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

ImageWare Systems, Inc.

(Name of Issuer)

Common Shares, par value $0.01 per share

(Title of Class of Securities)

45245S 10 8

(CUSIP Number)

Kenneth M. Socha, Esq.
Perseus 2000, L.L.C.
2099 Pennsylvania Avenue, Suite 900
Washington, D.C. 20006
(202) 452-0101

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

May 22, 2002

(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-l(e), 240.13d-l(f) or 240.13d-l(g), check the following box. [  ]

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).

Persons who respond to the collection of information contained in this form are not
required to respond unless the form displays a currently valid OMB control number.

Page 1 of 10 Pages

CUSIP No 45245S 10 8 SCHEDULE 13D Page 2 of 10 Pages

1.	Name of Reporting Person:	Perseus 2000, L.L.C.
	I.R.S. Identification No. of above person (entities only)
2.	Check the Appropriate Box if a Member of a Group (See Instructions)
	(a)	[  ]
	(b)	[x]
3.	SEC Use Only
4.	Source of Funds (See Instructions): OO
5.	Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e)	[  ]
6.	Citizenship or Place of Organization:	Delaware

Number of	7. Sole Voting Power:	1,535,093*
Shares
Beneficially	8. Shared Voting Power:	0
Owned by
Each	9. Sole Dispositive Power:	1,535,093*
Reporting
Person With	10. Shared Dispositive Power:	0

11.	Aggregate Amount Beneficially Owned by Each Reporting Person:	1,535,093*
12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares
	(See Instructions)	[  ]
13.	Percent of Class Represented by Amount in Row (11):	21.9%**
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 First Note; (ii) exercise in full of the First Warrant; and (iii) exercise in full of the Purchaser Option, conversion of the entire principal amount of the Second Note and exercise in full of the Second Warrant (each as defined herein below and subject to certain adjustments set forth in the Purchase 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 August 6, 2002 as reported in the Company’s Quarterly Report on Form 10-QSB filed with the Commission on August 14, 2002 and (b) the number of Purchased Shares. (see footnote * above)

CUSIP No 45245S 10 8 SCHEDULE 13D Page 3 of 10 Pages

1.	Name of Reporting Person:	Frank H. Pearl
		(in capacity described herein)
	I.R.S. Identification Nos. of above persons (entities only):
2.	Check the Appropriate Box if a Member of a Group (See Instructions)
	(a)	[  ]
	(b)	[x]
3.	SEC Use Only
4.	Source of Funds (See Instructions):  AF
5.	Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e)	[  ]
6.	Citizenship or Place of Organization: British Virgin Islands

Number of	7. Sole Voting Power:
Shares
Beneficially	8. Shared Voting Power:	1,535,093*
Owned by
Each	9. Sole Dispositive Power:
Reporting
Person With	10. Shared Dispositive Power:	1,535,093*

15.	Aggregate Amount Beneficially Owned by Each Reporting Person:	1,535,093*
16.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions)	[  ]
17.	Percent of Class Represented by Amount in Row (11):	21.9%**
18.	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 First Note; (ii) exercise in full of the First Warrant; and (iii) exercise in full of the Purchaser Option, conversion of the entire principal amount of the Second Note and exercise in full of the Second Warrant (each as defined herein below and subject to certain adjustments set forth in the Purchase 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 August 6, 2002 as reported in the Company’s Quarterly Report on Form 10-QSB filed with the Commission on August 14, 2002 and (b) the number of Purchased Shares. (see footnote * above)

CUSIP No 45245S 10 8 SCHEDULE 13D Page 4 of 10 Pages

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 Perseus 2000, L.L.C. 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.

Item 2.      Identity and Background

             (a), (b), (c) and (f). This statement on Schedule 13D is being filed on behalf of the following persons (collectively the “Reporting Persons”):

            (i)      Perseus 2000, L.L.C., a Delaware limited liability company (the “Purchaser”); and

            (ii)      Mr. Frank H. Pearl (“Mr. Pearl”).

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

             Mr. Pearl is the Chairman of Perseus, L.L.C., a Delaware limited liability company. Mr. Pearl controls Perseus, L.L.C., which was formed to engage in the acquiring, holding, disposing and management of various forms of investments in various businesses, and which, through certain subsidiary entities, controls the Purchaser. Mr. Pearl is a United States citizen. Mr. Pearl has been included as a Reporting Person in this Statement solely because of his control of the Purchaser.

             The business address of the Purchaser and Mr. Pearl is 2099 Pennsylvania Avenue, N.W., Suite 900, Washington, DC 20006.

             (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.

CUSIP No 45245S 10 8 SCHEDULE 13D Page 5 of 10 Pages

      

Item 3.      Source and Amount of Funds or Other Consideration

     The source of the $2,000,000 purchase price for the First Note, First Warrant and Purchaser Option (each as defined below) was capital contributions from the members of the Purchaser (see Item 4 below).

Item 4.      Purpose of Transaction

                 Except as disclosed herein, the Reporting Persons have acquired the First Note, First Warrant and Purchaser Option (each as defined below) and are holding them for investment purposes only.

                 Pursuant to a Note and Warrant Purchase Agreement, dated as of May 22, 2002 (the “Purchase Agreement,” a copy of which is attached hereto as Exhibit 1 and incorporated by reference herein), by and between the Company and the Purchaser, the Company sold to the Purchaser, and the Purchaser acquired from the Company, (i) a Senior Secured Convertible Promissory Note with a principal amount of $2,000,000 convertible into 464,037 Common Shares (the “First Note,” a copy of which is attached hereto as Exhibit 2 and incorporated herein by reference) and (ii) a warrant exercisable for 150,000 Common Shares at a price of $4.74 per share (the “First Warrant,” a copy of which is attached hereto as Exhibit 3 and incorporated herein by reference), along with (iii) an option (the “Purchaser Option”), exercisable at the sole discretion of the Purchaser at any time on or prior to May 22, 2003, for the purchase of (x) an additional Senior Secured Convertible Promissory Note with a principal amount of up to $3,000,000, which would be convertible into the number of Common Shares obtained by dividing the principal amount of such note by $4.31 (the “Second Note”) and (y) an additional warrant which, depending upon the principal amount of the Second Note, would be exercisable for up to 225,000 additional Common Shares at a price of $4.74 per share (the “Second Warrant,” and collectively with the First Note, First Warrant and Second Note, the “Purchased Securities”).

                 The aggregate purchase price for the First Note, the First Warrant and the Purchaser Option was $2,000,000. If the Purchaser Option is exercised in full, the aggregate purchase price for the Second Note and the Second Warrant will be $3,000,000.

                 The Company has the right to pay 28% of any interest payable under the First Note (and if issued, any Second Note) through the issuance of one or more additional Senior Secured Convertible Promissory Notes (each, an “Additional Note”) with terms substantially identical to those of the note under which such interest accrued.

                 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

CUSIP No 45245S 10 8 SCHEDULE 13D Page 6 of 10 Pages

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 First Note contains, and any Second Note or Additional Note upon its issuance will 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 First and Second Notes. The First Warrant contains, and any Second Warrant upon its issuance will contain, provisions providing the Purchaser with weighted-average antidilution protection in the event of certain issuances or deemed issuances of Common Shares by the Company at a price per share below the exercise price in the First and Second Warrants. (See Exhibits 2 and 3 hereto).

                       Pursuant to the terms of the Purchase Agreement, the Purchaser may, at its sole discretion, either (i) select one representative (the “Board Observer”) of its choice to attend all meetings of the Board of Directors of the Company in a nonvoting capacity, or, (ii) in lieu of the Board Observer, cause the Board of Directors of the Company to appoint one director designated by the Purchaser to the Board of Directors of Company in accordance with the provisions of the Company’s Bylaws.

                       As security for the Company’s obligations under the Purchase Agreement, including under the First Note and, if issued, the Second Note, the Company and the Purchaser entered into a Pledge and Security Agreement, 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 the Purchaser, granting a first priority security interest in all of its assets and properties as well as guaranteeing performance of the Company’s obligations under the Purchase Agreement.

                       The foregoing summary is qualified in its entirety by reference to the actual Purchase Agreement, and the forms of each of the Note, the Warrant and the Pledge and Security Agreement 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, 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 Company and the Purchaser have discussed and are likely to continue to discuss the

CUSIP No 45245S 10 8 SCHEDULE 13D Page 7 of 10 Pages

possibility of one or more further investments by the Purchaser in the Company. Depending upon market conditions at the time of any such further investment, such investment could be on terms that trigger the antidilution provisions in the Purchased Securities described above.

                       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. The Reporting Persons have had conversations with the Company concerning the possibility of an acquisition by the Company of certain other companies in the security technology industry, and the possibility of pursuing a merger, reorganization, consolidation or other business combination transaction involving the Company and such companies. Perseus has investments in other companies in the security technology industry, and the possible acquisitions and combination transactions discussed by the Company and the Reporting Persons could involve one or more of such companies. The Purchaser may make an additional investment in the Company in connection with any such business combination and, if such business combination involves another company in which the Purchaser has an interest, the Purchaser would likely receive an additional interest in the Company in consideration of its interest in such other company.

                       Except as described herein, neither 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 May 22, 2002, the Company sold to the Purchaser, and the Purchaser purchased from the Company, the First Note, First Warrant and Purchaser Option, which are convertible into or exercisable for, in the aggregate, up to 1,535,093 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 1,535,093 Common Shares, which, based on calculations made in accordance with Rule 13d-3 and (excluding the Purchased Shares) there being 5,485,612 Common Shares outstanding on August 6, 2002 as disclosed by the Company in its Quarterly Report in Form 10-QSB filed with the Commission on August 14, 2002, represents approximately 21.9% of the outstanding Common Shares.

           (b)      (i)  The Purchaser may be deemed to have sole power to direct the voting and disposition of the 1,535,093 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. Pearl may be deemed to have the

CUSIP No 45245S 10 8 SCHEDULE 13D Page 8 of 10 Pages

power to direct the voting and disposition of the 1,535,093 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

                 In connection with the Company’s sale to the Purchaser, and the Purchaser’s purchase from the Company, of the Purchased Securities pursuant to the Purchase Agreement, the Company and Purchaser entered into a Registration Rights Agreement, dated as of May 22, 2002 (the “Registration Rights Agreement,” a copy of which is attached hereto as Exhibit 4 and incorporated by reference herein), pursuant to which the Company granted to the Purchaser certain registration rights whereby the Purchaser may, subject to certain limitations, request that the Company register the Common Shares.

                 On September 23, 2002, the Company issued to Purchaser a Demand Promissory Note with a principal amount of $500,000 and an interest rate of 12.5%.

                 Except as described in this Schedule 13D, as set forth in the Purchase Agreement, a copy of which is attached hereto as Exhibit 1 and incorporated herein by reference, and as set forth in the Registration Rights Agreement, a copy of which is attached hereto as Exhibit 4 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.

CUSIP No 45245S 10 8 SCHEDULE 13D Page 9 of 10 Pages

Item 7.      Material to be Filed as Exhibits

     Exhibit 1.      Note and Warrant Purchase Agreement, dated as of May 22, 2002, by and between the Company and the Purchaser (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 the Purchaser.

     Exhibit 5.      Pledge and Security Agreement, dated as May 22, 2002, by and between the Company and the Purchaser (without exhibits).

     Exhibit 6.      Joint Filing Agreement, dated as of September 23, 2002, by and between the Purchaser and Mr. Pearl.

CUSIP No 45245S 10 8 SCHEDULE 13D Page 10 of 10 Pages

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.

	FRANK H. PEARL
Date: September 23, 2002		/s/ FRANK H. PEARL
		Name: Frank H. Pearl
	PERSEUS 2000, L.L.C.
	By:	/s/ KENNETH M. SOCHA
Date: September 23, 2002		Name: Kenneth M. Socha
		Title: Senior Managing Director

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

EX-1 3 w64123exv1.htm EXHIBIT 1

EXHIBIT 1

NOTE AND WARRANT PURCHASE AGREEMENT

     This NOTE AND WARRANT PURCHASE AGREEMENT, dated as of May 22, 2002 (this “Agreement”), is entered into by and between ImageWare Systems, Inc., a California corporation (the “Company”), and Perseus 2000, L.L.C., a Delaware limited liability company (“Perseus” and together with the Company, each, a “Party” and collectively, the “Parties”).

RECITALS

     A.     To provide the Company with additional funds to conduct its business, Perseus is willing to purchase from the Company, and the Company is willing to issue and sell to Perseus, on the terms and subject to the conditions set forth herein, at a closing (the “Initial Closing”) to be held on the date hereof (the “Initial Closing Date”), (i) a Senior Secured Convertible Promissory Note of the Company with an aggregate principal amount of $2,000,000 (the “Initial Note”), and (ii) a warrant to acquire 150,000 shares of Common Stock, par value $0.01 per share, of the Company (the “Common Stock”) (the “Initial Warrant”).

     B.     To induce Perseus to execute and deliver this Agreement and to make the investment in the Company at the Initial Closing contemplated hereby, the Company is willing to grant to Perseus the option, which may be exercised by Perseus in its sole discretion upon the terms and subject to the conditions described herein, to acquire from the Company, on the terms and subject to the conditions set forth herein, (i) an additional Senior Secured Convertible Promissory Note of the Company with an aggregate principal amount of up to $3,000,000 (the “Additional Note” and together with the Initial Note and any Senior Secured Convertible Promissory Notes issued in payment of interest on any Note, each, a “Note” and collectively, the “Notes”), and (ii) the Additional Warrant (as defined in Section 1(b) hereof) (the Additional Warrant, together with the Initial Warrant, each, a “Warrant” and collectively, the “Warrants”).

AGREEMENT

     NOW, THEREFORE, in consideration of the foregoing, and the representations, warranties, covenants and conditions set forth below, the Parties, intending to be legally bound, hereby agree as follows:

     1.      Issuance and Sale of the Notes and Warrants.

           (a)      Issuance and Sale of Initial Note and Initial Warrant. In reliance upon the representations, warranties and covenants of the Parties set forth herein, and subject to satisfaction of the conditions set forth in Section 1(f) and 1(g) hereof, at the Initial Closing, the Company shall issue, sell and deliver to Perseus, and Perseus shall purchase from the Company, the Initial Note and the Initial Warrant for an aggregate purchase price of $2,000,000.

           (b)      Option to Acquire Additional Note and Additional Warrant.

                      (i)      Subject to subsection (ii) below, the Company hereby grants to Perseus the option, which may be exercised by Perseus in its sole discretion, to acquire the Additional Note with an aggregate principal amount of up to $3,000,000 (the “Perseus Option”).

Upon exercise of the Perseus Option, Perseus shall also receive an additional warrant (the “Additional Warrant”) to acquire a number of shares of Common Stock equal to the product of (A) the result obtained by dividing (x) the aggregate principal amount of the Additional Note by (y) $2,000,000 multiplied by (B) 150,000.

                     (ii)     The Perseus Option may be exercised by Perseus at any time on or prior to the first anniversary of the Initial Closing through the delivery by Perseus to the Company of a written notice of exercise (an “Exercise Notice”), which specifies a date (the “Additional Closing Date”) on which such acquisition shall be consummated (the “Additional Closing” and together with the Initial Closing, each, a “Closing”), which date shall be no earlier than three and no later than 15 Business Days after the date of delivery of an Exercise Notice.

           (c)      Closings. Subject to satisfaction or waiver of the conditions specified in Sections 1(f) and 1(g) hereof, (i) the Initial Closing shall take place on the date hereof immediately after the execution and delivery of this Agreement and (ii) if Perseus exercises the Perseus Option, the Additional Closing shall take place on the Additional Closing Date, and each Closing shall be held at 10:00 a.m. at the offices of Cooley Godward LLP, 4401 Eastgate Mall, San Diego, California, or at such other times and places as shall be mutually agreed to by the Parties. At each Closing, the Company shall deliver to Perseus the Note and Warrant to be purchased by Perseus at such Closing, and Perseus shall pay the respective purchase price therefor by wire transfer of immediately available funds to the account designated by the Company on Schedule 1(c) hereto.

          (d)      Terms of the Notes and Warrants. The terms and conditions of each Note are set forth in the form of Note attached as Exhibit A hereto. The terms and conditions of each Warrant are set forth in the form of Warrant attached as Exhibit B hereto.

           (e)      Use of Proceeds. The Company hereby covenants and agrees that all of the proceeds received by it from the issuance and sale of the Notes and the Warrants shall be used for product development and working capital purposes.

           (f)      Conditions to Obligations of Perseus. The obligations of Perseus to purchase the Notes and the Warrants under this Section 1 at each Closing shall be subject to satisfaction of the following conditions:

                       (i)      Representations and Warranties Correct; Performance of Obligations. The representations and warranties of the Company contained herein or in the other Transaction Documents shall be true and correct, in all material respects, at and as of such Closing, and the Company shall have performed and complied with all the covenants and agreements and satisfied all the conditions required by this Agreement to be performed or complied with or satisfied by the Company in all material respects at or prior to such Closing.

                       (ii)      Compliance Certificate. Perseus shall have received a certificate dated as of such Closing Date and signed by the president of the Company on behalf of the Company stating that, to the best of his knowledge after due inquiry, the conditions specified in Section 1(f)(i) and Section 1(f)(iv) hereof have been satisfied.

                       (iii)      Registration Rights Agreement; Pledge and Security Agreements. The Registration Rights Agreement in the form attached as Exhibit C hereto shall have been

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executed and delivered by the Company and Perseus prior to the Initial Closing (the “Registration Rights Agreement”). Each of the Pledge and Security Agreements in the forms attached as Exhibit D and Exhibit E hereto shall have been executed and delivered by the Company, ImageWare Systems ID Group, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“IWS ID Group”), and Perseus, as applicable, prior to the Initial Closing (the “Pledge and Security Agreements,” and together with this Agreement, the Notes, the Warrants, and the Registration Rights Agreement, the “Transaction Documents”).

                       (iv)      Consents and Waivers. The Company shall have received all consents, approvals, authorizations, permits and waivers of third parties necessary for the Company to consummate the transactions contemplated hereby and by the Transaction Documents.

                       (v)      Opinion of Company’s Counsel. Perseus shall have received an opinion of counsel to the Company, in form and substance reasonably satisfactory to Perseus, addressing the matters set forth in Exhibit F hereto.

                       (vi)      Secretary’s Certificate. The Company shall have delivered to Perseus a certificate, executed by its Secretary or Assistant Secretary, dated as of such Closing Date, certifying the authenticity and continued effectiveness of attached copies of the Company’s Articles of Incorporation, Bylaws and resolutions of its Board of Directors approving the transactions contemplated hereby and by the other Transaction Documents, and authorizing specific officers to execute and deliver this Agreement and each of the other Transaction Documents.

                       (vii)      Security Filings. The Company shall have executed and Perseus shall have filed all filings described in section 1.2 of each of the Pledge and Security Agreements necessary or appropriate for the perfection of the security interests granted thereby.

                       (viii)      Other Documents. Perseus shall have received from the Company such other documents as Perseus may reasonably request.

           (g)      Conditions to Obligations of the Company. The obligations of the Company to deliver the Notes and Warrants under this Section 1 at each Closing shall be subject to the satisfaction of the following conditions:

                       (i)      Perseus shall have performed and complied with all agreements contained in this Agreement required to be performed and complied with by it in all material respects prior to or at such Closing.

                       (ii)      The representations and warranties of Perseus contained in Section 3 hereof shall be true and correct in all material respects on and as of such Closing Date as if made on such date.

                       (iii)      Perseus shall have tendered payment for the Notes and the Warrants at such Closing in accordance with Section 1(c) hereof.

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           (h)      No Original Issue Discount. The Company and Perseus acknowledge and agree that each of the Warrants sold to Perseus in connection herewith is part of an investment unit, which includes the respective Notes, within the meaning of Section 1273(c)(2) of the Internal Revenue Code of 1986, as amended (“IRC”). As of each Closing Date, the Company and Perseus further agree that as between the Company and Perseus, the fair market value of the right to buy one share of Common Stock under the terms as set forth in the Warrant purchased on such Closing Date is equal to $0.01 and that, pursuant to Treas. Reg. Section 1.1273-2(h), a portion of the issue price of the investment unit (such amount being equal to $0.01 multiplied by the number of shares of Common Stock issuable upon exercise of such Warrant) will be allocable to such Warrant and the balance shall be allocable to the Note purchased on such Closing Date. The Company and Perseus agree to prepare their federal income tax returns in a manner consistent with the foregoing agreement and, pursuant to Treas. Reg. Section 1.1273, the original issue discount on the Notes shall be considered to be zero.

     2.     Representations and Warranties of the Company. The Company hereby represents and warrants to Perseus that, except as set forth in the Company’s Disclosure Schedule delivered to Perseus on the date hereof (the “Disclosure Schedule”), the statements contained in the following paragraphs of this Section 2 are all true and correct:

           (a)      Organization and Good Standing: Articles of Incorporation and Bylaws. The Company and each of its subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of its organization and (ii) has all requisite corporate power and authority to carry on its business as now conducted and proposed to be conducted. The Company and each of its subsidiaries (i) is duly qualified to conduct business as a foreign corporation and (ii) is in good standing as a foreign corporation in all jurisdictions where the properties owned, leased or operated by it are located or where its business is conducted, except where the failure to so qualify or be in good standing is not reasonably likely to have a material adverse effect on its business, condition, results of operations, assets or liabilities (a “Material Adverse Effect”).

           (b)      Subsidiaries. Section 2(b) of the Disclosure Schedule sets forth an accurate list of all subsidiaries of the Company, together with their respective jurisdictions of organization, and the authorized and outstanding capital stock of each such subsidiary, by class and number and percentage of each class owned by the Company or a subsidiary of the Company or any other person or entity. Except as set forth in Section 2(b) of the Disclosure Schedule, neither the Company nor any of its subsidiaries owns, of record or beneficially, any shares of capital stock or other ownership interest in any other corporation, partnership, limited liability company or other entity.

           (c)      Corporate Power. The Company has all requisite legal and corporate power to enter into, execute, deliver and perform its obligations under this Agreement and the Transaction Documents. Assuming due execution and delivery by the other parties thereto, this Agreement is, and upon their execution and delivery, the Transaction Documents will be, valid and binding obligations of the Company, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally.

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           (d)      Authorization, Etc.

                      (i)      Corporate Action. All corporate and legal action on the part of the Company, its officers, directors and stockholders necessary for the execution and delivery of this Agreement, the other Transaction Documents, the sale and issuance of the Notes and Warrants, and the performance of the Company’s obligations hereunder and thereunder, has been taken.

                      (ii)      Valid Issuance. The Notes, the Warrants, any additional Notes issued in payment of interest on any of the Notes and any shares of Common Stock of the Company issuable upon conversion of any of the Notes or exercise or conversion of any of the Warrants (collectively, the “Securities”), when issued against payment in compliance with the provisions of this Agreement, the Notes, or the Warrants, as the case may be, will be validly issued and, in the case of any such shares of capital stock, will be fully-paid and nonassessable and delivered to Perseus free and clear of any liens or other encumbrances.

                      (iii)      No Preemptive Rights. Except as set forth in this Agreement, no person or entity has any right of first refusal or any preemptive or similar rights in connection with the issuance of any Securities, or the issuance of any other securities by the Company, other than pursuant to the Transaction Documents.

                      (iv)      No Voting Rights. There are no agreements to which the Company is a party with respect to the voting or transfer of any securities of the Company other than the Transaction Documents or as set forth in the Company’s Articles of Incorporation.

           (e)      Noncontravention. None of the execution, delivery and performance of and compliance with this Agreement and the other Transaction Documents nor the issuance of any of the Securities will result in or constitute any breach, default or violation of (i) any agreement, contract, lease, license, instrument or commitment (oral or written) to which the Company or any of its subsidiaries is a party or is bound or (ii) any law, rule, regulation, statute or order applicable to the Company, its subsidiaries or their respective properties, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or its subsidiaries.

           (f)      Consents, Etc. No consent, approval, order or authorization of, or designation, registration, declaration or filing with, any federal, state, local or provincial or other governmental authority or other person or entity on the part of the Company is required in connection with the valid execution, delivery and performance of this Agreement and the other Transaction Documents or the offer, sale or issuance of the Notes, the Warrants or any other Securities, other than (i) those filings required under the Registration Rights Agreement, (ii) those filings required under Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), (iii) if required, filings or qualifications under applicable state securities laws, which filings or qualifications, if required, will be timely filed or obtained by the Company, and (iv) filings of financing statements with any state agency, the United State Patent and Trademark Office or the United States Copyright Office necessary or appropriate for the perfection of the security interests described in section 1.2 of each of the Pledge and Security Agreements.

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           (g)      Offering. Subject to the accuracy of and in reliance upon the Perseus’ representations in Section 3 hereof, the offer, sale and issuance of the Securities in conformity with the terms of this Agreement and the Transaction Documents constitute or will constitute at the time of their offer, sale and issuance transactions exempt from the registration requirements of Section 5 of the Securities Act, and the qualification or registration requirements of any applicable state securities laws. Neither the Company or any of its subsidiaries nor any person acting on its or their behalf has taken or will undertake any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any Securities under the Securities Act and the rules and regulations of the Securities and Exchange Commission (the “SEC”) thereunder) which might subject the offering, issuance or sale of such Securities to the registration requirements of Section 5 of the Securities Act.

           (h)      Capitalization.

                      (i)      Section 2(h) of the Disclosure Schedule sets forth the authorized, issued and outstanding capitalization of the Company as of the date hereof, and all of the issued and outstanding shares of capital stock reflected therein have been duly authorized and validly issued, and are fully paid and nonassessable and have been offered, issued, sold and delivered by the Company in compliance with all applicable federal and state securities laws.

                      (ii)      Except as set forth in the Company’s most recent proxy statement filed with the SEC, Section 2(h) of the Disclosure Schedule sets forth all outstanding options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from either the Company or any of its subsidiaries of their shares of capital stock or any securities convertible into or ultimately exchangeable or exercisable for any shares of their capital stock. Except as set forth in the Company’s most recent proxy statement filed with the SEC or as contemplated by this Agreement and the other Transaction Documents, neither the Company nor any of its subsidiaries is obligated in any manner to issue any shares of its capital stock or any other securities.

           (i)      SEC Documents; Financial Information. Within the 18-month period immediately preceding the date hereof, the Company has made all filings with the SEC required under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or the Securities Act on a timely basis. The Company has previously made available to Perseus complete and accurate copies, as amended or supplemented through the date hereof, of the following forms filed with the SEC: (i) Form 10-QSB under the Exchange Act for the period ended September 30, 2001, (ii) Form 10-KSB under the Exchange Act for the fiscal year ended December 31, 2001, (iii) the Company’s definitive proxy statement filed in connection with the Company’s 2002 annual shareholders’ meeting filed on Form DEF 14A, and (iv) each Form 8-KSB filed by the Company during fiscal years 2001 and 2002 (such reports are collectively referred to herein as the “Company Reports”). As of their respective dates, the Company Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited financial statements and unaudited interim financial statements of the Company included in the Company Reports (i) comply as to form in all material respects with applicable accounting requirements and published rules and regulations

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of the SEC with respect thereto, (ii) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods covered thereby (except as may be indicated therein or in the notes thereto, and in the case of quarterly financial statements, as permitted by Form 10-QSB under the Exchange Act), and (iii) fairly presented in all material respects (subject, in the case of the unaudited interim financial statements, to normal, year-end audit adjustments, none of which will be material) the consolidated financial condition, results of operations and cash flows of the Company as of the respective dates thereof and for the periods referred to therein.

           (j)      Judgments, Etc. Neither the Company nor any of its subsidiaries is subject to the terms or provisions of any material judgment, decree, order, writ or injunction of any court, governmental department, commission, agency, instrumentality or arbitrator.

           (k)      Proprietary Assets.

                      (i)      The Company and each of its subsidiaries (A) owns or has sufficient rights to all Proprietary Assets used in or necessary for its business as currently conducted, and as proposed to be conducted as described in the Company Reports, free and clear of all material liens and other encumbrances other than Permitted Liens; and (B) has taken reasonable and customary measures and precautions necessary to protect and maintain the confidentiality and secrecy of all its Proprietary Assets (except the Proprietary Assets whose value would be unimpaired by public disclosure) and otherwise to maintain and protect the value of all its Proprietary Assets. (As a point of clarification, the representations and warranties set forth in this Section 2(k)(i) shall not be deemed to expand the scope of the representations and warranties set forth in Section 2(k)(ii).)

                      (ii)      Except where such infringement, misappropriation or unlawful use has not or could not reasonably be expected to have a Material Adverse Effect, to the Company’s knowledge, neither the Company nor any of its subsidiaries is infringing, misappropriating or making any unlawful use of or has at any time infringed, misappropriated or made any unlawful use of, any Proprietary Asset owned or used by any other person or entity. No claims or notices (in writing or otherwise) with respect to Proprietary Assets have been communicated to the Company (A) to the effect that the manufacture, sale, license or use of any Proprietary Assets as now used or currently offered or proposed for use or sale by the Company or any of its subsidiaries infringes or potentially infringes, or constitutes a misappropriation or unlawful use of, any copyright, patent, trade secret or other intellectual property right of a third party, or (B) challenging the ownership or validity of any of the rights of either the Company or any of its subsidiaries to or interest in such Proprietary Assets. Neither the Company nor any of its subsidiaries has received notice to the effect that any patents or registered trademarks, service marks or registered copyrights held by either them are invalid or not subsisting except for failures to be valid and subsisting that would not reasonably be expected to have a Material Adverse Effect. To the Company’s knowledge, no other person or entity is infringing, misappropriating or making any unlawful use of, and no Proprietary Asset owned or used by any other person or entity infringes or conflicts with, any Proprietary Asset used in or pertaining to the business of the Company or any of its subsidiaries.

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                      (iii)      The Proprietary Assets used in or pertaining to the business of the Company and its subsidiaries are sufficient in the Company’s reasonable judgment to enable the Company and each of its subsidiaries to conduct its business in the manner in which such business has been and is being conducted and, to the Company’s knowledge, free from liabilities or valid claims of infringement or misappropriation by third parties. Neither the Company nor any of its subsidiaries have licensed any of its Proprietary Assets to any person or entity on an exclusive basis and they have not entered into any covenant not to compete or contract limiting their ability to sell their products in any market or geographical area or with any person or entity other than restrictions in a license agreement that are typical of those granted in the ordinary course of business in its industry.

                      (iv)      All current and former employees of the Company providing technical services, or otherwise having access to confidential information, relating to the Company’s Proprietary Assets have executed and delivered to the Company an agreement (containing no exceptions to or exclusions from the scope of its coverage relevant to the Company’s business) that is substantially identical to the form of the Employee Nondisclosure and Invention Assignment Agreement previously delivered to Perseus, and all current and former consultants and independent contractors to the Company providing technical services relating to the Company’s Proprietary Assets have executed and delivered to the Company an agreement (containing no exceptions to or exclusions from the scope of its coverage relevant to the Company’s business), the material provisions of which are in substance as protective to the Company as the terms of the form of Employee Agreement previously delivered to Perseus.

                      (v)      Section 2(k) of the Disclosure Schedule lists separately, by entity, all material Proprietary Assets of the Company and each of its subsidiaries and all other Proprietary Assets of the Company and each of its subsidiaries that have been registered in or with, issued by, or for which an application for registration has been filed in or with, a federal, state or other governmental office or agency of appropriate jurisdiction. As used herein, “Proprietary Assets” means: (A) any patent, patent application, trademark (whether registered or unregistered), trademark application, trade name, fictitious business name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, maskwork, maskwork application, trade secret, know-how, customer list, franchise, system, computer software, computer program, source code, invention, design, blueprint, engineering drawing, proprietary product, technology, proprietary right or other intellectual property right or intangible asset; and (B) any right to use or exploit any of the foregoing.

           (l)      Contracts.

                      (i)      Section 2(l) of the Disclosure Schedule identifies each Material Contract, other than those Material Contracts filed with the SEC and listed as Exhibits on the Company’s Form 10-KSB for the fiscal year ended December 31, 2001.

                      (ii)      The Company has made available to Perseus accurate and complete copies of all Material Contracts, including all amendments thereto. Neither the Company nor any of its subsidiaries has entered into any oral Material Contracts. Each Material Contract is valid and in full force and effect, is enforceable by either the Company or its

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subsidiaries in accordance with its terms, and will continue to be so immediately following each Closing Date. No such contract, agreement or instrument contains any liquidated damages, penalty or similar provision that, if enforced against the Company, would have a Material Adverse Effect. To the Company’s knowledge, no party to any such contract, agreement or instrument intends to cancel, withdraw, modify or amend such contract, agreement or instrument.

                      (iii)      (A)      The Company has not violated or breached, or committed any default under, any Material Contract in any material respect, and, to the Company’s knowledge, no other person or entity has violated or breached, or committed any default under, any Material Contract in any material respect; and

                                  (B)      to the Company’s knowledge, no event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, (a) result in a violation or breach of any of the provisions of any Material Contract, which individually or taken as a whole, would have a Material Adverse Effect, (b) give any person or entity the right to declare a default or exercise any remedy under any Material Contract, (c) give any person or entity the right to accelerate the maturity or performance of any Material Contract or (d) give any person or entity the right to cancel, terminate or materially modify any Material Contract.

                      (iv)      None of the Material Contracts contain any provision which would require the consent of third parties to the sale and issuance of the Notes or Warrants or any of the other transactions as contemplated hereunder or under any of the Transaction Documents or which would be altered as a result of such transaction.

           (m)      Registration Rights. Except as set forth in the Registration Rights Agreement, neither the Company nor any of its subsidiaries has agreed to grant to any person or entity any rights (including piggyback registration rights) to have any securities of the Company registered with the SEC under the Securities Act or with any other governmental authority.

           (n)      Compliance with Corporate Instruments and Laws. Neither the Company nor any of its subsidiaries is in violation of any provisions of its Articles of Incorporation or Bylaws as currently in effect. The Company and each of its subsidiaries is in compliance in all material respects with all applicable laws, statutes, rules, and regulations of all governmental and regulatory authorities. The Company and each of its subsidiaries is currently in compliance in all material respects with all applicable federal, state and foreign laws, rules, regulations, proclamations and orders relating to the importation or exportation of its products. All licenses, franchises, permits and other governmental authorizations held by the Company and its subsidiaries and which are necessary to their businesses are valid and sufficient in all material respects for the businesses presently carried on by them.

           (o)      Litigation. There is no suit, action, proceeding, claim or investigation pending or, to the Company’s knowledge, threatened against the Company or its subsidiaries before any court or administrative agency which could have a Material Adverse Effect or which questions or challenges the validity of this Agreement or any of the other Transaction Documents.

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           (p)      Corporate Documents. The Company has furnished to Perseus and its counsel for their examination true and complete copies of the Articles of Incorporation and Bylaws for the Company, each as currently in effect. The Company has made available to Perseus and its counsel for their examination true and complete copies of the following documents, (i) the Articles of Incorporation and Bylaws for each of the Company’s subsidiaries, each as currently in effect (ii) minute books of the Company and each of its subsidiaries containing required records setting forth proceedings, consents, actions, and meetings of their respective shareholders, boards of directors and any committees thereof, and (iii) all material permits, orders, and consents issued by any regulatory agency with respect to the Company, its subsidiaries, or any securities of the Company or its subsidiaries, and all applications for such permits, orders, and consents. The corporate minute books, stock certificate books, stock registers and other corporate records of the Company and each of its subsidiaries are complete and accurate in all material respects, and the signatures appearing on all documents contained therein are the true signatures of the persons purporting to have signed the same. All actions reflected in such books and records were duly and validly taken in compliance in all material respects with the laws of the applicable jurisdiction.

           (q)      No Brokers. Other than pursuant to the Company’s engagement with Allen & Co., Incorporated, neither the Company, nor to the Company’s knowledge any of its shareholders, is obligated for the payment of fees or expenses of any broker or finder in connection with the origination, negotiation or execution of this Agreement or the Transaction Documents, or in connection with any transaction contemplated hereby or thereby.

           (r)Related Party Transactions.

                      (i)      None of the Company’s or any of its subsidiaries’ affiliates, officers, directors, shareholders or employees, or any affiliate of any of such person, or to the knowledge of the Company and its subsidiaries, any supplier, distributor or customer of the Company or its subsidiaries, has any material interest in any property, real or personal, tangible or intangible, including Proprietary Assets used in or pertaining to the business of the Company or its subsidiaries, except for the normal rights of a stockholder.

                      (ii)      Except as set forth in the Company’s definitive proxy statement filed with the SEC on Form DEF 14A in connection with the Company’s 2002 annual shareholders’ meeting, there are no agreements, understandings or proposed transactions between either the Company or any of its subsidiaries and any of its officers, directors, employees, affiliates, or, to the Company’s knowledge, any affiliate thereof.

                      (iii)      To the best of the Company’s knowledge, no executive officer or director of the Company or any of its subsidiaries has any direct or indirect ownership interest in any firm or corporation with which the Company or any of its subsidiaries has a material business relationship, or any firm or corporation that competes in any material respect with the Company or any of its subsidiaries, except that executive officers or directors of the Company or its subsidiaries may own stock in publicly traded companies that may compete with the Company or its subsidiaries. To the Company’s knowledge, no member of the immediate family of any executive officer or director of the Company or any of its subsidiaries is directly or indirectly interested in any Material Contract.

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           (s)      Disclosure. The statements by the Company contained in this Agreement, the exhibits hereto, and the certificates and documents required to be delivered by the Company to Perseus under this Agreement, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements contained herein and therein not misleading in light of the circumstances under which such statements were made.

           (t)      Anti-Dilution and Other Shares. The issuance of the Notes, Warrants, or any of the other Securities will not result in the triggering of any anti-dilution or similar rights contained in any options, warrants, debentures or other securities or agreements of the Company.

           (u)      Solvency. Based on the Company’s financial plans as provided to Perseus, it is the Company’s reasonable judgment that after giving effect to the purchase and sale of the Notes as contemplated in Section 1(b) hereof, (i) the fair value of the assets of the Company and its subsidiaries, at a fair valuation, will exceed their respective current debts and liabilities, subordinated, contingent or otherwise, (ii) the present fair saleable value of the property of the Company and its subsidiaries will be greater than the amount that will be required to pay the probable liability of their current debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured, (iii) the Company and its subsidiaries will be able to pay their debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, and (iv) none of the Company or any of its subsidiaries will have unreasonably small capital with which to conduct the business in which they are engaged as such business is now conducted and is proposed to be conducted following the Closing Date.

           (v)      No Material Adverse Effect. Except as expressly set forth in the Company Reports filed with the SEC after December 31, 2001, no event has occurred since December 31, 2001 that has had or could be reasonably expected to have a Material Adverse Effect.

     3.      Representations and Warranties by the Perseus. Perseus represents, and warrants to, and covenants with, the Company as follows:

           (a)      Investment Intent; Authority. Perseus is acquiring the Notes, the Warrants, and any other Securities for investment for Perseus’ own account, and not as nominee or agent for investment and not with a view to or for resale in connection with any distribution or public offering thereof within the meaning of the Securities Act. Perseus is a limited liability company, duly formed, validly existing and in good standing under the laws of its jurisdiction of formation. Perseus has the requisite legal and limited liability company power to enter into, execute, deliver and perform its obligations under this Agreement and the other Transaction Documents. Assuming due execution and delivery by the other parties thereto, this Agreement is, and upon their issuance, the other Transaction Documents to which Perseus is a Party will be, valid and binding obligations of Perseus, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally.

           (b)      Securities Not Registered. Perseus understands and acknowledges that none of the Notes, the Warrants or any of the other Securities will be registered under the

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Securities Act or qualified under any state securities laws in reliance upon one or more exemptions from registration or qualification under the Securities Act and such state securities laws, and that the Company’s reliance upon such exemption is predicated upon Perseus’ representations set forth in this Agreement. Perseus understands and acknowledges that resale of the Notes, the Warrants and the other Securities may be restricted indefinitely unless they are subsequently registered under the Securities Act and qualified under state law or an exemption from such registration and such qualification is available.

           (c)      No Transfer. Perseus will not dispose of any of the Notes, the Warrants or the other Securities, other than in conjunction with an effective registration statement or applicable exemption from registration under the Securities Act and other than in compliance with the applicable state securities laws.

           (d)      Accredited Investor. Perseus is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act, as presently in effect.

     4.      Covenants. The Company covenants and agrees that from and after the date hereof:

           (a)      Annual Budget. The Company shall deliver its annual budget for each fiscal year to Perseus as soon as practicable, but in any event within 15 days prior to the beginning of such fiscal year.

           (b)      Financial and Business Information. The Company covenants and agrees that it will deliver or make available to Perseus each of the following documents as soon as practicable after such document is filed with the SEC: (i) Form 10-K or 10-KSB report, (ii) Form 10-Q or 10-QSB report, (iii) definitive proxy statement, and (iv) Form 8-K or 8-KSB report.

           (c)      Access. The Company shall permit representatives of Perseus to visit and inspect any of the properties of the Company and its subsidiaries, to examine the corporate books and make copies or extracts therefrom and to discuss the affairs, finances and accounts of the Company and its subsidiaries with the principal officers and employees of the Company, during regular business hours, as often as Perseus may reasonably request; provided, however, that Perseus or its representative, as the case may be, shall hold all information so received in strict confidence, shall not trade in the Company’s securities while in possession of material, non-public information, and shall use such information only for the purpose of enforcement of this Agreement or the Transaction Documents and for the valuation of its investment in the Company.

           (d)      Communication with Accountants. The Company authorizes Perseus to communicate directly with its independent certified public accountants and tax advisors and authorizes those accountants to disclose to Perseus any and all financial statements and other supporting financial documents and schedules including copies of any management letter with respect to the business, financial condition and other affairs of the Company and any of its subsidiaries. At or before the Closing Date, the Company shall deliver a letter addressed to such accountants and tax advisors instructing them to comply with the provisions of this Section 4(d).

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           (e)      Observer Rights; Expenses of Board Observer. Perseus shall be allowed one representative (the “Board Observer”) of its choice (which individual shall be reasonably acceptable to the Company) to attend all meetings of the Company’s Board of Directors in a nonvoting capacity for so long as Perseus owns (i) any of the Notes or (ii) Securities representing, convertible into and/or exercisable for at least 50% of the Common Stock Equivalents (as defined below). In connection therewith, the Company shall provide the Board Observer with copies of all notices, minutes, consents and other materials, financial or otherwise, which the Company provides to its Board of Directors; provided, however, that the Company reserves the right to exclude such Board Observer from access to any material or meeting or portion thereof if the Company in good faith believes, upon advice of counsel, that such exclusion is necessary to preserve the attorney-client privilege, to protect highly confidential proprietary information or for other similar reasons. The Company shall reimburse the Board Observer for any reasonable expenses incurred in connection with its function as a Board Observer, including travel and lodging expenses incurred to attend meetings of the Company’s Board of Directors. Notwithstanding the foregoing, (A) Perseus shall not be entitled to exercise the Board Observer rights set forth herein at any time that a Perseus Director (as defined below) is then serving on the Company’s Board of Directors; and (B) in the event that Perseus exercises the Perseus Option and the Director Indemnification Amendments (as defined below) have been adopted pursuant to Section 4(f)(vi) hereof, the Board Observer right set forth in this Section 4(e) shall terminate on the earlier of (x) 90 days after the date on which Perseus exercises the Perseus Option and, (y) in the event a Perseus Director is then serving on the Company’s Board of Directors at the time of such exercise, immediately.

           (f)      Optional Perseus Designated Director; Expenses of Perseus Director.

                      (i)      Effective as of the date hereof, Perseus shall have the option, exercisable in Perseus’ sole discretion for so long as Perseus owns (i) any of the Notes or (ii) Securities representing, convertible into and/or exercisable for at least 50% of the Common Stock Equivalents (as defined below), to cause the Board of Directors of the Company to appoint one director designated by Perseus (which director shall be reasonably acceptable to the Company) to the Company’s Board of Directors (the “Perseus Director”) in accordance with the provisions of the Company’s Bylaws. For so long as Perseus owns (i) any of the Notes or (ii) Securities representing, convertible into and/or exercisable for at least 50% of the Common Stock Equivalents, at each annual meeting of the stockholders of the Company and at each special meeting of the stockholders of the Company called for the purposes of electing directors, and at any time at which stockholders of the Company shall have the right to, or shall, vote for or consent to the election of directors, then the Company shall nominate for election and the Board of Directors shall so support in connection with the election thereto of the Perseus Director. The Company shall use its best efforts to effectuate the purposes of this paragraph.

                      (ii)      Perseus shall timely notify the Company in writing of the person designated by it pursuant to this Section 4(f) as nominee for election to the Board, and shall promptly furnish all information necessary for all required filings with the SEC. In the absence of any notice from Perseus, the Perseus Director then serving and previously designated by Perseus shall be renominated.

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                      (iii)      Any vacancy on the Board of Directors created by the resignation, removal, incapacity or death of any Perseus Director shall be filled by another Perseus Director in accordance with the terms of this Section 4(f) and Article III of the Company’s Bylaws.

                      (iv)      The Perseus Director shall be entitled to compensation, reimbursement for reasonable out-of-pocket expenses incurred in connection with the performance of his or her duties as a Director, directors’ liability insurance and indemnification in accordance with the Company’s Articles of Incorporation and policies established by the Board of Directors for all Directors generally.

                      (v)      In the event that Perseus exercises its right to designate the Perseus Director, the Company and the Perseus Director shall enter into an indemnification agreement in substantially the form of indemnification agreement attached as Exhibit G hereto, the terms of which are in all respects at least as favorable to the Perseus Director as those provided to any other director of the Company. The indemnification rights set forth in such indemnification agreement shall be in addition to any rights that the Perseus Director may have at common law, pursuant to the Company’s Articles of Incorporation, the Company’s Bylaws, Resolutions of the Board of Directors, or otherwise.

                      (vi)      The Company hereby agrees (i) to present for vote at the next regularly scheduled or special meeting of the Company’s shareholders resolutions authorizing amendments to the Company’s Articles of Incorporation providing indemnification to, and limiting the liability of, directors of the Company each to the fullest extent permitted under the California General Corporation Law and other applicable law (the “Director Indemnification Amendments”); (ii) to use its commercially reasonable best efforts to obtain the shareholders’ approval thereof; and (iii) to amend its Article of Incorporation to incorporate the Director Indemnification Amendments promptly upon obtaining such shareholder approval.

           (g)      Extraordinary Action. The Company and each of its subsidiaries shall, for as long as Perseus holds any Notes obtain the written consent of Perseus prior to (i) declaring any dividend or other distribution with respect to its capital stock (other than the payment of a dividend by a subsidiary to the Company, or mandatory payments by the Company to the holders of the Company’s Series B Preferred Stock required by the terms of the Company’s Articles of Incorporation as in effect on the date hereof) or the redemption and/or purchase by it of any of its capital stock (other than a redemption by a subsidiary of stock held by the Company), (ii) permitting, directly or indirectly, the sale of all or substantially all of its assets, unless the proceeds from such sale are used to repay in full the principal amount of and all accrued but unpaid interest outstanding on the Notes; (iii) acquiring or disposing (or permitting any of its subsidiaries to acquire or dispose) of assets in a single or series of related transactions with a value in excess of $1,000,000, other than in the ordinary course of business, (iv) permitting any merger, consolidation 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 of the surviving entity in such merger, consolidation or other business combination, unless the proceeds resulting from such transaction are used to repay in full the principal amount, all accrued but unpaid interest outstanding and any other amounts owed on the Notes; (v) permitting any merger, consolidation or other business combination involving any

14

subsidiary of the Company or the sale of its capital stock that results the Company not owning, directly or indirectly, 100% of the capital stock of such subsidiary; (vi) permitting, directly or indirectly, any acquisition of assets by the Company or any of its subsidiaries outside the ordinary course of its business or in excess of $1,000,000; (vii) authorizing any change in the executive management team or the size of the Company’s Board of Directors (excluding changes resulting from actions taken by the stockholders of the Company against or without the recommendations of the Company’s Board of Directors or any committee thereof); (viii) incurring any indebtedness for borrowed money or other indebtedness or obligation that under GAAP is treated as indebtedness for borrowed money, or any guaranty of any of the foregoing by it, in an amount in excess of $1,000,000, unless the proceeds resulting from such transaction are used to repay in full the principal amount, all accrued but unpaid interest outstanding and any other amounts owed on the Notes; (ix) making any loans that aggregate more than $1,000,000; (x) authorizing or entering into any employment, consulting or similar compensation agreements (other than at will arrangements) in excess of $150,000; (xi) creating, incurring, assuming or suffering to exist any Lien of any kind on any of their properties or assets of any kind, other than Permitted Liens; or (xii) agreeing to do any of the foregoing.

For avoidance of doubt, the $1,000,000 limits set forth above shall apply to the Company and its subsidiaries on an aggregate basis and not individually with respect to each entity.

           (h)      Expenditures. Without the prior approval of Perseus, neither the Company nor any of its subsidiaries shall make or agree to make any per item capital expenditure in excess of $200,000, or any capital expenditures in the aggregate in excess of $1,000,000 during any twelve-month period.

           (i)      Public or Private Offering. Without the prior approval of Perseus, neither the Company nor any of its subsidiaries shall effect a public offering of any securities of the Company or its subsidiaries registered under the Securities Act or a private offering or sale of any securities of the Company or its subsidiaries exempt from registration under the Securities Act (collectively, a “Securities Sale”), unless the proceeds resulting from such offering are used to repay in full the principal amount, all accrued but unpaid interest outstanding and any other amounts owed on the Notes, if any.

           (j)      Tax Compliance. The Company shall pay all transfer, excise or similar taxes (not including income or franchise taxes) in connection with the issuance, sale, delivery or transfer by the Company to Perseus of the Notes, the Warrants and the other Securities, and shall indemnify and save Perseus harmless without limitation as to time against any and all liabilities with respect to such taxes. The Company shall not be responsible for any taxes in connection with the transfer of the Notes, the Warrants or other Securities by the holder thereof. The obligations of the Company under this section 4(j) shall survive the payment, prepayment or redemption of the Securities (as applicable) and the termination of this Agreement.

           (k)      Insurance. The Company shall and shall cause each subsidiary of the Company to maintain insurance covering, without limitation, fire, theft, burglary, public liability, property damage, product liability, workers’ compensation and insurance on all property and assets material to the operation of the business, all in amounts customary for the Company’s industry. The Company shall continue to maintain in full force and effect directors’ and officers’

15

insurance in an amount and on other terms as approved by a majority of the Board of Directors of the Company. The Company shall, and shall cause each of its subsidiaries to, pay all insurance premiums payable by them.

           (l)      Compliance with Law. The Company shall, and shall cause each of its subsidiaries to, comply with all laws, including environmental laws, applicable to it, except where the failure to comply would not result in a Material Adverse Effect.

           (m)      Pledge and Security Agreements. Each of the Company and IWS ID Group shall grant to Perseus a perfected lien on and first-priority security interest in all of their respective assets and properties, whether now or hereafter existing, owned or acquired (including, but not limited to, all outstanding shares of capital stock of each subsidiary of the Company and IWS ID Group), all in accordance with the terms of the Pledge and Security Agreements.

           (n)      Rights of First Refusal.

                      (i)      Subsequent Offerings. Perseus shall have the following rights of first refusal with respect to New Securities (as defined below) that the Company may from time to time propose to sell and issue after the date of this Agreement:

        (a) Until Perseus converts in full the Notes or the Company repays in full the full principal amount, all accrued but unpaid interest outstanding and any other amounts owed on the Notes, Perseus shall have a right of first refusal to purchase all such New Securities (other than the New Securities excluded by subsection (v) hereof); and

        (b) At anytime after Perseus has converted in full the Notes or the Company has repaid in full the principal amount, all accrued but unpaid interest outstanding and any other amounts owed on the Notes and for so long as Perseus owns Securities representing, convertible into and/or exercisable for at least 50% of the Common Stock Equivalents (as defined below), Perseus shall have a right of first refusal to purchase up to that portion of such New Securities (other than the New Securities excluded by subsection (v) hereof) that equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of the Notes or exercise or conversion of the Warrants then held, by Perseus bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities).

The term “New Securities” shall mean (A) any Common Stock, Preferred Stock or other debt or equity security of the Company, or (B) any security convertible into or exercisable for (including without limitation a warrant or option), with or without consideration, any Common Stock, Preferred Stock or other debt or equity security of the Company (including any option to purchase such a convertible security). The term “Common Stock Equivalents” shall mean (A) prior to exercise of the Perseus Option all shares of Common Stock issued to Perseus pursuant to conversion of the Initial Note or exercise or conversion of the Initial Warrant plus all shares of Common Stock issuable to Perseus upon conversion of the Initial Note or exercise or conversion of the Initial Warrant (determined as of the Initial Closing Date); and (B) following

16

exercise of the Perseus Option all shares of Common Stock issued to Perseus pursuant to conversion of the Notes or exercise or conversion of the Warrants plus all shares of Common Stock issuable to Perseus upon conversion of the Notes or exercise or conversion of the Warrants (determined as of the Additional Closing Date).

                      (ii)      Exercise of Rights. If the Company proposes to issue any New Securities, it shall give Perseus written notice of its intention, describing the New Securities, the price and the terms and conditions upon which the Company proposes to issue the same. Perseus shall have ten (10) Business Days from the giving of such notice to agree to purchase up to 100% of the New Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased.

                      (iii)      Issuance of Securities to Other Persons. If Perseus fails to exercise in full its rights of first refusal, the Company shall have ninety (90) days thereafter to sell the New Securities in respect of which Perseus’ rights were not exercised, at a price and upon general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company’s notice to Perseus pursuant to subsection (ii) hereof. If the Company has not sold such New Securities within ninety (90) days of the notice provided pursuant to subsection (ii) hereof, the Company shall not thereafter issue or sell any New Securities, without first offering such securities to Perseus in the manner provided above.

                      (iv)      Excluded Securities. The rights of first refusal established by this Section 4(n) shall not apply with respect to any of the following:

                                  (A)      shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of the Company, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors;

                                  (B)      shares of Common Stock issued pursuant to any rights, agreements, options or warrants outstanding as of the date hereof and disclosed in writing to Perseus; and stock issued pursuant to any such rights or agreements granted after the date hereof; provided that the rights of first refusal established by this Section 4(n) applied (or were exempted pursuant to this subsection (iv)) with respect to the initial sale or grant by the Company of such rights or agreements;

                                  (C)      shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization by the Company;

                                  (D)      shares of Common Stock issued upon conversion of the Notes or the Company’s Series B Preferred Stock or upon exercise or conversion of the Warrants;

                                  (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;

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                                  (F)      shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued 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 Board of Directors, the principal purpose of which is not to raise equity capital;

                                  (G)      shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) that are issued 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; or

                                  (H)      shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued pursuant to any financing arrangement in which the proceeds of such arrangement are used to repay in full the principal amount, all accrued but unpaid interest outstanding and any other amounts owed on the Notes.

           (o)      Affiliate and Related Party Transactions. Without the prior approval of Perseus, neither the Company nor any of its subsidiaries shall permit any affiliate or other related party transaction except (i) transactions in the ordinary course, and pursuant to the reasonable requirements, of the Company’s business and upon fair and reasonable terms that are fully disclosed to Perseus prior to consummation thereof and are no less favorable to the Company than would be obtained in a comparable arm’s-length transaction with a person not an affiliate of the Company or any of its subsidiaries and (ii) payment of reasonable compensation to employees and directors’ fees each consistent with past practice.

           (p)      Shareholder Approval of Anti-Dilution Provisions. Unless earlier approved, the Company hereby agrees (i) to present for vote at the next regularly scheduled or special meeting of the Company’s shareholders resolutions authorizing (A) the issuance of the full number of shares of Warrant Stock issuable upon exercise of the Warrants but for the limitation provided in Section 3(d)(vii) of the Warrants; and (B) the issuance of the full number of shares of Common Stock issuable upon conversion of the Notes but for the limitation provided in Section 7(e)(iv) of the Notes; and (ii) to use its commercially reasonable best efforts to obtain the shareholders’ approval thereof, including but not limited to, by recommending to the shareholders that they vote in favor of such resolutions and issuances.

           (q)      Termination of Covenants. The covenants set forth in this Section 4 (other than the covenants set forth in Sections 4(e) and (f) regarding Board Observer and Director rights and their related expenses, and in Section 4(n) regarding Rights of First Refusal) shall continue in effect until the full principal amount, all accrued but unpaid interest outstanding and any other amounts owed on the Notes are repaid in full.

     5.      Legends. (a)      Each certificate representing any of the Securities shall bear a legend substantially in the following form:

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        “THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE HOLDER FOR ITS OWN ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO THE DISTRIBUTION OF SUCH SECURITIES. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) AND ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 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.”

The Company may instruct its transfer agent not to register the transfer of the Securities, unless the conditions specified in the foregoing legends are satisfied.

           (b)      Any legend endorsed on a certificate pursuant to Section 5(a) and the stop transfer instructions with respect to such Securities shall be removed and the Company shall issue a certificate without such legend to the holder thereof (i) if such Securities are registered and sold under the Securities Act and a prospectus meeting the requirements of Section 10 of the Securities Act is available, (ii) if such legend may be properly removed under the terms of Rule 144 promulgated under the Securities Act, or (iii) if such holder provides the Company with an opinion of counsel for such holder, reasonably satisfactory to legal counsel for the Company to the effect that a sale, transfer or assignment of such Securities may be made without registration.

     6.      Indemnity.

     (a)      Indemnity. The Company hereby agrees to indemnify and defend and hold harmless Perseus, its respective affiliates, successors and assigns and each of their respective officers, directors, employees and agents (an “Indemnified Party” or collectively the “Indemnified Parties”) from and against, and agrees to pay or cause to be paid to the Indemnified Parties all amounts equal to the sum of, any and all claims, demands, costs, expenses, losses and other liabilities of any kind (“Losses”) that the Indemnified Parties may incur or suffer (including without limitation all reasonable legal fees and expenses) which arise or result from any breach of any of its representations or warranties, or failure by the Company to perform any of its covenants or agreements, in this Agreement or in any other Transaction Document or in any certificate or document delivered pursuant hereto or any other Transaction Document, or arising out of any environmental law applicable to the Company or its subsidiaries or otherwise relating to or arising out of the transactions contemplated hereby, including but not limited to any third party claims arising or resulting from such breach or failure, except to the extent such Losses arise out of the gross negligence or willful misconduct of Perseus, its respective affiliates, successors and assigns and their respective officers, directors, employees and agents. The rights of Perseus hereunder shall be in addition to, and not in lieu of, any other rights and remedies which may be available to them by law or under the Articles of Incorporation of the Company or the Transaction Documents.

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           (b)      Procedures.

                      (i)      If a third party shall notify an Indemnified Party with respect to any matter that may give rise to a claim for indemnification under the indemnity set forth above in Section 6(a), the procedure set forth below shall be followed.

                                  (A)      Notice. The Indemnified Party shall give to the party providing indemnification (the “Indemnifying Party”) written notice of any claim, suit, judgment or matter for which indemnity may be sought under Section 6(a) promptly but in any event within 30 days after the Indemnified Party receives notice thereof; provided, however, that failure by the Indemnified Party to give such notice shall not relieve the Indemnifying Party from any liability it shall otherwise have pursuant to this Agreement except to the extent that the Indemnifying Party is actually prejudiced by such failure. Such notice shall set forth in reasonable detail (x) the basis for such potential claim and (y) the dollar amount of such claim. The Indemnifying Party shall have a period of 15 days within which to respond thereto. If the Indemnifying Party does not respond within such 15-day period, the Indemnifying Party shall be deemed to have accepted responsibility for such indemnity.

                                  (B)      Defense of Claim. With respect to a claim by a third party against an Indemnified Party for which indemnification may be sought under this Agreement, the Indemnifying Party shall have the right, at its option, to be represented by counsel of its choice and to assume the defense or otherwise control the handling of any claim, suit, judgment or matter for which indemnity is sought, which is set forth in the notice sent by the Indemnified Party, by notifying the Indemnified Party in writing to such effect within 15 days of receipt of such notice; provided, however, that the Indemnified Party shall have the right to employ counsel to represent it if, in the Indemnified Party’s reasonable judgment based upon the advice of counsel, it is advisable in light of the separate interests of the Indemnified Party, to be represented by separate counsel, and in that event the reasonable fees and expenses of such separate counsel shall be paid by the Indemnifying Party. If the Indemnifying Party does not give timely notice in accordance with the preceding sentence, the Indemnifying Party shall be deemed to have given notice that it does not wish to control the handling of such claim, suit or judgment. In the event the Indemnifying Party elects (by notice in writing within such fifteen day period) to assume the defense of or otherwise control the handling of any such claim, suit, judgment or matter for which indemnity is sought, the Indemnifying Party shall indemnify and hold harmless the Indemnified Party from and against any and all reasonable professional fees (including attorneys’ fees, accountants, consultants and engineering fees) and investigation expenses incurred by the Indemnified Party after it provides notice under clause (A) and prior to such election, notwithstanding the fact that the Indemnifying Party may not have been so liable to the Indemnified Party had the Indemnifying Party not elected to assume the defense of or to otherwise control the handling of such claim, suit, judgment or other matter. In the event that the Indemnifying Party does not assume the defense or otherwise control the handling of such matter, the Indemnified Party may retain counsel, as an indemnification expense, to defend such claim, suit, judgment or matter.

                                  (C)      Final Authority. The parties shall cooperate in the defense of any such claim or litigation and each shall make available all books and records which are relevant in connection with such claim or litigation. In connection with any claim, suit or other

20

proceeding with respect to which the Indemnifying Party has assumed the defense or control, the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to any matter which does not include a provision whereby the plaintiff or claimant in the matter releases the Indemnified Party from all liability with respect thereto, without the written consent of the Indemnified Party, which shall not be unreasonably withheld. In connection with any claim, suit or other proceeding with respect to which the Indemnifying Party has not assumed the defense or control, the Indemnified Party may not compromise or settle such claim without the consent of the Indemnifying Party, which shall not be unreasonably withheld.

                      (ii)      Claims Between the Indemnifying Party and the Indemnified Party. Any claim for indemnification under this Agreement which does not result from the assertion of a claim by a third party shall be asserted by written notice given by the Indemnified Party to the Indemnifying Party. The Indemnifying Party shall have a period of 30 days within which to respond thereto.

     7.      Miscellaneous.

           (a)      Waivers and Amendments. Unless otherwise provided, any provision of this Agreement may be amended, waived or modified upon the written consent of the Company and Perseus.

           (b)      Governing Law. This Agreement and all actions arising out of or in connection with this Agreement shall be governed by and construed in accordance with the laws of the State of New York.

           (c)      Exclusive Jurisdiction. Any action or proceeding brought by a Party arising out of or in connection with this Agreement or any other Transaction Document, shall be brought solely in a court of competent jurisdiction located in the County of New York, State of New York, or in the United States District Court for the Southern District of New York. The Parties agree not to contest such exclusive jurisdiction or seek to transfer any action relating to such dispute to any other jurisdiction. Each of the Parties hereby submits to personal jurisdiction and waives any objection as to venue in the County of New York. Service of process on the Parties in any action arising out of or relating to this Agreement shall be effective if mailed to the Parties in accordance with Section 7(g) hereof.

           (d)      JURY WAIVER. THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT.

           (e)      Entire Agreement. This Agreement, together with the Exhibits hereto and the Notes and Warrants, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof.

           (f)      Expenses. The Company shall pay all reasonable out-of-pocket expenses and fees and disbursements, including reasonable attorneys’ fees, incurred by Perseus in connection with (i) the negotiation and consummation of the transactions contemplated hereunder, (ii) any amendment, modification or waiver, or consent with respect to, any of the Transaction Documents and (iii) any attempt to enforce any right of Perseus against the

21

Company, any subsidiary of the Company, any person or other entity, that may be obligated to Perseus by virtue of any of the Transaction Documents, unless a court of competent jurisdiction finally determines that Perseus is not entitled to enforce such right.

           (g)      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 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 the Company:
	ImageWare Systems, Inc.
	10883 Thornmint Road
	San Diego, California 92127
	Attention:    S. James Miller, Jr., CEO, President and Chairman
	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
If to Perseus:
	Perseus 2000, L.L.C.
	2099 Pennsylvania Ave., N.W., Suite 900
	Washington, D.C. 20006-1813
	Attention:    Chip Newton, Managing Director; and
	Rodd Macklin, Chief Financial Officer
	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

           (h)      Validity. If any provision of this Agreement or any of the Transaction Documents shall be judicially determined to be invalid, illegal or unenforceable, the validity,

22

legality and enforceability of the remaining provisions thereof shall not in any way be affected or impaired thereby.

           (i)      Counterparts. This Agreement may be executed in any number of counterparts. This Agreement, and each other agreement or instrument entered into in connection herewith or therewith or contemplated hereby or thereby, and any amendments hereto or thereto, to the extent signed and delivered by means of a facsimile machine, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto or to any such agreement or instrument, each other party hereto or thereto shall re-execute original forms thereof and deliver them to all other parties. No party hereto or to any such agreement or instrument shall raise the use of a facsimile machine to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine as a defense to the formation or enforceability of a contract and each such party forever waives any such defense.

           (j)      Publicity. Neither Perseus nor the Company shall issue any press release or make any public disclosure regarding the transactions contemplated hereby unless such press release or public disclosure is approved by those parties mentioned in such press release or public disclosure in advance. Notwithstanding the foregoing, each of the parties hereto, may, if required by the SEC, American Stock Exchange or other regulatory bodies, make such public disclosures with respect to the transactions contemplated hereby as each may be advised by counsel is legally necessary or advisable; provided, however, that the disclosing party shall give the other party prior written notice of such requirement and a copy of the proposed public disclosure, in all cases with sufficient time for such other parties to seek a protective order or other limit on the proposed public disclosure (unless the disclosing party would suffer penalties or sanctions for failure to immediately disclose such information).

     The parties hereto acknowledge that immediately following the Initial Closing, the Company intends to file with the SEC a current report on Form 8-K regarding the transactions contemplated hereby, which report likely will include the Transaction Documents attached as exhibits thereto. Perseus hereby agrees that it shall not seek a protective order or other limit on the proposed public disclosure of such exhibits to the Transaction Documents. The Company hereby agrees that it shall provide Perseus with a copy of any such report at least two Business Days prior to the intended date of such filing and shall not file such report unless approved in advance by Perseus, which approval shall not be unreasonably withheld or delayed.

           (k)      Succession and Assignment. Except as otherwise expressly provided in this Agreement and subject to the other Transaction Documents and applicable law, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, permitted transferees, heirs, executors and administrators of the parties hereto. In the event that any person or persons other than Perseus holds a majority of the Notes issued pursuant to this Agreement, any proposed action that requires the prior written consent of Perseus shall instead require the prior written consent of the holders of a majority of the Notes issued pursuant to this Agreement.

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           (l)      Additional Definitions. In addition to the terms defined elsewhere in this Agreement, the following term shall have the meaning set forth below:

     “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, the State of California or the District of Columbia are authorized to be closed.

     “Material Contracts” means (i) all of the Company’s and its subsidiaries’ contracts, agreements, leases or other instruments to which the Company or any of its subsidiaries is a party or by which the Company, its subsidiaries or its properties are bound, which involve prospective fixed and/or contingent payments or expenditures by or to the Company or its subsidiaries of more than $100,000 or in excess of the normal ordinary and usual requirements of its business or which extend for a term of more than a year from the date hereof, (ii) all of the Company’s and its subsidiaries’ loans or advances to any person or entity, and all loan agreements, bank lines of credit agreements, indentures, mortgages, deeds of trust, pledge and security agreements, factoring agreements, conditional sales contracts, letters of credit or other debt instruments to which the Company or any of its subsidiaries is a party, (iii) any guarantees by the Company or any of its subsidiaries, (iv) all material operating or capital leases for equipment to which the Company or any of its subsidiaries is a party, (v) all non-competition and similar agreements to which the Company is a party, (vi) all contracts for the employment of any officer or employee, (vii) all contracts, agreements or commitments with any agent, independent contractor, advisor or dealer that are not cancelable by it on notice of not longer than 30 days, (viii) all consulting agreements, (ix) all distributor and sales agency agreements, (x) any collective bargaining or union agreements, contracts or commitments, and (xi) all other contracts filed, or required to be filed by the Company as an exhibit to the Company Reports pursuant to Item 601 of Regulation S-B promulgated pursuant to the Securities Act.

     “Permitted Liens” shall have the meaning ascribed to such term in the applicable Pledge and Security Agreement.

[signatures appear on following page]

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

COMPANY:

IMAGEWARE SYSTEMS, INC.

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

PERSEUS 2000, L.L.C.

By: /s/ Ray E. Newton III
Name: Ray E. Newton III
Title: Managing Director

25 EX-2 4 w64123exv2.htm EXHIBIT 2

EXHIBIT 2

FORM OF
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.

$[Principal Amount]	[Issuance Date]
	San Diego, California

     FOR VALUE RECEIVED, IMAGEWARE SYSTEMS, INC., a California corporation (the “Company”), promises to pay to the order of Perseus 2000, L.L.C. (the “Lender”) or its registered assigns (the “Holder”), the principal sum of [Insert Principal Amount] Dollars ($[Insert Principal Amount]), 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, 2004 (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. Subject to Section 3(b) hereof, 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) 72% of the amount of each such interest payment shall be paid in lawful money of the United States of America and (b) the remaining 28% of the amount of each such interest payment shall be paid, at the Company’s sole option, (i) in lawful money of the United States of America or (ii) 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.

     This Note is issued pursuant to the Note and Warrant Purchase Agreement (the “Purchase Agreement”) dated as of May 22, 2002 by and between the Company and the Lender.

     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 Note” means any of the Notes issued pursuant to the Purchase Agreement or in payment of interest on any Note.

           (d)      “Date of Original Issue” means May 22, 2002, the date of issuance of the Initial Note by the Company under the Purchase Agreement.

           (e)      “Obligations” means the principal, interest and other amounts payable under this Note.

           (f)      “Transaction Documents” shall mean each of the Company Notes, the Warrants, the Purchase Agreement, the Registration Rights Agreement and the Pledge and Security 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 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

           (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

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Section 2(a) hereof, and such failure shall continue for thirty 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 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 90 days of commencement.

     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

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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:

Prepayment Date	Prepayment Premium %
[0-3 months from date of issuance]		10	%
[3-6 months from date of issuance]		8	%
[6-9 months from date of issuance]		6	%
[9-12 months from date of issuance]		4	%
[12-15 months from date of issuance]		2	%
[>15 months from date of issuance]		0	%

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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. [TO BE INCLUDED IN ADDITIONAL NOTE ONLY: In the event that the Perseus Option (as defined in the Purchase Agreement) is exercised during the Prepayment Notice Period under the Initial Note (as defined in the Purchase Agreement) the provisions of this Section 5 with respect to the prepayment premium shall not apply to any prepayment made under this Note].

     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 $4.31, subject to adjustment as provided in Section 7 hereof (the “Conversion Price”).

           (b)      Conversion by Company. At any time following the first anniversary of the Date of Original Issue, 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 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.

           (c)      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

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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.

           (d)      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.

           (e)      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 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 the Date of Original Issue 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 the Date of Original Issue 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

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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 the Date of Original Issue 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 the Date of Original Issue 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 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 the Date of Original Issue, 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

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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.

                      (i)      If at any time or from time to time after the Date of Original Issue, 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 the Date of Original Issue, 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;

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

                                              (4)      upon conversion of the Notes (as defined in the Purchase Agreement) or the Company’s Series B Preferred Stock or upon exercise or conversion of 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

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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. “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.

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

                                  (C)      “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.

                      (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

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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.

                                  (E)      Notwithstanding anything to the contrary in this Section 7(e), if any reduction of the Conversion Price provided for by this Section 7(e) would result in the Company not being in compliance with AMEX Listing Standards, Policies and Requirements Section 713 (“AMEX Rule 713”), or any successor provision, then, until the Company obtains shareholder approval to issue the full number of shares of Common Stock issuable after such adjustment, this Note shall be convertible into the maximum number of shares of Common Stock then permitted by AMEX Rule 713 without shareholder approval.

           (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

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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 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 holders of at least 85% of the outstanding principal amount of the Notes issued pursuant to the Purchase Agreement.

     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

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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.

     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

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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.

[signatures appear on following page]

13

IN WITNESS WHEREOF, the Company has caused this Note to be issued 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 w64123exv3.htm 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.: ______

FORM OF
WARRANT
TO PURCHASE COMMON STOCK
OF
IMAGEWARE SYSTEMS, INC.

(void after May 22, 2007)

     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 May 22, 2007 (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 Perseus 2000, L.L.C., 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 the Holder.

           (e)      “Warrant Price” means $4.74 per share, subject to adjustment as described in Section 3 below.

           (f)      “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 [insert number of shares], 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

2

successor or purchasing 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) 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 a consideration per Common Stock Equivalent Share less than Warrant Price in effect immediately prior to the issuance of such Additional Stock, then the Warrant Price in effect immediately prior to each such issuance shall forthwith be adjusted to a price determined by multiplying such Warrant Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by the Company for such issuance would purchase at such Warrant Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of such Additional Stock so issued. For purposes of this clause (i), the number of shares of Common Stock outstanding at a given time shall be deemed to be the number of shares of Common Stock that are then issued and outstanding plus the number of shares of Common Stock then issuable upon exercise of all then outstanding warrants, options or similar rights to purchase Common Stock or securities convertible into Common Stock plus the number of shares of Common Stock then issuable upon conversion of such convertible securities and all other convertible securities of the Company then outstanding.

                      (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

3

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 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

4

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).

                      (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 the Notes (as defined in the Purchase Agreement) or the Company’s Series B Preferred Stock or upon exercise or conversion of 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.

5

                      (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 Section 3(d), if any adjustment of the Warrant Price provided for by this Section 3(d) would result in the Company not being in compliance with AMEX Listing Standards, Policies and Requirements Section 713 (“AMEX Rule 713”), or any successor provision, then, until the Company obtains shareholder approval to issue the full number of shares of Warrant Stock issuable after such adjustment, this Warrant shall be exercisable for the maximum number of shares of Warrant Stock then permitted by AMEX Rule 713 without shareholder approval.

           (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

6

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.

     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

7

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.
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

8

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 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:

	IMAGEWARE SYSTEMS, INC.
By:
Name:
Title:

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:________________________________________________

10

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 w64123exv4.htm 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 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

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                         (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 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

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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 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.

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               (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.

               (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

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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 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;

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               (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;

               (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,

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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 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

8

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 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.

9

               (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

               (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

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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.

               (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.

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               (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]

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[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:/s/ S. James Miller, Jr.
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

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[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: /s/ Ray E. Newton III
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

14 EX-5 7 w64123exv5.htm 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:

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 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”);

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                         (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 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

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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.

     “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

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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 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

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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 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.

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               (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 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.

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               (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.

               (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;

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               (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 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;

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               (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;

                         (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;

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                         (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 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

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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, 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

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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 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;

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                         (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 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.

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     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 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

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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 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.

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               (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;

        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

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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.

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

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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, 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

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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 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

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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

               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

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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 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,

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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 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]

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

IMAGEWARE SYSTEMS, INC.

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

ACKNOWLEDGED:

Perseus 2000, L.L.C.

By: /s/ Ray E. Newton III
Name: Ray E. Newton III
Title: Managing Director

24 EX-6 8 w64123exv6.htm 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.

          This agreement may be executed in one or more counterparts.

Dated: September 23, 2002

FRANK H. PEARL

s/ Frank H. Pearl
Name: Frank H. Pearl

PERSEUS 2000, L.L.C.

By: /s/ Kenneth M. Socha
Name: Kenneth M. Socha
Title: Senior Managing Director

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