DESCRIPTION OF BUSINESS AND OPERATIONS	12 Months Ended
Dec. 31, 2013
Notes to Financial Statements
Note 1 - DESCRIPTION OF BUSINESS AND OPERATIONS	*Overview* ImageWare Systems, Inc. (the “Company”) is incorporated in the state of Delaware. The Company is a pioneer and leader in the emerging market for biometrically enabled software-based identity management solutions. Using those human characteristics that are unique to us all, the Company creates software that provides a highly reliable indication of a person’s identity. The Company’s “flagship” product is the patented IWS Biometric Engine®. The Company’s products are used to manage and issue secure credentials, including national IDs, passports, driver licenses and access control credentials. The Company’s products also provide law enforcement with integrated mug shot, fingerprint LiveScan and investigative capabilities. The Company also provides comprehensive authentication security software using biometrics to secure physical and logical access to facilities or computer networks or internet sites. Biometric technology is now an integral part of all markets the Company addresses and all of the products are integrated into the IWS Biometric Engine. *Recent Developments* Contracts In August 2013, the Company was awarded a $2.2 million contract by its largest customer, the U.S. Department of Veteran Affairs (the "VA"), to expand its personal identity verification ("PIV") credentialing capabilities across federal, state and local facilities. Under the terms of the agreement, the Company delivered software licenses during the third quarter of 2013 and recognized approximately $1.5 million in product revenue. Additionally, the Company will recognize maintenance related service revenues valued at approximately $692,000 from this customer ratably over the next year. *Liquidity and Capital Resources* For the year ended December 31, 2013, the Company issued 6,132,779 shares of its common stock and received net proceeds of approximately $3,291,000 from the exercise of warrants for cash. In March 2013, the Company entered into a new unsecured line of credit agreement with available borrowing of up to $2,500,000. The credit line was extended by an existing shareholder and member of our Board of Directors. Borrowings under the credit facility bear interest of 8% per annum and are due in March 2015. At any time prior to the Maturity Date, the holder shall have the right to convert the outstanding balance owed into shares of the Company’s common stock by dividing the outstanding balance by $0.95. Advances under the credit facility are made at the Company’s request. The line of credit shall terminate, and no further advances shall be made, upon the earlier of the Maturity Date or such date that the Company consummates a debt and/or equity financing resulting in net proceeds to the Company of at least $2,500,000. In the event of such financing, the outstanding balance under the terms of this note shall be due and payable upon demand. As additional consideration for the unsecured line of credit agreement, the Company issued to the holder a warrant exercisable for 1,052,632 shares of the Company’s common stock. The warrant has a term of two years from the date of issuance and an exercise price of $0.95 per share. In March 2014, the holder of the line of credit agreed to increase the borrowing facility to an aggregate total of $3,500,000. Borrowings under the increased credit facility will bear interest at the same rate and are also due in March 2015. As consideration for the increase to the line of credit borrowing facility, the Company issued to the holder a warrant exercisable for 177,778 shares of the Company’s common stock. The warrant has a term of one year from the date of issuance and an exercise price of $2.25 per share. Historically, our principal sources of cash have included customer payments from the sale of our products, proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt. Our principal uses of cash have included cash used in operations, payments relating to purchases of property and equipment and repayments of borrowings. We expect that our principal uses of cash in the future will be for product development including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital and capital expenditure requirements. We expect that, as our revenues grow, our sales and marketing and research and development expenses will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenues to achieve and sustain income from operations. Management believes that the Company’s current cash and cash equivalents will be sufficient to meet working capital and capital expenditure requirements for at least the next 12 months from the date of this filing and that we will have sufficient liquidity to fund our business and meet our contractual obligations over a period beyond the next 12 months.

DESCRIPTION OF BUSINESS AND OPERATIONS

12 Months Ended

Dec. 31, 2013

Note 1 - DESCRIPTION OF BUSINESS AND OPERATIONS

Overview

ImageWare Systems, Inc. (the “Company”) is incorporated in the state of Delaware. The Company is a pioneer and leader in the emerging market for biometrically enabled software-based identity management solutions. Using those human characteristics that are unique to us all, the Company creates software that provides a highly reliable indication of a person’s identity. The Company’s “flagship” product is the patented IWS Biometric Engine®. The Company’s products are used to manage and issue secure credentials, including national IDs, passports, driver licenses and access control credentials. The Company’s products also provide law enforcement with integrated mug shot, fingerprint LiveScan and investigative capabilities. The Company also provides comprehensive authentication security software using biometrics to secure physical and logical access to facilities or computer networks or internet sites. Biometric technology is now an integral part of all markets the Company addresses and all of the products are integrated into the IWS Biometric Engine.

Recent Developments

Contracts

In August 2013, the Company was awarded a $2.2 million contract by its largest customer, the U.S. Department of Veteran Affairs (the "VA"), to expand its personal identity verification ("PIV") credentialing capabilities across federal, state and local facilities. Under the terms of the agreement, the Company delivered software licenses during the third quarter of 2013 and recognized approximately $1.5 million in product revenue. Additionally, the Company will recognize maintenance related service revenues valued at approximately $692,000 from this customer ratably over the next year.

Liquidity and Capital Resources

For the year ended December 31, 2013, the Company issued 6,132,779 shares of its common stock and received net proceeds of approximately $3,291,000 from the exercise of warrants for cash.

In March 2013, the Company entered into a new unsecured line of credit agreement with available borrowing of up to $2,500,000. The credit line was extended by an existing shareholder and member of our Board of Directors. Borrowings under the credit facility bear interest of 8% per annum and are due in March 2015. At any time prior to the Maturity Date, the holder shall have the right to convert the outstanding balance owed into shares of the Company’s common stock by dividing the outstanding balance by $0.95.

Advances under the credit facility are made at the Company’s request. The line of credit shall terminate, and no further advances shall be made, upon the earlier of the Maturity Date or such date that the Company consummates a debt and/or equity financing resulting in net proceeds to the Company of at least $2,500,000. In the event of such financing, the outstanding balance under the terms of this note shall be due and payable upon demand.

As additional consideration for the unsecured line of credit agreement, the Company issued to the holder a warrant exercisable for 1,052,632 shares of the Company’s common stock. The warrant has a term of two years from the date of issuance and an exercise price of $0.95 per share.

In March 2014, the holder of the line of credit agreed to increase the borrowing facility to an aggregate total of $3,500,000. Borrowings under the increased credit facility will bear interest at the same rate and are also due in March 2015. As consideration for the increase to the line of credit borrowing facility, the Company issued to the holder a warrant exercisable for 177,778 shares of the Company’s common stock. The warrant has a term of one year from the date of issuance and an exercise price of $2.25 per share.

Historically, our principal sources of cash have included customer payments from the sale of our products, proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt. Our principal uses of cash have included cash used in operations, payments relating to purchases of property and equipment and repayments of borrowings. We expect that our principal uses of cash in the future will be for product development including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“SaaS”) capabilities for existing products as well as general working capital and capital expenditure requirements. We expect that, as our revenues grow, our sales and marketing and research and development expenses will continue to grow, albeit at a slower rate and, as a result, we will need to generate significant net revenues to achieve and sustain income from operations.

Management believes that the Company’s current cash and cash equivalents will be sufficient to meet working capital and capital expenditure requirements for at least the next 12 months from the date of this filing and that we will have sufficient liquidity to fund our business and meet our contractual obligations over a period beyond the next 12 months.