An image cryptosystem that encrypts a plain image using an amplitude-based virtual image and a separable phase function is proposed. The proposed cryptosystem is based on a optical correlator that is a common architecture for image encryption. Unlike the noise-like amplitude distribution of the encrypted data in conventional phase encoding techniques, the amplitude distribution in the proposed cryptosystem is meaningful and represented as a virtual image. Therefore, the illegal users who steal the virtual image could be confused or treat it as a plain image. The plain image, in fact, is encrypted by a separate phase function, which is iteratively retrieved by using the plain image, an arbitrary virtual image, and another fixed random phase function. The phase function is determined when both the iterated image and the plain image are identical, or the error between both images is less than a threshold value. Two types of the cryptosystem are proposed, such that the separate phase function can be located in either the input plane or the Fourier plane in a correlator. The decryption process can be performed in digital methods or implemented by optics at high speed. © 2001 Society of Photo-Optical Instrumentation Engineers.