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                                                                    EXHIBIT 10.3

                                                                  EXECUTION COPY

                          REGISTRATION RIGHTS AGREEMENT

     REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of May 22,
2002 by and between ImageWare Systems, Inc., a California corporation (the
"Company"), and Perseus 2000, L.L.C., a Delaware limited liability company (the
"Investor").

                                 R E C I T A L S

     A.   The Investor has made an investment in the Company by acquiring senior
secured convertible promissory notes of the Company (the "Notes") convertible
into shares of the Company's common stock (the "Common Stock") and warrants to
acquire shares of Common Stock (the "Warrants") (collectively, the Notes and
Warrants together, the "Securities").

     B.   In connection with such purchase of the Securities, and to induce the
Investor to consummate such purchase of the Securities, the Company has agreed
to enter into this Agreement and to grant to the Investor the rights set forth
herein.

                                    AGREEMENT

     NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, the Investor and the Company
(collectively, the Parties") agree as follows:

     1. DEFINITIONS. For purposes of this Statement:

          "Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.

          "Holder" means (i) the Investor, (ii) the partners, members or
stockholders of the Investor collectively provided that such partners, members
or stockholders act through the Investor or its successor and (iii) any person
or entity to whom the Investor or any person or entity identified in clause (ii)
of this definition sells, transfers or assigns 25% or more of the Registrable
Securities issued pursuant to the Purchase Agreement, any Note or any Warrant,
other than in a sale pursuant to Rule 144 under the Securities Act or a
registration effected pursuant to this Agreement.

          "Register," "registered," and "registration" refer to an underwritten
registration effected by preparing and filing with the Securities and Exchange
Commission (the "Commission") a registration statement or similar document in
compliance with the Securities Act, and the declaration or ordering by the
Commission of effectiveness of such registration statement or document.

          "Registration Expenses" means all expenses in connection with the
Company's performance of or compliance with its obligations under this
Agreement, including, without limitation, all (i) registration, qualification
and filing fees; (ii) fees, costs and expenses of compliance with securities or
blue sky laws (including reasonable fees, expenses and disbursements of counsel
for the underwriters in connection with blue sky qualifications of the

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Registrable Securities under the laws of such jurisdictions as the managing
underwriter or underwriters in a registration may designate, subject to the
limitation as set forth in subsection (h) of Section 5 hereof); (iii) printing
expenses; (iv) messenger, telephone and delivery expenses; (v) fees, expenses
and disbursements of counsel for the Company and of all independent certified
public accountants retained by the Company (including the expenses of any
special audit and "cold comfort" letters required by or incident to such
performance); (vi) Securities Act liability insurance if the Company so desires;
(vii) fees, expenses and disbursements of any other individuals or entities
retained by the Company in connection with the registration of the Registrable
Securities; (viii) fees, costs and expenses incurred in connection with the
listing of the Registrable Securities on each national securities exchange or
automated quotation system on which the Company has made application for the
listing of its Common Stock; and (ix) internal expenses of the Company
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties and expenses of any annual
audit). Registration Expenses shall not include selling commissions, discounts
or other compensation paid to underwriters or other agents or brokers to effect
the sale of Registrable Securities, or counsel fees and any other expenses
incurred by Holders in connection with any registration that are not specified
in the immediately preceding sentence.

          "Registrable Securities" means any shares of Common Stock of the
Company owned by any Holder or that may be acquired by any Holder upon the
conversion of any convertible security or the exercise of any warrant, option or
other right owned by any Holder, but only to the extent such shares constitute
"restricted securities" under Rule 144 under the Securities Act.

          "Requestor" means the Holder or Holders requesting the registration in
question. Actions taken by the Requestor shall be taken by those Holders making
such request who hold a majority of the Registrable Securities held by such
Holders.

          "Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.

     2. DEMAND REGISTRATIONS.

          (a) REQUEST FOR REGISTRATION. If at any time after the date hereof one
or more Holders who in the aggregate hold at least 25% of the Registrable
Securities submits a written request (a "Demand Notice") to the Company that the
Company register Registrable Securities under and in accordance with the
Securities Act (a "Demand Registration"), then the Company shall:

               (i)     within five days after receipt of such Demand Notice,
give written notice of the proposed registration to all other Holders; and

               (ii)    as soon as practicable, use diligent efforts to effect
such registration as may be so requested and as would permit or facilitate the
sale and distribution of all or such portion of such Registrable Securities as
are

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specified in such request, together with all or such portion of the Registrable
Securities of any Holders joining in such request as are specified in written
requests received by the Company within 20 days after the date the Company mails
the written notice referred to in clause (i) above.

               Notwithstanding the foregoing, if the Company shall furnish to
the Holders a certificate signed by the president of the Company stating that in
the good faith judgment of the board of directors of the Company, it would be
seriously detrimental to the Company or its stockholders for a registration
statement to be filed on or before the date filing would be required in
connection with any Demand Registration and it is therefore essential to defer
the filing of such registration statement, the Company shall have the right to
defer such filing or delay its effectiveness for a reasonable period not to
exceed 90 days provided that such right shall not be exercised more than once
with respect to a request for registration hereunder during any period of twelve
consecutive months. The Company will pay all Registration Expenses in connection
with such withdrawn request for registration.

               Notwithstanding the foregoing, the Company shall not be required
to effect any registration (i) requested within less than 120 days after the
filing of another registration filed by the Company in which all of the
Registrable Securities requested to be included in such registration by
participating Holders were so included; or, (ii)(A) if Perseus has not exercised
the Perseus Option in full, after the Company has filed and effected one
registration pursuant to this Section 2 in which all of the Registrable
Securities requested to be included in such registration by participating
Holders were so included and such registration has been declared or ordered
effective; (B) if Perseus has exercised the Perseus Option in full, after the
Company has filed and effected two registrations pursuant to this Section 2 in
which all of the Registrable Securities requested to be included in each such
registration by participating Holders were so included and each such
registration has been declared or ordered effective; or (C) if Perseus has
exercised the Perseus Option in part but less than in full, after the Company
has filed and effected two registrations pursuant to this Section 2 in which all
of the Registrable Securities requested to be included in each such registration
by participating Holders were so included and each such registration has been
declared or ordered effective; provided, however, that in the case of the second
registration filed and effected pursuant to this subclause (C), the Company
shall be required to register only those Registrable Securities acquired
pursuant to such partial exercise of the Perseus Option.

          (b) UNDERWRITING. In connection with any registration under this
Section 2, if the Requestors intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to Section 2(a). In such event,
the right of any Holder to include its Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. The Holders proposing to distribute
their securities through such underwriting shall enter into an underwriting
agreement with one or more underwriters selected by the Requestors having terms
and conditions customary for such agreements (which underwriter or underwriters
shall be reasonably acceptable to the Company). Notwithstanding any other
provision of this Section 2, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the number of Registrable
Securities to be included in such registration. The Company shall so advise all
Holders distributing Registrable Securities through such underwriting, and the
number of Registrable

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Securities that may be included in the registration and underwriting shall be
allocated in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities required to be included (determined without regard to any
requirement of a request to be included in such registration) in such
registration held by all Holders at the time of filing the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any Holder
to the nearest 100 shares.

          (c) SHELF REGISTRATION. If at the time the Company registers
Registrable Securities under the Securities Act pursuant to this Section 2, the
sale or other disposition of such Registrable Securities by the Holders may be
made pursuant to a registration statement on Form S-3 (or any successor form
that permits the incorporation by reference of future filings by the Company
under the Exchange Act), and such registration statement, unless otherwise
directed by the Requestor, shall be filed as a "shelf" registration statement
pursuant to Rule 415 under the Securities Act (or any successor rule). Any such
shelf registration shall cover the disposition of all Registrable Securities in
one or more underwritten offerings, block transactions, broker transactions,
at-market transactions and in such other manner or manners as may be specified
by the Requestor. Except as provided in Section 5(b) hereof, the Company shall
use its reasonable best efforts to keep such "shelf" registration continuously
effective as long as the delivery of a prospectus is required under the
Securities Act in connection with the disposition of the Registrable Securities
registered thereby and in furtherance of such obligation, shall supplement or
amend such registration statement if, as and when required by the rules,
regulations and instructions applicable to the form used by the Company for such
registration or by the Securities Act or by any other rules and regulations
thereunder applicable to shelf registrations. Upon their receipt of a
certificate signed by the president of the Company in accordance with the
procedure set forth in the penultimate paragraph of Section 2(a) hereof, the
Holders will refrain from making any sales of Registrable Securities under the
shelf registration statement for a period of up to 90 days; provided that this
right to cause the Holders to refrain from making sales shall not be exercised
by the Company more than twice, or for an aggregate period of more than 90 days,
in any twelve-month period (counting as a permitted exercise any exercise by the
Company of its right to defer the filing or delay its effectiveness of a
registration statement under the penultimate paragraph of Section 2(a)).

     3. COMPANY REGISTRATION.

          (a)  NOTICE OF REGISTRATION. If at any time or from time to time, the
Company shall determine to register any of its capital stock, whether or not for
its own account, other than a registration relating to employee benefit plans or
a registration effected on Form S-4, the Company shall:

               (i)     provide to each Holder written notice thereof at least
ten days prior to the filing of the registration statement by the Company in
connection with such registration; and

               (ii)    include in such registration, and in any underwriting
involved therein, all those Registrable Securities specified in a written
request by each Holder received by the Company within five days after the
Company mails the written notice referred to above, subject to the provisions of
Section 3(b) below.

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          (b)  UNDERWRITING. The right of any Holder to registration pursuant to
this Section 3 shall be conditioned upon the participation by such Holder in the
underwriting arrangements specified by the Company in connection with such
registration and the inclusion of the Registrable Securities of such Holder in
such underwriting to the extent provided herein. All Holders proposing to
distribute their Registrable Securities through such underwriting shall
(together with the Company) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the Company
and take all other actions, and deliver such opinions and certifications, as may
be reasonably requested by such managing underwriter. Notwithstanding any other
provision of this Section 3, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the number of Registrable
Securities to be included in such registration. The Company shall so advise all
Holders distributing Registrable Securities through such underwriting, and there
shall be excluded from such registration and underwriting, to the extent
necessary to satisfy such limitation, first shares held by the Holders and,
thereafter, to the extent necessary, shares which the Company wishes to register
for its own account. As among the Holders as a group, the number of Registrable
Securities that may be included in the registration and underwriting shall be
allocated in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities required to be included (determined without regard to any
requirement of a request to be included in such registration) in such
registration held by all Holders at the time of filing the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any Holder
to the nearest 100 shares.

          (c)  RIGHT TO TERMINATE REGISTRATION. The Company shall have the right
to terminate or withdraw any registration initiated by it under this Section 3
whether or not any Holder has elected to include Registrable Securities in such
registration.

     4. EXPENSE OF REGISTRATION. All Registration Expenses incurred in
connection with the registration and other obligations of the Company pursuant
to Sections 2, 3 and 5 shall be borne by the Company, and all underwriting
discounts and selling commissions incurred in connection with any such
registrations shall be borne by the Holders of the securities so registered pro
rata on the basis of the number of shares so registered. The Company shall not,
however, be required to pay for expenses of any registration proceeding begun
pursuant to Sections 2, 3 or 5, the request of which has been subsequently
withdrawn by the Holders unless the withdrawal is based upon material adverse
information concerning the Company of which the Holders were not aware at the
time of such request.

     5. REGISTRATION PROCEDURES. If and whenever the Company is required by the
provisions of this Agreement to effect the registration of Registrable
Securities, the Company shall:

          (a) promptly prepare and file with the Commission a registration
statement with respect to such Registrable Securities on any form that may be
utilized by the Company and that shall permit the disposition of the Registrable
Securities in accordance with the intended method or methods of disposition
thereof, and use its reasonable diligent efforts to cause such registration
statement to become effective as promptly as practicable and remain effective
thereafter as provided herein, provided that prior to filing a registration
statement or prospectus or any amendments or supplements thereto, including
documents incorporated by reference after

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the initial filing of any registration statement, the Company will furnish to
each of the Investor whose Registrable Securities are covered by such
registration statement, their counsel and the underwriters copies of all such
documents proposed to be filed sufficiently in advance of filing to provide them
with a reasonable opportunity to review such documents and comment thereon;

          (b) prepare and file with the Commission such amendments (including
post-effective amendments) and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective and current and to comply with the provisions
of the Securities Act with respect to the sale or other disposition of all
Registrable Securities covered by such registration statement, including such
amendments (including post-effective amendments) and supplements as may be
necessary to reflect the intended method of disposition by the prospective
seller or sellers of such Registrable Securities, provided that except in the
case of a shelf registration under Section 2(c) such registration statement need
not be kept effective and current for longer than 120 days subsequent to the
effective date of such registration statement;

          (c) subject to receiving reasonable assurances of confidentiality, for
a reasonable period after the filing of such registration statement, and
throughout each period during which the Company is required to keep a
registration effective, make available for inspection by the selling holders of
Registrable Securities being offered, and any underwriters, and their respective
counsel, such financial and other information and books and records of the
Company, and cause the officers, directors, employees, counsel and independent
certified public accountants of the Company to respond to such inquiries as
shall be reasonably necessary, in the judgment of such counsel, to conduct a
reasonable investigation within the meaning of Section 11 of the Securities Act;

          (d) promptly notify the selling holders of Registrable Securities and
any underwriters and confirm such advice in writing, (i) when such registration
statement or the prospectus included therein or any prospectus amendment or
supplement or post-effective amendment has been filed, and, with respect to such
registration statement or any post-effective amendment, when the same has become
effective, (ii) of any comments by the Commission, by the National Association
of Securities Dealers Inc. ("NASD"), and by the blue sky or securities
commissioner or regulator of any state with respect thereto or any request by
any such entity for amendments or supplements to such registration statement or
prospectus or for additional information, (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of such registration
statement or the initiation or threatening of any proceedings for that purpose,
(iv) if at any time the representations and warranties of the Company cease to
be true and correct in all material respects, (v) of the receipt by the Company
of any notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, or (vi) at any time when a
prospectus is required to be delivered under the Securities Act, that such
registration statement, prospectus, prospectus amendment or supplement or
post-effective amendment, or any document incorporated by reference in any of
the foregoing, contains an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading;

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          (e) furnish to each selling holder of Registrable Securities being
offered, and any underwriters, prospectuses or amendments or supplements
thereto, in such quantities as they may reasonably request and as soon as
practicable, that update previous prospectuses or amendments or supplements
thereto;

          (f) use reasonable diligent efforts to (i) register or qualify the
Registrable Securities to be included in a registration statement hereunder
under such other securities laws or blue sky laws of such jurisdictions within
the United States of America as any selling holder of such Registrable
Securities or any underwriter of the securities being sold shall reasonably
request, (ii) keep such registrations or qualifications in effect for so long as
the registration statement remains in effect and (iii) take any and all such
actions as may be reasonably necessary or advisable to enable such holder or
underwriter to consummate the disposition in such jurisdictions of such
Registrable Securities owned by such holder; PROVIDED, HOWEVER, that the Company
shall not be required for any such purpose to (x) qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would not
otherwise be required to qualify but for the requirements of this Section 5(f),
(y) subject itself to taxation in any such jurisdiction or (z) consent to
general service of process in any such jurisdiction;

          (g) cause all such Registrable Securities to be listed or accepted for
quotation on each securities exchange or automated quotation system on which the
Company's Common Stock then trades; and

          (h) otherwise use reasonable diligent efforts to comply with all
applicable provisions of the Securities Act, and rules and regulations of the
Commission, and make available to its security holders, as soon as reasonably
practicable, an earnings statement covering a period of at least twelve months
which shall satisfy the provisions of Section 11(a) of the Securities Act and
Rule 158 thereunder.

     6. INDEMNIFICATION. In the event any of the Registrable Securities are
included in a registration statement under this Agreement:

          (a) to the extent permitted by law, the Company will indemnify each
Holder who participates in such registration, each of its officers and directors
and partners, and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, and each underwriter, if any, and each person
who controls any underwriter within the meaning of Section 15 of the Securities
Act, against all expenses, claims, losses, damages or liabilities (or actions in
respect thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement or prospectus, or any amendment or supplement thereto, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, or any
violation by the Company of any rule or regulation promulgated under the
Securities Act applicable to the Company in connection with any such
registration, qualification or compliance (each, a "Violation"), and the Company
will reimburse each such Holder, each of its officers and directors and partners
and each person controlling such Holder, each such underwriter and each person
who controls any such underwriter, for any legal and any other expenses
reasonably

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incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any Violation which occurs in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder or underwriter and stated
to be specially for use therein, and provided further, that the indemnity
agreement described in this Section 6(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld.

          (b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers and its legal counsel and independent accountants, each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, and each other such Holder, each of its
officers and directors and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, and will reimburse the Company, such Holders, such directors,
officers, persons, underwriters or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein.

          (c) Each party entitled to indemnification under this Section 6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought provided
that failure to give such prompt notice shall not relieve the Indemnifying Party
of its obligations hereunder unless it is materially prejudiced thereby, and
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld). Such Indemnified Party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall be that of such Indemnified Party unless
(i) the Indemnifying Party has agreed to pay such fees and expenses or (ii) the
Indemnifying Party shall have failed to assume the defense of such action or
proceeding and employ counsel reasonably satisfactory to such Indemnified Party
in any such action or proceeding or (iii) the named parties to any such action
or proceeding (including any impleaded parties) include both such Indemnified
Party and the Indemnifying Party and such Indemnified Party shall have been
advised by counsel that there may be one or more legal defenses available to
such Indemnified Party which are different from

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or additional to those available to the Indemnifying Party (in which case, if
such Indemnified Party notifies the Indemnifying Party in writing of an election
to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense of such action
or proceeding on behalf of such Indemnified Party, it being understood, however,
that the Indemnifying Party then shall have the right to employ separate counsel
at its own expense and to participate in the defense thereof, and shall not, in
connection with any one such action or proceeding or separate but substantially
similar or related actions or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys at any time for
all Indemnified Parties, which firm shall be designated in writing by a majority
of the Indemnified Parties who are eligible to select such counsel). No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. No
Indemnified Party may consent to entry of any judgment or enter into any
settlement without the prior written consent of the Indemnifying Party.

          (d) If the indemnification provided for in this Section 6 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage or expense referred to herein,
then the Indemnifying Party, in lieu of indemnifying the Indemnified Party,
shall contribute to the amount paid or payable by such Indemnified Party with
respect to such loss, liability, claim, damage or expenses in the proportion
that is appropriate to reflect the relative fault of the Indemnifying Party and
the Indemnified Party in connection with the statements or omissions that
resulted in such loss, liability, claim, damage, or expense, as well as any
other relevant equitable considerations. The relative fault of the Indemnifying
Party and the Indemnified Party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.

     7. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock, the Company shall use
reasonably diligent efforts to:

          (a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, beginning 90 days
after the Company registers a class of securities under Section 12 of the
Exchange Act or completes a registered offering under the Securities Act;

          (b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and

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          (c) Furnish to any Holder promptly upon request a written statement as
to its compliance with the reporting requirements of Rule 144 (at any time after
90 days after the Company completes a registered offering under the Securities
Act), and of the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements), and a copy of the most recent
annual or quarterly report of the Company.

     8. TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled to
exercise any right provided for in this Agreement after the earlier of (a) five
years after the date hereof and (b) the date all Registrable Securities held by
such Holder may be sold in a single three-month period under Rule 144 under the
Securities Act.

     9. INFORMATION TO BE PROVIDED BY THE HOLDERS. Each Holder whose Registrable
Securities are included in any registration pursuant to this Agreement shall
furnish the Company such information regarding such Holder and the distribution
proposed by such Holder as may be reasonably requested in writing by the Company
and as shall be required in connection with such registration or the
registration or qualification of such securities under any applicable state
securities law.

     10. "STAND-OFF" AGREEMENT. Each Holder, if requested by the managing
underwriter of a registered public offering of securities by the Company, shall
agree not to sell or otherwise transfer or dispose of any Registrable Securities
or other securities of the Company then held by such Holder for a specified
period of time that is customary under the circumstances (not to exceed 180
days) following the effective date of the registration statement for such
offering, provided that (a) no such agreement shall be required unless the other
principal stockholders of the Company enter into a similar agreement covering
the same period of time and (b) such agreement shall contain terms customary for
such agreements. The Company may impose stop transfer instructions to enforce
any required agreement of the Holders under this Section 10.

     11. MISCELLANEOUS.

          (a) 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 address or facsimile number (as the case may be) listed
below the signature of each Party on such Party's signature page hereto if any
Party shall have designated a different address or facsimile number by notice to
the other Parties given as provided above, then to the last address or facsimile
number so designated.

          (b) SEVERABILITY. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed and interpreted in such manner as to be effective and valid
under applicable law.

          (c) WAIVER OR MODIFICATION. Any amendment or modification of this
Agreement shall be effective only if evidenced by a written instrument executed
by the Company and by Investor that hold a majority of the total Registrable
Securities.

                                      -10-
<Page>

          (d) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York without regard to the
principles of conflicts of laws thereof.

          (e) ATTORNEYS' FEES. In the event of any dispute involving the terms
hereof, the prevailing parties shall be entitled to collect legal fees and
expenses from the other party to the dispute.

          (f) FURTHER ASSURANCES. Each Party agrees to act in accordance
herewith and not to take any action that is designed to avoid the intention
hereof.

          (g) SUCCESSORS AND ASSIGNS. This Agreement and the rights and
obligations of the Parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.

          (h) DEFINED TERMS. Certain defined terms used herein and not otherwise
defined herein shall have them meanings ascribed to such terms in the Note and
Warrant Purchase Agreement, dated as of May 22, 2002, by and between the Company
and the Investor (the "Purchase Agreement").

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                     [SIGNATURES APPEAR ON FOLLOWING PAGES]

                                      -11-
<Page>

                            [COMPANY SIGNATURE PAGE]

     IN WITNESS WHEREOF, the undersigned Party has executed this Agreement as of
the day and year first above written.

                                     IMAGEWARE SYSTEMS, INC.

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

                                         Name:  S. James Miller, Jr.

                                         Title: Chairman, CEO and President

                                     ADDRESS FOR NOTICE:

                                     ImageWare Systems, Inc.
                                     10883 Thornmint Road
                                     San Diego, California 92127
                                     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..
                                     Facsimile:  (858) 550-6420

                                      -12-
<Page>

                           [INVESTOR SIGNATURE PAGE]

     IN WITNESS WHEREOF, the undersigned Investor has executed this Agreement as
of the day and year first above written.

                                    PERSEUS 2000, L.L.C.

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

                                         Name:  Ray E. Newton III

                                         Title: Managing Director

                                    ADDRESS FOR NOTICE:

                                    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

                                      -13-<Page>

                                                                    EXHIBIT 10.4

                                                                  EXECUTION COPY

                                     FORM OF
                   SENIOR SECURED CONVERTIBLE PROMISSORY NOTE

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE
SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES 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.

$2,000,000.00                                                       May 22, 2002
                                                           San Diego, California

     FOR VALUE RECEIVED, IMAGEWARE SYSTEMS, INC., a California corporation (the
"Company"), promises to pay to the order of Perseus 2000, L.L.C. (the "Lender")
or its registered assigns (the "Holder"), the principal sum of Two Million
Dollars ($2,000,000.00), or such lesser amount as shall then equal the
outstanding principal amount hereof, together with interest thereon at a rate
equal to 12.5% per annum, compounding quarterly and computed on the basis of a
year consisting of 360 days and four quarterly periods each consisting of 90
days. All unpaid principal, together with any accrued but unpaid interest and
other amounts payable hereunder, shall be due and payable on the earlier of (i)
May 22, 2004 (the "Maturity Date"); or (ii) when such amounts are declared due
and payable by the Holder or made automatically due and payable upon or after
(A) the occurrence of an Event of Default (as defined below), (B) the
liquidation or dissolution of the Company, (C) any merger, consolidation,
reorganization 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 power of the surviving entity in such
merger, consolidation or similar transaction, (D) the sale of all, or
substantially all, of the assets of the Company, or (E) the sale of voting
securities of the Company to any person (or group of persons acting in concert)
that results in such person (or group of persons) (together with their
affiliates) owning more than 50% of the outstanding voting securities of the
Company. Subject to Section 3(b) hereof, interest on this Note shall be payable
in arrears on each January 1, April 1, July 1, and October 1 after the date of
issuance of this Note as follows: (a) 72% of the amount of each such interest
payment shall be paid in lawful money of the United States of America and (b)
the remaining 28% of the amount of each such interest payment shall be paid, at
the Company's sole option, (i) in lawful money of the United States of America
or (ii) by the issuance of an additional senior secured convertible promissory
note identical in all respects to this Note except that it shall have a
principal amount equal to such interest payment.

<Page>

     This Note is issued pursuant to the Note and Warrant Purchase Agreement
(the "Purchase Agreement") dated as of May 22, 2002 by and between the Company
and the Lender.

     The following is a statement of the rights of the Holder and the conditions
to which this Note is subject, and to which the Holder hereof, by the acceptance
of this Note, agrees:

     1.   DEFINITIONS. Capitalized terms defined in the Purchase Agreement and
used herein without definition have the same meaning herein as in the Purchase
Agreement. In addition, as used in this Note, the following capitalized terms
have the following meanings:

          (a)  "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,
State of California or the District of Columbia are authorized to be closed.

          (b)  "Common Stock" means the common stock, par value $0.01 per share,
of the Company.

          (c)  "Company Note" means any of the Notes issued pursuant to the
Purchase Agreement or in payment of interest on any Note.

          (d)  "Date of Original Issue" means May 22, 2002, the date of issuance
of the Initial Note by the Company under the Purchase Agreement.

          (e)  "Obligations" means the principal, interest and other amounts
payable under this Note.

          (f)  "Transaction Documents" shall mean each of the Company Notes, the
Warrants, the Purchase Agreement, the Registration Rights Agreement and the
Pledge and Security Agreement.

     2.   EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Note:

          (a)  FAILURE TO PAY. The Company shall fail to pay when due any
principal payment on this Note or any interest or other payment required under
the terms of this Note or any other Transaction Document if such nonpayment is
not cured by the Company within five days immediately after the date on which
such payment became due and payable; or

          (b)  BREACHES OF REPRESENTATIONS AND WARRANTIES. Any representation or
warranty made by the Company herein or in any of the other Transaction Documents
shall prove false or misleading in any material respect when made or deemed
made; or

          (c)  BREACHES OF OTHER COVENANTS. The Company shall fail to observe or
to perform any other material covenant, obligation, condition or agreement
contained

                                        2
<Page>

in this Note or the other Transaction Documents, other than those specified in
Section 2(a) hereof, and such failure shall continue for thirty days after
written notice thereof is delivered to the Company; or

          (d)  CROSS-DEFAULT. The Company or any of its subsidiaries shall
default under (i) any Company Note or (ii) any other bond, debenture, note or
other evidence of indebtedness for money borrowed, under any guarantee or under
any mortgage, or indenture pursuant to which there shall be issued or by which
there shall be secured or evidenced any indebtedness for money borrowed by the
Company or any of its subsidiaries, whether such indebtedness now exists or
shall hereafter be created, which default (other than a default under a Company
Note) shall have resulted in indebtedness of at least $100,000 being due and
payable prior to the date on which it would otherwise become due and payable and
shall not have been cured by the Company or waived by the lender; or

          (e)  UNDISCHARGED JUDGMENT. One or more judgments for the payment of
money in an amount in excess of $100,000 in the aggregate, outstanding at any
one time, shall be rendered against the Company or any of its subsidiaries (or
any combination thereof) and shall remain undischarged for a period of thirty
consecutive days during which execution shall not be effectively stayed, or any
action is legally taken by a judgment creditor to levy upon any such judgment;
or

          (f)  VOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. The Company (and
any subsidiary thereof) shall (i) apply for or consent to the appointment of a
receiver, trustee, liquidator or custodian of itself or of all or a substantial
part of its property, (ii) be unable, or admit in writing its inability, to pay
its debts generally as they mature, (iii) make a general assignment for the
benefit of its or any of its creditors, (iv) be dissolved or liquidated in full
or in part, (v) become insolvent (as such term may be defined or interpreted
under any applicable statute), (vi) commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or consent to any such relief or to the appointment of or
taking possession of its property by any official in an involuntary case or
other proceeding commenced against it or (vii) take any action for the purpose
of effecting any of the foregoing; or

          (g)  INVOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. Proceedings for
the appointment of a receiver, trustee, liquidator or custodian of the Company
(and any subsidiary thereof) or of all or a substantial part of the property
thereof, or an involuntary case or other proceedings seeking liquidation,
reorganization or other relief with respect to the Company (and any subsidiary
thereof) or the debts thereof under any bankruptcy, insolvency or other similar
law now or hereafter in effect shall be commenced and an order for relief
entered, or such case or proceeding shall not be dismissed, discharged or stayed
within 90 days of commencement.

                                        3
<Page>

     3.   RIGHTS OF HOLDER UPON DEFAULT.

          (a)  Upon the occurrence or existence of any Event of Default (other
than an Event of Default referred to in Sections 2(f) or 2(g) hereof) and at any
time thereafter during the continuance of such Event of Default, the Holder may
declare all outstanding Obligations payable by the Company hereunder to be
immediately due and payable without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived, anything contained
herein or in the other Transaction Documents to the contrary notwithstanding.
Upon the occurrence or existence of any Event of Default described in Sections
2(f) or 2(g) hereof, immediately and without notice, all outstanding Obligations
payable by the Company hereunder shall automatically become immediately due and
payable, without presentment, demand, protest or any other notice of any kind,
all of which are hereby expressly waived, anything contained herein or in the
other Transaction Documents to the contrary notwithstanding. In addition to the
foregoing remedies, upon the occurrence or existence of any Event of Default,
the Holder may exercise any other right, power or remedy granted to it by the
Transaction Documents or otherwise permitted to it by law, either by suit in
equity or by action at law, or both.

          (b)  In addition to the rights of the Holder specified in subsection
(a) of this Section 3, on the date an Event of Default under this Note occurs,
the interest rate on this Note shall increase, from that date forward, to the
lesser of 15% and the maximum legally permissible interest rate, with such
interest payable solely in lawful money of the United States.

     4.   SENIORITY; COLLATERAL. To secure the Company's payment and performance
of the Obligations and to secure the Company's prompt, full and faithful
performance and observance of all of the provisions under this Note and the
other Transaction Documents, the Company hereby grants the Holder the rights set
forth in the Pledge and Security Agreement. The security interest granted by the
Company under the Pledge and Security Agreement securing the indebtedness
evidenced by this Note, including all Obligations, is senior to all other liens,
security interests or encumbrances securing any other indebtedness of the
Company, subject only to Permitted Liens (as defined in the Pledge and Security
Agreement) to the extent such Permitted Liens by their express terms or
applicable law have priority equal or superior to such security interest.

     5.   PREPAYMENT AND EFFECT ON CONVERSION RIGHTS. This Note may be prepaid
as a whole or in part at any time prior to the Maturity Date at the election of
the Company upon at least thirty (30) days prior written notice to the Holder
(the "Prepayment Notice Period"); provided that any such prepayment shall
include a prepayment premium equal to a percentage of the amount of principal so
prepaid, as determined by the date of such prepayment, as follows:

                                        4
<Page>

<Table>
<Caption>
     PREPAYMENT DATE                        PREPAYMENT PREMIUM %
     ---------------                        --------------------
     <S>                                           <C>
     May 22, 2002 - August 22, 2002                10%
     August 22, 2002 - November 22, 2002            8%
     November 22, 2002 - February 22, 2003          6%
     February 22, 2003 - May 22, 2003               4%
     May 22, 2003 - August 22, 2003                 2%
     August 22, 2003 or later                       0%
</Table>

Any such prepayment shall be applied first to the payment of expenses due under
this Note, second to any prepayment premium, third to interest accrued on the
portion of this Note so prepaid and fourth, if the amount of prepayment exceeds
the amount of all such expenses, prepayment penalties and accrued interest, to
the payment of principal of this Note. Notwithstanding the foregoing or anything
to the contrary herein, any such election to prepay the Note shall not
extinguish or otherwise effect the conversion rights set forth in Section 6
hereof with respect to the amount of principal so elected to prepaid until after
the expiration of the Prepayment Notice Period.

     6.   CONVERSION.

          (a)  CONVERSION BY HOLDER. At any time, and from time to time, the
Holder may, at its sole and exclusive option, convert all or any part of the
principal and accrued interest outstanding under this Note into shares of Common
Stock at a conversion price per share of Common Stock equal to $4.31, subject to
adjustment as provided in Section 7 hereof (the "Conversion Price").

          (b)  CONVERSION BY COMPANY. At any time following the first
anniversary of the Date of Original Issue, the Company may, at its sole and
exclusive option, convert all of the principal and accrued interest outstanding
under this Note into shares of Common Stock at a conversion price per share of
Common Stock equal to the Conversion Price, provided that each of the following
two conditions is satisfied: (i) the volume weighted average price of the
Company's Common Stock, as reported by Bloomberg Financial LP (or, in the event
that such price is not available from Bloomberg Financial LP, a comparable
nationally recognized financial reporting service), using the VAP function for
the fifteen trading days immediately prior to the date on which the Company
provides the Conversion Notice (as defined below), is equal to or greater than
$12.93 and (ii) the Company's aggregate EBITDA for the two full calendar
quarters immediately preceding the date on which the Company provides the
Conversion Notice, as set forth in the Company's Forms 10-QSB or 10-Q and/or
10-KSB or 10-K filed with the United States Securities and Exchange Commission
for such calendar quarters, is equal to or greater than $3,750,000. If the
Company elects to exercise its conversion right pursuant to this Section 6(b),
it shall provide the Holder with written notice of such election at least five
(5) but no more than ten (10) Business Days prior to the date of such conversion
(the "Conversion Notice") together with evidence reasonably establishing that
all conditions precedent to such conversion have been satisfied.

          (c)  MECHANICS AND EFFECT OF CONVERSION. No fractional shares of
Common Stock shall be issued upon conversion of this Note. Upon the conversion
of all

                                        5
<Page>

of the principal outstanding under this Note, in lieu of the Company issuing any
fractional shares to the Holder, the Company shall pay to the Holder the amount
of outstanding principal that is not so converted in cash. On partial conversion
of this Note, the Company shall issue to the Holder (i) the shares of Common
Stock into which a portion of this Note is converted and (ii) a new senior
secured convertible promissory note having identical terms to this Note, except
that the principal amount thereof shall equal the difference between (A) the
principal amount of this Note immediately prior to such conversion minus (B) the
portion of such principal amount converted into Common Stock. Upon conversion of
this Note pursuant to this Section 6, the Holder shall surrender this Note, duly
endorsed, at the principal office of the Company. At its expense, the Company
shall, as soon as practicable thereafter, issue and deliver to such Holder at
such principal office a certificate or certificates for the number of shares of
Common Stock, to which the Holder shall be entitled upon such conversion
(bearing such legends as are required by the Purchase Agreement and applicable
state and federal securities laws in the opinion of counsel to the Company),
together with any other securities and property to which the Holder is entitled
upon such conversion under the terms of this Note. Upon full conversion of this
Note, the Company shall be forever released from all its obligations and
liabilities under this Note.

          (d)  RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of capital stock, solely for the purpose of effecting the conversion of
this Note, such number of its shares of capital stock of the Company as shall
from time to time be sufficient to effect the conversion of this Note; and if at
any time the number of authorized but unissued shares of capital stock of the
Company shall not be sufficient to effect the conversion of this Note, the
Company hereby covenants and agrees to take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of capital stock to such number of shares as shall be sufficient for such
purpose.

          (e)  PAYMENT OF EXPENSES AND TAXES ON CONVERSION. The Company shall
pay all expenses, taxes and other charges payable in connection with the
preparation, execution, issuance and delivery of stock certificates and new
promissory notes pursuant to this Section 6 hereof, except that, in the event
such stock certificates or new promissory notes shall be registered in a name or
names other than the name of the holder of this Note, funds sufficient to pay
all stock transfer fees, which shall be payable upon the execution and delivery
of such stock certificate or certificates or new promissory notes, shall be paid
by the holder hereof to the Company at the time of delivering this Note to the
Company upon conversion.

     7.   CONVERSION PRICE ADJUSTMENTS.

          (a)  ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Company
shall at any time or from time to time after the Date of Original Issue effect a
stock split or subdivision of the outstanding Common Stock, the Conversion Price
in effect immediately before that subdivision shall be proportionately
decreased, and, conversely, if the Company shall at any time or from time to
time after the Date of Original Issue

                                        6
<Page>

combine the outstanding shares of Common Stock into a smaller number of shares,
the Conversion Price in effect immediately before the combination shall be
proportionately increased. Any adjustment under this Section 7(a) shall become
effective at the close of business on the date the stock split, subdivision or
combination becomes effective.

          (b)  ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If the
Company at any time or from time to time after the Date of Original Issue
issues, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable solely in
additional shares of Common Stock, the Conversion Price that is then in effect
shall be decreased as of the time of such issuance or, in the event such record
date is fixed, as of the close of business on such record date, by multiplying
the Conversion Price by a fraction (i) the numerator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date, and (ii) the
denominator of which is the sum of the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of Common Stock
issuable in payment of such dividend or distribution; provided, however, that if
such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Conversion Price
shall be recomputed accordingly as of the close of business on such record date
and thereafter the Conversion Price shall be adjusted pursuant to this Section
7(b) to reflect the actual payment of such dividend or distribution.

          (c)  ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the Company
at any time or from time to time after the Date of Original Issue issues, or
fixes a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock or in other property, in each such event
provision shall be made so that the Holder of this Note shall receive upon
conversion hereof, in addition to the number of shares of Common Stock
receivable hereupon, the amount of securities of the Company or other property
which such Holder would have received had this Note been converted into Common
Stock on the date of such event and had it thereafter, during the period from
the date of such event to and including the conversion date, retained such
securities or other property receivable by it as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section 7 with respect to the rights of the Holders of this Note or with respect
to such other securities or other property by their terms. As used herein, the
term "other property" does not include cash.

          (d)  ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If at
any time or from time to time after the Date of Original Issue, the Common Stock
issuable upon the conversion of this Note is changed into the same or a
different number of shares of any class or series of stock, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 7), then
in any such event the Holder shall have the right thereafter to convert this
Note into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the number of shares

                                        7
<Page>

of Common Stock into which this Note could have been converted immediately prior
to such recapitalization, reclassification or change, all subject to further
adjustment as provided herein or with respect to such other securities or
property by the terms thereof.

          (e)  SALE OF SHARES BELOW CONVERSION PRICE.

               (i)     If at any time or from time to time after the Date of
Original Issue, the Company issues or sells, or is deemed by the provisions of
clause (iii) of this Section 7(e) to have issued or sold, Additional Shares of
Common Stock (as hereinafter defined), other than a subdivision or combination
of shares of Common Stock or as a dividend or other distribution of Common Stock
as provided for elsewhere in this Section 7, for an Effective Price (as
hereinafter defined) less than the then effective Conversion Price, then and in
each such case the then existing Conversion Price shall be reduced as of the
close of business on the date of such issue or sale to a price equal to the
lowest such Effective Price.

               (ii)    For the purpose of making any adjustment required under
this Section 7(e):

                       (A) "ADDITIONAL SHARES OF COMMON STOCK" means all shares
of Common Stock issued by the Company, whether or not subsequently reacquired or
retired by the Company, or capital stock of the Company issued upon the exercise
or conversion of Convertible Securities outstanding on the Date of Original
Issue, other than shares of Common Stock issued or issuable:

                           (1)  to employees, officers or directors of the
Company, pursuant to stock purchase or stock option plans or other arrangements
that are approved by the Company's Board of Directors;

                           (2)  pursuant to any rights, agreements, options or
warrants outstanding as of the date hereof and disclosed in writing to the
Holder; and stock issued pursuant to any such rights or agreements granted after
the date hereof;

                           (3)  in connection with any stock split, stock
dividend or recapitalization by the Company;

                           (4)  upon conversion of the Notes (as defined in the
Purchase Agreement) or the Company's Series B Preferred Stock or upon exercise
or conversion of the Warrants issued pursuant to the Purchase Agreement;

                           (5)  for consideration other than cash pursuant to a
merger, consolidation, strategic alliance, acquisition or similar business
combination approved by the Board of Directors;

                           (6)  pursuant to any equipment leasing, real property
leasing or loan arrangement, or debt financing from a bank or similar financial

                                        8
<Page>

or lending institution approved by the Company's Board of Directors, the
principal purpose of which is not to raise equity capital; or

                           (7)  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.

                       (B) "AGGREGATE CONSIDERATION RECEIVED" by the Company for
any issue or sale of securities shall (1) to the extent it consists of cash, be
computed at the gross amount of cash received by the Company before deduction of
any underwriting or similar commissions, compensation or concessions paid or
allowed by the Company in connection with such issue or sale and without
deduction of any expenses payable by the Company, (2) to the extent it consists
of property other than cash, be computed at the fair value of that property as
determined in good faith by the Board of Directors of the Company, and (3) if
Additional Shares of Common Stock or Convertible Securities are issued or sold
together with other stock or securities or other assets of the Company for a
consideration which covers both, be computed as the portion of the consideration
so received that may be reasonably determined in good faith by the Board of
Directors of the Company to be allocable to such Additional Shares of Common
Stock or Convertible Securities.

                       (C) "CONVERTIBLE SECURITIES" means stock or other
securities (including options, warrants and other rights) of the Company
ultimately convertible into shares of Common Stock.

                       (D) "EFFECTIVE PRICE" of Additional Shares of Common
Stock means the quotient determined by dividing the total number of Additional
Shares of Common Stock issued or sold, or deemed to have been issued or sold by
the Company under this Section 7(e), into the Aggregate Consideration Received,
or deemed to have been received by the Company for such issue under this Section
7(e), for such Additional Shares of Common Stock.

               (iii)   For the purpose of making any adjustment to the
Conversion Price required under this Section 7(e), if the Company issues or
sells any Convertible Securities and if the Effective Price of the shares of
Common Stock issuable upon conversion of the Convertible Securities is less than
the Conversion Price then in effect, the Company shall be deemed to have issued
at the time of the issuance of such Convertible Securities that number of
Additional Shares of Common Stock equal to the maximum number of shares of
Common Stock issuable upon conversion thereof and to have received as
consideration for the issuance of such shares an amount equal to the total
amount of the consideration, if any, received by the Company for the issuance of
such Convertible Securities, plus the minimum amounts of consideration, if any,
payable to the Company (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) upon the conversion thereof; provided
that:

                                        9
<Page>

                       (A) if the minimum amounts of such consideration cannot
be ascertained, but are a function of antidilution or similar protective
clauses, the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses;

                       (B) if the minimum amount of consideration payable to the
Company upon the conversion of Convertible Securities is reduced over time or on
the occurrence or non-occurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced;

                       (C) if the minimum amount of consideration payable to the
Company upon the conversion of Convertible Securities is subsequently increased,
the Effective Price shall be again recalculated using the increased minimum
amount of consideration payable to the Company upon the conversion of
Convertible Securities; and

                       (D) no further adjustment of the Conversion Price,
adjusted or subject to adjustment upon the issuance of such Convertible
Securities, shall be made as a result of the actual issuance of shares of Common
Stock on the conversion of any such Convertible Securities. If the conversion
privilege represented by any such Convertible Securities shall expire without
having been exercised, the Conversion Price adjusted upon the issuance of such
Convertible Securities shall be readjusted to the Conversion Price which would
have been in effect had an adjustment been made on the basis that the only
shares of Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold on the exercise of such rights of conversion of such
Convertible Securities, and such shares of Common Stock, if any, were issued or
sold for the consideration received for issuing or selling the Convertible
Securities actually converted, plus the consideration, if any, actually received
by the Company (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) on the conversion of such Convertible
Securities, provided that such readjustment shall not apply to prior conversions
of this Note.

               (iv)    Notwithstanding anything to the contrary in this Section
(e), if any reduction of the Conversion Price provided for by this Section 7(e)
would result in the Company not being in compliance with AMEX Listing Standards,
Policies and Requirements Section 713 ("AMEX Rule 713"), or any successor
provision, then, until the Company obtains shareholder approval to issue the
full number of shares of Common Stock issuable after such adjustment, this Note
shall be convertible into the maximum number of shares of Common Stock then
permitted by AMEX Rule 713 without shareholder approval.

          (f)  CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or
readjustment of the Conversion Price for the number of shares of Common Stock or
other securities issuable upon conversion of this Note, the Company, at its own
expense, shall cause its Treasurer to compute such adjustment or readjustment in
accordance with the provisions hereof and prepare a certificate showing such
adjustment or readjustment, and shall mail such certificate, by first class
mail, postage prepaid, to the Holder at the

                                       10
<Page>

Holder's address as shown in the Company's books. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based. No adjustment in the Conversion Price
shall be required to be made unless it would result in an increase or decrease
of at least one cent, but any adjustments not made because of this sentence
shall be carried forward and taken into account in any subsequent adjustment
otherwise required hereunder.

          (g)  NOTICES OF RECORD DATE. Upon (i) the establishment by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company with or into any other Company, or any
transfer of all or substantially all the assets of the Company to any other
person or any voluntary or involuntary dissolution, liquidation or winding up of
the Company, the Company shall mail to the Holder at least 20 days prior to the
record date specified therein a notice specifying (A) the date on which any such
record is to be taken for the purpose of such dividend or distribution and a
description of such dividend or distribution, (B) the date on which any such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up is expected to become effective, and (C) the date, if
any, that is to be fixed as to when the holders of record of Common Stock (or
other securities), shall be entitled to exchange their shares of Common Stock
(or other securities), for securities or other property deliverable upon such
reorganization, reclassification transfer, consolidation, merger, dissolution,
liquidation or winding up.

          (h)  NO IMPAIRMENT. The Company shall not amend its Articles of
Incorporation or participate in any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action for the purpose of avoiding or seeking to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but shall at all times in good faith assist in carrying out all such
action as may be reasonably necessary or appropriate in order to protect the
conversion rights of the Holders of this Note against dilution or other
impairment as provided herein.

     8.   SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer
described in Sections 10 and 11 hereof, the rights and obligations of the
Company and the Holder of this Note shall be binding upon and benefit the
successors, assigns, heirs, administrators and transferees of the parties.

     9.   WAIVER AND AMENDMENT. Any provision of this Note may be amended,
waived or modified upon the written consent of the Company and the holders of at
least 85% of the outstanding principal amount of the Notes issued pursuant to
the Purchase Agreement.

     10.  TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE ON CONVERSION HEREOF.
This Note may not be transferred in violation of any restrictive legend set
forth hereon. Each new Note issued upon transfer of this Note or securities
issuable on conversion of this

                                       11
<Page>

Note shall bear a legend as to the applicable restrictions on transferability in
order to ensure compliance with the Securities Act, unless in the opinion of
counsel for the Company such legend is not required in order to ensure
compliance with the Securities Act. The Company may issue stop transfer
instructions to its transfer agent in connection with such restrictions. Subject
to the foregoing, transfers of this Note shall be registered upon registration
books maintained for such purpose by or on behalf of the Company. Prior to
presentation of this Note for registration of transfer, the Company shall treat
the registered holder hereof as the owner and holder of this Note for the
purpose of receiving all payments of principal and interest hereon and for all
other purposes whatsoever, whether or not this Note shall be overdue and the
Company shall not be affected by notice to the contrary.

     11.  ASSIGNMENT BY THE COMPANY. Neither this Note nor any of the rights,
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by the Company, without the prior written
consent of the Holder.

     12.  TREATMENT OF NOTE. To the extent permitted by generally accepted
accounting principles, the Company will treat, account and report the Note as
debt and not equity for accounting purposes and with respect to any returns
filed with federal, state or local tax authorities.

     13.  NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier, personal delivery or facsimile
transmission at the respective addresses or facsimile number of the parties as
set forth in or otherwise designated by either party pursuant to the Purchase
Agreement or on the register maintained by the Company. Any party hereto may by
notice so given change its address or facsimile number for future notice
hereunder. Notice shall conclusively be deemed to have been given when received.

     14.  EXPENSES; WAIVERS. If action is instituted to collect this Note, the
Company promises to pay all costs and expenses, including, without limitation,
reasonable attorneys' fees and costs, incurred in connection with such action.
The Company hereby waives notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor and all other notices or demands
relative to this instrument.

     15.  GOVERNING LAW; EXCLUSIVE JURISDICTION; JURY WAIVER. This Note and all
actions arising out of or in connection with this Note shall be governed by and
construed in accordance with the laws of the State of New York. IN THE EVENT OF
ANY DISPUTE AMONG OR BETWEEN ANY OF THE PARTIES TO THIS NOTE ARISING OUT OF THE
TERMS OF THIS NOTE, THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE JURISDICTION OF
THE COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, OR THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR RESOLUTION OF
SUCH DISPUTE, AND AGREE NOT TO CONTEST SUCH

                                       12
<Page>

EXCLUSIVE JURISDICTION OR SEEK TO TRANSFER ANY ACTION RELATING TO SUCH DISPUTE
TO ANY OTHER JURISDICTION. THE COMPANY AND THE HOLDER AGREE TO ACCEPT SERVICE OF
PROCESS PURSUANT TO THE PROCEDURES SET FORTH IN SECTION 13. The parties hereto
waive all right to trial by jury in any action or proceeding to enforce or
defend any rights under this NOTE.

                      [SIGNATURE APPEARS ON FOLLOWING PAGE]

                                       13
<Page>

     IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the
date first written above.

                                          IMAGEWARE SYSTEMS, INC.

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

                                       14

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