Document:

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                                                                    EXHIBIT 10.1

                                                                  EXECUTION COPY

                       NOTE AND WARRANT PURCHASE AGREEMENT

     This NOTE AND WARRANT PURCHASE AGREEMENT, dated as of May 22, 2002 (this
"Agreement"), is entered into by and between ImageWare Systems, Inc., a
California corporation (the "Company"), and Perseus 2000, L.L.C., a Delaware
limited liability company ("Perseus" and together with the Company, each, a
"Party" and collectively, the "Parties").

                                    RECITALS

     A.   To provide the Company with additional funds to conduct its business,
Perseus is willing to purchase from the Company, and the Company is willing to
issue and sell to Perseus, on the terms and subject to the conditions set forth
herein, at a closing (the "Initial Closing") to be held on the date hereof (the
"Initial Closing Date"), (i) a Senior Secured Convertible Promissory Note of the
Company with an aggregate principal amount of $2,000,000 (the "Initial Note"),
and (ii) a warrant to acquire 150,000 shares of Common Stock, par value $0.01
per share, of the Company (the "Common Stock") (the "Initial Warrant").

     B.   To induce Perseus to execute and deliver this Agreement and to make
the investment in the Company at the Initial Closing contemplated hereby, the
Company is willing to grant to Perseus the option, which may be exercised by
Perseus in its sole discretion upon the terms and subject to the conditions
described herein, to acquire from the Company, on the terms and subject to the
conditions set forth herein, (i) an additional Senior Secured Convertible
Promissory Note of the Company with an aggregate principal amount of up to
$3,000,000 (the "Additional Note" and together with the Initial Note and any
Senior Secured Convertible Promissory Notes issued in payment of interest on any
Note, each, a "Note" and collectively, the "Notes"), and (ii) the Additional
Warrant (as defined in Section 1(b) hereof) (the Additional Warrant, together
with the Initial Warrant, each, a "Warrant" and collectively, the "Warrants").

                                    AGREEMENT

     NOW, THEREFORE, in consideration of the foregoing, and the representations,
warranties, covenants and conditions set forth below, the Parties, intending to
be legally bound, hereby agree as follows:

     1.   ISSUANCE AND SALE OF THE NOTES AND WARRANTS.

          (a)  ISSUANCE AND SALE OF INITIAL NOTE AND INITIAL WARRANT. In
reliance upon the representations, warranties and covenants of the Parties set
forth herein, and subject to satisfaction of the conditions set forth in Section
1(f) and 1(g) hereof, at the Initial Closing, the Company shall issue, sell and
deliver to Perseus, and Perseus shall purchase from the Company, the Initial
Note and the Initial Warrant for an aggregate purchase price of $2,000,000.

          (b)  OPTION TO ACQUIRE ADDITIONAL NOTE AND ADDITIONAL WARRANT.

               (i)     Subject to subsection (ii) below, the Company hereby
grants to Perseus the option, which may be exercised by Perseus in its sole
discretion, to acquire the Additional Note with an aggregate principal amount of
up to $3,000,000 (the "Perseus Option").

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Upon exercise of the Perseus Option, Perseus shall also receive an additional
warrant (the "Additional Warrant") to acquire a number of shares of Common Stock
equal to the product of (A) the result obtained by dividing (x) the aggregate
principal amount of the Additional Note by (y) $2,000,000 multiplied by (B)
150,000.

               (ii)    The Perseus Option may be exercised by Perseus at any
time on or prior to the first anniversary of the Initial Closing through the
delivery by Perseus to the Company of a written notice of exercise (an "Exercise
Notice"), which specifies a date (the "Additional Closing Date") on which such
acquisition shall be consummated (the "Additional Closing" and together with the
Initial Closing, each, a "Closing"), which date shall be no earlier than three
and no later than 15 Business Days after the date of delivery of an Exercise
Notice.

          (c)  CLOSINGS. Subject to satisfaction or waiver of the conditions
specified in Sections 1(f) and 1(g) hereof, (i) the Initial Closing shall take
place on the date hereof immediately after the execution and delivery of this
Agreement and (ii) if Perseus exercises the Perseus Option, the Additional
Closing shall take place on the Additional Closing Date, and each Closing shall
be held at 10:00 a.m. at the offices of Cooley Godward LLP, 4401 Eastgate Mall,
San Diego, California, or at such other times and places as shall be mutually
agreed to by the Parties. At each Closing, the Company shall deliver to Perseus
the Note and Warrant to be purchased by Perseus at such Closing, and Perseus
shall pay the respective purchase price therefor by wire transfer of immediately
available funds to the account designated by the Company on Schedule 1(c)
hereto.

          (d)  TERMS OF THE NOTES AND WARRANTS. The terms and conditions of each
Note are set forth in the form of Note attached as EXHIBIT A hereto. The terms
and conditions of each Warrant are set forth in the form of Warrant attached as
EXHIBIT B hereto.

          (e)  USE OF PROCEEDS. The Company hereby covenants and agrees that all
of the proceeds received by it from the issuance and sale of the Notes and the
Warrants shall be used for product development and working capital purposes.

          (f)  CONDITIONS TO OBLIGATIONS OF PERSEUS. The obligations of Perseus
to purchase the Notes and the Warrants under this Section 1 at each Closing
shall be subject to satisfaction of the following conditions:

               (i)     REPRESENTATIONS AND WARRANTIES CORRECT; PERFORMANCE OF
OBLIGATIONS. The representations and warranties of the Company contained herein
or in the other Transaction Documents shall be true and correct, in all material
respects, at and as of such Closing, and the Company shall have performed and
complied with all the covenants and agreements and satisfied all the conditions
required by this Agreement to be performed or complied with or satisfied by the
Company in all material respects at or prior to such Closing.

               (ii)    COMPLIANCE CERTIFICATE. Perseus shall have received a
certificate dated as of such Closing Date and signed by the president of the
Company on behalf of the Company stating that, to the best of his knowledge
after due inquiry, the conditions specified in Section 1(f)(i) and Section
1(f)(iv) hereof have been satisfied.

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               (iii)   REGISTRATION RIGHTS AGREEMENT; PLEDGE AND SECURITY
AGREEMENTS. The Registration Rights Agreement in the form attached as EXHIBIT C
hereto shall have been executed and delivered by the Company and Perseus prior
to the Initial Closing (the "Registration Rights Agreement"). Each of the Pledge
and Security Agreements in the forms attached as EXHIBIT D and EXHIBIT E hereto
shall have been executed and delivered by the Company, ImageWare Systems ID
Group, Inc., a Delaware corporation and wholly owned subsidiary of the Company
("IWS ID Group"), and Perseus, as applicable, prior to the Initial Closing (the
"Pledge and Security Agreements," and together with this Agreement, the Notes,
the Warrants, and the Registration Rights Agreement, the "Transaction
Documents").

               (iv)    CONSENTS AND WAIVERS. The Company shall have received all
consents, approvals, authorizations, permits and waivers of third parties
necessary for the Company to consummate the transactions contemplated hereby and
by the Transaction Documents.

               (v)     OPINION OF COMPANY'S COUNSEL. Perseus shall have received
an opinion of counsel to the Company, in form and substance reasonably
satisfactory to Perseus, addressing the matters set forth in EXHIBIT F hereto.

               (vi)    SECRETARY'S CERTIFICATE. The Company shall have delivered
to Perseus a certificate, executed by its Secretary or Assistant Secretary,
dated as of such Closing Date, certifying the authenticity and continued
effectiveness of attached copies of the Company's Articles of Incorporation,
Bylaws and resolutions of its Board of Directors approving the transactions
contemplated hereby and by the other Transaction Documents, and authorizing
specific officers to execute and deliver this Agreement and each of the other
Transaction Documents.

               (vii)   SECURITY FILINGS. The Company shall have executed and
Perseus shall have filed all filings described in section 1.2 of each of the
Pledge and Security Agreements necessary or appropriate for the perfection of
the security interests granted thereby.

               (viii)  OTHER DOCUMENTS. Perseus shall have received from the
Company such other documents as Perseus may reasonably request.

          (g)  CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the
Company to deliver the Notes and Warrants under this Section 1 at each Closing
shall be subject to the satisfaction of the following conditions:

               (i)     Perseus shall have performed and complied with all
agreements contained in this Agreement required to be performed and complied
with by it in all material respects prior to or at such Closing.

               (ii)    The representations and warranties of Perseus contained
in Section 3 hereof shall be true and correct in all material respects on and as
of such Closing Date as if made on such date.

               (iii)   Perseus shall have tendered payment for the Notes and the
Warrants at such Closing in accordance with Section 1(c) hereof.

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          (h)  NO ORIGINAL ISSUE DISCOUNT. The Company and Perseus acknowledge
and agree that each of the Warrants sold to Perseus in connection herewith is
part of an investment unit, which includes the respective Notes, within the
meaning of Section 1273(c)(2) of the Internal Revenue Code of 1986, as amended
("IRC"). As of each Closing Date, the Company and Perseus further agree that as
between the Company and Perseus, the fair market value of the right to buy one
share of Common Stock under the terms as set forth in the Warrant purchased on
such Closing Date is equal to $0.01 and that, pursuant to Treas. Reg. Section
1.1273-2(h), a portion of the issue price of the investment unit (such amount
being equal to $0.01 multiplied by the number of shares of Common Stock issuable
upon exercise of such Warrant) will be allocable to such Warrant and the balance
shall be allocable to the Note purchased on such Closing Date. The Company and
Perseus agree to prepare their federal income tax returns in a manner consistent
with the foregoing agreement and, pursuant to Treas. Reg. Section 1.1273, the
original issue discount on the Notes shall be considered to be zero.

     2.   REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Perseus that, except as set forth in the Company's
Disclosure Schedule delivered to Perseus on the date hereof (the "Disclosure
Schedule"), the statements contained in the following paragraphs of this Section
2 are all true and correct:

          (a)  ORGANIZATION AND GOOD STANDING: ARTICLES OF INCORPORATION AND
BYLAWS. The Company and each of its subsidiaries (i) is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its organization and (ii) has all requisite corporate power and authority to
carry on its business as now conducted and proposed to be conducted. The Company
and each of its subsidiaries (i) is duly qualified to conduct business as a
foreign corporation and (ii) is in good standing as a foreign corporation in all
jurisdictions where the properties owned, leased or operated by it are located
or where its business is conducted, except where the failure to so qualify or be
in good standing is not reasonably likely to have a material adverse effect on
its business, condition, results of operations, assets or liabilities (a
"Material Adverse Effect").

          (b)  SUBSIDIARIES. Section 2(b) of the Disclosure Schedule sets forth
an accurate list of all subsidiaries of the Company, together with their
respective jurisdictions of organization, and the authorized and outstanding
capital stock of each such subsidiary, by class and number and percentage of
each class owned by the Company or a subsidiary of the Company or any other
person or entity. Except as set forth in Section 2(b) of the Disclosure
Schedule, neither the Company nor any of its subsidiaries owns, of record or
beneficially, any shares of capital stock or other ownership interest in any
other corporation, partnership, limited liability company or other entity.

          (c)  CORPORATE POWER. The Company has all requisite legal and
corporate power to enter into, execute, deliver and perform its obligations
under this Agreement and the Transaction Documents. Assuming due execution and
delivery by the other parties thereto, this Agreement is, and upon their
execution and delivery, the Transaction Documents will be, valid and binding
obligations of the Company, enforceable in accordance with their terms, subject
to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally.

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          (d)  AUTHORIZATION, ETC.

               (i)     CORPORATE ACTION. All corporate and legal action on the
part of the Company, its officers, directors and stockholders necessary for the
execution and delivery of this Agreement, the other Transaction Documents, the
sale and issuance of the Notes and Warrants, and the performance of the
Company's obligations hereunder and thereunder, has been taken.

               (ii)    VALID ISSUANCE. The Notes, the Warrants, any additional
Notes issued in payment of interest on any of the Notes and any shares of Common
Stock of the Company issuable upon conversion of any of the Notes or exercise or
conversion of any of the Warrants (collectively, the "Securities"), when issued
against payment in compliance with the provisions of this Agreement, the Notes,
or the Warrants, as the case may be, will be validly issued and, in the case of
any such shares of capital stock, will be fully-paid and nonassessable and
delivered to Perseus free and clear of any liens or other encumbrances.

               (iii)   NO PREEMPTIVE RIGHTS. Except as set forth in this
Agreement, no person or entity has any right of first refusal or any preemptive
or similar rights in connection with the issuance of any Securities, or the
issuance of any other securities by the Company, other than pursuant to the
Transaction Documents.

               (iv)    NO VOTING RIGHTS. There are no agreements to which the
Company is a party with respect to the voting or transfer of any securities of
the Company other than the Transaction Documents or as set forth in the
Company's Articles of Incorporation.

          (e)  NONCONTRAVENTION. None of the execution, delivery and performance
of and compliance with this Agreement and the other Transaction Documents nor
the issuance of any of the Securities will result in or constitute any breach,
default or violation of (i) any agreement, contract, lease, license, instrument
or commitment (oral or written) to which the Company or any of its subsidiaries
is a party or is bound or (ii) any law, rule, regulation, statute or order
applicable to the Company, its subsidiaries or their respective properties, or
result in the creation of any mortgage, pledge, lien, encumbrance or charge upon
any of the properties or assets of the Company or its subsidiaries.

          (f)  CONSENTS, ETC. No consent, approval, order or authorization of,
or designation, registration, declaration or filing with, any federal, state,
local or provincial or other governmental authority or other person or entity on
the part of the Company is required in connection with the valid execution,
delivery and performance of this Agreement and the other Transaction Documents
or the offer, sale or issuance of the Notes, the Warrants or any other
Securities, other than (i) those filings required under the Registration Rights
Agreement, (ii) those filings required under Regulation D under the Securities
Act of 1933, as amended (the "Securities Act"), (iii) if required, filings or
qualifications under applicable state securities laws, which filings or
qualifications, if required, will be timely filed or obtained by the Company,
and (iv) filings of financing statements with any state agency, the United State
Patent and Trademark Office or the United States Copyright Office necessary or
appropriate for the perfection of the security interests described in
section 1.2 of each of the Pledge and Security Agreements.

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          (g)  OFFERING. Subject to the accuracy of and in reliance upon the
Perseus' representations in Section 3 hereof, the offer, sale and issuance of
the Securities in conformity with the terms of this Agreement and the
Transaction Documents constitute or will constitute at the time of their offer,
sale and issuance transactions exempt from the registration requirements of
Section 5 of the Securities Act, and the qualification or registration
requirements of any applicable state securities laws. Neither the Company or any
of its subsidiaries nor any person acting on its or their behalf has taken or
will undertake any action (including, without limitation, any offering of any
securities of the Company under circumstances which would require the
integration of such offering with the offering of any Securities under the
Securities Act and the rules and regulations of the Securities and Exchange
Commission (the "SEC") thereunder) which might subject the offering, issuance or
sale of such Securities to the registration requirements of Section 5 of the
Securities Act.

          (h)  CAPITALIZATION.

               (i)     Section 2(h) of the Disclosure Schedule sets forth the
authorized, issued and outstanding capitalization of the Company as of the date
hereof, and all of the issued and outstanding shares of capital stock reflected
therein have been duly authorized and validly issued, and are fully paid and
nonassessable and have been offered, issued, sold and delivered by the Company
in compliance with all applicable federal and state securities laws.

               (ii)    Except as set forth in the Company's most recent proxy
statement filed with the SEC, Section 2(h) of the Disclosure Schedule sets forth
all outstanding options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from either the Company or
any of its subsidiaries of their shares of capital stock or any securities
convertible into or ultimately exchangeable or exercisable for any shares of
their capital stock. Except as set forth in the Company's most recent proxy
statement filed with the SEC or as contemplated by this Agreement and the other
Transaction Documents, neither the Company nor any of its subsidiaries is
obligated in any manner to issue any shares of its capital stock or any other
securities.

          (i)  SEC DOCUMENTS; FINANCIAL INFORMATION. Within the 18-month period
immediately preceding the date hereof, the Company has made all filings with the
SEC required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or the Securities Act on a timely basis. The Company has
previously made available to Perseus complete and accurate copies, as amended or
supplemented through the date hereof, of the following forms filed with the SEC:
(i) Form 10-QSB under the Exchange Act for the period ended September 30, 2001,
(ii) Form 10-KSB under the Exchange Act for the fiscal year ended December 31,
2001, (iii) the Company's definitive proxy statement filed in connection with
the Company's 2002 annual shareholders' meeting filed on Form DEF 14A, and (iv)
each Form 8-KSB filed by the Company during fiscal years 2001 and 2002 (such
reports are collectively referred to herein as the "Company Reports"). As of
their respective dates, the Company Reports did not contain any 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. The audited financial
statements and unaudited interim financial statements of the Company included in
the Company Reports (i) comply as to form in all material respects with
applicable accounting requirements and published rules and regulations

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of the SEC with respect thereto, (ii) have been prepared in accordance with
United States generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods covered thereby (except as may be
indicated therein or in the notes thereto, and in the case of quarterly
financial statements, as permitted by Form 10-QSB under the Exchange Act), and
(iii) fairly presented in all material respects (subject, in the case of the
unaudited interim financial statements, to normal, year-end audit adjustments,
none of which will be material) the consolidated financial condition, results of
operations and cash flows of the Company as of the respective dates thereof and
for the periods referred to therein.

          (j)  JUDGMENTS, ETC. Neither the Company nor any of its subsidiaries
is subject to the terms or provisions of any material judgment, decree, order,
writ or injunction of any court, governmental department, commission, agency,
instrumentality or arbitrator.

          (k)  PROPRIETARY ASSETS.

               (i)     The Company and each of its subsidiaries (A) owns or has
sufficient rights to all Proprietary Assets used in or necessary for its
business as currently conducted, and as proposed to be conducted as described in
the Company Reports, free and clear of all material liens and other encumbrances
other than Permitted Liens; and (B) has taken reasonable and customary measures
and precautions necessary to protect and maintain the confidentiality and
secrecy of all its Proprietary Assets (except the Proprietary Assets whose value
would be unimpaired by public disclosure) and otherwise to maintain and protect
the value of all its Proprietary Assets. (As a point of clarification, the
representations and warranties set forth in this Section 2(k)(i) shall not be
deemed to expand the scope of the representations and warranties set forth in
Section 2(k)(ii).)

               (ii)    Except where such infringement, misappropriation or
unlawful use has not or could not reasonably be expected to have a Material
Adverse Effect, to the Company's knowledge, neither the Company nor any of its
subsidiaries is infringing, misappropriating or making any unlawful use of or
has at any time infringed, misappropriated or made any unlawful use of, any
Proprietary Asset owned or used by any other person or entity. No claims or
notices (in writing or otherwise) with respect to Proprietary Assets have been
communicated to the Company (A) to the effect that the manufacture, sale,
license or use of any Proprietary Assets as now used or currently offered or
proposed for use or sale by the Company or any of its subsidiaries infringes or
potentially infringes, or constitutes a misappropriation or unlawful use of, any
copyright, patent, trade secret or other intellectual property right of a third
party, or (B) challenging the ownership or validity of any of the rights of
either the Company or any of its subsidiaries to or interest in such Proprietary
Assets. Neither the Company nor any of its subsidiaries has received notice to
the effect that any patents or registered trademarks, service marks or
registered copyrights held by either them are invalid or not subsisting except
for failures to be valid and subsisting that would not reasonably be expected to
have a Material Adverse Effect. To the Company's knowledge, no other person or
entity is infringing, misappropriating or making any unlawful use of, and no
Proprietary Asset owned or used by any other person or entity infringes or
conflicts with, any Proprietary Asset used in or pertaining to the business of
the Company or any of its subsidiaries.

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               (iii)   The Proprietary Assets used in or pertaining to the
business of the Company and its subsidiaries are sufficient in the Company's
reasonable judgment to enable the Company and each of its subsidiaries to
conduct its business in the manner in which such business has been and is being
conducted and, to the Company's knowledge, free from liabilities or valid claims
of infringement or misappropriation by third parties. Neither the Company nor
any of its subsidiaries have licensed any of its Proprietary Assets to any
person or entity on an exclusive basis and they have not entered into any
covenant not to compete or contract limiting their ability to sell their
products in any market or geographical area or with any person or entity other
than restrictions in a license agreement that are typical of those granted in
the ordinary course of business in its industry.

               (iv)    All current and former employees of the Company providing
technical services, or otherwise having access to confidential information,
relating to the Company's Proprietary Assets have executed and delivered to the
Company an agreement (containing no exceptions to or exclusions from the scope
of its coverage relevant to the Company's business) that is substantially
identical to the form of the Employee Nondisclosure and Invention Assignment
Agreement previously delivered to Perseus, and all current and former
consultants and independent contractors to the Company providing technical
services relating to the Company's Proprietary Assets have executed and
delivered to the Company an agreement (containing no exceptions to or exclusions
from the scope of its coverage relevant to the Company's business), the material
provisions of which are in substance as protective to the Company as the terms
of the form of Employee Agreement previously delivered to Perseus.

               (v)     Section 2(k) of the Disclosure Schedule lists separately,
by entity, all material Proprietary Assets of the Company and each of its
subsidiaries and all other Proprietary Assets of the Company and each of its
subsidiaries that have been registered in or with, issued by, or for which an
application for registration has been filed in or with, a federal, state or
other governmental office or agency of appropriate jurisdiction. As used herein,
"Proprietary Assets" means: (A) any patent, patent application, trademark
(whether registered or unregistered), trademark application, trade name,
fictitious business name, service mark (whether registered or unregistered),
service mark application, copyright (whether registered or unregistered),
copyright application, maskwork, maskwork application, trade secret, know-how,
customer list, franchise, system, computer software, computer program, source
code, invention, design, blueprint, engineering drawing, proprietary product,
technology, proprietary right or other intellectual property right or intangible
asset; and (B) any right to use or exploit any of the foregoing.

          (l)  CONTRACTS.

               (i)     Section 2(l) of the Disclosure Schedule identifies each
Material Contract, other than those Material Contracts filed with the SEC and
listed as Exhibits on the Company's Form 10-KSB for the fiscal year ended
December 31, 2001.

               (ii)    The Company has made available to Perseus accurate and
complete copies of all Material Contracts, including all amendments thereto.
Neither the Company nor any of its subsidiaries has entered into any oral
Material Contracts. Each Material Contract is valid and in full force and
effect, is enforceable by either the Company or its

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subsidiaries in accordance with its terms, and will continue to be so
immediately following each Closing Date. No such contract, agreement or
instrument contains any liquidated damages, penalty or similar provision that,
if enforced against the Company, would have a Material Adverse Effect. To the
Company's knowledge, no party to any such contract, agreement or instrument
intends to cancel, withdraw, modify or amend such contract, agreement or
instrument.

               (iii)   (A) The Company has not violated or breached, or
committed any default under, any Material Contract in any material respect, and,
to the Company's knowledge, no other person or entity has violated or breached,
or committed any default under, any Material Contract in any material respect;
and

                       (B) to the Company's knowledge, no event has occurred,
and no circumstance or condition exists, that (with or without notice or lapse
of time) will, or could reasonably be expected to, (a) result in a violation or
breach of any of the provisions of any Material Contract, which individually or
taken as a whole, would have a Material Adverse Effect, (b) give any person or
entity the right to declare a default or exercise any remedy under any Material
Contract, (c) give any person or entity the right to accelerate the maturity or
performance of any Material Contract or (d) give any person or entity the right
to cancel, terminate or materially modify any Material Contract.

               (iv)    None of the Material Contracts contain any provision
which would require the consent of third parties to the sale and issuance of the
Notes or Warrants or any of the other transactions as contemplated hereunder or
under any of the Transaction Documents or which would be altered as a result of
such transaction.

          (m)  REGISTRATION RIGHTS. Except as set forth in the Registration
Rights Agreement, neither the Company nor any of its subsidiaries has agreed to
grant to any person or entity any rights (including piggyback registration
rights) to have any securities of the Company registered with the SEC under the
Securities Act or with any other governmental authority.

          (n)  COMPLIANCE WITH CORPORATE INSTRUMENTS AND LAWS. Neither the
Company nor any of its subsidiaries is in violation of any provisions of its
Articles of Incorporation or Bylaws as currently in effect. The Company and each
of its subsidiaries is in compliance in all material respects with all
applicable laws, statutes, rules, and regulations of all governmental and
regulatory authorities. The Company and each of its subsidiaries is currently in
compliance in all material respects with all applicable federal, state and
foreign laws, rules, regulations, proclamations and orders relating to the
importation or exportation of its products. All licenses, franchises, permits
and other governmental authorizations held by the Company and its subsidiaries
and which are necessary to their businesses are valid and sufficient in all
material respects for the businesses presently carried on by them.

          (o)  LITIGATION. There is no suit, action, proceeding, claim or
investigation pending or, to the Company's knowledge, threatened against the
Company or its subsidiaries before any court or administrative agency which
could have a Material Adverse Effect or which questions or challenges the
validity of this Agreement or any of the other Transaction Documents.

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          (p)  CORPORATE DOCUMENTS. The Company has furnished to Perseus and its
counsel for their examination true and complete copies of the Articles of
Incorporation and Bylaws for the Company, each as currently in effect. The
Company has made available to Perseus and its counsel for their examination true
and complete copies of the following documents, (i) the Articles of
Incorporation and Bylaws for each of the Company's subsidiaries, each as
currently in effect (ii) minute books of the Company and each of its
subsidiaries containing required records setting forth proceedings, consents,
actions, and meetings of their respective shareholders, boards of directors and
any committees thereof, and (iii) all material permits, orders, and consents
issued by any regulatory agency with respect to the Company, its subsidiaries,
or any securities of the Company or its subsidiaries, and all applications for
such permits, orders, and consents. The corporate minute books, stock
certificate books, stock registers and other corporate records of the Company
and each of its subsidiaries are complete and accurate in all material respects,
and the signatures appearing on all documents contained therein are the true
signatures of the persons purporting to have signed the same. All actions
reflected in such books and records were duly and validly taken in compliance in
all material respects with the laws of the applicable jurisdiction.

          (q)  NO BROKERS. Other than pursuant to the Company's engagement with
Allen & Co., Incorporated, neither the Company, nor to the Company's knowledge
any of its shareholders, is obligated for the payment of fees or expenses of any
broker or finder in connection with the origination, negotiation or execution of
this Agreement or the Transaction Documents, or in connection with any
transaction contemplated hereby or thereby.

          (r)  RELATED PARTY TRANSACTIONS.

               (i)     None of the Company's or any of its subsidiaries'
affiliates, officers, directors, shareholders or employees, or any affiliate of
any of such person, or to the knowledge of the Company and its subsidiaries, any
supplier, distributor or customer of the Company or its subsidiaries, has any
material interest in any property, real or personal, tangible or intangible,
including Proprietary Assets used in or pertaining to the business of the
Company or its subsidiaries, except for the normal rights of a stockholder.

               (ii)    Except as set forth in the Company's definitive proxy
statement filed with the SEC on Form DEF 14A in connection with the Company's
2002 annual shareholders' meeting, there are no agreements, understandings or
proposed transactions between either the Company or any of its subsidiaries and
any of its officers, directors, employees, affiliates, or, to the Company's
knowledge, any affiliate thereof.

               (iii)   To the best of the Company's knowledge, no executive
officer or director of the Company or any of its subsidiaries has any direct or
indirect ownership interest in any firm or corporation with which the Company or
any of its subsidiaries has a material business relationship, or any firm or
corporation that competes in any material respect with the Company or any of its
subsidiaries, except that executive officers or directors of the Company or its
subsidiaries may own stock in publicly traded companies that may compete with
the Company or its subsidiaries. To the Company's knowledge, no member of the
immediate family of any executive officer or director of the Company or any of
its subsidiaries is directly or indirectly interested in any Material Contract.

                                      -10-
<Page>

          (s)  DISCLOSURE. The statements by the Company contained in this
Agreement, the exhibits hereto, and the certificates and documents required to
be delivered by the Company to Perseus under this Agreement, taken as a whole,
do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements contained herein and
therein not misleading in light of the circumstances under which such statements
were made.

          (t)  ANTI-DILUTION AND OTHER SHARES. The issuance of the Notes,
Warrants, or any of the other Securities will not result in the triggering of
any anti-dilution or similar rights contained in any options, warrants,
debentures or other securities or agreements of the Company.

          (u)  SOLVENCY. Based on the Company's financial plans as provided to
Perseus, it is the Company's reasonable judgment that after giving effect to the
purchase and sale of the Notes as contemplated in Section 1(b) hereof, (i) the
fair value of the assets of the Company and its subsidiaries, at a fair
valuation, will exceed their respective current debts and liabilities,
subordinated, contingent or otherwise, (ii) the present fair saleable value of
the property of the Company and its subsidiaries will be greater than the amount
that will be required to pay the probable liability of their current debts and
other liabilities, subordinated, contingent or otherwise, as such debts and
other liabilities become absolute and matured, (iii) the Company and its
subsidiaries will be able to pay their debts and liabilities, subordinated,
contingent or otherwise, as such debts and liabilities become absolute and
matured, and (iv) none of the Company or any of its subsidiaries will have
unreasonably small capital with which to conduct the business in which they are
engaged as such business is now conducted and is proposed to be conducted
following the Closing Date.

          (v)  NO MATERIAL ADVERSE EFFECT. Except as expressly set forth in the
Company Reports filed with the SEC after December 31, 2001, no event has
occurred since December 31, 2001 that has had or could be reasonably expected to
have a Material Adverse Effect.

     3.   REPRESENTATIONS AND WARRANTIES BY THE PERSEUS.  Perseus represents,
and warrants to, and covenants with, the Company as follows:

          (a)  INVESTMENT INTENT; AUTHORITY. Perseus is acquiring the Notes, the
Warrants, and any other Securities for investment for Perseus' own account, and
not as nominee or agent for investment and not with a view to or for resale in
connection with any distribution or public offering thereof within the meaning
of the Securities Act. Perseus is a limited liability company, duly formed,
validly existing and in good standing under the laws of its jurisdiction of
formation. Perseus has the requisite legal and limited liability company power
to enter into, execute, deliver and perform its obligations under this Agreement
and the other Transaction Documents. Assuming due execution and delivery by the
other parties thereto, this Agreement is, and upon their issuance, the other
Transaction Documents to which Perseus is a Party will be, valid and binding
obligations of Perseus, enforceable in accordance with their terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally.

          (b)  SECURITIES NOT REGISTERED. Perseus understands and acknowledges
that none of the Notes, the Warrants or any of the other Securities will be
registered under the

                                      -11-
<Page>

Securities Act or qualified under any state securities laws in reliance upon one
or more exemptions from registration or qualification under the Securities Act
and such state securities laws, and that the Company's reliance upon such
exemption is predicated upon Perseus' representations set forth in this
Agreement. Perseus understands and acknowledges that resale of the Notes, the
Warrants and the other Securities may be restricted indefinitely unless they are
subsequently registered under the Securities Act and qualified under state law
or an exemption from such registration and such qualification is available.

          (c)  NO TRANSFER. Perseus will not dispose of any of the Notes, the
Warrants or the other Securities, other than in conjunction with an effective
registration statement or applicable exemption from registration under the
Securities Act and other than in compliance with the applicable state securities
laws.

          (d)  ACCREDITED INVESTOR. Perseus is an "accredited investor" within
the meaning of Rule 501 of Regulation D under the Securities Act, as presently
in effect.

     4.   COVENANTS. The Company covenants and agrees that from and after the
date hereof:

          (a)  ANNUAL BUDGET. The Company shall deliver its annual budget for
each fiscal year to Perseus as soon as practicable, but in any event within 15
days prior to the beginning of such fiscal year.

          (b)  FINANCIAL AND BUSINESS INFORMATION. The Company covenants and
agrees that it will deliver or make available to Perseus each of the following
documents as soon as practicable after such document is filed with the SEC: (i)
Form 10-K or 10-KSB report, (ii) Form 10-Q or 10-QSB report, (iii) definitive
proxy statement, and (iv) Form 8-K or 8-KSB report.

          (c)  ACCESS. The Company shall permit representatives of Perseus to
visit and inspect any of the properties of the Company and its subsidiaries, to
examine the corporate books and make copies or extracts therefrom and to discuss
the affairs, finances and accounts of the Company and its subsidiaries with the
principal officers and employees of the Company, during regular business hours,
as often as Perseus may reasonably request; provided, however, that Perseus or
its representative, as the case may be, shall hold all information so received
in strict confidence, shall not trade in the Company's securities while in
possession of material, non-public information, and shall use such information
only for the purpose of enforcement of this Agreement or the Transaction
Documents and for the valuation of its investment in the Company.

          (d)  COMMUNICATION WITH ACCOUNTANTS. The Company authorizes Perseus to
communicate directly with its independent certified public accountants and tax
advisors and authorizes those accountants to disclose to Perseus any and all
financial statements and other supporting financial documents and schedules
including copies of any management letter with respect to the business,
financial condition and other affairs of the Company and any of its
subsidiaries. At or before the Closing Date, the Company shall deliver a letter
addressed to such accountants and tax advisors instructing them to comply with
the provisions of this Section 4(d).

                                      -12-
<Page>

          (e)  OBSERVER RIGHTS; EXPENSES OF BOARD OBSERVER. Perseus shall be
allowed one representative (the "Board Observer") of its choice (which
individual shall be reasonably acceptable to the Company) to attend all meetings
of the Company's Board of Directors in a nonvoting capacity for so long as
Perseus owns (i) any of the Notes or (ii) Securities representing, convertible
into and/or exercisable for at least 50% of the Common Stock Equivalents (as
defined below). In connection therewith, the Company shall provide the Board
Observer with copies of all notices, minutes, consents and other materials,
financial or otherwise, which the Company provides to its Board of Directors;
PROVIDED, HOWEVER, that the Company reserves the right to exclude such Board
Observer from access to any material or meeting or portion thereof if the
Company in good faith believes, upon advice of counsel, that such exclusion is
necessary to preserve the attorney-client privilege, to protect highly
confidential proprietary information or for other similar reasons. The Company
shall reimburse the Board Observer for any reasonable expenses incurred in
connection with its function as a Board Observer, including travel and lodging
expenses incurred to attend meetings of the Company's Board of Directors.
Notwithstanding the foregoing, (A) Perseus shall not be entitled to exercise the
Board Observer rights set forth herein at any time that a Perseus Director (as
defined below) is then serving on the Company's Board of Directors; and (B) in
the event that Perseus exercises the Perseus Option and the Director
Indemnification Amendments (as defined below) have been adopted pursuant to
Section 4(f)(vi) hereof, the Board Observer right set forth in this Section 4(e)
shall terminate on the earlier of (x) 90 days after the date on which Perseus
exercises the Perseus Option and, (y) in the event a Perseus Director is then
serving on the Company's Board of Directors at the time of such exercise,
immediately.

          (f)  OPTIONAL PERSEUS DESIGNATED DIRECTOR; EXPENSES OF PERSEUS
DIRECTOR.

               (i)     Effective as of the date hereof, Perseus shall have the
option, exercisable in Perseus' sole discretion for so long as Perseus owns (i)
any of the Notes or (ii) Securities representing, convertible into and/or
exercisable for at least 50% of the Common Stock Equivalents (as defined below),
to cause the Board of Directors of the Company to appoint one director
designated by Perseus (which director shall be reasonably acceptable to the
Company) to the Company's Board of Directors (the "Perseus Director") in
accordance with the provisions of the Company's Bylaws. For so long as Perseus
owns (i) any of the Notes or (ii) Securities representing, convertible into
and/or exercisable for at least 50% of the Common Stock Equivalents, at each
annual meeting of the stockholders of the Company and at each special meeting of
the stockholders of the Company called for the purposes of electing directors,
and at any time at which stockholders of the Company shall have the right to, or
shall, vote for or consent to the election of directors, then the Company shall
nominate for election and the Board of Directors shall so support in connection
with the election thereto of the Perseus Director. The Company shall use its
best efforts to effectuate the purposes of this paragraph.

               (ii)    Perseus shall timely notify the Company in writing of the
person designated by it pursuant to this Section 4(f) as nominee for election to
the Board, and shall promptly furnish all information necessary for all required
filings with the SEC. In the absence of any notice from Perseus, the Perseus
Director then serving and previously designated by Perseus shall be renominated.

                                      -13-
<Page>

               (iii)   Any vacancy on the Board of Directors created by the
resignation, removal, incapacity or death of any Perseus Director shall be
filled by another Perseus Director in accordance with the terms of this Section
4(f) and Article III of the Company's Bylaws.

               (iv)    The Perseus Director shall be entitled to compensation,
reimbursement for reasonable out-of-pocket expenses incurred in connection with
the performance of his or her duties as a Director, directors' liability
insurance and indemnification in accordance with the Company's Articles of
Incorporation and policies established by the Board of Directors for all
Directors generally.

               (v)     In the event that Perseus exercises its right to
designate the Perseus Director, the Company and the Perseus Director shall enter
into an indemnification agreement in substantially the form of indemnification
agreement attached as EXHIBIT G hereto, the terms of which are in all respects
at least as favorable to the Perseus Director as those provided to any other
director of the Company. The indemnification rights set forth in such
indemnification agreement shall be in addition to any rights that the Perseus
Director may have at common law, pursuant to the Company's Articles of
Incorporation, the Company's Bylaws, Resolutions of the Board of Directors, or
otherwise.

               (vi)    The Company hereby agrees (i) to present for vote at the
next regularly scheduled or special meeting of the Company's shareholders
resolutions authorizing amendments to the Company's Articles of Incorporation
providing indemnification to, and limiting the liability of, directors of the
Company each to the fullest extent permitted under the California General
Corporation Law and other applicable law (the "Director Indemnification
Amendments"); (ii) to use its commercially reasonable best efforts to obtain the
shareholders' approval thereof; and (iii) to amend its Article of Incorporation
to incorporate the Director Indemnification Amendments promptly upon obtaining
such shareholder approval.

          (g)  EXTRAORDINARY ACTION. The Company and each of its subsidiaries
shall, for as long as Perseus holds any Notes obtain the written consent of
Perseus prior to (i) declaring any dividend or other distribution with respect
to its capital stock (other than the payment of a dividend by a subsidiary to
the Company, or mandatory payments by the Company to the holders of the
Company's Series B Preferred Stock required by the terms of the Company's
Articles of Incorporation as in effect on the date hereof) or the redemption
and/or purchase by it of any of its capital stock (other than a redemption by a
subsidiary of stock held by the Company), (ii) permitting, directly or
indirectly, the sale of all or substantially all of its assets, unless the
proceeds from such sale are used to repay in full the principal amount of and
all accrued but unpaid interest outstanding on the Notes; (iii) acquiring or
disposing (or permitting any of its subsidiaries to acquire or dispose) of
assets in a single or series of related transactions with a value in excess of
$1,000,000, other than in the ordinary course of business, (iv) permitting any
merger, consolidation or other business combination involving the Company in
which the stockholders of the Company immediately prior thereto do not own,
directly or indirectly, outstanding voting securities representing more than
fifty percent (50%) of the combined outstanding voting of the surviving entity
in such merger, consolidation or other business combination, unless the proceeds
resulting from such transaction are used to repay in full the principal amount,
all accrued but unpaid interest outstanding and any other amounts owed on the
Notes; (v) permitting any merger, consolidation or other business combination
involving any

                                      -14-
<Page>

subsidiary of the Company or the sale of its capital stock that results the
Company not owning, directly or indirectly, 100% of the capital stock of such
subsidiary; (vi) permitting, directly or indirectly, any acquisition of assets
by the Company or any of its subsidiaries outside the ordinary course of its
business or in excess of $1,000,000; (vii) authorizing any change in the
executive management team or the size of the Company's Board of Directors
(excluding changes resulting from actions taken by the stockholders of the
Company against or without the recommendations of the Company's Board of
Directors or any committee thereof); (viii) incurring any indebtedness for
borrowed money or other indebtedness or obligation that under GAAP is treated as
indebtedness for borrowed money, or any guaranty of any of the foregoing by it,
in an amount in excess of $1,000,000, unless the proceeds resulting from such
transaction are used to repay in full the principal amount, all accrued but
unpaid interest outstanding and any other amounts owed on the Notes; (ix) making
any loans that aggregate more than $1,000,000; (x) authorizing or entering into
any employment, consulting or similar compensation agreements (other than at
will arrangements) in excess of $150,000; (xi) creating, incurring, assuming or
suffering to exist any Lien of any kind on any of their properties or assets of
any kind, other than Permitted Liens; or (xii) agreeing to do any of the
foregoing.

For avoidance of doubt, the $1,000,000 limits set forth above shall apply to the
Company and its subsidiaries on an aggregate basis and not individually with
respect to each entity.

          (h)  EXPENDITURES. Without the prior approval of Perseus, neither the
Company nor any of its subsidiaries shall make or agree to make any per item
capital expenditure in excess of $200,000, or any capital expenditures in the
aggregate in excess of $1,000,000 during any twelve-month period.

          (i)  PUBLIC OR PRIVATE OFFERING. Without the prior approval of
Perseus, neither the Company nor any of its subsidiaries shall effect a public
offering of any securities of the Company or its subsidiaries registered under
the Securities Act or a private offering or sale of any securities of the
Company or its subsidiaries exempt from registration under the Securities Act
(collectively, a "Securities Sale"), unless the proceeds resulting from such
offering are used to repay in full the principal amount, all accrued but unpaid
interest outstanding and any other amounts owed on the Notes, if any.

          (j)  TAX COMPLIANCE. The Company shall pay all transfer, excise or
similar taxes (not including income or franchise taxes) in connection with the
issuance, sale, delivery or transfer by the Company to Perseus of the Notes, the
Warrants and the other Securities, and shall indemnify and save Perseus harmless
without limitation as to time against any and all liabilities with respect to
such taxes. The Company shall not be responsible for any taxes in connection
with the transfer of the Notes, the Warrants or other Securities by the holder
thereof. The obligations of the Company under this section 4(j) shall survive
the payment, prepayment or redemption of the Securities (as applicable) and the
termination of this Agreement.

          (k)  INSURANCE. The Company shall and shall cause each subsidiary of
the Company to maintain insurance covering, without limitation, fire, theft,
burglary, public liability, property damage, product liability, workers'
compensation and insurance on all property and assets material to the operation
of the business, all in amounts customary for the Company's industry. The
Company shall continue to maintain in full force and effect directors' and
officers'

                                      -15-
<Page>

insurance in an amount and on other terms as approved by a majority of the Board
of Directors of the Company. The Company shall, and shall cause each of its
subsidiaries to, pay all insurance premiums payable by them.

          (l)  COMPLIANCE WITH LAW. The Company shall, and shall cause each of
its subsidiaries to, comply with all laws, including environmental laws,
applicable to it, except where the failure to comply would not result in a
Material Adverse Effect.

          (m)  PLEDGE AND SECURITY AGREEMENTS. Each of the Company and IWS ID
Group shall grant to Perseus a perfected lien on and first-priority security
interest in all of their respective assets and properties, whether now or
hereafter existing, owned or acquired (including, but not limited to, all
outstanding shares of capital stock of each subsidiary of the Company and IWS ID
Group), all in accordance with the terms of the Pledge and Security Agreements.

          (n)  RIGHTS OF FIRST REFUSAL.

               (i)     SUBSEQUENT OFFERINGS. Perseus shall have the following
rights of first refusal with respect to New Securities (as defined below) that
the Company may from time to time propose to sell and issue after the date of
this Agreement:

          (a)  Until Perseus converts in full the Notes or the Company repays in
     full the full principal amount, all accrued but unpaid interest outstanding
     and any other amounts owed on the Notes, Perseus shall have a right of
     first refusal to purchase all such New Securities (other than the New
     Securities excluded by subsection (v) hereof); and

          (b)  At anytime after Perseus has converted in full the Notes or the
     Company has repaid in full the principal amount, all accrued but unpaid
     interest outstanding and any other amounts owed on the Notes and for so
     long as Perseus owns Securities representing, convertible into and/or
     exercisable for at least 50% of the Common Stock Equivalents (as defined
     below), Perseus shall have a right of first refusal to purchase up to that
     portion of such New Securities (other than the New Securities excluded by
     subsection (v) hereof) that equals the proportion that the number of shares
     of Common Stock issued and held, or issuable upon conversion of the Notes
     or exercise or conversion of the Warrants then held, by Perseus bears to
     the total number of shares of Common Stock then outstanding (assuming full
     conversion and exercise of all convertible or exercisable securities).

The term "New Securities" shall mean (A) any Common Stock, Preferred Stock or
other debt or equity security of the Company, or (B) any security convertible
into or exercisable for (including without limitation a warrant or option), with
or without consideration, any Common Stock, Preferred Stock or other debt or
equity security of the Company (including any option to purchase such a
convertible security). The term "Common Stock Equivalents" shall mean (A) prior
to exercise of the Perseus Option all shares of Common Stock issued to Perseus
pursuant to conversion of the Initial Note or exercise or conversion of the
Initial Warrant plus all shares of Common Stock issuable to Perseus upon
conversion of the Initial Note or exercise or conversion of the Initial Warrant
(determined as of the Initial Closing Date); and (B) following

                                      -16-
<Page>

exercise of the Perseus Option all shares of Common Stock issued to Perseus
pursuant to conversion of the Notes or exercise or conversion of the Warrants
plus all shares of Common Stock issuable to Perseus upon conversion of the Notes
or exercise or conversion of the Warrants (determined as of the Additional
Closing Date).

               (ii)    EXERCISE OF RIGHTS. If the Company proposes to issue any
New Securities, it shall give Perseus written notice of its intention,
describing the New Securities, the price and the terms and conditions upon which
the Company proposes to issue the same. Perseus shall have ten (10) Business
Days from the giving of such notice to agree to purchase up to 100% of the New
Securities for the price and upon the terms and conditions specified in the
notice by giving written notice to the Company and stating therein the quantity
of New Securities to be purchased.

               (iii)   ISSUANCE OF SECURITIES TO OTHER PERSONS. If Perseus fails
to exercise in full its rights of first refusal, the Company shall have ninety
(90) days thereafter to sell the New Securities in respect of which Perseus'
rights were not exercised, at a price and upon general terms and conditions
materially no more favorable to the purchasers thereof than specified in the
Company's notice to Perseus pursuant to subsection (ii) hereof. If the Company
has not sold such New Securities within ninety (90) days of the notice provided
pursuant to subsection (ii) hereof, the Company shall not thereafter issue or
sell any New Securities, without first offering such securities to Perseus in
the manner provided above.

               (iv)    EXCLUDED SECURITIES. The rights of first refusal
established by this Section 4(n) shall not apply with respect to any of the
following:

                       (A) shares of Common Stock (and/or options, warrants or
other Common Stock purchase rights issued pursuant to such options, warrants or
other rights) issued or to be issued to employees, officers or directors of the
Company, pursuant to stock purchase or stock option plans or other arrangements
that are approved by the Board of Directors;

                       (B) shares of Common Stock issued pursuant to any rights,
agreements, options or warrants outstanding as of the date hereof and disclosed
in writing to Perseus; and stock issued pursuant to any such rights or
agreements granted after the date hereof; provided that the rights of first
refusal established by this Section 4(n) applied (or were exempted pursuant to
this subsection (iv)) with respect to the initial sale or grant by the Company
of such rights or agreements;

                       (C) shares of Common Stock issued in connection with any
stock split, stock dividend or recapitalization by the Company;

                       (D) shares of Common Stock issued upon conversion of the
Notes or the Company's Series B Preferred Stock or upon exercise or conversion
of the Warrants;

                       (E) shares of Common Stock (and/or options, warrants or
other Common Stock purchase rights issued pursuant to such options, warrants or
other rights) issued for consideration other than cash pursuant to a merger,
consolidation, strategic alliance, acquisition or similar business combination
approved by the Board of Directors;

                                      -17-
<Page>

                       (F) shares of Common Stock (and/or options, warrants or
other Common Stock purchase rights issued pursuant to such options, warrants or
other rights) issued pursuant to any equipment leasing, real property leasing or
loan arrangement, or debt financing from a bank or similar financial or lending
institution approved by the Board of Directors, the principal purpose of which
is not to raise equity capital;

                       (G) shares of Common Stock (and/or options, warrants or
other Common Stock purchase rights issued pursuant to such options, warrants or
other rights) that are issued by the Company in connection with joint ventures,
manufacturing, marketing or distribution arrangements or technology transfer or
development arrangements; PROVIDED that such strategic transactions and the
issuance of shares in connection therewith have been approved by the Company's
Board of Directors and the principal purpose thereof is not to raise equity
capital; or

                       (H) shares of Common Stock (and/or options, warrants or
other Common Stock purchase rights issued pursuant to such options, warrants or
other rights) issued pursuant to any financing arrangement in which the proceeds
of such arrangement are used to repay in full the principal amount, all accrued
but unpaid interest outstanding and any other amounts owed on the Notes.

          (o)  AFFILIATE AND RELATED PARTY TRANSACTIONS. Without the prior
approval of Perseus, neither the Company nor any of its subsidiaries shall
permit any affiliate or other related party transaction except (i) transactions
in the ordinary course, and pursuant to the reasonable requirements, of the
Company's business and upon fair and reasonable terms that are fully disclosed
to Perseus prior to consummation thereof and are no less favorable to the
Company than would be obtained in a comparable arm's-length transaction with a
person not an affiliate of the Company or any of its subsidiaries and (ii)
payment of reasonable compensation to employees and directors' fees each
consistent with past practice.

          (p)  SHAREHOLDER APPROVAL OF ANTI-DILUTION PROVISIONS. Unless earlier
approved, the Company hereby agrees (i) to present for vote at the next
regularly scheduled or special meeting of the Company's shareholders resolutions
authorizing (A) the issuance of the full number of shares of Warrant Stock
issuable upon exercise of the Warrants but for the limitation provided in
Section 3(d)(vii) of the Warrants; and (B) the issuance of the full number of
shares of Common Stock issuable upon conversion of the Notes but for the
limitation provided in Section 7(e)(iv) of the Notes; and (ii) to use its
commercially reasonable best efforts to obtain the shareholders' approval
thereof, including but not limited to, by recommending to the shareholders that
they vote in favor of such resolutions and issuances.

          (q)  TERMINATION OF COVENANTS. The covenants set forth in this Section
4 (other than the covenants set forth in Sections 4(e) and (f) regarding Board
Observer and Director rights and their related expenses, and in Section 4(n)
regarding Rights of First Refusal) shall continue in effect until the full
principal amount, all accrued but unpaid interest outstanding and any other
amounts owed on the Notes are repaid in full.

     5.   LEGENDS. (a) Each certificate representing any of the Securities shall
bear a legend substantially in the following form:

                                      -18-
<Page>

          "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY
     THE HOLDER FOR ITS OWN ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW
     TO THE DISTRIBUTION OF SUCH SECURITIES. THE SECURITIES HAVE NOT BEEN
     REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND ANY
     APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE
     TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
     THE ACT AND COMPLIANCE WITH SUCH STATE SECURITIES LAWS, IN COMPLIANCE WITH
     RULE 144 UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL OR OTHER
     EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION AND/OR
     COMPLIANCE IS NOT REQUIRED."

The Company may instruct its transfer agent not to register the transfer of the
Securities, unless the conditions specified in the foregoing legends are
satisfied.

          (b)  Any legend endorsed on a certificate pursuant to Section 5(a) and
the stop transfer instructions with respect to such Securities shall be removed
and the Company shall issue a certificate without such legend to the holder
thereof (i) if such Securities are registered and sold under the Securities Act
and a prospectus meeting the requirements of Section 10 of the Securities Act is
available, (ii) if such legend may be properly removed under the terms of Rule
144 promulgated under the Securities Act, or (iii) if such holder provides the
Company with an opinion of counsel for such holder, reasonably satisfactory to
legal counsel for the Company to the effect that a sale, transfer or assignment
of such Securities may be made without registration.

     6.   INDEMNITY.

          (a)  INDEMNITY. The Company hereby agrees to indemnify and defend and
hold harmless Perseus, its respective affiliates, successors and assigns and
each of their respective officers, directors, employees and agents (an
"Indemnified Party" or collectively the "Indemnified Parties") from and against,
and agrees to pay or cause to be paid to the Indemnified Parties all amounts
equal to the sum of, any and all claims, demands, costs, expenses, losses and
other liabilities of any kind ("Losses") that the Indemnified Parties may incur
or suffer (including without limitation all reasonable legal fees and expenses)
which arise or result from any breach of any of its representations or
warranties, or failure by the Company to perform any of its covenants or
agreements, in this Agreement or in any other Transaction Document or in any
certificate or document delivered pursuant hereto or any other Transaction
Document, or arising out of any environmental law applicable to the Company or
its subsidiaries or otherwise relating to or arising out of the transactions
contemplated hereby, including but not limited to any third party claims arising
or resulting from such breach or failure, except to the extent such Losses arise
out of the gross negligence or willful misconduct of Perseus, its respective
affiliates, successors and assigns and their respective officers, directors,
employees and agents. The rights of Perseus hereunder shall be in addition to,
and not in lieu of, any other rights and remedies which may be available to them
by law or under the Articles of Incorporation of the Company or the Transaction
Documents.

                                      -19-
<Page>

          (b)  PROCEDURES.

               (i)     If a third party shall notify an Indemnified Party with
respect to any matter that may give rise to a claim for indemnification under
the indemnity set forth above in Section 6(a), the procedure set forth below
shall be followed.

                       (A) NOTICE. The Indemnified Party shall give to the party
providing indemnification (the "Indemnifying Party") written notice of any
claim, suit, judgment or matter for which indemnity may be sought under Section
6(a) promptly but in any event within 30 days after the Indemnified Party
receives notice thereof; PROVIDED, HOWEVER, that failure by the Indemnified
Party to give such notice shall not relieve the Indemnifying Party from any
liability it shall otherwise have pursuant to this Agreement except to the
extent that the Indemnifying Party is actually prejudiced by such failure. Such
notice shall set forth in reasonable detail (x) the basis for such potential
claim and (y) the dollar amount of such claim. The Indemnifying Party shall have
a period of 15 days within which to respond thereto. If the Indemnifying Party
does not respond within such 15-day period, the Indemnifying Party shall be
deemed to have accepted responsibility for such indemnity.

                       (B) DEFENSE OF CLAIM. With respect to a claim by a third
party against an Indemnified Party for which indemnification may be sought under
this Agreement, the Indemnifying Party shall have the right, at its option, to
be represented by counsel of its choice and to assume the defense or otherwise
control the handling of any claim, suit, judgment or matter for which indemnity
is sought, which is set forth in the notice sent by the Indemnified Party, by
notifying the Indemnified Party in writing to such effect within 15 days of
receipt of such notice; PROVIDED, HOWEVER, that the Indemnified Party shall have
the right to employ counsel to represent it if, in the Indemnified Party's
reasonable judgment based upon the advice of counsel, it is advisable in light
of the separate interests of the Indemnified Party, to be represented by
separate counsel, and in that event the reasonable fees and expenses of such
separate counsel shall be paid by the Indemnifying Party. If the Indemnifying
Party does not give timely notice in accordance with the preceding sentence, the
Indemnifying Party shall be deemed to have given notice that it does not wish to
control the handling of such claim, suit or judgment. In the event the
Indemnifying Party elects (by notice in writing within such fifteen day period)
to assume the defense of or otherwise control the handling of any such claim,
suit, judgment or matter for which indemnity is sought, the Indemnifying Party
shall indemnify and hold harmless the Indemnified Party from and against any and
all reasonable professional fees (including attorneys' fees, accountants,
consultants and engineering fees) and investigation expenses incurred by the
Indemnified Party after it provides notice under clause (A) and prior to such
election, notwithstanding the fact that the Indemnifying Party may not have been
so liable to the Indemnified Party had the Indemnifying Party not elected to
assume the defense of or to otherwise control the handling of such claim, suit,
judgment or other matter. In the event that the Indemnifying Party does not
assume the defense or otherwise control the handling of such matter, the
Indemnified Party may retain counsel, as an indemnification expense, to defend
such claim, suit, judgment or matter.

                       (C) FINAL AUTHORITY. The parties shall cooperate in the
defense of any such claim or litigation and each shall make available all books
and records which are relevant in connection with such claim or litigation. In
connection with any claim, suit or other

                                      -20-
<Page>

proceeding with respect to which the Indemnifying Party has assumed the defense
or control, the Indemnifying Party will not consent to the entry of any judgment
or enter into any settlement with respect to any matter which does not include a
provision whereby the plaintiff or claimant in the matter releases the
Indemnified Party from all liability with respect thereto, without the written
consent of the Indemnified Party, which shall not be unreasonably withheld. In
connection with any claim, suit or other proceeding with respect to which the
Indemnifying Party has not assumed the defense or control, the Indemnified Party
may not compromise or settle such claim without the consent of the Indemnifying
Party, which shall not be unreasonably withheld.

               (ii)    CLAIMS BETWEEN THE INDEMNIFYING PARTY AND THE INDEMNIFIED
PARTY. Any claim for indemnification under this Agreement which does not result
from the assertion of a claim by a third party shall be asserted by written
notice given by the Indemnified Party to the Indemnifying Party. The
Indemnifying Party shall have a period of 30 days within which to respond
thereto.

     7.   MISCELLANEOUS.

          (a)  WAIVERS AND AMENDMENTS. Unless otherwise provided, any provision
of this Agreement may be amended, waived or modified upon the written consent of
the Company and Perseus.

          (b)  GOVERNING LAW. THIS AGREEMENT AND ALL ACTIONS ARISING OUT OF OR
IN CONNECTION WITH THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

          (c)  EXCLUSIVE JURISDICTION. Any action or proceeding brought by a
Party arising out of or in connection with this Agreement or any other
Transaction Document, shall be brought solely in a court of competent
jurisdiction located in the County of New York, State of New York, or in the
United States District Court for the Southern District of New York. The Parties
agree not to contest such exclusive jurisdiction or seek to transfer any action
relating to such dispute to any other jurisdiction. Each of the Parties hereby
submits to personal jurisdiction and waives any objection as to venue in the
County of New York. Service of process on the Parties in any action arising out
of or relating to this Agreement shall be effective if mailed to the Parties in
accordance with Section 7(g) hereof.

          (d)  JURY WAIVER. THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY
IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS
AGREEMENT.

          (e)  ENTIRE AGREEMENT. This Agreement, together with the Exhibits
hereto and the Notes and Warrants, constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof.

          (f)  EXPENSES. The Company shall pay all reasonable out-of-pocket
expenses and fees and disbursements, including reasonable attorneys' fees,
incurred by Perseus in connection with (i) the negotiation and consummation of
the transactions contemplated hereunder, (ii) any amendment, modification or
waiver, or consent with respect to, any of the

                                      -21-
<Page>

Transaction Documents and (iii) any attempt to enforce any right of Perseus
against the Company, any subsidiary of the Company, any person or other entity,
that may be obligated to Perseus by virtue of any of the Transaction Documents,
unless a court of competent jurisdiction finally determines that Perseus is not
entitled to enforce such right.

          (g)  NOTICES. All notices, requests and other communications hereunder
shall be in writing and shall be deemed to have been duly given at the time of
receipt if delivered by hand or by facsimile transmission or three days after
being mailed, registered or certified mail, return receipt requested, with
postage prepaid to the applicable parties hereto at the address stated below or
if any party shall have designated a different address or facsimile number by
notice to the other party given as provided above, then to the last address or
facsimile number so designated.

          If to the Company:

               ImageWare Systems, Inc.
               10883 Thornmint Road
               San Diego, California 92127
               Attention:   S. James Miller, Jr., CEO, President and Chairman
               Facsimile:   (858) 673-0291

          with a copy to:

               Cooley Godward LLP
               4401 Eastgate Mall
               San Diego, California 92121-1909
               Attention:   M. Wainwright Fishburn, Jr., Esq.
               Facsimile:   (858) 550-6420

          If to Perseus:

               Perseus 2000, L.L.C.
               2099 Pennsylvania Ave., N.W.
               Suite 900
               Washington, D.C. 20006-1813
               Attention: Chip Newton, Managing Director; and
                          Rodd Macklin, Chief Financial Officer
               Facsimile: (202) 429-0588

          with a copy to:

               Arnold & Porter
               1600 Tysons Boulevard; Suite 900
               McLean, Virginia 22102-4865
               Attention:   Robert B. Ott, Esq.
               Facsimile:   (703) 720-7399

                                      -22-
<Page>

          (h)  VALIDITY. If any provision of this Agreement or any of the
Transaction Documents shall be judicially determined to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions thereof shall not in any way be affected or impaired thereby.

          (i)  COUNTERPARTS. This Agreement may be executed in any number of
counterparts. This Agreement, and each other agreement or instrument entered
into in connection herewith or therewith or contemplated hereby or thereby, and
any amendments hereto or thereto, to the extent signed and delivered by means of
a facsimile machine, shall be treated in all manner and respects as an original
agreement or instrument and shall be considered to have the same binding legal
effect as if it were the original signed version thereof delivered in person. At
the request of any party hereto or to any such agreement or instrument, each
other party hereto or thereto shall re-execute original forms thereof and
deliver them to all other parties. No party hereto or to any such agreement or
instrument shall raise the use of a facsimile machine to deliver a signature or
the fact that any signature or agreement or instrument was transmitted or
communicated through the use of a facsimile machine as a defense to the
formation or enforceability of a contract and each such party forever waives any
such defense.

          (j)  PUBLICITY. Neither Perseus nor the Company shall issue any press
release or make any public disclosure regarding the transactions contemplated
hereby unless such press release or public disclosure is approved by those
parties mentioned in such press release or public disclosure in advance.
Notwithstanding the foregoing, each of the parties hereto, may, if required by
the SEC, American Stock Exchange or other regulatory bodies, make such public
disclosures with respect to the transactions contemplated hereby as each may be
advised by counsel is legally necessary or advisable; provided, however, that
the disclosing party shall give the other party prior written notice of such
requirement and a copy of the proposed public disclosure, in all cases with
sufficient time for such other parties to seek a protective order or other limit
on the proposed public disclosure (unless the disclosing party would suffer
penalties or sanctions for failure to immediately disclose such information).

     The parties hereto acknowledge that immediately following the Initial
Closing, the Company intends to file with the SEC a current report on Form 8-K
regarding the transactions contemplated hereby, which report likely will include
the Transaction Documents attached as exhibits thereto. Perseus hereby agrees
that it shall not seek a protective order or other limit on the proposed public
disclosure of such exhibits to the Transaction Documents. The Company hereby
agrees that it shall provide Perseus with a copy of any such report at least two
Business Days prior to the intended date of such filing and shall not file such
report unless approved in advance by Perseus, which approval shall not be
unreasonably withheld or delayed.

          (k)  SUCCESSION AND ASSIGNMENT. Except as otherwise expressly provided
in this Agreement and subject to the other Transaction Documents and applicable
law, the provisions hereof shall inure to the benefit of, and be binding upon,
the successors, assigns, permitted transferees, heirs, executors and
administrators of the parties hereto. In the event that any person or persons
other than Perseus holds a majority of the Notes issued pursuant to this
Agreement, any proposed action that requires the prior written consent of
Perseus shall instead require the prior written consent of the holders of a
majority of the Notes issued pursuant to this Agreement.

                                      -23-
<Page>

          (l)  Additional Definitions. In addition to the terms defined
elsewhere in this Agreement, the following term shall have the meaning set forth
below:

     "Business Day" means any day other than a Saturday, Sunday or other day on
which the national or state banks located in the State of New York, the State of
California or the District of Columbia are authorized to be closed.

     "Material Contracts" means (i) all of the Company's and its subsidiaries'
contracts, agreements, leases or other instruments to which the Company or any
of its subsidiaries is a party or by which the Company, its subsidiaries or its
properties are bound, which involve prospective fixed and/or contingent payments
or expenditures by or to the Company or its subsidiaries of more than $100,000
or in excess of the normal ordinary and usual requirements of its business or
which extend for a term of more than a year from the date hereof, (ii) all of
the Company's and its subsidiaries' loans or advances to any person or entity,
and all loan agreements, bank lines of credit agreements, indentures, mortgages,
deeds of trust, pledge and security agreements, factoring agreements,
conditional sales contracts, letters of credit or other debt instruments to
which the Company or any of its subsidiaries is a party, (iii) any guarantees by
the Company or any of its subsidiaries, (iv) all material operating or capital
leases for equipment to which the Company or any of its subsidiaries is a party,
(v) all non-competition and similar agreements to which the Company is a party,
(vi) all contracts for the employment of any officer or employee, (vii) all
contracts, agreements or commitments with any agent, independent contractor,
advisor or dealer that are not cancelable by it on notice of not longer than 30
days, (viii) all consulting agreements, (ix) all distributor and sales agency
agreements, (x) any collective bargaining or union agreements, contracts or
commitments, and (xi) all other contracts filed, or required to be filed by the
Company as an exhibit to the Company Reports pursuant to Item 601 of Regulation
S-B promulgated pursuant to the Securities Act.

     "Permitted Liens" shall have the meaning ascribed to such term in the
applicable Pledge and Security Agreement.

                      [SIGNATURES APPEAR ON FOLLOWING PAGE]

                                      -24-
<Page>

     IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date and year first written above.

                                      COMPANY:

                                      IMAGEWARE SYSTEMS, INC.

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

                                            Name:  S. James Miller, Jr.

                                            Title: Chairman, CEO and President

                                      PERSEUS 2000, L.L.C.

                                      By:   /s/ Ray E. Newton III
                                            ------------------------------------

                                            Name:  Ray E. Newton III

                                            Title: Managing Director

                                      -25-<Page>

                                                                    EXHIBIT 10.2

                                                                  EXECUTION COPY

                          PLEDGE AND SECURITY AGREEMENT

     THIS PLEDGE AND SECURITY AGREEMENT is entered into as of May 22, 2002 (as
from time to time amended, modified, restated, supplemented and in effect, this
"Security Agreement"), by and between ImageWare Systems, Inc., a California
corporation ("Grantor"), in favor of Perseus 2000, L.L.C., a Delaware limited
liability company (the "Secured Party"), as agent for itself and the other
holders from time to time of the Notes (as defined below) (collectively, the
"Note Holders").

                                    RECITALS

     A.   Grantor and the Secured Party have entered into a Note and Warrant
Purchase Agreement dated as of May 22, 2002 (the "Purchase Agreement") pursuant
to which Grantor has issued to the Secured Party Senior Secured Convertible
Promissory Notes dated of even date herewith in the aggregate principal amount
of Two Million Dollars ($2,000,000) (together with any Senior Secured
Convertible Promissory Notes issued in payment of interest on any Note and any
Additional Notes issued at the Additional Closing, each, a "Note" and
collectively, the "Notes"). The purchase and sale of the Notes is governed by
the Purchase Agreement.

     B.   In order to induce the Secured Party to make the loan evidenced by the
Notes, and in consideration therefor, Grantor has agreed to pledge, collaterally
assign and grant to the Secured Party, as agent for itself and any other future
Note Holders, a perfected lien on and security interest in all of Grantor's
assets and properties (including, but not limited to, all outstanding shares of
capital stock of each subsidiary of Grantor, except as otherwise provided
herein), whether now or hereafter existing, owned or acquired, all pursuant to
the terms of this Security Agreement in order to secure (i) the due and punctual
payment of (A) any current or future principal and interest (including, without
limitation, interest accruing during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding, regardless of whether allowed or
allowable in such proceeding) on the Notes, when and as due, whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise, and (B) all other monetary obligations, including but not limited to,
fees, costs, expenses and indemnities, whether primary, secondary, direct,
contingent, fixed or otherwise (including monetary obligations incurred during
the pendency of any bankruptcy, insolvency, receivership or other similar
proceeding regardless of whether allowed or allowable in such proceeding), of
Grantor now or hereafter due under the Notes or this Security Agreement, and
(ii) the due and punctual performance of all covenants, agreements, obligations
and liabilities of Grantor now or hereafter due under or pursuant to the Notes,
the Purchase Agreement or this Security Agreement (collectively, the
"Obligations").

     C.   It is a condition precedent to the making of the loan evidenced by the
Notes that Grantor execute and deliver this Security Agreement.

     NOW, THEREFORE, for and in consideration of the covenants and provisions
set forth herein, and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor agrees as follows:

<Page>

                                    ARTICLE 1

                                SECURITY INTEREST

     1.1  GRANT OF SECURITY INTEREST. As security for the Obligations, Grantor
hereby collaterally assigns, pledges and grants a continuing and unconditional
security interest to the Secured Party, its successors and assigns, in and to
all of the following:

          (a)  all equipment (including all "Equipment" as defined in Section
9102(a)(33) of the Uniform Commercial Code as in effect from time to time in the
State of California (such code, together with any other successor or applicable
adoption of the Uniform Commercial Code in any applicable jurisdiction, the
"Code")) machinery, vehicles, fixtures, improvements, supplies, office
furniture, fixed assets, all as now owned or hereafter acquired by Grantor or in
which Grantor has or hereafter acquires any interest, and any items substituted
therefor as replacements and any additions or accessions thereto;

          (b)  all goods (including all "Goods" as defined in Section
9102(a)(44) of the Code) and all inventory (including all "Inventory" as defined
in Section 9102(a)(48) of the Code) of Grantor, now owned or hereafter acquired
by Grantor or in which Grantor has or hereafter acquires any interest, including
but not limited to, raw materials, scrap inventory, work in process, products,
packaging materials, finished goods, all documents of title, chattel paper and
other instruments covering the same and all substitutions therefor and additions
thereto (all of the property described in this clause (b) being hereinafter
collectively referred to as "Inventory");

          (c)  all present and future accounts in which Grantor has or hereafter
acquires any interest (including all "Accounts" as defined in Section 9102(a)(2)
of the Code), contract rights (including all rights to receive payments and
other rights under all equipment and other leasing contracts) and rights to
payment and rights or accounts receivable evidencing or representing
indebtedness due or to become due Grantor on account of goods sold or leased or
services rendered, claims, instruments and other general intangibles (including
tax refunds, royalties and all other rights to the payment of money of every
nature and description), including but not limited to, any such right evidenced
by chattel paper, and all liens, securities, guaranties, remedies, security
interests and privileges pertaining thereto (all of the property described in
this clause (c) being hereinafter collectively referred to as "Accounts");

          (d)  all investment property now owned or hereafter acquired by
Grantor (including all "Investment Property" as defined in Section 9102(a)(49)
of the Code), including, without limitation, all securities (certificated and
uncertificated), securities accounts, securities entitlements, commodity
contracts and commodity accounts, excluding any of the foregoing also excluded
by the immediately following paragraph (e);

          (e)  (i)     all of the shares of capital stock of whatever class of
the Issuers, now owned or hereafter acquired by Grantor, together with in each
case the

                                       -2-
<Page>

certificates representing the same and 66 2/3% of the shares of capital
stock of whatever class of the Foreign Issuers, now owned or hereafter acquired
by Grantor, together with in each case the certificates representing the same
(collectively, the "PLEDGED STOCK");

               (ii)    all shares, securities, moneys or property representing
a dividend on, or a distribution or return of capital in respect of any of the
Pledged Stock, resulting from a split-up, revision, reclassification or other
like change of any of the Pledged Stock or otherwise received in exchange for
any of the Pledged Stock and all Equity Rights issued to the holders of, or
otherwise in respect of, any of the Pledged Stock; and

               (iii)   without affecting the obligations of Grantor under any
provision prohibiting such action under any loan document, in the event of any
consolidation or merger in which any Issuer is not the surviving corporation,
all shares of each class of the capital stock of the successor corporation
(unless such successor corporation is Grantor itself) formed by or resulting
from such consolidation or merger (collectively, and together with the property
described in clauses (i) and (ii) above, the "STOCK COLLATERAL");

          (f)  all general intangibles now owned or hereafter acquired by
Grantor or in which Grantor has or hereafter acquires any interest (including
all "General Intangibles" as defined in Section 9102(a)(42) of the Code),
including but not limited to, payment intangibles (including all "Payment
Intangibles" as defined in Section 9102(a)(61) of the Code), choses in action
and causes of action and all licenses and permits (to the extent the collateral
assignment of such licenses and permits is not prohibited by applicable law),
contract rights (including but not limited to all rights under all Material
Contracts (as defined in the Purchase Agreement) and all rights to receive
payments and other rights under all equipment and other leasing contracts,
instruments and documents owned or used by Grantor, and any goodwill relating
thereto);

          (g)  all other property owned by Grantor or in which Grantor has or
hereafter acquires any interest, wherever located, and of whatever kind or
nature, tangible or intangible, including all Intellectual Property;

          (h)  all insurance policies of any kind maintained in effect by
Grantor, now existing or hereafter acquired, under which any of the property
referred to in clauses (a) through (f) above is insured, including but not
limited to, any proceeds payable to Grantor pursuant to such policies;

          (i)  all moneys, cash collateral, chattel paper (including all
"Chattel Paper" as defined in Section 9102(a)(11) of the Code), checks, notes,
bills of exchange, documents of title, money orders, negotiable instruments,
commercial paper, and other securities, letters of credit (including all
"Letter-of-Credit Rights" as defined in Section 9102(a)(51) of the Code),
supporting obligations (including all "Supporting Obligations" as defined in
Section 9102(a)(77) of the Code), instruments (including all "Instruments" as
define in Section 9102(a)(47) of the Code), documents (including all "Documents"
as defined in Section 9102(a)(30) of the Code), deposit accounts (including

                                       -3-
<Page>

all "Deposit Accounts" as defined in Section 9102(a)(29) of the Code), deposits
and credits from time to time whether or not in the possession of or under the
control of the Secured Party; and

          (j)  any consideration received when all or any part of the property
referred to in clauses (a) through (i) above is sold, transferred, exchanged,
leased, collected or otherwise disposed of, or any value received as a
consequence of possession thereof, including but not limited to, all products,
proceeds (including all "Proceeds" as defined in Section 9102(a)(64) of the
Code), cash, negotiable instruments and other instruments for the payment of
money, chattel paper, security agreements or other documents, insurance proceeds
or proceeds of other proceeds now or hereafter owned by Grantor or in which
Grantor has an interest.

       The property set forth in clauses (a) through (j) of the preceding
sentence, together with property of a similar nature which Grantor hereafter
owns or in which Grantor hereafter acquires any interest, is referred to herein
as the "Collateral."

     As used in this Security Agreement, the following terms shall have the
following meanings:

     "COPYRIGHT COLLATERAL" shall mean all Copyrights, whether now owned or
hereafter acquired by Grantor.

     "COPYRIGHTS" shall mean, collectively, (a) all copyrights, copyright
registrations and applications for copyright registrations, (b) all renewals and
extensions of all copyrights, copyright registrations and applications for
copyright registration and (c) all rights, now existing or hereafter coming into
existence, (i) to all income, royalties, damages and other payments (including
in respect of all past, present or future infringements) now or hereafter due or
payable under or with respect to any of the foregoing, (ii) to sue for all past,
present and future infringements with respect to any of the foregoing and (iii)
otherwise accruing under or pertaining to any of the foregoing throughout the
world.

     "EQUITY RIGHTS" shall mean, with respect to any person, any outstanding
subscriptions, options, warrants, commitments, preemptive rights or agreements
of any kind (including any stockholders' or voting trust arrangements) for the
issuance, sale, registration or voting of, or outstanding securities convertible
into, any additional shares of capital stock of any class, or partnership or
other ownership interests of any type in, such person.

     "FOREIGN ISSUERS" shall mean, collectively, each subsidiary of Grantor
organized under the laws of any jurisdiction outside of the United States of
America, directly or indirectly, that is the issuer of any shares of capital
stock now owned or hereafter acquired by Grantor.

     "ISSUERS" shall mean, collectively, each subsidiary of Grantor organized
under the laws of any jurisdiction within the United States of America, directly
or indirectly, that is the issuer of any shares of capital stock now owned or
hereafter acquired by Grantor.

                                       -4-
<Page>

     "INTELLECTUAL PROPERTY" shall mean all Copyright Collateral, all Patent
Collateral and all Trademark Collateral, together with (a) all inventions,
processes, production methods, proprietary information, know-how and trade
secrets; (b) all licenses or user or other agreements granted to Grantor with
respect to any of the foregoing, in each case whether now or hereafter owned or
used, including all licenses or other agreements with respect to the Copyright
Collateral, the Patent Collateral or the Trademark Collateral listed; (c) all
information, customer lists, identification of suppliers, data, plans,
blueprints, specifications, designs, drawings, recorded knowledge, surveys,
engineering reports, test reports, manuals, materials standards, processing
standards, performance standards, catalogs, computer and automatic machinery
software and programs; (d) all field repair data, sales data and other
information relating to sales or service of products now or hereafter
manufactured; (e) all accounting information and all media in which or on which
any information or knowledge or data or records may be recorded or stored and
all computer programs used for the compilation or printout of such information,
knowledge, records or data; (f) all governmental approvals now held or hereafter
obtained by Grantor in respect of any of the foregoing; and (g) all causes of
action, claims and warranties now owned or hereafter acquired by Grantor in
respect of any of the foregoing. It is understood that Intellectual Property
shall include all of the foregoing owned or acquired by Grantor on a worldwide
basis.

     "PATENT COLLATERAL" shall mean all Patents, whether now owned or hereafter
acquired by Grantor.

     "PATENTS" shall mean, collectively, (a) all patents and patent
applications, (b) all reissues, divisions, continuations, renewals, extensions
and continuations-in-part of all patents or patent applications and (c) all
rights, now existing or hereafter coming into existence, (i) to all income,
royalties, damages, and other payments (including in respect of all past,
present and future infringements) now or hereafter due or payable under or with
respect to any of the foregoing, (ii) to sue for all past, present and future
infringements with respect to any of the foregoing and (iii) otherwise accruing
under or pertaining to any of the foregoing throughout the world, including all
inventions and improvements described or discussed in all such patents and
patent applications.

     "PERMITTED LIENS" shall mean (a) any and all liens or security interests
granted by Grantor or its subsidiaries existing on the date hereof and described
in SCHEDULE C attached hereto; (b) liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings if adequate reserves with respect to such liens
are maintained on the books of Grantor in accordance with GAAP; (c) liens (i)
upon or in any equipment acquired or held by Grantor to secure the purchase
price or lease of such equipment or indebtedness incurred solely for the purpose
of financing the acquisition or lease of such equipment, or (ii) existing on
such equipment at the time of its acquisition; provided that in each of (i) and
(ii) above, (A) the lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment and (B) the principal
amount of such indebtedness secured by any such lien shall at no time exceed the
fair market value of such equipment at the time it was acquired; (d) liens
arising from judgments, decrees or attachments to the extent and only so long as
such judgment, decree or

                                       -5-
<Page>

attachment has not caused or resulted in an Event of Default; (e) leases,
subleases, licenses and sublicenses granted to others in the ordinary course of
Grantor's business not interfering in any material respect with the conduct of
the business of Grantor and not materially detracting from the value of the
Collateral; (f) easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar liens affecting real
property not interfering in any material respect with the ordinary conduct of
business of Grantor and not materially detracting from the value of the property
subject to such lien; (g) liens incurred or deposits made in the ordinary course
of Grantor's business in connection with worker's compensation, unemployment
insurance, social security and other like laws; (h) liens in favor of customs
and revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (i) carriers',
warehousemen's, materialmen's, mechanics', landlords', repairmen's, employees'
or other like liens arising in the ordinary course of business which are not
delinquent or which are being contested in good faith by appropriate
proceedings; and (j) liens arising solely by virtue of any statutory or common
law provision relating to banker's liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a creditor
depository institution.

     "TRADEMARK COLLATERAL" shall mean all Trademarks, whether now owned or
hereafter acquired by Grantor. Notwithstanding the foregoing, the Trademark
Collateral shall not include any Trademark which would be rendered invalid,
abandoned, void or unenforceable by reason of its being included as part of the
Trademark Collateral.

     "TRADEMARKS" shall mean, collectively, (a) all trade names, trademarks and
service marks, logos, trademark and service mark registrations and applications
for trademark and service mark registrations, (b) all renewals and extensions of
any of the foregoing and (c) all rights, now existing or hereafter coming into
existence, (i) to all income, royalties, damages and other payments (including
in respect of all past, present and future infringements) now or hereafter due
or payable under or with respect to any of the foregoing, (ii) to sue for all
past, present and future infringements with respect to any of the foregoing and
(iii) otherwise accruing under or pertaining to any of the foregoing throughout
the world, together, in each case, with the product lines and goodwill of the
business connected with the use of, or otherwise symbolized by, each such trade
name, trademark and service mark.

     1.2  PERFECTION OF SECURITY INTERESTS.

          (a)  Grantor hereby authorizes the Secured Party to file a financing
statement or financing statements (the "Financing Statement") describing the
Collateral in any and all jurisdictions where, and with any and all governmental
authorities with whom, the Secured Party reasonably deems such filing to be
necessary or appropriate including, without limitation, the jurisdiction of the
debtor's location for purposes of the Code, the United States Patent and
Trademark Office and the United States Copyright Office. Grantor will reimburse
the Secured Party for any and all reasonable costs, charges and expenses
(including reasonable fees of counsel) incurred in connection with such filings.
For purposes of this Section 1.2(a), the Financing Statements shall be deemed to
include any amendment, modification, assignment, continuation statement or

                                       -6-
<Page>

other similar instrument consistent with the rights granted to the Secured Party
under this Security Agreement and the Purchase Agreement.

          (b)  Grantor shall have possession of the Collateral, except where as
expressly otherwise provided in this Security Agreement or where the Secured
Party chooses to perfect its security interest by possession in addition to the
filing of a Financing Statement. Where Collateral is in the possession of a
third party, Grantor will join with the Secured Party in notifying the third
party of the Secured Party's security interest therein and obtaining an
acknowledgement from the third party that it is holding the Collateral for the
benefit of the Secured Party.

          (c)  Grantor will cooperate with the Secured Party in obtaining
control (including "Control" as contemplated by Section 9312(b) of the Code)
with respect to Collateral consisting of deposit accounts, investment property,
letter of credit rights and electronic chattel paper.

          (d)  Grantor will not create any chattel paper without a legend on
such chattel paper reasonably acceptable to the Secured Party indicating that
the Secured Party has a secured interest in such Chattel Paper.

          (e)  Grantor shall, upon the Grantor's acquiring, or otherwise
becoming entitled to the benefits of, any Copyright (or copyrightable material),
Patent (or patentable invention), Trademark (or associated goodwill) or other
Intellectual Property or upon or prior to Grantor's filing, either directly or
through any agent, licensee or other designee, of any application with any
governmental authority for any Copyright, Patent, Trademark, or other
Intellectual Property, in each case after the date hereof, execute and deliver
such contracts, agreements and other instruments as the Secured Party may
reasonably request to evidence, validate, perfect and establish the priority of
the security interest granted by this Security Agreement in such and any related
Intellectual Property.

          (f)  Grantor shall deliver and pledge to the Secured Party any and all
certificates representing the Pledged Stock, accompanied by undated stock powers
duly executed in blank.

          (g)  Grantor shall upon the acquisition after the date hereof by
Grantor of any Stock Collateral, promptly either (x) transfer and deliver to the
Secured Party all such Stock Collateral (together with the certificates
representing such Stock Collateral securities duly endorsed in blank or
accompanied by undated stock powers duly executed in blank) or (y) take such
other action as the Secured Party shall deem reasonably necessary or appropriate
to perfect, and establish the priority of, the security interest granted by this
Security Agreement in such Stock Collateral.

     1.3  INTELLECTUAL PROPERTY. For the purpose of enabling and to the extent
necessary to enable the Secured Party to exercise its rights, remedies, powers
and privileges under Article 4 at such time or times as the Secured Party shall
be lawfully entitled to exercise such rights, remedies, powers and privileges,
and for no other purpose, Grantor hereby grants to the Secured Party, to the
extent assignable, an

                                       -7-
<Page>

irrevocable, nonexclusive license (exercisable without payment of royalty or
other compensation to Grantor) to use, assign, license or sublicense any of the
Intellectual Property of Grantor, together with reasonable access to all media
in which any of the licensed items may be recorded or stored and to all computer
programs used for the compilation or printout of such items. Such license shall
terminate upon full and final payment, performance or other satisfaction of the
Obligations.

     1.4  SPECIAL PROVISIONS RELATING TO STOCK COLLATERAL.

          (a)  So long as no Event of Default shall have occurred and be
continuing, Grantor shall have the right to exercise all voting, consensual and
other powers of ownership pertaining to the Stock Collateral for all purposes
not inconsistent with the terms of any loan document; PROVIDED, that Grantor
agrees that it will not vote the Stock Collateral in any manner that is
inconsistent with the terms of any loan document.

          (b)  So long as no Event of Default shall have occurred and be
continuing, Grantor shall be entitled to receive and retain any dividends on the
Stock Collateral paid in cash out of earned surplus.

          (c)  If any Event of Default shall have occurred and be continuing,
and whether or not the Secured Party exercises any available right to declare
any Obligation due and payable or seeks or pursues any other right, remedy,
power or privilege available to it under applicable law, this Security Agreement
or any other loan document, all dividends and other distributions on the Stock
Collateral shall be paid directly to the Secured Party, subject to the terms of
this Security Agreement.

                                    ARTICLE 2
                         REPRESENTATIONS AND WARRANTIES

     2.1  REPRESENTATIONS AND WARRANTIES. Grantor represents and warrants as of
the date hereof that:

          (a)  Grantor has absolute, good and marketable title to all the
Collateral, wherever and whenever acquired, free and clear of any lien, except
for Permitted Liens, and Grantor has not filed, nor is there on record, a
financing statement under the Code (or similar statement or instrument of
registration under the law of any jurisdiction) covering any Collateral except
as permitted by the Purchase Agreement and except for Permitted Liens;

          (b)  SCHEDULE A hereto lists, as to Grantor, (i) Grantor's chief
executive office and other place(s) of business, (ii) Grantor's legal
organizational structure and its jurisdiction of incorporation, (iii) the
address where records relating to the Collateral are maintained, (iv) any other
location of any other equipment and goods (other than mobile goods) included in
the Collateral, (v) location of leased facilities and name of lessor/sublessor
and (vi) any fictitious names used by Grantor.

                                       -8-
<Page>

          (c)  Grantor has paid or will pay when due all taxes, fees,
assessments and other charges now or hereafter imposed upon the Collateral
except for any tax, fee, assessment or other charge the validity of which is
being contested in good faith by appropriate proceedings and so long as Grantor
has set aside on its books adequate reserves with respect thereto;

          (d)  as a result of the execution and delivery of this Security
Agreement and upon the filing of any financing statements or other documents
necessary to assure, preserve and perfect the security interest created hereby
and to the extent a lien may be perfected by filing a financing statement, the
Secured Party shall have a valid, perfected, enforceable lien on, and a
continuing security interest in, the Collateral, enforceable and superior as
such as against creditors and purchasers (other than purchasers of Inventory in
the ordinary course of business) and as against any owner of real property where
any of the equipment or Inventory is located and as against any purchaser of
such real property and any present or future creditor obtaining a mortgage or
other lien on such real property, and such lien shall be superior and prior to
all other liens, subject, in each case, only to Permitted Liens to the extent
such Permitted Liens by statute have priority equal to or greater than such
security interest;

          (e)  the amount that has been represented by Grantor to the Secured
Party as owing by all obligors (such obligors being hereinafter referred to as
the "Account Debtors") in the aggregate with respect to Accounts has not
materially deviated from the correct amount actually and unconditionally owing
at such time by such Account Debtors subject to set off, return and similar
rights arising in the ordinary course of business; all Accounts represent bona
fide transactions completed in accordance with the terms and provisions
contained in the invoices and other documents evidencing the same; as of the
date hereof, there are no material setoffs, counterclaims or disputes existing
or asserted with respect to Accounts subject to set off, return and similar
rights arising in the ordinary course of business, and Grantor has not made any
agreement with any Account Debtor for any material deduction therefrom except
set-off and claims arising in the ordinary course of business; to Grantor's
knowledge, all Account Debtors have the capacity to contract and are solvent; to
Grantor's knowledge the goods giving rise to Accounts are not subject to any
lien, claim or encumbrance except set-off and claims arising in the ordinary
course of business, except in favor of the Secured Party and except for
Permitted Liens and as permitted by the Purchase Agreement; and, except as set
forth herein, Grantor does not have knowledge of any fact or circumstances which
would impair the validity or collectability of Accounts;

          (f)  except as disclosed on Schedule 2.1(f), none of the Collateral is
held by a third party in any location as assignee, trustee, bailee, consignee or
in any similar capacity; and

          (g)  The Pledged Stock evidenced by the certificates described in
Section 1.1(e) hereof (i) is duly authorized, validly existing, fully paid and
nonassessable, and none of such Pledged Stock is subject to any contractual
restriction, or any restriction under the charter or by-laws of the respective
Issuer or Foreign Issuer of such Pledged Stock, upon the transfer of such
Pledged Stock (except for any such restriction contained

                                       -9-
<Page>

in any loan document); and (ii) constitutes all of the issued and outstanding
shares of capital stock of any class of the Issuers, and approximately 66 2/3%
of the issued and outstanding shares of capital stock of any class of the
Foreign Issuers, beneficially owned by Grantor on the date hereof (whether or
not registered in the name of Grantor), and SCHEDULE B correctly identifies, as
of the date hereof, the respective Issuers or Foreign Issuers of such Pledged
Stock and the respective class of the shares comprising such Pledged Stock and
the respective number (and registered owners of) of the shares evidenced by each
such certificate.

     2.2  SURVIVAL. All representations, warranties and agreements of Grantor
contained in this Security Agreement shall survive the execution, delivery and
performance of this Security Agreement until the termination of this Security
Agreement pursuant to Section 6.5 hereof.

                                    ARTICLE 3
                                    COVENANTS

     3.1  COVENANTS. Grantor hereby covenants and agrees with the Secured Party
that so long as this Security Agreement shall remain in effect or any
Obligations shall remain unpaid or unperformed:

          (a)  Grantor shall promptly give written notice to the Secured Party
of any levy or attachment, execution or other process against any of the
Collateral;

          (b)  at Grantor's own cost and expense, Grantor shall take any and all
actions reasonably necessary or desirable to defend the Collateral against the
claims and demands of all persons other than the Secured Party, and to defend
the security interest of the Secured Party in the Collateral and the priority
thereof against any lien of any nature, except in each case for Permitted Liens;

          (c)  Grantor shall keep all tangible Collateral properly insured and
in good order and repair (normal wear and tear excepted) and immediately notify
the Secured Party of any event causing any material loss, damage or depreciation
in value of the Collateral in the aggregate and of the extent of such loss,
damage or depreciation;

          (d)  Grantor shall mark any Collateral that is chattel paper with a
legend showing the Secured Party's lien and security interest therein;

          (e)  Grantor shall:

               (i) furnish to the Secured Party from time to time (but, unless
an Event of Default shall have occurred and be continuing, no more frequently
than quarterly) statements and schedules further identifying and describing the
Copyright Collateral, the Patent Collateral and the Trademark Collateral and
such other reports in connection with the Copyright Collateral, the Patent
Collateral and the Trademark Collateral, as the Secured Party may reasonably
request, all in reasonable detail;

                                      -10-
<Page>

               (ii)    prior to filing, either directly or through an agent,
licensee or other designee, any application for any Copyright, Patent or
Trademark, furnish to the Secured Party prompt notice of such proposed filing;
and

               (iii)   promptly give written notice to the Secured Party of any
other change in the intellectual property rights material to its businesses.

          (f)  Grantor shall:

               (i) (either itself or through licensees) for each Trademark,
(A) to the extent consistent with past practice and good business judgment,
continue to use such Trademark on each and every trademark class of goods
applicable to its current line as reflected in its current catalogs, brochures
and price lists in order to maintain such Trademark in full force and effect
free from any claim of abandonment for nonuse, (B) maintain as in the past the
quality of products and services offered under such Trademark, (C) employ such
Trademark with the appropriate notice of registration and (D) not (and not
permit any licensee or sublicensee to) do any act or knowingly omit to do any
act whereby any Trademark material to the conduct of its business may become
invalidated, except in each case as Grantor's business or products may change
over time as may be consistent with good business judgment;

               (ii)    (either itself or through licensees) not do any act or
knowingly omit to do any act whereby any Patent material to the conduct of its
business may become abandoned or dedicated;

               (iii)   notify the Secured Party immediately if it knows or has
reason to know that any Intellectual Property material to the conduct of its
business may become abandoned or dedicated, or of any adverse determination or
development (including the institution of, or any such determination or
development in, any proceeding before any governmental authority) regarding
Grantor's ownership of any Intellectual Property material to its business, its
right to copyright, patent or register the same (as the case may be), or its
right to keep, use and maintain the same;

               (iv)    take all necessary steps that are consistent with good
business practices in any proceeding before any appropriate governmental
authority to maintain and pursue each application relating to any Intellectual
Property (and to obtain the relevant registrations) and to maintain each
registration material to the conduct of its business, including payment of
maintenance fees, filing of applications for renewal, affidavits of use,
affidavits of incontestability and opposition, interference and cancellation
proceedings;

               (v)     in the event that any Intellectual Property material to
the conduct of its business is infringed, misappropriated or diluted by a third
party, Grantor shall notify the Secured Party within (10) days after it learns
of such event and shall, if consistent with good business practice, promptly sue
for infringement, misappropriation or dilution, seek temporary restraints and
preliminary injunctive relief to the extent practicable, seek to recover any and
all damages for such infringement, misappropriation

                                      -11-
<Page>

or dilution and take such other actions as are appropriate under the
circumstances and in Grantor's good faith business judgment to protect such
Collateral;

               (vi)    shall, through counsel selected by Grantor and reasonably
acceptable to the Secured Party, prosecute diligently any application for any
Intellectual Property pending as of the date of this Security Agreement or
thereafter made until the termination of this Security Agreement, make
application on uncopyrighted but copyrightable material, unpatented but
patentable inventions and unregistered but registrable Trademarks and preserve
and maintain all rights in applications for any Intellectual Property; provided,
however, that Grantor shall have no obligation to make any such application if
making such application would be unnecessary or imprudent in the good faith
business judgment of Grantor. Any expenses incurred in connection with such an
application shall be borne by Grantor. Grantor shall not abandon any right to
file a application for any Intellectual Property or any pending application in
the United States without the consent of the Secured Party, which consent shall
not be unreasonably withheld; and

               (vii)   after the occurrence and through the continuance of an
Event of Default, the Secured Party shall have the right but shall in no way be
obligated to bring suit in its own name to enforce the Copyrights, Patents and
Trademarks and any license under such Intellectual Property, in which event
Grantor shall, at the request of the Secured Party, do any and all lawful acts
and execute and deliver any and all proper documents required by the Secured
party in aid of such enforcement action.

          (g)  Grantor shall cause the Stock Collateral to constitute at all
times 100% of the total number of shares of each class of capital stock of each
Issuer and 66 2/3% of the total number of shares of each class of capital stock
of each Foreign Issuer then outstanding and shall not permit any such Issuer or
Foreign Issuer to issue any shares of capital stock other than to Grantor.
Grantor shall cause all such shares to be duly authorized, validly issued, fully
paid and nonassessable and to be free of any contractual restriction or any
restriction under the charter or bylaws of the respective Issuer of such Stock
Collateral, upon the transfer of such Stock Collateral (except for any such
restriction contained in any loan document).

          (h)  Grantor shall not:

               (i)     amend or terminate any material contract or other
document or instrument constituting part of the Collateral, except for
transactions in the ordinary course of business;

               (ii)    voluntarily or involuntarily exchange, lease, sell,
transfer or otherwise dispose of any Collateral other than for fair value in the
ordinary course of business;

               (iii)   make any compromise, settlement, discharge or adjustment
or grant any extension of time for payment with respect to any Account or any
lien,

                                      -12-
<Page>

guaranty or remedy pertaining thereto, except for transactions in the ordinary
course of business;

               (iv)    change its name or use any fictitious or trade name,
other than in accordance with Section 6.1 hereof;

               (v)     change the location of its chief executive office, other
than in accordance with Section 6.1 hereof;

               (vi)    permit any of the Collateral (other than Collateral that
constitutes goods that are mobile and that are of a type normally used in more
than one jurisdiction or otherwise in the ordinary course of business
(including, without limitation, sales and shipments of inventory in the ordinary
course of business)) to be removed from or located in any place not identified
as the location of such Collateral to the Secured Party, as the case may be,
except after written notice to and with written consent of the Secured Party and
compliance with such procedures as the Secured Party reasonably may impose to
prevent any interruptions or discontinuity in the security interest granted
pursuant to this Security Agreement; or

               (vii)   voluntarily grant, incur or allow to exist any lien or
security interest on or in any of the Collateral which lien or security interest
shall be equal or superior in priority to the security interests granted in this
Security Agreement, except for Permitted Liens to the extent such Permitted
Liens by their express terms or applicable law have priority equal or greater
than the security interests granted pursuant to this Security Agreement.

                                    ARTICLE 4
                                REMEDIAL MATTERS

     4.1  EVENT OF DEFAULT. An "Event of Default" shall exist hereunder (a) if
an event of default shall occur under any of the Notes, (b) upon the filing of a
voluntary or involuntary petition for bankruptcy, insolvency, receivership or
similar event involving Grantor and, in the case of an involuntary petition, an
order for relief is not entered or such petition or proceeding shall not be
dismissed, discharged or stayed within ninety (90) days of commencement, or (c)
if Grantor shall breach in any material respect any agreement contained herein
or otherwise default in any material respect in the observance or performance of
any of the covenants, terms, conditions or agreements on the part of Grantor
contained in this Security Agreement and, with respect to non-monetary
covenants, terms, conditions or agreements, such non observance or non
performance continues for a period of thirty (30) days after the earlier of (i)
written notice from the Secured Party of such default or (ii) actual knowledge
of Grantor of such default.

     4.2  POWERS OF ATTORNEY.

          (a)  Grantor hereby irrevocably appoints the Secured Party (and any
officer or agent of the Secured Party) as its true and lawful attorney-in-fact,
with power of substitution for and in the name of the Secured Party or
otherwise, for the use and

                                      -13-
<Page>

benefit of the Secured Party, effective upon the occurrence and during the
continuance of an Event of Default:

               (i)     to receive, endorse the name of Grantor upon and deliver
any notes, acceptances, checks, drafts, money orders or other evidences of
payment that may come into the possession of the Secured Party with respect to
the Collateral;

               (ii)    to cause Grantor's mail to be transferred to the Secured
Party's own offices and to receive and open all mail addressed to Grantor for
the purposes of removing any such notes, acceptances, checks, drafts, money
orders or other evidences of payment;

               (iii)   to demand, collect and receive payment in respect of the
Collateral and to apply any such payments directly to the payment of the
Obligations in accordance with Section 4.5 hereof;

               (iv)    to receive and give discharges and releases of all or any
of the Collateral;

               (v)     to commence and prosecute any and all suits, actions or
proceedings at law or in equity in any court of competent jurisdiction, to
collect or otherwise realize on all or any part of the Collateral or to enforce
any rights in respect thereof;

               (vi)    to sign the name of Grantor on any invoice or bill of
lading relating to any of the Collateral;

               (vii)   to send verification of any Accounts to any Account
Debtor or customer;

               (viii)  to notify any Account Debtor or other obligor of Grantor
with respect to any Collateral to make payment to the Secured Party;

               (ix)    to settle, compromise, compound, adjust or defend any
actions, suits or proceedings relating or pertaining to all or any of the
Collateral;

               (x)     to take any action for purposes of carrying out of the
terms of this Security Agreement;

               (xi)    to enforce all of Grantor's rights and powers under and
pursuant to any and all agreements with respect to the Collateral; and

               (xii)   generally, to sell, assign, transfer, pledge, make any
agreement with respect to or otherwise deal with all or any of the Collateral,
and to do all other acts and things necessary to carry out this Security
Agreement, as fully and completely as though the Secured Party were the absolute
owner of the Collateral for all purposes; provided, however, nothing herein
contained shall be construed as requiring or obligating the Secured Party to
make any commitment or to make any inquiry as to the

                                      -14-
<Page>

nature or sufficiency of any payment received by the Secured Party, or to
present or file any claim or notice, or to take any action with respect to the
Collateral or any part thereof or the moneys due or to become due in respect
thereof or any property covered thereby; and, provided further, that Secured
Party shall in all cases act in material compliance with all applicable laws.

     It is understood and agreed that the power of attorney granted to the
Secured Party for the purposes set forth above in this Section 4.2 is coupled
with an interest and is irrevocable until the payment, performance or other
satisfaction of all of the Obligations, and each Grantor hereby ratifies all
actions taken by its attorney-in-fact by virtue hereof. The provisions of this
Section 4.2 shall in no event relieve Grantor of any of its obligations
hereunder or under any of the other Security Documents with respect to the
Collateral or any part thereof or impose any obligation on the Secured Party to
proceed in any particular manner with respect to the Collateral or any part
thereof, or in any way limit the exercise by the Secured Party of any other or
further right which it may have on the date of this Security Agreement or
hereafter, whether hereunder, under any of the other Security Documents, by law
or otherwise.

          (b)  Beyond the duty of the Secured Party to exercise reasonable care
in the custody of any Collateral in its possession and to comply with the Code,
the Secured Party shall not, under any circumstance or in any event whatsoever,
have any liability for any part of the Collateral, nor shall the Secured Party
have any liability for any error or omission or delivery of any kind incurred in
the good faith settlement, collection or payment of any of the Collateral or any
monies received in payment therefor or for any damages resulting therefrom, nor
shall this Security Agreement impose upon the Secured Party any obligation to
perform any obligation with respect to the Collateral. The costs of collection,
notification and enforcement, including but not limited to, reasonable
attorneys' fees and reasonable out-of-pocket expenses, shall be borne solely by
Grantor whether the same are incurred by Grantor or the Secured Party. Grantor
agrees to indemnify, defend and hold the Secured Party harmless from and against
any and all other claims, demands, losses, judgments and liabilities (including,
but not limited to, liabilities for penalties) of any nature, and to reimburse
the Secured Party for all reasonable costs and expenses, including but not
limited to reasonable attorneys' fees and expenses, arising from this Security
Agreement or the exercise of any right or remedy granted to the Secured Party
hereunder other than those incurred solely as a result of the gross negligence
and willful misconduct of the Secured Party. In no event shall the Secured Party
be liable for any matter or thing in connection with this Security Agreement
other than to account for moneys actually received by the Secured Party in
accordance with the terms hereof, and matters arising out of the gross
negligence or willful misconduct of the Secured Party.

     4.3  COLLECTIONS. Upon the occurrence and during the continuance of an
Event of Default, the Secured Party may, in its sole discretion, in its name or
in the name of Grantor, or otherwise, (a) demand, sue for, collect or receive
any money or property at any time payable or receivable on account of or in
exchange for, or make any compromise or settlement deemed desirable with respect
to any of the Collateral, but shall be under no obligation to do so, or (b)
extend the time of payment, arrange for

                                      -15-
<Page>

payment in installments, or otherwise modify the term of, or release, any of the
Collateral, without thereby incurring responsibility to, or discharging or
otherwise affecting any liability of, Grantor, other than to discharge Grantor
in so doing with respect to liabilities of Grantor to the extent that the
liabilities are paid or repaid. After the occurrence and during the continuance
of an Event of Default, any money, checks, notes, bills, drafts, or commercial
paper received by Grantor shall be held in trust for the Secured Party and any
other secured party having rights thereto senior to the Secured Party and shall
be promptly turned over to the Secured Party or any other secured party having
rights thereto senior to the Secured Party as their interest shall appear. Upon
the occurrence and during the continuance of an Event of Default, the Secured
Party may make such payments and take such actions as the Secured Party, in its
sole discretion, deems necessary to protect its security interest in the
Collateral or the value thereof, and the Secured Party is hereby unconditionally
and irrevocably authorized (without limiting the general nature of the authority
hereinabove conferred) to pay, purchase, contest or compromise any liens which
in the judgment of the Secured Party appear to be equal to, prior to or superior
to its security interest in the Collateral and any liens not expressly permitted
by this Security Agreement.

     4.4  POSSESSION; SALE OF COLLATERAL.

          (a)  Upon the occurrence and during the continuance of an Event of
Default, the Secured Party may, subject to the rights of any other secured party
having rights senior to those of the Secured Party: (i) require Grantor to
assemble the tangible assets that comprise part of the Collateral and make them
available to the Secured Party at any place or places reasonably designated by
the Secured Party; (ii) to the extent permitted by applicable law, with or
without notice or demand for performance and without liability for trespass,
enter any premises where the Collateral may be located and peaceably take
possession of the same, and may demand and receive such possession from any
person who has possession thereof, and may take such measures as it may deem
necessary or proper for the care or protection thereof (including, but not
limited to, the right to remove all or any portion of the Collateral); and (iii)
with or without taking such possession may sell or cause to be sold, in one or
more sales or parcels, for cash, on credit or for future delivery, without
assumption of any credit risk, all or any portion of the Collateral, at public
or private sale or at any broker's board or any securities exchange, without
demand of performance or notice of intention to sell or of time or place of
sale, except ten (10) business days' written notice to Grantor of the time and
place of such sale or sales (and such other notices as may be required by
applicable statute, if any, and which cannot be waived), which Grantor hereby
expressly acknowledges is commercially reasonable. In the event of any sale,
license or other disposition of any of the Trademark Collateral, the goodwill
connected with and symbolized by the Trademark Collateral subject to such
disposition shall be included, and Grantor shall supply to the Secured Party or
its designee, for inclusion in such sale, assignment or other disposition, all
Intellectual Property relating to such Trademark Collateral. The Secured Party
shall have no obligation to clean-up or otherwise prepare any Collateral for
sale. The Collateral may be sold or disposed of for cash, upon credit or for
future delivery as the Secured Party shall deem appropriate. Each such purchaser
at any such sale shall hold the property sold absolutely, free from any claim or
right on the

                                      -16-
<Page>

part of Grantor, and Grantor hereby waives (to the extent permitted by law) all
rights of redemption, stay and appraisal that Grantor now has or may at any time
in the future have under any rule of law or statute now existing or hereafter
enacted. At any such sale, the Collateral, or portion thereof, to be sold may be
sold in one lot as an entirety or in separate parcels, as the Secured Party may
(in its sole and absolute discretion) determine. The Secured Party shall not be
obligated to make any sale of any Collateral if it shall determine not to do so,
regardless of the fact that notice of sale of such Collateral shall have been
given. The Secured Party may, without notice or publication, adjourn any public
or private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for sale, and such sale may, without
further notice, be made at the time and place to which the same was so
adjourned. The Secured Party may comply with any applicable state or federal law
requirements in connection with a disposition of the Collateral and compliance
will not be considered adversely to affect the commercial reasonableness of any
disposition of the Collateral. In case any sale of all or any part of the
Collateral is made on credit or for future delivery, the Collateral so sold may
be retained by the Secured Party until the sale price is paid by the purchaser
or purchasers thereof. The Secured Party shall not incur any liability for the
failure to collect or realize upon any or all of the Collateral or for any delay
in doing so and, in case of any such failure, shall not be under any obligation
to take any action with respect thereto; provided, such Collateral may be sold
again upon like notice. If any Collateral is sold upon credit, Grantor will be
credited only with payments actually made by the purchaser, received by the
Secured Party and applied to the Obligations in accordance with Section 4.5 In
the event the purchasers fail to pay for the Collateral, the Secured Party may
resell the Collateral. At any public sale made pursuant to this Section 4.4, the
Secured Party may bid for or purchase, free from any right of redemption, stay
or appraisal and all rights of marshalling, the Collateral and any other
security for the Obligations or otherwise on the part of Grantor (all said
rights being also hereby waived and released by Grantor to the fullest extent
permitted by law) or any part thereof offered for sale and may make payment on
account thereof by using any claim then due and payable to the Secured Party
from Grantor as a credit against the purchase price, and the Secured Party may,
upon compliance with the terms of sale, hold, retain and dispose of such
property without further accountability to Grantor therefor. For purposes
hereof, a written agreement to purchase the Collateral or any portion thereof
shall be treated as a sale thereof; the Secured Party shall be free to carry out
such sale pursuant to such agreement, and Grantor shall not be entitled to the
return of the Collateral or any portion thereof subject thereto, notwithstanding
the fact that after the Secured Party shall have entered into such an agreement,
all Events of Default shall have been remedied and any obligations to the
Secured Party shall have been paid in full. As an alternative to exercising the
power of sale herein conferred upon it, the Secured Party may proceed by a suit
or suits at law or in equity to foreclose this Security Agreement and to sell
the Collateral or any portion thereof pursuant to a judgment or decree of a
court or courts having competent jurisdiction or pursuant to a proceeding by a
court-appointed receiver. In any such action, the Secured Party shall be
entitled to the appointment of a receiver without notice, to peaceably take
possession of all or any portion of the Collateral and to exercise such powers
as the court shall confer upon the receiver. Notwithstanding the foregoing, if
an Event of Default shall occur and be

                                      -17-
<Page>

continuing, the Secured Party shall be entitled to apply, without notice to
Grantor, any cash or cash items constituting Collateral in their possession to
payment of the Obligations in accordance with the provisions of Section 4.5
hereof.

          (b)  If an Event of Default shall occur and be continuing, the Secured
Party shall, in addition to exercising any and all rights and remedies afforded
to it hereunder, have all the rights and remedies of a secured party under all
applicable provisions of law, including but not limited to, the Code.

          (c)  Grantor agrees that notwithstanding anything to the contrary
contained in this Security Agreement, Grantor shall remain liable under each
contract or other agreement giving rise to Accounts and General Intangibles and
all other contracts or agreements constituting part of the Collateral and the
Secured Party shall not have any obligation or liability in respect thereof.

          (d)  After the occurrence and during the continuance of an Event of
Default, upon the Secured Party's request, but subject to the rights of any
other secured party having rights senior to those of the Secured Party, Grantor
shall deliver to the Secured Party all original and other documents evidencing
and relating to the sale and delivery of Inventory or Accounts, including but
not limited to, all original orders, invoices and shipping receipts. After the
occurrence and during the continuance of an Event of Default, Grantor shall also
furnish to the Secured Party, promptly upon the request of the Secured Party,
such reports, reconciliations and aging balances regarding Accounts as the
Secured Party may request from time to time.

     4.5  APPLICATION OF PROCEEDS. The proceeds of any sale of Collateral
pursuant to this Security Agreement or otherwise, as well as any Collateral
consisting of cash, shall be applied after receipt by the Secured Party as
follows, subject to the rights of any other secured party having rights senior
to those of the Secured Party:

               First, to the payment of all reasonable costs,
          fees and expenses of the Secured Party and its agents,
          representatives and attorneys incurred in connection
          with such sale or with the retaking, holding, handling,
          preparing for sale (or other disposition) of the
          Collateral or otherwise in connection with the Notes,
          this Security Agreement or any of the Obligations,
          including but not limited to, the reasonable fees and
          expenses of the Secured Party's agents and attorneys'
          and court costs (whether at trial, appellate or
          administrative levels), if any, incurred by the Secured
          Party in so doing;

               Second, to the payment of the outstanding
          principal balance and accrued interest and fees on the
          Obligations in such order as the Secured Party may
          determine;

                                      -18-
<Page>

               Third, to pay all other amounts payable by Grantor
          under the Notes and any other Obligations; and

               Fourth, to Grantor or to such other person as a
          court may direct.

     4.6  AUTHORITY OF SECURED PARTY. The Secured Party shall have and be
entitled to exercise all such powers hereunder as are specifically delegated to
the Secured Party by the terms hereof, together with such powers as are
reasonably incidental thereto. The Secured Party may execute any of its duties
hereunder by or through its agents or employees and shall be entitled to retain
counsel and to act in reliance upon the advice of such counsel concerning all
matters pertaining to its duties hereunder.

     4.7  CERTAIN WAIVERS; GRANTOR NOT DISCHARGED. Grantor expressly and
irrevocably waives (to the extent permitted by applicable law) presentment,
demand of payment and protest of nonpayment in respect of its Obligations under
this Security Agreement. The obligations and duties of Grantor hereunder are
irrevocable, absolute, and unconditional and shall not be discharged, impaired
or otherwise affected by (a) the failure of the Secured Party to assert any
claim or demand or to enforce any right or remedy against Grantor or any grantee
under the provisions of this Security Agreement or any grantee or any waiver,
consent, extension, indulgence or other action or inaction in respect thereof,
(b) any extension or renewal of any part of the Obligations, (c) any rescission,
waiver, amendment or modification of any of the terms or provisions of any
agreement related to this Security Agreement, (d) the release of any liens on or
security interests in any part of the Collateral or the release, sale or
exchange of or failure to foreclose against any security held by or for the
benefit of the Secured Party for payment or performance of the Obligations, (e)
the bankruptcy, insolvency or reorganization of Grantor or any grantee or any
other persons, (f) any change, restructuring or termination of the corporate
structure or existence of Grantor or any grantee or any restructuring or
refinancing of all or any portion of the Obligations, or (g) any other event
which under law would discharge the obligations of a surety.

     4.8  TRANSFER OF SECURITY INTEREST. The Secured Party may transfer to any
other person all or any part of the liens and security interests granted hereby,
and all or any part of the Collateral which may be in the Secured Party's
possession after the occurrence and during the continuance of an Event of
Default or to a successor Secured Party at any time. Upon such transfer, the
transferee shall be vested with all the rights and powers of the Secured Party
hereunder with respect to such of the Collateral as is so transferred, but, with
respect to any of the Collateral not so transferred, the Secured Party shall
retain all of their rights and powers (whether given to it in this Security
Agreement, or otherwise). The Secured Party or any of them may, at any time,
assign their rights as the secured party hereunder to any person, in the Secured
Party's discretion, and upon notice to Grantor, but without any requirement for
consent or approval by or from Grantor, and any such assignment shall be valid
and binding upon Grantor, as fully as it had expressly approved the same.

                                      -19-
<Page>

                                    ARTICLE 5
                            SECURED PARTY'S INTERESTS

     5.1  PRO RATA INTERESTS. The security interests and other rights granted or
reserved to the Secured Party and its successors and assigns under this Security
Agreement (the "Contractual Rights") and the other rights available to the
Secured Party under applicable law by reason of the existence of this Security
Agreement and the attachment and perfection of the security interests created
under this Security Agreement (the "Statutory Rights") are for the pro rata
benefit of the Note Holders according to the interest in the outstanding
principal amount of the Notes held by each Note Holder, respectively, expressed
as a percentage of the aggregate outstanding principal amount of all Notes, and
shall be held by the Note Holders in such percentages, regardless of the time or
order of the attachment or perfection of their respective security interests or
the time and manner of filing of their respective deeds of trust, financing
statements or assignments thereof and regardless of which, if any, Note Holder
may hold possession of the Collateral. All recoveries attributable to
enforcement of Contractual Rights or Statutory Rights, or both, shall be shared
ratably by the Note Holders according to their respective pro rata interests as
provided in this Security Agreement.

     5.2  GRANTOR OBLIGATIONS. The provisions of this Article 5 are for the
purpose of defining the relative rights of the Note Holders with respect to the
Collateral and the exercise of Contractual Rights and Statutory Rights. Nothing
herein shall impair the obligations of Grantor, which are absolute and
unconditional, to pay and perform the Obligations as and when due. No provision
of this Security Agreement shall be construed to prevent any Note Holder from
exercising remedies that may otherwise be available to it.

                                    ARTICLE 6
                                  MISCELLANEOUS

     6.1  FURTHER ASSURANCES. Grantor agrees, at its expense, to do such further
things, to execute, acknowledge, deliver and cause to be duly filed all such
further instruments and documents and take all such actions as the Secured Party
may from time to time reasonably request for the better assuming and preserving
of the security interests and the rights and remedies created hereby, including
but not limited to, the execution and delivery of such additional conveyances,
assignments, agreements and instruments, the payment of any fees and taxes
required in connection with the execution and delivery of this Security
Agreement, the granting of the security interests created hereby and the
execution, filing and recordation of any financing statements (including fixture
filings) or other documents as the Secured Party may deem reasonably necessary
for the perfection of the security interests granted hereunder. If any amount
payable under or in connection with any of the Collateral shall be or become
evidenced by any promissory note or other instrument, such note or instrument
shall be immediately pledged and delivered to the Secured Party, duly endorsed
in a manner reasonably satisfactory to the Secured Party, subject to the rights
of any other secured party having rights senior to the Secured Party. If at any
time Grantor shall take and perfect a security interest in any property to
secure payment and performance of an Account, Grantor, upon the request of the
Secured Party,

                                      -20-
<Page>

shall promptly assign such security interest to the Secured Party, subject to
the rights of any other secured party having rights senior to the Secured Party.
Grantor agrees to notify the Secured Party thirty (30) days prior to any change
(a) in its corporate name, (b) in its jurisdiction of incorporation or
organization, (c) in the location of its chief executive office, (d) in its
chief place of business, or (e) in the office or offices where it keeps its
records relating to the Collateral. Grantor agrees that, after the occurrence
and during the continuance of an Event of Default, it shall upon request of the
Secured Party, take any and all actions, to the extent permitted by applicable
law, at its own expense, to obtain the approval of any governmental authority
for any action or transaction contemplated by this Security Agreement which is
then required by law, and specifically, without limitation, upon request of the
Secured Party, to prepare, sign and file with any governmental authority
Grantor's portion of any application or applications for consent to the
assignment of licenses held by Grantor, or for consent to the possession and
sale of any of the Collateral by or on behalf of the Secured Party. Grantor
further agrees that it shall at all times, at its own expense and cost, keep
accurate and complete records with respect to the Collateral, including but not
limited to, a record of all payments and proceeds received in connection
therewith or as a result of the sale thereof and of all credits granted, and
agrees that the Secured Party or its representatives shall have the right at any
reasonable time and from time to time to call at Grantor's place or places of
business to inspect the Collateral and to examine or cause to be examined all of
the books, records, journals and other data relating to the Collateral and to
make extracts therefrom or copies thereof as are reasonably requested; provided
that such inspections shall occur no more often than quarterly unless an Event
of Default has occurred and is continuing.

     6.2  EFFECTIVENESS. This Security Agreement shall take effect immediately
upon execution by Grantor.

     6.3  INDEMNITY; REIMBURSEMENT OF THE SECURED PARTY; DEFICIENCY. In
connection with the Collateral, this Security Agreement and the administration
and enforcement or exercise of any right or remedy granted to the Secured Party
hereunder, Grantor agrees, subject to the limitations set forth hereafter (a) to
indemnify, defend and hold harmless the Secured Party from and against any and
all claims, demands, losses, judgments and liabilities (including but not
limited to, liabilities for penalties) of whatever nature, relating thereto or
resulting therefrom, and (b) to reimburse the Secured Party for all reasonable
costs and expenses, including but not limited to, the reasonable fees and
disbursements of attorneys, relating thereto or resulting therefrom. The
foregoing indemnity agreement includes all reasonable costs incurred by the
Secured Party in connection with any litigation relating to the Collateral
whether or not the Secured Party shall be a party to such litigation, including
but not limited to, the reasonable fees and disbursements of attorneys for the
Secured Party, and any out-of-pocket costs incurred by the Secured Party in
appearing as a witness or in otherwise complying with legal process served upon
it. The obligations in this Section 6.3 do not apply to any claims for
indemnity, defense, or reimbursement that arise from the gross negligence or
willful misconduct of the Secured Party. In no event shall the Secured Party be
liable, in the absence of gross negligence or willful misconduct on its part,
for any matter or thing in connection with this Security Agreement other than

                                      -21-
<Page>

to account for moneys actually received by it in accordance with the terms
hereof. All indemnities contained in this Section 6.3 and elsewhere in this
Security Agreement shall survive the expiration or earlier termination of this
Security Agreement. After application of the proceeds by the Secured Party
pursuant to Section 4.5 hereof, Grantor shall remain liable to the Secured Party
for any deficiency.

     6.4  CONTINUING LIEN. It is the intent of the parties hereto that (a) this
Security Agreement shall constitute a continuing agreement as to any and all
future, as well as existing transactions, between Grantor and the Secured Party
under or in connection with the Note or otherwise relating to any other
Obligation, and (b) the security interest provided for herein shall attach to
after-acquired as well as existing Collateral.

     6.5  TERMINATION. Upon payment, performance or other satisfaction in full
of the Notes and all other Obligations and all other amounts due in connection
therewith and termination of all commitments relating thereto, the Secured Party
shall reassign, redeliver and release (or cause to be so reassigned, redelivered
and released), without recourse upon or warranty by the Secured Party, and at
the sole expense of Grantor, to Grantor, against receipt therefor, such of the
Collateral (if any) as shall not have been sold or otherwise applied by the
Secured Party pursuant to the terms hereof and not theretofore reassigned,
redelivered and released to Grantor, together with appropriate instruments of
reassignment and release.

     6.6  NOTICES. All notices, requests and other communications hereunder
shall be in writing and shall be deemed to have been duly given at the time of
receipt if delivered by hand or by facsimile transmission (with receipt of
successful and full transmission) or three days after being mailed, registered
or certified mail, return receipt requested, with postage prepaid to the
applicable parties hereto at the address stated below or if any party shall have
designated a different address or facsimile number by notice to the other party
given as provided above, then to the last address or facsimile number so
designated.

          If to Grantor:

               Image Ware Systems, Inc.
               10883 Thornmint Road
               San Diego, California  2127
               Attention:   S. James Miller, Jr.,
                            Chairman, CEO and President
               Facsimile:   (858) 673-0291

          with a copy to:

               Cooley Godward LLP
               4401 Eastgate Mall
               San Diego, California  92121-1909
               Attention:   M. Wainwright Fishburn, Jr., Esq.
               Facsimile:   (858) 550-6420

                                      -22-
<Page>

          If to Secured Party:

               Perseus 2000, L.L.C.
               2099 Pennsylvania Ave., N.W.
               Suite 900
               Washington, D.C. 20006-1813
               Attention: Chip Newton, Managing Director
               Facsimile: (202) 429-0588

          with a copy to:

               Arnold & Porter
               1600 Tysons Boulevard; Suite 900
               McLean, Virginia  22102-4865
               Attention:   Robert B. Ott, Esq.
               Facsimile:   (703) 720-7399

     6.7  SUCCESSORS AND ASSIGNS. Whenever in this Security Agreement any of the
parties hereto is referred to, such reference shall be deemed to include the
successors and assigns of such party, and all covenants, promises and agreements
by or on behalf of the Secured Party that are contained in this Security
Agreement shall bind and inure to the benefit of its respective successors and
assigns. Grantor may not assign or transfer any of its rights or obligations
hereunder without the prior written consent of the Secured Party.

     6.8  APPLICABLE LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE
TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE WITHOUT REFERENCE TO ITS
CONFLICTS OF LAW RULES THAT MIGHT REFER THE GOVERNANCE OR CONSTRUCTION OF THIS
SECURITY AGREEMENT TO THE LAW OF ANOTHER JURISDICTION (EXCEPT WHEN THE CODE OR
OTHER APPLICABLE LAW WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION). THE PARTIES HERETO AGREE THAT THE APPROPRIATE AND EXCLUSIVE FORUM
FOR ANY DISPUTES ARISING OUT OF THIS SECURITY AGREEMENT SOLELY BETWEEN THE
GRANTOR AND THE SECURED PARTY SHALL BE THE COURTS OF THE STATE OF NEW YORK
LOCATED IN THE BOROUGH OF MANHATTAN OR IN THE UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF NEW YORK, AND THE PARTIES HERETO IRREVOCABLY CONSENT TO
THE EXCLUSIVE JURISDICTION OF SUCH COURTS, AND AGREE TO COMPLY WITH ALL
REQUIREMENTS NECESSARY TO GIVE SUCH COURTS JURISDICTION. THE PARTIES HERETO
FURTHER AGREE THAT THE PARITIES WILL NOT BRING SUIT WITH RESPECT TO ANY DISPUTES
ARISING OF THIS SECURITY AGREEMENT EXCEPT AS EXPRESSLY SET FORTH BELOW FOR THE
EXECUTION OR ENFORCEMENT OF JUDGEMENT, IN ANY JURISDICTION OTHER THAN THE ABOVE
SPECIFIED COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY CONSENTS TO THE SERVICE
OF PROCESS IN ANY ACTION OR PROCEEDING HEREUNDER

                                      -23-
<Page>

BY THE MAILING OF COPIES THEREOF BY REGISTERED MAIL OR CERTIFIED AIRMAIL,
POSTAGE PREPAID, TO THE ADDRESS SPECIFIED IN SECTION 6.6 HEREOF. THE FOREGOING
SHALL NOT LIMIT THE RIGHTS OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR TO OBTAIN EXECUTION OF JUDGMENT IN ANY OTHER
JURISDICTION. THE PARTIES FURTHER AGREE, TO THE EXTENT PERMITTED BY LAW, THAT
FINAL AND UNAPPEALABLE JUDGMENT AGAINST ANY OF THEM IN ANY ACTION OR PROCEEDING
CONTEMPLATED ABOVE SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER
JURISDICTION WITHIN OR OUTSIDE OF THE UNITED STATES BY SUIT ON THE JUDGMENT, A
CERTIFIED COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT
OF INDEBTEDNESS.

     6.9  WAIVERS. No failure or delay of the Secured Party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
future exercise thereof or the exercise of any other right or power. The rights
and remedies of the Secured Party hereunder are cumulative and not exclusive of
any rights or remedies which it would otherwise have. No waiver of any provision
of this Security Agreement or consent to any departure by Grantor therefrom
shall in any event be effective unless the same shall be authorized as provided
in Section 6.10, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. No notice to or demand on
Grantor in any case shall entitle Grantor to any other or further notice or
demand in similar or other circumstances.

     6.10 AMENDMENTS. Neither this Security Agreement nor any provision hereof
may be amended or modified except pursuant to an agreement or agreements in
writing entered into by Grantor and the Secured Party.

     6.11 SEVERABILITY. In the event any one or more of the provisions contained
in this Security Agreement should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein or therein shall not in any way be affected or
impaired thereby.

     6.12 COUNTERPARTS. This Security Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one contract, and shall become effective
when copies hereof which, when taken together, bear the signatures of each of
the parties hereto shall be delivered or mailed to the Secured Party.

     6.13 HEADINGS. Article and Section headings used herein are for convenience
of reference only and are not to affect the construction of, or to be taken into
consideration in interpreting, this Security Agreement.

     6.14 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR

                                      -24-
<Page>

PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN
CONNECTION WITH THIS SECURITY AGREEMENT AND AGREE THAT ANY SUCH ACTION SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE TERMS AND PROVISIONS OF THIS
SECTION CONSTITUTE A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS
SECURITY AGREEMENT.

                      [SIGNATURES APPEAR ON FOLLOWING PAGE]

                                      -25-
<Page>

     IN WITNESS WHEREOF, Grantor has executed this Security Agreement as of the
date first above written.

                                      IMAGEWARE SYSTEMS, INC.

                                      By: /s/ S. James Miller, Jr.
                                         ---------------------------------------
                                         Name:  S. James Miller, Jr.
                                         Title: Chairman, CEO and President

                                      ACKNOWLEDGED:

                                      PERSEUS 2000, L.L.C.

                                      By: /s/ Ray E. Newton III
                                         ---------------------------------------
                                         Name:   Ray E. Newton III
                                         Title:  Managing Director

                     [Signature Page to Security Agreement]

<Page>

                                   SCHEDULE A

Pursuant to Section 2.1(b), the following information is disclosed:

<Table>
<Caption>
                  CHIEF EXECUTIVE     OTHER PLACE(S) OF     JURISDICTION OF     COLLATERAL    EQUIPMENT AND          LOCATION OF
    GRANTOR           OFFICE              BUSINESS           INCORPORATION       LOCATION     GOODS LOCATION      LEASED FACILITIES
--------------   -----------------   -------------------   ----------------   --------------  ---------------     -----------------
<S>             <C>                  <C>                    <C>               <C>             <C>                   <C>
IMAGEWARE       10883 Thornmint Rd                          California        10883           10883 Thornmint       10883
SYSTEMS, INC.   San Diego, CA 92127                                           Thornmint Rd.,  Rd., San Diego, CA    Thornmint Rd.,
                                                                              San Diego, CA   92127                 San Diego, CA
                                                                              92127                                 92127
</Table>

<Page>

                                   SCHEDULE B

                                  PLEDGED STOCK

1,629,665 shares of no par Common Stock of XImage Corporation, a California
     corporation, certificate #57

1,000 shares of Common Stock, $0.0001 par value per share, o fImageWare Systems
     ID Group, Inc., a Delaware corporation, certificate #C-11

66 shares of I.W. Systems Canada Company - ULC, an entity formed under the laws
     of Nova Scotia, Canada, Common Stock

5 shares of Digital Imaging International GmbH, an entity formed under the laws
     of Germany, Common Stock

66,666 shares of Digital Imaging Asia Pacific Pte. Ltd., an entity formed under
     the laws of Singapore, Common Stock

1 share of no par Common Stock of G&A Imaging, Inc., a Nevada corporation,
     certificate #C-

90,000 Series A Common Shares, $0.01 par value per share, of ImageWare Digital
     Photography Systems, LLC, a Nevada limited liability company, certificate
     of membership interest #8

100,000 Series A Common Shares, $0.01 par value per share, of E-Focus West LLC,
     a Nevada limited liability company, certificate of membership interest #2

<Page>

                                   SCHEDULE C

Security interests granted by German subsidiary Digital Imaging International
GmbH in favor of Deutsche Bank AG on accounts receivable from goods delivered
and services rendered

     Security interest granted by Grantor in favor of American Contractors
Indemnity Company on certificate of deposit #0192-600-003 originally issued by
Imperial Bank for which the underlying obligations have been satisfied but the
UCC financing statement has not yet been terminated.

<Page>

                                 SCHEDULE 2.1(f)

(i) immaterial amount of boxed products kept off-site for packaging and shipping
    at:

      ICON
      399 River Road
      Hudson, MA  01749

(ii) copies of software (i.e., originals located at chief executive office and
    other locations listed on Schedule A) located with the following software
    escrow services:

      (A)   Lincoln-Parry SoftEscrow
            400 Inverness Drive South, Suite 200
            Englewood, CO  80112

      (B)   DSI Technology Escrow Services, Inc.
            9265 Sky Park Court, Suite 202
            San Diego, CA  92123

(iii) server for web hosting of EPIWEB services located at:

      Magma Communications
      195 Colonade Road South, Unit 2
      Nepean, Ontario, CANADA  K2K-7Q3

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