**Exhibit 10.27**

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY ISEXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION ORTHE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROMREGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIESACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO ANEFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO ANAVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATIONREQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATESECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFERORREASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICHSHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.  THIS SECURITY MAY BE PLEDGED IN CONNECTIONWITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOANWITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED INRULE 501(a) UNDER THE SECURITIES ACT.

 

**COMMONSTOCK PURCHASE WARRANT**

 

To Purchase 85,000 Sharesof Common Stock of 

 

**ImageWare Systems, Inc.**

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)CERTIFIES that, for value received, CD Investment Partners, Ltd. (the “Holder”),is entitled, upon the terms and subject to the limitations on exercise and theconditions hereinafter set forth, at any time on or after August 16, 2004 (the “InitialExercise Date”) and on or prior to the thirty (30) month anniversary of theInitial Exercise Date (the “Termination Date”) but not thereafter, tosubscribe for and purchase from ImageWare Systems, Inc., a corporationincorporated in the State of California (the “Company”), up to 85,000shares (the “Warrant Shares”) of Common Stock, par value $0.01 pershare, of the Company (the “Common Stock”).  The purchase price of one share of CommonStock (the “Exercise Price”) under this Warrant shall be $3.00, subjectto adjustment hereunder.  The ExercisePrice and the number of Warrant Shares for which the Warrant is exercisableshall be subject to adjustment as provided herein.  **Capitalized terms used andnot otherwise defined herein shall have the meanings set forth in that certainSecurities Purchase Agreement (the “Purchase Agreement”), dated November14, 2003, between the Company and Holder.**

 

1.  Title to Warrant.  Prior to the Termination Date and subject tocompliance with applicable laws and Section 7 of this Warrant, this Warrant andall rights hereunder are transferable, in whole or in part, at the office oragency of the Company by the Holder in person or by duly authorized attorney,upon surrender of this Warrant together with the Assignment Form annexed heretoproperly endorsed.  The transferee shallsign an investment letter in form and substance reasonably satisfactory to theCompany.

 

----

 

2.  Authorization of Shares.  The Company covenants that all Warrant Shareswhich may be issued upon the exercise of the purchase rights represented bythis Warrant will, upon exercise of the purchase rights represented by thisWarrant, be duly authorized, validly issued, fully paid and nonassessable andfree from all taxes, liens and charges in respect of the issue thereof (otherthan taxes in respect of any transfer occurring contemporaneously with such issue).

 

3.  Exercise of Warrant.

 

(a)  Exerciseof the purchase rights represented by this Warrant may be made at any time ortimes on or after the Initial Exercise Date and on or before the TerminationDate by delivery to the Company of a duly executed copy of the Notice ofExercise Form annexed hereto (or such other office or agency of the Company asit may designate by notice in writing to the registered Holder at the addressof such Holder appearing on the books of the Company and surrender of thisWarrant to the Company along with payment of the aggregate Exercise Price ofthe shares thereby purchased by wire transfer or cashier’s check drawn on aUnited States bank.  Certificates forshares purchased hereunder shall be delivered to the Holder not later than thethird Trading Day after the delivery to the Company of the Notice of ExerciseForm, surrender of this Warrant and payment of the aggregate Exercise Price asset forth above (“Warrant Share Delivery Date”)  This Warrant shall be deemed to have beenexercised on the date of delivery to the Company of the Notice of ExerciseForm, surrender of this Warrant and payment of the aggregate Exercise Price asset forth above.  The Warrant Sharesshall be deemed to have been issued, and Holder or any other person sodesignated to be named therein shall be deemed to have become a holder ofrecord of such shares for all purposes, as of the date the Warrant has beenexercised by payment to the Company of the Exercise Price and all taxesrequired to be paid by the Holder, if any, pursuant to Section 5 prior to theissuance of such shares, have been paid.  If the Company fails to deliver to the Holdera certificate or certificates representing the Warrant Shares pursuant to thisSection 3(a) by the third Trading Day following the Warrant Share DeliveryDate, then the Holder will have the right to rescind such exercise.  In addition to any other rights available tothe Holder, if the Company fails to deliver to the Holder a certificate orcertificates representing the Warrant Shares pursuant to an exercise by thethird Trading Day after the Warrant Share Delivery Date, and if after such daythe Holder is required by its broker to purchase (in an open market transactionor otherwise) shares of Common Stock to deliver in satisfaction of a sale bythe Holder of the Warrant Shares which the Holder anticipated receiving uponsuch exercise (a “Buy-In”), then the Company shall (1) pay in cash tothe Holder the amount by which (x) the Holder’s total purchase price (includingbrokerage commissions, if any) for the shares of Common Stock so purchasedexceeds (y) the amount obtained by multiplying (A) the number of Warrant Sharesthat the Company was required to deliver to the Holder in connection with theexercise at issue times (B) the price at which the sell order giving rise tosuch purchase obligation was executed, and (2) at the option of the Holder,either reinstate the portion of the Warrant and equivalent number of WarrantShares for which such exercise was not honored or deliver to the Holder thenumber of shares of Common Stock that would have been issued had the Companytimely complied with its exercise and delivery obligations hereunder.  For example, if the Holder purchases CommonStock having a total purchase

 

2

----

 

price of $11,000 to covera Buy-In with respect to an attempted exercise of shares of Common Stock withan aggregate sale price giving rise to such purchase obligation of $10,000,under clause (1) of the immediately preceding sentence the Company shall berequired to pay the Holder $1,000.  TheHolder shall provide the Company written notice indicating the amounts payableto the Holder in respect of the Buy-In, together with applicable confirmationsand other evidence reasonably requested by the Company.  Nothing herein shall limit a Holder’s right topursue any other remedies available to it hereunder, at law or in equityincluding, without limitation, a decree of specific performance and/orinjunctive relief with respect to the Company’s failure to timely delivercertificates representing shares of Common Stock upon exercise of the Warrantas required pursuant to the terms hereof.

 

(b)  If thisWarrant shall have been exercised in part, the Company shall, at the time ofdelivery of the certificate or certificates representing Warrant Shares,deliver to Holder a new Warrant evidencing the rights of Holder to purchase theunpurchased Warrant Shares called for by this Warrant, which new Warrant shallin all other respects be identical with this Warrant.

 

(c)  TheCompany shall not effect any exercise of this Warrant, and the Holder shall nothave the right to exercise any portion of this Warrant, pursuant to Section3(a) or otherwise, to the extent that after giving effect to such issuanceafter exercise, the Holder, together with the Holder’s affiliates and any otherperson or entity acting as a group together with Holder or any of Holder’saffiliates, would beneficially own in excess of 4.99% (the “ApplicablePercentage”) of the number of shares of the Common Stock outstandingimmediately after giving effect to such issuance.  For purposes of the foregoing sentence, thenumber of shares of Common Stock beneficially owned by the Holder and itsaffiliates shall include the number of shares of Common Stock issuable uponexercise of this Warrant with respect to which the determination of suchsentence is being made, but shall exclude the number of shares of Common Stock whichwould be issuable upon (A) exercise of the remaining, nonexercised portion ofthis Warrant beneficially owned by the Holder or any of its affiliates and (B)exercise or conversion of the unexercised or nonconverted portion of any othersecurities of the Company (including, without limitation, any other Warrants)subject to a limitation on conversion or exercise analogous to the limitationcontained herein beneficially owned by the Holder or any of its affiliates.  Except as set forth in the preceding sentence,for purposes of this Section 3(c), beneficial ownership shall be calculated inaccordance with Section 13(d) of the Exchange Act and the rules and regulationspromulgated thereunder.  In addition, adetermination as to any group status as contemplated above shall also be determinedin accordance with Section 13(d) of the Exchange Act and the rules and regulationspromulgated thereunder.  For purposes ofthis Section 3(c), in determining the number of outstanding shares of CommonStock, the Holder may rely on the number of outstanding shares of Common Stockas reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as thecase may be, (y) a more recent public announcement by the Company or (z) anyother notice by the Company or the Company’s Transfer Agent setting forth thenumber of shares of Common Stock outstanding.  Upon the written or oral request of theHolder, the Company shall within three Trading Days confirm orally and inwriting to the Holder the number of shares of Common Stock then outstanding.

 

3

----

 

The provisions of thisparagraph shall be implemented in a manner otherwise than in strict conformitywith the terms this Section 3(c) to correct this paragraph (or any portionhereof) which may be defective or inconsistent with the intended ApplicablePercentage beneficial ownership limitation herein contained or to make changesor supplements necessary or desirable to properly give effect to suchApplicable Percentage limitation.  Thelimitations contained in this paragraph shall apply to a successor holder ofthis Warrant.  The holders of CommonStock of the Company shall be third party beneficiaries of this Section 3(c)and the Company may not waive this Section 3(c) without the consent of holdersof a majority of its Common Stock.

 

(d)  Ifat any time after one year from the date of issuance of this Warrant there isno effective Registration Statement registering the resale of the WarrantShares by the Holder, this Warrant may also be exercised at such time by meansof a “cashless exercise” in which the Holder shall be entitled to receive acertificate for the number of Warrant Shares equal to the quotient obtained bydividing [(A-B) (X)] by (A), where:

 

(A) = the VWAP on theTrading Day immediately preceding the date of suchelection;

 

(B) = the Exercise Price ofthe Warrants, as adjusted; and

 

(X)= the number of Warrant Shares issuable upon exercise of the Warrants inaccordance with the terms of this Warrant.

 

4.  NoFractional Shares or Scrip.  Nofractional shares or scrip representing fractional shares shall be issued uponthe exercise of this Warrant.  As to anyfraction of a share which Holder would otherwise be entitled to purchase uponsuch exercise, the Company shall pay a cash adjustment in respect of such finalfraction in an amount equal to such fraction multiplied by the Exercise Price.

 

5.  Charges,Taxes and Expenses.  Issuance ofcertificates for Warrant Shares shall be made without charge to the Holder forany issue or transfer tax or other incidental expense in respect of theissuance of such certificate, all of which taxes and expenses shall be paid bythe Company, and such certificates shall be issued in the name of the Holder orin such name or names as may be directed by the Holder; provided, however,that in the event certificates for Warrant Shares are to be issued in a nameother than the name of the Holder, this Warrant when surrendered for exerciseshall be accompanied by the Assignment Form attached hereto duly executed bythe Holder; and the Company may require, as a condition thereto, the payment ofa sum sufficient to reimburse it for any transfer tax incidental thereto.

 

6.  Closing ofBooks.  The Company will not close its stockholderbooks or records in any manner which prevents the timely exercise of thisWarrant, pursuant to the terms hereof.

 

7.  Transfer,Division and Combination.

 

(a)  Subjectto compliance with any applicable securities laws and the conditions set forthin Sections 1 and 7(e) hereof and to the provisions of Section 4.1 of

 

4

----

 

the Purchase Agreement, thisWarrant and all rights hereunder are transferable, in whole or in part, uponsurrender of this Warrant at the principal office of the Company, together witha written assignment of this Warrant substantially in the form attached heretoduly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payableupon the making of such transfer.  Uponsuch surrender and, if required, such payment, the Company shall execute anddeliver a new Warrant or Warrants in the name of the assignee or assignees andin the denomination or denominations specified in such instrument ofassignment, and shall issue to the assignor a new Warrant evidencing theportion of this Warrant not so assigned, and this Warrant shall promptly becancelled.  A Warrant, if properlyassigned, may be exercised by a new holder for the purchase of Warrant Shareswithout having a new Warrant issued.

 

(b)  ThisWarrant may be divided or combined with other Warrants upon presentation hereofat the aforesaid office of the Company, together with a written notice specifyingthe names and denominations in which new Warrants are to be issued, signed by theHolder or its agent or attorney.  Subjectto compliance with Section 7(a), as to any transfer which may be involved insuch division or combination, the Company shall execute and deliver a newWarrant or Warrants in exchange for the Warrant or Warrants to be divided orcombined in accordance with such notice.

 

(c)  TheCompany shall prepare, issue and deliver at its own expense (other than transfertaxes) the new Warrant or Warrants under this Section 7.

 

(d)  TheCompany agrees to maintain, at its aforesaid office, books for the registrationand the registration of transfer of the Warrants.

 

(e)  Athe time of the surrender of this Warrant in connection with any transfer ofthis Warrant, the Company may require, as a condition of allowing such transfer(i) that the Holder or transferee of this Warrant, as the case may be, furnishto the Company a written opinion of counsel (which opinion shall be in form,substance and scope customary for opinions of counsel in comparabletransactions and reasonably acceptable to the Company) to the effect that suchtransfer may be made without registration under the Securities Act and underapplicable state securities or blue sky laws, (ii) that the holder ortransferee execute and deliver to the Company an investment letter in form andsubstance acceptable to the Company and (iii) that the transferee be an “accreditedinvestor” as defined in Rule 501(a) promulgated under the Securities Act.

 

8.  NoRights as Shareholder until Exercise. This Warrant does not entitle the Holder to any voting rights or otherrights as a shareholder of the Company prior to the exercise hereof.  Upon the proper exercise of this Warrantpursuant to Section 3(a) or 3(d), the Warrant Shares so purchased shall be andbe deemed to be issued to such Holder as the record owner of such shares as ofthe close of business on the date of such surrender or payment.

 

9.  Loss,Theft, Destruction or Mutilation of Warrant.  The Company covenants that upon receipt bythe Company of evidence reasonably satisfactory to it of the loss, theft, destructionor mutilation of this Warrant, and in case of loss, theft or destruction, ofindemnity or security reasonably satisfactory to it (which, may include theposting of any bond), and upon

 

5

----

 

surrender and cancellation of such Warrant,if mutilated, the Company will make and deliver a new Warrant of like tenor anddated as of such cancellation, in lieu of such Warrant.

 

10.  Saturdays,Sundays, Holidays, etc.  If the lastor appointed day for the taking of any action or the expiration of any rightrequired or granted herein shall be a Saturday, Sunday or a legal holiday, thensuch action may be taken or such right may be exercised on the next succeedingday not a Saturday, Sunday or legal holiday.

 

11.  Adjustmentsof Exercise Price and Number of Warrant Shares.

 

(a)           Stock Splits, etc.  The number and kind of securities purchasableupon the exercise of this Warrant and the Exercise Price shall be subject toadjustment from time to time upon the happening of any of the following.  In case the Company shall (i) pay a dividendin shares of Common Stock or make a distribution in shares of Common Stock toholders of its outstanding Common Stock, (ii) subdivide its outstanding sharesof Common Stock into a greater number of shares, (iii) combine its outstandingshares of Common Stock into a smaller number of shares of Common Stock, or (iv)issue any shares of its capital stock in a reclassification of the CommonStock, then the number of Warrant Shares purchasable upon exercise of thisWarrant immediately prior thereto shall be adjusted so that the Holder shall beentitled to receive the kind and number of Warrant Shares or other securitiesof the Company which it would have owned or have been entitled to receive hadsuch Warrant been exercised in advance thereof.  Upon each such adjustment of the kind andnumber of Warrant Shares or other securities of the Company which arepurchasable hereunder, the Holder shall thereafter be entitled to purchase thenumber of Warrant Shares or other securities resulting from such adjustment atan Exercise Price per Warrant Share or other security obtained by multiplyingthe Exercise Price in effect immediately prior to such adjustment by the numberof Warrant Shares purchasable pursuant hereto immediately prior to suchadjustment and dividing by the number of Warrant Shares or other securities ofthe Company resulting from such adjustment.  An adjustment made pursuant to this paragraphshall become effective immediately after the effective date of such eventretroactive to the record date, if any, for such event.

 

(b)           Anti-DilutionProvisions.  During the ExercisePeriod, the Exercise Price shall be subject to adjustment from time to time asprovided in this Section 11(b).  In theevent that any adjustment of the Exercise Price as required herein results in afraction of a cent, such Exercise Price shall be rounded up or down to thenearest cent.

 

(i)  Adjustmentof Exercise Price.  If and wheneverthe Company issues or sells, or in accordance with Section 11(b)(ii) hereof isdeemed to have issued or sold, any shares of Common Stock for a considerationper share of less than the then Exercise Price or for no consideration (suchlower price, the “Base Share Price” and such issuances collectively, a “DilutiveIssuance”), then, the Exercise Price shall be reduced to equal the BaseShare Price provided, that the Exercise Price shall in no event be less thanthe Closing Price on the Closing Date (subject to adjustment only for stocksplits and the like).  Such adjustmentshall be made whenever shares of Common Stock or Common Stock Equivalents areissued.

 

6

----

 

(ii)           Effect on Exercise Price ofCertain Events.  For purposes ofdetermining the adjusted Exercise Price under Section 11(b) hereof, thefollowing will be applicable:

 

(A)          Issuance of Rights or Options.  If the Company in any manner issues or grantsany warrants, rights or options, whether or not immediately exercisable, tosubscribe for or to purchase Common Stock or Common Stock Equivalents (suchwarrants, rights and options to purchase Common Stock or Common StockEquivalents are hereinafter referred to as “Options”) and the effectiveprice per share for which Common Stock is issuable upon the exercise of suchOptions is less than the Exercise Price (“Below Base Price Options”),then the maximum total number of shares of Common Stock issuable upon theexercise of all such Below Base Price Options (assuming full exercise,conversion or exchange of Common Stock Equivalents, if applicable) will, as ofthe date of the issuance or grant of such Below Base Price Options, be deemedto be outstanding and to have been issued and sold by the Company for suchprice per share and the maximum consideration payable to the Company upon suchexercise (assuming full exercise, conversion or exchange of Common StockEquivalents, if applicable) will be deemed to have been received by theCompany.  For purposes of the precedingsentence, the “effective price per share for which Common Stock is issuableupon the exercise of such Below Base Price Options” is determined by dividing(i) the total amount, if any, received or receivable by the Company asconsideration for the issuance or granting of all such Below Base Price Options,plus the minimum aggregate amount of additional consideration, if any, payableto the Company upon the exercise of all such Below Base Price Options, plus, inthe case of Common Stock Equivalents issuable upon the exercise of such BelowBase Price Options, the minimum aggregate amount of additional considerationpayable upon the exercise, conversion or exchange thereof at the time suchCommon Stock Equivalents first become exercisable, convertible or exchangeable,by (ii) the maximum total number of shares of Common Stock issuable upon theexercise of all such Below Base Price Options (assuming full conversion ofCommon Stock Equivalents, if applicable).  No further adjustment to the Exercise Pricewill be made upon the actual issuance of such Common Stock upon the exercise ofsuch Below Base Price Options or upon the exercise, conversion or exchange ofCommon Stock Equivalents issuable upon exercise of such Below Base PriceOptions.

 

(B)           Issuance of Common StockEquivalents.  If the Company in anymanner issues or sells any Common Stock Equivalents, whether or not immediatelyconvertible (other than where the same are issuable upon the exercise ofOptions) and the effective price per share for which Common Stock is issuableupon such exercise, conversion or exchange is less than the Exercise Price,then the maximum total number of shares of Common Stock issuable upon theexercise, conversion or

 

7

----

 

exchange of all such CommonStock Equivalents will, as of the date of the issuance of such Common Stock Equivalents,be deemed to be outstanding and to have been issued and sold by the Company forsuch price per share and the maximum consideration payable to the Company uponsuch exercise (assuming full exercise, conversion or exchange of Common StockEquivalents, if applicable) will be deemed to have been received by the Company. For the purposes of the precedingsentence, the “effective price per share for which Common Stock is issuableupon such exercise, conversion or exchange” is determined by dividing (i) thetotal amount, if any, received or receivable by the Company as considerationfor the issuance or sale of all such Common Stock Equivalents, plus the minimumaggregate amount of additional consideration, if any, payable to the Companyupon the exercise, conversion or exchange thereof at the time such Common StockEquivalents first become exercisable, convertible or exchangeable, by (ii) themaximum total number of shares of Common Stock issuable upon the exercise,conversion or exchange of all such Common Stock Equivalents.  No further adjustment to the Exercise Pricewill be made upon the actual issuance of such Common Stock upon exercise,conversion or exchange of such Common Stock Equivalents.

 

(C)           Change in Option Price orConversion Rate.  If there is achange at any time in (i) the amount of additional consideration payable to theCompany upon the exercise of any Options; (ii) the amount of additionalconsideration, if any, payable to the Company upon the exercise, conversion orexchange of any Common Stock Equivalents; or (iii) the rate at which any CommonStock Equivalents are convertible into or exchangeable for Common Stock (ineach such case, other than under or by reason of provisions similar to thisSection 11(b) designed to protect against dilution), the Exercise Price ineffect at the time of such change will be readjusted to the Exercise Pricewhich would have been in effect at such time had such Options or Common StockEquivalents still outstanding provided for such changed additionalconsideration or changed conversion rate, as the case may be, at the timeinitially granted, issued or sold.

 

(D)          Calculation of ConsiderationReceived.  If any Common Stock,Options or Common Stock Equivalents are issued, granted or sold for cash, theconsideration received therefor for purposes of this Warrant will be the amountreceived by the Company therefor, before deduction of reasonable commissions,underwriting discounts or allowances or other reasonable expenses paid orincurred by the Company in connection with such issuance, grant or sale.  In case any Common Stock, Options or CommonStock Equivalents are issued or sold for a consideration part or all of whichshall be other than cash, the amount of the consideration other than cashreceived by the Company will be the fair market value of such consideration,except where such consideration consists of securities, in which case theamount of consideration received

 

8

----

 

bythe Company will be the fair market value (closing bid price, if traded on anymarket) thereof as of the date of receipt.  In case any Common Stock, Options or CommonStock Equivalents are issued in connection with any merger or consolidation inwhich the Company is the surviving corporation, the amount of considerationtherefor will be deemed to be the fair market value of such portion of the netassets and business of the non-surviving corporation as is attributable to suchCommon Stock, Options or Common Stock Equivalents, as the case may be.  The fair market value of any considerationother than cash or securities will be determined in good faith by an investmentbanker or other appropriate expert of national reputation selected by the Companyand reasonably acceptable to the holder hereof, with the costs of suchappraisal to be borne by the Company.

 

(E)           Exceptions toAdjustment of Exercise Price.  Notwithstandingthe foregoing, no adjustment will be made under this Section 11(b) in respectof (1) the granting of options to employees, officers, directors or keyconsultants of the Company pursuant to any stock option plan duly adopted by amajority of the non-employee members of the Board of Directors of the Companyor a majority of the members of a committee of non-employee directorsestablished for such purpose, (2) upon the exercise of or conversion of anyCommon Stock Equivalents or Options issued and outstanding on the OriginalIssue Date, provided that the securities have not been amended since the dateof the Purchase Agreement except as a result of the Purchase Agreement, or (3)acquisitions or strategic investments, the primary purpose of which is not toraise capital.

 

(iii)          MinimumAdjustment of Exercise Price.  Noadjustment of the Exercise Price shall be made in an amount of less than 1% ofthe Exercise Price in effect at the time such adjustment is otherwise requiredto be made, but any such lesser adjustment shall be carried forward and shallbe made at the time and together with the next subsequent adjustment which,together with any adjustments so carried forward, shall amount to not less than1% of such Exercise Price.

 

12.  Reorganization,Reclassification, Merger, Consolidation or Disposition of Assets.  In case the Company shall reorganize itscapital, reclassify its capital stock, consolidate or merge with or intoanother corporation (where the Company is not the surviving corporation orwhere there is a change in or distribution with respect to the Common Stock ofthe Company), or sell, transfer or otherwise dispose of any of its property,assets or business to another corporation (including by way of a spinoff) and,pursuant to the terms of such reorganization, reclassification, merger,consolidation or disposition of assets, shares of common stock of the successoror acquiring corporation, or any cash, shares of stock or other securities orproperty of any nature whatsoever (including warrants or other subscription orpurchase rights) in addition to or in lieu of common stock of the successor oracquiring corporation (“Other Property”), are to be received by ordistributed to the holders of Common Stock of the Company, then the Holder

 

9

----

 

shallhave the right thereafter to receive, upon exercise of this Warrant, the numberof shares of Common Stock of the successor or acquiring corporation or of theCompany, if it is the surviving corporation, and Other Property receivable uponor as a result of such reorganization, reclassification, merger, consolidationor disposition of assets by a Holder of the number of shares of Common Stockfor which this Warrant is exercisable immediately prior to such event.  In case of any such reorganization,reclassification, merger, consolidation or disposition of assets, the successoror acquiring corporation (if other than the Company) shall expressly assume thedue and punctual observance and performance of each and every covenant andcondition of this Warrant to be performed and observed by the Company and allthe obligations and liabilities hereunder, subject to such modifications as maybe deemed appropriate (as determined in good faith by resolution of the Boardof Directors of the Company) in order to provide for adjustments of WarrantShares for which this Warrant is exercisable which shall be as nearlyequivalent as practicable to the adjustments provided for in this Section 12.  For purposes of this Section 12, “common stockof the successor or acquiring corporation” shall include stock of suchcorporation of any class which is not preferred as to dividends or assets overany other class of stock of such corporation and which is not subject toredemption and shall also include any evidences of indebtedness, shares ofstock or other securities which are convertible into or exchangeable for anysuch stock, either immediately or upon the arrival of a specified date or thehappening of a specified event and any warrants or other rights to subscribefor or purchase any such stock.  Theforegoing provisions of this Section 12 shall similarly apply to successivereorganizations, reclassifications, mergers, consolidations or disposition ofassets.

 

13.  [RESERVED]

 

14.  Noticeof Adjustment.  Whenever the numberof Warrant Shares or number or kind of securities or other property purchasableupon the exercise of this Warrant or the Exercise Price is adjusted, as hereinprovided, the Company shall give notice thereof to the Holder, which noticeshall state the number of Warrant Shares (and other securities or property)purchasable upon the exercise of this Warrant and the Exercise Price of suchWarrant Shares (and other securities or property) after such adjustment,setting forth a brief statement of the facts requiring such adjustment andsetting forth the computation by which such adjustment was made.

 

15.  Noticeof Corporate Action.  If at any time:

 

(a)           the Company shalltake a record of the holders of its Common Stock for the purpose of entitlingthem to receive a dividend or other distribution, or any right to subscribe foror purchase any evidences of its indebtedness, any shares of stock of any classor any other securities or property, or to receive any other right, or

 

(b)           there shall be anycapital reorganization of the Company, any reclassification or recapitalizationof the capital stock of the Company or any consolidation or merger of theCompany with, or any sale, transfer or other disposition of all orsubstantially all the property, assets or business of the Company to, another corporationor,

 

(c)           there shall be avoluntary or involuntary dissolution, liquidation or winding up of the Company;

 

10

----

 

then, in any one or more ofsuch cases, the Company shall give to Holder (i) at least 20 days’ priorwritten notice of the date on which a record date shall be selected for suchdividend, distribution or right or for determining rights to vote in respect ofany such reorganization, reclassification, merger, consolidation, sale,transfer, disposition, liquidation or winding up, and (ii) in the case of anysuch reorganization, reclassification, merger, consolidation, sale, transfer,disposition, dissolution, liquidation or winding up, at least 20 days’ priorwritten notice of the date when the same shall take place.  Such notice in accordance with the foregoingclause also shall specify (i) the date on which any such record is to be takenfor the purpose of such dividend, distribution or right, the date on which theholders of Common Stock shall be entitled to any such dividend, distribution orright, and the amount and character thereof, and (ii) the date on which anysuch reorganization, reclassification, merger, consolidation, sale, transfer,disposition, dissolution, liquidation or winding up is to take place and thetime, if any such time is to be fixed, as of which the holders of Common Stockshall be entitled to exchange their Warrant Shares for securities or otherproperty deliverable upon such disposition, dissolution, liquidation or windingup.  Each such written notice shall besufficiently given if addressed to Holder at the last address of Holderappearing on the books of the Company and delivered in accordance with Section17(d).

 

16.  AuthorizedShares.  The Company covenants thatduring the period the Warrant is outstanding, it will reserve from itsauthorized and unissued Common Stock a sufficient number of shares to providefor the issuance of the Warrant Shares upon the exercise of any purchase rightsunder this Warrant.  The Company furthercovenants that its issuance of this Warrant shall constitute full authority toits officers who are charged with the duty of executing stock certificates toexecute and issue the necessary certificates for the Warrant Shares upon theexercise of the purchase rights under this Warrant.  The Company will take all such reasonableaction as may be necessary to assure that such Warrant Shares may be issued asprovided herein without violation of any applicable law or regulation, or ofany requirements of the Trading Market upon which the Common Stock may belisted.

 

Exceptand to the extent as waived or consented to by the Holder, the Company shallnot by any action, including, without limitation, amending its certificate ofincorporation or through any reorganization, transfer of assets, consolidation,merger, dissolution, issue or sale of securities or any other voluntary action,avoid or seek to avoid the observance or performance of any of the terms ofthis Warrant, but will at all times in good faith assist in the carrying out ofall such terms and in the taking of all such actions as may be necessary orappropriate to protect the rights of Holder as set forth in this Warrantagainst impairment.  Without limiting thegenerality of the foregoing, the Company will (a) not increase the par value ofany Warrant Shares above the amount payable therefor upon such exerciseimmediately prior to such increase in par value, (b) take all such action asmay be necessary or appropriate in order that the Company may validly andlegally issue fully paid and nonassessable Warrant Shares upon the exercise ofthis Warrant, and (c) use commercially reasonable efforts to obtain all suchauthorizations, exemptions or consents from any public regulatory body havingjurisdiction thereof as may be necessary to enable the Company to perform itsobligations under this Warrant.

 

Beforetaking any action which would result in an adjustment in the number of WarrantShares for which this Warrant is exercisable or in the Exercise Price, the

 

11

----

 

Company shall obtain all such authorizationsor exemptions thereof, or consents thereto, as may be necessary from any publicregulatory body or bodies having jurisdiction thereof.

 

17.  Miscellaneous.

 

(a)  Jurisdiction. All questions concerning the construction, validity, enforcement andinterpretation of this Warrant shall be determined in accordance with the provisionsof the Purchase Agreement.

 

(b)  Restrictions. The Holder acknowledges that the Warrant Shares acquired upon theexercise of this Warrant, if not registered, will have restrictions upon resaleimposed by state and federal securities laws.

 

(c)  Nonwaiver and Expenses.  No course of dealing or any delay or failure toexercise any right hereunder on the part of Holder shall operate as a waiver ofsuch right or otherwise prejudice Holder’s rights, powers or remedies,notwithstanding all rights hereunder terminate on the Termination Date.  If the Company willfully and knowingly failsto comply with any provision of this Warrant, which results in any materialdamages to the Holder, the Company shall pay to Holder such amounts as shall besufficient to cover any costs and expenses including, but not limited to,reasonable attorneys’ fees, including those of appellate proceedings, incurredby Holder in collecting any amounts due pursuant hereto or in otherwiseenforcing any of its rights, powers or remedies hereunder.

 

(d)  Notices.  Anynotice, request or other document required or permitted to be given ordelivered to the Holder by the Company shall be delivered in accordance withthe notice provisions of the Purchase Agreement.

 

(e)  Limitation of Liability.  No provision hereof, in**the absence of any affirmative action byHolder to exercise this Warrant or purchase Warrant Shares, and no enumerationherein of the rights or privileges of Holder, shall give rise to any liabilityof Holder for the purchase price of any Common Stock or as a stockholder of theCompany, whether such liability is asserted by the Company or by creditors ofthe Company.

 

(f)  Remedies.  Holder,in addition to being entitled to exerciseall rights granted by law, including recovery of damages, will be entitled tospecific performance of its rights under this Warrant.  The Company agrees that monetary damages wouldnot be adequate compensation for any loss incurred by reason of a breach by itof the provisions of this Warrant and hereby agrees to waive the defense in anyaction for specific performance that a remedy at law would be adequate.

 

(g)  Successors and Assigns.  Subject to applicable securities laws, thisWarrant and the rights and obligations evidenced hereby shall inure to thebenefit of and be binding upon the successors of the Company and the successorsand permitted assigns of Holder.  Theprovisions of this Warrant are intended to be for the benefit of all Holdersfrom time to time of this Warrant and shall be enforceable by any such Holderor holder of Warrant Shares.

 

12

----

 

(h)  Amendment. This Warrant may be modified or amended or the provisions hereof waivedwith the written consent of the Company and the Holder.

 

(i)  Severability. Wherever possible, each provision of this Warrant shall be interpretedin such manner as to be effective and valid under applicable law, but if anyprovision of this Warrant shall be prohibited by or invalid under applicablelaw, such provision shall be ineffective to the extent of such prohibition orinvalidity, without invalidating the remainder of such provisions or theremaining provisions of this Warrant.

 

(j)  Headings.  Theheadings used in this Warrant are for the convenience of reference only andshall not, for any purpose, be deemed a part of this Warrant.

 

********************

 

13

----

 

IN WITNESS WHEREOF, the Company has caused thisWarrant to be executed by its officer thereunto duly authorized.

 

 
| Dated: | 9/28, 2004                  |                        |
|--------|-----------------------------|-----------------------------|
|   | **IMAGEWARE SYSTEMS, INC.** |
|   |                        |
|   |                        |
|   | By:                         | /s/ Wayne Wetherell         |   |
|   |                        | Name: Wayne Wetherell       |
|   |                        | Title:  SVP  & CFO |
|        |                             |                             |  |  |  |

 

14

----

 

**NOTICE OF EXERCISE**

 

To:          ImageWare Systems,Inc.

 

(1) The undersigned hereby elects to purchase                                      Warrant Shares of ImageWare Systems, Inc. pursuant to the terms of the attachedWarrant (only if exercised in full), and tenders herewith payment of theexercise price in full, together with all applicable transfer taxes, if any.

 

(2) Payment shall take the form of (check applicablebox):

 

oin lawful money of the United States; or

 

othe cancellation of such number of Warrant Shares as is necessary, inaccordance with the formula set forth in subsection 3(d), to exercise thisWarrant with respect to the maximum number of Warrant Shares purchasablepursuant to the cashless exercise procedure set forth in subsection 3(d).

 

(3) Please issue a certificate or certificatesrepresenting said Warrant Shares in the name of the undersigned or in suchother name as is specified below:

 
|   |
|--------|

 

The Warrant Shares shall be delivered to the following:

 
|   |
|--------|

 
|   |
|--------|

 
|   |
|--------|

 

(4) Accredited Investor. The undersigned is an “accreditedinvestor” as defined in Regulation D promulgated under the Securities Act of1933, as amended.

 
|   | CD INVESTMENT PARTNERS, LTD. |
|--------|------------------------------|
|   |                         |
|   |                         |
|   | By:                          | CD Capital Management LLC |
|   | Its:                         | Investment Manager |
|   |                         |
|   |                         |
|   | By:                          |   |   |
|   | Name:                        |
|   | Title:                       |
|   |                         |
|   | Dated:                       |   |   |
|        |                              |  |  |  |  |  |

 

----

 

# **ASSIGNMENT FORM**

 

(To assign the foregoingwarrant, execute this form and supply required information.

Do not use this form toexercise the warrant.)

 

FOR VALUE RECEIVED, the foregoing Warrant and allrights evidenced thereby are hereby assigned to

 

__________________________________________________________________________whose address is 

 

___________________________________________________________________________________________.

 

 

___________________________________________________________________________________________

 
|   | Dated:                   |   | ,      |   |   |
|--------|--------------------------|--------|--------|--------|--------|
|   |                     |
|   |                     |
|   | Holder’s Signature: |   |   |
|   |                     |
|   | Holder’s Address:   |   |   |
|   |                     |   |   |
|   |                     |   |   |
|        |                          |        |        |        |        |  |  |  |

 

 
| Signature Guaranteed: |   |   |
|-----------------------|--------|--------|

 

NOTE: The signature to this Assignment Form must correspond with thename as it appears on the face of the Warrant, without alteration orenlargement or any change whatsoever, and must be guaranteed by a bank or trustcompany.  Officers of corporations andthose acting in a fiduciary or other representative capacity should file properevidence of authority to assign the foregoing Warrant.

 

----