permitted by law) all rights
of redemption, stay and appraisal that Grantor now has or may at any time in the
future have under any rule of law or statute now existing or hereafter enacted.
At any such sale, the Collateral, or portion thereof, to be sold may be sold in
one lot as an entirety or in separate parcels, as the Secured Party may (in its
sole and absolute discretion) determine. The Secured Party shall not be
obligated to make any sale of any Collateral if it shall determine not to do so,
regardless of the fact that notice of sale of such Collateral shall have been
given. The Secured Party may, without notice or publication, adjourn any public
or private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for sale, and such sale may, without
further notice, be made at the time and place to which the same was so
adjourned. The Secured Party may comply with any applicable state or federal law
requirements in connection with a disposition of the Collateral and compliance
will not be considered adversely to affect the commercial reasonableness of any
disposition of the Collateral. In case any sale of all or any part of the
Collateral is made on credit or for future delivery, the Collateral so sold may
be retained by the Secured Party until the sale price is paid by the purchaser
or purchasers thereof. The Secured Party shall not incur any liability for the
failure to collect or realize upon any or all of the Collateral or for any delay
in doing so and, in case of any such failure, shall not be under any obligation
to take any action with respect thereto; provided, such Collateral may be sold
again upon like notice. If any Collateral is sold upon credit, Grantor will be
credited only with payments actually made by the purchaser, received by the
Secured Party and applied to the Obligations in accordance with Section 4.5 In
the event the purchasers fail to pay for the Collateral, the Secured Party may
resell the Collateral. At any public sale made pursuant to this Section 4.4, the
Secured Party may bid for or purchase, free from any right of redemption, stay
or appraisal and all rights of marshalling, the Collateral and any other
security for the Obligations or otherwise on the part of Grantor (all said
rights being also hereby waived and released by Grantor to the fullest extent
permitted by law) or any part thereof offered for sale and may make payment on
account thereof by using any claim then due and payable to the Secured Party
from Grantor as a credit against the purchase price, and the Secured Party may,
upon compliance with the terms of sale, hold, retain and dispose of such
property without further accountability to Grantor therefor. For purposes
hereof, a written agreement to purchase the Collateral or any portion thereof
shall be treated as a sale thereof; the Secured Party shall be free to carry out
such sale pursuant to such agreement, and Grantor shall not be entitled to the
return of the Collateral or any portion thereof subject thereto, notwithstanding
the fact that after the Secured Party shall have entered into such an agreement,
all Events of Default shall have been remedied and any obligations to the
Secured Party shall have been paid in full. As an alternative to exercising the
power of sale herein conferred upon it, the Secured Party may proceed by a suit
or suits at law or in equity to foreclose this Security Agreement

                                     - 17 -



and to sell the Collateral or any portion thereof pursuant to a judgment or
decree of a court or courts having competent jurisdiction or pursuant to a
proceeding by a court-appointed receiver. In any such action, the Secured Party
shall be entitled to the appointment of a receiver without notice, to peaceably
take possession of all or any portion of the Collateral and to exercise such
powers as the court shall confer upon the receiver. Notwithstanding the
foregoing, if an Event of Default shall occur and be continuing, the Secured
Party shall be entitled to apply, without notice to Grantor, any cash or cash
items constituting Collateral in their possession to payment of the Obligations
in accordance with the provisions of Section 4.5 hereof.

                  (b)      If an Event of Default shall occur and be continuing,
the Secured Party shall, in addition to exercising any and all rights and
remedies afforded to it hereunder, have all the rights and remedies of a secured
party under all applicable provisions of law, including but not limited to, the
Code.

                  (c)      Grantor agrees that notwithstanding anything to the
contrary contained in this Security Agreement, Grantor shall remain liable under
each contract or other agreement giving rise to Accounts and General Intangibles
and all other contracts or agreements constituting part of the Collateral and
the Secured Party shall not have any obligation or liability in respect thereof.

                  (d)      After the occurrence and during the continuance of an
Event of Default, upon the Secured Party's request, but subject to the rights of
any other secured party having rights senior to those of the Secured Party,
Grantor shall deliver to the Secured Party all original and other documents
evidencing and relating to the sale and delivery of Inventory or Accounts,
including but not limited to, all original orders, invoices and shipping
receipts. After the occurrence and during the continuance of an Event of
Default, Grantor shall also furnish to the Secured Party, promptly upon the
request of the Secured Party, such reports, reconciliations and aging balances
regarding Accounts as the Secured Party may request from time to time.

         4.5      Application of Proceeds. The proceeds of any sale of
Collateral pursuant to this Security Agreement or otherwise, as well as any
Collateral consisting of cash, shall be applied after receipt by the Secured
Party as follows, subject to the rights of any other secured party having rights
senior to those of the Secured Party:

                           First, to the payment of all reasonable costs, fees
                  and expenses of the Secured Party and its agents,
                  representatives and attorneys incurred in connection with such
                  sale or with the retaking, holding, handling, preparing for
                  sale (or other disposition) of the Collateral or otherwise in
                  connection with the Notes, this Security Agreement or any of
                  the Obligations, including but not limited to, the reasonable
                  fees and expenses of the Secured Party's agents and attorneys'
                  and court costs (whether at trial, appellate or administrative
                  levels), if any, incurred by the Secured Party in so doing;

                                     - 18 -



                           Second, to the payment of the outstanding principal
                  balance and accrued interest and fees on the Obligations in
                  such order as the Secured Party may determine;

                           Third, to pay all other amounts payable by Parent
                  under the Notes and payable by Parent or Grantor under any
                  other Obligations; and

                           Fourth, to Grantor or to such other person as a court
                  may direct.

         4.6      Authority of Secured Party. The Secured Party shall have and
be entitled to exercise all such powers hereunder as are specifically delegated
to the Secured Party by the terms hereof, together with such powers as are
reasonably incidental thereto. The Secured Party may execute any of its duties
hereunder by or through its agents or employees and shall be entitled to retain
counsel and to act in reliance upon the advice of such counsel concerning all
matters pertaining to its duties hereunder.

         4.7      Certain Waivers; Grantor Not Discharged. Grantor expressly and
irrevocably waives (to the extent permitted by applicable law) presentment,
demand of payment and protest of nonpayment in respect of its Obligations under
this Security Agreement. The obligations and duties of Grantor hereunder are
irrevocable, absolute, and unconditional and shall not be discharged, impaired
or otherwise affected by (a) the failure of the Secured Party to assert any
claim or demand or to enforce any right or remedy against Grantor or any grantee
under the provisions of this Security Agreement or any grantee or any waiver,
consent, extension, indulgence or other action or inaction in respect thereof,
(b) any extension or renewal of any part of the Obligations, (c) any rescission,
waiver, amendment or modification of any of the terms or provisions of any
agreement related to this Security Agreement, (d) the release of any liens on or
security interests in any part of the Collateral or the release, sale or
exchange of or failure to foreclose against any security held by or for the
benefit of the Secured Party for payment or performance of the Obligations, (e)
the bankruptcy, insolvency or reorganization of Grantor or any grantee or any
other persons, (f) any change, restructuring or termination of the corporate
structure or existence of Grantor or any grantee or any restructuring or
refinancing of all or any portion of the Obligations, or (g) any other event
which under law would discharge the obligations of a surety.

         4.8      Transfer of Security Interest. The Secured Party may transfer
to any other person all or any part of the liens and security interests granted
hereby, and all or any part of the Collateral which may be in the Secured
Party's possession after the occurrence and during the continuance of an Event
of Default or to a successor Secured Party at any time. Upon such transfer, the
transferee shall be vested with all the rights and powers of the Secured Party
hereunder with respect to such of the Collateral as is so transferred, but, with
respect to any of the Collateral not so transferred, the Secured Party shall
retain all of their rights and powers (whether given to it in this Security
Agreement, or otherwise). The Secured Party or any of them may, at any time,
assign their rights as the secured party hereunder to any person, in the Secured
Party's discretion, and upon notice

                                     - 19 -



to Grantor, but without any requirement for consent or approval by or from
Grantor, and any such assignment shall be valid and binding upon Grantor, as
fully as it had expressly approved the same.

                                   ARTICLE 5
                            SECURED PARTY'S INTERESTS

         5.1      Pro Rata Interests. The security interests and other rights
granted or reserved to the Secured Party and its successors and assigns under
this Security Agreement (the "Contractual Rights") and the other rights
available to the Secured Party under applicable law by reason of the existence
of this Security Agreement and the attachment and perfection of the security
interests created under this Security Agreement (the "Statutory Rights") are for
the pro rata benefit of the Note Holders according to the interest in the
outstanding principal amount of the Notes held by each Note Holder,
respectively, expressed as a percentage of the aggregate outstanding principal
amount of all Notes, and shall be held by the Note Holders in such percentages,
regardless of the time or order of the attachment or perfection of their
respective security interests or the time and manner of filing of their
respective deeds of trust, financing statements or assignments thereof and
regardless of which, if any, Note Holder may hold possession of the Collateral.
All recoveries attributable to enforcement of Contractual Rights or Statutory
Rights, or both, shall be shared ratably by the Note Holders according to their
respective pro rata interests as provided in this Security Agreement.

         5.2      Grantor Obligations. The provisions of this Article 5 are for
the purpose of defining the relative rights of the Note Holders with respect to
the Collateral and the exercise of Contractual Rights and Statutory Rights.
Nothing herein shall impair the obligations of Grantor, which are absolute and
unconditional, to pay and perform the Obligations as and when due. No provision
of this Security Agreement shall be construed to prevent any Note Holder from
exercising remedies that may otherwise be available to it.

                                   ARTICLE 6
                                   GUARANTEE

         6.1      Guarantee. Grantor hereby guarantees to Secured Party and each
Note Holder and their respective successors and assigns the prompt payment in
full when due (whether at stated maturity, by acceleration or otherwise) of the
principal of and interest on the Notes and all other amounts from time to time
owing to Secured Party or each Note Holder by Parent under the Purchase
Agreement or any other Transaction Document (as such term is defined in the
Purchase Agreement), in each case strictly in accordance with the terms thereof
(such obligations being herein collectively called the "Guaranteed
Obligations"). Grantor hereby further agrees that if Parent shall fail to pay in
full when due (whether at stated maturity, by acceleration or otherwise) any of
the Guaranteed Obligations, Grantor will promptly pay the same, without any
demand or notice whatsoever, and that in the case of any extension of time of
payment or renewal of any of the Guaranteed Obligations, the same will be
promptly paid in full when due

                                     - 20 -



(whether at extended maturity, by acceleration or otherwise) in accordance with
the terms of such extension or renewal.

         6.2      Obligations Unconditional. The obligations of Grantor under
Section 6.1 are absolute and unconditional irrespective of the validity,
regularity or enforceability of the obligations of Parent under the Transaction
Documents or any other agreement or instrument referred to herein or therein, or
any substitution, release or exchange of any other guarantee of or security for
any of the Guaranteed Obligations, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever that might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor (other than the defense that the Guaranteed Obligations have been paid
in full), it being the intent of this Article 6 that the obligations of Grantor
hereunder shall be absolute and unconditional under any and all circumstances.
Without limiting the generality of the foregoing, it is agreed that the
occurrence of any one or more of the following shall not alter or impair the
liability of Grantor hereunder, which shall remain absolute and unconditional as
described above:

                  (a)      at any time or from time to time, without notice to
Grantor, the time for any performance of or compliance with any of the
Guaranteed Obligations shall be extended, or such performance or compliance
shall be waived;

                  (b)      any of the acts mentioned in any of the provisions of
the Transaction Documents or any other agreement or instrument referred to
herein or therein shall be done or omitted;

                  (c)      the maturity of any of the Guaranteed Obligations
shall be accelerated, or any of the Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under the Transaction
Documents or any other agreement or instrument referred to herein or therein
shall be waived or any other guarantee of any of the Guaranteed Obligations or
any security therefor shall be released or exchanged in whole or in part or
otherwise dealt with; or

                  (d)      any lien or security interest granted to, or in favor
of, the Secured Party or any Note Holder or Note Holders as security for any of
the Guaranteed Obligations shall fail to be perfected.

         Grantor hereby expressly waives diligence, presentment, demand of
payment, protest and all notices whatsoever, and any requirement that Secured
Party or any Note Holder exhaust any right, power or remedy or proceed against
Parent under the Transaction Documents or any other agreement or instrument
referred to herein or therein, or against any other person or entity under any
other guarantee of, or security for, any of the Guaranteed Obligations.

         6.3      Reinstatement. The obligations of Grantor under this Article 6
shall be automatically reinstated if and to the extent that for any reason any
payment by or on behalf of Parent in respect of the Guaranteed Obligations is
rescinded or must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a

                                     - 21 -



result of any proceedings in bankruptcy or reorganization or otherwise and
Grantor agrees that it will indemnify the Secured Party and each Note Holder on
demand for all reasonable costs and expenses (including, without limitation,
fees of counsel) incurred by the Secured Party or such Note Holder in connection
with such rescission or restoration, including any such costs and expenses
incurred in defending against any claim alleging that such payment constituted a
preference, fraudulent transfer or similar payment under any bankruptcy,
insolvency or similar law.

         6.4      Subrogation. Grantor hereby agrees that until the payment and
satisfaction in full of all Guaranteed Obligations under the Transaction
Documents it shall not exercise any right or remedy arising by reason of any
performance by it of its guarantee in Section 6.1, whether by subrogation or
otherwise, against Parent or any other guarantor of any of the Guaranteed
Obligations or any security for any of the Guaranteed Obligations.

         6.5      Remedies. Grantor agrees that the obligations of Parent under
the Notes may be declared to be or may become forthwith due and payable as
provided in each Note for purposes of Section 6.1 hereof notwithstanding any
stay, injunction or other prohibition preventing such declaration (or such
obligations from becoming automatically due and payable) as against Parent and
that, in the event of such declaration (or such obligations being deemed to have
become automatically due and payable), such obligations (whether or not due and
payable by Parent) shall forthwith become due and payable by Grantor for
purposes of said Section 6.1.

         6.6      Continuing Guarantee. The guarantee in this Article 6 is a
continuing guarantee, and shall apply to all Guaranteed Obligations whenever
arising.

                                    ARTICLE 7
                                  MISCELLANEOUS

         7.1      Further Assurances. Grantor agrees, at its expense, to do such
further things, to execute, acknowledge, deliver and cause to be duly filed all
such further instruments and documents and take all such actions as the Secured
Party may from time to time reasonably request for the better assuming and
preserving of the security interests and the rights and remedies created hereby,
including but not limited to, the execution and delivery of such additional
conveyances, assignments, agreements and instruments, the payment of any fees
and taxes required in connection with the execution and delivery of this
Security Agreement, the granting of the security interests created hereby and
the execution, filing and recordation of any financing statements (including
fixture filings) or other documents as the Secured Party may deem reasonably
necessary for the perfection of the security interests granted hereunder. If any
amount payable under or in connection with any of the Collateral shall be or
become evidenced by any promissory note or other instrument, such note or
instrument shall be immediately pledged and delivered to the Secured Party, duly
endorsed in a manner reasonably satisfactory to the Secured Party, subject to
the rights of any other secured party having rights senior to the Secured Party.
If at any time Grantor shall take and perfect a security interest in any
property to secure payment and performance of an Account, Grantor, upon the
request of the Secured Party,

                                     - 22 -



shall promptly assign such security interest to the Secured Party, subject to
the rights of any other secured party having rights senior to the Secured Party.
Grantor agrees to notify the Secured Party thirty (30) days prior to any change
(a) in its corporate name, (b) in its jurisdiction of incorporation or
organization, (c) in the location of its chief executive office, (d) in its
chief place of business, or (e) in the office or offices where it keeps its
records relating to the Collateral. Grantor agrees that, after the occurrence
and during the continuance of an Event of Default, it shall upon request of the
Secured Party, take any and all actions, to the extent permitted by applicable
law, at its own expense, to obtain the approval of any governmental authority
for any action or transaction contemplated by this Security Agreement which is
then required by law, and specifically, without limitation, upon request of the
Secured Party, to prepare, sign and file with any governmental authority
Grantor's portion of any application or applications for consent to the
assignment of licenses held by Grantor, or for consent to the possession and
sale of any of the Collateral by or on behalf of the Secured Party. Grantor
further agrees that it shall at all times, at its own expense and cost, keep
accurate and complete records with respect to the Collateral, including but not
limited to, a record of all payments and proceeds received in connection
therewith or as a result of the sale thereof and of all credits granted, and
agrees that the Secured Party or its representatives shall have the right at any
reasonable time and from time to time to call at Grantor's place or places of
business to inspect the Collateral and to examine or cause to be examined all of
the books, records, journals and other data relating to the Collateral and to
make extracts therefrom or copies thereof as are reasonably requested; provided
that such inspections shall occur no more often than quarterly unless an Event
of Default has occurred and is continuing.

         7.2      Effectiveness. This Security Agreement shall take effect
immediately upon execution by Grantor.

         7.3      Indemnity; Reimbursement of the Secured Party; Deficiency. In
connection with the Collateral, this Security Agreement and the administration
and enforcement or exercise of any right or remedy granted to the Secured Party
hereunder, Grantor agrees, subject to the limitations set forth hereafter (a) to
indemnify, defend and hold harmless the Secured Party from and against any and
all claims, demands, losses, judgments and liabilities (including but not
limited to, liabilities for penalties) of whatever nature, relating thereto or
resulting therefrom, and (b) to reimburse the Secured Party for all reasonable
costs and expenses, including but not limited to, the reasonable fees and
disbursements of attorneys, relating thereto or resulting therefrom. The
foregoing indemnity agreement includes all reasonable costs incurred by the
Secured Party in connection with any litigation relating to the Collateral
whether or not the Secured Party shall be a party to such litigation, including
but not limited to, the reasonable fees and disbursements of attorneys for the
Secured Party, and any out-of-pocket costs incurred by the Secured Party in
appearing as a witness or in otherwise complying with legal process served upon
it. The obligations in this Section 7.3 do not apply to any claims for
indemnity, defense, or reimbursement that arise from the gross negligence or
willful misconduct of the Secured Party. In no event shall the Secured Party be
liable, in the absence of gross negligence or willful misconduct on its part,
for any matter or thing in connection with this Security Agreement other than

                                     - 23 -



to account for moneys actually received by it in accordance with the terms
hereof. All indemnities contained in this Section 7.3 and elsewhere in this
Security Agreement shall survive the expiration or earlier termination of this
Security Agreement. After application of the proceeds by the Secured Party
pursuant to Section 4.5 hereof, Grantor shall remain liable to the Secured Party
for any deficiency.

         7.4      Continuing Lien. It is the intent of the parties hereto that
(a) this Security Agreement shall constitute a continuing agreement as to any
and all future, as well as existing transactions, between Grantor and the
Secured Party under or in connection with the Note or otherwise relating to any
other Obligation, and (b) the security interest provided for herein shall attach
to after-acquired as well as existing Collateral.

         7.5      Termination. Upon payment, performance or other satisfaction
in full of the Notes and all other Obligations and all other amounts due in
connection therewith and termination of all commitments relating thereto, the
Secured Party shall reassign, redeliver and release (or cause to be so
reassigned, redelivered and released), without recourse upon or warranty by the
Secured Party, and at the sole expense of Grantor, to Grantor, against receipt
therefor, such of the Collateral (if any) as shall not have been sold or
otherwise applied by the Secured Party pursuant to the terms hereof and not
theretofore reassigned, redelivered and released to Grantor, together with
appropriate instruments of reassignment and release.

         7.6      Notices. All notices, requests and other communications
hereunder shall be in writing and shall be deemed to have been duly given at the
time of receipt if delivered by hand or by facsimile transmission (with receipt
of successful and full transmission) or three days after being mailed,
registered or certified mail, return receipt requested, with postage prepaid to
the applicable parties hereto at the address stated below or if any party shall
have designated a different address or facsimile number by notice to the other
party given as provided above, then to the last address or facsimile number so
designated.

                  If to Grantor:

                           Image Ware Systems, Inc.
                           10883 Thornmint Road
                           San Diego, California 92127
                           Attention: S. James Miller, Jr.,
                                      Chairman, CEO and President
                           Facsimile: (858) 673-0291

                  with a copy to:

                           Cooley Godward LLP
                           4401 Eastgate Mall
                           San Diego, California 92121-1909
                           Attention: M. Wainwright Fishburn, Jr., Esq.
                           Facsimile: (858) 550-6420

                                     - 24 -



                  If to Secured Party:

                           Perseus 2000, L.L.C.
                           2099 Pennsylvania Ave., N.W.
                           Suite 900
                           Washington, D.C. 20006-1813
                           Attention: Chip Newton, Managing Director
                           Facsimile: (202) 429-0588

                  with a copy to:

                           Arnold & Porter
                           1600 Tysons Boulevard; Suite 900
                           McLean, Virginia 22102-4865
                           Attention: Robert B. Ott, Esq.
                           Facsimile: (703) 720-7399

         7.7      Successors and Assigns. Whenever in this Security Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and assigns of such party, and all covenants, promises
and agreements by or on behalf of the Secured Party that are contained in this
Security Agreement shall bind and inure to the benefit of its respective
successors and assigns. Grantor may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of the Secured Party.

         7.8      APPLICABLE LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY,
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE WITHOUT REFERENCE TO ITS
CONFLICTS OF LAW RULES THAT MIGHT REFER THE GOVERNANCE OR CONSTRUCTION OF THIS
SECURITY AGREEMENT TO THE LAW OF ANOTHER JURISDICTION (EXCEPT WHEN THE CODE OR
OTHER APPLICABLE LAW WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION). THE PARTIES HERETO AGREE THAT THE APPROPRIATE AND EXCLUSIVE FORUM
FOR ANY DISPUTES ARISING OUT OF THIS SECURITY AGREEMENT SOLELY BETWEEN SECURED
PARTY AND GRANTOR SHALL BE THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE
BOROUGH OF MANHATTAN OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND THE PARTIES HERETO IRREVOCABLY CONSENT TO THE
EXCLUSIVE JURISDICTION OF SUCH COURTS, AND AGREE TO COMPLY WITH ALL REQUIREMENTS
NECESSARY TO GIVE SUCH COURTS JURISDICTION. THE PARTIES HERETO FURTHER AGREE
THAT THE PARITIES WILL NOT BRING SUIT WITH RESPECT TO ANY DISPUTES ARISING OF
THIS SECURITY AGREEMENT EXCEPT AS EXPRESSLY SET FORTH BELOW FOR THE EXECUTION OR
ENFORCEMENT OF JUDGEMENT, IN ANY JURISDICTION OTHER THAN THE ABOVE SPECIFIED
COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY CONSENTS TO THE SERVICE OF
PROCESS IN ANY ACTION OR PROCEEDING HEREUNDER BY THE MAILING OF COPIES

                                     - 25 -



THEREOF BY REGISTERED MAIL OR CERTIFIED AIRMAIL, POSTAGE PREPAID, TO THE ADDRESS
SPECIFIED IN SECTION 7.6 HEREOF. THE FOREGOING SHALL NOT LIMIT THE RIGHTS OF ANY
PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO OBTAIN
EXECUTION OF JUDGMENT IN ANY OTHER JURISDICTION. THE PARTIES FURTHER AGREE, TO
THE EXTENT PERMITTED BY LAW, THAT FINAL AND UNAPPEALABLE JUDGMENT AGAINST ANY OF
THEM IN ANY ACTION OR PROCEEDING CONTEMPLATED ABOVE SHALL BE CONCLUSIVE AND MAY
BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE OF THE UNITED STATES BY
SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF
THE FACT AND THE AMOUNT OF INDEBTEDNESS.

         7.9      Waivers. No failure or delay of the Secured Party in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or future exercise thereof or the exercise of any other right
or power. The rights and remedies of the Secured Party hereunder are cumulative
and not exclusive of any rights or remedies which it would otherwise have. No
waiver of any provision of this Security Agreement or consent to any departure
by Grantor therefrom shall in any event be effective unless the same shall be
authorized as provided in Section 7.10, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice to or demand on Grantor in any case shall entitle Grantor to any other or
further notice or demand in similar or other circumstances.

         7.10     Amendments. Neither this Security Agreement nor any provision
hereof may be amended or modified except pursuant to an agreement or agreements
in writing entered into by Grantor and the Secured Party.

         7.11     Severability. In the event any one or more of the provisions
contained in this Security Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein or therein shall not in any way be
affected or impaired thereby.

         7.12     Counterparts. This Security Agreement may be executed in two
or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one contract, and shall become
effective when copies hereof which, when taken together, bear the signatures of
each of the parties hereto shall be delivered or mailed to the Secured Party.

         7.13     Headings. Article and Section headings used herein are for
convenience of reference only and are not to affect the construction of, or to
be taken into consideration in interpreting, this Security Agreement.

         7.14     WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY EXPRESSLY
WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR

                                     - 26 -



PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN
CONNECTION WITH THIS SECURITY AGREEMENT AND AGREE THAT ANY SUCH ACTION SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE TERMS AND PROVISIONS OF THIS
SECTION CONSTITUTE A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS
SECURITY AGREEMENT.

                      [signatures appear on following page]

                                     - 27 -



         IN WITNESS WHEREOF, Grantor has executed this Security Agreement as of
the date first above written.

                                       IMAGEWARE SYSTEMS ID GROUP, INC.

                                       By: _____________________________________
                                           Name:  S. James Miller, Jr.
                                           Title: Chairman, CEO and President

                                       ACKNOWLEDGED:

                                       PERSEUS 2000, L.L.C.

                                       By: _____________________________________
                                           Name:  Ray E. Newton III
                                           Title: Managing Director

                     [Signature Page to Security Agreement]



                                   SCHEDULE A

Pursuant to Section 2.1(b), the following information is disclosed:



                       CHIEF EXECUTIVE        OTHER PLACE(S) OF      JURISDICTION OF
    GRANTOR                OFFICE                  BUSINESS           INCORPORATION    COLLATERAL LOCATION
- --------------------  --------------------  -----------------------  ---------------  -----------------------
                                                                          
ImageWare Systems ID  10883 Thornmint Road  7001-A Pelham Rd.        Delaware         7001-A Pelham Rd.
Group, Inc.           San Diego, CA 92127   Greenville, SC 29615                      Greenville, SC 29615

                                            33 Boston Post Rd. West                   33 Boston Post Rd. West
                                            Suite 270                                 Suite 270
                                            Marlborough, MA 01752                     Marlborough, MA 01752



                           EQUIPMENT AND            LOCATION OF LEASED
    GRANTOR                GOODS LOCATION                FACILITIES
- --------------------    -----------------------    -----------------------
                                             
ImageWare Systems ID    7001-A Pelham Rd.          7001-A Pelham Rd.
Group, Inc.             Greenville, SC 29615       Greenville, SC 29615

                        33 Boston Post Rd. West    33 Boston Post Rd. West
                        Suite 270                  Suite 270
                        Marlborough, MA 01752      Marlborough, MA 01752




                                   SCHEDULE B

                                      None

                                     - 30 -

EX-6

                                                                       EXHIBIT 6

                             JOINT FILING AGREEMENT

         Each of the undersigned hereby acknowledges and agrees, in compliance
with the provisions of Rule 13d-1(k)(1) promulgated under the Securities
Exchange Act of 1934, as amended, that the Schedule 13D to which this agreement
is attached as Exhibit 6, and any amendments thereto, will be filed with the
Securities and Exchange Commission jointly on behalf of each of the undersigned.
These signatures are executed by Robert W. Blanchard, Esq., attorney-in-fact for
the Reporting Parties under the Power of Attorney dated June 13, 2003, attached
to the aforementioned Schedule 13D as Exhibit 7.

         This agreement may be executed in one or more counterparts.

Dated: June 24, 2003

                                        MARVIN I. FRIEDMAN

                                        ________________________________________
                                        By:  Robert W. Blanchard, Esq.

                                        MILTON LOHR

                                        ________________________________________
                                        By:  Robert W. Blanchard, Esq.

                                        L.F. GLOBAL HOLDINGS, LLC

                                        ________________________________________
                                        By:  Robert W. Blanchard, Esq.

                                        L.F. GLOBAL INVESTMENTS, LLC

                                         _______________________________________
                                         By:  Robert W. Blanchard, Esq.

EX-7

                                                                       EXHIBIT 7

                               POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert W. Blanchard and/or Joseph C.
Alter, his attorney-in-fact, each with the power of substitution, for him, in
any and all capacities, to sign any Form 3, Form 4, Form 5, Schedule 13d, or
other report of beneficial ownership relating to the securities of ImageWare
Systems, Inc., or any successor, and to file the same, with exhibits thereto and
other documents in connection therewith as needed, with the Securities and
Exchange Commission, hereby ratifying and conforming all that each the attorney
in-fact, or his substitute may do or cause to be done by virtue hereof.

SIGNATURE                                            DATE

L.F. Global Investments, LLC                         June 12, 2003

By:  ___________________________________
         Marvin Friedman

L.F. Global Holdings, LLC                            June 12, 2003

_________________________________________
By:      Marvin Friedman

_______________________________________              June 12, 2003
         Marvin Friedman

_______________________________________              June 12, 2003
         Milton Lohr

EX-8

                                                                       EXHIBIT 8

                             INTERCREDITOR AGREEMENT

         This Intercreditor Agreement ("Agreement") dated as of June 13, 2003,
is made and entered into by and between Laurus Master Fund, Ltd., a Cayman
Islands corporation ("Laurus"), and L.F. Global Holdings, LLC, a California
limited liability company ("LF") (together, the "Purchaser"), to determine the
parties' respective rights, remedies and interests with respect to ImageWare
Systems, Inc., a California corporation ("Company").

                                    RECITALS

         A.       Under this Agreement, the parties intend to clarify their
respective rights in connection with the purchase of the Promissory Note
(defined below) and LF's advance of additional working capital to the Company.

         B.       As of June 6, 2003, the Company is indebted to Perseus 2000,
L.L.C., a Delaware limited liability company ("Perseus") or assignee ("Lender")
in the amount of $3,066,504, with daily accrual of interest of $1,111.42
(collectively "Existing Debt").

         C.       Such Existing Debt is evidenced by: (i) a Note and Warrant
Purchase Agreement entered into between Company and Lender and dated as of May
22, 2002; (ii) Pledge and Security Agreement entered into between Company and
Lender and dated as of May 22, 2002; (iii) Registration Rights Agreement entered
into between Company and Lender and dated as of May 22, 2002; (iv) Senior
Secured Convertible Promissory Note in the original amount of $2,000,000.00
entered into between Company and Lender and dated as of May 22, 2002; and (v)
Demand Promissory Note in the original amount of $500,000.00 entered into
between the Company and Lender and dated as of September 23, 2002 (collectively
"Promissory Note"). The Promissory Note is specifically exclusive of that
certain Warrant to Purchase Common Stock issued in favor of Lender by Company
and dated as of May 22, 2002, which warrant shall be retained by Perseus.

         D.       Collateral for the Promissory Note consists of all collateral
described in: (i) the Pledge and Security Agreement entered into between Company
and Perseus dated as of May 22, 2002; and (ii) the Pledge and Security Agreement
entered into between ImageWare Systems ID Group, Inc., a Delaware corporation,
and Perseus dated as of May 22, 2002 (collectively "Collateral").

         E.       The Purchaser will purchase the Existing Debt represented by
the Promissory Note from Lender at Closing (defined below) in consideration of
the payment of $3,063,170.05 in good funds plus per diem interest accruing on
the Promissory Note after June 3, 2003 until the date of Closing (defined below)
to Perseus, and shall cause the Company concurrently therewith to retire the
Promissory Note and issue the Laurus Note (defined below) and the LF Note
(defined below), which collectively shall constitute the Recast Promissory Note
(defined below).



         F.       Concurrent with the closing of the purchase of the Promissory
Note by Purchaser, LF shall advance Company the sum of approximately $1,088,000
to pay costs associated with this transaction and as additional working capital
("Additional Advance"). The Additional Advance shall be included by the Company
within the principal balance of the LF Note (defined below). The proceeds of the
Additional Advance shall be used by Company to (i) pay costs associated with
this transaction; and (ii) for general ongoing working capital for the Company.

         G.       For purposes of this Agreement, the Closing Date shall be the
date on which the parties execute and deliver their agreement and concurrently
close the purchase of the Promissory Note and contribute the Additional Advance
("Closing").

         H.       At Closing Laurus will be obligated to fund an amount equal to
$1,500,000.00 ("Initial Laurus Investment"). Such Initial Laurus Investment will
be funded at Closing by wire transfer to Perseus as partial payment for the
purchase of the Promissory Note, which Initial Laurus Investment shall be
evidenced by the Laurus Note (defined below).

         I.       At Closing LF will be obligated to fund an amount equal to
$2,650,000.00 ("Initial LF Investment"). Such Initial LF Investment will be
funded at Closing by wire transfer to: (i) Perseus as partial payment for the
purchase of the Promissory Note; and (ii) the balance to Company which Initial
LF Investment shall be evidenced by the LF Note (defined below).

         J.       Concurrent with Closing LF will cause the Company to: (1) pay
Laurus a closing fee in cash in an amount equal to four percent (4.0%) of the
Initial Laurus Investment ("Closing Fee"), and (2) pay LF a closing fee in an
amount equal to four percent (4.0%) of the Initial LF Investment through an
increase in the principal amount of the LF Note (as defined below) or paid
in-kind by delivery of a separate note ("LF Closing Fee Note").

         K.       All closing costs of Purchaser to a maximum of $25,000.00
shall be reimbursed Purchaser by Company upon request and presentation of
invoices from third party service providers for costs incurred by Purchaser,
which if less than all such costs incurred shall be divided pro rata between LF
and Laurus. Company will be responsible for its own closing costs.

                                    AGREEMENT

         NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, Laurus and LF hereby agree as follows:

         1.       LF Subordination. The Initial LF Investment as evidenced by
the LF Note (defined below) and Closing Fee Note will be subordinate to the
Initial Laurus Investment as evidenced by the Laurus Note (defined below), such
that in the event of any liquidation of Collateral or retirement of the
Promissory Note, the Initial Laurus Investment together with pro rata accrued
but unpaid interest due Laurus pursuant to the Laurus Note (defined below) will
be returned to Laurus prior to distributions to LF on account of any liquidation
of Collateral or retirement of the LF Note (defined below) and Closing Fee Note
("LF Subordination").

                                       2



         Such LF Subordination shall be evidenced by this Agreement between LF
and Laurus, which Agreement and LF Subordination shall remain in effect for so
long as the Laurus Note (defined below) is outstanding.

         2.       Laurus Call Right. Laurus shall have the right and option (but
not the obligation) to purchase the Initial LF Investment, including the LF
Closing Fee Note and any interest paid in-kind up to close of business on July
11, 2003 ("Call Right"). Such Call Right, if exercised, shall be in
consideration of payment by Laurus to LF prior to close of business on July 11,
2003 of:

                  2.1      an amount in cash equal to the unpaid principal
amount of the LF Note, together with pro rata accrued but unpaid interest
(including any interest paid in-kind) due LF pursuant to the LF Note (defined
below); and

                  2.2      a distribution by LF to Laurus of the Purchaser
Warrants (defined below) issued to LF, which exceed 800,000 Purchaser Warrants
which are to be retained by LF.

         3.       Promissory Note Recast.

                  3.1      Concurrent with Closing, LF on behalf of Purchaser
shall use its best efforts to cause the Company to:

                           3.1.1    Cause the Promissory Note to be amended and
restated such that two serial notes in the total combined amount of the Initial
LF Investment ("LF Note") and the Initial Laurus Investment ("Laurus Note") are
issued on identical terms to the Promissory Note, except as noted herein, each
serial note being issued respectively in favor of LF and Laurus in the original
principal amount of their respective initial investments, which recast
promissory notes when issued by the Company will amend, restate and replace the
Promissory Note (collectively "Recast Promissory Note");

                           3.1.2    Allow all of the interest owing LF and
Laurus on the LF Note and Laurus Note through December 31, 2003, at the option
of LF, to be converted from a cash obligation of Company to a payment-in-kind
obligation of Company as provided for in the Recast Promissory Note (it being
expressly understood that all interest owing Laurus on the Laurus Note shall
always be payable to Laurus monthly in cash after December 31, 2003 even if LF
elects thereafter to continue to allow for payment-in-kind interest on the LF
Note);

                           3.1.3    Cause, no later than ninety (90) days
following Closing, all shares which may be issued in connection with the
Promissory Note, including Purchaser's Warrants, pursuant to the Registration
Rights Agreement entered into between Company and Lender and dated as of May 22,
2002 to be registered and declared effective by the Securities and Exchange
Commission;

                           3.1.4    Extend the maturity date of the Promissory
Note until May 22, 2005;

                                       3



                           3.1.5    Limit the amount of permitted borrowings by
Company's German subsidiary to an amount no greater than that outstanding as of
the date of Closing;

                           3.1.6    Provide (to the extent not so provided in
the Promissory Note) "full ratchet" anti-dilution protection to Purchaser in the
Notes and Purchaser's Warrants;

                           3.1.7    Allow for all amounts outstanding under the
Laurus Note and/or the LF Note to be convertible into shares of Company's common
stock at $2.11 per share; and

                           3.1.8    Increase the number of seats on Company's
Board of Directors which can be filled by Purchaser from one, as currently set
forth in the Promissory Note, to three (collectively "Promissory Note Recast").

                  3.2      Concurrent with the Promissory Note Recast, LF will
use its best efforts to cause the Company to:

                           3.2.1    Issue in favor of Purchaser warrants to
purchase 1,600,000 shares of common stock of Company at a strike price of $2.11
and for a term of six (6) years and otherwise containing reasonable and
customary terms ("Purchaser's Warrants");

                           3.2.2    Elect to Company's Board of Directors Milton
Lohr, Dr. Kenneth Widder, and James Chadwick as Purchaser's representatives; and

                           3.2.3    Take such good faith actions as are
reasonably required to secure the consent of Company's shareholders required to
effectuate this transaction, if any, at Company's next annual meeting and to
include within its proxy materials a solicitation of the same at Company's
expense and at such other times as may be required.

         4.        Profit Distributions.

                  4.1      In the event that Laurus does not exercise the Call
Right, profits, if any from the joint conversion in full of the Recast
Promissory Note into common shares of Company's stock and exercise in full of
Purchaser's Warrants, shall be divided between LF and Laurus on the following
basis: profits (exclusive of accrued but unpaid interest as provided for in the
Recast Promissory Note), if any, shall be distributed to Laurus in an amount
equal to Laurus' pro rata share exclusive of profits, if any, which may be
attributable to interest due Laurus pursuant to the Laurus Note and the Closing
Fee due Laurus as well as interest or the LF Closing Fee Note due LF, which
interest and/or LF Closing Fee Note was, at the option of LF, paid to LF either
in cash or as payment-in-kind (such interest and/or securities flowing therefrom
being the exclusive property of LF) less twenty-five percent (25%), with the
balance of profits (exclusive of accrued but unpaid interest as provided for in
the Recast Promissory Note), if any, distributed to LF.

                                       4



         By way of example, if Laurus invested $1.5 million and LF invested
$2.65 million, profits of $3.0 million (after return of capital to both LF and
Laurus) would be distributed $813,253.01 to Laurus and $2,186,746.99 to LF.

                  4.2      In the event that Laurus: (i) does not exercise the
Call Right, and (ii) exercises its conversion rights under the Laurus Note
independent and in advance of LF exercising any of its conversion rights under
the LF Note, twenty-five percent (25%) of the profits, if any, from the
conversion of the Laurus Note into common shares of Company's stock and exercise
of Purchaser's Warrants, shall be paid by Laurus to LF as follows: on the date
on which Laurus has fully recovered the Laurus Initial Investment together with
accrued but unpaid interest to the date of conversion, it will transfer into
trust for the benefit of LF twenty-five percent (25%) of its then remaining
shares of Company's common stock, or cash profits as applicable, the profits
from the sale of which shall be held in trust for LF by Laurus ("LF Escrow") for
a period of up to eighteen (18) months ("LF Tail Period") for the benefit of LF.

         If by the termination of the LF Tail Period, LF has still not converted
the LF Note and liquidated its as converted Company common stock, the funds held
in the LF Escrow will be released by Laurus to LF and neither LF nor Laurus will
have any additional obligation to the other. If during the LF Tail Period LF
does convert any portion of the LF Note and has liquidated its as converted
Company common stock, then in that event Laurus shall be entitled to retain all
amounts in the LF Escrow, if the profits attributable to LF (exclusive of
accrued interest) from the as converted LF Note on a pro rata basis exceed one
hundred and twenty-five percent (125%) of the profits realized by Laurus. If the
profits realized by LF from the as converted LF Note on an as converted basis
during the LF Tail Period are less than one hundred and twenty-five percent
(125%) of the profits realized by Laurus, Laurus shall immediately distribute to
LF the amounts in the LF Escrow.

         5.       Conversion Stand-Off. Notwithstanding the foregoing, if Laurus
shall exercise the Call Right then Laurus shall be entitled to retain
one-hundred percent (100%) of all proceeds from the conversion and sale of the
Recast Promissory Note and all of Laurus' portion of Purchasers Warrants

                  5.1      Laurus agrees that it will not exercise its
conversion rights under the Laurus Note before February 28, 2004 so long as: (i)
LF agrees not to exercise its conversion rights under the LF Note during the
same period, and (ii) the holder of the existing $600,000.00 convertible debt of
the Company has not converted such into common stock of the Company.

                  5.2      After February 28, 2004, or if: (i) LF exercises its
conversion rights prior to that date, or (ii) the holder of the existing
$600,000.00 convertible debt of the Company has exercised its conversion rights
prior to that date, Laurus may elect to convert the Laurus Note on sixty (60)
days prior written notice to LF during which time LF will have the right to
purchase the Laurus Note on terms agreed to by LF and Laurus, and sell the
shares underlying the conversion of the Laurus Note (absent a purchase of the
Laurus Note by LF during such sixty (60) day period) independent of LF, but
subject to the Profit Distributions section of this

                                       5



Agreement. In such event, and provided LF has not converted the LF Note into
common shares of the Company, Laurus shall be free to liquidate its as converted
shares into the market while, to the extent possible, attempting to maintain an
orderly market in the Company's shares.

         6.       Optional Advances to Company. Following closing, each of
Laurus and LF may elect to advance additional amounts to Company as provided for
in the Laurus Note and LF Note, respectively. To the extent that Laurus has
exercised the Call Right, LF will be obligated to advance Company in a single or
series of advances, up to the first $1,500,000.00 ("Additional Initial Advance")
subject to Laurus' right of first refusal to participate equally in such
Additional Initial Advance. To the extent that Laurus does not exercise the Call
Right it will have no obligation to participate in any additional advances LF
may decide in its sole discretion to make to Company pursuant to the terms of
the Recast Promissory Note. Such Additional Initial Advance, if any, shall be
recoverable from an event of liquidation of Collateral or retirement of the
Laurus Note on a pari passu basis with other amounts then owing under the Laurus
Note and shall not be subject to the LF Subordination. Profits, if any,
attributable to the Additional Initial Advance, if any, shall be divided pro
rata between LF and Laurus in proportion to the amount, if any, contributed by
each to the Additional Initial Advance.

         7.       Investment Decisions. Unless Laurus shall have exercised the
Call Right, and for so long as the Laurus Promissory Note is not in default past
any applicable cure periods, if any, LF shall make all non-economic decisions
regarding the Recast Promissory Note on behalf of Purchaser, and be entitled to
vote all shares of Company's common stock held by Purchaser (collectively
"Investment Decisions"). In the event that the Laurus Note is in default past
any applicable cure periods, and for so long as such uncured default continues,
LF shall relinquish its right to make the Investment Decisions, and such
decisions regarding the Recast Promissory Note shall be made jointly by LF and
Laurus. Each party agrees that it will not take unilateral action to enforce the
Recast Promissory Note or any document securing the Recast Promissory Note
without the consent and agreement of the other party; provided, if after
reasonable efforts have been made by a party to reach agreement and no agreement
has been reached, either party, provided such party is not in default under this
Agreement, may unilaterally take reasonable actions to enforce the Recast
Promissory Note held by such party and any document securing such note after
having provided the other party with thirty (30) days prior written notice of
the action to be taken. Provided reasonable steps are taken to give the other
party advance notice, no advance notice shall be required if immediate action is
reasonably necessary to preserve the value of any collateral or the ability to
foreclose on such collateral.

                                       6



         8.       LF Default Call Option.

                  8.1      In the event that the Call Right is not exercised, LF
shall have a right and option to purchase the Initial Laurus Investment at any
time that in the joint good faith opinion of LF and Laurus, either:

                           8.1.1    The Recast Promissory Note is in material
default past any applicable cure periods such that the principal balance then
owed pursuant to the Recast Promissory Note is in jeopardy of not being repaid;

                           8.1.2    The Company has either through its actions,
or those of third-party creditors, been placed in either a voluntary or
involuntary bankruptcy proceeding; or

                  8.1.3    The Company is known to LF to be taking such actions
as can be reasonably viewed as preparatory for a bankruptcy filing ("LF Default
Call Option").

                  8.2      Such LF Default Call Option if exercised shall be in
consideration of payment by LF to Laurus of:

                           8.2.1    An amount in cash equal to the Initial
Laurus Investment together with pro rata accrued but unpaid interest due Laurus
pursuant to the Laurus Note;

                           8.2.2    The pro rata prepayment privilege payment
then due under the Laurus Note; and

                           8.2.3    Laurus shall distribute to LF of fifty
percent (50%) of Purchaser's Warrants issued to Laurus.

         9.       Right of First Refusal to Purchase As Converted Shares. LF
shall be granted the right of first refusal to purchase any shares of Company's
common stock which Laurus may own as a result of a conversion of all or a
portion of the Laurus Note or exercise of Laurus' interest in Purchaser's
Warrants if such sale involves a block of Company's stock in excess of 50,000
shares. Such right of first refusal shall be afforded LF by way of private
purchase on twenty-four (24) hours notice from Laurus.

         10.      Additional Remedies. If either party violates any of the terms
of this Agreement, in addition to any remedies in law, equity or otherwise, the
non-violating party may restrain such violation in any court of law and may
interpose this Agreement as a defense in any action by the violating party.

                                       7



         11.      Waivers. No waiver shall be deemed to be made by Laurus or LF
of any of their respective rights hereunder unless it is in writing and signed
by the waiving party. Each such waiver shall be a waiver only with respect to
the specific instance involved and shall in no way impair the rights of the
waiving party or the obligations of the other party to the waiving party in any
other respect at any other time.

         12.      Third Party Beneficiaries. This Agreement is solely for the
benefit of Laurus, LF and their respective successors and assigns, and neither
Company nor any other persons or entities are intended to be third party
beneficiaries hereunder or to have any right, benefit, priority or interest
under, or because of the existence of, or to have any right to enforce, this
Agreement. Laurus and LF shall have the right to modify or terminate this
Agreement at any time without notice to or approval of Company or any other
person or entity.

         13.      Notices. For the purposes of this Agreement, written notices
shall be sent by U.S. certified mail, return receipt requested, postage prepaid;
or by personal delivery; or by facsimile confirmed by the recipient; and
addressed to the notified party at its address set forth below its signature
line, or such other address specified by the party with like notice. Notices
shall be deemed received three (3) business days after deposit in the U.S. mail,
if sent by first class mail; upon the date set forth in the return receipt, if
by certified mail; on the day of confirmation of delivery by the recipient, if
by facsimile; or on the day of transmittal by personal delivery.

         14.      Costs and Attorneys' Fees. In the event that any party hereto
shall institute any litigation or other proceeding arising out of or relating to
this Agreement, the prevailing party therein shall be entitled to recover its
reasonable attorney's fees and costs incurred in connection therewith.

         15.      Mediation/Arbitration. The parties mutually agree that any
claim or controversy arising out of or relating to this Agreement shall be
resolved by first submitting to mediation under the rules of the American
Arbitration Association, and should a resolution not be reached, by submitting
to binding arbitration administered by the American Arbitration Association in
accordance with its Arbitration Rules in San Diego, California and shall be
governed by the laws of the State of California, including, but not limited to,
California Code of Civil Procedure Section 1283.05 relating to depositions and
discovery, and judgment on the award rendered by the arbitrator(s) may be
entered in any court in San Diego County having jurisdiction thereof. The
arbitrator shall have the authority to order such discovery, by way of
deposition, interrogatory, document production, or otherwise, as the arbitrator
considers necessary to a full and fair exploration of the issues in dispute,
consistent with the expedited nature of arbitration.

         16.      Governing Law. This Agreement has been delivered and accepted
at and shall be deemed to have been made in the State of New York, and shall be
interpreted, and the rights and liabilities of the parties hereto determined, in
accordance with the internal laws of the State of New York.

         17.      Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties' respective successors and
assigns, subject to the provisions hereof.

                                       8



         18.      Integrated Agreement. This Agreement sets forth the entire
understanding of the parties with respect to the within matters and may not be
modified or amended except upon a writing signed by all parties.

         19.      Authority. Each of the signatories hereto certifies that such
party has all necessary authority to execute this Agreement.

         20.      Counterparts. This Agreement may be executed in one or more
counterparts, each one of which when so executed shall be deemed to be an
original, and all of which taken together shall constitute one and the same
agreement.

                         (Signatures on following page)

                                       9



         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.

"LAURUS"

Laurus Master Fund, Ltd.,
a Cayman Islands Corporation

By: ______________________________________
Name:  ___________________________________
Title:  ___________________________________

Address for notices: 152 West 57th Street
                     Fourth Floor
                     New York, NY 10019
                     Facsimile: (212) 541-4434
                     Attention: John E. Tucker, Esq.

"LF"

L.F. Global Holdings, LLC,
a California limited liability company

By: ____________________________________
Name:  Marvin Friedman
Title: Managing Member

Address for notices:  12230 El Camino Real, Suite 220
                      San Diego, CA 92130
                      Facsimile:  (858) 509-8830
                      Attention: Marvin Friedman

                                       10



                                 ACKNOWLEDGMENT

         ImageWare Systems, Inc., a California corporation, the Borrower
referred to in the foregoing Purchase and Sale Agreement (the "Agreement"),
acknowledges that it has received a copy of the Agreement and consents to it

Dated: June 13, 2003

IMAGEWARE SYSTEMS, INC.,
A California Corporation

By:  ______________________________
Name: S. James Miller, Jr.
Title: Chairman & Chief Executive Officer

                                       11

EX-9

                                                                       EXHIBIT 9

                                   ASSIGNMENT

         FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged,
Perseus 2000, L.L.C., a Delaware limited liability company ("Assignor"), hereby
sells, assigns, transfers and conveys, upon the terms and subject to the
conditions set forth in that certain Purchase and Sale Agreement dated as of the
date hereof by and between the Assignor and Assignees (as defined below), to
L.F. Global Holding, LLC, a California limited liability company and Laurus
Master Fund, Ltd., a Cayman Islands corporation (collectively "Assignees"), all
of its right, title and interest in and to the following: (1) Senior Secured
Convertible Promissory Note in the principal amount of $2,000,000.00 executed by
ImageWare Systems, Inc., a California corporation ("Company") in favor of
Assignor dated May 22, 2002; (2) Demand Promissory Note in the principal amount
of $500,000.00 executed by the Company in favor of Assignor dated as of
September 23, 2002; (3) the Pledge and Security Agreement entered into by and
between Company and Assignor dated as of May 22, 2002, together with any and all
collateral described therein, including without limitation, the intellectual
property set forth on Exhibit BKF-1 attached hereto; and (4) the Pledge and
Security Agreement entered into by and between ImageWare Systems ID Group, Inc.,
a Delaware corporation, and Assignor dated as of May 22, 2002, together with any
and all collateral described therein, including without limitation, the
intellectual property set forth on Exhibit BKF-2 attached hereto.

         This assignment shall be binding on and inure to the benefit of the
parties thereto, their heirs, executors, administrators, successors in interest
and assigns.

         IN WITNESS WHEREOF, the undersigned has executed the within instrument
effective as of June 13, 2003.

                                     ASSIGNOR:
                                     Perseus 2000, L.L.C.,
                                     a Delaware limited liability company

                                     By:  ________________________________
                                     Name:
                                     Title:

STATE OF ______________    )
                           )       ss
COUNTY OF _____________    )

On this ____ day of ________, 2003, before me, _________________, Notary Public,
personally appeared ____________________________, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person whose name
is subscribed to the within instrument and acknowledged to me that he executed
the same in his authorized capacity, and that by his signature on the instrument
the person, or the entity upon behalf of which the person acted, executed the
instrument.

WITNESS my hand and official seal                            (Seal)

________________________________
  SIGNATURE OF NOTARY PUBLIC