Document:

ex10_2.htm

    
      

    

    Exhibit
10.2

    

    

    THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF BY THE HOLDER EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS OF ANY STATE WITH
RESPECT THERETO OR IN ACCORDANCE WITH AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER THAT AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE AND ALSO MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT
IN COMPLIANCE WITH ANY APPLICABLE RULES OF THE SECURITIES AND EXCHANGE
COMMISSION.

    

    

    _________
Warrants

    

    

    REGEN
BIOLOGICS, INC.

    WARRANT
CERTIFICATE

     

    Warrant
to Purchase

    Common
Stock

     

    Date of
Issue:  February 13, 2009

    

    

    This
warrant certificate (“Warrant
Certificate”) certifies that for value received
___________________________ or registered assigns (the “Holder”) is the owner of the
warrants specified above (the “Warrants”), which entitles the
Holder thereof to purchase, at any time on or before the Expiration Date
(hereinafter defined) up to _____________ fully paid and nonassessable shares of
Common Stock, $0.01 par value (“Common Stock”), of ReGen
Biologics, Inc., a Delaware corporation (the “Company”), at the Exercise
Price (as defined herein).

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	
               
      

            	
              1.

            	
              Warrant; Exercise
      Price

            

    

     

    This
Warrant Certificate shall entitle the Holder to purchase up to (i) __________
shares of Common Stock of the Company, and the per share purchase price payable
upon exercise of the Warrants shall initially be $1.20 per share of Common
Stock, subject to adjustment as hereinafter provided (as may be adjusted from
time to time, the “Exercise
Price”).  The Exercise Price and number of shares of Common
Stock issuable upon exercise of this Warrant are subject to adjustment as
provided in Sections 6 hereof.

     

    
      	
               
      

            	
              2.

            	
              Exercise; Expiration
      Date

            

    

     

    2.1           The
Warrants are exercisable, at the option of the Holder, at any time or times
after issuance and on or before the Expiration Date (as hereinafter defined),
upon surrender of this Warrant Certificate to the Company together with a duly
completed Notice of Exercise, in the form attached hereto as Exhibit A, and
payment of an amount equal to the product of the Exercise Price times the number
of shares of Common Stock to be acquired.  Payment of the Exercise
Price for the Warrant Shares (as hereinafter defined) shall be in lawful money
of the United States of America, paid by wired transfer or cashier’s check drawn
on a United States bank or pursuant to the terms of Section 7.  In the
case of exercise of the Warrants for less than all the Warrant Shares (as
hereinafter defined) represented by this Warrant Certificate, the Company shall
cancel the Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate for the balance of such Warrant Shares (as
hereinafter defined).

     

    2.2           The
term “Expiration Date”
shall mean 5:00 p.m. New York time on February 13, 2014 or if such date shall in
the State of New York be a holiday or a day on which banks are authorized to
close, then 5:00 p.m. New York time the next following date which in the State
of New York is not a holiday or a day on which banks are authorized to
close.

     

    
      	
               
      

            	
              3.

            	
              Registration and
      Transfer on Company Books

            

    

     

    3.1           The
Company shall maintain books for the registration and transfer of the Warrants
and the registration and transfer of the shares of Common Stock issued upon
exercise of the Warrants.

     

    3.2           Prior
to due presentment for registration of transfer of this Warrant Certificate, or
the shares of Common Stock issued upon exercise of the Warrants, the Company may
deem and treat the registered Holder as the absolute owner thereof.

    

    
      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

     

    3.3           Neither
this Warrant Certificate nor the shares of Common Stock issuable upon exercise
hereof (the “Warrant
Shares”) have been registered under the Securities Act of 1933, as
amended (the “Act”).  The Company
will not transfer this Warrant Certificate or the Warrants or issue or transfer
the Warrant Shares unless (i) there is an effective registration covering such
Warrants or Warrant Shares, as the case may be, under the Act and applicable
states securities laws, (ii) it first receives a letter from an attorney,
acceptable to the Company's board of directors or its agents, stating that in
the opinion of the attorney the proposed issue or transfer is exempt from
registration under the Act and under all applicable state securities laws, or
(iii) the transfer is made pursuant to Rule 144 under the
Act.  Subject to the foregoing, this Warrant Certificate, the Warrants
represented hereby, and the Warrant Shares, may be sold, assigned or otherwise
transferred voluntarily by the Holder to officers or directors of the Holder, to
members of such persons' immediate families, or to the Holder's parent or
subsidiary corporations.  The Company shall register upon its books
any permitted transfer of a Warrant Certificate, upon surrender of same to the
Company with a written instrument of transfer duly executed by the registered
Holder or by a duly authorized attorney.  Upon any such registration
of transfer, new Warrant Certificate(s) shall be issued to the transferee(s) and
the surrendered Warrant Certificate shall be canceled by the
Company.  A Warrant Certificate may also be exchanged, at the option
of the Holder, for new Warrant Certificates representing in the aggregate the
number of Warrant Shares evidenced by the Warrant Certificate
surrendered.

     

    
      	
               
      

            	
              4.

            	
              Reservation of
      Shares

            

    

     

    The
Company covenants that it will at all times reserve and keep available out of
its authorized Common Stock, solely for the purpose of issue upon exercise of
the Warrants, such number of shares of Common Stock as shall then be issuable
upon the exercise of all the Warrants represented by this Warrant
Certificate.  The Company covenants that all Warrant Shares shall be
duly and validly issued and, upon payment for such shares as set forth herein,
fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof, and that upon issuance such shares shall be listed
on the national securities exchange, if any, on which the other shares of
outstanding Common Stock of the Company are then listed.

    

    
      	
               
      

            	
              5.

            	
              Loss or
      Mutilation

            

    

     

    Upon
receipt by the Company of reasonable evidence of the ownership of and the loss,
theft, destruction or mutilation of any Warrant Certificate and, in the case of
loss, theft or destruction, of indemnity reasonably satisfactory to the Company,
or, in the case of mutilation, upon surrender and cancellation of the mutilated
Warrant Certificate, the Company shall execute and deliver in lieu thereof a new
Warrant Certificate representing the number of Warrant Shares evidenced by the
lost, stolen, destroyed or mutilated Warrant Certificate.

    

    
      
        
           

        

        
          3

          
            

          

        

        
           

        

      

    

     

    
      	
               
      

            	
              6.

            	
              Adjustments of Exercise Price
      and Shares

            

    

     

    6.1           In
the event of changes in the outstanding Common Stock of the Company by reason of
dividends, distributions, split-ups, recapitalizations, reclassifications,
combinations or exchanges of shares, separations, reorganizations, liquidations,
consolidation, acquisition of the Company (whether through merger or acquisition
of substantially all the assets or stock of the Company), or the like, the
number and class of shares available under the Warrants in the aggregate and the
Exercise Price shall be correspondingly adjusted to give the Holder of the
Warrants, on exercise for the same aggregate Exercise Price, the total number,
class, and kind of shares or other property as the Holder would have owned had
the Warrants been exercised prior to the event and had the Holder continued to
hold such shares until the event requiring adjustment.  The form of
this Warrant Certificate need not be changed because of any adjustment in the
number of Warrant Shares subject to this Warrant Certificate or the Exercise
Price provided herein.

     

    6.2           If
at any time or from time to time the holders of all of the shares of Common
Stock of the Company (or the holders of all of the shares of stock or other
securities at the time receivable upon the exercise of the Warrants) shall, as a
class, have received or become entitled to receive, without payment
therefor:

     

    
      	
               
      

            	
              (i)

            	
              Common
      Stock or any shares of stock or other securities which are at any time
      directly or indirectly convertible into or exchangeable for Common Stock,
      or any rights or options to subscribe for, purchase or otherwise acquire
      any of the foregoing by way of dividend or other distribution (other than
      a dividend or distribution covered in Section 6.1
  above),

            

    

     

    
      	
               
      

            	
              (ii)

            	
              any
      cash paid or payable; or

            

    

     

    
      	
               
      

            	
              (iii)

            	
              Common
      Stock or additional stock or other securities or property (including cash)
      by way of spinoff, split-up, reclassification, combination of shares or
      similar corporate rearrangement (other than shares of Common Stock
      pursuant to Section 6.1 above),

            

    

     

    then, and
in each such case, the Holder hereof will, upon the exercise of the Warrants, be
entitled to receive, in addition to the number of shares of Common Stock
receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the cases referred to in clauses (ii) and (iii) above) which such Holder
would hold on the date of such exercise had he or she been the holder of record
of such Common Stock as of the date on which holders of Common Stock received or
became entitled to receive such shares or all other additional stock and other
securities and property.

    

    
      
        
           

        

        
          4

          
            

          

        

        
           

        

      

    

     

    6.3           Whenever
the number of Warrant Shares purchasable upon the exercise of the Warrants or
the Exercise Price of such Warrant Shares is adjusted, as herein provided, the
Company shall mail to the Holder, at the address of the Holder shown on the
books of the Company, a notice of such adjustment or adjustments, prepared and
signed by the Chief Financial Officer, the Secretary or another authorized
officer of the Company, which sets forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Exercise Price of such
Warrant Shares after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was
made.

     

    
      	
               
      

            	
              7.

            	
              Conversion

            

    

     

    7.1           In
lieu of exercise of any portion of the Warrants as provided in Section 2.1
hereof, the Warrants represented by this Warrant Certificate (or any portion
thereof) may, at the election of the Holder, be converted into the nearest whole
number of shares of Common Stock equal to:  (1) the product of (a) the
number of Warrants to be so converted, (b) the number of shares of Common Stock
then issuable upon the exercise of each Warrant and (c) the excess, if any, of
(i) the Common Stock Market Price Per Share (as determined pursuant to Section
8.2 hereof) with respect to the date of conversion minus (ii) the
Exercise Price in effect on the business day next preceding the date of
conversion, divided
by (2) the Common Stock Market Price Per Share with respect to the date
of conversion.

     

    7.2           The
conversion rights provided under this Section 7 may be exercised in whole or in
part and at any time and from time to time while any Warrants remain
outstanding.  In order to exercise the conversion privilege, the
Holder shall surrender to the Company, at its offices, this Warrant Certificate
accompanied by a duly completed Notice of Conversion in the form attached hereto
as Exhibit
B.  The Warrants (or so many thereof as shall have been
surrendered for conversion) shall be deemed to have been converted immediately
prior to the close of business on the day of surrender of such Warrant
Certificate for conversion in accordance with the foregoing
provisions.  As promptly as practicable on or after the conversion
date, the Company shall issue and shall deliver to the Holder (i) a certificate
or certificates representing the number of shares of Common Stock to which the
Holder shall be entitled as a result of the conversion, and (ii) if the Warrant
Certificate is being converted in part only, a new certificate in principal
amount equal to the unconverted portion of the Warrant Certificate.

     

    8.           Fractional Shares and
Warrants; Determination of Market Price Per Share

     

    8.1           Anything
contained herein to the contrary notwithstanding, the Company shall not be
required to issue any fraction of a share of Common Stock in connection with the
exercise of the Warrants.  The Warrants may not be exercised in such
number as would result (except for the provisions of this paragraph) in the
issuance of a fraction of a share of Common Stock unless the Holder is
exercising all the Warrants represented by this Warrant Certificate then owned
by the Holder.  In such event, the Company shall, upon the exercise of
the Warrants, issue to the Holder the largest aggregate whole number of shares
of Common Stock called for thereby upon receipt of the Exercise Price for all
the Warrants represented by this Warrant Certificate and pay a sum in cash equal
to the remaining fraction of a share of Common Stock multiplied by the Common
Stock Market Price Per Share (as determined pursuant to Section 8.2 below) as of
the last business day preceding the date on which the Warrants are presented for
exercise.

    

    
      
        
           

        

        
          5

          
            

          

        

        
           

        

      

    

     

    8.2           As
used herein, the “Common Stock
Market Price Per Share” with respect to any date shall mean the average
closing price per share of Company's Common Stock for the ten (10) trading days
immediately preceding such date during which the Common Stock has
traded.  The closing price for each such day shall be the closing sale
price or, in case no such sale takes place on such day, the closing price on the
last trading day, in either case on the principal securities exchange on which
the shares of Common Stock of the Company are listed or admitted to trading, the
last sale price, or in case no sale takes place on any such day, the average of
the high and low sales prices of the Common Stock on the Over-the-Counter
Bulletin Board (“OTCBB”) or any comparable system, or if the Common Stock is not
reported on OTCBB, or a comparable system, the average of the closing bid and
asked prices as furnished by two members of the Financing Industry Regulatory
Authority selected from time to time by the Company for that
purpose.  If such bid and asked prices are not available, then “Common
Stock Market Price Per Share” shall be equal to the fair market value of the
Company's Common Stock as determined in good faith by the board of directors of
the Company.

     

    
      	
               
      

            	
              9.

            	
              Notices

            

    

     

    All
notices, requests, demands, claims, and other communications hereunder shall be
in writing and shall be delivered by certified or registered mail (first class
postage pre-paid), guaranteed overnight delivery, or facsimile transmission if
such transmission is confirmed by delivery by certified or registered mail
(first class postage pre-paid) or guaranteed overnight delivery, to the
following addresses and telecopy numbers (or to such other addresses or telecopy
numbers which such party shall subsequently designate in writing to the other
party):

    

     

    if to the
Company to:

     

    ReGen
Biologics, Inc.

    411
Hackensack Avenue

    Hackensack,
NJ  07601

    Attention:
Brion D. Umidi

    Telecopy:
201.651.5141

     

    with a
copy to:

     

    Pillsbury
Winthrop Shaw Pittman LLP

    1650
Tysons Boulevard

    McLean,
VA 22102

    Attention:
David C. Main, Esq.

    Telecopy:
703.770.7901

     

    if to the
Holder to the address set forth on the books of the Company.

    

    
      
        
           

        

        
          6

          
            

          

        

        
           

        

      

    

     

    Each such
notice or other communication shall for all purposes of this Agreement be
treated as effective or having been given when delivered if delivered by hand,
by messenger or by courier, or if sent by facsimile, upon confirmation of
receipt.

     

    
      	
               
      

            	
              10.

            	
              Governing
      Law

            

    

     

    This
Warrant Certificate shall be governed by and construed in accordance with the
laws of the State of New York.

    

    
      
        
           

        

        
          7

          
            

          

        

        
           

        

      

    

    

    IN
WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed as of the date first above written.

     

    

     

    

     

    REGEN
BIOLOGICS, INC.

    

    

    

    
      
        
          
            
              	
                      By:

                    	 
      	 
      	 
      
	 
      	
                      Name:

                    	
                      Brion
      D. Umidi

                    	 
      
	 
      	
                      Title:

                    	
                      Senior
      Vice President and Chief Financial
Officer

                    

            

          

        

      

    

    

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

    

     

    EXHIBIT
A

     

    NOTICE OF
EXERCISE

     

    
      	
               
      

            	
              To:

            	
              ReGen
      Biologics, Inc.

            

    

    
      	
               
      

            	
              411
      Hackensack Avenue

            	
              ______________,
      20_____

            

    

    Hackensack,
NJ  07601

    

    The
undersigned hereby irrevocably elects to purchase, pursuant to Section 2 of the
Warrant Certificate accompanying this Notice of Exercise, _______ Warrant Shares
of the total number of Warrant Shares issuable to the undersigned pursuant to
the accompanying Warrant Certificate, and herewith makes payment of $___________
in payment in full of the aggregate Exercise Price of such shares. (Company to
confirm)

     

    Please
issue a certificate or certificates representing said Warrant Shares in the name
of the undersigned or in such other name as is specified below:

    
 

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 	      
                                        The
      Warrant Shares shall be delivered to the following:

                                      	 	 
	
                                         

                                      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	
                                        Name
      of Holder

                                      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	
                                        Signature

                                      
	 
      	 
      	 	 
      
	 
      	 
      	 	
                                        Address:

                                      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

     

     

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
B

    

    NOTICE OF
CONVERSION

    

    
      	
               
      

            	
              To:

            	
              ReGen
      Biologics, Inc.

            

    

    
      	
               
      

            	
              411
      Hackensack Avenue

            	
              ______________,
      20_____

            

    

    Hackensack,
NJ  07601

    

    The
undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the
Warrant Certificate accompanying this Notice of Conversion, _________ Warrant
Shares of the total number of Warrant Shares issuable to the undersigned
pursuant to the accompanying Warrant Certificate into shares of the Common Stock
of the Company (the “Shares”).

     

    The
number of Shares to be received by the undersigned, calculated in accordance
with the provisions of Section 7.1 of the accompanying Warrant Certificate, is
________________. (Company to confirm)

    

    Please
issue a certificate or certificates representing said Warrant Shares in the name
of the undersigned or in such other name as is specified below:

    
 

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 	      
                                          The
      Warrant Shares shall be delivered to the following:

                                        	 	 
	
                                           

                                        	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	
                                          Name
      of Holder

                                        
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	
                                          Signature

                                        
	 
      	 
      	 	 
      
	 
      	 
      	 	
                                          Address:Unassociated Document

    
      

    

    
       

      IMAGEWARE
SYSTEMS, INC.

       

      SECURED PROMISSORY
NOTE

      

      
        
          	
                  $5,000,000

                	 
      	
                  February
      12, 2009

                

        

      

       

      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.

      

      
        
          
             

          

          
            2

            
              

            

          

          
             

          

        

      

       

      (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.

      

      
        
          
             

          

          
            3

            
              

            

          

          
             

          

        

      

       

      (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.

      

      
        
          
             

          

          
            4

            
              

            

          

          
             

          

        

      

       

      (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.

      

      
        
          
             

          

          
            5

            
              

            

          

          
             

          

        

      

       

      (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:

      

      
        
          
             

          

          
            6

            
              

            

          

          
             

          

        

      

       

      (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.

      

      
        
          
             

          

          
            7

            
              

            

          

          
             

          

        

      

       

      (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 and documents
incorporated by reference therein, being hereinafter referred to herein as the
"SEC
Documents").  Company has delivered to Lender true and complete
copies of the SEC Documents.  To the extent that any SEC Document is
available under the SEC's EDGAR filing system, such SEC Document shall be deemed
to have been delivered to Lender.  As of their respective dates, the
SEC Documents complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.  None of the statements made in any such SEC Documents is,
or has been, required to be amended or updated under applicable law (except for
such statements as have been amended or updated in subsequent filings made prior
to the date hereof).  As of their respective dates, the Financial
Statements of Company included in the SEC Documents complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC applicable with respect
thereto.  Such Financial Statements have been prepared in accordance
with GAAP, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such Financial Statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the consolidated financial position of Company and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to immaterial year-end audit
adjustments).  Except as set forth in the Financial Statements of
Company included in the SEC Documents filed prior to the date hereof, Company
has no liabilities, contingent or otherwise, other than (i) liabilities incurred
in the ordinary course of business subsequent to the date of such Financial
Statements and (ii) obligations under contracts and commitments incurred in the
ordinary course of business and not required under GAAP to be reflected in such
Financial Statements, which liabilities and obligations referred to in clauses
(i) and (ii), individually or in the aggregate, are not material to the
financial condition or operating results of Company.

      

      
        
          
             

          

          
            8

            
              

            

          

          
             

          

        

      

       

      (h)           Absence of Certain
Changes.  Since December 31, 2007, there has been no Material
Adverse Effect to the business, properties, operations, prospects, financial
condition or results of operations of Company and its subsidiaries, taken as a
whole, except as disclosed in the SEC Documents filed prior to the date
hereof.

       

      (i)           Defaults. Company is not in
default under any term of any indenture, contract, lease, agreement, instrument
or other commitment to which it is a party or by which it is bound which default
has had or could be reasonably expected to have a Material Adverse Effect other
than defaults related to unpaid trade payables.  Company knows of no
dispute regarding any indenture, contract, lease, agreement, instrument or other
commitment which could reasonably be expected to have a Material Adverse Effect,
other than disputes related to unpaid trade payables.

       

      (j)           ERISA. Neither Company, nor
any ERISA Affiliate maintains or contributes to any Benefit Plan other than
those listed on Schedule
4(j).  Each Benefit Plan has been and is being maintained and
funded in accordance with its terms and in compliance in all material respects
with all provisions of ERISA and the Internal Revenue Code applicable
thereto.  Company, and each ERISA Affiliate has fulfilled all
obligations related to the minimum funding standards of ERISA and the Internal
Revenue Code for each Benefit Plan, is in compliance in all material respects
with the currently applicable provisions of ERISA and of the Internal Revenue
Code and has not incurred any liability (other than routine liability for
premiums) under Title IV of ERISA.  No Termination Event has occurred
nor has any other event occurred that may result in such a Termination
Event.  No event or events have occurred in connection with which
Company, any ERISA Affiliate, any fiduciary of a Benefit Plan or any Benefit
Plan, directly or indirectly, would be subject to any material liability,
individually or in the aggregate, under ERISA, the Internal Revenue Code or any
other law, regulation or governmental order or under any agreement, instrument,
statute, rule of law or regulation pursuant to or under which any such entity
has agreed to indemnify or is required to indemnify any person against liability
incurred under, or for a violation or failure to satisfy the requirements of,
any such statute, regulation or order.  Neither Company, nor any ERISA
Affiliate, has incurred or, to the best of their knowledge, would reasonably
expect to incur, any withdrawal liability under ERISA to any Benefit
Plan.  Except as disclosed on Schedule 4(j), the
actuarial present value of all "benefit liabilities" (as described in Section 4001(a)(16)
of ERISA), whether or not vested, under each Benefit Plan, as of the last annual
valuation date prior to the date on which this representation is made or deemed
to be made, did not exceed as of such valuation date the fair market value of
the assets of such Benefit Plan.

       

      (k)           Taxes and Tax Returns.  Company has timely
filed (inclusive of any permitted extensions) with the appropriate taxing
authorities all returns (including, without limitation, information returns and
other material information) in respect of taxes required to be filed through the
date hereof and will timely file (inclusive of any permitted extensions) any
such returns required to be filed on and after the date hereof.  The
information filed is complete and accurate in all material
respects.  All deductions taken by Company as reflected in such income
tax returns have been taken in accordance with applicable laws and
regulations.  All taxes, in respect of periods beginning prior to the
date hereof, have been timely paid, or will be timely paid, or an adequate
reserve has been established therefor, as set forth in the Financial Statements
of Company, and Company does not have any material liability for such taxes for
such periods in excess of the amounts so paid or reserves so
established.  No material deficiencies for taxes have been claimed,
proposed or assessed by any taxing or other Governmental Authority against
Company and no material tax Liens have been filed.

      

      
        
          
             

          

          
            9

            
              

            

          

          
             

          

        

      

       

      (l)           Licenses and Permits.  Company has
obtained and holds in full force and effect, all material franchises, licenses,
leases, permits, certificates, authorizations, qualifications, easements, rights
of way and other rights and approvals which are necessary or appropriate for the
operation of its business as presently conducted and as proposed to be
conducted.  Company is in compliance with the terms of any each
franchise, license, lease, permit, certificate, authorization, qualification,
easement, right of way, right or approval except where Company's non-compliance
could not reasonably be expected to have a Material Adverse Effect.

       

      (m)           Disclosure.  All
information relating to or concerning Company set forth in this Note or provided
to Lender in connection with the transactions contemplated hereby is true and
correct in all material respects and Company has not omitted to state any
material fact necessary in order to make the statements made herein or therein,
in light of the circumstances under which they were made, not
misleading.  No event or circumstance has occurred or exists with
respect to Company or its subsidiaries or their respective businesses,
properties, prospects, operations or financial conditions, which has not been
publicly disclosed but, under applicable law, rule or regulation, would be
required to be disclosed by Company in a registration statement filed on the
date hereof by Company under the Securities Act with respect to the primary
issuance of Company's securities.

       

      (n)           No Integrated
Offering.  Neither Company, nor any of its affiliates, nor any
Person acting on its or their behalf, has directly or indirectly made any offers
or sales of any security or solicited any offers to buy any security under
circumstances that would require registration of the Securities being offered
hereby under the Securities Act or cause the offering of the Securities to be
integrated with any prior offering of securities of Company for purposes of the
Securities Act or any applicable stockholder approval provisions.

       

      (o)           Solvency.  The fair
saleable value of Company's assets exceeds all probable liabilities, including
those to be incurred pursuant to this Note and other Financing
Documents.

       

      (p)           Consideration.  Company
has been unable, despite its good faith efforts, to obtain financing for Company
on terms at least as favorable as those being offered by
Lender.  Company has had the complete and full opportunity to
negotiate the terms of this Note and the other Financing Documents and is
satisfied that such terms are fair and reasonable.  This Note and the
other Financing Documents have been entered into by Company voluntarily and with
the advice of counsel or the opportunity to obtain such advice.

      

      
        
          
             

          

          
            10

            
              

            

          

          
             

          

        

      

       

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

       

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

       

      (b)           Lender Status.  At
the time Lender was offered the Securities, it was, and at the date hereof it
is, and on each date on which it exercises the Warrant, it will be either: (i)
an "accredited investor" as defined in Rule 501(a)(1), (a)(2), (a)(3),
(a)(7) or (a)(8) under the Securities Act or (ii) a "qualified
institutional buyer" as defined in Rule 144A(a) under the Securities
Act.  Lender is not required to be registered as a broker-dealer under
Section 15 of the Securities Exchange Act of 1934, as amended.

       

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

       

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

       

      6.      Certain
Covenants.

       

      (a)           Best Efforts.  The
parties shall use their best efforts timely to satisfy each of the conditions
described in Section
7 of this Note.

       

      (b)           Form D; Blue Sky
Laws.  Company shall file with the SEC a Form D with respect to
the Securities as required under Regulation D and provide a copy thereof to
Lender promptly after such filing.  Company shall, on or before the
date of this Note, take such action as Company shall reasonably determine is
necessary to qualify the Securities for sale to Lender under applicable
securities or "blue sky" laws of the states of the United States or obtain
exemption therefrom, and shall provide evidence of any such action so taken to
Lender on or prior to the date of this Note.  Within two (2) trading
days after the date of this Note, Company shall file a Form 8-K concerning this
Note and the transactions contemplated hereby, which Form 8-K shall attach this
Note and its Exhibits as exhibits to such Form 8-K.

      

      
        
          
             

          

          
            11

            
              

            

          

          
             

          

        

      

       

      (c)           Reporting
Status.  The Company shall bring all SEC filings into
compliance on or before May 1, 2009, including, without limitation, it quarterly
report on Form 10-Q for the period ending September 30, 2008.  So long
as Lender beneficially owns any of the Securities, Company shall timely file
(within applicable extension periods) all reports required to be filed with the
SEC pursuant to the Exchange Act, and Company shall not terminate its status as
an issuer required to file reports under the Exchange Act even if the Exchange
Act or the rules and regulations thereunder would permit such
termination.  In addition, Company shall take all actions necessary to
meet the "registrant eligibility" requirements set forth in the general
instructions to Form S-3 or any successor form thereto, to continue to be
eligible to register the resale of its Common Stock on a registration statement
on Form S-3 under the Securities Act.

       

      (d)           Reservation of
Shares.  Company shall at all times have authorized and
reserved for the purpose of issuance a sufficient number of shares of Common
Stock to provide for the full exercise of the Lender Warrant and the issuance of
the Warrant Shares in connection therewith and as otherwise required by the
Lender Warrant.

       

      (e)           Financial Information.  Company will
furnish to Lender within ninety (90) days after the close of each fiscal year of
Company, Financial Statements, and upon Lender's request, such other financial
information as Lender may reasonably require.

       

      (f)           Corporate Existence.  Company shall
(i) maintain its corporate existence and maintain in full force and effect all
licenses, bonds, franchise, leases, trademarks and qualifications to do
business, (ii) obtain or maintain contracts and other rights necessary or
desirable to the profitable conduct of its business, (iii) continue in, and
limit its operations to, the same general lines of business as that presently
conducted by it, and (iv) comply with all applicable laws and regulations of any
federal, state or local Governmental Authority, except where noncompliance could
not reasonably be expected to have a Material Adverse Effect.

       

      (g)           ERISA. Company will establish,
maintain and operate all Plans to comply in all respects with the provisions of
ERISA, the Internal Revenue Code, and all other applicable laws, and the
regulations and interpretations thereunder other than to the extent that Company
is in good faith contesting by appropriate proceedings the validity or
implication of any such provision, law, rule, regulation or interpretation.
Promptly upon obtaining notice thereof, Company shall provide written notice to
Lender of (i) any event or condition that constitutes or which might lead to, a
Termination Event or (ii) the failure to make full payment on or before the due
date thereof of all amounts which Company or ERISA Affiliate is required to
contribute to each Benefit Plan pursuant to its terms and as require to meet the
minimum funding standard set forth in ERISA and the Internal Revenue Code with
respect thereto.

      

      
        
          
             

          

          
            12

            
              

            

          

          
             

          

        

      

       

      (h)           Books and Records. Company will maintain
books and records pertaining to the Collateral in such detail, form and scope as
is consistent with good business practice.  Company agrees that Lender
or its agents may enter upon the premises of Company, at any time and from time
to time, for the purpose of (i) enabling Lender's internal auditors or outside
third party designees to conduct (at Company's expense) field examinations, (ii)
inspecting the Collateral, (iii) inspecting and/or copying (at Company's
expense) any and all records pertaining thereto, or (iv) discussing the affairs,
finances and business of Company with any officers, employees and directors of
Company or Company's independent accountant.

       

      (i)           Insurance; Casualty
Loss. Company will maintain
public liability insurance, third party property damage insurance and
replacement value insurance on the Collateral under such policies of insurance,
with such insurance companies, in such amounts and covering such risks as are at
all times satisfactory to Lender in its commercially reasonable
judgment.  All policies covering the Collateral are to name Lender as
an additional insured and lender's loss payee in case of loss, and are to
contain such other provisions as Lender may reasonably require to fully protect
Lender's interest in the Collateral and to any payments to be made under such
policies.  True copies of all original insurance policies or
certificates of insurance evidencing such insurance covering the Collateral are
to be delivered to Lender, premium prepaid, with the lender's loss payable
endorsement in Lender's favor, and shall provide for not less than thirty (30)
days prior written notice to Lender, of the exercise of any right of
cancellation.

       

      (j)           Taxes.  Company
will pay, when due and in any event prior to delinquency, all taxes lawfully
levied or assessed against Company or any of the Collateral; provided, however, that unless
such taxes have become a federal tax or ERISA Lien on any of the assets of
Company, no such tax need be paid if the same is being contested in good faith,
by appropriate proceedings promptly instituted and diligently conducted and if
an adequate reserve or other appropriate provision shall have been made therefor
as required in order to be in conformity with GAAP.

       

      (k)           Compliance With Laws. Company will comply
with all acts, rules, regulations, orders, directions and ordinances of any
legislative, administrative or judicial body or official applicable to the
Collateral or any part thereof, or to the operation of its business, except
where the failure to so comply could not reasonably be expected to have a
Material Adverse Effect.

       

      (l)           Restrictions on Liens.  Company will not
mortgage, assign, pledge, transfer or otherwise permit any Lien of any kind to
exist at any time on any of its property, except for Permitted
Liens.

       

      (m)           Restrictions on Additional
Indebtedness.  Company will not
incur, create or be liable for any Indebtedness, except for trade payables in
the ordinary course of Company's business and except to the extent that the
proceeds of such Indebtedness are being paid to Lender pursuant to Section
3(b).

       

      (n)           Restrictions on Sale of
Assets.  Company will not
sell, lease, assign, transfer or otherwise dispose of any property other than
(i) sales of inventory in the ordinary course of business, (ii) sales or other
dispositions in the ordinary course of business of equipment that is obsolete or
that are no longer used or useful in the conduct of Company's business and (iii)
sales in the ordinary course of business of property used in Company's business
that is worn out or in need of replacement and that is replaced with property of
reasonably equivalent value or utility.

      

      
        
          
             

          

          
            13

            
              

            

          

          
             

          

        

      

       

      (o)           No
Guarantees.  Company will not assume, guarantee, endorse, or
otherwise become liable upon the obligations of any other Person, except by the
endorsement of negotiable instruments in the ordinary course of
business.

       

      (p)           No Prohibited Transactions Under
ERISA.  Company shall not:

       

      (i)                 Engage,
or permit any ERISA Affiliate to engage, in any prohibited transaction which
could result in a civil penalty or excise tax described in Section 406 of ERISA
or Section 4975
of the Internal Revenue Code for which a statutory or class exemption is not
available or a private exemption has not been previously obtained from the
DOL;

       

      (ii)            
     Permit to exist with respect to any Benefit Plan
any accumulated funding (as defined in Sections 302 of ERISA
and 412 of the
Internal Revenue Code), whether or not waived;

       

      (iii)                 Fail,
or permit any ERISA Affiliate to fail, to pay timely required contributions or
annual installments due with respect to any waived funding deficiency to any
Benefit Plan;

       

      (iv)                Terminate,
or permit any ERISA Affiliate to terminate, any Benefit Plan where such event
would result in any liability of Company, or any ERISA Affiliate under Title IV
of ERISA;

       

      (v)                 Fail,
or permit any ERISA Affiliate to fail to make any required contribution or
payment to any Multiemployer Plan;

       

      (vi)                 Fail,
or permit any ERISA Affiliate to fail, to pay any required installment or any
other payment required under Section 412 of the
Internal Revenue Code on or before the due date for such installment or other
payment;

       

      (vii)               Amend,
or permit any ERISA Affiliate to amend, a Benefit Plan resulting in an increase
in current liability for the plan year such that either of Company, or any ERISA
Affiliate is required to provide security to such Benefit Plan under Section 401(a)(29) of
the Internal Revenue Code;

       

      (viii)               Withdraw,
or permit any ERISA Affiliate to withdraw, from any Multiemployer Plan where
such withdrawal may result in any liability of any such entity under Title IV of
ERISA; or

       

      (ix)                 Allow
any representation made in Section 4(j) to be
untrue at any time while this Note is outstanding.

       

      (q)           Affiliate Transactions. Company shall not enter
into any transaction with, including, without limitation, the purchase, sale or
exchange of property or the rendering of any service to any affiliate of Company
except in the ordinary course of and pursuant to the reasonable requirements of
Company's business and upon fair and reasonable terms no less favorable to
Company than could be obtained in a comparable arm's-length transaction with an
unaffiliated Person.

      

      
        
          
             

          

          
            14

            
              

            

          

          
             

          

        

      

       

      (r)           Mandatory Customer
Contracts.  Company shall, on or before July 1, 2009, deliver
to Lender a binding contract (or contracts) with a customer (or customers)
acceptable to Lender, in its sole discretion, for the provision of goods and
services sufficient to generate aggregate revenue of not less than Four Million
($4,000,000) Dollars within twelve (12) months of the date of execution of such
contract.

       

      (s)           Notice of
Default.  Company agrees to give prompt written notice to
Lender of the occurrence of any Event of Default hereunder.

       

      (t)           Expenses.  Company
agrees to pay all reasonable fees and expenses, including reasonable attorney’s
fees and expenses, actually incurred by Lender in connection with the Loan
including without limitation, expenses related to the preparation, negotiation,
execution and delivery of this Note, the Security Agreement and the other
Financing Documents, any amendment, waiver or consent related hereto or thereto,
and the enforcement hereof and thereof.

       

      7.      Conditions to
Closing.  The obligation of Lender to make the loan hereunder
is subject to the satisfaction of each of the following conditions, provided
that such conditions are for Lender's sole benefit and may be waived by Lender
at any time in Lender's sole discretion:

       

      (a)           Company
shall have executed and delivered to Lender this Note, the Security Agreement
and each of the other Financing Documents.

       

      (b)           Company
shall have terminated the financing statement naming the Company, as debtor and
Factor, as secured party which filed with the Secretary of State of Delaware,
numbered and file dated DE 2007 2881091, and shall have provided Lender
evidence, satisfactory to Lender, in its sole discretion, of such
termination.

       

      (c)           Company
shall have delivered to Lender a Warrant agreement representing Lender Warrant
being so issued to Lender on the date hereof.

       

      (d)           Lender
shall have received an opinion of Company's counsel, dated the date hereof, in
form, scope and substance reasonably satisfactory to Lender and in substantially
the form of Exhibit
"C" attached hereto.

       

      (e)           Company
shall have paid all of Lender’s reasonable fees and expenses in connection the
Loan, including, without limitation, attorney’s fees and costs in connection
with the negotiation, preparation, execution and delivery of this Note, the
Security Agreement and the other Financing Documents.

       

      8.      Events of
Default.  The occurrence of any of the following shall
constitute an "Event
of Default" under this Note and the other Financing
Documents:

      

      
        
          
             

          

          
            15

            
              

            

          

          
             

          

        

      

       

      (a)           Failure to Pay.  If
Company fails to pay any principal or interest payment or any other payment
required under the terms of this Note within five (5) days of the due date of
such payment; 

       

      (b)           Failure to Comply With
Covenants.  Company shall have failed to perform, keep, or
observe any other material term, provision, condition, covenant, or agreement
contained in this Note or the Security Agreement or any of the other Financing
Documents (including, without limitation, Company's obligation to register the
Warrant Shares under the terms of the Registration Rights Agreement), and,
except with respect to the covenants contained in clauses 6(l) through 6(r) of
this Note and the covenants set forth in the Registration Rights Agreement for
which no notice shall be provided, has failed to cure such default within
fifteen (15) days after Company's receipt of written notice from Lender of such
default;

       

      (c)           Loss of Priority of
Lien.  Lender's Lien in the Collateral shall not be a first
priority security interest, subject to Permitted Liens;

       

      (d)           Representations and
Warranties.  Any representation, warranty, or other statement
(financial or otherwise) made or furnished by or on behalf of Company to Lender
in writing in connection with this Note and the Security Agreement or any of the
other Financing Documents, or as an inducement to Lender to enter into this Note
and the Security Agreement, shall be false, incorrect, incomplete or misleading
in any material respect when made or furnished;

       

      (e)           Voluntary Bankruptcy or Insolvency
Proceedings.  Company 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) make a general assignment
for the benefit of its or any of its creditors, (iii) be dissolved or
liquidated, (iv) become insolvent (as such term may be defined or
interpreted under any applicable statute), (v) 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 (vi) take any
action for the purpose of effecting any of the foregoing;

       

      (f)           Involuntary Bankruptcy or Insolvency
Proceedings.  Proceedings for the appointment of a receiver,
trustee, liquidator or custodian of Company 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 Company 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 proceeding
shall not be dismissed or discharged within thirty (30) days of
commencement;

       

      (g)           Financing
Documents.  Any Financing Document or any material term thereof
shall cease to, or be asserted by Company not to be, a legal valid and binding
obligation of Company enforceable in accordance to this term, or if the Liens of
Lender in any of the assets of Company shall cease to be or shall not be valid,
first priority perfected liens or Company shall assert that such liens are not
valid, first priority and perfected liens;

      

      
        
          
             

          

          
            16

            
              

            

          

          
             

          

        

      

       

      (h)           Indebtedness.  The
occurrence of a default or event of default (in each case which shall continue
beyond the expiration of any applicable grace periods) under, or the occurrence
of any event that results in or would permit the acceleration of the maturity of
any note, agreement or instrument evidencing any Indebtedness of
Company;

       

      (i)           Judgments.   One
or more judgments or decrees shall be entered against Company (to the extent not
paid or covered by insurance (i) provided by a carrier who has acknowledged
coverage and has the ability to perform or (ii) as determined by Lender in its
reasonable discretion) and any such judgments or decrees shall not have been
vacated, discharged or stayed or bonded pending appeal within thirty (30) days
from the entry thereof;

       

      (j)           ERISA.  Any
Termination Event with respect to a Benefit Plan shall have occurred and be
continuing fifteen (15) days after notice thereof shall have been given to
Company by Lender; or

       

      (k)           Material Adverse
Effect.  Any event occurs, which in the reasonable discretion
of Lender, could have a Material Adverse Effect.

       

      9.      Rights of Lender upon
Default.  Upon the occurrence or existence of any Event of
Default (other than an Event of Default referred to in Sections 8(e) and
8(f)) and at any time thereafter during the continuance of such Event of
Default, Lender, by written notice to Company, declare all outstanding
Obligations payable by 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.  Upon the occurrence or existence
of any Event of Default described in Sections 8(e) and
(f), immediately and without notice, all outstanding Obligations payable
by 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.  In addition to the foregoing
remedies, upon the occurrence or existence of any Event of Default, Lender may
exercise any other right, power or remedy granted to it by the Financing
Documents or otherwise permitted to it by law, either by suit in equity or by
action at law, or both.

       

      10.           Successors and
Assigns.  Subject to the restrictions on transfer described in
Sections 12 and
13 below, the rights and obligations of Company and Lender under this
Note shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.

       

      11.           Waiver and
Amendment.  Any provision of this Note may be amended, waived
or modified upon the written consent of Company and Lender.

       

      12.           Transfer of this
Note.  This Note may be sold, assigned or transferred by Lender
at any time, and from time to time, in its sole discretion.  Lender
will provide Company with notice of such transfer as soon as practicable after
the occurrence of such transfer.  Subject to the foregoing, transfers
of this Note shall be registered upon registration books maintained for such
purpose by or on behalf of Company.  Prior to the receipt of notice of
the transfer of this Note, Company shall treat Lender 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.

      

      
        
          
             

          

          
            17

            
              

            

          

          
             

          

        

      

       

      13.           Assignment by
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 Company without the prior written consent of Lender, which
may be withheld by Lender in its sole and absolute discretion.

       

      14.           Notices.  All
notices, requests, demands, consents, instructions or other communications
required or permitted hereunder shall in writing and faxed, mailed or delivered
to each party at the respective addresses of the parties as set forth in the
Security Agreement, or at such other address or facsimile number as Company
shall have furnished to Lender in writing.  All such notices and
communications shall be effective (a) when sent by Federal Express or other
overnight service of recognized standing, on the business day following the
deposit with such service; (b) when mailed, by registered or certified mail,
first class postage prepaid and addressed as aforesaid through the United States
Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d)
when faxed, upon confirmation of receipt.

       

      15.           Usury.  In
the event any interest is paid on this Note that is deemed to be in excess of
the then legal maximum rate, then that portion of the interest payment
representing an amount in excess of the then legal maximum rate shall be deemed
a payment of principal and applied against the principal of this
Note.

       

      16.           Waivers.  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.

       

      17.           Publicity.  Company
and Lender shall have the right to approve before issuance any press releases,
SEC or NASD filings, or any other public statements with respect to the
transactions contemplated hereby; provided, however, that Company
shall be entitled, without the prior approval of Lender, to make any press
release or SEC or NASD filings with respect to such transactions as is required
by applicable law and regulations (although Lender shall be consulted by Company
in connection with any such press release and filing prior to its release and
shall be provided with a copy thereof).

       

      18.           Governing
Law.  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 Delaware, without regard to the conflicts of law provisions of the
State of Delaware, or of any other state.  Company and Lender hereby
consent to the personal jurisdiction of the state and/or federal courts of the
State of Delaware for the resolution of any controversies arising out of or
relating to this Note, the Security Agreement of any of the other Financing
Documents.

       

      19.           Jury Trial
Waiver.  COMPANY AND LENDER WAIVE ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR
OTHERWISE, BETWEEN COMPANY AND LENDER ARISING OUT OF, IN CONNECTION WITH,
RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER FINANCING
DOCUMENTS.

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

       

      [Remainder
of page intentionally left blank.]

      

      
        
          
             

          

          
            19

            
              

            

          

          
             

          

        

      

       

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

       

      
        
          
            
              	 
      	
                      IMAGEWARE
      SYSTEMS, INC.

                    
	 
      	
                      A
      Delaware Corporation

                    
	 	 
	 	 
	 
      	
                      By:

                    	
                      /s/ S. James Miller

                    
	 
      	 
      	
                      S.
      James Miller, Chairman and CEO

                    
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	
                      (SEAL)

                    

            

          

        

      

      
 

      ACKNOWLEDGED
AND AGREED TO SOLELY FOR PURPOSES OF SECTION 5 OF THIS
NOTE:

      
 

      BET
FUNDING LLC

      
 

      
        
          	
                  By:

                	
                  /s/ Doug Topkis

                	 
      
	 
      	
                  Name:  Doug
      Topkis

                	 
      
	 
      	
                  Title:

                	 
      

        

      

      

      
        
          
             

          

          
            20

            
              

            

          

          
             

          

        

      

      

      Exhibit
A

      

      Form of
Warrant

      

        
          
             

          

          
            21

            
              

            

          

          
             

          

        

      

       

      Exhibit
B

      

      Form of
Registration Rights Agreement

      

      
        
          
             

          

          
            22

            
              

            

          

          
             

          

        

      

      

      Exhibit
C

      

      Form of
Opinion

    

    
       

       

      23

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