Document:

ex10-46.htm

    EXHIBIT
10.46

    
      

       

      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.

       

      
        
          
          

        

        
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      (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.

       

      
        
          
          

        

        
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      (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.

       

      
        
          
          

        

        
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      (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.

       

      
        
          
          

        

        
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      (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:

       

      
        
          
          

        

        
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      (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. 

       

      
        
          
          

        

        
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      (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. 

       

      
        
          
          

        

        
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      (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.

       

      
        
          
          

        

        
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      (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.

       

      (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.

       

      [Remainder
of page intentionally left blank.]

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

      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:

       

      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

      

      Exhibit
A

      

      Form of
Warrant

      

      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

      

      Exhibit
B

      

      Form of
Registration Rights Agreement

       

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

      Exhibit
C

      

      Form of
Opinion

      

      

       

       

      22ex10-47.htm

    EXHIBIT
10.47

     

    
      

       

      IMAGEWARE SYSTEMS, INC.

       

      SECURITY
AGREEMENT

       

      This
Security Agreement (as amended, modified or otherwise supplemented from time to
time, this “Security
Agreement”), dated as of February 12, 2009, is executed by ImageWare
Systems, Inc., a Delaware corporation (“Company”), in favor of BET
Funding LLC, a Delaware limited liability company (together with its successors
and assigns, “Lender”).

       

      RECITALS

       

      A.           Company
has issued to Lender a promissory note (the “Note”), dated as of the date
hereof in an aggregate principal amount of up to $5,000,000 in favor of
Lender.

       

      B.           In
order to induce Lender to extend the credit evidenced by the Note, Company has
agreed to enter into this Security Agreement and to grant Lender, the security
interest in the Collateral described below.

       

      AGREEMENT

       

      NOW,
THEREFORE, in consideration of the above recitals and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Company hereby agrees with Lender as follows:

       

      1.           Definitions and
Interpretation.  When used in this Security Agreement, the
following terms have the following respective meanings:

       

      “Collateral” has the meaning
given to that term in Section 2 hereof.

       

      “Event of
Default”  shall have the meaning ascribed to such term in the
Note.

       

      “Financing Documents” shall
have the meaning ascribed to such term in the Note.

       

      “Liens” means any mortgage,
pledge, security interest, encumbrance, lien or charge of any kind (including,
without limitation, any conditional sale or other title retention agreement or
lease in the nature thereof), any sale of receivables with recourse against
Company, any filing or agreement to file a financing statement as debtor under
the UCC or any similar statute or any subordination arrangement in favor of
another person.

       

      “Obligations” means 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 the Note, this Security
Agreement or 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.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      “Permitted Liens” means (a)
Liens for taxes not yet delinquent or Liens for taxes being contested in good
faith and by appropriate proceedings for which adequate reserves have been
established; and (b) Liens in favor of Lender.

       

      “UCC” means the Uniform
Commercial Code as in effect in the State of Delaware from time to
time.

       

      All
capitalized terms not otherwise defined herein shall have the respective
meanings given in the Note. Unless otherwise defined herein, all terms defined
in the UCC have the respective meanings given to those terms in the
UCC.

       

      2.           Grant of Security
Interest.  As security for the Obligations, Company hereby
pledges to Lender and grants to Lender a first priority lien on and security
interest in and to all right, title and interests of Company in and to the
property described in Attachment 1 hereto,
whether now existing or hereafter from time to time acquired (collectively, the
“Collateral”).

       

      3.           General Representations and
Warranties.  Company represents and warrants to Lender that
(a) Company is the owner of the Collateral (or, in the case of
after-acquired Collateral, at the time Company acquires rights in the
Collateral, will be the owner thereof) and that no other Person has (or, in the
case of after-acquired Collateral, at the time Company acquires rights therein,
will have) any right, title, claim or interest (by way of Lien or otherwise) in,
against or to the Collateral, other than Permitted Liens; (b) upon the
filing of UCC-1 financing statements in the appropriate filing offices, Lender
has (or in the case of after-acquired Collateral, at the time Company acquires
rights therein, will have) a first priority perfected security interest in the
Collateral to the extent that a security interest in the Collateral can be
perfected by such filing, except for Permitted Liens; (c) all Inventory has
been (or, in the case of hereafter produced Inventory, will be) produced in
compliance with applicable laws, including the Fair Labor Standards Act;
(d) all accounts receivable and payment intangibles are genuine and
enforceable against the party obligated to pay the same; (e) the originals of
all documents evidencing all accounts receivable and payment intangibles of
Company and the only original books of account and records of Company relating
thereto are, and will continue to be, kept at the address of Company set forth
in Section 7 of this Security Agreement.

       

      4.           Covenants Relating to
Collateral.

       

      (a)           Company
hereby agrees (a) to perform all acts that may be necessary to maintain,
preserve, protect and perfect the Collateral, the Lien granted to Lender therein
and the perfection and priority of such Lien, except for Permitted Liens;
(b) not to have any other Liens, except Permitted Liens, placed on the
Collateral; (c) not to use or permit any Collateral to be used (i) in
violation in any material respect of any applicable law, rule or regulation, or
(ii) in violation of any policy of insurance covering the Collateral;
(d) to pay promptly when due all taxes and other governmental charges, all
Liens and all other charges now or hereafter imposed upon or affecting any
Collateral; (e) without 30 days’ written notice to Collateral Agent,
(i) not to change Company’s name or place of business (or, if Company has
more than one place of business, its chief executive office), or the office in
which Company’s records relating to accounts receivable and payment intangibles
are kept, (ii) not to change Company’s state of incorporation, or
(f) to procure, execute and deliver from time to time any endorsements,
assignments, financing statements and other writings reasonably deemed necessary
or appropriate by Lender to perfect, maintain and protect its Lien hereunder and
the priority thereof and to deliver promptly upon the request of Lender all
originals of Collateral consisting of instruments.

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

      (b)           Company
hereby further agrees to (i) notify Lender, in writing, at such time or times
that Company enters into a Material Contract and (ii) perform all acts that may
be necessary to maintain, preserve, protect and perfect a security interest in
such Material Contract, the Lien granted to Lender therein and the perfection
and priority of such Lien.  Upon Lender's request, Company shall
provide copies of any Material Contracts to Lender.  For purposes of
this Section
4(b), "Material
Contract" means any agreement not made in the ordinary course of
Company's business or an agreement that requires payments of $100,000 or more,
in which Company or any subsidiary of Company is a party or has a beneficial
interest.

       

      5.           Authorized Action by
Lender.  Company hereby irrevocably appoints Lender, or any
Person that Lender may designate, as its attorney-in-fact (which appointment is
coupled with an interest), at Company’s expense, and agrees that Lender may
perform (but Lender shall not be obligated to and shall incur no liability to
Company or any third party for failure so to do) any act which Company is
obligated by the Note or this Security Agreement to perform, and to exercise
such rights and powers as Company might exercise with respect to the Collateral,
including the right to (a) collect by legal proceedings or otherwise and
endorse, receive and receipt for all dividends, interest, payments, proceeds and
other sums and property now or hereafter payable on or on account of the
Collateral; (b) enter into any extension, reorganization, deposit, merger,
consolidation or other agreement pertaining to, or deposit, surrender, accept,
hold or apply other property in exchange for the Collateral; (c) make any
compromise or settlement, and take any action it deems advisable, with respect
to the Collateral; (d) pay any indebtedness of Company relating to the
Collateral; (e)  insure, process and preserve the Collateral; and
(f) file UCC financing statements and execute other documents, instruments
and agreements required hereunder; provided, however, that Lender
shall not exercise any such powers granted pursuant to subsections (a) through
(d) prior to the occurrence of an Event of Default and shall only exercise such
powers during the continuance of an Event of Default.  Company agrees
to reimburse Lender upon demand for any reasonable costs and expenses, including
attorneys’ fees, Lender may incur while acting as Company’s attorney-in-fact
hereunder, all of which costs and expenses are included in the
Obligations.  It is further agreed and understood between the parties
hereto that such care as Lender gives to the safekeeping of its own property of
like kind shall constitute reasonable care of the Collateral when in Lender’s
possession; provided, however, that Lender
shall not be required to make any presentment, demand or protest, or give any
notice and need not take any action to preserve any rights against any prior
party or any other person in connection with the Obligations or with respect to
the Collateral.

       

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

      6.           Default and
Remedies.

       

      (a)           Default.  Company
shall be deemed in default under this Security Agreement upon the occurrence and
during the continuance of an Event of Default.

       

      (b)           Remedies.  Upon
the occurrence and during the continuance of any such Event of Default, Lender
shall have the rights of a secured creditor under the UCC, all rights granted by
this Security Agreement and by law, including the right
to:  (a) enter Company’s premises and take possession of the
Collateral or dispose of the Collateral on the Premises, (b) require Company to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender; (c) prior to the disposition of the Collateral,
store, process, repair or recondition it or otherwise prepare it for disposition
in any manner and to the extent Lender deems appropriate; and (d) sell or
dispose of the Collateral pursuant to a sale under the UCC, if
applicable.  Company hereby agrees that ten (10) days’ notice of any
intended sale or disposition of any Collateral is reasonable.  In
furtherance of Lender’s rights hereunder, Company hereby grants to Lender an
irrevocable, non-exclusive license, exercisable without royalty or other payment
by Lender, and only in connection with the exercise of remedies hereunder, to
use, license or sublicense any patent, trademark, trade name, copyright or other
intellectual property in which Company now or hereafter has any right, title or
interest together with the right of access to all media in which any of the
foregoing may be recorded or stored.

       

      (c)           Application of Collateral
Proceeds.  The proceeds and/or avails of the Collateral, or any
part thereof, and the proceeds and the avails of any remedy hereunder (as well
as any other amounts of any kind held by Lender at the time of, or received by
Lender after, the occurrence of an Event of Default) shall be paid to and
applied as follows:

       

      (i)      First, to the payment
of reasonable costs and expenses, including all amounts expended to preserve the
value of the Collateral, of foreclosure or suit, if any, and of such sale and
the exercise of any other rights or remedies, and of all proper fees, expenses,
liability and advances, including reasonable legal expenses and attorneys’ fees,
incurred or made hereunder by Collateral Agent;

       

      (ii)      Second, to the
payment to Lender of the amount then owing or unpaid on Lender’s Note, and in
case such proceeds shall be insufficient to pay in full the whole amount so
due;

       

      (iii)     Third, to the payment
of the surplus, if any, to Company, its successors and assigns, or to whomsoever
may be lawfully entitled to receive the same.

       

      7.           Miscellaneous.

       

      (a)           Notices.  Except
as otherwise provided herein, all notices, requests, demands, consents,
instructions or other communications to or upon Company or Lender under this
Security Agreement shall be in writing and faxed, mailed or delivered to each
party to the facsimile number or its address set forth below (or to such other
facsimile number or address as the recipient of any notice shall have notified
the other 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.

       

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      

      Lender:

       

      BET
Funding LLC

      C/o 250
Gibraltar Road

      Horsham,
PA  19044

      Telephone:
215-938-8000

      Facsimile:  215-938-8019

       

      Company:

       

      ImageWare
Systems, Inc.

      10883
Thornmint Road

      San
Diego, CA 92127

      Attn: Mr.
Wayne Wetherell

      Telephone:
858-673-8600

      Facsimile:  858-673-0291

       

      (b)           Termination of Security
Interest.  Upon the payment, performance and satisfaction in
full of all Obligations, the security interest granted herein shall immediately
terminate and all rights to the Collateral shall revert to Company.

       

      (c)           Nonwaiver.  No
failure or delay on Lender’s part in exercising any right hereunder shall
operate as a waiver thereof or of any other right nor shall any single or
partial exercise of any such right preclude any other further exercise thereof
or of any other right.

       

      (d)           Amendments and
Waivers.  This Security Agreement may not be amended or
modified, nor may any of its terms be waived, except by written instruments
signed by Company and Lender.  Each waiver or consent under any
provision hereof shall be effective only in the specific instances for the
purpose for which given.

       

      (e)           Assignments.  This
Security Agreement shall be binding upon and inure to the benefit of Lender and
Company and their respective successors and assigns; provided, however, that Company
may not sell, assign or delegate rights and obligations hereunder without the
prior written consent of Lender.

       

      (f)           Cumulative Rights,
etc.  The rights, powers and remedies of Lender under this
Security Agreement shall be in addition to all rights, powers and remedies given
to Lender by virtue of any applicable law, rule or regulation of any
governmental authority, any Financing Document or any other agreement, all of
which rights, powers, and remedies shall be cumulative and may be exercised
successively or concurrently without impairing Lender’s rights
hereunder.  Company waives any right to require Lender to proceed
against any person or entity or to exhaust any Collateral or to pursue any
remedy in Lender ‘s power.

       

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

      (g)           Payments Free of Taxes,
Etc.  All payments made by Company under the Financing
Documents shall be made by Company free and clear of and without deduction for
any and all present and future taxes, levies, charges, deductions and
withholdings.  In addition, Company shall pay upon demand any stamp or
other taxes, levies or charges of any jurisdiction with respect to the
execution, delivery, registration, performance and enforcement of this Security
Agreement.  Upon request by Lender, Company shall furnish evidence
satisfactory to Lender that all requisite authorizations and approvals by, and
notices to and filings with, governmental authorities and regulatory bodies have
been obtained and made and that all requisite taxes, levies and charges have
been paid.

       

      (h)           Partial
Invalidity.  If at any time any provision of this Security
Agreement is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability of
the remaining provisions of this Security Agreement nor the legality, validity
or enforceability of such provision under the law of any other jurisdiction
shall in any way be affected or impaired thereby.

       

      (i)           Expenses.  Company
shall pay all reasonable fees and expenses, including reasonable attorneys’ fees
and expenses, actually incurred by Lender in connection with realization on, any
of the Collateral or the enforcement or attempt to enforce any of the
Obligations which is not performed as and when required by this Security
Agreement.

       

      (j)           Entire
Agreement.  This Security Agreement taken together with the
other Financing Documents constitute and contain the entire agreement of Company
and Lender and supersede any and all prior agreements, negotiations,
correspondence, understandings and communications among the parties, whether
written or oral, respecting the subject matter hereof.

       

      (k)           Other Interpretive
Provisions.   References in this Security Agreement and
each of the other Financing Documents to any document, instrument or agreement
(a) includes all exhibits, schedules and other attachments thereto,
(b) includes all documents, instruments or agreements issued or executed in
replacement thereof, and (c) means such document, instrument or agreement,
or replacement or predecessor thereto, as amended, modified and supplemented
from time to time and in effect at any given time.  The words
“hereof,” “herein” and “hereunder” and words of similar import when used in this
Security Agreement or any other Financing Document refer to this Security
Agreement or such other Financing Document, as the case may be, as a whole and
not to any particular provision of this Security Agreement or such other
Financing Document, as the case may be.  The words “include” and
“including” and words of similar import when used in this Security Agreement or
any other Financing Document shall not be construed to be limiting or
exclusive.

       

      (l)           Governing
Law.  This Security Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without reference
to conflicts of law rules.  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 Security Agreement, the Note of any of the other Financing
Documents.

       

      (m)           Counterparts. This
Security Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall be deemed to constitute
one instrument.

       

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      

      (n)           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 SECURITY AGREEMENT, THE NOTE OR ANY OTHER FINANCING
DOCUMENT.

       

      (o)           Seal.  This Security
Agreement is intended to take effect as an instrument under seal.

       

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

      IN
WITNESS WHEREOF, Company has caused this Security Agreement to be executed as of
the day and year first above written.

       

      IMAGEWARE
SYSTEMS, INC.

       

      By:   /s/  S.
James Miller

             S.
James Miller, CEO

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ATTACHMENT
1

       

      To Security Agreement

       

      All
right, title, interest, claims and demands of Company in and to the following
property:

       

      (i)      All
goods and equipment now owned or hereafter acquired, including, without
limitation, all laboratory equipment, computer equipment, office equipment,
machinery, fixtures, vehicles, and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;

       

      (ii)           All
inventory now owned or hereafter acquired, including, without limitation, all
merchandise, raw materials, parts, supplies, packing and shipping materials,
work in process and finished products including such inventory as is temporarily
out of Company’s custody or possession or in transit and including any returns
upon any accounts or other proceeds, including insurance proceeds, resulting
from the sale or disposition of any of the foregoing and any documents of title
representing any of the above, and Company’s books relating to any of the
foregoing;

       

      (iii)           All
contract rights, general intangibles, health care insurance receivables, payment
intangibles and commercial tort claims, now owned or hereafter acquired,
including, without limitation, all patents, patent rights (and applications and
registrations therefor), trademarks and service marks (and applications and
registrations therefor), inventions, copyrights, mask works (and applications
and registrations therefor), trade names, trade styles, software and computer
programs, trade secrets, methods, processes, know how, drawings, specifications,
descriptions, and all memoranda, notes, and records with respect to any research
and development, goodwill, license agreements, franchise agreements, blueprints,
drawings, purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer disks, computer tapes, literature, reports,
catalogs, design rights, income tax refunds, payments of insurance and rights to
payment of any kind and whether in tangible or intangible form or contained on
magnetic media readable by machine together with all such magnetic
media;

       

      (iv)           All
now existing and hereafter arising accounts, contract rights, royalties, license
rights and all other forms of obligations owing to Company arising out of the
sale or lease of goods, the licensing of technology or the rendering of services
by Company (subject, in each case, to the contractual rights of third parties to
require funds received by Company to be expended in a particular manner),
whether or not earned by performance, and any and all credit insurance,
guaranties, and other security therefor, as well as all merchandise returned to
or reclaimed by Company and Company’s books relating to any of the
foregoing;

       

      (v)           All
documents, cash, deposit accounts, letters of credit, letter of credit rights,
supporting obligations, certificates of deposit, instruments, chattel paper,
electronic chattel paper, tangible chattel paper and investment property,
including, without limitation, all securities, whether certificated or
uncertificated, security entitlements, securities accounts, commodity contracts
and commodity accounts, and all financial assets held in any securities account
or otherwise, wherever located, now owned or hereafter acquired and Company’s
books relating to the foregoing; and

       

      (vi)           Any
and all claims, rights and interests in any of the above and all substitutions
for, additions and accessions to and replacements, products and proceeds
thereof, including, without limitation, insurance, condemnation, requisition or
similar payments and the proceeds thereof.

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