Exhibit 10.1


 


SECURITIES PURCHASE AGREEMENT


 


This Securities Purchase Agreement (this “Agreement”) is made effective as of July 22, 2005, by and
between Imageware Systems, Inc., a California corporation (the “Company”), and the purchasers identified on
the signature pages hereto (each, a “Purchaser”
and collectively, the “Purchasers”).


 


WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4.2 of the Securities Act of 1933, as
amended (the “Securities Act”),
the Company desires to issue and sell to each Purchaser, and each Purchaser,
severally and not jointly, desires to purchase from the Company, certain
securities of the Company as more fully described in this Agreement.


 


NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser,
severally and not jointly, agree as follows:


 


ARTICLE I


DEFINITIONS


 


1.1                                 Definitions.  In addition to the terms defined elsewhere in
this Agreement, the following terms have the meanings indicated:


 


“Affiliate” means
any Person that, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with a Person, as such
terms are used in and construed under Rule 144 of the Securities Act.  With respect to a Purchaser, any investment
fund or managed account that is managed on a discretionary basis by the same
investment manager as such Purchaser will be deemed to be an Affiliate of such
Purchaser.


 


“Business
Day” means any day other than Saturday, Sunday or other day on which
commercial banks in The City of New York are authorized or required by law to
remain closed.


 


“Change of Control”
means the occurrence of any of the following in one or a series of related
transactions: (i) an acquisition after the date hereof by an individual or
legal entity or “group” (as described in Rule 13d-5(b)(1) under the
Exchange Act) of more than one-half of the voting rights or equity interests in
the Company; (ii) a replacement of more than one-half of the members of
the Company’s board of directors that is not approved by those individuals who
are members of the board of directors on the date hereof (or other directors
previously approved by such individuals); (iii) a merger or consolidation
of the Company or any significant Subsidiary or a sale of more than one-half of
the assets of the Company in one or a series of related transactions, unless
following such transaction or series of transactions, the holders of the
Company’s securities prior to the first such transaction continue to hold at
least two-thirds of the voting rights and equity interests in the surviving
entity or acquirer of such assets; (iv) a recapitalization, reorganization
or other transaction involving the Company or any


 





















 


significant Subsidiary that
constitutes or results in a transfer of more than one-half of the voting rights
or equity interests in the Company; (v) consummation of a “Rule 13e-3
transaction” as defined in Rule 13e-3 under the Exchange Act with respect
to the Company, or (vi) the execution by the Company or its controlling
shareholders of an agreement providing for or reasonably likely to result in
any of the foregoing events.


 


“Closing” means the
closing of the purchase and sale of the Shares and the Warrants pursuant to Section 2.1.


 


“Closing Date” means
the date of the Closing.


 


“Closing Price”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on an
Eligible Market or any other national securities exchange, the closing price
per share of the Common Stock for such date (or the nearest preceding date) on
the primary Eligible Market or exchange on which the Common Stock is then
listed or quoted; (b) if prices for the Common Stock are then quoted on
the OTC Bulletin Board, the closing bid price per share of the Common Stock for
such date (or the nearest preceding date) so quoted; (c) if prices for the
Common Stock are then reported in the “Pink Sheets” published by the National
Quotation Bureau Incorporated (or a similar organization or agency succeeding
to its functions of reporting prices), the most recent closing bid price per
share of the Common Stock so reported; or (d) in all other cases, the fair
market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by Purchasers holding a majority of the
Securities.


 


“Commission” means
the Securities and Exchange Commission.


 


“Common Stock” means
the common stock of the Company, par value $0.01 per share.


 


“Common
Stock Equivalents” means, collectively, Options and Convertible
Securities.


 


“Company Counsel”
means Greenberg Traurig, LLP, counsel to the Company.


 


“Convertible
Securities” means any stock or securities (other than Options)
convertible into or exercisable or exchangeable for Common Stock.


 


“Effective Date”
means the date that the Registration Statement is first declared effective by
the Commission.


 


“Eligible Market”
means any of the New York Stock Exchange, the American Stock Exchange, the
NASDAQ National Market or the NASDAQ SmallCap Market.


 


“Effectiveness
Period” means with respect to any Registrable Security, the period
beginning on the Effective Date and continuing until the earlier of (A) the
fifth year after the date the Registration Statement is declared effective by
the Commission and (B) the date when all Registrable Securities and
Underlying Shares have been sold.


 


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


 


“Excluded Stock” means
the issuance of (A) Common Stock 
upon exercise or conversion of any options or other securities described
in Schedule 3.1(f) (provided that such exercise or conversion
occurs in accordance with the terms thereof, without amendment or modification,
and that the applicable exercise or conversion price or ratio is described in
such schedule) or otherwise pursuant to any employee benefit plan described in Schedule 3.1(f) or
hereafter adopted by the Company and approved by its shareholders, (B) securities
in connection with any issuance of shares or grant of options to employees,
officers, directors or consultants of the Company pursuant to a stock option
plan or other incentive stock plan duly adopted by the Company’s board of
directors or in respect of the issuance of Common Stock upon exercise of any
such options, (C) securities in connection with a bona fide strategic deal
or other business combination transaction, the purpose of which is not to raise
cash, (D) securities issued in connection with a shareholder rights plan
adopted by the Board of Directors, or (E) securities to Gruber &
McBaine Capital Management LLC and its Affiliates pursuant to the terms of this
Agreement for up to $1,000,000 and prior to the 3rd Trading Day
following the Closing Date.


 


“Filing Date” means
the 30th day following the Closing Date with respect to the initial
Registration Statement required to be filed hereunder, and, with respect to any
additional Registration Statements that may be required pursuant to Section 6.1(f),
the 15th day following the date on which the Company first knows, or
reasonably should have known, that such additional Registration Statement is
required under such Section.


 


“Lien” means any
lien, charge, claim, security interest, encumbrance, right of first refusal or
other restriction.


 


“Losses” means any
and all losses, claims, damages, liabilities, settlement costs and expenses,
including, without limitation, costs of preparation and reasonable attorneys’
fees.


 


“Options”
means any rights, warrants or options to subscribe for or purchase Common Stock
or Convertible Securities.


 


“Person” means any
individual, corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or any court or other federal,
state, local or other governmental authority or other entity of any kind.


 


“Per Unit Purchase Price”
means $2.58.


 


“Proceeding” means
an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.


 


“Prospectus” means
the prospectus included in the Registration Statement (including, without
limitation, a prospectus that includes any information previously


 


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omitted from a prospectus filed
as part of an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by any
prospectus supplement, with respect to the terms of the offering of any portion
of the Registrable Securities covered by the Registration Statement, and all
other amendments and supplements to the Prospectus including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.


 


“Purchaser Counsel”
has the meaning set forth in Section 6.2(a).


 


“Registrable Securities”
means any Common Stock (excluding Underlying Shares) issued or issuable
pursuant to the Transaction Documents, together with any common stock issued or
issuable upon any stock split, dividend or other distribution, recapitalization
or similar event (including any common stock issued upon exercise of any
derivative securities so issued or issuable), occurring during the
Effectiveness Period, with respect to the foregoing.


 


“Registration Statement”
means each registration statement required to be filed under ARTICLE VI,
including (in each case) the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference in such registration statement.


 


“Required Effectiveness Date”
means (i) with respect to the initial Registration Statement required to
be filed hereunder, the 90th day following the Closing Date, or in
the event the Registration Statement shall be reviewed by the Commission, the
120th day following the Closing Date, and (ii) with respect to
any additional Registration Statements that may be required pursuant to Section 6.1(f),
the 60th day, or in the event the Registration Statement shall be
reviewed by the Commission, the 90th day,  following the date on which the Company first
knows, or reasonably should have known, that such additional Registration
Statement is required under such Section.


 


“Rule 144,”  “Rule 415,” and “Rule 424” means Rule 144, Rule 415
and Rule 424, respectively, promulgated by the Commission pursuant to the
Securities Act, as such Rules may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.


 


“Securities” means
the Shares, Warrants and the Underlying Shares.


 


“Shares” means the
aggregate number of shares of Common Stock, which are being issued and sold to
the Purchasers at the Closing.


 


“Subsidiary” means
any Person in which the Company, directly or indirectly, owns capital stock or
holds an equity or similar interest.


 


“Trading Day” means (a) any
day on which the Common Stock is listed or quoted and traded on its primary
Trading Market, or (b) if the Common Stock is not then listed or quoted
and traded on any Eligible Market, then a day on which trading occurs on


 


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the American Stock Exchange (or
any successor thereto), or (c) if trading ceases to occur on the American
Stock Exchange (or any successor thereto), any Business Day.


 


“Trading Market”
means the American Stock Exchange or any other Eligible Market, or any national
securities exchange, market or trading or quotation facility on which the
Common Stock is then listed or quoted.


 


“Transaction Documents”
means this Agreement, the Warrant, the Transfer Agent Instructions and any
other documents or agreements executed in connection with the transactions
contemplated hereunder.


 


“Transfer
Agent Instructions” means the Irrevocable Transfer Agent
Instructions, in the form of Exhibit B, executed by the Company and
delivered to and acknowledged in writing by the Company’s transfer agent.


 


“Underlying Shares”
means the shares of Common Stock issuable upon exercise of the Warrant.


 


“Unit” means one
Share and a Warrant to acquire 0.38 shares of Common Stock.


 


“Warrant” means,
collectively, the Warrants issued and sold under this Agreement, in the form of
Exhibit A.


 


ARTICLE II


PURCHASE AND SALE


 


2.1                                 Closing.    Subject to the terms and
conditions set forth in this Agreement, at the Closing the Company shall issue
and sell to each Purchaser, and each Purchaser shall, severally and not
jointly, purchase from the Company, such number of Units indicated below such
Purchaser’s name on the signature page of this Agreement at the Per Unit
Purchase Price.  The Closing shall take
place at the offices of Proskauer Rose LLP immediately following the execution
hereof and delivery of each item set forth in Section 2.2, or at such
other location or time as the parties may agree.


 


2.2                                 Closing
Deliveries.


 


(a)                                  At
the Closing, the Company shall deliver or cause to be delivered to each
Purchaser the following:


 


(i)                                     one
or more stock certificates, free and clear of all restrictive and other legends
(except as expressly provided in Section 4.1(b) hereof),
evidencing such number of Shares equal to the number of Units indicated below
such Purchaser’s name on the signature page of this Agreement, registered
in the name of such Purchaser;


 


(ii)                                  a
Warrant, registered in the name of such Purchaser, pursuant to which such
Purchaser shall have the right to acquire such number of Underlying Shares
indicated below such Purchaser’s name on the signature page of this
Agreement under the heading “Warrant Shares,” on the terms set forth therein;


 


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(iii)                               duly
executed Transfer Agent Instructions, in the form of Exhibit B,
acknowledged by the Company’s transfer agent; and


 


(iv)                              a
legal opinion of Company Counsel, in the form of Exhibit C,
executed by such counsel and delivered to the Purchasers.


 


(b)                                 At
the Closing, each Purchaser shall deliver or cause to be delivered to the
Company an amount equal to the Per Unit Purchase Price multiplied by the number
of Units indicated below such Purchaser’s name on the signature page of
this Agreement, in United States dollars and in immediately available funds, by
wire transfer to an account designated in writing to such Purchaser by the
Company for such purpose.


 


ARTICLE III


REPRESENTATIONS AND WARRANTIES


 


3.1                                 Representations
and Warranties of the Company.  Except as set forth in the schedules
delivered concurrently herewith, the Company hereby makes the following
representations and warranties to each of the Purchasers as of the date hereof
and as of the Closing Date:


 


(a)                                  Subsidiaries.  The Company has no direct or indirect
Subsidiaries other than those listed in Schedule 3.1(a).  Except as disclosed in Schedule 3.1(a),
the Company owns, directly or indirectly, all of the capital stock or
comparable equity interests of each Subsidiary free and clear of any Lien and
all the issued and outstanding shares of capital stock or comparable equity
interest of each Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights.


 


(b)                                 Organization
and Qualification.  Each of the
Company and the Subsidiaries is an entity duly 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 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 do 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, individually or in the aggregate, (i) adversely
affect the legality, validity or enforceability of any Transaction Document, (ii) have
or result in a material adverse effect on the results of operations, assets,
prospects, business or condition (financial or otherwise) of the Company and
the Subsidiaries, taken as a whole on a consolidated basis, or (iii) adversely
impair the Company’s ability to perform fully on a timely basis its obligations
under any of the Transaction Documents (any of (i), (ii) or (iii), a “Material Adverse Effect”).


 


(c)                                  Authorization;
Enforcement.  The Company has the
requisite corporate power and authority to enter into and to consummate the
transactions contemplated by each of


 


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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 consent or
action is required by the Company, its Board of Directors or its
shareholders.  Each of the Transaction
Documents has been (or upon delivery will be) duly executed by the Company and
is, or when delivered in accordance with the terms hereof, will constitute, the
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms.


 


(d)                                 No
Conflicts.  The execution, delivery
and performance of the Transaction Documents by the Company and the
consummation by the Company of the 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, (ii) conflict with, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, 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 affected, or (iii) 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 and the rules and regulations of any self-regulatory
organization to which the Company or its securities are subject), or by which
any property or asset of the Company or a Subsidiary is bound or affected.


 


(e)                                  Issuance
of the Securities.  The Securities
(including the Underlying Shares) are duly authorized and, when issued and paid
for in accordance with the Transaction Documents, will be duly and validly
issued, fully paid and nonassessable, free and clear of all Liens and shall not
be subject to preemptive rights or similar rights of shareholders.  The Company has reserved from its duly authorized
capital stock the maximum number of shares of Common Stock issuable upon
exercise of the Warrant.


 


(f)                                    Capitalization.  The number of shares and type of all
authorized, issued and outstanding capital stock, options and other securities
of the Company (whether or not presently convertible into or exercisable or
exchangeable for shares of capital stock of the Company) is set forth in Schedule 3.1(f).  All outstanding shares of capital stock are
duly authorized, validly issued, fully paid and nonassessable and have been
issued in compliance with all applicable securities laws.  Except as disclosed in Schedule 3.1(f),
there are no outstanding options, warrants, script rights to subscribe to,
calls or commitments of any character whatsoever relating to, or securities,
rights or obligations convertible into or exercisable or exchangeable for, or
giving any Person any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional shares of
Common Stock, or securities or rights convertible or exchangeable into shares
of Common Stock. There are no anti-dilution or price adjustment provisions
contained in any security issued by the Company (or in any agreement providing
rights to security holders) and the issue and sale of the Securities (including
the Underlying Shares) will not obligate the Company to issue shares of Common
Stock or other


 


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securities to
any Person (other than the Purchasers) and will not result in a right of any
holder of Company securities to adjust the exercise, conversion, exchange or
reset price under such securities.  To
the knowledge of the Company, except as specifically disclosed in Schedule 3.1(f),
no Person or group of related Persons beneficially owns (as determined pursuant
to Rule 13d-3 under the Exchange Act), or has the right to acquire, by
agreement with or by obligation binding upon the Company, beneficial ownership
of in excess of 5% of the outstanding Common Stock, ignoring for such purposes
any limitation on the number of shares of Common Stock that may be owned at any
single time.


 


(g)                                 SEC
Reports; Financial Statements.  The
Company has filed all reports required to be filed by it under the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for
the two years preceding the date hereof (or such shorter period as the Company
was required by law to file such material) (the foregoing materials (together
with any materials filed by the Company under the Exchange Act, whether or not
required) being collectively referred to herein as the “SEC Reports” and, together with this
Agreement and the Schedules to this Agreement, the “Disclosure Materials”) on a timely basis (except any such
report that is required solely pursuant to Items 1.01, 1.02, 2.03, 2.04, 2.05,
2.06 or 4.02(a) of Form 8-K, which have been filed but not
necessarily timely) or has received a valid extension of such time of filing
and has filed any such SEC Reports prior to the expiration of any such
extension.  The Company has delivered to
each Purchaser true, correct and complete copies of all SEC Reports filed
within the 10 days preceding the date hereof. 
As of their respective dates, the SEC Reports complied in all material
respects with the requirements of the Securities Act and the Exchange Act and
the rules and regulations of the Commission promulgated thereunder, and
none of the SEC Reports, when filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.  The financial statements of the Company
included in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the Commission
with respect thereto as in effect at the time of filing.  Such financial statements have been prepared
in accordance with United States generally accepted accounting principles
applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise
specified in such financial statements or the notes thereto, and fairly present
in all material respects the financial position of the Company and its
consolidated subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.  All material agreements to which the Company
or any Subsidiary is a party or to which the property or assets of the Company
or any Subsidiary are subject are included as part of or specifically identified
in the SEC Reports.


 


(h)                                 Material
Changes.  Since the date of the
latest audited financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports or in Schedule 3.1(h), (i) there
has been no event, occurrence or development that, individually or in the
aggregate, has had or that could result in a Material Adverse Effect, (ii) the
Company has not incurred any 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 required to
be disclosed in filings made with the Commission, (iii) the Company has
not altered its method of accounting or the identity of its auditors, except as
disclosed in its SEC


 


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Reports, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its shareholders 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,
except pursuant to existing Company stock-based plans.


 


(i)                                     Absence
of Litigation.  There is no action,
suit, claim, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries that could, individually or in the
aggregate, have a Material Adverse Effect. 
Schedule 3.1(i) contains a complete list and summary
description of any pending or, to the knowledge of the Company, threatened
proceeding against or affecting the Company or any of its Subsidiaries, without
regard to whether it could, individually or in the aggregate, have a Material
Adverse Effect.


 


(j)                                     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 agreement
or instrument 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 relating to taxes, environmental protection, occupational
health and safety, product quality and safety and employment and labor matters,
except in each case as could not, individually or in the aggregate, have or
result in a Material Adverse Effect.


 


(k)                                  Title
to Assets. The Company and the Subsidiaries have good and marketable title
in fee simple to all real property owned by them that is material to the
business of the Company and the Subsidiaries and good and marketable 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 made and proposed to be made of such property
by the Company and the Subsidiaries. Any real property and facilities held
under lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases of which the Company and the Subsidiaries are
in compliance.


 


(l)                                     Certain
Fees.  Except for the fees described
in Schedule 3.1(l), all of which are payable to registered
broker-dealers, no brokerage or finder’s fees or commissions are or will be
payable by the Company to any broker, financial advisor or consultant, finder,
placement agent, investment banker, bank or other Person with respect to the
transactions contemplated by this Agreement, and the Company has not taken any
action that would cause any Purchaser to be liable for any such fees or
commissions.


 


(m)                               Private
Placement.  Neither the Company nor
any Person acting on the Company’s behalf has sold or offered to sell or
solicited any offer to buy the Securities by means of any form of general
solicitation or advertising.  Neither the
Company nor any of its Affiliates


 


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nor any Person
acting on the Company’s behalf has, directly or indirectly, at any time within
the past six months, made any offer or sale of any security or solicitation of
any offer to buy any security under circumstances that would (i) eliminate
the availability of the exemption from registration under Regulation D under
the Securities Act in connection with the offer and sale of the Securities as
contemplated hereby or (ii) cause the offering of the Securities pursuant
to the Transaction Documents to be integrated with prior offerings by the
Company for purposes of any applicable law, regulation or stockholder approval
provisions, including, without limitation, under the rules and regulations
of any Trading Market.  The Company is
not, and is not an Affiliate of, an “investment company” within the meaning of
the Investment Company Act of 1940, as amended. 
The Company is not a United States real property holding corporation
within the meaning of the Foreign Investment in Real Property Tax Act of 1980.


 


(n)                                 Listing
and Maintenance Requirements.  Except
as described in Schedule 3.1(n), the Company has not, in the two years
preceding the date hereof, received notice (written or oral) from any Trading
Market on which the Common Stock is or has been listed or quoted to the effect
that the Company is not in compliance with the listing or maintenance
requirements of such Trading Market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in
compliance with all such listing and maintenance requirements.


 


(o)                                 Registration
Rights.  Except as described in Schedule 3.1(o),
the Company has not granted or agreed to grant to any Person any rights
(including “piggy-back” registration rights) to have any securities of the
Company registered with the Commission or any other governmental authority that
have not been satisfied.


 


(p)                                 Application
of Takeover Protections.  There is no
control share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under the Company’s charter documents or the laws of its state of incorporation
that is or could become applicable to any of the Purchasers as a result of the
Purchasers and the Company fulfilling their obligations or exercising their
rights under the Transaction Documents, including, without limitation, as a
result of the Company’s issuance of the Securities and the Purchasers’ ownership
of the Securities.


 


(q)                                 Disclosure.  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 constitutes or might constitute
material, nonpublic information.  The
Company understands and confirms that each of the Purchasers will rely on the
foregoing representations in effecting transactions in securities of the
Company.  All disclosure materials
provided to the Purchasers regarding the Company, its business and the
transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company are true and correct and do 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 the light of
the circumstances under which they were made, not misleading.  No event or circumstance has occurred or
information exists with respect to the Company or any of its Subsidiaries or
its or their business, properties, prospects, operations or financial
conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.  The
Company acknowledges and agrees that


 


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(i) no
Purchaser makes or has made any representations or warranties with respect to
the transactions contemplated hereby other than those specifically set forth in
Section 3.2 or (ii) any statement, commitment or promise to
the Company or, to its knowledge, any of its representatives which is or was an
inducement to the Company to enter into this Agreement or otherwise.


 


(r)                                    Acknowledgment
Regarding Purchasers’ Purchase of Securities.  The Company acknowledges and agrees that each
of the Purchasers is acting solely in the capacity of an arm’s length purchaser
with respect to the Company and to this Agreement and the transactions
contemplated hereby.  The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to this Agreement and the
transactions contemplated hereby and any advice given by any Purchaser or any
of their respective representatives or agents in connection with this Agreement
and the transactions contemplated hereby is merely incidental to the Purchasers’
purchase of the Securities.  The Company
further represents to each Purchaser that the Company’s decision to enter into
this Agreement has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.


 


(s)                                  Patents
and Trademarks.  The Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other similar rights that are necessary or material for use in
connection with their respective businesses as described in the SEC Reports and
which the failure to so have could have a Material Adverse Effect
(collectively, the “Intellectual Property
Rights”). Neither the Company nor any Subsidiary has received a
written notice that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person. To the
knowledge of the Company, all such Intellectual Property Rights are enforceable
and there is no existing infringement by another Person of any of the
Intellectual Property Rights.


 


(t)                                    Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged.  Neither the Company nor any Subsidiary has
any reason to believe that it will not be 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 without a
significant increase in cost.


 


(u)                                 Regulatory
Permits.  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 as described in the SEC Reports, except
where the failure to possess such permits could not, individually or in the
aggregate, have or 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.


 


(v)                                 Transactions
With Affiliates and Employees. 
Except as set forth in SEC Reports filed at least ten days prior to the
date hereof, none of the officers or directors of the


 


11





















 


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.


 


(w)                               Form S-3
Eligibility. The Company is eligible to register the resale of its  Common Stock for resale by the Purchasers
under Form S-3 promulgated under the Securities Act.


 


(x)                                   Solvency.  Based on the financial condition of the
Company as of the Closing Date, (i) the Company’s fair saleable value of
its assets exceeds the amount that will be required to be paid on or in respect
of the Company’s existing debts and other liabilities (including known
contingent liabilities) as they mature; (ii) the Company’s assets do not
constitute unreasonably small capital to carry on its business for the current
fiscal year as now conducted and as proposed to be conducted including its
capital needs taking into account the particular capital requirements of the
business conducted by the Company, and projected capital requirements and
capital availability thereof; and (iii) the current cash flow of the
Company, together with the proceeds the Company would receive, were it to
liquidate all of its assets, after taking into account all anticipated uses of the
cash, would be sufficient to pay all amounts on or in respect of its debt when
such amounts are required to be paid. 
The Company does not intend to incur debts beyond its ability to pay
such debts as they mature (taking into account the timing and amounts of cash
to be payable on or in respect of its debt).


 


(y)                                 Internal
Accounting Controls.  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 generally accepted accounting principles 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.


 


(z)                                   Sarbanes-Oxley
Act. The Company is in compliance with applicable  requirements of the Sarbanes-Oxley Act of
2002 and applicable rules and regulations promulgated by
the Commission thereunder in effect as of the date of this Agreement,
except where such noncompliance could not be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect.


 


3.2                                 Representations
and Warranties of the Purchasers.  Each Purchaser hereby, as to itself only and
for no other Purchaser, represents and warrants to the Company as of the date
hereof and as of the Closing Date, as follows:


 


12





















 


(a)                                  Organization;
Authority.  Such Purchaser is an
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization with the requisite corporate or
partnership power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to carry out
its obligations hereunder and thereunder. 
The purchase by such Purchaser of the Shares and Warrants hereunder has
been duly authorized by all necessary action on the part of such  Purchaser. 
This Agreement has been duly executed and delivered by such Purchaser
and constitutes the valid and binding obligation of such Purchaser, enforceable
against it in accordance with its terms.


 


(b)                                 Investment
Intent.  Such Purchaser is acquiring
the Securities for investment purposes and not with a view to or for distributing
or reselling such Securities or any part thereof, without prejudice, however,
to such Purchaser’s right, subject to the provisions of this Agreement, at all
times to sell or otherwise dispose of all or any part of such Securities
pursuant to an effective registration statement under the Securities Act or
under an exemption from such registration and in compliance with applicable
federal and state securities laws.  Such
Purchaser is acquiring the Securities hereunder in the ordinary course of business.  Nothing contained herein shall be deemed a
representation or warranty by such Purchaser to hold Securities for any period
of time.


 


(c)                                  Purchaser
Status.  At the time such Purchaser
was offered the Shares and the Warrants, it was, and at the date hereof it is,
an “accredited investor” as defined in Rule 501(a) under the
Securities Act.  Such Purchaser is not
registered as, or required to be registered as, a broker-dealer under Section 15
of the Exchange Act.


 


(d)                                 Experience
of such Purchaser.  Such Purchaser,
either alone or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment.  Such Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.


 


(e)                                  General
Solicitation.  Such Purchaser is not
purchasing the Securities as a result of any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine, website or similar media or broadcast over television or radio or
presented at any seminar or other general solicitation or general
advertisement.


 


ARTICLE IV


OTHER AGREEMENTS OF THE PARTIES


 


4.1                                 Transfer
Restrictions.


 


(a)                                  Securities
may only be disposed of pursuant to an effective registration statement under
the Securities Act or pursuant to an available exemption from the registration
requirements of the Securities Act, and in compliance with any applicable state
securities laws.  In connection with any
transfer of Securities other than pursuant to an effective registration statement
or to the Company or pursuant to Rule 144(k), the Company may require the
transferor


 


13





















 


to provide to
the Company an opinion of counsel selected by the transferor licensed to
practice law in the applicable jurisdiction, the form and substance of which
opinion shall be reasonably satisfactory to the Company, to the effect that
such transfer does not require registration under the Securities Act or require
qualification or registration pursuant to any applicable state securities
law.  Notwithstanding the foregoing, the
Company hereby consents to and agrees to register on the books of the Company
and with its transfer agent, without any such legal opinion, any transfer of
Securities by a Purchaser to an Affiliate of such Purchaser, provided that (i) such
transferee is an “accredited investor” as that term is defined in Rule 501(a) under
the Securities Act, (ii) such transferee certifies to the Company that it
was not formed for the purpose of acquiring the Securities and such transfer
will not violate the Securities Act, and (iii) such transferee certifies
to the Company which of the following facts is true as of such transfer date:


 


•      Transferee is a small business investment
company licensed by the U.S. Small Business Administration under the Small
Business Investment Company Act of 1958,


•      Transferee is a business development
company as defined in the Investment Company Act of 1940,


•      Transferee is a national or
state-chartered commercial bank, whether acting in an individual or fiduciary
capacity,


•      Transferee is an insurance company as
defined in Section 2(13) of the Securities Act,


•      Transferee is an investment company
registered under the Investment Company Act of 1940,


•      Transferee is a an employee benefit plan
within the meaning of Title I of the Employee Retirement Income Security Act of
1974, where the investment decision is made by a plan fiduciary, as defined in
Section 3(21) of such Act, which is either a bank, insurance company, or
registered investment advisor, or an employee benefit plan which has total
assets in excess of $5,000,000,


•      Transferee is a private business
development company as defined in Section 202(a)(22) of the Investment Advisors
Act of 1940,


•      Transferee is an organization described in
Section 501(c)(3) of the Internal Revenue Code, a corporation or a partnership
with total assets in excess of $5,000,000,


•      Transferee is a natural person (as opposed
to a corporation, partnership, trust or other legal entity) whose net worth, or
joint net worth together with his/her spouse, exceeds $1,000,000,


•      Transferee is a trust, with total assets
in excess of $5,000,000, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated person as
described in Section 506(b)(2)(ii) of Regulation D,


•      Transferee is a natural person (as opposed
to a corporation, partnership, trust or other legal entity) whose individual
income was in excess of $200,000 in each of the two most recent years (or whose
joint income with such person’s spouse was at least $300,000 during such years)
and who reasonably expects an income in excess of such amount in the current
year, or


 


14





















 


•      Transferee is a corporation, partnership,
trust or other legal entity (as opposed to a natural person) and all of such
entity’s equity owners fall into one or more of the categories enumerated
above.


 


 


(b)                                 The
Purchasers agree to the imprinting, so long as is required by this Section 4.1(b) or
the Securities Act, of the following legend on any certificate evidencing
Securities:


 


THESE
SECURITIES [AND THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE]
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 (THE “SECURITIES ACT”),
AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS
IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS AND UNLESS
AND UNTIL REGISTERED UNDER THE ACT, OR UNLESS AN EXEMPTION FROM SUCH
REGISTRATION AND QUALIFICATION IS AVAILABLE AND THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.


 


Certificates evidencing Securities shall not be required to contain
such legend or any other legend (i) while a Registration Statement
covering the resale of such Securities is effective under the Securities Act,
or (ii) following any sale of such Securities pursuant to Rule 144 to
a non-affiliate of the Company, as defined under Rule 144, or (iii) if
such Securities are eligible for sale under Rule 144(k), or (iv) if
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the Staff of
the Commission).  The Company shall cause
its counsel to issue the legal opinion included in the Transfer Agent
Instructions to the Company’s transfer agent on the Effective Date.  Following the Effective Date or at such
earlier time as a legend is no longer required for certain Securities, the
Company will no later than three Trading Days following the delivery by a
Purchaser to the Company or the Company’s transfer agent of a legended
certificate representing such Securities, deliver or cause to be delivered to
such Purchaser a certificate representing such Securities that is free from all
restrictive and other legends.  The
Company may not make any notation on its records or give instructions to any
transfer agent of the Company that enlarge the restrictions on transfer set
forth in this Section.  Notwithstanding
the foregoing, the Purchaser acknowledges and agrees that from and after the
Effective Date (i) the Securities may remain “restricted” as that term is
defined under Rule 144, (ii) for so long as such Securities remain
restricted under Rule 144, the Purchaser shall not transfer such
Securities except pursuant to the effective Registration Statement and
prospectus delivery requirements or otherwise in accordance with Section 4.1(a)of
this Agreement, and (iii) for so long as such Securities remain restricted
under Rule 144, the Company shall instruct its transfer agent not to
record any transfer unless Purchaser complies with subpart (ii) of this
sentence.


 


15





















 


(c)                                  Subject
to Section 4.1(a), the Company acknowledges and agrees that a Purchaser
may from time to time pledge or grant a security interest in some or all of the
Securities in connection with a bona fide margin agreement or other personal
recourse loan or financing arrangement secured by the Securities and, if
required under the terms of such agreement, loan or arrangement, such Purchaser
may transfer pledged or secured Securities to the pledgees or secured parties,
as permitted by the Securities Act.  Such
a pledge and transfer would not be subject to approval by the Company and no
legal opinion of the pledgee, secured party or pledgor shall be required in
connection therewith.  Further, no notice
shall be required of such pledge.  At the
appropriate Purchaser’s expense, the Company will execute and deliver such
reasonable documentation as a pledgee or secured party of Securities may
reasonably request in connection with a pledge or transfer of the Securities,
including the preparation and filing of any required prospectus supplement
under Rule 424(b)(3) of the Securities Act or other applicable
provision of the Securities Act to appropriately amend the list of Selling
Stockholders thereunder.


 


4.2                                 Furnishing of
Information.  As long
as any Purchaser owns Securities, the Company covenants to timely file (or
obtain extensions in respect thereof and file within the applicable grace
period) all reports required to be filed by the Company after the date hereof
pursuant to the Exchange Act.  Upon the
request of any Purchaser, the Company shall deliver to such Purchaser a written
certification of a duly authorized officer as to whether it has complied with
the preceding sentence. As long as any Purchaser owns Securities, if the
Company is not required to file reports pursuant to such laws, it will prepare
and furnish to the Purchasers and make publicly available in accordance with
paragraph (c) of Rule 144 such information as is required for the
Purchasers to sell the Securities under Rule 144.  The Company further covenants that it will
take such further action as any holder of Securities may reasonably request to
satisfy the provisions of Rule 144 applicable to the issuer of securities
relating to transactions for the sale of securities pursuant to Rule 144.


 


4.3                                 Integration.  The Company shall not, and shall use its best
efforts to ensure that no Affiliate of the Company shall, sell, offer for sale
or solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities to the
Purchasers or that would be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of any Trading Market.


 


4.4                                 Reservation
and Listing of Securities. 
The Company shall maintain a reserve from its duly authorized shares of
Common Stock for issuance pursuant to the Transaction Documents in such amount
as may be required to fulfill its obligations in full under the Transaction
Documents.  In the event that at any time
the then authorized shares of Common Stock are insufficient for the Company to
satisfy its obligations in full under the Transaction Documents, the Company
shall promptly take such actions as may be required to increase the number of
authorized shares.  The Company shall in
the time and manner required by its Trading Market, prepare and file with such
Trading Market an additional shares listing application covering the number of
shares of Common Stock issuable under the Transaction Documents and shall take
all steps necessary to cause such shares of Common Stock to be approved for
listing on its Trading Market as soon as possible.


 


16





















 


4.5                                 Subsequent
Placements.


 


(a)                                  From
the date hereof until the Effective Date, the Company will not, directly or
indirectly, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its or the Subsidiaries’ equity or equity equivalent
securities, including without limitation any debt, preferred stock or other
instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for Common Stock
or Common Stock Equivalents, other than issuances pursuant to clauses (A), (B) and
(E) of the definition of Excluded Stock (any such offer, sale, grant,
disposition or announcement being referred to as a “Subsequent Placement”).


 


(b)                                 From
the Effective Date until 30 Trading Days after the Effective Date (the “Blockout Period”), the Company will not,
directly or indirectly, effect any Subsequent Placement except Excluded Stock.


 


(c)                                  The
Blockout Period set forth in Section 4.5(b) above shall be
extended for the number of Trading Days during such period in which (i) trading
in the Common Stock is suspended by any Trading Market, (ii) the
Registration Statement is not effective, or (iii) the prospectus included
in the Registration Statement may not be used by the Purchasers for the resale
of Registrable Securities thereunder.


 


(d)                                 From
the period beginning on the Effective Date and continuing for two hundred
seventy (270) days thereafter, the Purchasers shall have the right to
participate in any Subsequent Placement other than of Excluded Stock, in
accordance with this Section 4.5(d).


 


(i)                                     The
Company shall deliver to each Purchaser a verbal or written notice (the “Offer”) of any proposed or intended
issuance or sale or exchange of the securities being offered (the “Offered Securities”) in a Subsequent
Placement, which Offer shall (w) identify and describe the Offered Securities,
(x) describe the price and other terms upon which they are to be issued, sold
or exchanged, and the number or amount of the Offered Securities to be issued,
sold or exchanged, (y) identify the Persons or entities to which or with which
the Offered Securities are to be offered, issued, sold or exchanged and
(z)  offer to issue and sell to each
Purchaser (A) such Purchaser’s pro rata share of a number of additional
securities of like kind to the Offered Securities (the “Participation Securities”) equal to
one-half of the Offered Securities, based on such Purchaser’s pro rata portion
of the aggregate purchase price paid by the Purchasers for all of the Shares
purchased hereunder (the “Basic Amount”),
and (B) with respect to each Purchaser that elects to purchase its Basic
Amount, any additional portion of the Offered Securities attributable to the
Basic Amounts of other Purchasers as such Purchaser shall indicate it will purchase
or acquire should the other Purchasers subscribe for less than their Basic
Amounts (the “Undersubscription Amount”).


 


(ii)                                  To
accept an Offer, in whole or in part, a Purchaser must (a) deliver a
written notice to the Company prior to the end of the three (3) Trading
Day period of the Offer, setting forth the portion of the Purchaser’s Basic
Amount that such Purchaser elects to purchase and, if such Purchaser shall
elect to purchase all of its Basic


 


17





















 


Amount, the Undersubscription
Amount, if any, that such Purchaser elects to purchase (in either case, the “Notice of Acceptance”), (b) be able to
make at the time of receiving the Offer and at the time of closing the purchase
of the Participation Securities, the representations and warranties to the
Company set forth in Section 3.2 of this Agreement with respect to the
Offer and the Participation Securities, and (c) deliver to the Company
such other agreements and documents required of the purchasers in the Subsequent
Offering (the “Subsequent Placement Documents”).  If the Basic Amounts subscribed for by all
Purchasers are less than the total of all of the Basic Amounts, then each
Purchaser who has set forth an Undersubcription Amount in its Notice of Acceptance
shall be entitled to purchase, in addition to the Basic Amounts subscribed for,
the Undersubscription Amount it has subscribed for; provided, however,
that if the Undersubscription Amounts subscribed for exceed the difference
between the total of all the Basic Amounts and the Basic Amounts subscribed for
(the “Available Undersubscription Amount”),
each Purchaser who has subscribed for any Undersubscription Amount shall be
entitled to purchase only that portion of the Available Undersubscription
Amount as the Basic Amount of such Purchaser bears to the total Basic Amounts
of all Purchasers that have subscribed for Undersubscription Amounts, subject
to rounding by the Board of Directors to the extent its deems reasonably
necessary.


 


(iii)                               The
Company shall have five (5) Trading Days from the expiration of the period
set forth in Section 4.5(d)(ii) above to issue, sell or exchange all
or any part of such Participation Securities as to which a Notice of Acceptance
has not been given by the Purchasers (the “Refused
Securities”), but only to the offerees described in the Offer and
only upon terms and conditions (including, without limitation, unit prices and
interest rates) that are not more favorable to the acquiring Person or Persons
or less favorable to the Company than those set forth in the Offer.


 


(iv)                              In
the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in Section 4.5(d)(iii) above),
then each Purchaser may, at its sole option and in its sole discretion, reduce
the number or amount of the Participation Securities specified in its Notice of
Acceptance to an amount that shall be not less than the number or amount of the
Participation Securities that the Purchaser elected to purchase pursuant to Section 4.5(d)(ii) above
multiplied by a fraction, (i) the numerator of which shall be the number
or amount of Participation Securities the Company actually proposes to issue,
sell or exchange (including Participation Securities to be issued or sold to
Purchasers pursuant to Section 4.5(d)(ii) above prior to such
reduction) and (ii) the denominator of which shall be the original amount
of the Participation Securities.  In the
event that any Purchaser so elects to reduce the number or amount of
Participation Securities specified in its Notice of Acceptance, the Company may
not issue, sell or exchange more than the reduced number or amount of the
Participation Securities unless and until such securities have again been
offered to the Purchasers in accordance with Section 4.5(d)(i) above.


 


(v)                                 Upon
the closing of the issuance, sale or exchange of the Offered Securities, the
Purchasers shall acquire from the Company, and the Company shall issue to the
Purchasers, the number or amount of Participation Securities specified in the


 


18





















 


Notices of Acceptance, as
reduced pursuant to Section 4.5(d)(iv) above if the Purchasers have
so elected, upon the terms and conditions specified in the Offer.  The purchase by the Purchasers of any
Participation Securities is subject in all cases to the execution and delivery
by the Company and the Purchasers of the Subsequent Placement Documents.  Notwithstanding the delivery of a Notice of
Acceptance, no Purchaser shall be required to purchase the Participation
Securities unless such Subsequent Placement Documents are reasonably
satisfactory in form and substance to the Purchasers and their respective
counsel.


 


4.6                                 Securities
Laws Disclosure; Publicity. 
The Company shall, on or before 8:30 a.m., New York City time on July 25,
2005, issue a press release acceptable to the Purchasers disclosing all
material terms of the transactions contemplated hereby.  On the Trading Day following the Closing Date
the Company shall file a Current Report on Form 8-K with the Commission
(the “8-K Filing”) describing the terms of the transactions
contemplated by the Transaction Documents and including as exhibits to such
Current Report on Form 8-K this Agreement, the form of the Warrant, in the
form required by the Exchange Act.  The
Company and the Purchasers shall consult with each other in issuing the
foregoing press release and 8-K Filing. 
Thereafter, the Company shall timely file any filings and notices
required by the Commission or applicable law with respect to the transactions
contemplated hereby.  Except as set forth
above, neither party shall issue any press release or otherwise make any such
public statement, filing or other communication regarding the transactions contemplated
by the Transaction Documents without the prior consent of the other, except if
such disclosure is required by law. 
Notwithstanding the foregoing, the Company shall not publicly disclose
the name of any Purchaser, or include the name of any Purchaser in any filing
with the Commission or any regulatory agency or Trading Market, without the
prior written consent of such Purchaser, except as part of the Registration
Statement or to the extent such disclosure is otherwise required by law or
Trading Market regulations, in which case the Company shall provide the
Purchasers with prior notice of its intent to make such disclosure.  The Company shall not, and shall cause each
of its Subsidiaries and its and each of their respective officers, directors,
employees and agents not to, provide any Purchaser with any material nonpublic
information regarding the Company or any of its Subsidiaries from and after the
filing of the 8-K Filing without the express written consent of such
Purchaser.  If the Company breaches the
foregoing covenant, then in addition to any other remedy provided herein or in
the Transaction Documents, a Purchaser shall provide notice to the Company and
an opportunity for the Company to make any disclosure required by Regulation FD
in connection with such disclosure to the Purchaser, and if the Company fails
to make such timely disclosure required by regulation FD, then such Purchaser
shall have the right to make a public disclosure, in the form of a press
release, public advertisement or otherwise, of such material nonpublic
information without the prior approval by the Company, its Subsidiaries, or any
of its or their respective officers, directors, employees or agents.  No Purchaser shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees, shareholders or agents for any such disclosure.  Subject to this paragraph, neither the
Company nor any Purchaser shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of any
Purchaser, to make any press release or other public disclosure with respect to
such transactions (i) in substantial conformity with the 8-K Filing and
documents filed contemporaneously therewith or (ii) as is required by
applicable law and regulations (provided that in the case of clause (ii) each


 


19





















 


Purchaser
shall be consulted by the Company in connection with any such press release or
other public disclosure prior to its release). 
Each press release disseminated during the 12 months preceding the date
of this Agreement did not at the time of release contain any untrue statement
of a material fact.


 


4.7                                 Use of
Proceeds.  Except as
set forth on Schedule 4.7, the Company shall use the net
proceeds from the sale of the Securities hereunder for working capital purposes
and not (i) for the satisfaction of any portion of the Company’s debt
(other than payment of trade payables and accrued expenses in the ordinary
course of the Company’s business and consistent with prior practices), (ii) to
redeem any Company equity or equity-equivalent securities, or (iii) to
settle any outstanding litigation.


 


4.8                                 Reimbursement.  If any Purchaser or any of its Affiliates or
any officer, director, partner, controlling Person, employee or agent of a
Purchaser or any of its Affiliates (a “Related
Person”) becomes involved in any capacity in any Proceeding brought
by or against any Person in connection with or as a result of the transactions
contemplated by the Transaction Documents, the Company will indemnify and hold
harmless such Purchaser or Related Person for its reasonable legal and other
expenses (including the costs of any investigation, preparation and travel) and
for any Losses incurred in connection therewith, as such expenses or Losses are
incurred, excluding only Losses that result directly from such Purchaser’s or
Related Person’s gross negligence, willful misconduct or violation of
applicable securities laws.  In addition,
the Company shall indemnify and hold harmless each Purchaser and Related Person
from and against any and all Losses, as incurred, arising out of or relating to
any breach by the Company of any of the representations, warranties or
covenants made by the Company in this Agreement or any other Transaction
Document, or any allegation by a third party that, if true, would constitute
such a breach.  The conduct of any
Proceedings for which indemnification is available under this paragraph shall
be governed by Section 6.4(c) below. 
The indemnification obligations of the Company under this paragraph
shall be in addition to any liability that the Company may otherwise have and
shall be binding upon and inure to the benefit of any successors, assigns,
heirs and personal representatives of the Purchasers and any such Related
Persons.  If the Company breaches its
obligations under any Transaction Document, then, in addition to any other liabilities
the Company may have under any Transaction Document or applicable law, the
Company shall pay or reimburse the Purchasers on demand for all costs of
collection and enforcement (including reasonable attorneys fees and expenses).  Without limiting the generality of the
foregoing, the Company specifically agrees to reimburse the Purchasers on
demand for all costs of enforcing the indemnification obligations in this
paragraph.


 


ARTICLE V


CONDITIONS


 


5.1                                 Conditions
Precedent to the Obligations of the Purchasers.  The obligation of each Purchaser to acquire
Securities at the Closing is subject to the satisfaction or waiver by such
Purchaser, at or before the Closing, of each of the following conditions:


 


(a)                                  Representations
and Warranties.  The representations
and warranties of the Company contained herein shall be true and correct in all
material respects as of the date when made and as of the Closing as though made
on and as of such date; and


 


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(b)                                 Performance.  The Company and each other Purchaser shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction Documents to
be performed, satisfied or complied with by it at or prior to the Closing.


 


(c)                                  No
Injunction.  No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any of
the transactions contemplated by the Transaction Documents;


 


(d)                                 Adverse
Changes.  Since the date of execution
of this Agreement, no event or series of events shall have occurred that
reasonably would be expected to have or result in a Material Adverse Effect;
and


 


(e)                                  No
Suspensions of Trading in Common Stock; Listing.  Trading in the Common Stock shall not have
been suspended by the Commission or any Trading Market (except for any
suspensions of trading of not more than three Trading Days (whether or not
consecutive) solely to permit dissemination of material information regarding
the Company) at any time since the date of execution of this Agreement, and the
Common Stock shall have been at all times since such date listed for trading on
an Eligible Market;


 


5.2                                 Conditions
Precedent to the Obligations of the Company.  The obligation of the Company to sell
Securities at the Closing is subject to the satisfaction or waiver by the
Company, at or before the Closing, of each of the following conditions:


 


(a)                                  Representations
and Warranties.  The representations
and warranties of the Purchasers contained herein shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made on and as of such date; and


 


(b)                                 Performance.  The Purchasers shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by the Purchasers at or prior to the Closing.


 


ARTICLE VI


REGISTRATION RIGHTS


 


6.1                                 Shelf
Registration


 


(a)                                  As
promptly as possible, and in any event on or prior to the Filing Date, the
Company shall prepare and file with the Commission a “Shelf” Registration Statement
covering the resale of all Registrable Securities for an offering to be made on
a continuous basis pursuant to Rule 415. 
The Registration Statement shall be on Form S-3 (except if the
Company is not then eligible to register for resale the Registrable Securities
on Form S-3, in which case such registration shall be on another
appropriate form in accordance herewith as the Purchasers may consent) and
shall contain (except if otherwise directed by the Purchasers) the “Plan of
Distribution” attached hereto as Exhibit D.


 


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(b)                                 The
Company shall use its best efforts to cause the Registration Statement to be
declared effective by the Commission as promptly as possible after the filing
thereof, but in any event prior to the Required Effectiveness Date, and shall
use its best efforts to keep the Registration Statement continuously effective
under the Securities Act until the expiration of the Effectiveness Period.


 


(c)                                  The
Company shall notify each Purchaser in writing promptly (and in any event
within one Trading Day) after receiving notification from the Commission that
the Registration Statement has been declared effective.


 


(d)                                 If:
(i) any Registration Statement is not filed on or prior to the Filing Date
(if the Company files such Registration Statement without affording the
Purchasers the opportunity to review and comment on the same as required by Section 6.2(a) hereof,
the Company shall not be deemed to have satisfied this clause (i)), or the
Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days after the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be “reviewed,” or will not be subject to further review, or (iii) a
Registration Statement filed hereunder is not declared effective by the
Commission by the Required Effectiveness Date, or (iv) after a
Registration Statement is filed with and declared effective by the Commission,
such Registration Statement ceases to be effective as to all Registrable
Securities to which it is required to relate at any time prior to the
expiration of the Effectiveness Period without being succeeded within 10
Trading Days by an amendment to such Registration Statement or by a subsequent
Registration Statement filed with and declared effective by the Commission, or (v) the
Common Stock is not listed or quoted, or is suspended from trading on an
Eligible Market for a period of three Trading Days (which need not be
consecutive Trading Days) (any such failure or breach being referred to as an “Event,” and the date on which such Event
occurs being referred to as “Event Date”),
then: (x) on each such Event Date the Company shall pay to each Purchaser an
amount in cash, as partial liquidated damages and not as a penalty, equal to 1%
of the aggregate purchase price paid by such Purchaser pursuant to the Purchase
Agreement; and (y) on each monthly anniversary of each such Event Date thereof
(if the applicable Event shall not have been cured by such date) until the
applicable Event is cured, the Company shall pay to each Purchaser an amount in
cash, as partial liquidated damages and not as a penalty, equal to 1% of the
aggregate purchase price paid by such Purchaser pursuant to the Purchase
Agreement.  Such payments shall be in
partial compensation to the Purchasers and shall not constitute the Purchaser’s
exclusive remedy for such events.  If the
Company fails to pay any liquidated damages pursuant to this Section in
full within seven days after the date payable, the Company will pay interest
thereon at a rate of 18% per annum (or such lesser maximum amount that is
permitted to be paid by applicable law) to the Purchaser, accruing daily from
the date such liquidated damages are due until such amounts, plus all such
interest thereon, are paid in full.


 


(e)                                  The
Company shall not, prior to the Effective Date of the Registration Statement,
prepare and file with the Commission a registration statement relating to an
offering for its own account or the account of others (other than as
contemplated in the Transaction Documents) under the Securities Act of any of
its equity securities.


 


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(f)                                    Notwithstanding
anything to the contrary, each Purchaser may request that the Company pay any
cash amounts due under Section 6.1(d) in freely tradable and
registered Common Stock, to the extent freely tradable and registered Common
Stock are available.  In the event that a
Purchaser elects to receive shares of Common Stock and the Company agrees, in
its sole and absolute discretion, to pay the Event Penalty in such shares, the
number of shares of Common Stock to be issued to such Purchaser as such payment
under Section 6.1(d) shall be determined by dividing the aggregate
amount of due to such Purchaser by the Market Price (as defined below) as of
the date of payment, and rounding up to the nearest whole share.  The term “Market Price” shall mean 90% of the
arithmetic average of the Closing Prices for the 20 Trading Days immediately
prior to the applicable date of payment (not including such date).


 


(g)                                 If
the Company issues to the Purchasers any Common Stock pursuant to the Transaction
Documents that is not included in the initial Registration Statement, then the
Company shall file an additional Registration Statement covering such number of
shares of Common Stock on or prior to the Filing Date and shall use it best
efforts, but in no event later than the Required Filing Date, to cause such
additional Registration Statement to become effective by the Commission.


 


6.2                                 Registration
Procedures.  In
connection with the Company’s registration obligations hereunder, the Company
shall:


 


(a)                                  Not
less than three Trading Days prior to the filing of a Registration Statement or
any related Prospectus or any amendment or supplement thereto (including any
document that would be incorporated or deemed to be incorporated therein by
reference), the Company shall (i) furnish to each Purchaser and any
counsel designated by any Purchaser, if any, (each, a “Purchaser Counsel”, and Iroquois Master
Fund Ltd has initially designated Proskauer Rose LLP) copies of all such
documents proposed to be filed, which documents (other than those incorporated
or deemed to be incorporated by reference) will be subject to the review of
each Purchaser and Purchaser Counsel, and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of respective
counsel, to conduct a reasonable investigation within the meaning of the
Securities Act.  The Company shall not
file a Registration Statement or any such Prospectus or any amendments or
supplements thereto to which Purchasers holding a majority of the Registrable
Securities shall reasonably object in writing. 
If Iroquois Master Fund, Ltd fails to approve the final draft of the
initial Registration Statement or respond to any comments on the Registration
Statement, within 3 Trading Days after receipt of the Registration Statement,
the Filing Date and the Required Effectiveness Date shall be tolled for the
period beginning on the 3rd Trading Day following the date any
notice is furnished in accordance with this Section 6.2(a) and the
date the Company receives approval from the Purchasers to file the Registration
Statement or Prospectus or any amendment or supplement thereto.  If any other Purchaser fails to (A) approve
the final draft of the initial Registration Statement within the 3rd
Trading Day following request of consent, then the Company shall deem the
Registration Statement accepted by such Purchaser, or (B) respond to
requests for necessary information or comments from the Commission within such
5 Trading Days, then the Company may elect to exclude the Registrable
Securities held by such Purchaser from the Registration Statement or amendment
thereto, without further liability to such Purchaser under this ARTICLE VI.


 


23





















 


(b)                                 (i) Prepare
and file with the Commission such amendments, including post-effective
amendments, to each Registration Statement and the Prospectus used in
connection therewith as may be necessary to keep the Registration Statement
continuously effective as to the applicable Registrable Securities for the
Effectiveness Period and prepare and file with the Commission such additional
Registration Statements in order to register for resale under the Securities
Act all of the Registrable Securities; (ii) cause the related Prospectus
to be amended or supplemented by any required Prospectus supplement, and as so
supplemented or amended to be filed pursuant to Rule 424; (iii) respond
as promptly as reasonably possible, and in any event within ten days, to any
comments received from the Commission with respect to the Registration
Statement or any amendment thereto and as promptly as reasonably possible
provide the Purchasers true and complete copies of all correspondence from and
to the Commission relating to the Registration Statement; and (iv) comply
in all material respects with the provisions of the Securities Act and the
Exchange Act with respect to the disposition of all Registrable Securities
covered by the Registration Statement during the applicable period in
accordance with the intended methods of disposition by the Purchasers thereof
set forth in the Registration Statement as so amended or in such Prospectus as
so supplemented.


 


(c)                                  Notify
the Purchasers of Registrable Securities to be sold and Purchaser Counsel as
promptly as reasonably possible, and (if requested by any such Person) confirm
such notice in writing no later than one Trading Day thereafter, of any of the
following events: (i) the Commission notifies the Company whether there
will be a “review” of any Registration Statement; (ii) the Commission
comments in writing on any Registration Statement (in which case the Company
shall deliver to each Purchaser a copy of such comments and of all written
responses thereto); (iii) any Registration Statement or any post-effective
amendment is declared effective; (iv) the Commission or any other Federal
or state governmental authority requests any amendment or supplement to any
Registration Statement or Prospectus or requests additional information related
thereto; (v) the Commission issues any stop order suspending the
effectiveness of any Registration Statement or initiates any Proceedings for
that purpose; (vi) the Company receives notice of any suspension of the
qualification or exemption from qualification of any Registrable Securities for
sale in any jurisdiction, or the initiation or threat of any Proceeding for
such purpose; or (vii) the financial statements included in any
Registration Statement become ineligible for inclusion therein or any statement
made in any Registration Statement or Prospectus or any document incorporated
or deemed to be incorporated therein by reference is untrue in any material
respect or any revision to a Registration Statement, Prospectus or other
document is required so that it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.


 


(d)                                 Use
its best efforts to avoid the issuance of or, if issued, obtain the withdrawal
of (i) any order suspending the effectiveness of any Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, as soon as possible.


 


(e)                                  Furnish
to each Purchaser and Purchaser Counsel, without charge, at least one conformed
copy of each Registration Statement and each amendment thereto, including
financial statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those


 


24





















 


previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission.


 


(f)                                    Promptly
deliver to each Purchaser and Purchaser Counsel, without charge, as many copies
of the Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request.  The Company hereby consents to the use of
such Prospectus and each amendment or supplement thereto by each of the selling
Purchasers in connection with the offering and sale of the Registrable
Securities covered by such Prospectus and any amendment or supplement thereto.


 


(g)                                 (i) In
the time and manner required by each Trading Market, prepare and file with such
Trading Market an additional shares listing application covering all of the
Registrable Securities; (ii) take all steps necessary to cause such
Registrable Securities to be approved for listing on each Trading Market as
soon as possible thereafter; (iii) provide to the Purchasers evidence of
such listing; and (iv) maintain the listing of such Registrable Securities
on each such Trading Market or another Eligible Market.


 


(h)                                 Prior
to any public offering of Registrable Securities, use its best efforts to
register or qualify or cooperate with the selling Purchasers and each
applicable Purchaser Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Purchaser requests in
writing, to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all
other acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by a Registration
Statement.


 


(i)                                     Cooperate
with the Purchasers to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be delivered to a
transferee pursuant to a Registration Statement, which certificates shall be
free, to the extent permitted by this Agreement, of all restrictive legends,
and to enable such Registrable Securities to be in such denominations and
registered in such names as any such Purchasers may request.


 


(j)                                     Upon
the occurrence of any event described in Section 6.2(c)(vii), as
promptly as reasonably possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.


 


(k)                                  Cooperate
with any due diligence investigation undertaken by the Purchasers in connection
with the sale of Registrable Securities, including, without limitation, by
making available any documents and information; provided that the Company will
not deliver or make available to any Purchaser material, nonpublic information
unless such Purchaser specifically requests in advance to receive material,
nonpublic information in writing.


 


25





















 


(l)                                     If
Holders of a majority of the Registrable Securities being offered pursuant to a
Registration Statement select underwriters for the offering, the Company shall
enter into and perform its obligations under an underwriting agreement, in
usual and customary form, including, without limitation, by providing customary
legal opinions, comfort letters and indemnification and contribution
obligations.


 


(m)                               Comply
with all applicable rules and regulations of the Commission.


 


6.3                                 Registration
Expenses.  The Company
shall pay (or reimburse the Purchasers for) all fees and expenses incident to
the performance of or compliance with this Agreement by the Company, including
without limitation (a) all registration and filing fees and expenses,
including without limitation those related to filings with the Commission, any
Trading Market and in connection with applicable state securities or Blue Sky
laws, (b) printing expenses (including without limitation expenses of
printing certificates for Registrable Securities and of printing prospectuses
requested by the Purchasers), (c) messenger, telephone and delivery
expenses, (d) fees and disbursements of counsel for the Company, (e) fees
and expenses of all other Persons retained by the Company in connection with
the consummation of the transactions contemplated by this Agreement, and (f) all
listing fees to be paid by the Company to the Trading Market.


 


6.4                                 Indemnification.  


 


(a)                                  Indemnification
by the Company.  The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Purchaser, the officers, directors, partners, members, agents, investment
advisors and employees of each of them, each Person who controls any such
Purchaser (within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act) and the officers, directors, partners, members, and
employees of each such controlling Person, to the fullest extent permitted by
applicable law, from and against any and all Losses, as incurred, arising out
of or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they were
made) not misleading, except to the extent, but only to the extent, that (i) such
untrue statements, alleged untrue statements, omissions or alleged omissions
are based solely upon information regarding any Purchaser furnished in writing
to the Company by any Purchaser expressly for use therein, or to the extent
that such information relates to any Purchaser or any Purchaser’s proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by any Purchaser expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto or (ii) in the case of an occurrence of an event of the
type specified in Section 6.2(c)(v)-(vii), the use by such
Purchaser of an outdated or defective Prospectus after the Company has notified
such Purchaser in writing that the Prospectus is outdated or defective and
prior to the receipt by such Purchaser of the Advice contemplated in Section 6.5.  The Company shall notify the Purchasers
promptly of the institution, threat or assertion of any Proceeding of which the
Company is aware in connection with the transactions contemplated by this
Agreement.


 


26





















 


(b)                                 Indemnification
by Purchasers.  Each Purchaser shall,
severally and not jointly, indemnify and hold harmless the Company, its
directors, officers, agents and employees, each Person who controls the Company
(within the meaning of Section 15 of the Securities Act and Section 20
of the Exchange Act), and the directors, officers, agents or employees of such
controlling Persons, to the fullest extent permitted by applicable law, from
and against all Losses (as determined by a court of competent jurisdiction in a
final judgment not subject to appeal or review) arising solely out of any
untrue statement of a material fact contained in the Registration Statement,
any Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of any omission of a material fact required to
be stated therein or necessary to make the statements therein (in the case of
any Prospectus or form of prospectus or supplement thereto, in the light of the
circumstances under which they were made) not misleading to the extent, but
only to the extent, that such untrue statement or omission is contained in any
information so furnished in writing by such Purchaser to the Company
specifically for inclusion in such Registration Statement or such Prospectus or
to the extent that (i) such untrue statements or omissions are based
solely upon information regarding such Purchaser furnished in writing to the
Company by such Purchaser expressly for use therein, or to the extent that such
information relates to such Purchaser or such Purchaser’s proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Purchaser expressly for use in the Registration Statement,
such Prospectus or such form of Prospectus or in any amendment or supplement
thereto or (ii) in the case of an occurrence of an event of the type
specified in Section 6.2(c)(v)-(vii), the use by such Purchaser of
an outdated or defective Prospectus after the Company has notified such
Purchaser in writing that the Prospectus is outdated or defective and prior to
the receipt by such Purchaser of the Advice contemplated in Section 6.5.  In no event shall the liability of any
selling Purchaser hereunder be greater in amount than the dollar amount of the
net proceeds received by such Purchaser upon the sale of the Registrable
Securities giving rise to such indemnification obligation.


 


(c)                                  Conduct
of Indemnification Proceedings. If any Proceeding shall be brought or
asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified
Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment
of counsel reasonably satisfactory to the Indemnified Party and the payment of
all fees and expenses incurred in connection with defense thereof; provided,
that the failure of any Indemnified Party to give such notice shall not relieve
the Indemnifying Party of its obligations or liabilities pursuant to this
Agreement, except (and only) to the extent that it shall be finally determined
by a court of competent jurisdiction (which determination is not subject to
appeal or further review) that such failure shall have proximately and
materially adversely prejudiced the Indemnifying Party.


 


An Indemnified Party shall have the right to
employ separate counsel in any such Proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party or Parties unless:  (i) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (ii) the Indemnifying Party
shall have failed promptly to assume the defense of such Proceeding and to
employ counsel reasonably satisfactory to such Indemnified Party in any such
Proceeding; or (iii) the named parties to any such Proceeding (including
any impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and such Indemnified Party shall have been advised by counsel that a


 


27










 













 


conflict of interest is likely to exist if the same counsel were to
represent such Indemnified Party and the Indemnifying Party (in which case, if
such Indemnified Party notifies the Indemnifying Party in writing that it
elects to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party).  The Indemnifying Party shall not be liable
for any settlement of any such Proceeding effected without its written consent,
which consent shall not be unreasonably withheld or delayed.  No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party
from all liability on claims that are the subject matter of such Proceeding.


 


All fees and expenses of the Indemnified Party
(including reasonable fees and expenses to the extent incurred in connection
with investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten Trading Days of written notice thereof to the Indemnifying
Party (regardless of whether it is ultimately determined that an Indemnified
Party is not entitled to indemnification hereunder; provided, that the
Indemnifying Party may require such Indemnified Party to undertake to reimburse
all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).


 


(d)                                 Contribution.  If a claim for indemnification under Section 6.4(a) or
(b) is unavailable to an Indemnified Party (by reason of public
policy or otherwise), then each Indemnifying Party, in lieu of indemnifying
such Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.  The relative fault of such Indemnifying Party
and Indemnified Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material
fact, has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission.  The
amount paid or payable by a party as a result of any Losses shall be deemed to
include, subject to the limitations set forth in Section 6.4(c),
any reasonable attorneys’ or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have
been indemnified for such fees or expenses if the indemnification provided for
in this Section was available to such party in accordance with its terms.


 


The parties hereto agree that it would not be
just and equitable if contribution pursuant to this Section 6.4(d) were
determined by pro rata allocation or by any other method of allocation that
does not take into account the equitable considerations referred to in the
immediately preceding paragraph. 
Notwithstanding the provisions of this Section 6.4(d), no
Purchaser shall be required to contribute, in the aggregate, any amount in
excess of the amount by which the proceeds actually received by such Purchaser
from the sale of the Registrable Securities subject to the Proceeding exceeds
the amount of any damages that such Purchaser has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission


 


28





















 


or alleged omission.  No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.


 


The indemnity and contribution agreements
contained in this Section are in addition to any liability that the
Indemnifying Parties may have to the Indemnified Parties.


 


6.5                                 Dispositions.  Each Purchaser agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable
to it in connection with sales of Registrable Securities pursuant to the
Registration Statement.  Each Purchaser
further agrees that, upon receipt of a notice from the Company of the
occurrence of any event of the kind described in Sections 6.2(c)(v), (vi) or
(vii),
such Purchaser will discontinue disposition of such Registrable Securities
under the Registration Statement until such Purchaser’s receipt of the copies
of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 6.2(j), or until it is advised in
writing (the “Advice”) by the
Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus
or Registration Statement.  The Company
may provide appropriate stop orders to enforce the provisions of this
paragraph.


 


6.6                                 No
Piggyback on Registrations.  Except
as set forth in Schedule 6.6, Neither the Company nor any of its security
holders (other than the Purchasers in such capacity pursuant hereto) may
include securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.


 


6.7                                 Piggy-Back
Registrations.  If the
Company shall determine to prepare and file with the Commission a registration
statement relating to an offering for its own account or the account of others
under the Securities Act of any of its equity securities, including the
Registrable Securities, other than on Form S-4 or Form S-8 (each as
promulgated under the Securities Act) or their then equivalents relating to
equity securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with stock
option or other employee benefit plans, then the Company shall send to each
Purchaser written notice of such determination and if, within fifteen days
after receipt of such notice, any such Purchaser shall so request in writing,
the Company shall include in such registration statement, including the
Registration Statement covering the Registrable Securities hereunder, any
Underlying Shares of any Warrants prior to the Expiration Date of such Warrant,
and if such notice is received during the Effectiveness Period and there is not
an effective Registration Statement covering all of the Registrable Securities,
all or any part of such Registrable Securities.


 


ARTICLE VII


MISCELLANEOUS


 


7.1                                 Termination.  This Agreement may be terminated by the
Company or any Purchaser, by written notice to the other parties, if the
Closing has not been consummated by the


 


29





















 


third Trading
Day following the date of this Agreement; provided that no such termination
will affect the right of any party to sue for any breach by the other party (or
parties).


 


7.2                                 Fees and
Expenses.  At the
Closing, the Company shall pay to Iroquois Master Fund Ltd an aggregate of
$25,000 for their legal fees and expenses incurred in connection with the
preparation and negotiation of the Transaction Documents, of which amount
$10,000 has been previously paid by the Company to Iroquois Master Fund
Ltd.  In lieu of the foregoing remaining
payment, Iroquois Master Fund Ltd may retain such amount at the Closing.  Except as expressly set forth in the
Transaction Documents to the contrary, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement.  The Company shall pay all transfer agent
fees, stamp taxes and other taxes and duties levied in connection with the
issuance of the Securities.


 


7.3                                 Entire
Agreement.  The
Transaction Documents, together with the Exhibits and Schedules thereto,
contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or
written, with respect to such matters, which the parties acknowledge have been
merged into such documents, exhibits and schedules.  At or after the Closing, and without further
consideration, the Company will execute and deliver to the Purchasers such
further documents as may be reasonably requested in order to give practical
effect to the intention of the parties under the Transaction Documents.  Notwithstanding anything to the contrary
herein, Securities may be assigned to any Person in connection with a bona fide
margin account or other loan or financing arrangement secured by such Company
Securities.


 


7.4                                 Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (a) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section 7.4 prior to
6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading
Day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number specified in this Section on
a day that is not a Trading Day or later than 6:30 p.m. (New York City
time) on any Trading Day, (c) the Trading Day following the date of
deposit with a nationally recognized overnight courier service, or (d) upon
actual receipt by the party to whom such notice is required to be given.  The addresses and facsimile numbers for such
notices and communications are those set forth on the signature pages hereof,
or such other address or facsimile number as may be designated in writing hereafter,
in the same manner, by any such Person.


 


7.5                                 Amendments;
Waivers.  No provision
of this Agreement may be waived or amended except in a written instrument
signed, in the case of an amendment, by the Company and each of the Purchasers
or, in the case of a waiver, by the party against whom enforcement of any such
waiver is sought.  No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver
of any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.  Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that
relates exclusively to


 


30





















 


the rights of
Purchasers under ARTICLE VI and that does not directly or
indirectly affect the rights of other Purchasers may be given by Purchasers
holding at least a majority of the Registrable Securities to which such waiver
or consent relates.


 


7.6                                 Construction.  The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.  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.


 


7.7                                 Successors
and Assigns.  This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. 
The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Purchasers. Any Purchaser
may assign its rights under this Agreement to any Person to whom such Purchaser
assigns or transfers any Securities, provided such transferee agrees in writing
to be bound, with respect to the transferred Securities, by the provisions
hereof that apply to the “Purchasers.” 
Notwithstanding anything to the contrary herein, Securities may be
assigned to any Person in connection with a bona fide margin account or other
loan or financing arrangement secured by such Securities.


 


7.8                                 No
Third-Party Beneficiaries. 
This Agreement is intended for the benefit of the parties hereto and
their respective successors and permitted assigns and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person, except that
each Related Person is an intended third party beneficiary of Section 4.8
and each Indemnified Party is an intended third party beneficiary of Section 6.4
and (in each case) may enforce the provisions of such Sections directly against
the parties with obligations thereunder.


 


7.9                                 Governing
Law; Venue; Waiver Of Jury Trial.  ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.  THE COMPANY AND PURCHASERS HEREBY
IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN FOR THE
ADJUDICATION OF ANY DISPUTE BROUGHT BY THE COMPANY OR ANY PURCHASER HEREUNDER,
IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED
HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION
DOCUMENTS), AND HEREBY IRREVOCABLY WAIVE, AND AGREE NOT TO ASSERT IN ANY SUIT,
ACTION OR PROCEEDING BROUGHT BY THE COMPANY OR ANY PURCHASER, ANY CLAIM THAT IT
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, OR THAT SUCH
SUIT, ACTION OR PROCEEDING IS IMPROPER. 
EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND
CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY
MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY
(WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES
TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL


 


31





















 


CONSTITUTE
GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF.  NOTHING CONTAINED HEREIN SHALL BE DEEMED TO
LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY
LAW.  THE COMPANY AND PURCHASERS HEREBY
WAIVE ALL RIGHTS TO A TRIAL BY JURY.


 


7.10                           Survival.  The representations, warranties contained
herein and Sections 4.8 and 6.4 herein shall survive the Closing and the
delivery and/or exercise of the Securities. The other agreements and covenants
contained herein shall survive the Closing and the delivery and/or exercise of
the Securities until the expiration of the Effectiveness Period.


 


7.11                           Execution.  This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. 
In the event that any signature is delivered by facsimile transmission,
such signature shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force
and effect as if such facsimile signature page were an original thereof.


 


7.12                           Severability.  If any provision of this Agreement is held to
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.


 


7.13                           Rescission
and Withdrawal Right. 
Notwithstanding anything to the contrary contained in (and without
limiting any similar provisions of) the Transaction Documents, whenever any
Purchaser exercises a right, election, demand or option under a Transaction
Document and the Company does not timely perform its related obligations within
the periods therein provided, then such Purchaser may rescind or withdraw, in
its sole discretion from time to time upon written notice to the Company, any
relevant notice, demand or election in whole or in part without prejudice to
its future actions and rights.


 


7.14                           Replacement
of Securities.  If any
certificate or instrument evidencing any Securities is mutilated, lost, stolen
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
customary and reasonable indemnity, if requested.  The applicants for a new certificate or
instrument under such circumstances shall also pay any reasonable third-party
costs associated with the issuance of such replacement Securities.


 


7.15                           Remedies.  In addition to being entitled to exercise all
rights provided herein or granted by law, including recovery of damages, each
of the Purchasers and the Company will be entitled to specific performance
under the Transaction Documents.  The
parties agree that monetary damages may not be adequate compensation for any
loss incurred by reason of any breach of obligations described in the foregoing
sentence and hereby agrees to waive in any


 


32





















 


action for
specific performance of any such obligation the defense that a remedy at law
would be adequate.


 


7.16                           Payment Set
Aside.  To the extent
that the Company makes a payment or payments to any Purchaser hereunder or
pursuant to the Warrant or any Purchaser enforces or exercises its rights
hereunder or thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company
by a trustee, receiver or any other Person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.


 


7.17                           Adjustments
in Share Numbers and Prices. 
In the event of any stock split, subdivision, dividend or distribution
payable in shares of Common Stock (or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly shares
of Common Stock), combination or other similar recapitalization or event
occurring after the date hereof, each reference in any Transaction Document to
a number of shares or a price per share shall be amended to appropriately
account for such event.


 


7.18                           Independent
Nature of Purchasers’ Obligations and Rights.  The obligations and rights of each Purchaser
under any Transaction Document are several and not joint with the obligations
and rights of any other Purchaser, and no Purchaser shall be responsible in any
way for the performance of the obligations of any other Purchaser under any
Transaction Document.  The decision of
each Purchaser to purchase Securities pursuant to this Agreement has been made
by such Purchaser independently of any other Purchaser and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company or of the Subsidiary which
may have been made or given by any other Purchaser or by any agent or employee
of any other Purchaser, and no Purchaser or any of its agents or employees
shall have any liability to any other Purchaser (or any other Person) relating
to or arising from any such information, materials, statements or
opinions.  Nothing contained herein or in
any Transaction Document, and no action taken by any Purchaser pursuant
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Document. The Company hereby confirms that it understands and
agrees that the Purchasers are not acting as a “group” as that term is used in Section 13(d) of
the Exchange Act. Each Purchaser acknowledges that no other Purchaser has acted
as agent for such Purchaser in connection with making its investment hereunder
and that no other Purchaser will be acting as agent of such Purchaser in
connection with monitoring its investment hereunder.  Each Purchaser shall be entitled to independently
protect and enforce its rights, including without limitation the rights arising
out of this Agreement or out of the other Transaction Documents, and it shall
not be necessary for any other Purchaser to be joined as an additional party in
any proceeding for such


 


33





















 


purpose. Each
Purchaser represents that it has been represented by its own separate legal
counsel in its review and negotiations of this Agreement and the Transaction
Documents and each party represents and confirms that Proskauer Rose LLP
represents only Iroquois Master Fund Ltd in connection with this Agreement and
the other Transaction Documents.


 


[SIGNATURE PAGES TO FOLLOW]


 


34





















 


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized signatories as of the date first
indicated above.


 


 


	
   

  	
  IMAGEWARE
  SYSTEMS, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address for Notice:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  10883 Thornmint Rd.

  	
   

  
	
   

  	
  San Diego, CA 92127

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Facsimile No.: (858) 673-0291

  	
   

  
	
   

  	
  Telephone No.: (858) 673-8600

  	
   

  
	
   

  	
  Attn: [                     ]

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
  Greenberg
  Traurig, LLP

  	
   

  
	
   

  	
  Tower Center

  	
   

  
	
   

  	
  650 Town
  Center Drive

  	
   

  
	
   

  	
  Suite 1700

  	
   

  
	
   

  	
  Costa Mesa,
  CA 92626

  	
   

  
	
   

  	
  Facsimile No.: (714) 708-6501

  	
   

  
	
   

  	
  Telephone No.: (714) 708-6510

  	
   

  
	
   

  	
  Attn: Raymond A. Lee, Esq.

  	
   

  
					



 


 


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK


SIGNATURE PAGES FOR PURCHASERS FOLLOW]


 


35





















 


	
   

  	
  IROQUOIS
  MASTER FUND LTD

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Number of Units:

  	
  [                                ]

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Warrant Shares:

  	
  [                                ]

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address for Notice:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Iroquois
  Master Fund Ltd

  	
   

  
	
   

  	
  641
  Lexington Ave, 26th Floor

  	
   

  
	
   

  	
  New
  York, NY 10022

  	
   

  
	
   

  	
  Facsimile No.: (212) 207-3452

  	
   

  
	
   

  	
  Telephone No.: (212) 974-3070

  	
   

  
	
   

  	
  Attn:
  Joshua Silverman

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
  Proskauer
  Rose LLP

  	
   

  
	
   

  	
  1585 Broadway

  	
   

  
	
   

  	
  New York, New York 10036-8299

  	
   

  
	
   

  	
  Facsimile No.: (212) 969-2900

  	
   

  
	
   

  	
  Telephone No.: (212) 969-3000

  	
   

  
	
   

  	
  Attn: Adam J. Kansler, Esq.

  	
   

  
						



 





















 


	
   

  	
  [                                                            ]

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Number of Units:

  	
  [                             ]

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Warrant Shares:

  	
  [                             ]

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address for Notice:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  [

  	
  ]

  	
   

  	
   

  
	
   

  	
  [

  	
  ]

  	
   

  	
   

  
	
   

  	
  [

  	
  ]

  	
   

  	
   

  
	
   

  	
  [

  	
  ]

  	
   

  	
   

  
	
   

  	
  Facsimile No.: [

  	
  ]

  	
   

  	
   

  
	
   

  	
  Telephone No.: [

  	
  ]

  	
   

  	
   

  
	
   

  	
  Attn: [

  	
  ]

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
   

  	
   

  
								



 





















 


Exhibits:


 


A                                      Form of
Warrant


B                                        Transfer
Agent Instructions


C                                        Opinion
of Company Counsel


D                                       Plan
of Distribution


 





















 


 


EXHIBIT A


 


THESE SECURITIES AND THE SECURITIES INTO
WHICH THESE SECURITIES ARE EXERCISABLE 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 (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED UNLESS IN COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS OR BLUE SKY LAWS AND UNLESS AND UNTIL REGISTERED UNDER THE ACT,
OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION AND QUALIFICATION IS AVAILABLE
AND THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.


 


IMAGEWARE
SYSTEMS, INC.


 


WARRANT


 


	
  Warrant No. [   ]

  	
  Dated: July    , 2005

  



 


Imageware Systems, Inc., a California corporation (the “Company”), hereby certifies that, for value
received, [Name of Holder] or its registered assigns (the “Holder”), is entitled to purchase from the
Company up to a total of [          ](1) shares
of common stock (the “Common Stock”),
of the Company (each such share, a “Warrant
Share” and all such shares, the “Warrant
Shares”) at an exercise price equal to $3.45 per share (as adjusted
from time to time as provided in Section 9, the “Exercise Price”), at any time and from time
to time from and after the date hereof and through and including the date that
is five (5) years from the date of issuance hereof (the “Expiration Date”), and subject to the
following terms and conditions.  This
Warrant (this “Warrant”) is one of
a series of similar Warrants issued pursuant to that certain Securities
Purchase Agreement, dated as of the date hereof, by and among the Company and
the Purchasers identified therein (the “Purchase
Agreement”).  All such
Warrants are referred to herein, collectively, as the “Warrants.”


 


1.                                       Definitions.  In addition to the terms defined
elsewhere in this Warrant, capitalized terms that are not otherwise defined
herein have the meanings given to such terms in the Purchase Agreement.


 


2.                                       Registration of Warrant.  The
Company shall register this Warrant, upon records to be maintained by the
Company for that purpose (the “Warrant
Register”), in the name of the record Holder hereof from time to
time.  The Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof for the purpose
of any exercise hereof or any distribution to the Holder, and for all other
purposes, absent actual notice to the contrary.


 










(1) 38% of the total Shares purchased by the Purchaser.


 





















 


3.                                       Registration of Transfers.  Subject
to the requirements of Section 4.1 of the Purchase Agreement, the Company
shall register the assignment and transfer of any portion of this Warrant made
in accordance with the Securities Act in the Warrant Register, upon surrender
of this Warrant to the Company at its address specified herein, together
with  the Form of Assignment
attached hereto as Exhibit A duly completed and signed.  Upon any such registration or transfer, a new
warrant to purchase Common Stock, in substantially the form of this Warrant
(any such new warrant, a “New Warrant”),
evidencing the portion of this Warrant so transferred shall be issued to the
transferee and a New Warrant evidencing the remaining portion of this Warrant
not so transferred, if any, shall be issued to the transferring Holder.  The acceptance of the New Warrant by the
transferee thereof shall be deemed the acceptance by such transferee of all of
the rights and obligations of a holder of a Warrant.


 


4.                                       Exercise and Duration of Warrant.


 


(a)                                  This
Warrant shall be exercisable by the registered Holder at any time and from time
to time on or after the date hereof to and including the Expiration Date.  At 6:30 P.M., New York City time on the
Expiration Date, the portion of this Warrant not exercised prior thereto shall
be and become void and of no value; provided that, if the average of the
Closing Prices for the five Trading Days immediately prior to (but not
including) the Expiration Date exceeds the Exercise Price on the Expiration
Date, then this Warrant shall be deemed to have been exercised in full (to the
extent not previously exercised) on a “cashless exercise” basis at 6:30 P.M.
New York City time on the Expiration Date if a “cashless exercise” may occur at
such time pursuant to Section 10 below.


 


(b)                                 A
Holder may exercise this Warrant by delivering to the Company (i) an
exercise notice, in the form attached hereto as Exhibit B (the “Exercise Notice”), appropriately completed
and duly signed, and (ii) payment of the Exercise Price for the number of
Warrant Shares as to which this Warrant is being exercised (which may take the
form of a “cashless exercise” if so indicated in the Exercise Notice and if a
“cashless exercise” may occur at such time pursuant to this Section 10
below, and the date such items are delivered to the Company (as determined in
accordance with the notice provisions hereof) is an “Exercise Date.”  The
Holder shall not be required to deliver the original Warrant in order to effect
an exercise hereunder.  Execution and
delivery of the Exercise Notice shall have the same effect as cancellation of
the original Warrant and issuance of a New Warrant evidencing the right to
purchase the remaining number of Warrant Shares.


 


5.                                       Delivery of Warrant Shares.


 


(a)                                  Upon
exercise of this Warrant, the Company shall promptly (but in no event later
than three Trading Days after the Exercise Date) issue or cause to be issued
and cause to be delivered to or upon the written order of the Holder and in
such name or names as the Holder may designate, a certificate for the Warrant
Shares issuable upon such exercise, free of restrictive legends unless a
registration statement covering the resale of the Warrant Shares and naming the
Holder as a selling stockholder thereunder is not then effective and the
Warrant Shares are not freely transferable without volume restrictions pursuant
to Rule 144 under the Securities Act. 
The Holder, or any Person so designated by the Holder to receive Warrant
Shares shall be deemed to have become holder of record of such Warrant Shares
as of the Exercise Date.


 


2





















 


The Company
shall, upon request of the Holder, use its best efforts to deliver Warrant
Shares hereunder electronically through the Depository Trust Corporation or
another established clearing corporation performing similar functions.


 


(b)                                 This
Warrant is exercisable, either in its entirety or, from time to time, for a
portion of the number of Warrant Shares. 
Upon surrender of this Warrant following one or more partial exercises,
the Company shall issue or cause to be issued, at its expense, a New Warrant
evidencing the right to purchase the remaining number of Warrant Shares.


 


(c)                                  In
addition to any other rights available to a Holder, if the Company fails to
deliver to the Holder a certificate representing Warrant Shares by the third
Trading Day after the date on which delivery of such certificate is required by
this Warrant and if after such third Trading Day the Holder purchases (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 that the Holder
anticipated receiving from the Company (a “Buy-In”),
then the Company shall, within three Trading Days after the Holder’s request
and in the Holder’s discretion, either (i) pay cash to the Holder in an
amount equal to the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s
obligation to deliver such certificate (and to issue such Common Stock) shall
terminate, or (ii) promptly honor its obligation to deliver to the Holder
a certificate or certificates representing such Common Stock and pay cash to
the Holder in an amount equal to the excess (if any) of the Buy-In Price over
the product of (A) such number of shares of Common Stock, times (B) the
Closing Price on the date of the event giving rise to the Company’s obligation
to deliver such certificate.


 


(d)                                 The
Company’s obligations to issue and deliver Warrant Shares in accordance with
the terms hereof are absolute and unconditional, irrespective of any action or
inaction by the Holder to enforce the same, any waiver or consent with respect
to any provision hereof, the recovery of any judgment against any Person or any
action to enforce the same, or any setoff, counterclaim, recoupment, limitation
or termination, or any breach or alleged breach by the Holder or any other
Person of any obligation to the Company or any violation or alleged violation
of law by the Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of Warrant Shares.  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.


 


6.                                       Charges, Taxes and Expenses.  Issuance
and delivery of certificates for shares of Common Stock upon exercise of this
Warrant shall be made without charge to the Holder for any issue or transfer
tax, withholding tax, transfer agent fee or other incidental tax or expense in
respect of the issuance of such certificates, all of which taxes and expenses
shall be paid by the Company; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the registration of any certificates for Warrant Shares or Warrants
in a name other than that of the Holder or an Affiliate thereof.  The Holder


 


3





















 


shall be responsible for all other
tax liability that may arise as a result of holding or transferring this
Warrant or receiving Warrant Shares upon exercise hereof.


 


7.                                       Replacement of Warrant.  If this
Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation hereof,
or in lieu of and substitution for this Warrant, a New Warrant, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft
or destruction and customary and reasonable indemnity, if requested.  Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable third-party costs as the Company may
prescribe.


 


8.                                       Reservation of Warrant Shares.  The
Company covenants that it will at all times reserve and keep available out of
the aggregate of its authorized but unissued and otherwise unreserved Common
Stock, solely for the purpose of enabling it to issue Warrant Shares upon
exercise of this Warrant as provided herein, the number of Warrant Shares which
are then issuable and deliverable upon the exercise of this entire Warrant free
from preemptive rights or any other contingent purchase rights of persons other
than the Holder (after giving effect to the adjustments and restrictions of Section 9,
if any). The Company covenants that all Warrant Shares so issuable and
deliverable shall, upon issuance and the payment of the applicable Exercise
Price in accordance with the terms hereof be duly and validly authorized,
issued and fully paid and nonassessable. 
The Company will take all such action as may be necessary to assure that
such shares of Common Stock may be issued as provided herein without violation
of any applicable law or regulation, or of any requirements of any securities
exchange or automated quotation system upon which the Common Stock may be
listed.


 


9.                                       Certain Adjustments.  The
Exercise Price and number of Warrant Shares issuable upon exercise of this
Warrant are subject to adjustment from time to time as set forth in this Section 9.


 


(a)                                  Stock
Dividends and Splits.  If the
Company, at any time while this Warrant is outstanding, (i) pays a stock
dividend on its Common Stock or otherwise makes a distribution on any class of
capital stock that is payable in shares of Common Stock, (ii) subdivides
outstanding shares of Common Stock into a larger number of shares, or (iii) combines
outstanding shares of Common Stock into a smaller number of shares, then in
each such case the Exercise Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of Common Stock outstanding
immediately before such event and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such event.  Any adjustment made pursuant to clause (i) of
this paragraph shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution, and any adjustment pursuant to clauses (ii) or (iii) of
this paragraph shall become effective immediately after the effective date of
such subdivision or combination.


 


(b)                                 Pro
Rata Distributions.  Except as
provided below, if the Company, at any time while this Warrant is outstanding,
distributes to holders of Common Stock (i) evidences of its indebtedness, (ii) any
security (other than a distribution of Common Stock covered by the preceding
paragraph), (iii) rights or warrants to subscribe for or purchase any
security, or (iv) any other asset (in each case, “Distributed Property”), then in each such
case the Exercise Price


 


4





















 


in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution shall be adjusted (effective on such
record date) to equal the product of such Exercise Price times a fraction of
which the denominator shall be the average of the Closing Prices for the five
Trading Days immediately prior to (but not including) such record date and of
which the numerator shall be such average less the then fair market value of
the Distributed Property distributed in respect of  one outstanding share of Common Stock, as
determined by the Company’s independent certified public accountants that
regularly examine the financial statements of the Company (an “Appraiser”).  In such event, the Holder, after receipt of
the determination by the Appraiser, shall have the right to select an
additional appraiser (which shall be a nationally recognized accounting firm),
in which case such fair market value shall be deemed to equal the average of
the values determined by each of the Appraiser and such appraiser.  As an alternative to the foregoing adjustment
to the Exercise Price, at the request of the Holder delivered before the 90th
day after such record date, the Company will deliver to such Holder, within
five Trading Days after such request (or, if later, on the effective date of
such distribution), the Distributed Property that such Holder would have been
entitled to receive in respect of the Warrant Shares for which this Warrant
could have been exercised immediately prior to such record date.  If such Distributed Property is not delivered
to a Holder pursuant to the preceding sentence, then upon expiration of or any
exercise of the Warrant that occurs after such record date, such Holder shall
remain entitled to receive, in addition to the Warrant Shares otherwise
issuable upon such exercise (if applicable), such Distributed Property.  Notwithstanding the foregoing, no adjustment
shall be made pursuant to this Section 9(b) as a result of the
issuance pursuant to clause (D) of the definition of Excluded Stock.


 


(c)                                  Fundamental
Transactions.  If, at any time while
this Warrant is outstanding, (i) the Company effects any merger or
consolidation of the Company with or into another Person, (ii) the Company
effects any sale of all or substantially all of its assets in one or a series
of related transactions, (iii) any tender offer or exchange offer (whether
by the Company or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other
securities, cash or property, or (iv) the Company effects any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is effectively converted into or exchanged for other
securities, cash or property (other than as a result of a subdivision or
combination of shares of Common Stock covered by Section 9(a) above)
(in any such case, a “Fundamental Transaction”),
then the Holder shall have the right thereafter to receive, upon exercise of
this Warrant, the same amount and kind of securities, cash or property as it
would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction,
the holder of the number of Warrant Shares then issuable upon exercise in full
of this Warrant (the “Alternate Consideration”).  The aggregate Exercise Price for this Warrant
will not be affected by any such Fundamental Transaction, but the Company shall
apportion such aggregate Exercise Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components of
the Alternate Consideration. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any exercise of this Warrant following such Fundamental
Transaction.  In the event of a
Fundamental Transaction, the Company or the successor or purchasing Person, as
the case may be, shall execute with the Holder a written agreement providing
that:


 


5





















 


(x)                                   this
Warrant shall thereafter entitle the Holder to purchase the Alternate
Consideration in accordance with this Section 9(c),


 


(y)                                 in
the case of any such successor or purchasing Person, upon such consolidation,
merger, statutory exchange, combination, sale or conveyance such successor or
purchasing Person shall be jointly and severally liable with the Company for
the performance of all of the Company’s obligations under this Warrant and the
Purchase Agreement, and


 


(z)                                   if
registration or qualification is required under the Exchange Act or applicable
state law for the public resale by the Holder of shares of stock and other
securities so issuable upon exercise of this Warrant, such registration or
qualification shall be completed prior to such reclassification, change,
consolidation, merger, statutory exchange, combination or sale.


 


If, in the
case of any Fundamental Transaction, the Alternate Consideration includes
shares of stock, other securities, other property or assets of a Person other
than the Company or any such successor or purchasing Person, as the case may
be, in such Fundamental Transaction, then such written agreement shall also be
executed by such other Person and shall contain such additional provisions to
protect the interests of the Holder as the Board of Directors of the Company
shall reasonably consider necessary by reason of the foregoing.  At the Holder’s request, any successor to the
Company or surviving entity in such Fundamental Transaction shall issue to the
Holder a new Warrant consistent with the foregoing provisions and evidencing
the Holder’s right to purchase the Alternate Consideration for the aggregate
Exercise Price upon exercise thereof. 
The terms of any agreement pursuant to which a Fundamental Transaction
is effected shall include terms requiring any such successor or surviving
entity to comply with the provisions of this paragraph (c) and insuring
that the Warrant (or any such replacement security) will be similarly adjusted
upon any subsequent transaction analogous to a Fundamental Transaction. If any
Fundamental Transaction constitutes or results in a Change of Control, then at
the request of the Holder delivered before the 90th day after such Fundamental
Transaction, the Company (or any such successor or surviving entity) will
purchase the Warrant from the Holder for a purchase price, payable in cash
within five Trading Days after such request (or, if later, on the effective
date of the Fundamental Transaction), equal to the Black-Scholes value of the
remaining unexercised portion of this Warrant on the date of such request.


 


(d)                                 Subsequent
Equity Sales.


 


(i)                                     If,
at any time while this Warrant is outstanding, the Company or any Subsidiary
issues additional shares of Common Stock or rights, warrants, options or other
securities or debt convertible, exercisable or exchangeable for shares of
Common Stock or otherwise entitling any Person to acquire shares of Common
Stock (collectively, “Common Stock
Equivalents”) at an effective net price to the Company per share of
Common Stock (the “Effective Price”)
less than the Exercise Price (as adjusted hereunder to such date), then the
Exercise Price shall be reduced to equal the “New
Exercise Price” determined as follows:


 


6





















 


	
   

  	
   

  	
   

  	
  CS + (AC/EP)

  
	
   

  	
  NEP = EP x

  	
   

  	
  CS + AS

  



 


where


 


CS =                             Common
Stock outstanding (on a fully converted basis) prior to the dilutive issuance,


 


AC =                          Aggregate
consideration paid for the securities causing the dilutive adjustment,


 


EP =                              Exercise
Price prior to the adjustment of the Warrant being adjusted,


 


AS =                           Number
of shares of securities (on as converted basis) causing the dilutive issuance,
and


 


NEP =                     New Exercise
Price.


 


(ii)                                  If,
at any time while this Warrant is outstanding, the Company or any Subsidiary
issues Common Stock Equivalents with an Effective Price or a number of
underlying shares that floats or resets or otherwise varies or is subject to
adjustment based (directly or indirectly) on market prices of the Common Stock
(a “Floating Price Security”),
then for purposes of applying the preceding paragraph in connection with any
subsequent exercise, the New Effective Price, if any, will be determined
separately on each Exercise Date based upon the lowest Effective Price at which
any holder of such Floating Price Security is entitled to acquire Common Stock
on such Exercise Date (regardless of whether any such holder actually acquires
any shares on such date).


 


(iii)                               Notwithstanding
the foregoing, no adjustment will be made under this Section 9(d) in
respect of any Excluded Stock.


 


(e)                                  Number
of Warrant Shares.  Simultaneously
with any adjustment to the Exercise Price pursuant to paragraphs (a) or (b) of
this Section, the number of Warrant Shares that may be purchased upon exercise
of this Warrant shall be increased or decreased proportionately, so that after
such adjustment the aggregate Exercise Price payable hereunder for the
increased or decreased number of Warrant Shares shall be the same as the
aggregate Exercise Price in effect immediately prior to such adjustment.


 


(f)                                    Calculations.  All final calculations under this Section 9
shall be made to the nearest cent.  The
number of shares of Common Stock outstanding at any given time shall not
include shares owned or held by or for the account of the Company, and the disposition
of any such shares shall be considered an issue or sale of Common Stock.


 


(g)                                 Notice
of Adjustments.  Upon the occurrence
of each adjustment pursuant to this Section 9, the Company at its
expense will promptly compute such adjustment in accordance with the terms of
this Warrant and prepare a certificate setting forth such adjustment, including
a statement of the adjusted Exercise Price and adjusted number or type of
Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable),
describing the transactions giving rise to such adjustments and showing in
detail the facts upon which such


 


7





















 


adjustment is
based.  Upon written request, the Company
will promptly deliver a copy of each such certificate to the Holder and to the
Company’s Transfer Agent.


 


(h)                                 Notice
of Corporate Events.  If the Company (i) declares
a dividend or any other distribution of cash, securities or other property in
respect of its Common Stock, including without limitation any granting of
rights or warrants to subscribe for or purchase any capital stock of the
Company or any Subsidiary, (ii) authorizes or approves, enters into any
agreement contemplating or solicits stockholder approval for any Fundamental Transaction
or (iii) authorizes the voluntary dissolution, liquidation or winding up
of the affairs of the Company, then the Company shall deliver to the Holder a
notice describing the material terms and conditions of such transaction, at
least 20 calendar days prior to the applicable record or effective date on
which a Person would need to hold Common Stock in order to participate in or
vote with respect to such transaction, and the Company will take all steps
reasonably necessary in order to insure that the Holder is given the practical
opportunity to exercise this Warrant prior to such time so as to participate in
or vote with respect to such transaction; provided, however, that the failure
to deliver such notice or any defect therein shall not affect the validity of
the corporate action required to be described in such notice.


 


10.                                 Payment of Exercise Price.  The
Holder shall pay the Exercise Price in immediately available funds; provided,
however, that if following the Required Effectiveness Date, the Registration
Statement is not effective on the Exercise Date, then the Holder may satisfy
its obligation to pay the Exercise Price through a “cashless exercise,” in
which event the Company shall issue to the Holder the number of Warrant Shares
determined as follows:


 


	
   

  	
  X = Y [(A-B)/A]

  
	
  where:

  	
   

  
	
   

  	
  X = the number of Warrant Shares to be issued to the Holder.

  
	
   

  	
   

  
	
   

  	
  Y = the number of Warrant Shares with respect to which this Warrant
  is being exercised.

  
	
   

  	
   

  
	
   

  	
  A = the arithmetic average of the Closing Prices for the five Trading
  Days immediately prior to (but not including) the Exercise Date.

  
	
   

  	
   

  
	
   

  	
  B = the Exercise Price.

  



 


For purposes of Rule 144 promulgated
under the Securities Act, it is intended, understood and acknowledged that
subject to the requirements of Rule 144(d)(3)(ii), the Warrant Shares
issued in a cashless exercise transaction shall be deemed to have been acquired
by the Holder, and the holding period for the Warrant Shares shall be deemed to
have commenced, on the date this Warrant was originally issued pursuant to the
Purchase Agreement.


 


11.                                 Limitation on
Exercice.  (a) Notwithstanding anything to the contrary contained
herein, the number of shares of Common Stock that may be acquired by the Holder
upon any exercise of this Warrant (or otherwise in respect hereof) shall be
limited to the extent necessary to insure that, following such exercise (or
other issuance), the total number of shares of Common


 


8





















 


Stock then beneficially owned by
such Holder and its Affiliates and any other Persons whose beneficial ownership
of Common Stock would be aggregated with the Holder’s for purposes of Section 13(d) of
the Exchange Act, does not exceed 4.999% 
(the “Threshold Percentage”)
or 9.999% (the “Maximum Percentage”)
of the total number of issued and outstanding shares of Common Stock (including
for such purpose the shares of Common Stock issuable upon such exercise).  For such purposes, beneficial ownership shall
be determined in accordance with Section 13(d) of the Exchange Act
and the rules and regulations promulgated thereunder.  Each delivery of an Exercise Notice hereunder
will constitute a representation by the Holder that it has evaluated the
limitations set forth in this paragraph and determined that issuance of the
full number of Warrant Shares requested in such Exercise Notice is permitted
under this paragraph.  The Company’s
obligation to issue shares of Common Stock in excess of the limitations
referred to in this Section shall be suspended (and shall not terminate or
expire notwithstanding any contrary provisions hereof) until such time, if any,
as such shares of Common Stock may be issued in compliance with such
limitation.  By written notice to the
Company, the Holder shall have the right (x) at any time and from time to time
to reduce its Maximum Percentage immediately upon notice to the Company in the
event and only to the extent that Section 16 of the Exchange Act or the rules promulgated
thereunder (or any successor statute or rules) is changed to reduce the
beneficial ownership percentage threshold thereunder to a percentage less than
9.999% and (y) at any time and from time to time, to waive the provisions of
this Section insofar as they relate to the Threshold Percentage or to
increase or decrease its Threshold Percentage (but not in excess of the Maximum
Percentage) unless the Holder shall have, by written instrument delivered to
the Company, irrevocably waived its rights to so increase or decrease its
Threshold Percentage, but (i) any such waiver, increase or decrease will
not be effective until the 61st day after such notice is delivered to the
Company, and (ii) any such waiver or increase or decrease will apply only
to the Holder and not to any other holder of Warrants.


 


(b)                                 Notwithstanding
anything to the contrary contained herein, the maximum number of shares of
Common Stock that the Company may issue pursuant to the Transaction Documents
at an effective purchase price less than the Closing Price on the Trading Day
immediately preceding the Closing Date equals 19.99% of the outstanding shares
of Common Stock immediately preceding the Closing Date  (the “Issuable
Maximum”), unless the Company obtains shareholder approval in
accordance with the rules and regulations of the applicable Trading
Market.  If, at the time any Holder
requests an exercise of any of the Warrants, the Actual Minimum (excluding any
shares issued or issuable at an effective purchase price in excess of the
Closing Price on the Trading Day immediately preceding the Closing Date) exceeds
the Issuable Maximum (and if the Company has not previously obtained the
required shareholder approval), then the Company shall issue to the Holder
requesting such exercise a number of shares of Common Stock not exceeding such
Holder’s pro-rata portion of the Issuable Maximum (based on such Holder’s share
(vis-à-vis other Holders) of the aggregate purchase price paid under the
Purchase Agreement and taking into account any Warrant Shares previously issued
to such Holder).  For the purposes
hereof, “Actual Minimum” shall
mean, as of any date, the maximum aggregate number of shares of Common Stock
then issued or potentially issuable in the future pursuant to the Transaction
Documents, including any Underlying Shares issuable upon exercise in full of
all Warrants, without giving effect to (x) any limits on the number of shares
of Common Stock that may be owned by a Holder at any one time, or (y) any
additional


 


9





















 


Underlying Shares that could be issuable as a result of any future
possible adjustments made under Section 9(d).


 


12.                                 Fractional Shares.  The
Company shall not be required to issue or cause to be issued fractional Warrant
Shares on the exercise of this Warrant. 
If any fraction of a Warrant Share would, except for the provisions of
this Section 12, be issuable upon exercise of this Warrant, the number of
Warrant Shares to be issued will be rounded up to the nearest whole share or
right to purchase the nearest whole share, as the case may be.


 


13.                                 Fractional Shares.  The
Company shall not be required to issue or cause to be issued fractional Warrant
Shares on the exercise of this Warrant. 
If any fraction of a Warrant Share would, except for the provisions of
this Section 13, be issuable upon exercise of this Warrant, the number of
Warrant Shares to be issued will be rounded up to the nearest whole share or
right to purchase the nearest whole share, as the case may be.


 


14.                                 Notices.  Any and all notices or other
communications or deliveries hereunder (including without limitation any
Exercise Notice) shall be in writing and shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section prior to 6:30 p.m. (New York City time) on a Trading
Day, (ii) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section on a day that is not a Trading Day or later than
6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading
Day following the date of mailing, if sent by a nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.  Delivery
by facsimile transmission shall not be deemed delivered unless a verifiable
proof of transmission is provided.  The
address for such notices or communications shall be as set forth in the
Purchase Agreement.


 


15.                                 Warrant Agent.  The Company shall serve as
warrant agent under this Warrant.  Upon
30 days’ notice to the Holder, the Company may appoint a new warrant
agent.  Any corporation into which the
Company or any new warrant agent may be merged or any corporation resulting from
any consolidation to which the Company or any new warrant agent shall be a
party or any corporation to which the Company or any new warrant agent
transfers substantially all of its corporate trust or shareholders services
business shall be a successor warrant agent under this Warrant without any
further act.  Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder’s
last address as shown on the Warrant Register.


 


16.                                 Miscellaneous.


 


(a)                                  Subject
to the restrictions on transfer set forth on the first page hereof, this
Warrant may be assigned by the Holder. 
This Warrant may not be assigned by the Company except to a successor in
the event of a Fundamental Transaction. 
This Warrant shall be binding on and inure to the benefit of the parties
hereto and their respective successors and assigns.  Subject to the preceding sentence, nothing in
this Warrant shall be construed to give to any Person other than the Company
and the Holder any legal or equitable right, remedy or cause of


 


10





















 


action under
this Warrant.  This Warrant may be
amended only in writing signed by the Company and the Holder and their
successors and assigns.


 


(b)                                 The
Company will not, by amendment of its governing documents 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 action as may be necessary or appropriate in order to
protect the rights of the Holder against impairment.  Without limiting the generality of the
foregoing, the Company (i) will not increase the par value of any Warrant
Shares above the amount payable therefor on such exercise, (ii) will take
all such action as may be reasonably necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable Warrant
Shares on the exercise of this Warrant, respectively, and (iii) will not
close its shareholder books or records in any manner which interferes with the
timely exercise of this Warrant.


 


(c)                                  GOVERNING
LAW; VENUE; WAIVER OF JURY TRIAL. 
ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND
INTERPRETATION OF THIS WARRANT  SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF
THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW
THEREOF.  EACH PARTY AGREES THAT ALL
LEGAL PROCEEDINGS CONCERNING THE INTERPRETATIONS, ENFORCEMENT AND DEFENSE OF
THE TRANSACTIONS CONTEMPLATED BY ANY OF THE TRANSACTION DOCUMENTS (WHETHER
BROUGHT AGAINST A PARTY HERETO OR ITS RESPECTIVE AFFILIATES, DIRECTORS,
OFFICERS, SHAREHOLDERS, EMPLOYEES OR AGENTS) SHALL BE COMMENCED EXCLUSIVELY IN
THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF
MANHATTAN.  EACH PARTY HERETO HEREBY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY
TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO
THE ENFORCEMENT OF ANY OF THIS WARRANT ), AND HEREBY IRREVOCABLY WAIVES, AND
AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS
NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT,
ACTION OR PROCEEDING IS IMPROPER.  EACH
PARTY HERETO HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS
TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A
COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH
EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT
UNDER THIS WARRANT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND
SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF.  NOTHING CONTAINED HEREIN SHALL BE DEEMED TO
LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.
EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS WARRANT OR ANY OF THE TRANSACTION DOCUMENTS
OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. IF EITHER PARTY SHALL
COMMENCE AN ACTION OR PROCEEDING TO ENFORCE ANY PROVISIONS OF THIS WARRANT OR
ANY TRANSACTION DOCUMENT, THEN THE PREVAILING PARTY IN SUCH ACTION OR
PROCEEDING SHALL BE REIMBURSED BY THE OTHER PARTY FOR ITS REASONABLE ATTORNEYS


 


11





















 


FEES AND OTHER
REASONABLE COSTS AND EXPENSES INCURRED WITH THE INVESTIGATION, PREPARATION AND
PROSECUTION OF SUCH ACTION OR PROCEEDING.


 


(d)                                 The
headings herein are for convenience only, do not constitute a part of this
Warrant and shall not be deemed to limit or affect any of the provisions
hereof.


 


(e)                                  In
case any one or more of the provisions of this Warrant shall be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Warrant shall not in any way be affected or impaired
thereby and the parties will attempt in good faith to agree upon a valid and
enforceable provision which shall be a commercially reasonable substitute
therefor, and upon so agreeing, shall incorporate such substitute provision in
this Warrant.


 


[REMAINDER OF
PAGE INTENTIONALLY LEFT BLANK,

SIGNATURE PAGE FOLLOWS]


 


12





















 


IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.


 


	
   

  	
  IMAGEWARE SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						



 


13





















 


EXHIBIT A


 


FORM OF
EXERCISE NOTICE


 


(To be executed by the Holder to exercise the right to purchase shares
of Common Stock under the foregoing Warrant)


 


To: IMAGEWARE SYSTEMS, INC.


 


The undersigned is the Holder of Warrant No.               
(the “Warrant”) issued by
Imageware Systems, Inc., a California corporation (the “Company”). 
Capitalized terms used herein and not otherwise defined have the
respective meanings set forth in the Warrant.


 


(a)                                  The
Warrant is currently exercisable to purchase a total of
                            
Warrant Shares.


 


(b)                                 The
undersigned Holder hereby exercises its right to purchase
                                  
Warrant Shares pursuant to the Warrant.


 


(c)                                  The
Holder intends that payment of the Exercise Price shall be made as (check one):


 


o                                    “Cash Exercise”
under Section 10


 


o                                    “Cashless Exercise”
under Section 10 (if permitted)


 


(d)                                 If
the holder has elected a Cash Exercise, the holder shall pay the sum of
$                        
to the Company in accordance with the terms of the Warrant.


 


(e)                                  Pursuant
to this exercise, the Company shall deliver to the holder
                              
Warrant Shares in accordance with the terms of the Warrant.


 


(f)                                    Following
this exercise, the Warrant shall be exercisable to purchase a total of
                            
Warrant Shares.


 


	
   

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  	
  ,

  	
   

  	
   

  	
  Name of
  Holder:

  
	
   

  	
   

  
	
   

  	
  (Print)

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Signature
  must conform in all respects to name of holder as specified on the face of
  the Warrant)

  
										



 





















 


EXHIBIT B


 


FORM OF
ASSIGNMENT


 


[To be completed and signed only upon transfer of Warrant]


 


FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
                                                                
the right represented by the Warrant to purchase                          
shares of Common Stock and appoints
                                
attorney to transfer said right on the books of Imageware Systems, Inc.
with full power of substitution in the premises.


 


 


	
   

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  	
  ,

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Signature
  must conform in all respects to name of holder

  as specified on the face of the Warrant)

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address of
  Transferee

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  In the
  presence of: