SECURED PROMISSORY NOTE

FOR VALUE RECEIVED, ImageWare Systems, Inc., a Delaware corporation (" Company "), intending to be legally bound, promises to pay to the order of BET Funding LLC, a Delaware limited liability company (" Lender "), at 250 Gibraltar Road, Horsham, PA  19044, Attention: Bruce E. Toll, or such other location as Lender may specify to Company in writing, in lawful money of the United States of America, the principal sum of up to Five Million Dollars ($5,000,000) or such lesser amount as shall equal the outstanding principal amount hereof, together with all accrued and unpaid interest on this Note on the terms and conditions described below.  Unpaid principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on the earlier of (i) the Maturity Date (as defined below), (ii) a Change of Control Transaction (as defined below) or (iii) when, upon or after the occurrence of an Event of Default, such amounts are declared due and payable by Lender or made automatically due and payable in accordance with the terms hereof.  

The parties hereto acknowledge that this credit facility is for a total of up to Five Million Dollars ($5,000,000).  The initial advance under this Note on the date hereof shall be One Million Dollars ($1,000,000).  Thereafter, subsequent advances shall be in increments of $1,000,000 and will be subject to the sole discretion of Lender, it being understood and acknowledged that Lender shall be under no obligation to make additional loans, advances and/or extensions of credit to or for the benefit of Company under this Note or otherwise.  The parties agree that the future advances, if any, will be on the same terms and conditions as the first.  Company shall execute and deliver a bring-down certificate, in a form acceptable to Lender, in connection with any future advance pursuant to which Company will certify that each representation and warranty made by Company herein and elsewhere in each of the other Financing Documents, are true and correct on and as of the date of such future advance (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date).

In light of the Company's current financial state and the unusually high-degree of risk of repayment associated with this loan, as consideration for the making of the loan hereunder, the Company shall pay to Lender, as a loan origination fee, a warrant, in the form attached hereto as Exhibit "A" , to acquire 4,500,000 shares of Common Stock at an exercise price of fifty cents ($0.50) (the " Lender Warrant ").

THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT (THE " SECURITY AGREEMENT "), DATED AS OF FEBRUARY 12, 2009, AS AMENDED, AND EXECUTED BY COMPANY IN FAVOR OF LENDER. CAPITALIZED TERMS NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN TO SUCH TERMS IN THE SECURITY AGREEMENT.

1.       Definitions .  As used in this Note, the following capitalized terms have the following meanings:

(a)           " Benefit Plan " shall mean a defined benefit plan as defined in Section 3(35) of ERISA (other than a Multiemployer Plan) in respect of which Company, or any ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA.

(b)           " Change of Control Transaction " shall mean the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an individual, legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Securities Exchange Act of 1934, as amended) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 50% of the voting securities of the Company, or (ii) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction own less than 50% of the aggregate voting power of the Company or the successor entity or an affiliate of the successor entity of such transaction, or (iii) the Company sells or transfers all or substantially all of its assets to another Person and the stockholders of the Company immediately prior to such transaction own less than 50% of the aggregate voting power of the acquiring entity or an affiliate of the acquiring entity immediately after the transaction, or (iv) a replacement at one time or within a one year period of more than one-half of the members of the Company's board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), or (v) the execution by the Company of an agreement to which the Company  is a party or by which it is bound, providing for any of the events set forth in clauses (i) through (iv) above.

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

(d)           " Common Stock " shall mean shares of common stock, par value $0.01 per share, of Company.

(e)           " DOL " shall mean the U.S. Department of Labor and any successor department or agency.

(f)           " ERISA " shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute.

(g)           " ERISA Affiliate " shall mean any (i) corporation which is or was at any time a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as Company; (ii) partnership or other trade or business (whether or not incorporated) at any time under common control (within the meaning of Section 414(c) of the Internal Revenue Code) with Company; and (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) as Company, any corporation described in clause (i) above, or any partnership or trade or business described in clause (ii) above.

(h)           " Event of Default " has the meaning given in Section 8 hereof.

(i)           " Financial Statements " shall mean, with respect to any accounting period for Company, audited statements of operations, retained earnings and cash flow of Company for such period, and audited balance sheets of Company as of the end of such period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year if such period is less than a full fiscal year or, if such period is a full fiscal year, corresponding figures from the preceding fiscal year, all in accordance with GAAP, and accompanied by a report and opinion of an independent accountant (as such term is defined in Rule 2-01 of Regulation S-X promulgated by the Securities and Exchange Commission, and acceptable to Lender).   Unless otherwise indicated, each reference to Financial Statements of Company shall be deemed to refer to Financial Statements prepared on a consolidated and consolidating basis.

(j)           " Financing Documents " shall mean, this Note, the Security Agreement, the Lender Warrant, the Registration Rights Agreement and the instruments, agreements and documents executed in connection therewith.

(k)           " GAAP " shall mean generally accepted accounting principals, consistently applied.

(l)           " Governmental Authority " shall mean any federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body.

(m)           " Indebtedness " shall mean obligations of a Person, whether current or long term, which in accordance with GAAP would be included as liabilities on such Person's balance sheet, including, without limitation, indebtedness owed to banks, commercial finance lenders, insurance companies, leasing or equipment financing institutions or other lending institutions regularly engaged in the business of lending money, which is for money borrowed or the deferred purchase price or leasing of equipment, whether or not secured and which would include guaranties, endorsements or other arrangements whereby responsibility is assumed for the obligations of others.

(n)           " Internal Revenue " shall mean the Internal Revenue Service and any successor agency.

(o)           " Internal Revenue Code " shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute thereto and all rules and regulations promulgated thereunder.

(p)           " Lender " shall mean the person specified in the introductory paragraph of this Note, its successors and assigns.

(q)           " Lien " shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction.

(r)           " Material Adverse Effect " shall mean a material adverse effect on (i) the business, prospects, assets, operations or financial condition of Company; (ii) the ability of Company to pay or perform the Obligations in accordance with the terms of this Note and the other Financing Documents; (iii) the Collateral or its value as determined by Lender in its sole discretion; or (iv) the rights and remedies of Lender under this Note and the other Financing Documents.

(s)           " Multiemployer Plan " shall mean a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA and (i) which is, or within the immediately preceding six (6) years was, contributed to by Company, or any ERISA Affiliate or (ii) with respect to which Company may incur any liability.

(t)            " Maturity Date " shall mean June 30, 2010.

(u)           " Obligations " shall mean all loans, advances, debts, liabilities and obligations, howsoever arising, owed by Company to Lender of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note, the Security Agreement and the other Financing Documents, including, all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by Company hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U. S. C. Section 101 et seq .), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding.

(v)           " PBGC " shall mean the Pension Benefit Guaranty Corporation and any Person succeeding to the functions thereof.

(w)           " Permitted Liens " shall mean:

(i)                 Liens for taxes, assessments or governmental charges or levies on its property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves are made in accordance with GAAP.

(ii)                 Liens created by the Security Agreement.

(x)           " Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority.

(y)           " Plan " shall mean any employee benefit plan, program or arrangement, whether oral or written, maintained or contributed to by Company, or with respect to which Company may incur liability.

(z)          " Registration Rights Agreement " shall mean the Registration Rights Agreement, in the form attached hereto as Exhibit "B" , pursuant to which Company has agreed to provide certain registration rights under the Securities Act and the rules and regulations promulgated thereunder, and applicable state securities laws.

(aa)           " Reportable Event " shall mean any of the events described in Section 4043 of ERISA and the regulations thereunder.

(bb)           " Retiree Health Plan " shall mean an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits to persons after termination of employment, other than as required by Section 601 of ERISA.

(cc)           " SEC " shall mean the United States Securities and Exchange Commission.

(dd)           " Securities " shall mean the the Lender Warrant and the Warrant Shares and each of them may individually referred to herein as a " Security ".

(ee)           " Securities Act " shall mean Securities Act of 1933, as amended.

(ff)           " Termination Event " shall mean (i) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan; (ii) the withdrawal of Company, or any ERISA Affiliate from a Benefit Plan during a plan year in which such entity was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to terminate a Benefit Plan pursuant to Section 4041 of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan; (v) any event or condition (A) which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (B) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of Company, or any ERISA Affiliate from a Multiemployer Plan.

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

(hh)           " Warrant Shares " shall mean the shares of Common Stock issuable upon the exercise of or otherwise pursuant to the Lender Warrant.

2.       Payments of Principal and Interest .

(a)           The entire unpaid principal balance of this Note together with all accrued interest on this Note under Sections 2(b) and 2(c) shall be payable on (i) the Maturity Date, (ii) a Change of Control Transaction or (iii) such earlier date as may be required under the terms of this Note.

(b)           Interest shall accrue on the unpaid principal balance of this Note at a rate equal to five percent (5%) per year, computed on the basis of a year consisting of 360 days.  Upon and/or after and during the continuance of an Event of Default, interest on the unpaid principal balance shall, at Lender's sole discretion, accrue at a rate equal to ten percent (10%) per year computed on the basis of a year consisting of 360 days.  Interest shall accrue at the applicable rate notwithstanding the occurrence of any Event of Default, acceleration of the Obligations (as defined below), the entry of any judgment, or the commencement of any bankruptcy, reorganization, receivership or other proceedings.

(c)           In addition to the interest payable under Section 2(b) , at the time set forth in Section 2(a) , Borrower shall pay to Lender additional interest on this Note in an amount equal to the greater of (i) Four Hundred Thousand Dollars ($400,000) and (ii) an amount equal to 2,000,000 multiplied by the average of the Closing Prices for the Common Stock for the ten (10) trading day period immediately preceding the date of the payment of such interest amount.

3.       Prepayment .  Prepayments of this Note shall automatically be due and payable upon the occurrence of any of the following events:

(a)           The receipt by Company of proceeds from the sale of equity or equity-linked securities by Company in excess of $2,500,000 (excluding the receipts from the exercise of existing warrants or employee options); or

(b)           Receipt of proceeds from the issuance by Company of any type of additional debt instruments, including lines of credit.

Each such prepayment shall be applied first to Lender’s costs and expenses, next to accrued and unpaid interest and then to principal.

In addition, upon five (5) days prior written notice to Lender, Company may prepay this Note in whole or in part, provided that such prepayment is accompanied by a payment of all accrued and unpaid interest on the amount so prepaid through and including the date of such prepayment.

4.       Certain Representations and Warranties of Company .  Company hereby represents and warrants to Lender as follows:

(a)            Organization and Qualification .   Company (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware, (ii) has the power and authority to own its properties and assets and to transact the businesses in which it is presently, or proposes to be, engaged, and (iii) is duly qualified and is authorized to do business and is in good standing in every jurisdiction in which the failure to be so qualified could reasonably be expected to have a Material Adverse Effect.   Schedule 4(a) contains a true, correct and complete list of Company's organizational identification number and all jurisdictions in which Company is qualified to do business as a foreign corporation as of the date of this Note.

(b)            No Conflict .   The execution and delivery by Company of this Note and the other Financing Documents and the performance of the obligations of Company hereunder and thereunder and the consummation by Company of the transactions contemplated hereby and thereby: (i) are within the corporate powers of Company; (ii) are duly authorized by the Board of Directors of Company and, if necessary, its stockholders; (iii) are not in contravention of the terms of the articles or certificate of incorporation or bylaws of Company or of any indenture, contract, lease, agreement instrument or other commitment to which Company is a party or by which Company or any of its property are bound; (iv) do not require the consent, registration or approval of any Governmental Authority or any other Person; (v) do not contravene any statute, law, ordinance regulation, rule, order or other governmental restriction applicable to or binding upon Company; and (vi) will not, except as contemplated herein for the benefit of Lender, result in the imposition of any Liens upon any property of Company.

(c)            Judgments or Litigation.    There is no (i) judgment, order, writ or decree outstanding against Company or (b) pending, or to the best of Company's knowledge threatened, litigation, contested claim, investigation, arbitration, or governmental audit (for taxes or otherwise) or proceeding by or against Company.

(d)            Stockholder Authorization .  Neither the execution, delivery or performance by Company of this Note or the other Financing Documents nor the consummation by it of the transactions contemplated hereby or thereby (including, without limitation, the issuance of the Lender Warrant or the issuance or reservation for issuance of the Warrant Shares) requires any consent or authorization of Company's stockholders.

(e)            Capitalization .  The capitalization of Company as of the date hereof, including the authorized capital stock, the number of shares issued and outstanding, the number of shares issuable and reserved for issuance pursuant to Company's stock option plans, the number of shares issuable and reserved for issuance pursuant to securities (other than the Lender Warrant) exercisable or exchangeable for, or convertible into, any shares of capital stock and the number of shares to be reserved for issuance upon exercise of the Lender Warrant is set forth on Schedule 4(e) .  All of such outstanding shares of capital stock have been, or upon issuance in accordance with the terms of any such warrants, options or preferred stock, will be, validly issued, fully paid and non-assessable.  No shares of capital stock of Company (including the Warrant Shares) are subject to preemptive rights or any other similar rights of the stockholders of Company or any liens or encumbrances.  Except for the Securities and as set forth on Schedule 4(e) , as of the date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of Company or any of its subsidiaries, or arrangements by which Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of Company or any of its subsidiaries, nor are any such issuances or arrangements contemplated, and (ii) there are no agreements or arrangements under which Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Securities Act (except the Registration Rights Agreement).   Schedule 4(e) sets forth all of Company issued securities or instruments containing antidilution or similar provisions that will be triggered by, and all of the resulting adjustments that will be made to such securities and instruments as a result of, the issuance of the Securities in accordance with the terms of this Note or the Lender Warrant.  Company has furnished to Lender true and correct copies of Company's Certificate of Incorporation as in effect on the date hereof (" Certificate of Incorporation "), Company's By-laws as in effect on the date hereof (the " By-laws "), and all other instruments and agreements governing securities convertible into or exercisable or exchangeable for capital stock of Company.

(f)            Issuance of Shares .  The Warrant Shares are duly authorized and reserved for issuance, and, upon exercise of the Lender Warrant in accordance with the terms thereof, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances and will not be subject to preemptive rights, rights of first refusal or other similar rights of stockholders of Company and will not impose personal liability upon the holder thereof.

(g)            SEC Documents, Financial Statements .  Except as set forth on Schedule 4(g) , since December 31, 2007, Company has timely filed (within applicable extension periods) all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the " Exchange Act ") (all of the foregoing filed prior to the date hereof and all exhibits included therein and Financial Statements and schedules thereto a