Document:

Exhibit 10.1

SECURITIES
PURCHASE AGREEMENT

This Securities Purchase Agreement (this “Agreement”)
is dated as of March 9, 2007, among ImageWare Systems, Inc., a Delaware
corporation (the “Company”), and each purchaser identified on the
signature pages hereto (each, including its successors and assigns, 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”), and Rule 506 promulgated thereunder,
the Company desires to issue and sell to each Purchaser, and each Purchaser,
severally and not jointly, desires to purchase from the Company, 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 agree as follows:

ARTICLE I

DEFINITIONS

1.1           Definitions.  In addition to the terms defined elsewhere in
this Agreement: (a) capitalized terms that are not otherwise defined herein
have the meanings given to such terms in the Certificate of Designation (as
defined herein), and (b) the following terms have the meanings set forth in
this Section 1.1:

“Action” shall have the meaning ascribed to
such term in Section 3.1(j).

“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 under 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 except Saturday,
Sunday, any day which shall be a federal legal holiday in the United States or
any day on which banking institutions in the State of New York are authorized
or required by law or other governmental action to close.

“Certificate of Designation” means the
Certificate of Designation to be filed prior to the Closing by the Company with
the Secretary of State of Delaware, in the form of Exhibit A attached
hereto.

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

“Closing Date” means the Trading Day when all
of the Transaction Documents have been executed and delivered by the applicable
parties thereto, and all conditions precedent to (i) the Purchasers’
obligations to pay the Subscription Amount and (ii) the Company’s obligations
to deliver the Securities have been satisfied or waived.

“Closing Price” means on any particular date
(a) the last reported closing bid price per share of Common Stock on such
date on the Trading Market (as reported by Bloomberg L.P. at 4:15 p.m. (New
York City time)), or (b) if there is no such price on such date, then the
closing bid price on the Trading Market on the date nearest preceding such date
(as reported by Bloomberg L.P. at 4:15 p.m. (New York City time)), or (c) 
if the Common Stock is not then listed or quoted on the Trading Market and if
prices for the Common Stock are then reported in the “pink sheets” published by
Pink Sheets LLC (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the
Common Stock so reported, or (d) if the shares of Common Stock are not
then publicly traded the fair market value of a share of Common Stock as
determined by an appraiser selected in good faith by the Purchasers of a
majority in interest of the Shares then outstanding.

“Commission” means the Securities and Exchange
Commission.

“Common Stock” means the common stock of the
Company, par value $0.01 per share, and any other class of securities into
which such securities may hereafter be reclassified or changed into.

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

“Company Counsel” means Paul Hastings Janofsky
& Walker, LLP with offices located at 3579 Valley Centre Drive, San Diego,
California 92130.

“Conversion Price” shall have the meaning
ascribed to such term in the Certificate of Designation.

“Disclosure Schedules” shall have the meaning
ascribed to such term in Section 3.1.

“Effective Date” means the date that the
initial Registration Statement filed by the Company pursuant to the
Registration Rights Agreement is first declared effective by the Commission.

“Evaluation Date” shall have the meaning
ascribed to such term in Section 3.1(r).

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

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and regulations promulgated thereunder.

“Exempt Issuance” means the issuance of (a)
shares of Common Stock or options to employees, officers or directors of the
Company pursuant to any stock or option plan duly adopted for such purpose by a
majority of the non-employee members of the Board of Directors of the Company
or a majority of the members of a committee of non-employee directors
established, (b) securities upon the exercise or exchange of or conversion of
any Securities issued hereunder and/or other securities exercisable or
exchangeable for or convertible into shares of Common Stock issued and
outstanding on the date of this Agreement, provided that such securities have
not been amended since the date of this Agreement to increase the number of
such securities or to decrease the exercise, exchange or conversion price of
such securities, and (c) securities issued pursuant to acquisitions or
strategic transactions approved by a majority of the disinterested directors of
the Company, provided any such issuance shall only be to a Person which is,
itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities.

“GAAP” shall have the meaning ascribed to such
term in Section 3.1(h).

“Indebtedness” shall have the meaning ascribed
to such term in Section 3.1(bb).

“Intellectual Property Rights” shall have the
meaning ascribed to such term in Section 3.1(o).

“Legend Removal Date” shall have the meaning
ascribed to such term in Section 4.1(c).

“Liens” means a lien, charge, security interest,
encumbrance, right of first refusal, preemptive right or other restriction.

“Material Adverse Effect” shall have the
meaning assigned to such term in Section 3.1(b).

“Material Permits” shall have the meaning
ascribed to such term in Section 3.1(m).

“Maximum Rate” shall have the meaning ascribed
to such term in Section 5.17.

“Participation Maximum” shall have the meaning
ascribed to such term in Section 4.13.

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

“Preferred Stock” means up to 1,500 shares of
the Company’s Series D 8% Convertible Preferred Stock issued hereunder, having
the rights, preferences and privileges set forth in the Certificate of
Designation as amended, in the form of Exhibit A hereto.

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“Pre-Notice” shall have the meaning ascribed to
such term in Section 4.13.

“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.

“Purchaser Party” shall have the meaning
ascribed to such term in Section 4.11.

“Registration Rights Agreement” means the
Registration Rights Agreement, dated the date hereof, among the Company and the
Purchasers, in the form of Exhibit B attached hereto.

“Registration Statement” means a registration
statement meeting the requirements set forth in the Registration Rights
Agreement and covering the resale of the Underlying Shares by each Purchaser.

“Required Approvals” shall have the meaning
ascribed to such term in Section 3.1(e).

“Required Minimum” means, 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 or conversion in full of all Warrants
and all shares of Preferred Stock, ignoring any conversion or exercise limits
set forth therein, and assuming that any previously unconverted shares of
Preferred Stock are held until the third anniversary of the Closing Date and
all dividends are paid in shares of Common Stock until such third anniversary.

“Rule 144” means Rule 144 promulgated by the
Commission pursuant to the Securities Act, as such Rule 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.

“SEC Reports” shall have the meaning ascribed
to such term in Section 3.1(h).

“Securities” means the Preferred Stock, the
Warrants, the Warrant Shares and the Underlying Shares.

“Securities Act” means the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder.

“Shareholder Approval” means such approval as
may be required by the applicable rules and regulations of the American Stock
Exchange (or any successor entity) from the shareholders of the Company with
respect to the transactions contemplated by the Transaction Documents,
including the issuance of all of the Underlying Shares in excess of 19.99% of
the issued and outstanding Common Stock on the Closing Date.

“Short Sales” means all “short sales” as defined
in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed
to include the location and/or reservation of borrowable shares of Common
Stock).

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“Stated Value” means $1,000 per share of
Preferred Stock.

“Subscription Amount” means, as to each
Purchaser, the aggregate amount to be paid for the Preferred Stock purchased
hereunder as specified below such Purchaser’s name on the signature page of
this Agreement and next to the heading “Subscription Amount”, in United States
dollars and in immediately available funds.

“Subsequent Financing” shall have the meaning
ascribed to such term in Section 4.13.

“Subsequent Financing Notice” shall have the
meaning ascribed to such term in Section 4.13.

“Subsidiary” shall have the meaning ascribed to
such term in Section 3.1(a).

“Trading Day” means a day on which the Common
Stock is traded on a Trading Market.

“Trading Market” means the following markets or
exchanges on which the Common Stock is listed or quoted for trading on the date
in question: the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq
Global Market, the Nasdaq Global Select Market or the New York Stock Exchange.

“Transaction Documents” means this Agreement,
the Certificate of Designation, the Warrants, the Registration Rights Agreement
and any other documents or agreements executed in connection with the
transactions contemplated hereunder.

“Transfer Agent” means ComputerShare Trust
Company, N.A., with a mailing address of 250 Royall Street, Canton,
Massachusetts 02021 and a facsimile number of (617) 575-2549, and any successor
transfer agent of the Company.

“Underlying Shares” means the shares of Common
Stock issued and issuable upon conversion of the Preferred Stock, upon exercise
of the Warrants and issued and issuable in lieu of the cash payment of
dividends on the Preferred Stock in accordance with the terms of the
Certificate of Designation.

“VWAP” 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 a Trading Market, the daily volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed
or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m.
(New York City time) to 4:02 p.m. (New York City time); (b)  if the OTC
Bulletin Board is not a Trading Market, the volume weighted average price of
the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin
Board; (c) if the Common Stock is not then quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the “Pink
Sheets” published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent 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 the Holder and reasonably acceptable to the
Company.

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“Warrants” means collectively the Common Stock
purchase warrants delivered to the Purchasers at the Closing in accordance with
Section 2.2(a) hereof, which Warrants shall be exercisable immediately and have
a term of exercise equal to 5 years, in the form of Exhibit C attached
hereto.

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

ARTICLE II

PURCHASE AND SALE

2.1           Closing.  On the Closing Date, upon the terms and
subject to the conditions set forth herein, substantially concurrent with the
execution and delivery of this Agreement by the parties hereto, the Company
agrees to sell, and each Purchaser, severally and not jointly, agrees to
purchase an aggregate of, up to $1,500,000 of shares of Preferred Stock with an
aggregate Stated Value equal to such Purchaser’s Subscription Amount and
Warrants as determined pursuant to Section 2.2(a).  The aggregate number of shares of Preferred
Stock sold hereunder shall be up to 1,500. 
Each Purchaser shall deliver to the Company via wire transfer or a
certified check immediately available funds equal to its Subscription Amount
and the Company shall deliver to each Purchaser its respective shares of
Preferred Stock and Warrants as determined pursuant to Section 2.2(a) and the
other items set forth in Section 2.2 issuable at the Closing.  Upon satisfaction of the conditions set forth
in Sections 2.2 and 2.3, the Closing shall occur at the offices of Company
Counsel or such other location as the parties shall mutually agree.

2.2           Deliveries.

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

(i)            this Agreement duly executed by the Company;

(ii)           certified resolutions of the Board of Directors of the
Company authorizing the transactions contemplated by the Transaction Documents;

(iii)          a certificate evidencing a number of shares of Preferred
Stock equal to such Purchaser’s Subscription Amount divided by the Stated
Value, registered in the name of such Purchaser;

(iv)          a
Warrant registered in the name of each Purchaser to purchase the Purchaser’s
pro-rata share of up to 59, 209 shares of Common Stock, with an exercise price
equal to $2.33, subject to adjustment therein; and

(v)           the Registration Rights Agreement duly executed by the
Company.

(b)           On the Closing Date, each Purchaser shall deliver or cause
to be delivered to the Company the following:

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(i)            this Agreement duly executed by such Purchaser;

(ii)           such Purchaser’s Subscription Amount by wire transfer to the
account as specified in writing by the Company; and

(iii)          the Registration Rights Agreement duly executed by such
Purchaser.

2.3           Subsequent Closings.  At any time on or before the 15th day
following the Closing, the Company may sell up to the balance of the authorized
shares of Preferred Stock and Warrants not sold at the Closing to such persons
as may be approved by the Company (the “Additional Purchasers”).  All such sales made at any additional
closings (each an “Additional Closing”), (i) shall be made on the terms
and conditions set forth in this Agreement, (ii) the representations and
warranties of the Company set forth in Section 3.1, and the Disclosure
Schedules, shall speak as of the Closing and the Company shall have no
obligation to update any such disclosure, and (iii) the representations and
warranties of the Additional Purchasers in Section 3.2 shall speak as of such
Additional Closing.  This Agreement,
including without limitation, the Disclosure Schedules, may be amended without
the consent of the Purchasers to include any Additional Purchasers.  Any shares of Preferred Stock or Warrants
sold pursuant to this Section 2.3 shall be deemed to be “Securities” for all
purposes under this Agreement and any Additional Purchasers shall be deemed to
be “Purchasers” for all purposes under this Agreement.

2.4           Closing Conditions.

(a)           The obligations of the Company hereunder in connection with
the Closing are subject to the following conditions being met:

(i)            the accuracy in all material respects when made and on the
Closing Date of the representations and warranties of the Purchasers contained
herein;

(ii)           all obligations, covenants and agreements of the Purchasers
required to be performed at or prior to the Closing Date shall have been performed;
and

(iii)          the delivery by the Purchasers of the items set forth in
Section 2.2(b) of this Agreement.

(b)           The respective obligations of the Purchasers hereunder in
connection with the Closing are subject to the following conditions being met:

(i)            the accuracy in all material respects when made and on the
Closing Date of the representations and warranties of the Company contained
herein;

(ii)           all obligations, covenants and agreements of the Company
required to be performed at or prior to the Closing Date shall have been
performed;

(iii)          the delivery by the Company of the items set forth in
Section 2.2(a) of this Agreement;

 

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(iv)          there shall have been no Material Adverse
Effect with respect to the Company since the date hereof; and

(v)           from the date hereof to the Closing Date, trading in the
Common Stock shall not have been suspended by the Commission or the Company’s
principal Trading Market (except for any suspension of trading of limited
duration agreed to by the Company, which suspension shall be terminated prior
to the Closing), and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg L.P. shall not have been
suspended or limited, or minimum prices shall not have been established on
securities whose trades are reported by such service, or on any Trading Market,
nor shall a banking moratorium have been declared either by the United States
or New York State authorities nor shall there have occurred any material
outbreak or escalation of hostilities or other national or international
calamity of such magnitude in its effect on, or any material adverse change in,
any financial market which, in each case, in the reasonable judgment of each
Purchaser, makes it impracticable or inadvisable to purchase the Preferred
Stock at the Closing.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

3.1           Representations and Warranties of the Company.  Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the “Disclosure Schedules”), which
Disclosure Schedules shall be deemed a part hereof and to qualify any
representation or warranty otherwise made herein to the extent of such
disclosure, and except as disclosed in the Company’s SEC Reports, the Company
hereby makes the following representations and warranties to each Purchaser:

(a)           Subsidiaries.  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each subsidiary listed in the
Company’s SEC Reports (each, a “Subsidiary”) free and clear of any
Liens, and all of the issued and outstanding shares of capital stock of each
Subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights to subscribe for or purchase securities.  If the Company has no subsidiaries, all other
references to the Subsidiaries or any of them in the Transaction Documents
shall be disregarded.

(b)           Organization and Qualification.  The Company and
each of the Subsidiaries is an entity duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted.  Neither the
Company nor any Subsidiary is in violation or default of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. 
Each of the Company and the Subsidiaries is duly qualified to conduct
business and is in good standing as a foreign corporation or other entity in
each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not have or
reasonably be expected to result in (i) a material adverse 

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effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect on
the results of operations, assets, business, prospects or condition (financial
or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a
material adverse effect on the Company’s ability to perform in any material
respect on a timely basis its obligations under any Transaction Document (any
of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding
has been instituted in any such jurisdiction revoking, limiting or curtailing
or seeking to revoke, limit or curtail such power and authority or
qualification.

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

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

(e)           Filings, Consents and Approvals.  The Company is not
required to obtain any consent, waiver, authorization or order of, give any
notice to, or make any filing or registration with, any court or other federal,
state, local or other governmental authority or other 

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Person
in connection with the execution, delivery and performance by the Company of
the Transaction Documents, other than (i) filings required pursuant to Section
4.6, (ii) the filing with the Commission of the Registration Statement, (iii)
the notice and/or application(s) to each applicable Trading Market for the
issuance and sale of the Securities and the listing of the Underlying Shares
for trading thereon in the time and manner required thereby, (iv) the filing of
Form D with the Commission and such filings as are required to be made under
applicable state securities laws and (v) Shareholder Approval (collectively,
the “Required Approvals”).

(f)            Issuance of the Securities.  The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear
of all Liens imposed by the Company other than restrictions on transfer
provided for in the Transaction Documents. 
The Underlying Shares, when issued in accordance with the terms of the
Transaction Documents, will be validly issued, fully paid and nonassessable,
free and clear of all Liens imposed by the Company.  The Company has reserved from its duly
authorized capital stock a number of shares of Common Stock for issuance of the
Underlying Shares at least equal to the Required Minimum on the date hereof.

(g)           Capitalization.  As of the date hereof (and prior to the
Closing), the Company has authorized for issuance 50,000,000 shares of Common
Stock, par value $ 0.01 per share (the “Common Stock”), and 4,000,000
shares of preferred stock, par value $0.01 per share.  As of the date
hereof (and prior to the Closing), there are 13,725,765 shares of Common Stock
issued and outstanding, 239,400 shares of Series B Preferred Stock, par value
$0.01 per share (the “Series B Preferred Stock”), issued and outstanding, and
2,500 shares of Series C 8% Convertible Preferred Stock, par value $0.01 per
share (the “Series C Preferred Stock”), issued and outstanding.  As of the
date hereof (and prior to the Closing), there are issued and outstanding
warrants to purchase 5,736,149 shares of Common Stock, stock options to
purchase 1,587,132 shares of Common Stock and restricted stock grants totaling
112,764 shares of Common Stock.  The
Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other
than pursuant to the exercise of employee stock options under the Company’s
stock option plans, the issuance of shares of Common Stock to employees
pursuant to the Company’s employee stock purchase plan and pursuant to the
conversion or exercise of Common Stock Equivalents outstanding as of the date
of the most recently filed periodic report under the Exchange Act.  No Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in the transactions contemplated by the Transaction Documents.  Except as a result of the purchase and sale
of the Securities, 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 Common Stock Equivalents.  The issuance and sale of the Securities will
not obligate the Company to issue shares of Common Stock or other 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 any of such securities. All of the outstanding shares of
capital stock of the Company are validly issued, fully paid and

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nonassessable,
have been issued in compliance with all federal and state securities laws, and
none of such outstanding shares was issued in violation of any preemptive
rights or similar rights to subscribe for or purchase securities.  No further approval or authorization of any
stockholder, the Board of Directors of the Company or others is required for
the issuance and sale of the Securities. 
There are no stockholders agreements, voting agreements or other similar
agreements with respect to the Company’s capital stock to which the Company is
a party or, to the knowledge of the Company, between or among any of the
Company’s stockholders.

(h)           SEC Reports; Financial Statements.  The Company has
filed all reports, schedules, forms, statements and other documents required to
be filed by the Company under the Securities Act and 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 or regulation to file such material) (the foregoing materials, including
the exhibits thereto and documents incorporated by reference therein, being
collectively referred to herein as the “SEC Reports”) on a timely basis
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.  As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act, as applicable, 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 except that unaudited financial statements may not contain all
footnotes required by GAAP, 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.

(i)            Material Changes; Undisclosed Events, Liabilities or
Developments.  Since the date of the latest audited
financial statements included within the SEC Reports, except as specifically
disclosed in a subsequent SEC Report filed prior to the date hereof, (i) there
has been no event, occurrence or development that has had or that could
reasonably be expected to result in a Material Adverse Effect, (ii) the Company
has not incurred any liabilities (contingent or otherwise) other than (A) trade
payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected
in the Company’s financial statements pursuant to GAAP or disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) the Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company stock option
plans.  The Company does not have pending
before the Commission any request for confidential treatment of information.  Except 

 11
 

for
the issuance of the Securities contemplated by this Agreement or as set forth
on Schedule 3.1(i), no event, liability or development has occurred or
exists with respect to the Company or its Subsidiaries or their respective
business, properties, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws at the time
this representation is made that has not been publicly disclosed at least 1
Trading Day prior to the date that this representation is made.

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

(k)           Labor Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.  None of the Company’s or its
Subsidiaries’ employees is a member of a union that relates to such employee’s
relationship with the Company, and neither the Company or any of its
Subsidiaries is a party to a collective bargaining agreement, and the Company and
its Subsidiaries believe that their relationships with their employees are
good.  No executive officer, to the
knowledge of the Company, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant, and to the knowledge of the
Company, the continued employment of each such executive officer does not
subject the Company or any of its Subsidiaries to any liability with respect to
any of the foregoing matters.  The
Company and its Subsidiaries are in compliance with all U.S. federal, state,
local and foreign laws and regulations relating to employment and employment
practices, terms and conditions of employment and wages and hours, except where
the failure to be in compliance could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.

(l)            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 

 12
 

violation
has been waived), (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is or has been in violation of any statute, rule or
regulation of any governmental authority, including without limitation all foreign,
federal, state and local laws applicable to its business and all such laws that
affect the environment, except in each case as could not have or reasonably be
expected to result in a Material Adverse Effect.

(m)          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 have or reasonably be expected to result in a
Material Adverse Effect (“Material Permits”), and neither the Company
nor any Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.

(n)           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 and Liens for the
payment of federal, state or other taxes, the payment of which is neither
delinquent nor subject to penalties.  Any
real property and facilities held under lease by the Company and the
Subsidiaries are held by them under valid, subsisting and enforceable leases
with which the Company and the Subsidiaries are in compliance.

(o)           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, trade secrets, inventions,
copyrights, licenses and other intellectual property rights and similar rights
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 notice (written or otherwise) 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. 
The Company and its Subsidiaries have taken reasonable security measures
to protect the secrecy, confidentiality and value of all of their intellectual
properties, except where failure to do so could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.

(p)           Insurance.  The Company and the Subsidiaries have in
place the insurance coverage set forth on Schedule 3.1(p).  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.

 13
 

(q)           Transactions With Affiliates and Employees.  None of the
officers or directors of the Company and, to the knowledge of the Company, none
of the employees of the Company is presently a party to any transaction with the
Company or any Subsidiary (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner, in each case in excess
of $60,000 other than (i) for payment of salary or consulting fees for services
rendered, (ii) reimbursement for expenses incurred on behalf of the Company and
(iii) for other employee benefits, including stock option agreements under any
stock option plan of the Company.

(r)            Sarbanes-Oxley; Internal Accounting Controls.  The Company is in
material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which
are applicable to it as of the Closing Date. 
The Company and the Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management’s general or specific authorization, and
(iv) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences. The Company has established disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that information
required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and forms.  The Company’s certifying officers have
evaluated the effectiveness of the Company’s disclosure controls and procedures
as of the end of the period covered by the Company’s most recently filed periodic
report under the Exchange Act (such date, the “Evaluation Date”).  The Company presented in its most recently
filed periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures
based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no
changes in the Company’s internal control over financial reporting (as such
term is defined in the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.

(s)           Certain Fees.  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 the Transaction
Documents.  The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made against
the Company by or on behalf of other Persons for fees of a type contemplated in
this Section that may be due in connection with the transactions contemplated
by the Transaction Documents.

 14
 

(t)            Private Placement.
Assuming the accuracy of the Purchasers representations and warranties set
forth in Section 3.2, no registration under the Securities Act is required for
the offer and sale of the Securities by the Company to the Purchasers as
contemplated hereby. The issuance and sale of the Securities hereunder does not
contravene the rules and regulations of the Trading Market.

(u)           Investment Company.
The Company is not, and is not an Affiliate of, and immediately after receipt
of payment for the Securities, will not be or be an Affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as
amended.  The Company shall conduct its
business in a manner so that it will not become subject to the Investment
Company Act of 1940, as amended.

(v)           Registration Rights.  Other than each of the Purchasers, no Person
has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.

(w)          Listing and Maintenance Requirements.  The Company’s
Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange
Act, and the Company has taken no action designed to, or which to its knowledge
is likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act nor has the Company received any notification that
the Commission is contemplating terminating such registration.  The Company has not, in the 12 months
preceding the date hereof, received notice 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.

(x)            Application of Takeover Protections.  The Company and its
Board of Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar anti-takeover
provision under the Company’s Certificate of Incorporation (or similar charter
documents) or the laws of its state of incorporation that is or could become
applicable to 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.

(y)           Disclosure.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Purchasers or their agents or counsel with any information
that it believes constitutes or might constitute material, nonpublic
information.  The Company understands and
confirms that the Purchasers will rely on the foregoing representation in
effecting transactions in securities of the Company.  All disclosure furnished by or on behalf of
the Company to the Purchasers regarding the Company, its business and the
transactions contemplated hereby, including the Disclosure Schedules to this Agreement,
is true and correct and does not contain any untrue statement of a material
fact or omit to state 

 15
 

any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading.   The press releases disseminated by the
Company during the twelve months preceding the date of this Agreement taken as
a whole do not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements, in light of the circumstances under which they were made and when
made, not misleading.  The Company
acknowledges and agrees that 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 hereof.

(z)            No Integrated Offering.
Assuming the accuracy of the Purchasers’ representations and warranties set
forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any
Person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the Securities
Act or any applicable shareholder approval provision of any Trading Market on
which any of the securities of the Company are listed or designated.  

(aa)         Tax Status.  Except for matters that would not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect, the Company and each Subsidiary has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid or accrued all taxes shown as due thereon, and the Company has no
knowledge of a tax deficiency which has been asserted or threatened against the
Company or any Subsidiary.

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

(cc)         Foreign Corrupt Practices.  Neither the Company, nor to the knowledge of
the Company, any agent or other person acting on behalf of the Company, has (i)
directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is  in
violation of law, or (iv) violated in any material respect any provision of the
Foreign Corrupt Practices Act of 1977, as amended.

(dd)         Accountants.  The Company’s accounting firm is Stonefield
Josephson, LLP.  To the knowledge of the
Company, such accounting firm (i) is a registered public accounting firm as
required by the Exchange Act and (ii) shall express its opinion with respect to
the financial statements to be included in the Company’s Annual Report on Form
10-KSB for the year ending December 31, 2006.

 

 16

(ee)         Seniority.  As of the Closing Date, no Indebtedness or
other claim against the Company is senior to the Preferred Stock in right of
payment, whether with respect to interest or upon liquidation or dissolution,
or otherwise, other than indebtedness secured by purchase money security
interests (which is senior only as to underlying assets covered thereby),
capital lease obligations (which is senior only as to the property covered
thereby), the Series B Preferred Stock and the Series C Preferred Stock (which
are senior only as to dividend and liquidation preferences) and those certain
Secured Promissory Notes dated as of March 17, 2006 with an aggregate
outstanding principal balance as of March 1, 2007 of $1,196,259.

(ff)           No Disagreements with Accountants and Lawyers.  There are no
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise, between the Company and the accountants and lawyers formerly
or presently employed by the Company and the Company is current with respect to
any fees owed to its accountants and lawyers.

(gg)         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 Transaction Documents
and the transactions contemplated thereby. 
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 the Transaction Documents and the transactions contemplated thereby
and any advice given by any Purchaser or any of their respective
representatives or agents in connection with the Transaction Documents and the
transactions contemplated thereby 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 and the other Transaction Documents has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.

(hh)         Acknowledgement Regarding Purchasers’ Trading Activity.  Anything in this
Agreement or elsewhere herein to the contrary notwithstanding (except for
Sections 3.2(f) and 4.16 hereof), it is understood and acknowledged by the
Company (i) that past or future open market or other transactions by any
Purchaser, including Short Sales, and specifically including, without
limitation, Short Sales or “derivative” transactions, before or after the
closing of this or future private placement transactions, may negatively impact
the market price of the Company’s publicly-traded securities; and (iii) that
any Purchaser, and counter-parties in “derivative” transactions to which any
such Purchaser is a party, directly or indirectly, presently may have a “short”
position in the Common Stock.  The
Company further understands and acknowledges that (a) one or more Purchasers
may engage in hedging activities at various times during the period that the
Securities are outstanding, including, without limitation, during the periods
that the value of the Underlying Shares deliverable with respect to Securities
are being determined and (b) such hedging activities (if any) could reduce the
value of the existing stockholders’ equity interests in the Company at and
after the time that the hedging activities are being conducted.

(ii)           Regulation M Compliance. 
The Company has not, and to its knowledge no one acting on its behalf has, (i)
taken, directly or indirectly, any action designed to cause or to result in the
stabilization or manipulation of the price of any security of the Company to
facilitate

 17
 

the
sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid
any compensation for soliciting purchases of, any of the securities of the
Company, or (iii) paid or agreed to pay to any Person any compensation for
soliciting another to purchase any other securities of the Company, other than,
in the case of clauses (ii) and (iii), compensation paid to the Company’s placement
agent in connection with the placement of the Securities.

(jj)           Form S-3 Eligibility.  The Company is eligible to register the
resale of the Underlying Shares for resale by the Purchaser on Form S-3
promulgated under the Securities Act.

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

(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 full right, 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 execution, delivery and performance by such Purchaser of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate or similar action on the part of such Purchaser.  Each Transaction Document to which it is a
party has been duly executed by such Purchaser, and when delivered by such
Purchaser in accordance with the terms hereof, will constitute the valid and
legally binding obligation of such Purchaser, enforceable against it in
accordance with its terms, except (i) as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium
and other laws of general application affecting enforcement of creditors’
rights generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and (iii)
insofar as indemnification and contribution provisions may be limited by
applicable law.

(b)           Own Account.  Such Purchaser understands that the
Securities are “restricted securities” and have not been registered under the
Securities Act or any applicable state securities law and is acquiring the
Securities as principal for its own account and not with a view to or for
distributing or reselling such Securities or any part thereof in violation of
the Securities Act or any applicable state securities law, has no present
intention of distributing any of such Securities in violation of the Securities
Act or any applicable state securities law and has no direct or indirect
arrangement or understandings with any other persons to distribute or regarding
the distribution of such Securities (this representation and warranty not
limiting such Purchaser’s right to sell the Securities pursuant to the
Registration Statement or otherwise in compliance with applicable federal and
state securities laws) in violation of the Securities Act or any applicable
state securities law.  Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business.

(c)           Purchaser Status.  At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
converts any shares of Preferred Stock or exercises any Warrants, it will be
either: (i) an “accredited investor” as defined in Rule

 18
 

501(a)(1),
(a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified
institutional buyer” as defined in Rule 144A(a) under the Securities Act.  Such Purchaser is not 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 or
similar media or broadcast over television or radio or presented at any seminar
or any other general solicitation or general advertisement.

(f)            Short Sales and Confidentiality Prior To The Date Hereof.  Other than the
transaction contemplated hereunder, such Purchaser has not, nor has any Person
acting on behalf of or pursuant to any understanding with such Purchaser,
directly or indirectly executed any transaction, including Short Sales, in
the securities of the Company during the period commencing from the time that
such Purchaser first received a term sheet (written or oral) from the Company
or any other Person setting forth the material terms of the transactions
contemplated hereunder until the date hereof (“Discussion Time”).  Notwithstanding the foregoing, in the case of
a Purchaser that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Purchaser’s assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Purchaser’s assets, the
representation set forth above shall only apply with respect to the portion of
assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement.  Other than to other Persons party to this
Agreement, such Purchaser has maintained the confidentiality of all disclosures
made to it in connection with this transaction (including the existence and
terms of this transaction).

ARTICLE IV

OTHER AGREEMENTS OF THE PARTIES

4.1           Transfer Restrictions.

(a)           The Securities may only be disposed of in compliance with
state and federal securities laws.  In
connection with any transfer of Securities other than pursuant to an effective
registration statement or Rule 144, to the Company or to an Affiliate of a
Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the
Company may require the transferor thereof to provide to the Company an opinion
of counsel selected by the transferor and reasonably acceptable to the Company,
the form and substance of which opinion shall be reasonably satisfactory to the
Company, to the effect that such transfer does not require

 19
 

registration
of such transferred Securities under the Securities Act.  As a condition of transfer, any such
transferee shall agree in writing to be bound by the terms of this Agreement
and shall have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement.

(b)           The Purchasers agree to the imprinting, so long as is
required by this Section 4.1, of a legend on any of the Securities (as
applicable) in the following form:

[NEITHER] THIS SECURITY
[NOR THE SECURITIES INTO WHICH THIS SECURITY IS [EXERCISABLE] [CONVERTIBLE]]
HAS BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION]
OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
OR OTHER LOAN SECURED BY SUCH SECURITIES.

The Company acknowledges and agrees that a Purchaser
may from time to time pledge pursuant to a bona fide margin agreement with a
registered broker-dealer or grant a security interest in some or all of the
Securities to a financial institution that is an “accredited investor” as
defined in Rule 501(a) under the Securities Act and who agrees to be bound by
the provisions of this Agreement and the Registration Rights Agreement and, if
required under the terms of such arrangement, such Purchaser may transfer
pledged or secured Securities to the pledgees or secured parties.  Such a pledge or transfer would not be
subject to approval of the Company and no legal opinion of legal counsel 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, if the Securities are subject to registration pursuant to the
Registration Rights Agreement, the preparation and filing of any required
prospectus supplement under Rule 424(b)(3) under the Securities Act or other
applicable provision of the Securities Act to appropriately amend the list of
Selling Stockholders thereunder.

(c)           Certificates evidencing the Underlying Shares shall not
contain any legend (including the legend set forth in Section 4.1(b) hereof):
(i) while a registration statement (including the Registration Statement)
covering the resale of such security is effective under the Securities Act, or
(ii) following any sale of such Underlying Shares pursuant to Rule 144, or
(iii)

 20
 

if
such Underlying Shares 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 a legal opinion
to the Transfer Agent promptly after the Effective Date if required by the
Transfer Agent to effect the removal of the legend hereunder. If all or any
shares of Preferred Stock or any portion of a Warrant is converted or exercised
(as applicable) at a time when there is an effective registration statement to
cover the resale of the Underlying Shares, or if such Underlying Shares may be
sold under Rule 144(k) or if such legend is not otherwise required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission) then
such Underlying Shares shall be issued free of all legends.  The Company agrees that following the
Effective Date or at such time as such legend is no longer required under this
Section 4.1(c), it will, no later than three Trading Days following the
delivery by a Purchaser to the Company or the Transfer Agent of a certificate
representing Underlying Shares, as applicable, issued with a restrictive legend
(such third Trading Day, the “Legend Removal Date”), deliver or cause to
be delivered to such Purchaser a certificate representing such shares 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. 
Certificates for Underlying Shares subject to legend removal hereunder
shall be transmitted by the Transfer Agent to the Purchasers by crediting the
account of the Purchaser’s prime broker with the Depository Trust Company
System.

(d)           [RESERVED]

(e)           Each Purchaser, severally and not jointly with the other
Purchasers, agrees that the removal of the restrictive legend from certificates
representing Securities as set forth in this Section 4.1 is predicated upon the
Company’s reliance that the Purchaser will sell any Securities pursuant to
either the registration requirements of the Securities Act, including any
applicable prospectus delivery requirements, or an exemption therefrom, and
that if Securities are sold pursuant to a Registration Statement, they will be
sold in compliance with the plan of distribution set forth therein.

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

4.3           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.  As long as any Purchaser owns Securities, if
the Company is not

 21
 

required
to file reports pursuant to the Exchange Act, it will prepare and furnish to
the Purchasers and make publicly available in accordance with Rule 144(c) 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 the extent required from time to time to enable such Person to sell
such Securities without registration under the Securities Act within the
requirements of the exemption provided by Rule 144.

4.4           Integration.  The Company shall not 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.

4.5           Conversion and Exercise Procedures.  The form of Notice
of Exercise included in the Warrants and the form of Notice of Conversion
included in the Certificate of Designation set forth the totality of the
procedures required of the Purchasers in order to exercise the Warrants or
convert the Preferred Stock.  No
additional legal opinion or other information or instructions shall be required
of the Purchasers to exercise their Warrants or convert their Preferred Stock.  The Company shall honor exercises of the
Warrants and conversions of the Preferred Stock and shall deliver Underlying
Shares in accordance with the terms, conditions and time periods set forth in
the Transaction Documents.

4.6           Securities Laws Disclosure;
Publicity.  The Company shall
within the time period required by the Exchange Act, issue a Current Report on
Form 8-K, disclosing the material terms of the transactions contemplated hereby
and filing the Transaction Documents as exhibits thereto.  The Company and each Purchaser shall consult
with each other in issuing any other press releases with respect to the
transactions contemplated hereby, and neither the Company nor any Purchaser
shall issue any such press release or otherwise make any such public statement
without the prior consent of the Company, with respect to any press release of
any Purchaser, or without the prior consent of each Purchaser, with respect to
any press release of the Company, which consent shall not unreasonably be
withheld or delayed, except if such disclosure is required by law, in which
case the disclosing party shall promptly provide the other party with prior
notice of such public statement or communication.  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 (i)
as required by federal securities law in connection with (A) any registration
statement contemplated by the Registration Rights Agreement and (B) the filing
of final Transaction Documents (including signature pages thereto) with the
Commission and (ii) to the extent such disclosure is required by law or Trading
Market regulations, in which case the Company shall provide the Purchasers with
prior notice of such disclosure permitted under this subclause (ii).

4.7           Shareholder Rights Plan.  No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any Purchaser
is an “Acquiring Person”

 22
 

under
any control share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or similar anti-takeover plan or
arrangement in effect or hereafter adopted by the Company, or that any
Purchaser could be deemed to trigger the provisions of any such plan or
arrangement, solely by virtue of receiving Securities under the Transaction
Documents.

4.8           Non-Public Information.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it nor any other Person acting on its
behalf will provide any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information.  The Company understands and confirms that each
Purchaser shall be relying on the foregoing representations in effecting
transactions in securities of the Company.

4.9           Use of Proceeds.  Except as set forth on Schedule 4.9
attached hereto, the Company shall use the net proceeds from the sale of the
Securities hereunder for (i) repayment of up to $1,196,259 of indebtedness of
the Company, and any accrued interest thereon, and (ii) working capital
purposes, and shall not use such proceeds for the satisfaction of any other
portion of the Company’s debt (other than payment of trade payables in the
ordinary course of the Company’s business and prior practices), or to redeem
any Common Stock, or Common Stock Equivalents or to settle any outstanding
litigation.

4.10         [RESERVED]

4.11         Indemnification of Purchasers.   Subject to the provisions of this Section
4.11, the Company will indemnify and hold each Purchaser and its directors,
officers, shareholders, members, partners, employees and agents (and any other
Persons with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling persons (each, a “Purchaser
Party”) harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys’ fees and costs of
investigation that any such Purchaser Party may suffer or incur as a result of
or relating to (a) any breach of any of the representations, warranties,
covenants or agreements made by the Company in this Agreement or in the other
Transaction Documents or (b) any action instituted against a Purchaser, or any
of them or their respective Affiliates, by any stockholder of the Company who
is not an Affiliate of such Purchaser, with respect to any of the transactions
contemplated by the Transaction Documents (unless such action is based upon a
breach of such Purchaser’s representations, warranties or covenants under the
Transaction Documents or any agreements or understandings such Purchaser may
have with any such stockholder or any violations by the Purchaser of state or
federal securities laws or any conduct by such Purchaser which constitutes fraud,
gross negligence, willful misconduct or malfeasance).  If any action shall be brought against any

 23
 

Purchaser
Party in respect of which indemnity may be sought pursuant to this Agreement,
such Purchaser Party shall promptly notify the Company in writing, and the
Company shall have the right to assume the defense thereof with counsel of its
own choosing reasonably acceptable to the Purchaser Party.  Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof has
been specifically authorized by the Company in writing, (ii) the Company has
failed after a reasonable period of time to assume such defense and to employ
counsel or (iii) in such action there is, in the reasonable opinion of such
separate counsel, a material conflict on any material issue between the
position of the Company and the position of such Purchaser Party, in which case
the Company shall be responsible for the reasonable fees and expenses of no
more than one such separate counsel.  The
Company will not be liable to any Purchaser Party under this Agreement (i) for
any settlement by a Purchaser Party effected without the Company’s prior
written consent, which shall not be unreasonably withheld or delayed; or (ii)
to the extent, but only to the extent that a loss, claim, damage or liability
is attributable to any Purchaser Party’s breach of any of the representations,
warranties, covenants or agreements made by such Purchaser Party in this
Agreement or in the other Transaction Documents.

4.12         Reservation and Listing of Securities.

(a)           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.

(b)           The Company shall, if applicable: (i) in the time and manner
required by the principal Trading Market, prepare and file with such Trading
Market an additional shares listing application covering a number of shares of
Common Stock at least equal to the Required Minimum on the date of such
application, (ii) take all steps necessary to cause such shares of Common Stock
to be approved for listing on such Trading Market as soon as possible
thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv)
maintain the listing of such Common Stock on any date at least equal to the
Required Minimum on such date on such Trading Market or another Trading Market.

4.13         [RESERVED]

4.14         [RESERVED]

4.15         Equal Treatment of Purchasers.  No consideration shall be offered or paid to
any Person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration is also offered
to all of the parties to the Transaction Documents.  For clarification purposes, this provision
constitutes a separate right granted to each Purchaser by the Company and
negotiated separately by each Purchaser, and is intended for the Company to
treat the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase, disposition
or voting of Securities or otherwise.

 

 24

 

4.16         Short Sales and Confidentiality After The Date Hereof. Each Purchaser severally and not jointly with the other
Purchasers covenants that neither it nor any Affiliate acting on its behalf or
pursuant to any understanding with it will execute any Short Sales during the
period commencing at the Discussion Time and ending at the time that the
transactions contemplated by this Agreement are first publicly announced as
described in Section 4.6.  Each
Purchaser, severally and not jointly with the other Purchasers, covenants that
until such time as the transactions contemplated by this Agreement are publicly
disclosed by the Company as described in Section 4.6, such Purchaser will
maintain the confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction).  Each Purchaser understands and acknowledges,
severally and not jointly with any other Purchaser, that the Commission
currently takes the position that coverage of short sales of shares of the
Common Stock “against the box” prior to the Effective Date of the Registration
Statement with the Securities is a violation of Section 5 of the Securities
Act, as set forth in Item 65, Section A, of the Manual of Publicly Available
Telephone Interpretations, dated July 1997, compiled by the Office of Chief
Counsel, Division of Corporation Finance. 
Notwithstanding the foregoing, no Purchaser makes any representation,
warranty or covenant hereby that it will not engage in Short Sales in the
securities of the Company after the time that the transactions contemplated by
this Agreement are first publicly announced as described in Section 4.6.  Notwithstanding the foregoing, in the case of
a Purchaser that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Purchaser’s assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Purchaser’s assets, the
covenant set forth above shall only apply with respect to the portion of assets
managed by the portfolio manager that made the investment decision to purchase
the Securities covered by this Agreement.

4.17         Form D; Blue Sky Filings.  The Company agrees to timely file a Form D
with respect to the Securities as required under Regulation D and to provide a
copy thereof, promptly upon request of any Purchaser. The Company shall take
such action as the Company shall reasonably determine is necessary in order to
obtain an exemption for, or to qualify the Securities for, sale to the
Purchasers at the Closing under applicable securities or “Blue Sky” laws of the
states of the United States, and shall provide evidence of such actions
promptly upon request of any Purchaser.

ARTICLE V

MISCELLANEOUS

5.1           Termination. 
This Agreement may be terminated by any Purchaser, as to such Purchaser’s
obligations hereunder only and without any effect whatsoever on the obligations
between the Company and the other Purchasers, by written notice to the other
parties, if the Closing has not been consummated on or before March 30, 2007; provided,
however, that no such termination will affect the right of any party to
sue for any breach by the other party (or parties).  The Agreement may be terminated by the
Company at any time and with respect to one or more Purchasers at any time and
without any obligation to any Purchaser at any time prior to the Closing Date.

 25
 

5.2           Fees and Expenses.  The Company shall deliver to each Purchaser,
prior to the Closing, a completed and executed copy of the Closing Statement,
attached hereto as Annex A. 
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 delivery of any Securities to the
Purchasers.

5.3           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.

5.4           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 set forth on the signature pages attached hereto prior to
5:30 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 set forth on the signature pages attached
hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York
City time) on any Trading Day, (c) the 2nd Trading Day following
the date of mailing, if sent by U.S. nationally recognized overnight courier
service, or (d) upon actual receipt by the party to whom such notice is
required to be given.  The address for
such notices and communications shall be as set forth on the signature pages
attached hereto.

5.5           Amendments; Waivers.  No provision of this Agreement may be waived,
modified, supplemented or amended except in a written instrument signed, in the
case of an amendment, by the Company and each Purchaser or, in the case of a
waiver, by the party against whom enforcement of any such waived provision 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 any party to exercise any right hereunder in
any manner impair the exercise of any such right.

5.6           Headings.  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.

5.7           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 each Purchaser (other than by merger).  Any Purchaser may assign any or all of 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 of the
Transaction Documents that apply to the “Purchasers”.

 26
 

5.8           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 as otherwise set forth in Section 4.11.

5.9           Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of the Transaction Documents shall be
governed by and construed and enforced in accordance with the internal laws of
the State of California, 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 this Agreement and any other 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 San
Diego.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in the City of San Diego 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 the Transaction
Documents), 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 or is an  inconvenient venue for
such proceeding.  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 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 other manner permitted by law. 
The parties hereby waive all rights to a trial by jury.  If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its reasonable attorneys’ fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.

5.10         Survival.  The representations and warranties contained
herein shall survive the Closing and the delivery of Securities for the
applicable statue of limitations.

5.11         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
or by e-mail delivery of a “.pdf” format data file, 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 or “.pdf”
signature page were an original thereof.

5.12         Severability.  If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full 

 27
 

force
and effect and shall in no way be affected, impaired or invalidated, and the
parties hereto shall use their commercially reasonable efforts to find and
employ an alternative means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or restriction.
It is hereby stipulated and declared to be the intention of the parties that
they would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.

5.13         Rescission and Withdrawal Right.  Notwithstanding
anything to the contrary contained in (and without limiting any similar
provisions of) any of the other 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; provided, however, in the case of a
rescission of a conversion of the Preferred Stock or exercise of a Warrant, the
Purchaser shall be required to return any shares of Common Stock subject to any
such rescinded conversion or exercise notice.

5.14         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 (in the case of mutilation), 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.  The applicant for a new certificate or
instrument under such circumstances shall also pay any reasonable third-party
costs (including customary indemnity) associated with the issuance of such
replacement Securities.

5.15         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 contained in the
Transaction Documents and hereby agrees to waive and not to assert in any
action for specific performance of any such obligation the defense that a
remedy at law would be adequate.

5.16         Usury.  To the extent it may lawfully do so, the
Company hereby agrees not to insist upon or plead or in any manner whatsoever
claim, and will resist any and all efforts to be compelled to take the benefit
or advantage of, usury laws wherever enacted, now or at any time hereafter in
force, in connection with any claim, action or proceeding that may be brought
by any Purchaser in order to enforce any right or remedy under any Transaction
Document.  Notwithstanding any provision
to the contrary contained in any Transaction Document, it is expressly agreed
and provided that the total liability of the Company under the Transaction
Documents for payments in the nature of interest shall not exceed the maximum
lawful rate authorized under applicable law (the “Maximum Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the 

 28
 

Transaction
Documents exceed such Maximum Rate.  It
is agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law.

5.17         Independent Nature of Purchasers’ Obligations and Rights.  The obligations of
each Purchaser under any Transaction Document are several and not joint with
the obligations of any other Purchaser, and no Purchaser shall be responsible
in any way for the performance or non-performance of the obligations of any
other Purchaser under any Transaction Document. 
Nothing contained herein or in any other 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 Documents.  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 purpose. 
Each Purchaser has been represented by, or had the opportunity to
consult with, its own separate legal counsel in their review and negotiation of
the Transaction Documents.  The Company
has elected to provide all Purchasers with the same terms and Transaction
Documents for the convenience of the Company and not because it was required or
requested to do so by the Purchasers.

5.18         Liquidated Damages.  The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.

5.19         Construction.
The parties agree that each of them and/or their respective counsel has
reviewed and had an opportunity to revise the Transaction Documents and, therefore,
the normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of the Transaction Documents or any amendments hereto.

[SIGNATURE PAGES FOLLOWS]

 29
 

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

 

	
  IMAGEWARE SYSTEMS, INC.

  	
   

  	
  Address for Notice:

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  10883 Thornmint Road

  
	
   

  	
  Name:

  	
   

  	
  San Diego, CA 92127

  
	
   

  	
  Title:

  	
   

  	
  Facsimile:
                  

  
	
   

  	
   

  	
  Attention:
                  

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  With a copy to
  (which shall not constitute notice):

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Carl R. Sanchez,
  Esq.

  	
   

  	
   

  
	
  Paul, Hastings,
  Janofsky & Walker LLP

  	
   

  	
   

  
	
  3579 Valley
  Centre Drive

  	
   

  	
   

  
	
  San Diego, CA
  92130

  	
   

  	
   

  
	
  Telephone: (858)
  720-2500

  	
   

  	
   

  

 

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR
PURCHASER FOLLOWS]

 

 30

 

[PURCHASER
SIGNATURE PAGES TO IW SECURITIES PURCHASE AGREEMENT]

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

	
  Name
  of Purchaser:

  	
   

  	
   

  
	
   

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   

  	
   

  
	
   

  	
   

  
	
  Name of Authorized Signatory: 

  	
   

  	
   

  
	
   

  	
   

  
	
  Title of Authorized Signatory: 

  	
   

  	
   

  
	
   

  	
   

  
	
  Email Address of Authorized Signatory: 

  	
   

  
	
   

  	
   

  
	
  Fax Number of Authorized Signatory: 

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Address for Notice of Purchaser:

  
	
   

  
	
   

  
	
   

  
	
  Address for Delivery of Securities for Purchaser (if
  not same as above):

  
	
   

  
	
   

  
	
   

  
	
  Subscription Amount: $

  	
   

  	
   

  
	
   

  	
   

  
	
  Shares of Preferred Stock: 

  	
   

  	
   

  
	
   

  	
   

  
	
  Warrant Shares: 

  	
   

  	
   

  
																

 

EIN Number:

[SIGNATURE PAGES
CONTINUE]

Annex A

CLOSING
STATEMENT

Pursuant to the
attached Securities Purchase Agreement, dated as of the date hereto, the
purchasers shall purchase up to $1,500,000 of Preferred Stock and Warrants from
ImageWare Systems, Inc., a Delaware corporation (the “Company”).  All funds will be wired directly to the
Company.  All funds will be disbursed in
accordance with this Closing Statement.

Disbursement
Date:           March    , 2007

 

	
  I.

  	
   

  	
  PURCHASE PRICE

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Gross Proceeds to be Received in Trust

  	
  $

  
	
   

  	
   

  	
   

  
	
  II.

  	
   

  	
  DISBURSEMENTS

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total Amount Disbursed:

  	
   

  	
  $

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
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  To:Exhibit
10.2

REGISTRATION RIGHTS AGREEMENT

This Registration Rights
Agreement (this “Agreement”) is made and entered into as of March 9,
2007 among ImageWare Systems, Inc., a Delaware corporation (the “Company”),
and the several purchasers signatory hereto (each such purchaser, a “Purchaser”
and collectively, the “Purchasers”).

This Agreement is made
pursuant to the Securities Purchase Agreement, dated as of the date hereof,
between the Company and each Purchaser (the “Purchase Agreement”).

The Company and each Purchaser hereby agrees as
follows:

1.             Definitions.  Capitalized terms used and not otherwise
defined herein that are defined in the Purchase Agreement shall have the
meanings given such terms in the Purchase Agreement.  As used in this Agreement, the following
terms shall have the following meanings:

“Advice” shall have the meaning set forth in Section 6(d).

“Effectiveness Date” means, with respect to the initial
Registration Statement required to be filed hereunder, the 90th calendar day following the date hereof (the
135th calendar day in the case of a review by the Commission of the initial
Registration Statement) and, with respect to any additional Registration
Statements which may be required pursuant to Section 3(c), the 90th calendar day following the date on which the
Company first knows, or reasonably should have known, that such additional
Registration Statement is required hereunder; provided, however,
that in the event the Company is notified by the Commission that one of the
above Registration Statements will not be reviewed or is no longer subject to
further review and comments, the Effectiveness Date as to such Registration
Statement shall be the fifth Trading Day following the date on which the
Company is so notified if such date precedes the dates required above.

“Effectiveness Period” shall have the meaning set forth in
Section 2(a).

“Event” shall have the meaning set forth in Section 2(b).

“Event Date” shall have the meaning set forth in Section 2(b).

“Filing Date” means, with respect to the initial Registration
Statement required hereunder, the 45th calendar day following the date hereof and,
with respect to any additional Registration Statements which may be required
pursuant to Section 3(c), the 30th calendar day following the date on which the
Company first knows, or reasonably should have known that such additional
Registration Statement is required hereunder.

 1
 

“Holder” or “Holders” means the holder or holders, as the
case may be, from time to time of Registrable Securities.

“Indemnified Party” shall have the meaning set forth in Section
5(c).

“Indemnifying Party” shall have the meaning set forth in Section
5(c).

“Losses” shall have the meaning set forth in Section 5(a).

“Plan of Distribution” shall have the meaning set forth in Section
2(a).

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

“Registrable Securities” means all of
(i) the Underlying Shares and (ii) any shares of Common Stock issued or
issuable upon any stock split, dividend or other distribution, recapitalization
or similar event contemplated by Rule 416 of the Securities Act with respect to
the foregoing; provided, however, that “Registrable Securities”
shall not include any
such shares that have been sold pursuant to a Registration Statement or Rule
144 or are eligible for sale pursuant to Rule 144(k).

“Registration Statement” means the registration statements
required to be filed hereunder and any additional registration statements
contemplated by Section 3(c), 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.

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

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

“Selling Shareholder Questionnaire” shall have the meaning set
forth in Section 3(a).

 2
 

2.             Shelf Registration.

(a)           On or prior to each
Filing Date, the Company shall prepare and file with the Commission a “Shelf”
Registration Statement covering the resale of 100% of the Registrable
Securities on such Filing Date 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) and shall
contain (unless otherwise directed by at least an 85% majority in interest of
the Holders) substantially the “Plan of Distribution” attached hereto as
Annex A; provided that such Plan of Distribution section of the
Registration Statement shall be amended to the extent required to respond to
comments received by the Company from the Commission.  Subject to the terms of this Agreement, the
Company shall use its commercially reasonable efforts to cause a Registration
Statement to be declared effective under the Securities Act as promptly as
possible after the filing thereof, but in any event prior to the applicable
Effectiveness Date, and shall use its commercially reasonable efforts to keep
such Registration Statement continuously effective under the Securities Act
until all Registrable Securities covered by such Registration Statement have
been sold, or may be sold without volume restrictions pursuant to Rule 144(k),
as determined by the counsel to the Company pursuant to a written opinion
letter to such effect, addressed and acceptable to the Company’s transfer agent
and the affected Holders (the “Effectiveness Period”).  The Company shall request effectiveness of a
Registration Statement as of 5:00 p.m. New York City time on a Trading
Day.  The Company shall immediately
notify the Holders via electronic mail or facsimile of the effectiveness of a
Registration Statement on the same Trading Day that the Company telephonically
confirms effectiveness with the Commission, which shall be the date requested for
effectiveness of a Registration Statement. 
The Company shall, by 9:30 a.m. New York City time on the Trading Day
after the Effective Date (as defined in the Purchase Agreement), file a final
Prospectus with the Commission as required by Rule 424.  Failure to so notify the Holder within one
Trading Day of such notification of effectiveness or failure to file a final
Prospectus as aforesaid shall be deemed an Event under Section 2(b).

(b)           If: (i) a
Registration Statement is not filed on or prior to its Filing Date (if the
Company files a Registration Statement without affording the Holders the
opportunity to review and comment on the same as required by Section 3(a)
herein, the Company shall be deemed to have not satisfied this clause (i)), or
(ii) 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 of 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 not subject to further review, or (iii) a Registration
Statement filed or required to be filed hereunder is not declared effective by
the Commission by its Effectiveness Date, or (iv) after the Effectiveness Date,
a Registration Statement ceases for any reason to remain continuously effective
as to all Registrable Securities for which it is required to be effective, or
the Holders are otherwise not permitted to utilize the Prospectus therein to resell
such Registrable Securities, for more than 10 consecutive calendar days or more
than an aggregate of 15 calendar days during 

 3
 

any 12-month
period (which need not be consecutive calendar days) (any such failure or
breach being referred to as an “Event”, and for purposes of clause (i) or (iii) the date
on which such Event occurs, or for purposes of clause (ii) the date on which
such five Trading Day period is exceeded, or for purposes of clause (iv) the
date on which such 10 or 15 calendar day period, as applicable, is exceeded
being referred to as “Event Date”),
then, in addition to any other rights the Holders may have hereunder or under
applicable law, on each such Event Date and on each monthly anniversary of each
such Event Date (if the applicable Event shall not have been cured by such
date) until the applicable Event is cured, the Company shall pay to each Holder
an amount in cash, as partial liquidated damages and not as a penalty, equal to
1% of the aggregate purchase price paid by such Holder pursuant to the Purchase
Agreement for any Registrable Securities then held by such Holder.  The parties agree that (1) in no event shall
the Company be liable for liquidated damages under this Agreement in excess of
1% of the aggregate Subscription Amount of the Holders in any 30-day period and
(2) the maximum aggregate liquidated damages payable to a Holder under this
Agreement shall be twelve percent (12%) of the aggregate Subscription Amount
paid by such Holder pursuant to the Purchase Agreement. If the Company fails to
pay any partial 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 Holder, accruing daily from the date such
partial liquidated damages are due until such amounts, plus all such interest
thereon, are paid in full. The partial liquidated damages pursuant to the terms
hereof shall apply on a daily pro-rata basis for any portion of a month prior
to the cure of an Event.

3.             Registration Procedures

In connection with the
Company’s registration obligations hereunder, the Company shall:

(a)           Not less than five
Trading Days prior to the filing of each Registration Statement and not less
than one Trading Day prior to the filing of any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), (i) furnish to
each Holder 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 such Holders (provided, however, as
to any related Prospectus, amendment or supplement thereto proposed to be
filed, the Company shall only be required to provide the Holders with copies of
such documents prior to the filing thereof to the extent there are changes to
the Selling Stockholder table or Plan of Distribution contained therein from
such sections included in the initial Registration Statement filed hereunder),
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 each Holder, 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 the Holders of a majority of the Registrable Securities shall
reasonably object in good faith, provided that, the Company is notified of such
objection in writing no later than three Trading Days after 

 4
 

the Holders
have been so furnished copies of a Registration Statement or one Trading Day
after the Holders have been so furnished copies of any related Prospectus or
amendments or supplements thereto.  Each
Holder agrees to furnish to the Company a completed questionnaire in the form
attached to this Agreement as Annex B (a “Selling Shareholder Questionnaire”)
not less than three Trading Days prior to the Filing Date or by the end of the
third Trading Day following the date on which such Holder receives draft
materials in accordance with this Section.

(b)           (i) Prepare and file
with the Commission such amendments, including post-effective amendments, to a
Registration Statement and the Prospectus used in connection therewith as may
be necessary to keep a 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 (subject to the terms of this Agreement), and as so
supplemented or amended to be filed pursuant to Rule 424; (iii) respond as
promptly as reasonably possible to any comments received from the Commission
with respect to a Registration Statement or any amendment thereto and provide
as promptly as reasonably possible to the Holders true and complete copies of
all correspondence from and to the Commission relating to a Registration Statement
(provided that the Company may excise any information contained therein which
would constitute material non-public information as to any Holder which has not
executed a confidentiality agreement with the Company); and (iv) comply in
all material respects with the provisions of the Securities Act and the
Exchange Act applicable to the Company with respect to the disposition of all
Registrable Securities covered by a Registration Statement during the
applicable period in accordance (subject to the terms of this Agreement) with
the intended methods of disposition by the Holders thereof set forth in such
Registration Statement as so amended or in such Prospectus as so supplemented.

(c)           [RESERVED]

(d)           Notify the Holders
of Registrable Securities to be sold (which notice shall, pursuant to clauses
(iii) through (vi) hereof, be accompanied by an instruction to suspend the use
of the Prospectus until the requisite changes have been made) as promptly as
reasonably possible (and, in the case of (i)(A) below, not less than one
Trading Day prior to such filing) and (if requested by any such Person) confirm
such notice in writing no later than one Trading Day following the day:  (i)(A) when a Prospectus or any Prospectus supplement
or post-effective amendment to a Registration Statement is proposed to be
filed; (B) when the Commission notifies the Company whether there will be a “review”
of such Registration Statement and whenever the Commission comments in writing
on such Registration Statement; and (C) with respect to a Registration
Statement or any post-effective amendment thereto, when the same has become
effective; (ii) of any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to a Registration Statement
or Prospectus or for additional information related thereto; (iii) of the
issuance by the Commission or any other federal or state governmental authority
of any stop order suspending the 

 5
 

effectiveness
of a Registration Statement covering any or all of the Registrable Securities
or the initiation of any Proceedings for that purpose; (iv) of the receipt by
the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable Securities
for sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose; (v) of the occurrence of any event or passage of
time that makes the financial statements included in a Registration Statement
ineligible for inclusion therein or any statement made in a Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to a Registration Statement, Prospectus or other
documents so that, in the case of a Registration Statement or the Prospectus,
as the case may be, 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 light of the circumstances under which they
were made, not misleading; and (vi) the occurrence or existence of any pending
corporate development with respect to the Company that the Company believes may
be material and that, in the determination of the Company, makes it not in the
best interest of the Company to allow continued availability of a Registration
Statement or Prospectus, provided that any and all of such information shall
remain confidential to each Holder until such information otherwise becomes
public, unless disclosure by a Holder is required by law; provided, further,
that notwithstanding each Holder’s agreement to keep such information
confidential, the Holders make no acknowledgement that any such information is
material, non-public information.

(e)           Use its commercially
reasonable efforts to avoid the issuance of, or, if issued, obtain the
withdrawal of (i) any order suspending the effectiveness of a Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.

(f)            If requested by a
Holder, furnish to each Holder, without charge, at least one conformed copy of
each such Registration Statement and each amendment thereto, including
financial statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference to the extent requested by such Holder, and
all exhibits to the extent requested by such Holder (including those previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission.

(g)           Subject to the terms
of this Agreement, the Company hereby consents to the use of such Prospectus
and each amendment or supplement thereto by each of the selling Holders in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus and any amendment or supplement thereto, except after the
giving of any notice pursuant to Section 3(d).

(h)           If NASDR Rule 2710
requires any broker-dealer to make a filing prior to executing a sale by a
Holder, the Company shall (i) make an Issuer Filing with the NASDR, Inc.
Corporate Financing Department pursuant to proposed NASDR Rule
2710(b)(10)(A)(i), (ii) respond within five Trading Days to any comments
received from 

 6
 

NASDR in
connection therewith, and (iii) pay the filing fee required in connection
therewith.

(i)            Prior to any resale
of Registrable Securities by a Holder, use its commercially reasonable efforts
to register or qualify or cooperate with the selling Holders in connection with
the registration or qualification (or exemption from the Registration or
qualification) of such Registrable Securities for the resale by the Holder
under the securities or Blue Sky laws of such jurisdictions within the United
States as any Holder reasonably requests in writing and if required by law, to
keep each registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
reasonably necessary to enable the disposition in such jurisdictions of the
Registrable Securities covered by each Registration Statement; provided, that
the Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified, subject the Company to any
material tax in any such jurisdiction where it is not then so subject or file a
general consent to service of process in any such jurisdiction.

(j)            If requested by the
Holders, cooperate with the Holders 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 the Purchase Agreement, of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any such Holders may reasonably request.

(k)           Upon the occurrence
of any event contemplated by this Section 3, as promptly as reasonably possible
under the circumstances taking into account the Company’s good faith assessment
of any adverse consequences to the Company and its stockholders of the
premature disclosure of such event, prepare a supplement or amendment,
including a post-effective amendment, to a 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 a 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 light of the circumstances under which they were made,
not misleading.  If the Company notifies
the Holders in accordance with clauses (iii) through (vi) of Section 3(d) above
to suspend the use of any Prospectus until the requisite changes to such
Prospectus have been made, then the Holders shall suspend use of such
Prospectus.  The Company will use its
best efforts to ensure that the use of the Prospectus may be resumed as
promptly as is practicable.  The Company
shall be entitled to exercise its right under this Section 3(k) to suspend the
availability of a Registration Statement and Prospectus, subject to the payment
of partial liquidated damages pursuant to Section 2(b), for a period not to
exceed 60 calendar days (which need not be consecutive days) in any 12 month
period.

(l)            During the
Effectiveness Period, comply with all applicable rules and regulations of the
Commission that are applicable to the Company.

 7
 

(m)          The Company may
require each selling Holder to furnish to the Company a certified statement as
to the number of shares of Common Stock beneficially owned by such Holder and,
if required by the Commission, the natural persons thereof that have voting and
dispositive control over the Shares. 
During any periods that the Company is unable to meet its obligations
hereunder with respect to the registration of the Registrable Securities solely
because any Holder fails to furnish such information within three Trading Days
of the Company’s request or a completed Selling Shareholder Questionnaire as
described in Section 3(a) above, any liquidated damages that are accruing at
such time as to such Holder only shall be tolled and any Event that may
otherwise occur solely because of such delay shall be suspended as to such
Holder only, until such information and/or questionnaire is delivered to the
Company, and the Company shall be permitted to exclude such Holder from the
Registration Statement, provided that as soon as such information and/or
questionnaire is furnished, the Company shall use its best efforts to include
such Holder on the Registration Statement after filing.

4.             Registration
Expenses.  All fees and expenses
incident to the performance of or compliance with this Agreement by the Company
shall be borne by the Company whether or not any Registrable Securities are
sold pursuant to a Registration Statement. 
The fees and expenses referred to in the foregoing sentence shall
include, without limitation, (i) all registration and filing fees (including,
without limitation, fees and expenses) (A) with respect to filings required to
be made with any Trading Market on which the Common Stock is then listed for
trading, (B) in compliance with applicable state securities or Blue Sky
laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the Company in connection
with Blue Sky qualifications or exemptions of the Registrable Securities) and
(C) if not previously paid by the Company in connection with an Issuer Filing,
with respect to any filing that may be required to be made by any broker
through which a Holder intends to make sales of Registrable Securities with
NASD Regulation, Inc. pursuant to the NASD Rule 2710, so long as the broker is
receiving no more than a customary brokerage commission in connection with such
sale, (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities, (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the Company,
(v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement.  In addition, the Company
shall be responsible for all of its internal expenses incurred in connection
with the consummation of the transactions contemplated by this Agreement
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit and the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange as required hereunder.  In no event shall the Company be responsible
for any broker or similar commissions of any Holder or, except to the extent
provided for in the Transaction Documents, any legal fees or other costs of the
Holders.

5.             Indemnification.

(a)           Indemnification
by the Company.  The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, members, partners, agents and employees
(and any other Persons with 

 8
 

a functionally
equivalent role of a Person holding such titles, notwithstanding a lack of such
title or any other title) of each of them, each Person who controls any such
Holder (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) and the officers, directors, members, shareholders, partners,
agents and employees (and any other Persons with a functionally equivalent role
of a Person holding such titles, notwithstanding a lack of such title or any
other title) of each such controlling Person, to the fullest extent permitted
by applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, reasonable attorneys’ fees)
and expenses (collectively, “Losses”), as determined by a court of
competent jurisdiction in a final judgment not subject to appeal or review,
arising out of or relating to (1) any untrue or alleged untrue statement of a
material fact contained in a 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 light of the circumstances under which they were made)
not misleading, or (2) any violation or alleged violation by the Company
of the Securities Act, Exchange Act or any state securities law, or any rule or
regulation thereunder, in connection with the performance of its obligations
under this Agreement, except, in each case, to the extent, but only to the
extent, that (i) such untrue statements or omissions or alleged untrue
statements or omissions are based upon information regarding such Holder
furnished in writing to the Company by such Holder expressly for use therein,
or to the extent that such information relates to such Holder or such Holder’s
proposed method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Holder expressly for use in a Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto (it being understood that the Holder has approved Annex A
hereto for this purpose), (ii) in the case of an occurrence of an event of the
type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated
or defective Prospectus after the Company has notified such Holder in writing
that the Prospectus is outdated or defective and prior to the receipt by such
Holder of the Advice contemplated in Section 6(d) or (iii) such Holder engaged
in wilfull misconduct.  The Company shall
notify the Holders promptly of the institution, threat or assertion of any
Proceeding arising from or in connection with the transactions contemplated by
this Agreement of which the Company is aware.

(b)           Indemnification
by Holders.  Each Holder 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 incurred, to the extent arising out of or based
upon:  (x) such Holder’s failure to
comply with the prospectus delivery requirements of the Securities Act or (y)
any untrue or alleged untrue statement of a material fact contained in any
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 not
misleading (i) to the extent, but 

 9
 

only to the
extent, that such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company specifically for
inclusion in such Registration Statement or such Prospectus or (ii) to the
extent that such information relates to such Holder’s proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in a Registration Statement (it being
understood that the Holder has approved Annex A hereto for this
purpose), such Prospectus or such form of Prospectus or in any amendment or
supplement thereto or (iii) in the case of an occurrence of an event of the
type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated
or defective Prospectus after the Company has notified such Holder in writing
that the Prospectus is outdated or defective and prior to the receipt by such
Holder of the Advice contemplated in Section 6(d).  In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder 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 have the right to
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 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:  (1) the Indemnifying
Party has agreed in writing to pay such fees and expenses; (2) 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 (3) the named parties to any such Proceeding (including any
impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and counsel to the Indemnified Party shall reasonably believe that a
material 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
the reasonable fees and expenses of no more than one separate 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.  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 

 10
 

includes an unconditional release of such Indemnified Party from all
liability on claims that are the subject matter of such Proceeding.

Subject to the terms of this Agreement, all reasonable 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, provided that the Indemnified Party
shall promptly reimburse the Indemnifying Party for that portion of such fees
and expenses applicable to such actions for which such Indemnified Party is
judicially determined to be not entitled to indemnification hereunder.

(d)           Contribution.  If the indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party or insufficient to hold an
Indemnified Party harmless for any Losses, then each Indemnifying Party shall
contribute to the amount paid or payable by such Indemnified Party, 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 this Agreement, 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 5(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 5(d), no Holder shall be required to contribute, in
the aggregate, any amount in excess of the amount by which the proceeds
actually received by such Holder from the sale of the Registrable Securities
subject or giving rise to the Proceeding exceeds the amount of any damages that
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, except in the case of
fraud by such Holder.

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.

 

 11

 

6.             Miscellaneous.

(a)           Remedies.  In the event of a breach by the Company or by
a Holder of any of their respective obligations under this Agreement, each
Holder or the Company, as the case may be, in addition to being entitled to
exercise all rights granted by law and under this Agreement, including recovery
of damages, shall be entitled to specific performance of its rights under this
Agreement.  The Company and each Holder
agree that monetary damages would not provide adequate compensation for any
losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall not assert or shall
waive the defense that a remedy at law would be adequate.

(b)           No Piggyback on
Registrations.  Except as set forth
on Schedule 6(b) attached hereto, neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the initial Registration Statement other
than the Registrable Securities.  The
Company shall not file any other registration statements until the initial
Registration Statement required hereunder is declared effective by the
Commission, provided that this Section 6(b) shall not prohibit the Company from
filing amendments to registration statements filed prior to the date of this
Agreement, and provided, further, that the Company shall be
permitted to file one or more registration statements on Form S-8 (relating to
securities offered pursuant to the Company’s employee benefit plans) or Form
S-4 (relating to securities issued in connection with a business combination).

(c)           Compliance.  Each Holder covenants and 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
a Registration Statement.

(d)           Discontinued
Disposition.  By its acquisition of
Registrable Securities, each Holder agrees that, upon receipt of a notice from
the Company of the occurrence of any event of the kind described in Section
3(d), such Holder will forthwith discontinue disposition of such Registrable
Securities under a Registration Statement until it is advised in writing (the “Advice”)
by the Company that the use of the applicable Prospectus (as it may have been
supplemented or amended) may be resumed. 
The Company will use commercially reasonable efforts to ensure that the
use of the Prospectus may be resumed as promptly as is practicable.  The Company agrees and acknowledges that any
periods during which the Holder is required to discontinue the disposition of
the Registrable Securities hereunder shall be subject to the provisions of
Section 2(b).

(e)           Piggy-Back Registrations.  If at any time during the Effectiveness
Period there is not an effective Registration Statement covering all of the
Registrable Securities and 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, 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

 12
 

or equity
securities issuable in connection with the stock option or other employee
benefit plans, then the Company shall send to each Holder a written notice of
such determination and, if within fifteen days after the date of such notice,
any such Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
Holder requests to be registered; provided, however, that, the
Company shall not be required to register any Registrable Securities pursuant
to this Section 6(e) that are eligible for resale pursuant to Rule 144(k)
promulgated under the Securities Act or that are the subject of a then effective
Registration Statement.

(f)            Amendments and Waivers.  The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the same shall be in writing and signed by the Company and each
Holder of the then-outstanding Registrable Securities.  Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that relates
exclusively to the rights of Holders and that does not directly or indirectly
affect the rights of other Holders may be given by Holders of all of the
Registrable Securities to which such waiver or consent relates; provided,
however, that the provisions of this sentence may not be amended,
modified, or supplemented except in accordance with the provisions of the
immediately preceding sentence.

(g)           Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be delivered
as set forth in the Purchase Agreement.

(h)           Successors and Assigns. This
Agreement shall inure to the benefit of and be binding upon the successors and
permitted assigns of each of the parties and shall inure to the benefit of each
Holder. The Company may not assign its rights (except by merger) or obligations
hereunder without the prior written consent of all of the Holders of the
then-outstanding Registrable Securities. Each Holder may assign their
respective rights hereunder in the manner and to the Persons as permitted under
the Purchase Agreement.

(i)            No Inconsistent Agreements.  Neither the Company nor any of its
Subsidiaries has entered, as of the date hereof, nor shall the Company or any
of its Subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would directly conflict with the
provisions hereof.  Except as set forth
on Schedule 6(b), neither the Company nor any of its subsidiaries has
previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person that have not been satisfied in
full or waived.

(j)            Execution and
Counterparts.  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 or by e-mail delivery of a “.pdf” format data file,
such signature shall create a valid and

 13
 

binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile or “.pdf”
signature page were an original thereof.

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

(l)            Cumulative
Remedies.  The remedies provided
herein are cumulative and not exclusive of any other remedies provided by law.

(m)          Severability.  If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their commercially reasonable efforts to find and
employ an alternative means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or restriction.  It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may
be hereafter declared invalid, illegal, void or unenforceable.

(n)           Headings.  The headings in this Agreement 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.

(o)           Additional
Holders.  Notwithstanding anything to
the contrary contained herein, if the Company shall issue additional
Registrable Securities pursuant to the Purchase Agreement, any purchaser of
such Registrable Securities may become a party to this Agreement by executing
and delivering an additional counterpart signature page to this Agreement and
shall be deemed a “Purchaser,” a “Holder” and a party hereunder.

(p)           Independent
Nature of Holders’ Obligations and Rights. 
The obligations of each Holder hereunder are several and not joint with
the obligations of any other Holder hereunder, and no Holder shall be
responsible in any way for the performance of the obligations of any other
Holder hereunder.  Nothing contained
herein or in any other agreement or document delivered at any closing, and no
action taken by any Holder pursuant hereto or thereto, shall be deemed to
constitute the Holders as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Holders are in any way
acting in concert with respect to such obligations or the transactions
contemplated by this Agreement.  Each
Holder shall be entitled to protect and enforce its rights, including without
limitation the rights arising out of this Agreement, and it shall not be necessary
for any other Holder to be joined as an additional party in any proceeding for
such purpose.

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK]

 14
 

IN WITNESS WHEREOF, the
parties have executed this Registration Rights Agreement as of the date first
written above.

 

	
  

  	
  IMAGEWARE
  SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  

 

[SIGNATURE PAGE OF
HOLDERS FOLLOWS]

 15
 

[SIGNATURE PAGE OF
HOLDERS TO REGISTRATION RIGHTS AGREEMENT]

	
  Name of Holder:

  	
   

  	
   

  
	
   

  
	
  Signature
  of Authorized Signatory of Holder:

  	
   

  	
   

  
	
   

  
	
  Name of
  Authorized Signatory:

  	
   

  	
   

  
	
   

  
	
  Title of
  Authorized Signatory:

  	
   

  	
   

  
								

 

[SIGNATURE PAGES
CONTINUE]

 16
 

ANNEX A

Plan of Distribution

Each Selling Stockholder
(the “Selling Stockholders”) of the common stock and any of their
pledgees, assignees and successors-in-interest may, from time to time, sell any
or all of their shares of common stock on the American Stock Exchange or any
other stock exchange, market or trading facility on which the shares are traded
or in private transactions.  These sales
may be at fixed or negotiated prices.  A
Selling Stockholder may use any one or more of the following methods when
selling shares:

·                  ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers;

·                  block trades in which the broker-dealer
will attempt to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;

·                  purchases by a broker-dealer as
principal and resale by the broker-dealer for its account;

·                  an exchange distribution in accordance
with the rules of the applicable exchange;

·                  privately negotiated transactions;

·                  settlement of short sales entered
into after the effective date of the registration statement of which this
prospectus is a part;

·                  broker-dealers may agree with
the Selling Stockholders to sell a specified number of such shares at a
stipulated price per share;

·                  through the writing or settlement of
options or other hedging transactions, whether through an options exchange or
otherwise;

·                  a combination of any such methods of
sale; or

·                  any other method permitted pursuant
to applicable law.

The Selling Stockholders
may also sell shares under Rule 144 under the Securities Act of 1933, as
amended (the “Securities Act”), if available, rather than under this
prospectus.

Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers
to participate in sales.  Broker-dealers
may receive commissions or discounts from the Selling Stockholders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the
purchaser) in amounts to be negotiated, but, except as set forth in a
supplement to this Prospectus, in the case of an agency transaction not in
excess of a customary brokerage commission in compliance with NASDR Rule 2440;
and in the case of a principal transaction a markup or markdown in compliance
with NASDR IM-2440.

 17
 

In connection with the
sale of the common stock or interests therein, the Selling Stockholders may
enter into hedging transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of the Common Stock in the course of
hedging the positions they assume.  The
Selling Stockholders may also sell shares of the common stock short and deliver
these securities to close out their short positions entered into after the
effective date of the registration statement of which this prospectus is a
part, or loan or pledge the common stock to broker-dealers that in turn may
sell these securities.  The Selling Stockholders
may also enter into option or other transactions with broker-dealers or other
financial institutions or the creation of one or more derivative securities
which require the delivery to such broker-dealer or other financial institution
of shares offered by this prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to this prospectus (as supplemented
or amended to reflect such transaction).

The Selling Stockholders
and any broker-dealers or agents that are involved in selling the shares may be
deemed to be “underwriters” within the meaning of the Securities Act in
connection with such sales.  In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.  Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock.  In no event shall any broker-dealer receive
fees, commissions and markups which, in the aggregate, would exceed eight
percent (8%).

The Company is required
to pay certain fees and expenses incurred by the Company incident to the
registration of the shares.  The Company
has agreed to indemnify the Selling Stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities
Act.

Because Selling
Stockholders may be deemed to be “underwriters” within the meaning of the Securities
Act, they will be subject to the prospectus delivery requirements of the
Securities Act including Rule 172 thereunder. 
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than under this prospectus.  There
is no underwriter or coordinating broker acting in connection with the proposed
sale of the resale shares by the Selling Stockholders.

We agreed to keep this
prospectus effective until the earlier of (i) the date on which the shares may
be resold by the Selling Stockholders without registration and without regard
to any volume limitations by reason of Rule 144(k) under the Securities Act or
any other rule of similar effect or (ii) all of the shares have been sold
pursuant to this prospectus or Rule 144 under the Securities Act or any other
rule of similar effect.  The resale
shares will be sold only through registered or licensed brokers or dealers if required
under applicable state securities laws. 
In addition, in certain states, the resale shares may not be sold unless
they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and
is complied with.

Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution
of the resale shares may not simultaneously engage in market making activities

 18
 

with respect to
the common stock for the applicable restricted period, as defined in
Regulation M, prior to the commencement of the distribution.  In addition, the Selling Stockholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of shares of the common stock by the Selling Stockholders
or any other person.  We will make copies
of this prospectus available to the Selling Stockholders and have informed them
of the need to deliver a copy of this prospectus to each purchaser at or prior
to the time of the sale (including by compliance with Rule 172 under the
Securities Act).

 

 19

Annex B

IMAGEWARE SYSTEMS, INC.

Selling Securityholder Notice and Questionnaire

The undersigned beneficial owner of common stock (the “Registrable
Securities”) of ImageWare Systems, Inc., a Delaware corporation (the “Company”),
understands that the Company has filed or intends to file with the Securities
and Exchange Commission (the “Commission”) a registration statement (the
“Registration Statement”) for the registration and resale under Rule 415
of the Securities Act of 1933, as amended (the “Securities Act”), of the
Registrable Securities, in accordance with the terms of the Registration Rights
Agreement (the “Registration Rights Agreement”) to which this document
is annexed.  A copy of the Registration
Rights Agreement is available from the Company upon request at the address set
forth below.  All capitalized terms not
otherwise defined herein shall have the meanings ascribed thereto in the
Registration Rights Agreement.

Certain legal consequences arise from being named as a selling
securityholder in the Registration Statement and the related prospectus.  Accordingly, holders and beneficial owners of
Registrable Securities are advised to consult their own securities law counsel
regarding the consequences of being named or not being named as a selling securityholder
in the Registration Statement and the related prospectus.

NOTICE

The undersigned beneficial owner (the “Selling Securityholder”)
of Registrable Securities hereby elects to include the Registrable Securities
owned by it in the Registration Statement.

 20
 

The
undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:

QUESTIONNAIRE

	
  1.

  	
  Name.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (a)

  	
  Full Legal Name of Selling Securityholder

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (b)

  	
  Full Legal Name of Registered Holder (if not the
  same as (a) above) through which Registrable Securities are held:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (c)

  	
  Full Legal Name of Natural Control Person (which
  means a natural person who directly or indirectly alone or with others has
  power to vote or dispose of the securities covered by the questionnaire):

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

2.  Address for Notices to Selling
Securityholder:

	
  

  
	
   

  
	
   

  
	
  Telephone:

  	
   

  
	
  Fax:

  	
   

  
	
  Contact Person:

  	
   

  
				

 

3.  Broker-Dealer
Status:

 

	
  

  	
  (a)

  	
  Are you a broker-dealer?

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Yes  o     No  o

  
	
   

  	
   

  	
   

  
	
   

  	
  (b)

  	
  If “yes” to Section 3(a), did you receive your
  Registrable Securities as compensation for investment banking services to the
  Company?

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Yes  o    No  o

  

 21
 

 

	
  

  	
  Note:

  	
  If “no”, the Commission’s staff has indicated that
  you should be identified as an underwriter in the Registration Statement.

  
	
   

  	
   

  	
   

  
	
   

  	
  (c)

  	
  Are you an affiliate of a broker-dealer?

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Yes  o     No  o

  
	
   

  	
   

  	
   

  
	
   

  	
  (d)

  	
  If you are an affiliate of a broker-dealer, do you
  certify that you bought the Registrable Securities in the ordinary course of
  business, and at the time of the purchase of the Registrable Securities to be
  resold, you had no agreements or understandings, directly or indirectly, with
  any person to distribute the Registrable Securities?

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Yes  o     No  o

  
	
   

  	
   

  	
   

  
	
   

  	
  Note:

  	
  If “no”, the Commission’s staff has indicated that
  you should be identified as an underwriter in the Registration Statement.

  

 

4.  Beneficial Ownership of Other Securities of
the Company Owned by the Selling Securityholder.

Except as set forth below in this Item 4, the
undersigned is not the beneficial or registered owner of any securities of the
Company other than the securities issuable pursuant to the Purchase Agreement.

(a)           Type
and Amount of other securities beneficially owned by the Selling
Securityholder:

	
  

  	
   

  
	
   

  	
   

  

 

5.  Relationships with the Company:

Except as set forth below, neither the undersigned
nor any of its affiliates, officers, directors or principal equity holders
(owners of 5% of more of the equity securities of the undersigned) has held any
position or office or has had any other material relationship with the Company
(or its predecessors or affiliates) during the past three years.

State any exceptions here:

	
   

  	
   

  
	
   

  	
   

  

 

 22
 

The undersigned agrees to promptly notify the Company of any
inaccuracies or changes in the information provided herein that may occur
subsequent to the date hereof at any time while the Registration Statement
remains effective.

By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to Items 1 through 5 and the
inclusion of such information in the Registration Statement and the related
prospectus and any amendments or supplements thereto.  The undersigned understands that such
information will be relied upon by the Company in connection with the
preparation or amendment of the Registration Statement and the related
prospectus.

IN WITNESS WHEREOF the undersigned, by authority duly given, has caused
this Notice and Questionnaire to be executed and delivered either in person or
by its duly authorized agent.

	
  Dated:

  	
   

  	
   

  	
  Beneficial Owner:

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
						

 

PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE
AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

 

 23

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