Exhibit 10.27


 


NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS
EXERCISABLE HAVE 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 (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.  THIS SECURITY MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN
WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN
RULE 501(a) UNDER THE SECURITIES ACT.


 


COMMON
STOCK PURCHASE WARRANT


 


To Purchase 85,000 Shares
of 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 the
conditions hereinafter set forth, at any time on or after August 16, 2004 (the “Initial
Exercise Date”) and on or prior to the thirty (30) month anniversary of the
Initial Exercise Date (the “Termination Date”) but not thereafter, to
subscribe for and purchase from ImageWare Systems, Inc., a corporation
incorporated in the State of California (the “Company”), up to 85,000
shares (the “Warrant Shares”) of Common Stock, par value $0.01 per
share, of the Company (the “Common Stock”).  The purchase price of one share of Common
Stock (the “Exercise Price”) under this Warrant shall be $3.00, subject
to adjustment hereunder.  The Exercise
Price and the number of Warrant Shares for which the Warrant is exercisable
shall be subject to adjustment as provided herein.  Capitalized terms used and
not otherwise defined herein shall have the meanings set forth in that certain
Securities Purchase Agreement (the “Purchase Agreement”), dated November
14, 2003, between the Company and Holder.


 


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


 





















 


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


 


3.  Exercise of Warrant.


 


(a)  Exercise
of the purchase rights represented by this Warrant may be made at any time or
times on or after the Initial Exercise Date and on or before the Termination
Date by delivery to the Company of a duly executed copy of the Notice of
Exercise Form annexed hereto (or such other office or agency of the Company as
it may designate by notice in writing to the registered Holder at the address
of such Holder appearing on the books of the Company and surrender of this
Warrant to the Company along with payment of the aggregate Exercise Price of
the shares thereby purchased by wire transfer or cashier’s check drawn on a
United States bank.  Certificates for
shares purchased hereunder shall be delivered to the Holder not later than the
third Trading Day after the delivery to the Company of the Notice of Exercise
Form, surrender of this Warrant and payment of the aggregate Exercise Price as
set forth above (“Warrant Share Delivery Date”)  This Warrant shall be deemed to have been
exercised on the date of delivery to the Company of the Notice of Exercise
Form, surrender of this Warrant and payment of the aggregate Exercise Price as
set forth above.  The Warrant Shares
shall be deemed to have been issued, and Holder or any other person so
designated to be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the Warrant has been
exercised by payment to the Company of the Exercise Price and all taxes
required to be paid by the Holder, if any, pursuant to Section 5 prior to the
issuance of such shares, have been paid.  If the Company fails to deliver to the Holder
a certificate or certificates representing the Warrant Shares pursuant to this
Section 3(a) by the third Trading Day following the Warrant Share Delivery
Date, then the Holder will have the right to rescind such exercise.  In addition to any other rights available to
the Holder, if the Company fails to deliver to the Holder a certificate or
certificates representing the Warrant Shares pursuant to an exercise by the
third Trading Day after the Warrant Share Delivery Date, and if after such day
the Holder is required by its broker to purchase (in an open market transaction
or otherwise) shares of Common Stock to deliver in satisfaction of a sale by
the Holder of the Warrant Shares which the Holder anticipated receiving upon
such exercise (a “Buy-In”), then the Company shall (1) pay in cash to
the Holder the amount by which (x) the Holder’s total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so purchased
exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares
that the Company was required to deliver to the Holder in connection with the
exercise at issue times (B) the price at which the sell order giving rise to
such purchase obligation was executed, and (2) at the option of the Holder,
either reinstate the portion of the Warrant and equivalent number of Warrant
Shares for which such exercise was not honored or deliver to the Holder the
number of shares of Common Stock that would have been issued had the Company
timely complied with its exercise and delivery obligations hereunder.  For example, if the Holder purchases Common
Stock having a total purchase


 


2





















 


price of $11,000 to cover
a Buy-In with respect to an attempted exercise of shares of Common Stock with
an aggregate sale price giving rise to such purchase obligation of $10,000,
under clause (1) of the immediately preceding sentence the Company shall be
required to pay the Holder $1,000.  The
Holder shall provide the Company written notice indicating the amounts payable
to the Holder in respect of the Buy-In, together with applicable confirmations
and other evidence reasonably requested by the Company.  Nothing herein shall limit a Holder’s right to
pursue any other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon exercise of the Warrant
as required pursuant to the terms hereof.


 


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


 


(c)  The
Company shall not effect any exercise of this Warrant, and the Holder shall not
have the right to exercise any portion of this Warrant, pursuant to Section
3(a) or otherwise, to the extent that after giving effect to such issuance
after exercise, the Holder, together with the Holder’s affiliates and any other
person or entity acting as a group together with Holder or any of Holder’s
affiliates, would beneficially own in excess of 4.99% (the “Applicable
Percentage”) of the number of shares of the Common Stock outstanding
immediately after giving effect to such issuance.  For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock which
would be issuable upon (A) exercise of the remaining, nonexercised portion of
this Warrant beneficially owned by the Holder or any of its affiliates and (B)
exercise or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any other Warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained 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 in
accordance with Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder.  In addition, a
determination as to any group status as contemplated above shall also be determined
in accordance with Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder.  For purposes of
this Section 3(c), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as the
case may be, (y) a more recent public announcement by the Company or (z) any
other notice by the Company or the Company’s Transfer Agent setting forth the
number of shares of Common Stock outstanding.  Upon the written or oral request of the
Holder, the Company shall within three Trading Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding.


 


3





















 


The provisions of this
paragraph shall be implemented in a manner otherwise than in strict conformity
with the terms this Section 3(c) to correct this paragraph (or any portion
hereof) which may be defective or inconsistent with the intended Applicable
Percentage beneficial ownership limitation herein contained or to make changes
or supplements necessary or desirable to properly give effect to such
Applicable Percentage limitation.  The
limitations contained in this paragraph shall apply to a successor holder of
this Warrant.  The holders of Common
Stock 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 holders
of a majority of its Common Stock.


 


(d)  If
at any time after one year from the date of issuance of this Warrant there is
no effective Registration Statement registering the resale of the Warrant
Shares by the Holder, this Warrant may also be exercised at such time by means
of a “cashless exercise” in which the Holder shall be entitled to receive a
certificate for the number of Warrant Shares equal to the quotient obtained by
dividing [(A-B) (X)] by (A), where:


 


(A) = the VWAP on the
Trading Day immediately preceding the date of such  election;


 


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


 


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


 


4.  No
Fractional Shares or Scrip.  No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant.  As to any
fraction of a share which Holder would otherwise be entitled to purchase upon
such exercise, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to such fraction multiplied by the Exercise Price.


 


5.  Charges,
Taxes and Expenses.  Issuance of
certificates for Warrant Shares shall be made without charge to the Holder for
any issue or transfer tax or other incidental expense in respect of the
issuance of such certificate, all of which taxes and expenses shall be paid by
the Company, and such certificates shall be issued in the name of the Holder or
in 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 name
other than the name of the Holder, this Warrant when surrendered for exercise
shall be accompanied by the Assignment Form attached hereto duly executed by
the Holder; and the Company may require, as a condition thereto, the payment of
a sum sufficient to reimburse it for any transfer tax incidental thereto.


 


6.  Closing of
Books.  The Company will not close its stockholder
books or records in any manner which prevents the timely exercise of this
Warrant, pursuant to the terms hereof.


 


7.  Transfer,
Division and Combination.


 


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


 


4





















 


the Purchase Agreement, this
Warrant and all rights hereunder are transferable, in whole or in part, upon
surrender of this Warrant at the principal office of the Company, together with
a written assignment of this Warrant substantially in the form attached hereto
duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable
upon the making of such transfer.  Upon
such surrender and, if required, such payment, the Company shall execute and
deliver a new Warrant or Warrants in the name of the assignee or assignees and
in the denomination or denominations specified in such instrument of
assignment, and shall issue to the assignor a new Warrant evidencing the
portion of this Warrant not so assigned, and this Warrant shall promptly be
cancelled.  A Warrant, if properly
assigned, may be exercised by a new holder for the purchase of Warrant Shares
without having a new Warrant issued.


 


(b)  This
Warrant may be divided or combined with other Warrants upon presentation hereof
at the aforesaid office of the Company, together with a written notice specifying
the names and denominations in which new Warrants are to be issued, signed by the
Holder or its agent or attorney.  Subject
to compliance with Section 7(a), as to any transfer which may be involved in
such division or combination, the Company shall execute and deliver a new
Warrant or Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice.


 


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


 


(d)  The
Company agrees to maintain, at its aforesaid office, books for the registration
and the registration of transfer of the Warrants.


 


(e)  A
the time of the surrender of this Warrant in connection with any transfer of
this 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, furnish
to the Company a written opinion of counsel (which opinion shall be in form,
substance and scope customary for opinions of counsel in comparable
transactions and reasonably acceptable to the Company) to the effect that such
transfer may be made without registration under the Securities Act and under
applicable state securities or blue sky laws, (ii) that the holder or
transferee execute and deliver to the Company an investment letter in form and
substance acceptable to the Company and (iii) that the transferee be an “accredited
investor” as defined in Rule 501(a) promulgated under the Securities Act.


 


8.  No
Rights as Shareholder until Exercise. 
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to the exercise hereof.  Upon the proper exercise of this Warrant
pursuant to Section 3(a) or 3(d), the Warrant Shares so purchased shall be and
be deemed to be issued to such Holder as the record owner of such shares as of
the 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 by
the Company of evidence reasonably satisfactory to it of the loss, theft, destruction
or mutilation of this Warrant, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it (which, may include the
posting 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 and
dated as of such cancellation, in lieu of such Warrant.


 


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


 


11.  Adjustments
of Exercise Price and Number of Warrant Shares.


 


(a)           Stock Splits, etc.  The number and kind of securities purchasable
upon the exercise of this Warrant and the Exercise Price shall be subject to
adjustment from time to time upon the happening of any of the following.  In case the Company shall (i) pay a dividend
in shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock into a greater number of shares, (iii) combine its outstanding
shares 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 Common
Stock, then the number of Warrant Shares purchasable upon exercise of this
Warrant immediately prior thereto shall be adjusted so that the Holder shall be
entitled to receive the kind and number of Warrant Shares or other securities
of the Company which it would have owned or have been entitled to receive had
such Warrant been exercised in advance thereof.  Upon each such adjustment of the kind and
number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the Holder shall thereafter be entitled to purchase the
number of Warrant Shares or other securities resulting from such adjustment at
an Exercise Price per Warrant Share or other security obtained by multiplying
the Exercise Price in effect immediately prior to such adjustment by the number
of Warrant Shares purchasable pursuant hereto immediately prior to such
adjustment and dividing by the number of Warrant Shares or other securities of
the Company resulting from such adjustment.  An adjustment made pursuant to this paragraph
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.


 


(b)           Anti-Dilution
Provisions.  During the Exercise
Period, the Exercise Price shall be subject to adjustment from time to time as
provided in this Section 11(b).  In the
event that any adjustment of the Exercise Price as required herein results in a
fraction of a cent, such Exercise Price shall be rounded up or down to the
nearest cent.


 


(i)  Adjustment
of Exercise Price.  If and whenever
the Company issues or sells, or in accordance with Section 11(b)(ii) hereof is
deemed to have issued or sold, any shares of Common Stock for a consideration
per share of less than the then Exercise Price or for no consideration (such
lower price, the “Base Share Price” and such issuances collectively, a “Dilutive
Issuance”), then, the Exercise Price shall be reduced to equal the Base
Share Price provided, that the Exercise Price shall in no event be less than
the Closing Price on the Closing Date (subject to adjustment only for stock
splits and the like).  Such adjustment
shall be made whenever shares of Common Stock or Common Stock Equivalents are
issued.


 


6





















 


(ii)           Effect on Exercise Price of
Certain Events.  For purposes of
determining the adjusted Exercise Price under Section 11(b) hereof, the
following will be applicable:


 


(A)          Issuance of Rights or Options.  If the Company in any manner issues or grants
any warrants, rights or options, whether or not immediately exercisable, to
subscribe for or to purchase Common Stock or Common Stock Equivalents (such
warrants, rights and options to purchase Common Stock or Common Stock
Equivalents are hereinafter referred to as “Options”) and the effective
price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Exercise Price (“Below Base Price Options”),
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Below Base Price Options (assuming full exercise,
conversion or exchange of Common Stock Equivalents, if applicable) will, as of
the date of the issuance or grant of such Below Base Price Options, be deemed
to be outstanding and to have been issued and sold by the Company for such
price per share and the maximum consideration payable to the Company upon such
exercise (assuming full exercise, conversion or exchange of Common Stock
Equivalents, if applicable) will be deemed to have been received by the
Company.  For purposes of the preceding
sentence, the “effective price per share for which Common Stock is issuable
upon the exercise of such Below Base Price Options” is determined by dividing
(i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or granting of all such Below Base Price Options,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the exercise of all such Below Base Price Options, plus, in
the case of Common Stock Equivalents issuable upon the exercise of such Below
Base Price Options, the minimum aggregate amount of additional consideration
payable upon the exercise, conversion or exchange thereof at the time such
Common Stock Equivalents first become exercisable, convertible or exchangeable,
by (ii) the maximum total number of shares of Common Stock issuable upon the
exercise of all such Below Base Price Options (assuming full conversion of
Common Stock Equivalents, if applicable).  No further adjustment to the Exercise Price
will be made upon the actual issuance of such Common Stock upon the exercise of
such Below Base Price Options or upon the exercise, conversion or exchange of
Common Stock Equivalents issuable upon exercise of such Below Base Price
Options.


 


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


 


7





















 


exchange of all such Common
Stock 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 for
such price per share and the maximum consideration payable to the Company upon
such exercise (assuming full exercise, conversion or exchange of Common Stock
Equivalents, if applicable) will be deemed to have been received by the Company.
 For the purposes of the preceding
sentence, the “effective price per share for which Common Stock is issuable
upon such exercise, conversion or exchange” is determined by dividing (i) the
total amount, if any, received or receivable by the Company as consideration
for the issuance or sale of all such Common Stock Equivalents, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the exercise, conversion or exchange thereof at the time such Common Stock
Equivalents first become exercisable, convertible or exchangeable, by (ii) the
maximum 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 Price
will 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 or
Conversion Rate.  If there is a
change at any time in (i) the amount of additional consideration payable to the
Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Common Stock Equivalents; or (iii) the rate at which any Common
Stock Equivalents are convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of provisions similar to this
Section 11(b) designed to protect against dilution), the Exercise Price in
effect at the time of such change will be readjusted to the Exercise Price
which would have been in effect at such time had such Options or Common Stock
Equivalents still outstanding provided for such changed additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.


 


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


 


8





















 


by
the Company will be the fair market value (closing bid price, if traded on any
market) thereof as of the date of receipt.  In case any Common Stock, Options or Common
Stock Equivalents are issued in connection with any merger or consolidation in
which the Company is the surviving corporation, the amount of consideration
therefor will be deemed to be the fair market value of such portion of the net
assets and business of the non-surviving corporation as is attributable to such
Common Stock, Options or Common Stock Equivalents, as the case may be.  The fair market value of any consideration
other than cash or securities will be determined in good faith by an investment
banker or other appropriate expert of national reputation selected by the Company
and reasonably acceptable to the holder hereof, with the costs of such
appraisal to be borne by the Company.


 


(E)           Exceptions to
Adjustment of Exercise Price.  Notwithstanding
the foregoing, no adjustment will be made under this Section 11(b) in respect
of (1) the granting of options to employees, officers, directors or key
consultants of the Company pursuant to any stock option plan duly adopted by a
majority of the non-employee members of the Board of Directors of the Company
or a majority of the members of a committee of non-employee directors
established for such purpose, (2) upon the exercise of or conversion of any
Common Stock Equivalents or Options issued and outstanding on the Original
Issue Date, provided that the securities have not been amended since the date
of the Purchase Agreement except as a result of the Purchase Agreement, or (3)
acquisitions or strategic investments, the primary purpose of which is not to
raise capital.


 


(iii)          Minimum
Adjustment of Exercise Price.  No
adjustment of the Exercise Price shall be made in an amount of less than 1% of
the Exercise Price in effect at the time such adjustment is otherwise required
to be made, but any such lesser adjustment shall be carried forward and shall
be made at the time and together with the next subsequent adjustment which,
together with any adjustments so carried forward, shall amount to not less than
1% of such Exercise Price.


 


12.  Reorganization,
Reclassification, Merger, Consolidation or Disposition of Assets.  In case the Company shall reorganize its
capital, reclassify its capital stock, consolidate or merge with or into
another corporation (where the Company is not the surviving corporation or
where there is a change in or distribution with respect to the Common Stock of
the 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 successor
or acquiring corporation, or any cash, shares of stock or other securities or
property of any nature whatsoever (including warrants or other subscription or
purchase rights) in addition to or in lieu of common stock of the successor or
acquiring corporation (“Other Property”), are to be received by or
distributed to the holders of Common Stock of the Company, then the Holder


 


9





















 


shall
have the right thereafter to receive, upon exercise of this Warrant, the number
of shares of Common Stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and Other Property receivable upon
or as a result of such reorganization, reclassification, merger, consolidation
or disposition of assets by a Holder of the number of shares of Common Stock
for which this Warrant is exercisable immediately prior to such event.  In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board
of Directors of the Company) in order to provide for adjustments of Warrant
Shares for which this Warrant is exercisable which shall be as nearly
equivalent as practicable to the adjustments provided for in this Section 12.  For purposes of this Section 12, “common stock
of the successor or acquiring corporation” shall include stock of such
corporation of any class which is not preferred as to dividends or assets over
any other class of stock of such corporation and which is not subject to
redemption and shall also include any evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable for any
such stock, either immediately or upon the arrival of a specified date or the
happening of a specified event and any warrants or other rights to subscribe
for or purchase any such stock.  The
foregoing provisions of this Section 12 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.


 


13.  [RESERVED]


 


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


 


15.  Notice
of Corporate Action.  If at any time:


 


(a)           the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or other distribution, or any right to subscribe for
or purchase any evidences of its indebtedness, any shares of stock of any class
or any other securities or property, or to receive any other right, or


 


(b)           there shall be any
capital reorganization of the Company, any reclassification or recapitalization
of the capital stock of the Company or any consolidation or merger of the
Company with, or any sale, transfer or other disposition of all or
substantially all the property, assets or business of the Company to, another corporation
or,


 


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


 


10





















 


then, in any one or more of
such cases, the Company shall give to Holder (i) at least 20 days’ prior
written notice of the date on which a record date shall be selected for such
dividend, distribution or right or for determining rights to vote in respect of
any such reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, liquidation or winding up, and (ii) in the case of any
such reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up, at least 20 days’ prior
written notice of the date when the same shall take place.  Such notice in accordance with the foregoing
clause also shall specify (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, the date on which the
holders of Common Stock shall be entitled to any such dividend, distribution or
right, and the amount and character thereof, and (ii) the date on which any
such reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up is to take place and the
time, if any such time is to be fixed, as of which the holders of Common Stock
shall be entitled to exchange their Warrant Shares for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up.  Each such written notice shall be
sufficiently given if addressed to Holder at the last address of Holder
appearing on the books of the Company and delivered in accordance with Section
17(d).


 


16.  Authorized
Shares.  The Company covenants that
during the period the Warrant is outstanding, it will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide
for the issuance of the Warrant Shares upon the exercise of any purchase rights
under this Warrant.  The Company further
covenants that its issuance of this Warrant shall constitute full authority to
its officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for the Warrant Shares upon the
exercise of the purchase rights under this Warrant.  The Company will take all such reasonable
action as may be necessary to assure that such Warrant Shares may be issued as
provided herein without violation of any applicable law or regulation, or of
any requirements of the Trading Market upon which the Common Stock may be
listed.


 


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


 


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


 


11





















 


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


 


17.  Miscellaneous.


 


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


 


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


 


(c)  Nonwaiver and Expenses.  No course of dealing or any delay or failure to
exercise any right hereunder on the part of Holder shall operate as a waiver of
such 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 fails
to comply with any provision of this Warrant, which results in any material
damages to the Holder, the Company shall pay to Holder such amounts as shall be
sufficient to cover any costs and expenses including, but not limited to,
reasonable attorneys’ fees, including those of appellate proceedings, incurred
by Holder in collecting any amounts due pursuant hereto or in otherwise
enforcing any of its rights, powers or remedies hereunder.


 


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


 


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


 


(f)  Remedies.  Holder,
in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant.  The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of the provisions of this Warrant and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.


 


(g)  Successors and Assigns.  Subject to applicable securities laws, this
Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and permitted assigns of Holder.  The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant and shall be enforceable by any such Holder
or holder of Warrant Shares.


 


12





















 


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


 


(i)  Severability. 
Wherever possible, each provision of this Warrant shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Warrant shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the
remaining provisions of this Warrant.


 


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


 


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


 


13





















 


IN WITNESS WHEREOF, the Company has caused this
Warrant 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 attached
Warrant (only if exercised in full), and tenders herewith payment of the
exercise price in full, together with all applicable transfer taxes, if any.


 


(2) Payment shall take the form of (check applicable
box):


 


o
in lawful money of the United States; or


 


o
the cancellation of such number of Warrant Shares as is necessary, in
accordance with the formula set forth in subsection 3(d), to exercise this
Warrant with respect to the maximum number of Warrant Shares purchasable
pursuant to the cashless exercise procedure set forth in subsection 3(d).


 


(3) Please issue a certificate or certificates
representing said Warrant Shares in the name of the undersigned or in such
other name as is specified below:


 


	
   

  



 


The Warrant Shares shall be delivered to the following:


 


	
   

  



 


	
   

  



 


	
   

  



 


(4) Accredited Investor. The undersigned is an “accredited
investor” as defined in Regulation D promulgated under the Securities Act of
1933, as amended.


 


	
   

  	
  CD INVESTMENT PARTNERS, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  CD Capital Management LLC

  
	
   

  	
  Its:

  	
  Investment Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  Dated:

  	
   

  	
   

  
							



 





















 


ASSIGNMENT FORM


 


(To assign the foregoing
warrant, execute 

this form and supply required information.


Do not use this form to
exercise the warrant.)


 


FOR VALUE RECEIVED, the foregoing Warrant and all
rights 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 the
name as it appears on the face of the Warrant, without alteration or
enlargement or any change whatsoever, and must be guaranteed by a bank or trust
company.  Officers of corporations and
those acting in a fiduciary or other representative capacity should file proper
evidence of authority to assign the foregoing Warrant.