IMAGEWARE SYSTEMS, INC.

SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of December 12,
2011, is made and entered into by and between ImageWare Systems, Inc., a
Delaware corporation with

its principal executive offices

located at 10815 Rancho Bernardo Road, Suite 310 San Diego, CA 92127  (the
“Company”), and each of the purchasers listed on Schedule A hereto (the
“Purchasers”).

WHEREAS, the Company and the Purchasers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the rules and regulations as promulgated by the U.S. Securities and Exchange
Commission (the “SEC”) under the Securities Act of 1933, as amended (the
“Securities Act”);

WHEREAS, the Purchasers, severally and not jointly, desire to purchase and the
Company desires to issue and sell to the Purchasers, in each case upon the terms
and subject to the conditions set forth in this Agreement, an aggregate of
shares (the “Shares”) of common stock, $0.01 par value per share, of the Company
(together with any securities into which such shares may be reclassified,
whether by merger, charter amendment or otherwise, the “Common Stock”), at a
purchase price of $0.50 per share (the “Per Share Purchase Price”) equal to at
least $10,000,000 (the "Minimum Amount") and up to $12,500,000;

WHEREAS, each Purchaser shall receive a warrant ("Warrant") to purchase 50% of
the number of Shares of Common Stock purchased (the "Warrant Shares").  

WHEREAS, each Purchaser, severally and not jointly, wishes to purchase, upon the
terms and conditions stated in this Agreement, such number of shares of Common
Stock and Warrants (in the form attached hereto as Exhibit A) as is set forth
immediately next to such Purchaser’s name on Schedule A hereto;

WHEREAS, simultaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement, in
the form attached hereto as Exhibit B (the “Registration Rights Agreement” and
collectively with this Agreement, the Questionnaire (attached as Exhibit C
hereto), the Warrants, the Placement Agent Warrant and the Registration Rights
Agreement, the “Transaction Documents”) pursuant to which the Company has agreed
to provide to the Purchasers certain registration rights under the Securities
Act and the rules and regulations promulgated thereunder, and applicable state
securities laws; and

WHEREAS, the Company has engaged MDB Capital Group, LLC as its exclusive
placement agent (the “Placement Agent”) for the offering contemplated hereby
and, as a portion of its fee has agreed to issue to the Placement Agent a
warrant, in substantially the form of the Warrant and containing such other
terms and conditions as may be required under the rules and regulations the
Financial Industry Regulatory Authority, Inc. (“FINRA”) (the “Placement Agent
Warrant”) to acquire shares of Common Stock (the “Placement Agent Warrant
Shares”).

NOW THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the Company and each
Purchaser severally (and not jointly) hereby agree as follows:

1.

Purchase and Sale of Common Stock and Warrants.

(a)

Purchase of Common Stock and Warrants.  Subject to the terms and conditions set
forth in this Agreement, on the Closing Date (as defined below), the Company
shall issue and sell to each Purchaser and each Purchaser, severally and not
jointly, agrees to purchase from the Company such number of Shares and such
number of Warrants (equal to 50% of the number of Shares of Common Stock
purchased) as is set forth next to such Purchaser’s name on Schedule A hereto.

(b)

Closing Date.  Subject to the satisfaction (or written waiver) of the conditions
thereto set forth in Section 6 and Section 7 below, the date and time of the
issuance and sale of the Common Stock Shares and Warrants pursuant to this
Agreement (the “Closing Date”) shall be 9:00 a.m., Pacific time, on the date
first written above, or such other mutually agreed upon time.  The closing of
the transactions contemplated by this Agreement (the “Closing”) shall occur on
the Closing Date at such location as may be agreed to by the parties and may be
undertaken remotely by facsimile or other electronic transmission.

(c)

Closing.  On or prior to the Closing, each Purchaser shall deliver or cause to
be delivered the following in accordance with the subscription procedures
described in Section 1(e) below:

(i)

this Agreement and the Registration Rights Agreement, duly executed by such
Purchaser;

(ii)

an amount equal to the Per Share Purchase Price multiplied by the number of
shares of Common Stock to be purchased by such Purchaser as set forth next to
such Purchaser’s name on Schedule A hereto (such product, the “Subscription
Amount”), in immediately available funds in the form of a wire transfer of
immediately available funds to the Company, in accordance with the Company’s
written instructions; and

(iii)

a fully completed and duly executed Questionnaire in the form attached as
Exhibit C hereto (the “Questionnaire”).

If this Agreement is terminated pursuant to Section 9(k) or the Company does not
receive subscriptions for the Minimum Amount, each Purchaser shall receive his
her or its Subscription Amount promptly, without interest.

(d)

Subscription Procedure.  Each Purchaser shall deliver or cause to be delivered a
duly executed copy of this Agreement, the Registration Rights Agreement and a
fully completed and duly executed Questionnaire to the Placement Agent at the
following address:  MDB Capital Group, LLC, Attention Bob Clifford, 401 Wilshire
Blvd., Suite 1020, Santa Monica, CA 90401. Unless other arrangements have been
made with a particular Purchaser, each Purchaser shall also deliver or cause to
be delivered the Subscription Amount pursuant to Section 1(c)(ii) hereof.

(e)

Acceptance.  This Agreement sets forth various representations, warranties,
covenants and agreements of the Company and the Purchasers, as the case may be,
all of which shall be deemed made, and shall be effective without further action
by the Company and the Purchasers, immediately upon the Company’s acceptance of
a Purchaser’s subscription and shall thereupon be binding upon the Company and
the applicable Purchasers.  Acceptance is evidenced only by execution of this
Agreement by the Company on its signature page attached hereto and the Company
shall have no obligation hereunder to a Purchaser until the Company shall have
delivered to such Purchaser an executed copy of this Agreement.

2.

Representations and Warranties of the Purchasers.  Each Purchaser severally (and
not jointly) represents and warrants to the Company solely as to such Purchaser
that:

(a)

Investment Purpose.  The Securities to be acquired by such Purchaser are being
acquired for investment for such Purchaser’s own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof in
violation of the Securities Act, and such Purchaser has no present intention of
selling, granting any participation in, or otherwise distributing the same in
violation of the Securities Act.  Such Purchaser does not presently 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 of the Securities in violation of the Securities Act. Such
Purchaser has not been formed for the specific purpose of acquiring the
Securities.

(b)

Accredited Investor Status.  Such Purchaser is an “accredited investor,” as that
term is defined in Rule 501(a) of Regulation D promulgated under the Securities
Act (an “Accredited Investor”).

(c)

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

(d)

Information.  Such Purchaser and its advisors, if any, have been furnished with
all materials relating to the business, financial condition, results of
operations, management and operations of the Company and materials relating to
the offer and sale of the Securities which have been requested by such Purchaser
or its advisors, and considered all factors such Purchaser deems material in
deciding on the advisability of investing the Securities.  Such Purchaser and
its advisors, if any, have been afforded the opportunity to ask questions of the
Company.  Notwithstanding the foregoing representations, neither such inquiries
nor any other due diligence investigation conducted by Purchaser or any of its
advisors or representatives shall modify, amend or affect Purchaser’s right to
rely on the Company’s representations and warranties contained in Section 3
below.

(e)

No Governmental Review.  Such Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.

(f)

Restricted Securities.  Such Purchaser understands that the Securities have not
been registered under the Securities Act, by reason of a specific exemption from
the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
such Purchaser’s representations as expressed herein.  Such Purchaser
understands that the Securities are characterized as “restricted securities”
under applicable U.S. federal and state securities laws and that, pursuant to
these laws, Purchaser must hold the Securities indefinitely unless subsequently
registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available.

(g)

Legends.  It is understood that, except as provided below, certificates
evidencing the Securities may bear the following legend:

“The securities represented hereby have not been registered with the Securities
and Exchange Commission or the securities commission of any state in reliance
upon an exemption from registration under the Securities Act of 1933, as
amended, and, accordingly, may not be transferred unless (i) such securities
have been registered for sale pursuant to the Securities Act of 1933, as
amended, (ii) such securities may be sold pursuant to Rule 144, or (iii) the
Company has received an opinion of counsel reasonably satisfactory to it that
such transfer may lawfully be made without registration under the Securities Act
of 1933, as amended.”

(h)

Authorization; Enforcement.  Each Transaction Document to which such Purchaser
is a party: (i) has been duly and validly authorized, (ii) has been duly
executed and delivered on behalf of such Purchaser, and (iii) will constitute,
upon execution and delivery by such Purchaser thereof and the Company, the valid
and binding agreements of such Purchaser enforceable in accordance with their
terms, except to the extent limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors’ rights and general principles of equity that restrict
the availability of equitable or legal remedies.

(i)

Residency.  If such Purchaser is an individual, then such Purchaser resides in
the state or province identified in the address of such Purchaser set forth on
the signature pages hereto; if such Purchaser is a partnership, corporation,
limited liability company or other entity, then the office or offices of such
Purchaser in which its principal place of business is identified in the address
or addresses of such Purchaser set forth on the signature pages hereto.

(j)

Investment Experience.  Such Purchaser is experienced in investments and
business matters, has made investments of a speculative nature and has purchased
securities of United States companies in private placements in the past, and,
with its representatives, has such knowledge and experience in financial, tax
and other business matters as to enable such Purchaser to utilize the
information made available by the Company to evaluate the merits and risks of
and to make an informed investment decision with respect to the proposed
purchase, which represents a speculative investment.  Such Purchaser is able to
bear the economic risk of an investment in the Securities and is able to afford
a complete loss of such investment.

(k)

Communication of Offer. Such Purchaser was contacted by either the Company or
the Placement Agent with respect to a potential investment in the Securities.
 Such Purchaser is not purchasing the Securities as a result of any “general
solicitation” or “general advertising,” as such terms are defined in Regulation
D of the Securities Act, which includes, but is not limited to, any
advertisement, article, notice or other communication regarding the Securities
published in any newspaper, magazine or similar media or on the internet or
broadcast over television, radio or the internet or presented at any seminar or
any other general solicitation or general advertisement.

(l)

Brokers and Finders. Other than the Placement Agent with respect to the Company,
no person will have, as a result of the transactions contemplated by this
Agreement, any valid right, interest or claim against or upon the Company or any
Purchaser for any commission, fee or other compensation pursuant to any
agreement, arrangement or understanding entered into by or on behalf of such
Purchaser.  Such Purchaser acknowledges that it is purchasing the Securities
directly from the Company and not from the Placement Agent.

(m)

FINRA.  Such Purchaser (i) has had no position, office or other material
relationship within the past three years with the Company or persons known to it
to be affiliates of the Company, and (ii) if such Purchaser is a member of the
Financial Industry Regulatory Authority (“FINRA”) or an associated person of a
member of FINRA, such Purchaser, together with its affiliates and any other
associated persons of such member of FINRA, does not, and as of the Closing will
not, directly or indirectly have a beneficial interest (as determined under
FINRA Rule 5130(i)(1)) of more than 50% of the outstanding voting securities of
the Company.

(n)

Prohibited Transactions.  Since the earlier of (a) such time as such Purchaser
was first contacted by the Company or the Placement Agent regarding the
transactions contemplated hereby or (b) thirty (30) days prior to the date
hereof, neither such Purchaser nor any Affiliate of such Purchaser which (x) had
knowledge of the transactions contemplated hereby, (y) has or shares discretion
relating to such Purchaser’s investments or trading or information concerning
such Purchaser’s investments, including in respect of the Securities, or (z) is
subject to such Purchaser’s review or input concerning such Affiliate’s
investments or trading (collectively, “Trading Affiliates”) has, directly or
indirectly, effected or agreed to effect any short sale, whether or not against
the box, established any “put equivalent position” (as defined in Rule 16a-1(h)
under the Exchange Act) with respect to the Common Stock, granted any other
right (including, without limitation, any put or call option) with respect to
the Common Stock or with respect to any security that includes, relates to or
derived any significant part of its value from the Common Stock or otherwise
sought to hedge its position in the Securities (each, a “Prohibited
Transaction”).  Prior to the earliest to occur of (i) the termination of this
Agreement, (ii) the Effective Date or (iii) the Effectiveness Deadline, such
Purchaser shall not, and shall cause its Trading Affiliates not to, engage,
directly or indirectly, in a Prohibited Transaction.  Such Purchaser
acknowledges that the representations, warranties and covenants contained in
this Section 2(n) are being made for the benefit of the Purchasers as well as
the Company and that each of the other Purchasers shall have an independent
right to assert any claims against such Purchaser arising out of any breach or
violation of the provisions of this Section 2(n).

3.

Representations and Warranties of the Company.  Subject to any exceptions set
forth in schedules attached hereto, which schedules are incorporated herein by
this reference, the Company hereby represents and warrants to each Purchaser
that:

(a)

Organization and Qualification.  The Company and each of the Subsidiaries is an
entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation or default of any of the
provisions of its respective certificate or articles of incorporation, bylaws or
other organizational or charter documents. Each of the Company and the
Subsidiaries is duly qualified to conduct business and is in good standing as a
foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not have or reasonably be expected to result in (i) a
material adverse effect on the legality, validity or enforceability of any
Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business, prospects or condition (financial or otherwise) of
the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse
effect on the Company’s ability to perform in any material respect on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or (iii),
a “Material Adverse Effect”) and no Proceeding of which the Company has received
written notice or otherwise has Knowledge has been instituted in any such
jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or
curtail such power and authority or qualification.

(b)

Authorization; Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company, its Board of Directors or the Company’s stockholders in connection
therewith other than in connection with the Required Approvals (as defined
below). Each Transaction Document to which the Company is a party has been (or
upon the execution and delivery thereof by the Company will have been) duly
executed by the Company and, when delivered in accordance with the terms hereof
and thereof, will constitute the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except (i) as
limited by general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may be
limited by applicable law.

(c)

Capitalization.  As of the date hereof, the authorized capital stock of the
Company consists of 4,000,000 shares of Preferred Stock and 150,000,000 shares
of Common Stock, of which 26,355,832 shares of Common Stock are issued and
outstanding, 243,685 shares of Preferred Stock are issued and outstanding and
1,707,713 shares of Common Stock are reserved for issuance pursuant to the
Company's stock option plans.  All of such outstanding shares of capital stock
are duly authorized, validly issued, fully paid and nonassessable and free of
pre-emptive rights and were issued in full compliance with applicable state and
federal securities law and any rights of third parties.  The Shares and the
Warrant Shares have been duly reserved for future issuance.  All of the issued
and outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued and are fully paid, nonassessable and free of
pre-emptive rights, were issued in full compliance with applicable state and
federal securities law and any rights of third parties and are owned by the
Company, beneficially and of record, subject to no Lien (as defined below).  No
shares of capital stock of the Company or any Subsidiary are subject to
preemptive rights or any other similar rights of the stockholders or any
mortgage, lien, title claim, assignment, encumbrance, security interest, adverse
claim, contract of sale, restriction on use or transfer or other defect of title
of any kind, other than those arising under applicable securities laws (each, a
“Lien”).  Except for the Transaction Documents and options issued under Employee
Benefit Plans, (i) there are no outstanding options, warrants, scrip, rights to
subscribe for, puts, calls, rights of first refusal, agreements, understandings,
claims or other commitments or rights of any character whatsoever relating to,
or securities or rights convertible into or exchangeable for any shares of
capital stock of the Company or any of its Subsidiaries, or arrangements by
which the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries,
(ii) other than the Registration Rights Agreement, there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of its or their securities under the Securities Act and
(iii) there are no anti-dilution or price adjustment provisions contained in any
security issued by the Company or any Subsidiary (or in any agreement providing
rights to security holders) that will be triggered by the issuance of the
Securities, and the Company is not currently contemplating any issuances of its
debt or equity securities which would trigger the anti-dilution or price
adjustment provisions contained in the Warrants and Common Stock.  Except for
the Registration Rights Agreement, there are no voting agreements, buy-sell
agreements, option or right of first purchase agreements or other agreements of
any kind among the Company and any of the securityholders of the Company
relating to the securities of the Company held by them.  The Certificate of
Incorporation of the Company as in effect on the date hereof (“Certificate of
Incorporation”) and the Company’s By-laws, as in effect on the date hereof (the
“By-laws”) have been made available to the Purchasers.

(d)

Issuance of Shares.  The Shares have been duly authorized and, when issued and
paid for in accordance with the applicable Transaction Documents, will be duly
and validly issued, fully paid and nonassessable, free and clear of all Liens.
 The Warrant Shares, when issued in accordance with the terms of the Transaction
Documents, will be validly issued, fully paid and nonassessable, free and clear
of all Liens. The Company has reserved from its duly authorized capital stock a
number of shares of Common Stock for issuance of the Warrant Shares.  The
Placement Agent Warrant Shares, when issued in accordance with the terms of the
Transaction Documents, will be validly issued, fully paid and nonassessable,
free and clear of all Liens. The Company has reserved from its duly authorized
capital stock a number of shares of Common Stock for issuance of the Placement
Agent Warrant Shares.

(e)

Acknowledgment of Dilution.  The Company acknowledges that the issuance of the
Securities may result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial under certain market conditions. The Company
further acknowledges that its obligations under the Transaction Documents,
including, without limitation, its obligation to issue the Warrant Shares and
the Placement Agent Warrant Shares pursuant to the Transaction Documents, are
unconditional and absolute and not subject to any right of set off,
counterclaim, delay or reduction, regardless of the effect of any such dilution
or any claim the Company may have against any Purchaser or the Placement Agent
and regardless of the dilutive effect that such issuance may have on the
ownership of the other stockholders of the Company.

(f)

No Conflicts.  The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the other
transactions contemplated hereby and thereby do not and will not: (i) conflict
with or violate any provision of the Company’s or any Subsidiary’s certificate
or articles of incorporation, bylaws or other organizational or charter
documents, or (ii) conflict with, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, result in the
creation of any Lien upon any of the properties or assets of the Company or any
Subsidiary, or give to others any rights of termination, amendment, acceleration
or cancellation (with or without notice, lapse of time or both) of, any
agreement, credit facility, debt or other instrument (evidencing a Company or
Subsidiary debt or otherwise) or other understanding to which the Company or any
Subsidiary is a party or by which any property or asset of the Company or any
Subsidiary is bound, or (iii) subject to the Required Approvals, conflict with
or result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or governmental authority
to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound; except in the case of each of clauses (ii) and
(iii), such as could not have and would not or reasonably be expected to result
in a Material Adverse Effect.

(g)

The Company has furnished to each Purchaser true and complete copies of the
unaudited consolidated balance sheet of the Company and its Subsidiaries as of
December 31, 2010 and 2009 and the related consolidated income statement,
consolidated statement of cash flows and consolidated statement of stockholders’
equity of the Company for the twelve (12) months then ended.  All of the
financial statements described above are hereinafter referred to, collectively,
as the “Financial Statements”. The Financial Statements have been prepared in
accordance with United States generally accepted accounting principles applied
on a consistent basis during the periods covered thereby, subject to, normal
year-end adjustments and  the absence of footnotes thereto, and present fairly,
in all material respects, the financial position of the Company and its
Subsidiaries and the results of operations and cash flows as of the date and for
the periods indicated therein.  Except as set forth in the Financial Statements,
the Company has no material liabilities or obligations, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business, (ii)
obligations under contracts and commitments incurred in the ordinary course of
business, and (iii) liabilities and obligations of a type or nature not required
under generally accepted accounting principles to be reflected in the Financial
Statements.

(h)

Absence of Certain Changes.  Since the date of the latest Financial Statements
as of and for the period ended December 31, 2010, (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Company has not incurred any
material liabilities (contingent or otherwise) other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the Company’s
Financial Statements pursuant to GAAP or disclosed in filings made with the
Commission, (iii) the Company has not altered its method of accounting, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock and (v) the Company has not
issued any equity securities to any officer, director or Affiliate (as defined
in Rule 405), except pursuant to the Employee Benefit Plans. The Company does
not have pending before the Commission any request for confidential treatment of
information. Except for the issuance of the Securities contemplated by this
Agreement or as set forth on Schedule 3(h), no event, liability or development
has occurred or exists with respect to the Company or its Subsidiaries or their
respective business, properties, operations or financial condition, that would
be required to be disclosed by the Company under applicable securities laws at
the time this representation is made or deemed made that has not been publicly
disclosed prior to the date hereof.

(i)

Absence of Litigation.  There is no action, suit, inquiry, notice of violation,
proceeding or investigation pending or, to the Knowledge of the Company,
threatened against or affecting the Company, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) except as disclosed on Schedule 3(i), could, if there
were an unfavorable decision, have or reasonably be expected to result in a
Material Adverse Effect. Neither the Company nor any Subsidiary, nor any
director or officer thereof, is or has been the subject of any Action involving
a claim of violation of or liability under federal or state securities laws or a
claim of breach of fiduciary duty. There has not been, and to the Knowledge of
the Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer of
the Company. The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the Company
or any Subsidiary under the Exchange Act or the Securities Act.  

(j)

Intellectual Property.  Schedule 3(j) attached hereto sets forth a complete and
accurate listing of the Company’s and each of its Subsidiaries’ patents, patent
applications, provisional patents, trademarks, service marks, trade names,
trademark registrations, service mark registrations, copyrights, licenses,
formulae, mask works, customer lists, internet domain names, know-how and other
intellectual property, including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems, procedures or
registrations or applications relating to the same (collectively, “Intellectual
Property”).  The Company owns valid title, free and clear of any Liens, or
possesses the requisite valid and current licenses or rights, free and clear of
any Liens, to use all Intellectual Property in connection with the conduct of
its business as now operated.  Except as disclosed in Schedule 3(j), there is no
claim or action by any person pertaining to, or proceeding pending, or to the
Company’s Knowledge threatened, which challenges the right of the Company or of
a Subsidiary to use any Intellectual Property as such Intellectual Property is
currently being used in the business.  To the Company’s Knowledge, the Company
or its Subsidiaries’ current and intended products, services and processes do
not infringe on any Intellectual Property or other rights held by any person,
and the Company is unaware of any facts or circumstances which might give rise
to any of the foregoing.  Except as disclosed in Schedule 3(j), the Company has
not received any notice of infringement of, or conflict with, the asserted
rights of others with respect to the Intellectual Property.  The Company and
each of its Subsidiaries have taken reasonable security measures to protect the
secrecy, confidentiality and value of their Intellectual Property.

(k)

Tax Matters.  Except for matters that would not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and, to the Company’s Knowledge no tax deficiency has been
asserted or threatened against the Company or any Subsidiary.  The Company has
not received notice that any of its tax returns is presently being audited by
any taxing authority.

(l)

Certain Transactions.  None of the officers or directors of the Company and, to
the Knowledge of the Company, none of the employees of the Company is presently
a party to any transaction with the Company or any Subsidiary (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
Knowledge of the Company, any entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner, in each case in excess of $120,000 other than for (i) payment of salary
or consulting fees for services rendered, (ii) reimbursement for expenses
incurred on behalf of the Company and (iii) other employee benefits, including
stock option agreements under any Employee Benefit Plan of the Company.

(m)

Disclosure.  Except with respect to the material terms and conditions of the
transactions contemplated by the Transaction Documents, the Company confirms
that neither it nor any other Person acting on its behalf has provided any of
the Purchasers or their agents or counsel with any information that it believes
constitutes or might constitute material, nonpublic information.  All disclosure
furnished by or on behalf of the Company to the Purchasers regarding the
Company, its business and the transactions contemplated hereby, including the
schedules to this Agreement, is true and correct and does not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. The press releases disseminated by the
Company during the twelve months preceding the date of this Agreement taken as a
whole do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made and
when made, not misleading.

(n)

No General Solicitation. Neither the Company nor any person acting on behalf of
the Company has offered or sold any of the Securities by any form of general
solicitation or general advertising. The Company has offered the Securities for
sale only to the Purchasers and certain other “accredited investors” within the
meaning of Rule 501 under the Securities Act.

(o)

No Integrated Offering.  Neither the Company, nor any of its Affiliates, nor any
Person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of (i) the
Securities Act which would require the registration of any such securities under
the Securities Act, or (ii) any applicable shareholder approval provisions of
any Trading Market on which any of the securities of the Company are listed or
designated.

(p)

No Brokers.  The Company has taken no action which would give rise to any claim
by any person for brokerage commissions, transaction fees or similar payments
relating to this Agreement or the transactions contemplated hereby, other than
to the Placement Agent.

(q)

Permits; Compliance.  The Company and the Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, local or
foreign regulatory authorities necessary to conduct their respective businesses,
except where the failure to possess such permits could not reasonably be
expected to result in a Material Adverse Effect (“Material Permits”), and
neither the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.

(r)

ERISA. Schedule 3(r) sets forth all employee benefit plans maintained,
established or sponsored by the Company, or in or to which the Company
participates or contributes, which is subject to the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”).  The Company has made all required
contributions and has no liability to any such employee benefit plan, other than
liability for health plan continuation coverage described in Part 6 of Title
I(B) of ERISA,  and has complied with all applicable laws for any such employee
benefit plan.

(s)

Title to Property.  The Company and the Subsidiaries have good and marketable
title in fee simple to all real property owned by them and good title in all
personal property owned by them that is material to the business of the Company
and the Subsidiaries, in each case free and clear of all Liens, except for Liens
as do not materially affect the value of such property and do not materially
interfere with the use currently made of such property by the Company and the
Subsidiaries and Liens for the payment of federal, state or other taxes, the
payment of which is neither delinquent nor subject to penalties. Any real
property and facilities held under lease by the Company and the Subsidiaries are
held by them under valid, subsisting and enforceable leases with which the
Company and the Subsidiaries are in material compliance.

(t)

Insurance.  The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged.  To the
Knowledge of the Company, there is no circumstance currently existing that would
result in the Company or any Subsidiary not being able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business at a
cost that would not have a Material Adverse Effect.  The Company has made
available to Purchaser true and correct copies of all policies relating to
directors’ and officers’ liability coverage, errors and omissions coverage, and
commercial general liability coverage.

(u)

Internal Controls.  The Company is in material compliance with the provisions of
the Sarbanes-Oxley Act of 2002 currently applicable to the Company.  Except as
noted on Schedule 3(u), the Company and the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. The
Company has established disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such
disclosure controls and procedures to ensure that material information relating
to the Company, including the Subsidiaries, is made known to the certifying
officers by others within those entities, particularly during the period in
which the Company’s most recently filed periodic report under the Exchange Act,
as the case may be, is being prepared.  The Company's certifying officers have
evaluated the effectiveness of the Company's controls and procedures as of the
end of the period covered by the most recently filed periodic report under the
Exchange Act (such date, the "Evaluation Date").  The Company presented in its
most recently filed periodic report under the Exchange Act the conclusions of
the certifying officers about the effectiveness of the disclosure controls and
procedures based on their evaluations as of the Evaluation Date.  Since the
Evaluation Date, there have been no significant changes in the Company's
internal controls (as such term is defined in Item 308 of Regulation S-K) or, to
the Company's Knowledge, in other factors that could significantly affect the
Company's internal controls.  The Company maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with GAAP and the applicable requirements of the Exchange Act.

(v)

Questionable Payments.  Neither the Company nor any of its Subsidiaries nor, to
the Company’s Knowledge, any of their respective current or former directors,
officers, employees, agents or other Persons acting on behalf of the Company or
any Subsidiary, has on behalf of the Company or any Subsidiary or in connection
with their respective businesses: (a) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; (b) made any direct or indirect unlawful payments to any
governmental officials or employees from corporate funds; (c) established or
maintained any unlawful or unrecorded fund of corporate monies or other assets;
(d) made any false or fictitious entries on the books and records of the Company
or any Subsidiary; or (e) made any unlawful bribe, rebate, payoff, influence
payment, kickback or other unlawful payment of any nature.

(w)

Assumptions or Guaranties of Indebtedness of Other Persons.  Except as set forth
on Schedule 3(w) attached hereto, neither the Company nor any of its
Subsidiaries has assumed, guaranteed, endorsed, or otherwise become directly or
contingently liable on, any Indebtedness or any other agreement of any other
person that is not an affiliate.

(x)

Investments in Other Persons.  Neither the Company nor any of its Subsidiaries
has made any loan or advance to any person which is outstanding, nor is it
committed or obligated to make any such loan or advance, nor does the Company or
any of its Subsidiaries own any capital stock, assets comprising the business
of, obligations of, or any equity, ownership or other interest in, any person
that is not an affiliate.  

(y)

No Investment Company.  The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an
Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.

(z)

Material Contracts.  Except as disclosed on Schedule 3(z) (each contract,
agreement, commitment or understanding disclosed on Schedule 3(z) being
hereinafter referred to as a “Material Agreement”), or as contemplated by this
Agreement or another Transaction Document, there are no agreements,
understandings, commitments, instruments, contracts, employment agreements,
proposed transactions or judgments to which the Company is a party or by which
it is bound which may involve obligations (contingent or otherwise), or a
related series of obligations (contingent or otherwise), of, or payments, or a
related series of payments, by the Company in excess of $100,000 in any one
year.  All Material Agreements are in full force and effect and constitute
legal, valid and binding obligations of the Company and, to the Company’s
Knowledge, the other parties thereto and are enforceable in accordance with
their respective terms.  To the Company’s Knowledge, neither the Company nor any
person is in default under the terms of any Material Agreement, and no
circumstance exists that would, with the giving of notice or the passage of
time, constitute a default under any Material Agreement.  The Purchasers have
been furnished with complete and correct copies of all Material Agreements
requested by them or their counsel to the extent requested.

(aa)

Employees.  No material labor dispute exists or, to the Knowledge of the
Company, is threatened or imminent with respect to any of the employees of the
Company which could reasonably be expected to result in a Material Adverse
Effect. None of the Company’s or its Subsidiaries’ employees is a member of a
union that relates to such employee’s relationship with the Company or such
Subsidiary, and neither the Company nor any of its Subsidiaries is a party to a
collective bargaining agreement, and the Company believes that their
relationships and their Subsidiaries’ relationships with their respective
employees are good. No executive officer is, or is now expected to be, in
violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement or non-competition agreement, or
any other contract or agreement or any restrictive covenant in favor of any
third party, and the continued employment of each such executive officer does
not subject the Company or any of its Subsidiaries to any liability with respect
to any of the foregoing matters. The Company and its Subsidiaries are in
compliance with all U.S. federal, state, local and foreign laws and regulations
relating to employment and employment practices, terms and conditions of
employment and wages and hours, except where the failure to be in compliance
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

(bb)

Compliance. Neither the Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred that has not been waived that, with
notice or lapse of time or both, would result in a default by the Company or any
Subsidiary under), nor has the Company or any Subsidiary received notice of a
claim that it is in default under or that it is in violation of, any indenture,
loan or credit agreement or any other Material Agreement to which it is a party
or by which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is or has been in violation of any
statute, rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws applicable to its business
and all such laws that affect the environment, except in each case as could not
have or would not reasonably be expected to result in a Material Adverse Effect.

(cc)

Filings, Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution of,
delivery and performance by the Company of the Transaction Documents, other than
(i) filings with the Commission of the Registration Statement and Form 8-K, (ii)
the notice and/or application(s) to each applicable Trading Market for the
issuance and sale of the Securities, and (iii) the filing of Form D with the
Commission and such filings as are required to be made under applicable state
securities laws (collectively, the “Required Approvals”). Subject to the
accuracy of the representations and warranties of each Purchaser set forth in
Section 2 hereof, the Company has taken all action necessary to exempt (i) the
issuance and sale of the Securities, (ii) the issuance of the Warrant Shares
upon due exercise of the Warrants, and (iii) the other transactions contemplated
by the Transaction Documents from the provisions of any stockholder rights plan
or other “poison pill” arrangement, any anti-takeover, business combination or
control share law or statute binding on the Company or to which the Company or
any of its assets and properties may be subject and any provision of the
Company’s Certificate of Incorporation or Bylaws that is or could reasonably be
expected to become applicable to the Purchasers as a result of the transactions
contemplated hereby, including without limitation, the issuance of the
Securities and the ownership, disposition or voting of the Securities by the
Purchasers or the exercise of any right granted to the Purchasers pursuant to
this Agreement or the other Transaction Documents.

(dd)

Environmental Matters.  Neither the Company nor any Subsidiary is in violation
of any statute, rule, regulation, decision or order of any governmental agency
or body or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, “Environmental Laws”), owns or operates any real
property contaminated with any substance that is subject to any Environmental
Laws, is liable for any off-site disposal or contamination pursuant to any
Environmental Laws, or is subject to any claim relating to any Environmental
Laws, which violation, contamination, liability or claim has had or could
reasonably be expected to have a Material Adverse Effect, individually or in the
aggregate; and there is no pending or, to the Company’s Knowledge, threatened
investigation that might lead to such a claim.

4.

Covenants.  In addition to the other agreements and covenants set forth herein,
unless otherwise consented to in writing by the Company and a majority in
interest of the Purchasers, the applicable parties hereto hereby covenant as
follows:

(a)

Affirmative Obligations. The Company will furnish to the Purchasers and/or their
assignees such information relating to the Company and its Subsidiaries as from
time to time may reasonably be requested by the Purchasers and/or their
assignees; provided, however, that the Company shall not disclose material
nonpublic information to the Purchasers, or to advisors to or representatives of
the Purchasers, unless prior to disclosure of such information the Company
identifies such information as being material nonpublic information and provides
the Purchasers, such advisors and representatives with the opportunity to accept
or refuse to accept such material nonpublic information for review and any
Purchaser wishing to obtain such information enters into an appropriate
confidentiality agreement with the Company with respect thereto.  The Company
shall maintain the quotation of its Common Stock on the Pink Sheets of the OTC
Markets or listing of the Common Stock a securities exchange maintained by The
NASDAQ Stock Market LLC (“Trading Markets”) and maintain such listing so long as
any Affirmative Obligations remain unfulfilled or any Registrable Securities
have not been resold.  The obligations contained in this Section 4(a) are
referred to as the “Affirmative Obligations”.  

(b)

Form D; Blue Sky Laws.  The Company agrees to file a Form D with respect to the
Securities as required under Regulation D.  The Company shall take such action
as the Company shall reasonably determine is necessary to qualify the Securities
for sale to the Purchasers at the applicable closing pursuant to this Agreement
under applicable securities or “blue sky” laws of the states of the United
States (or to obtain an exemption from such qualification).

(d)

Reporting Status; Press Release.  

Following the effectiveness of the Registration Statement required under the
Registration Rights Agreement, the Company shall use its reasonable best efforts
file timely to file all reports required to be filed with the SEC pursuant to
the Exchange Act, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would permit such termination.   The Company
shall issue a press release describing the materials terms of the transaction
contemplated hereby as soon as practicable following the Closing Date but in no
event more than one (1) business day after the Closing Date.  The Company agrees
that such press release shall not disclose the names of the Purchasers unless
expressly consented to in writing by the Purchasers or unless required by
applicable law or regulation, and then only to the extent of such requirement

.

(e)

Use of Proceeds.  The Company shall use the proceeds from the sale of the Shares
for (i) customization of identity management products for enterprise and
consumer applications; (ii) further development of intellectual property; (iii)
development of SaaS capabilities for existing products; (iv) payment of up to
$1.5 million of the Company's convertible secured notes, and (v) working capital
and for general corporate purposes.

(f)

Expenses.  Each of the Company and the Purchasers shall be solely and
exclusively responsible for the respective fees and expenses incurred by them in
connection with the negotiation, preparation, execution, delivery and
performance of the Transaction Documents, including, without limitation,
attorneys’ fees and expenses.  

(g)

Authorization and Reservation of Shares.  The Company shall at all times have
authorized, and reserved for the purpose of issuance, a sufficient number of
shares of Common Stock to provide for the full exercise of its options under
Employee Benefit Plans and issuance of the Warrant Shares in connection
therewith (based on the exercise prices in effect from time to time) (the
“Reserved Amount”).  The Company shall not reduce the number of shares of Common
Stock reserved for issuance upon exercise of the Warrants without the consent of
a majority-in-interest of the Purchasers.  If at any time the number of shares
of Common Stock authorized and reserved for issuance (“Authorized and Reserved
Shares”) is below the Reserved Amount, the Company will promptly take all
corporate action necessary to authorize and reserve a sufficient number of
shares, including, without limitation, calling a special meeting of stockholders
to authorize additional shares to meet the Company’s obligations under this
Section 4(g), in the case of an insufficient number of authorized shares, obtain
stockholder approval of an increase in such authorized number of shares, and
shall use reasonable best efforts to obtain the favorable vote of the Company’s
officer’s and directors.  The Company shall use its reasonable best efforts to
obtain such stockholder approval within sixty (60) days following the date on
which the number of Reserved Amount exceeds the Authorized and Reserved Shares.

(h)

Corporate Existence.  So long as a Purchaser beneficially owns any Common Stock
or Warrants, the Company shall maintain its corporate existence, except in
connection with a consolidation or merger of the Company with or into another
corporation or any transfer of all or substantially all of the assets of the
Company.

(i)

Sarbanes-Oxley Matters.  When required to do so, the Company will comply with
any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are
effective for the Company, and any and all applicable rules and regulations
promulgated by the SEC thereunder.  The Company shall implement such programs
and shall take such steps reasonably necessary to provide for its future
compliance (not later than the relevant statutory and regulatory deadline
therefor) with all provisions of Section 404 of the Sarbanes-Oxley Act that
shall become applicable to the Company.

 

(j)

ERISA.  (i) The Company shall not terminate any plan (“Plan”) of a type
described in Section 402l(a) of ERISA in respect of which the Company is an
“employer” as defined in Section 3(5) of ERISA so as to result in any material
liability to the Pension Benefit Guaranty Corporation (the “PBGC”) established
pursuant to Subtitle A of Title IV of ERISA; (ii) engage in or permit any person
to engage in any “prohibited transaction” (as defined in Section 406 of ERISA or
Section 4975 of the Internal Revenue Code of 1986, as amended) involving any
Plan which would subject the Company to any material tax, penalty or other
liability; (iii) incur or suffer to exist any material “accumulated funding
deficiency” (as defined in Section 302 of ERISA), whether or not waived,
involving any Plan; or (iv) allow or suffer to exist any event or condition,
which presents a material risk of incurring a material liability to the PBGC by
reason of termination of any Plan.

(k)

No Integration.  The Company shall not make any offers or sales of any security
(other than the Securities) under circumstances that would require registration
of the Securities being offered or sold hereunder under the Securities Act or
cause the offering of the Securities to be integrated with any other offering of
securities by the Company for the purpose of any stockholder approval provision
applicable to the Company or its securities.

(l)

Intellectual Property.  Subject to the Company’s reasonable business judgment,
each of the Company and each of its Subsidiaries shall use commercially
reasonable efforts maintain in full force and effect its existence, rights and
franchises and all licenses and other rights to use Intellectual Property owned
or possessed by it and reasonably deemed to be necessary to the conduct of its
business.

(m)

Taxes.  The Company shall duly pay and discharge all material taxes or other
material claims, which might become a lien upon any of its material property
except to the extent that any thereof are being disputed in good faith
appropriately contested with adequate reserves provided therefor.

(n)

Preferred Stock.  All shares of the Company's Series C 8% Convertible Preferred
Stock and Series D 8% Convertible Preferred Stock shall be converted into Common
Stock according to their terms

This Section 4 shall terminate in its entirety upon the earlier to occur of (i)
the date that no Purchaser owns any Securities or (ii) December 12, 2016.

5.

Removal of Legends.  In connection with any sale or disposition of the
Securities by a Purchaser pursuant to Rule 144 or pursuant to any other
exemption under the Securities Act such that the purchaser acquires freely
tradable shares and upon compliance by the Purchaser with the requirements of
this Agreement, the Company shall or, in the case of Common Stock, shall cause
the transfer agent for the Common Stock (the “Transfer Agent”) to issue
replacement certificates representing the Securities sold or disposed of without
restrictive legends.  Upon the earlier of (i) registration for resale pursuant
to the Registration Rights Agreement or (ii) the Shares becoming freely tradable
by a non-affiliate pursuant to Rule 144 the Company shall (A) deliver to the
Transfer Agent irrevocable instructions that the Transfer Agent shall reissue a
certificate representing shares of Common Stock without legends upon receipt by
such Transfer Agent of the legended certificates for such shares, together with
either (1) a customary representation by the Purchaser that Rule 144 applies to
the shares of Common Stock represented thereby or (2) a statement by the
Purchaser that such Purchaser has sold the shares of Common Stock represented
thereby in accordance with the Plan of Distribution contained in the
Registration Statement, and (B) cause its counsel to deliver to the Transfer
Agent one or more blanket opinions to the effect that the removal of such
legends in such circumstances may be effected under the Securities Act.  From
and after the earlier of such dates, upon an Purchaser’s written request, the
Company shall promptly cause certificates evidencing the Purchaser’s Securities
to be replaced with certificates which do not bear such restrictive legends, and
Warrant Shares subsequently issued upon due exercise of the Warrants shall not
bear such restrictive legends provided the provisions of either clause (i) or
clause (ii) above, as applicable, are satisfied with respect to such Warrant
Shares.  When the Company is required to cause an unlegended certificate to
replace a previously issued legended certificate, if: (1) the unlegended
certificate is not delivered to an Purchaser within three (3) Business Days of
submission by that Purchaser of a legended certificate and supporting
documentation to the Transfer Agent as provided above and (2) prior to the time
such unlegended certificate is received by the Purchaser, the Purchaser, or any
third party on behalf of such Purchaser or for the Purchaser’s account,
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by the Purchaser of shares represented by such
certificate (a “Buy-In”), then the Company shall pay in cash to the Purchaser
(for costs incurred either directly by such Purchaser or on behalf of a third
party) the amount by which the total purchase price paid for Common Stock as a
result of the Buy-In (including brokerage commissions, if any) exceeds the
proceeds received by such Purchaser as a result of the sale to which such Buy-In
relates.  The Purchaser shall provide the Company written notice indicating the
amounts payable to the Purchaser in respect of the Buy-In.

6.

Conditions to the Company’s Obligation to Sell.  The obligation of the Company
hereunder to issue and sell the Common Stock Shares and Warrants to a Purchaser
at the Closing is subject to the satisfaction, at or before the Closing Date of
each of the following conditions, provided that these conditions are for the
Company’s sole benefit and may be waived by the Company at any time in its sole
discretion:

(a)

The applicable Purchaser shall have executed this Agreement and the Registration
Rights Agreement, and delivered the same to the Company.

(b)

The applicable Purchaser shall have delivered the Subscription Amount in
accordance with Section 1(c) above.

(c)

The representations and warranties of the applicable Purchaser shall be true and
correct in all material respects, and the applicable Purchaser shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement and the other Transaction
Documents to be performed, satisfied or complied with by the applicable
Purchaser at or prior to the Closing Date.

(d)

No litigation, statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by or in
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement and the other Transaction Documents.

(e)

The Company shall have received gross proceeds from the sale of the Shares and
Warrants as contemplated hereby of at least Ten Million Dollars ($10,000,000).

7.

Conditions to Each Purchaser’s Obligation to Purchase.  The obligation of each
Purchaser hereunder to purchase the Common Stock Shares and Warrants at the
Closing is subject to the satisfaction, at or before the Closing Date of each of
the following conditions, provided that these conditions are for such
Purchaser’s sole benefit and may be waived by such Purchaser at any time in its
sole discretion:

(a)

The Company shall have executed and delivered to such Purchaser this Agreement
and each other Transaction Document to which the Company is a party.

(b)

The Company shall have delivered an irrevocable notice to its transfer agent to
deliver to such Purchaser (i) a stock certificate of the Company certifying that
each Purchaser is the holder of record of the number of Common Stock set forth
opposite such Purchaser’s name on Schedule A and (ii) a Warrant to purchase the
number of Warrant Shares set forth opposite such Purchaser’s name on Schedule A
  in accordance with Section 1(c) above.

(c)

The representations and warranties made by the Company in Section 3 hereof
qualified as to materiality shall be true and correct at all times prior to and
on the Closing Date, except to the extent any such representation or warranty
expressly speaks as of an earlier date, in which case such representation or
warranty shall be true and correct as of such earlier date, and, the
representations and warranties made by the Company in Section 3 hereof not
qualified as to materiality shall be true and correct in all material respects
at all times prior to and on the Closing Date, except to the extent any such
representation or warranty expressly speaks as of an earlier date, in which case
such representation or warranty shall be true and correct in all material
respects as of such earlier date.  The Company shall have performed in all
material respects all obligations and covenants herein required to be performed
by it on or prior to the Closing Date.

(d)

The Company shall have obtained any and all consents, permits, approvals,
registrations and waivers  necessary or appropriate for consummation of the
purchase and sale of the Securities and the consummation of the other
transactions contemplated by the Transaction Documents, all of which shall be in
full force and effect.

(e)

No judgment, writ, order, injunction, award or decree of or by any court, or
judge, justice or magistrate, including any bankruptcy court or judge, or any
order of or by any governmental authority, shall have been issued, and no action
or proceeding shall have been instituted by any governmental authority,
enjoining or preventing the consummation of the transactions contemplated hereby
or in the other Transaction Documents.

(f)

No event shall have occurred which would reasonably be expected to have a
Material Adverse Effect on the Company.

(g)

The Company’s counsel shall have delivered the opinion in the form attached as
Exhibit D hereto.

(h)

The Company's officers and directors shall have entered into a Lock-Up
Agreement, in the form attached as Exhibit E hereto, whereby each agrees to not
sell, transfer, make any short sale of, grant any option for the purchase of, or
enter into any hedging or similar transaction with the same economic effect as a
sale, any Common Stock (or other securities) of the Company held by him during
the 180-day period following the effective date of the Registration Statement.

(j)

The Company shall have delivered a Certificate, executed on behalf of the
Company by its Chief Executive Officer or its Chief Financial Officer, dated as
of the Closing Date, certifying to the fulfillment of the conditions specified
in subsections (c), (d), (e), (f) and (l) of this Section 7.

(k)

The Company shall have delivered a Certificate, executed on behalf of the
Company by its Secretary, dated as of the Closing Date, certifying the
resolutions adopted by the Board of Directors of the Company approving the
transactions contemplated by this Agreement and the other Transaction Documents
and the issuance of the Securities, certifying the current versions of the
Certificate of Incorporation and Bylaws of the Company and certifying as to the
signatures and authority of persons signing the Transaction Documents and
related documents on behalf of the Company.

(l)

No stop order or suspension of trading shall have been imposed by the SEC or any
other governmental or regulatory body with respect to public trading in the
Common Stock.

(m)

All issued and outstanding convertible secured debt shall be converted into
Common Stock according to its terms;

(n)

A notice has been sent to all holders of Series C 8% Convertible Preferred Stock
and Series D 8% Convertible Preferred Stock to notify all holders that the
Series C 8% Convertible Preferred Stock and Series D 8% Convertible Preferred
Stock shall be converted into Common Stock according to their terms; and

(o)

All outstanding warrants with anti-dilution protection held by Neal Goldman and
the Gruber McBaine group of investors shall be amended so that the exercise
price of such warrants cannot be reduced to less than $.50.

8.

Termination of Obligations to Effect Closing; Effects.

(a)

The obligations of the Company, on the one hand, and the Purchasers, on the
other hand, to effect the Closing shall terminate as follows:

(i)

Upon the mutual written consent of the Company and the Purchasers;

(ii)

By the Company if any of the conditions set forth in Section 6 shall have become
incapable of fulfillment, and shall not have been waived by the Company;

(iii)

By a Purchaser (with respect to itself only) if any of the conditions set forth
in Section 7 shall have become incapable of fulfillment, and shall not have been
waived by the Purchaser; or

(iv)

By either the Company or any Purchaser (with respect to itself only) if the
Closing has not occurred on or prior to the 30th date after the date hereof;

provided, however, that, except in the case of clause (i) above, the party
seeking to terminate its obligation to effect the Closing shall not then be in
breach of any of its representations, warranties, covenants or agreements
contained in this Agreement or the other Transaction Documents if such breach
has resulted in the circumstances giving rise to such party’s seeking to
terminate its obligation to effect the Closing.

(b)

In the event of termination by the Company or any Purchaser of its obligations
to effect the Closing pursuant to this Section 8, written notice thereof shall
forthwith be given to the other Purchasers by the Company and the other
Purchasers shall have the right to terminate their obligations to effect the
Closing upon written notice to the Company and the other Purchasers.  Nothing in
this Section 8 shall be deemed to release any party from any liability for any
breach by such party of the terms and provisions of this Agreement or the other
Transaction Documents or to impair the right of any party to compel specific
performance by any other party of its obligations under this Agreement or the
other Transaction Documents.

9.

Governing Law; Jurisdiction; Fees; Waiver of Jury Trial.

(a)

This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of New York without regard to the choice of law
principles thereof.  Each of the parties hereto irrevocably submits to the
exclusive jurisdiction of the courts of the State of New York located in New
York County and the United States District Court for the Southern District of
New York for the purpose of any suit, action, proceeding or judgment relating to
or arising out of this Agreement and the transactions contemplated hereby.
 Service of process in connection with any such suit, action or proceeding may
be served on each party hereto anywhere in the world by the same methods as are
specified for the giving of notices under this Agreement.  Each of the parties
hereto irrevocably consents to the jurisdiction of any such court in any such
suit, action or proceeding and to the laying of venue in such court.  Each party
hereto irrevocably waives any objection to the laying of venue of any such suit,
action or proceeding brought in such courts and irrevocably waives any claim
that any such suit, action or proceeding brought in any such court has been
brought in an inconvenient forum.  EACH OF THE PARTIES HERETO WAIVES ANY RIGHT
TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND
REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

10.

Miscellaneous.

(a)

Counterparts; Signatures by Facsimile.  This Agreement may be executed in one or
more counterparts (with the Purchasers each executing the counterpart in the
form of Annex A hereto).  Each of such counterparts shall be deemed an original,
and all of which shall, when taken together, constitute one and the same
agreement, and shall become effective when counterparts have been signed by each
party and delivered to the other party.  This Agreement, once executed by a
party (including in the manner described above), may be delivered to the other
party hereto by facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement.

(b)

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

(c)

Severability.  In the event that any provision of this Agreement is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law.  Any
provision hereof which may prove invalid or unenforceable under any law shall
not affect the validity or enforceability of any other provision hereof.

(d)

Entire Agreement; Amendments.  This Agreement, the other Transaction Documents
and the instruments, documents, exhibits and schedules referenced herein contain
the entire understanding of the parties with respect to the matters covered
herein and therein and, except as specifically set forth herein or therein,
neither the Company nor any Purchaser makes any representation, warranty,
covenant or undertaking with respect to such matters.  No provision of this
Agreement may be waived or amended other than by an instrument in writing signed
by the Company and the Required Purchasers.

(e)

Notices.  Any notices required or permitted to be given under the terms of this
Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile transmission and shall be effective
five days after being placed in the mail, if mailed by regular United States
mail, or upon receipt, if delivered personally or by courier (including a
recognized overnight delivery service) or by facsimile transmission, with
printed confirmation of receipt, in each case addressed to a party.  The
addresses for such communications shall be:

If to the Company:

ImageWare Systems, Inc.

10815 Rancho Bernardo Road, Suite 310

San Diego, CA 92127

Attention: Mr. Jim Miller, CEO

Telephone: (858) 673-8600

Facsimile:  

with a copy to:

Daniel W. Rumsey

Disclosure Law Group

501 West Broadway, Suite 800

San Diego, CA 92101

Telephone: (619) 795-1134

Facsimile: (619) 330-2101

If to a Purchaser:  

To the address and fax number set forth immediately below such Purchaser’s name
on the counterpart signature pages hereto.

With copy to:

MDB Capital Group, LLC

401 Wilshire Blvd., Suite 1020

Santa Monica, CA 90401

Attention: Peter Conley, Managing Director

Telephone: (310) 526-5025

Facsimile:  (310) 526-5020

Each party shall provide notice to the other party of any change in address,
telephone or facsimile number (including, if a Purchaser is holding any
Securities purchased hereunder in street name, the address, telephone and
facsimile of the beneficial owner of such Securities), and each Purchaser and
its assignees under Section 10(f) acknowledge and agree that such parties must
provide such notice and contact information promptly (but in any event within 30
days of any change in such information or assignment of any rights hereunder).

(f)

Successors and Assigns.  This Agreement may not be assigned by a party hereto
without the prior written consent of the Company or the Purchasers, as
applicable, provided, however, that a Purchaser may assign its rights and
delegate its duties hereunder in whole or in part to an Affiliate or to a third
party acquiring some or all of its Securities in a transaction complying with
applicable securities laws without the prior written consent of the Company or
the other Purchasers.  The provisions of this Agreement shall inure to the
benefit of and be binding upon the respective permitted successors and assigns
of the parties.  Without limiting the generality of the foregoing, in the event
that the Company is a party to a merger, consolidation, share exchange or
similar business combination transaction in which the Common Stock is converted
into the equity securities of another Person, from and after the effective time
of such transaction, such Person shall, by virtue of such transaction, be deemed
to have assumed the obligations of the Company hereunder, the term “Company”
shall be deemed to refer to such Person and the term “Shares” shall be deemed to
refer to the securities received by the Purchasers in connection with such
transaction.  Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.

(g)

Survival; Indemnification.

(i)

The representations and warranties of the Company set forth in Section 3 hereof
shall survive the Closing Date, notwithstanding any due diligence investigation
conducted by or on behalf of the Purchasers.  The representations and warranties
of each Purchaser set forth in Section 2 shall survive the Closing
notwithstanding any due diligence investigation conducted by or on behalf of the
Company.

(ii)

The Company agrees to indemnify and hold harmless each Purchaser and its
Affiliates and their respective directors, officers, trustees, members,
managers, employees and agents, and their respective successors and assigns,
from and against any and all losses, claims, damages, liabilities and expenses
(including without limitation reasonable attorney fees and disbursements and
other expenses incurred in connection with investigating, preparing or defending
any action, claim or proceeding, pending or threatened and the costs of
enforcement thereof) (collectively, “Losses”) to which such Person may become
subject as a result of any breach of representation, warranty, covenant or
agreement made by or to be performed on the part of the Company under the
Transaction Documents, and will reimburse any such Person for all such amounts
as they are incurred by such Person.

(iii)

Any Person entitled to indemnification hereunder shall (i) give prompt notice to
the indemnifying party of any claim with respect to which it seeks
indemnification and (ii) permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party;
provided that any Person entitled to indemnification hereunder shall have the
right to employ separate counsel and to participate in the defense of such
claim, but the fees and expenses of such counsel shall be at the expense of such
person unless (a) the indemnifying party has agreed to pay such fees or
expenses, or (b) the indemnifying party shall have failed to assume the defense
of such claim and employ counsel reasonably satisfactory to such person or (c)
in the reasonable judgment of any such Person, based upon written advice of its
counsel, a conflict of interest exists between such person and the indemnifying
party with respect to such claims (in which case, if the Person notifies the
indemnifying party in writing that such Person elects 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 claim on behalf of such Person); and
provided, further, that the failure of any indemnified party to give notice as
provided herein shall not relieve the indemnifying party of its obligations
hereunder, except to the extent that such failure to give notice shall
materially adversely affect the indemnifying party in the defense of any such
claim or litigation.  It is understood that the indemnifying party shall not, in
connection with any proceeding in the same jurisdiction, be liable for fees or
expenses of more than one separate firm of attorneys at any time for all such
indemnified parties.  No indemnifying party will, except with the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
that 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 of such claim or litigation.

(i)

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

(j)

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

(k)

Definitions.  In addition to those terms defined above and elsewhere in this
Agreement, for the purposes of this Agreement, the following terms shall have
the meanings set forth below:

“Affiliate” means, with respect to any Person, any other Person which directly
or indirectly through one or more intermediaries Controls, is controlled by, or
is under common Control with, such Person.

“Business Day” means a day, other than a Saturday or Sunday, on which banks in
New York City are open for the general transaction of business.

“Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.

“Company’s Knowledge,” “Knowledge of the Company” and words of similar import
means the actual knowledge of the executive officers (as defined in Rule 405
under the Securities Act) of the Company, after due inquiry.

“Control” (including the terms “controlling”, “controlled by” or “under common
control with”) means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.

“Effective Date” means the date on which the initial Registration Statement is
declared effective by the SEC.

“Effectiveness Deadline” means the date on which the initial Registration
Statement is required to be declared effective by the SEC under the terms of the
Registration Rights Agreement.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Person” means an individual, corporation, partnership, limited liability
company, trust, business trust, association, joint stock company, joint venture,
sole proprietorship, unincorporated organization, governmental authority or any
other form of entity not specifically listed herein.

"Preferred Stock" means the authorized shares of the Company's preferred stock.

“Registration Statement” has the meaning set forth in the Registration Rights
Agreement.

“Required Purchasers” means (i) prior to the Closing Date, the Purchasers
agreeing to purchase at least a majority of the Shares and Warrants hereunder,
and (ii) from and after the Closing Date the Purchasers beneficially owning at
least a majority of the Shares and the Warrant Shares (if any) then outstanding
and held by all of the Purchasers.

“Securities” means the Shares and Warrants to be issued at Closing.

“Subsidiary” of any Person means another Person, an amount of the voting
securities, other voting ownership or voting partnership interests of which is
sufficient to elect at least a majority of its Board of Directors or other
governing body (or, if there are no such voting interests, 50% or more of the
equity interests of which) is owned directly or indirectly by such first Person,
and such Subsidiary is material to the financial condition, operations or
business of the Company.

[Remainder of page intentionally left blank; signature pages follow.]

`

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

IN WITNESS WHEREOF, the undersigned Purchasers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first above
written.

IMAGEWARE SYSTEMS, INC.

By: /s/ S. James Miller, Jr._____________

       Name:  S. James Miller, Jr.

       Title:  Chief Executive Officer

PURCHASERS:

The Purchasers executing the Signature Page in the form attached hereto as Annex
A and delivering the same to the Company or its agents shall be deemed to have
executed this Agreement and agreed to the terms hereof.

2

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

SCHEDULE OF EXCEPTIONS

TO
REPRESENTATIONS AND WARRANTIES
OF
IMAGEWARE SYSTEMS, INC.

The following Schedules of Exceptions refers to the applicable Section set forth
in the Securities Purchase Agreement by and between ImageWare Systems, Inc. (the
“Company”) and the Purchasers thereto (the “Purchase Agreement”).  The following
exceptions are hereby incorporated by reference, and made a part of, the
Purchase Agreement:

Schedule 3.(c)(i)

Set forth below are the outstanding shares and shares reserved for issuance upon
conversion or exercise of derivative securities, including convertible preferred
stock, convertible debt, employee options, outstanding warrants and unvested
restricted stock grants, each as of the Closing Date.

Common Stock outstanding

 

26,355,832

 

 

 

 

 

 

Preferred Stock

Liquidation Preference

 

 

Series B  

239,400 shares

$

770,343.29

as converted

58,415

Series C

2,200 shares

$

3,103,145.21

as converted

6,206,290

Series D

2,085 shares

$

2,791,448.22

as converted

5,582,896

 

 

 

 

 

 

Convertible Notes

$

6,527,379.18

as converted

13,054,758

 

 

 

 

 

Employee stock options

 

 

 

1,707,713

 

 

 

 

 

Restricted stock grants

 

Unvested

 

360,000

 

 

 

 

 

Warrants

 

 

 

15,900,260

 

 

 

 

 

Fully Diluted

 

 

 

69,226,165

Assuming consummation of the Closing, each of the Series C and Series D
preferred stock will automatically convert into shares of common stock, $1.5
million of the convertible notes will be paid from proceeds from the Offering,
and the remaining due and payable under the convertible notes will be converted
into shares of common stock of the Company.

Schedule 3.(c )(ii)

The Company is a party to a Registration Rights Agreement, dated February 12,
2009, pursuant to which BET Funding LLC has the right to register shares of
common stock held by BET Funding LLC.

Schedule 3.(c)(iii)

Warrants exercisable for 13,810,436 shares of the Company’s common stock are
issued and outstanding, which warrants contain anti-dilution/price adjustment
provisions.  These warrants are being amended to prevent the downward adjustment
to the exercise price below $0.50 per share.  In addition, the Series C and
Series D preferred stock contain anti-dilution / price adjustment provisions,
which Series C and Series D will convert to shares of the Company’s common stock
upon Closing.

Schedule 3.(h)(ii)

The Company has issued $1.1 million in additional promissory notes, of which
$600,000 is being used to purchase Shares in the Offering, and the remainder of
which is being paid using proceeds from the Offering.

Schedule 3.(j)  

The Company owns the following patents and patent applications

File Number

IP Family Number

Country

Status

Title

Serial No

Filing Date

Patent No.

Issue Date

88764-672967

000100US

United States of America

Issued

IMAGE EDITING SYSTEM

07/919,584

Jul 23, 1992

5,577,179

Nov 19, 1996

88764-674501

001900US

United States of America

Issued

IMAGE EDITING SYSTEM INCLUDING SIZING FUNCTION

08/745,471

Nov 12, 1996

5,687,306

Nov 11, 1997

88764-728826

002700AU

Australia

Pending

MULTIMODAL BIOMETRIC PLATFORM

2005307863

Nov 15, 2005

88764-728827

002700CA

Canada

Pending

MULTIMODAL BIOMETRIC PLATFORM

2,588,078

Nov 15, 2005

88764-705299

002700CL

Chile

Pending

MULTIMODAL BIOMETRIC PLATFORM

2991-05

Nov 16, 2005

88764-687915

002700US

United States of America

Issued

MULTIMODAL BIOMETRIC PLATFORM

10/991,352

Nov 16, 2004

7,298,873

Nov 20, 2007

88764-738213

002710US

United States of America

Issued

MULTIMODAL BIOMETRIC PLATFORM

11/927,476

Oct 29, 2007

7,606,396

Oct 20, 2009

88764-738214

002720US

United States of America

Issued

MULTIMODAL BIOMETRIC PLATFORM

11/927,472

Oct 29, 2007

7,596,246

Sep 29, 2009

88764-734703

002910AU

Australia

Issued

MULTIMODAL BIOMETRIC ANALYSIS

2006336252

Mar 17, 2006

2006336252

Sep 9, 2010

88764-734704

002910CA

Canada

Pending

MULTIMODAL BIOMETRIC ANALYSIS

2,600,388

Mar 17, 2006

88764-734705

002910CN

China

Issued

MULTIMODAL BIOMETRIC ANALYSIS

200680008481.4

Mar 17, 2006

CN101233459B

Jan 26, 2011

88764-734706

002910EP

European Patent Office

Published

MULTIMODAL BIOMETRIC ANALYSIS

06849332.9

Mar 17, 2006

88764-706896

002910US

United States of America

Issued

MULTIMODAL BIOMETRIC ANALYSIS

11/378,015

Mar 17, 2006

7,362,884

Apr 22, 2008

88764-751197

003110CA

Canada

Pending

BIOMETRIC REMEDIATION OF DATASETS

2,630,711

Nov 24, 2006

88764-720486

003110US

United States of America

Issued

 

11/563,059

Nov 24, 2006

7,949,156

May 24, 2011

Additional Patent Applications:

·

Anonymous Biometric Verification System (US-IDMS-001) has been accorded U.S.
Provisional Patent Application No. 61/567,591;

 

·

Anonymous Biometric Enrollment System (US-IDMS-002) has been accorded U.S.
Provisional Patent Application No. 61/567,595; and

 

·

Anonymous Biometric Identification System (US-IDMS-003) has been accorded U.S.
Provisional Patent Application No. 61/567,599.

The Company owns the following trademarks:   

·

ImageWare

·

IWS Biometric Engine

·

EPI Builder

Schedule 3.(k)

The Company’s Canadian subsidiary has been audited relative to Canadian taxes
and the Canadian tax authority has issued a proposed notice of assessment of
approximately $560,000.  The Company has appealed the assessment and was
successful in reducing the liability to approximately $150,000.

Schedule 3.(l)

The Company has issued certain convertible notes to directors and officers of
the Company, in the principal amount totaling $110,000 (“Management Notes”),
which Management Notes are convertible into 231,452 shares of the Company’s
Common Stock.

Schedule 3.(r )

 The Company manages the ImageWare Systems, Inc. 401(k) Plan and Trust

Schedule 3.(u)

 

Under the supervision and with the participation of the Company’s management,
including our principal executive officer and principal financial officer,
management conducted an evaluation of the effectiveness of the design and
operations of the Company’s disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of
December 31, 2009 and 2010. Based on this evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were not effective to ensure that information
required to be disclosed in the reports submitted under the Securities and
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms, due to the weaknesses described
below.  In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework.

Due principally to the Company’s liquidity challenges in 2009, the Company was
compelled to reduce personnel, including accounting staff, and therefore suspend
SEC filings and the associated costs until such time as the Company had
sufficient resources to cover ongoing operations and the expenses of maintaining
compliance with SEC filing requirements.  These factors contributed to a
material weakness in the Company’s disclosure controls and procedures, and
therefore arguably the Company’s entity level control environment, and prevented
the Company from timely filing its required reports with the SEC.  While the
Company nevertheless has competent accounting and finance professionals
necessary to ensure accurate reporting with the SEC, the weakness described
above, together with our limited resources with which to conduct an audit of its
financial statements, prevented the Company from timely filing with the SEC.

Schedule 3.(z)

The following represent Material Agreements of the Company:

1.

Employment Agreement with Jim Miller as amended on March 4, 2011;

2.

Employment Agreement with Wayne Wetherell as amended on March 4, 2011;

3.

Change in Control and Severance Benefits Agreement with Chuck AuBuchon as
amended on March 4, 2011;

4.

Change in Control and Severance Benefits Agreement with Dave Harding as amended
on March 4, 2011;

5.

6 % convertible notes issued to Neal Goldman dated October 5, 2010, November 24,
2010, December 8, 2010, June 9, 2011 and associated Security Agreement dated
December 8, 2010;

6.

6% notes issued to Neal Goldman dated October 13, 2011, November 10, 2011 and
November 23, 2011;

7.

7% convertible notes issued to Jim Miller, Chuck AuBuchon, Steve Hamm and David
Loesch dated November 14, 2008;

8.

Lease agreement for the San Diego office dated November 30, 2010;

9.

Lease agreement for the Clackamas, Oregon office dated October 2, 2009; and

10.

Lease agreement for the Ottawa, Canada office dated July 25, 2008.

Schedule 3.(cc)

The Company is currently not current with its required filings with the SEC.
 The Company intends to file delinquent reports through December 31, 2010 upon
receipt of consent from the SEC granting an accommodation to file delinquent
reports through December 31, 2010, on one Annual Report on Form 10-K for the
fiscal year ended December 31, 2010, which consent has been requested.  The
Company currently intends to file quarterly reports for 2011 before January 31,
2012, therefore becoming current with its reporting obligations under the
Securities and Exchange Act of 1934, as amended, by such date.

3