**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K/A**

**(Amendment No. 1)**
| x          | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**     |
|------------|------------|-----------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                          |
| ** ** | ** ** | **For the  fiscal year ended December 31, 2006.**                                              |
| ** ** | ** ** | ** **                                                                                          |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |

 

**For the transitionperiod               to               .**

**Commission File Number  001-15757**

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**IMAGEWARE SYSTEMS, INC.**

(Exact name of Registrant as Specified in its Charter)

| **Delaware**                                                                       |   | **33-0224167**                                  |
|------------------------------------------------------------------------------------|--------|-------------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization)                    |   | (I.R.S. Employer  Identification No.)           |
|                                                                               |   |                                            |
| **10883  Thornmint Road, San Diego, California**                                   |   | **92127**                                       |
| (Address of  Principal Executive Offices)                                          |   | (Zip Code)                                      |
|                                                                               |   |                                            |
| (Registrant’s  telephone number, including area code):**(858) 673-8600** |
|                                                                               |   |                                            |
| Securities  registered pursuant to Section 12(b) of the Exchange Act:         |
|                                                                               |   |                                            |
| **Title  of Each Class**                                                           |   | **Name of  Each Exchange  on Which Registered** |
| Common Stock,  $0.01 par value                                                     |   | American Stock  Exchange                        |
| Warrants to  Purchase Common Stock                                                 |   | American Stock  Exchange                        |

 

Securities registered pursuant to Section 12(g)of the Act: **None**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o     No x

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes x     No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K.  Yes x     No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).     Yes o   No x

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates of the registrant, based on the closing sales price of theissuer’s Common Stock on June 30, 2006, as reported on the American StockExchange was approximately $22,555,987. Excluded from this computation were 388,315 shares of Common Stock heldby all current executive officers and directors and 1,586,987 shares held byeach person who is known by the registrant to own 5% or more of the outstandingCommon Stock.  Share ownershipinformation of certain persons known by the issuer to own greater than 5% ofthe outstanding Common Stock for purposes of the preceding calculation is basedsolely on information on Schedule 13G filed with the Commission and is asof June 30, 2006. Exclusion of shares held by any person or entity should notbe construed to indicate that such person or entity possesses the power,directly or indirectly, to direct or cause the direction of the management orthe policies of the Registrant.

Thenumber of shares of the registrant’s common stock outstanding as of April 11,2007 was 14,511,721.

**DOCUMENTS INCORPORATED BY REFERENCE**

 

 

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                EXPLANATORY NOTE:This Amendment No. 1 on Form 10-K/A amends the Registrant’s Annual Report onForm 10-K, as filed by the Registrant on April 17, 2007, and is being filedsolely to replace Part III, Item 10 through Item 14,  previously intended to be incorporated byreference to the definitive proxy statement for our annual meeting.  The required certifications are included withthis amendment as Exhibits 31.1 and 31.2 of this amended report.

** **

**TABLE OF CONTENTS**
| **PART III** |
|-------------------|
| Item 10.          |   | Directors,  Executive Officers and Corporate Governance |
| Item 11.          |   | Executive  Compensation |
| Item 12.          |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |
| Item 13.          |   | Certain  Relationships and Related Transactions, and Director Independence |
| Item 14.          |   | Principal  Accountant Fees and Services |
|              |   |   |
| Signatures        |
|              |
| Exhibit Index     |

 

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**PART III**

**ITEM 10. Directors, ExecutiveOfficers, Promoters and Corporate Governance.**

**DIRECTORS AND EXECUTIVE OFFICERS**

The following table sets forth information regardingour Directors as of April 15, 2007:
| **Name**                           | ** ** | **Age** | ** ** | **Principal Occupation/Position  Currently Held With the Company** |
|------------------------------------|------------|---------|------------|--------------------------------------------------------------------|
| Mr. S. James Miller, Jr. |       | 53      |       | Chief Executive Officer and Chairman of the Board of  Directors    |
| Mr. John Callan               |       | 60      |       | Director                                                           |
| Mr. Patrick Downs             |       | 70      |       | Director                                                           |
| Mr. John Holleran             |       | 80      |       | Director                                                           |
| Mr. David Loesch              |       | 62      |       | Director                                                           |
| Mr. Guy Steven Hamm           |       | 59      |       | Director                                                           |
| Mr. David Carey               |       | 62      |       | Director                                                           |

 

*S. James Miller, Jr.*has served asthe Company’s Chief Executive Officer of the Company since 1990 and Chairman ofthe Board since 1996. He also served as the Company’s President from 1990 until2003. From 1980 to 1990, Mr. Miller was an executive with OakIndustries, Inc., a manufacturer of components for the telecommunicationsindustry. While at Oak Industries, Mr. Miller served as a director and asSenior Vice President, General Counsel, Corporate Secretary andChairman/President of Oak Industries’ Pacific Rim subsidiaries. Mr. Millerhas a J.D. from the University of San Diego School of Law and a B.A. from theUniversity of California, San Diego.

*John Callan*was elected to the board in September 2000. In 2006, Mr. Callan joinedDHL Global Mail, Americas as Vice President - Domestic Product Management andhas served as Vice President Strategy and Business Development since January of2007. From 2001 to 2006, Mr. Callan served as Principal of Ursa MajorAssociates, LLC, a logistics strategy consulting firm he co-founded. From 1997 to2002, he was an independent business strategy consultant in the imaging andlogistics fields. From 1996 to 1997, he served as Chief Operating Officer forMilestone Systems, a shipping systems software company, and from 1987 to 1996,served as Director of Entertainment Imaging at Polaroid Corporation.

*Patrick Downs*was elected to the board inAugust 1994. Since 1997, Mr. Downs has been Chairman of ControlCommerce, LLC, an internet e-commerce business. He is also a foundingshareholder of NTN Communications, Inc., an interactive televisionCompany, and served as its Chairman and Chief Executive Officer from 1983 to1997. Since 1999, Mr. Downs has also served on the Board of Directors ofTullamore Corp., a video services company. In 2002, Mr. Downs co-foundedDNA Protective Corporation, a private company involved in marketing DNA testingservices to the general public through the use of DNA technology whichpreviously was only available to researchers. Mr. Downs serves as Chairmanand CEO of DNA Protective Corporation.

*John Holleran*was elected to the board inMay 1996. Since 1974, Mr. Holleran has been a management andinvestment consultant. Prior to consulting, Mr. Holleran served as theChief Financial Officer, Executive Vice President and Chief Operating Officerof Southwest Gas Corporation. He served as Executive Vice President of theHawaii Corporation, a diversified holding company, and as President andChairman of Property Research Financial Corporation, a real estate investmentand syndication firm, from 1972 to 1974. Mr. Holleran has also served as adirector of Kilroy Industries, a national office building and office parkdeveloper, as a director of Walker & Lee, a national full service realestate firm, and as a director of NTN Communications, Inc., a companyengaged in the interactive television business.

*David Loesch*was elected to the board inSeptember 2001 after 29 years of service as a Special Agent with theFederal Bureau of Investigations (FBI). At the time of his retirement from theFBI, Mr. Loesch was the Assistant Director in Charge of the CriminalJustice Information Services Division of the FBI. Mr. Loesch was awardedthe Presidential Rank Award for Meritorious Executive in 1998 and has served onthe board of directors of the Special Agents Mutual Benefit Association since1996. He is also a member of the International Association of Chiefs of Policeand the Society of Former Special Agents of the FBI, Inc. Mr. Loeschserved in the United States Army as an Officer with the 101st Airborne Division in Vietnam. Heholds a Bachelor’s degree from Canisius College and a Master’s degree inCriminal Justice from George Washington University. Mr. Loesch is currently aprivate consultant on public safety and criminal justice solutions.

*GuySteven Hamm* wasappointed to the board in October 28, 2004. Mr. Hamm is a retiredPricewaterhouseCoopers (PwC) national partner-in-charge of middle market andwas instrumental in growing the Audit Business Advisory Services

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(ABAS) Middle Marketpractice where he was responsible for $300 million in revenue and more than 100partners. Mr. Hamm is also a member of the board of directors of Clarient, Inc.

*David Care*y wasappointed to the board in February 2006. Mr. Carey is a former Executive Director of the Central IntelligenceAgency.  Since April 2005, Mr. Carey hasserved as Executive Director for Blackbird Technologies, which providesstate-of-the-art IT security expertise, where he assists the company withbusiness development and strategic planning. Prior to joining BlackbirdTechnologies, Mr. Carey was Vice President, Information Assurance for OracleCorporation from September 2001 to April 2005. In addition, Mr. Carey workedfor the CIA for 32 years until 2001. During his career at the CIA, Mr. Careyheld several senior positions including that of Executive Director, oftenreferred to as the Chief Operating Officer, or No. 3 person in the agency, from1997 to 2001. Before assuming that position, Mr. Carey was Director of the DCICrime and Narcotics Center, the Director of the Office of Near Eastern andSouth Asian Analysis, and Deputy Director of the Office of Global Issues. Mr.Carey is a graduate of Cornell University and the University of Delaware.

Thefollowing table sets forth the names, ages and positions of the Company’sExecutive Officers as of April 15, 2007:
| **Name**                           | ** ** | **Age** | ** ** | **Principal Position Held With the Company**                                      |
|------------------------------------|------------|---------|------------|-----------------------------------------------------------------------------------|
| Mr. S. James Miller, Jr. |       | 53      |       | Chief Executive Officer and Chairman of the Board of  Directors                   |
| Mr. Wayne Wetherell           |       | 54      |       | Sr. Vice President Administration, Chief Financial  Officer, Secretary, Treasurer |
| Mr. Charles AuBuchon          |       | 63      |       | Vice President Business Development                                               |
| Mr. William Willis            |       | 48      |       | Executive Vice President Sales                                                    |
| Mr. David Harding             |       | 37      |       | Vice President and Chief Technical Officer                                        |

 

*Wayne Wetherell*has served as the Company’sSenior Vice President, Administration and Chief Financial Officer sinceMay 2001 and additionally as Secretary Treasurer since October of 2005.From 1996 to May 2001, he served as Vice President of Finance and ChiefFinancial Officer. From 1991 to 1996, Mr. Wetherell was the Vice Presidentand Chief Financial Officer of Bilstein Corporation of America, a manufacturerand distributor of automotive parts. Mr. Wetherell holds a B.S. degree inManagement and a M.S. degree in Finance from San Diego State University.

*ChuckAuBuchon*has served as Vice President, Business Developmentsince December 2006. From May of 2004 to December of 2006, he served as VicePresident, Sales. From 2003 to 2004 he served as Director of North American Sales.From 2000 to 2003 was Vice President Sales & Marketing at Card TechnologyCorporation, a manufacturer of Card Personalization Systems, where he wasresponsible for distribution within the Americas, Asia Pacific, and EMEA(Europe, Middle East and Africa) regions. From 1992 to 2000 he held varioussales management positions including Vice President Sales and Marketing forGemplus and Datacard.

*William Willis*has served as ExecutiveVice President, Sales since December 2006. From January 2006 to December 2006, he served as Executive VicePresident, Business Development. From 2003 to January 2006, he served as SeniorVice President of Technology and Business Development. From 2001 untilJuly 2003, Mr. Willis served as the Chief Technology Officer forIridian Technologies, a developer of authentication technologies based on irisrecognition. From 2000 to 2001, Mr. Willis was the Chief Operating Officerof e-dn.com. From 1993 to 2000, Mr. Willis served as Chief TechnologyOfficer and Vice President of Engineering of Access360 (formerly known asEnable Solutions).

*DavidHarding* has served as Vice President and Chief TechnologyOfficer since January, 2006. Before joining ImageWare, Mr. Harding was theChief Technology Officer at IC Solutions, Inc., where he was responsible forall technology departments including the development and management of softwaredevelopment, IT and quality assurance as well as their respective hardware,software and human resource budgets from 2001 to 2003.  He was the Chief Technology Officer atThirsty.com from 1999 to 2000, the Chief Technology Officer at Fulcrum PointTechnologies, Inc., from 1996 to 1999; and consultant to Access360, which isnow part of IBM/Tivoli, from 1995 to 1996.

**COMPLIANCE WITH FEDERALSECURITIES LAWS**

Section 16(a)of the Exchange Act of 1934, as amended (the “Exchange Act”), requires ourdirectors and executive officers, and persons who own more than 10% of aregistered class of our equity securities, to file with the Secutities andExchange Commission (“SEC”) initial reports of ownership and reports of changesin ownership of common stock and other equity securities of the company.Executive officers, directors and greater than 10% stockholders are required bySEC regulations to furnish us copies of all Section 16(a) forms they file.

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To our knowledge,based solely upon review of the copies of such reports furnished to us duringthe fiscal year ended December 31, 2006, no director, officer orbeneficial holder of more than 10% of any class of our equity securities failedto file on a timely basis reports required by Section 16(a) of the Exchange Actduring the most recent fiscal year

**CODE OF ETHICS.**

The Company has adopted a*Code of Business Conduct and Ethics*policy that applies to our directors and employees (including the Company’sprincipal executive officer, principal financial officer, principal accountingofficer or controller, or persons performing similar functions).  The Company intends to promptly disclose (i)the nature of any amendment to this code of ethics that applies to ourprincipal executive officer, principal financial officer, principal accountingofficer or controller, or persons performing similar functions and (ii) thenature of any waiver, including an implicit waiver, from a provision of thiscode of ethics that is granted to one of these specified individuals, the nameof such person who is granted the waiver and the date of the waiver on ourwebsite in the future.  A copy of ourCode of Business Conduct and Ethics can be obtained from our website athttp://www.iwsinc.com.

CORPORATE GOVERANCE

**THE AUDIT COMMITTEE**

The Company’s AuditCommittee of the Board of Directors consists of Guy Steven Hamm, David Loeschand John Holleran. The Audit Committee operates pursuant to a written charter.  In accordance with the American Stock Exchangelisting standards, the charter addresses the purpose, duties andresponsibilities of the Audit Committee.

The Audit Committee isdirectly responsible for the appointment, compensation, retention and oversightof our independent registered public accountants. The Audit Committee alsomonitors the integrity of the company’s financial statements and theindependence and performance of the independent registered public accountantsand reviews our financial reporting processes. The Audit Committee reviews andreports to the Board of Directors the scope and results of audits by thecompany’s independent registered public accountants and reviews otherprofessional services rendered by the company’s independent registered publicaccountants. It reviews transactions between the company and our directors andofficers, the company’s policies regarding such transactions and compliancewith our Cod e of Business Conduct and Ethics and conflict of interest policies.

The Board has determinedthat all members of the Audit Committee meet the American Stock Exchangestandards of independence and financial literacy, and the SEC’s requirementswith respect to independence of listed company audit committee members.  The Board has determined that at least onemember of the Audit Committee, Guy Steven Hamm, meets the SEC’s definition ofan “audit committee financial expert”.

The AuditCommittee met four times during 2006.

**ITEM 11. ExecutiveCompensation**

**COMPENSATIONDISCUSSION AND ANALYSIS**

**Overview of Compensation Program**

TheCompensation Committee of the Board has responsibility for establishing,implementing and monitoring adherence to the Company’s compensation philosophy.The Compensation Committee seeks to ensure that the total compensation paid tothe executive officers of the Company is fair, reasonable and competitive.

**Compensation Philosophy and Objectives**

TheCompensation Committee believes that the most effective executive officercompensation program is one that is designed to reward the achievement ofspecific annual and long-term operational and strategic goals by the Company,and which aligns executives’ interests with those of the stockholders byrewarding performance above established goals, with the ultimate objective ofimproving stockholder value. The Committee evaluates both performance andcompensation in an effort to ensure that the Company maintains its ability toattract and retain individuals of superior ability and managerial talent in keypositions and that compensation provided to key employees remains competitiverelative to the compensation paid to similarly situated executives of our peercompanies. To that end, the Compensation Committee believes executivecompensation packages provided by the Company to its executive officers shouldinclude both cash and stock-based compensation that rewards individual andcorporate performance as measured against established goals.

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**Role Of Executive Officers In CompensationDecisions**

TheCompensation Committee makes all compensation decisions for the Company’sexecutive officers.  Regarding theestablishment of base salary levels payable throughout 2006 and cash and equityincentives in respect of 2006 performance, the Company’s CEO, S. James Miller,provided input and arranged for the Compensation Committee to have access toCompany records and personnel for purposes of its deliberations.  The Company’s Sr. Vice PresidentAdministration, Chief Financial Officer, Secretary and Treasurer, Wayne G. Wetherell, also provided input tothe Compensation Committee to this end. With respect to compensation levels of executive officers in 2007 withrespect to 2006 performance, S. James Miller reviewed the performance of eachexecutive officer (other than his own, which was reviewed by the CompensationCommittee) and provided such input and observations to the CompensationCommittee. The conclusions reached and recommendations based on these reviews,including with respect to salary adjustments for 2007 for 2006 performance,were presented to the Compensation Committee. The Compensation Committee canexercise its discretion in modifying any recommended adjustments or awards toexecutive officers.

**Setting Executive Compensation**

Basedon the foregoing objectives, the Compensation Committee has structured theCompany’s annual and long-term incentive-based cash and non-cash executivecompensation in an effort to motivate the Company’s executive officers toachieve the business goals set by the Company and reward them for achievingsuch goals. In furtherance of these objectives, in 2005 the CompensationCommittee engaged Compensia, an outside consulting firm, to assess and evaluateits total compensation program for the executive officers of the Company andprovide the Compensation Committee with relevant market data andrecommendations to consider when developing compensation packages for the executive officers.

Inmaking compensation decisions, the Compensation Committee compared each elementof the executive’s total compensation package with the research andrecommendations of Compensia.

TheCompensation Committee believes that the Company competes with many companiesfor top executive-level talent. Accordingly, the Compensation Committee strivesto implement compensation packages for the Company’s executive officers thatare competitive with total compensation paid to similarly situated executives.Variations to this objective may occur as dictated by the experience level ofthe individual and market factors.

Asignificant percentage of total compensation for Company executive officers isallocated to incentives as a result of the philosophy mentioned above.Nevertheless, strictly speaking, there is no pre-established policy or targetfor the allocation between either cash and non-cash or short-term and long-termincentive compensation.  Income from suchincentive compensation is realized as a result of the performance of theCompany or the individual, depending on the type of award, compared toestablished goals.

**2006 Executive Compensation Components**

For the fiscal year ended December 31, 2006, theprincipal components of compensation for executive officers were:

·     base salary; and

·     long-term equity incentive compensation inthe form of stock option; and restricted stock

##### **Base Salary.** The Company provides itsexecutive officers and other employees with base salary to compensate them forservices rendered during the fiscal year. Base salary ranges for executiveofficers are determined for each executive based on his or her position andresponsibility by using market data.

Duringits review of base salaries for executive officers for 2006, the CompensationCommittee primarily considered:

·     marketdata provided by our outside consultant and data published by independentthird-party sources;

·     internal review of the executive’scompensation, both individually and relative to other executive officers; and

·     individualperformance and responsibility of the executive.

Salary levels for namedexecutives not under employment contracts are considered annually as part ofthe Company’s performance review process as well as upon a promotion or othermaterial change in job responsibility. Merit based increases to salaries ofexecutive officers are determined upon assessment of the individual’sperformance and responsibility.

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**Long-Term Equity Incentive Compensation.**

The Company’s long-term incentive compensationprogram is designed to recognize scope of responsibilities, reward demonstratedperformance and leadership, motivate future superior performance, align theinterests of the executives with our stockholders and retain the executivesthrough the term of the awards. When making equity award decisions, theCompensation Committee considers market data, the grant size, the forms oflong-term equity compensation available to it under existing plans and thestatus of awards granted in previous years. The amount of equity incentivecompensation granted in 2006 was based upon the strategic, operational andfinancial performance of the Company overall and reflects the executives’expected contributions to the Company’s future success. Existing ownershiplevels are not a factor in award determination, as the Compensation Committeedoes not want to discourage executives from holding significant amounts ofCompany stock.

EffectiveJanuary 1, 2006, the Company adopted the requirements of Statement ofFinancial Accounting Standards 123(R), which requires companies to estimate thefair value of share-based payment option awards on the date of grant using anoption-pricing model. The value of the awards that are ultimately expected tovest are recognized as compensation expense over the requisite service periodsusing the straight-line method. When determining the appropriate form ofincentive award (for example whether stock options, restricted stock,restricted stock units, or stock appreciation rights, each of which the 1999Stock Award Plan permits, should be used) the Compensation Committee’s goal isto weigh the cost of these grants with their potential benefits as acompensation tool.

**Retirement and Other Benefits.**

All Company employees inthe United States are eligible to participate in the 401(k) Savings Plan. TheSavings Plan is a tax-qualified retirement savings plan pursuant to which all U.S. basedemployees, including the named executive officers, are able to contribute.  The Plan provides for annual contributions bythe Company of 50% of employee contributions not to exceed 8% of employeecompensation.  Participantsmay contribute up to 100% of the annual contribution limitationsdetermined by the Internal Revenue Service. Employees are fully vested in theirshare of the Company’s contributions after the completion of five years ofservice.

**Tax andAccounting Implications.** As part of its role, the CompensationCommittee reviews and considers the deductibility of executive compensationunder Section 162(m) of the Internal Revenue Code, which provides that theCompany may not deduct compensation of more than $1,000,000 that is paid tocertain individuals. To qualify for deductibility under Section 162(m),compensation in excess of $1,000,000 per year paid to the named executiveofficers at the end of such fiscal year generally must be “performance-based”compensation as determined under Section 162(m). The Compensation Committeegenerally intends to comply with the requirements for full deductibility ofexecutive compensation under Section 162(m). However, the CompensationCommittee will balance the costs and burdens involved in such complianceagainst the value to the Company and its stockholders of the tax benefits thatthe Company would obtain as a result, and may in certain instances paycompensation that is not fully deductible if, in its determination, such costsand burdens outweigh such benefits.

**SUMMARYCOMPENSATION TABLE**

Thefollowing table sets forth information regarding the compensation of our ChiefExecutive Officer, our Chief Financial Officer and the persons who were, atDecember 31, 2006, our three other most highly compensated executive officersduring 2006, our named executive officers.

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| ** **                                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Stock**  | ** ** | **Option**    | ** ** | **All Other** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|---------------|------------|--------------------|------------|------------|------------|
| **Name and Principal Position**                                                                 | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards** | ** ** | **Awards(1)** | ** ** | **Compensation**   | ** ** | **Total**  | ** ** |
|                                                                                                           |       |       |       |       |       |       |       |       |       |          |       |               |       |       |       |
| S. James Miller,  Jr.  Chairman of the Board and Chief  Executive Officer                                      |       | 2006       |       | $          | 299,230    |       | $          | —     |       | $             | 167,540    | (2)                | $          | 168,648    |       | $ | 12,015 | (3) | $ | 647,433 |   |
|                                                                                                           |       |       |       |       |       |       |       |       |       |          |       |               |       |       |       |
| Wayne G.  Wetherell  Senior Vice President Administration,  Chief Financial Officer, Secretary, and  Treasurer |       | 2006       |       | 177,022    |       | $          | —     |       | $          | 75,702        | (4)        | $                  | 91,079     |       |       | (4) | $ | 343,803 |   |
|                                                                                                           |       |       |       |       |       |       |       |       |       |          |       |               |       |       |       |
| William Willis  Executive Vice President Sales                                                                 |       | 2006       |       | 229,917    |       | $          | —     |       | $          | —        |       | $                  | 100,780    |       |       |   | $ | 330,697 |   |
|                                                                                                           |       |       |       |       |       |       |       |       |       |          |       |               |       |       |       |
| Charles Aubuchon  Vice President Business Development                                                          |       | 2006       |       | 152,600    |       | $          | —     |       | $          | —        |       | $                  | 117,557    |       |       |   | $ | 270,157 |   |
|                                                                                                           |       |       |       |       |       |       |       |       |       |          |       |               |       |       |       |
| David Harding  Vice President and Chief Technical  Officer                                                     |       | 2006       |       | 138,107    |       | $          | —     |       | $          | —        |       | $                  | 36,052     |       |       |   | $ | 174,159 |   |
|                                                                                                                |            |            |            |            |            |            |            |            |            |               |            |                    |            |            |            |  |  |  |  |  |  |

 

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(1) The amounts reflect the dollar amount recognizedfor financial statement reporting purposes for the fiscal year ended December31, 2006, in accordance with the provisions of FAS 123R and thus may includeamounts from awards granted prior to 2006. Assumptions used in the calculation of these amounts are included in Noteto the Notes to the Consolidated Financial Statements for the fiscal year endedDecember 31, 2006 included in the Company’s annual report on Form 10-K filedwith the SEC on April 17, 2007.

(2) Represents the quarterly vesting of 124,162restricted shares granted on March 30, 2004 and the vesting of 109,700 restrictedshares granted on September 27, 2005 for Mr Miller. The restricted sharesgranted in September 2005 vest one-third after one year with the remaindervesting ratably on a quarterly basis over two years ending September 27, 2008. Representsthe quarterly vesting of 80,281 restricted shares granted on March 30, 2004 andthe vesting of 52,600 restricted shares granted on September 27, 2005.  The restricted shares granted in September2005 vest one-third after one year with the remainder vesting ratably on aquarterly basis over two years ending September 27, 2008.

(3) Consists of $8,000 in401(K) matching contributions, $1,215 in life insurance premiums and $2,000 inclub membership.

 

(4)  Representsthe quarterly vesting of 80,281 restricted shares granted on March 30, 2004 andthe vesting of 52,600 restricted shares granted on September 27, 2005.  The restricted shares granted in September2005 vest one-third after one year with the remainder vesting ratably on a quarterlybasis over two years ending September 27, 2008.

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**2006Grants of Plan-Based Awards**

Thefollowing table sets forth certain information with respect to each grant of anaward made to a named executive officer in 2006 under our plans.
| ** **       | ** ** | ** ** | ** ** | **All Other** | ** ** | ** **           | ** ** | ** **          | ** ** |
|------------------|------------|------------|------------|--------------------|------------|----------------------|------------|---------------------|------------|
| ** **       | ** ** | ** ** | ** ** | **Stock**          | ** ** | **Exercise or** | ** ** | **Grant Date** | ** ** |
| ** **       | ** ** | ** ** | ** ** | **Awards:**        | ** ** | **Base**             | ** ** | **Fair Value** | ** ** |
| ** **       | ** ** | ** ** | ** ** | **Number of** | ** ** | **Price of**    | ** ** | **Of Stock**   | ** ** |
| ** **       | ** ** | ** ** | ** ** | **Securities**     | ** ** | **Option**           | ** ** | **and Option** | ** ** |
| ** **       | ** ** | **Grant**  | ** ** | **Underlying**     | ** ** | **Awards(2)**        | ** ** | **Awards(3)**       | ** ** |
| **Name**         | ** ** | **Date**   | ** ** | **Options(1)**     | ** ** | **($/Sh)**           | ** ** | **($)**             | ** ** |
|             |       |       |       |               |       |                 |       |                |       |
| Charles Aubuchon |       | 1/13/2006  |       | 60,000             |       | 1.99                 |       | 87,000              |       |
|             |       |       |       |               |       |                 |       |                |       |
| William Willis   |       | 1/13/2006  |       | 60,000             |       | 1.99                 |       | 87,000              |       |
|             |       |       |       |               |       |                 |       |                |       |
| David Harding    |       | 1/31/2006  |       | 100,000            |       | 1.65                 |       | 120,000             |       |

 

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(1) The shares subject toeach option vest over a three year period, with 331/3% of the shares subject toeach option vesting on each anniversary at the grant date.

(2) The exercise price isthe closing price of ImageWare Systems, Inc. Common Stock on the date of grant.

(3) The fair valueof ImageWare Systems, Inc.'s stock options is computed using the Black-Scholesvaluation model.

**OutstandingEquity Awards at Fiscal Year-End**

Thefollowing table sets forth information regarding unexercised options, stockthat has not vested and equity incentive awards held by each of the namedexecutive officers outstanding as of December 31, 2006.

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|                      | ** ** | ** **             | ** ** | **Stock Awards** | ** ** |
|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **           | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** |
| ** **           | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** | **Incentive** | ** ** |
| ** **           | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive** | ** ** | **Plan** | ** ** |
| ** **           | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Plan** | ** ** | **Awards:** | ** ** |
| ** **           | ** ** | **Option Awards** | ** ** | ** **            | ** ** | ** ** | ** ** | **Awards:** | ** ** | **Market or** | ** ** |
| ** **           | ** ** | **Number of**     | ** ** | **Number of**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Market** | ** ** | **Number of** | ** ** | **Payout Value** | ** ** |
| ** **           | ** ** | **Securities**         | ** ** | **Securities**        | ** ** | ** ** | ** ** | ** ** | ** ** | **Number of** | ** ** | **Value of** | ** ** | **Unearned** | ** ** | **of Unearned** | ** ** |
| ** **           | ** ** | **Underlying**         | ** ** | **Underlying**        | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares or** | ** ** | **Shares or** | ** ** | **Shares, Units** | ** ** | **Shares, Units** | ** ** |
| ** **           | ** ** | **Unexercised**        | ** ** | **Unexercised**       | ** ** | ** ** | ** ** | ** ** | ** ** | **Units of** | ** ** | **Units of** | ** ** | **or Other** | ** ** | **or Other** | ** ** |
| ** **           | ** ** | **Unearned**           | ** ** | **Unearned**          | ** ** | **Option** | ** ** | ** ** | ** ** | **Stock That** | ** ** | **Stock That** | ** ** | **Rights That** | ** ** | **Rights That** | ** ** |
| ** **           | ** ** | **Options:**           | ** ** | **Options:**          | ** ** | **Exercise** | ** ** | **Option** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** |
| ** **           | ** ** | **#**                  | ** ** | **#**                 | ** ** | **Price** | ** ** | **Expiration** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** |
| **Name**             | ** ** | **Exercisable**        | ** ** | **Unexercisable**     | ** ** | **($)** | ** ** | **Date** | ** ** | **(#)** | ** ** | **($)** | ** ** | **(#)** | ** ** | **($)** | ** ** |
|                 |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| S. James Miller, Jr. |       | 75,000                 |       | —                |       | $ | 3.00 |   | 9/12/2011 |   | 74,332 | (6) | $ | 126,364 |   | — |   | — |   |
|                      |       | 25,000                 |       | —                |       | $ | 1.97 |   | 5/28/2013 |   |   |   |   |   |   |   |   |   |
|                      |       | 100,000                |       | —                |       | $ | 2.40 |   | 10/28/2014 |   |   |   |   |   |   |   |   |   |
|                      |       | 33,336                 | (1)        | 66,664                |       | $ | 2.62 |   | 8/16/2015 |   |   |   |   |   |   |   |   |   |
|                      |       | 36,572                 | (2)        | 73,128                |       | $ | 2.36 |   | 9/27/2015 |   |   |   |   |   |   |   |   |   |
|                 |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wayne G. Wetherell   |       | 10,000                 |       | —                |       | $ | 3.00 |   | 9/12/2011 |   | 37,372 | (7) | $ | 63,532 |   | — |   | — |   |
|                      |       | 10,000                 |       | —                |       | $ | 1.97 |   | 5/28/2013 |   |   |   |   |   |   |   |   |   |
|                      |       | 50,000                 |       | —                |       | $ | 2.40 |   | 10/28/2014 |   |   |   |   |   |   |   |   |   |
|                      |       | 20,000                 | (1)        | 40,000                |       | $ | 2.62 |   | 8/16/2015 |   |   |   |   |   |   |   |   |   |
|                      |       | 17,536                 | (2)        | 35,064                |       | $ | 2.36 |   | 9/27/2015 |   |   |   |   |   |   |   |   |   |
|                 |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| William Willis       |       | 67,500                 |       | —                |       | $ | 2.65 |   | 10/1/2013 |   | — |   | — |   | — |   | — |   |
|                      |       | 34,000                 | (3)        | 16,000                |       | $ | 2.30 |   | 10/15/2014 |   |   |   |   |   |   |   |   |   |
|                      |       | 20,000                 | (1)        | 40,000                |       | $ | 2.62 |   | 8/16/2015 |   |   |   |   |   |   |   |   |   |
|                      |       | 0                      |       | 60,000                |       | $ | 1.99 |   | 1/13/2016 |   |   |   |   |   |   |   |   |   |
|                 |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Charles Aubuchon     |       | 9,164                  |       | 836                   |       | $ | 3.00 |   | 12/31/2013 |   | — |   | — |   | — |   | — |   |
|                      |       | 27,000                 | (3)        | 13,000                |       | $ | 2.30 |   | 10/15/2014 |   |   |   |   |   |   |   |   |   |
|                      |       | 10,000                 | (4)        | 20,000                |       | $ | 3.19 |   | 4/1/2015 |   |   |   |   |   |   |   |   |   |
|                      |       | 20,000                 | (1)        | 40,000                |       | $ | 2.62 |   | 8/16/2015 |   |   |   |   |   |   |   |   |   |
|                      |       | 0                      |       | 60,000                |       | $ | 1.99 |   | 1/13/2016 |   |   |   |   |   |   |   |   |   |
|                 |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| David Harding        |       | 0                      | (5)        | 100,000               |       | $ | 1.65 |   | 1/31/2016 |   | — |   | — |   | — |   | — |   |

----

(1)           These options vestover three years with one third vesting 8/16/2006 and the            

                remainder vestingin equal quarterly installments thereafter.

(2)           These options vestover three years with one third vesting 9/27/2006 and the        remainder vesting in equal quarterlyinstallments thereafter.

(3)           These options vestover three years with one third vesting on each of 10/15/2005,                10/15/2006 and 10/15/2007.

(4)           These options vestover three years with one third vesting on each of 4/1/2006,    4/1/2007 and 4/1/2008.

(5)           These options vestover three years with one third vesting 1/31/2007 and the        remainder vesting in equal quarterlyinstallments thereafter.

(6)           10,435 shares veston 3/31/2007 and 9,141 shares vest quarterly beginning on        3/27/2007 

(7)           6,691 shares vest on 3/31/2007 and4,383 shares vest quarterly beginning on          3/27/2007

**Options Exercisesand Stock Vested**

Thefollowing table sets forth information regarding exercises of stock options andvesting of stock for each of the named executive officers during 2006.  There were no exercises of stock options byour named executive officers in 2006.
|                          | ** ** | ** **            | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **Stock Awards** | ** ** |
| ** **               | ** ** | **Number of**    | ** ** | **Value** | ** ** |
| ** **               | ** ** | **Shares**            | ** ** | **Realized** | ** ** |
| ** **               | ** ** | **Acquired on**  | ** ** | **on Vesting** | ** ** |
| **Name**                 | ** ** | **Vesting**           | ** ** | **($)** | ** ** |
|                     |       |                  |       |   |   |
| S. James Miller,  Jr.(1) |       | 87,101                |       | 167,540 |   |
|                     |       |                  |       |   |   |
| Wayne G. Wetherell(2)    |       | 39,451                |       | 75,702 |   |

 

----

(1) Represents the quarterly vesting of 124,162restricted shares granted on March 30, 2004 and the vesting of 109,700 restrictedshares granted on September 27, 2005. The restricted shares granted inSeptember 2005 vest one-third after one year with the remainder vesting ratablyon a quarterly basis over two years ending September 27, 2008.

(2) Represents the quarterly vesting of 80,281restricted shares granted on March 30, 2004 and the vesting of 52,600restricted shares granted on September 27, 2005.  The restricted shares granted in September2005 vest one-third after one year with the remainder vesting ratably on aquarterly basis over two years ending September 27, 2008.

10

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***Employment andChange of Control and Severance Benefits Agreements***

The Company has enteredinto Employment Agreements and Change of Control and Severance BenefitsAgreements with certain of its executive officers. The Employment Agreementsand Change of Control and Severance Benefits Agreements are intended to promotestability and continuity of senior management. A description of the terms ofthe employment agreements is set forth below and the amount payable to eachnamed executive officer in each situation is set forth in the tables below.

On October 1, 2005,we entered into an employment agreement with Mr. Miller pursuant to whichMr. Miller will serve as President and Chief Executive officer. Thisagreement is for a three-year term ending September 30, 2008. This agreementprovides for annual base compensation in the amount of $291,048, which amountwill be increased based on cost-of-living increases. Under this agreement, wewill reimburse Mr. Miller for reasonable expenses incurred in connectionwith our business. Under the terms of the agreement, Mr. Miller will beentitled to the following severance benefits if we terminate his employmentwithout cause or in the event of an involuntary termination (i) a lump sumcash payment equal to twenty-four months base salary; (ii) continuation ofMr. Miller’s fringe benefits and medical insurance for a period of three years;(iii) immediate vesting of 50% of Mr. Miller’s outstanding stock optionsand restricted stock awards. In the event that Mr. Miller’s employment isterminated within six months prior to or the thirteen months following a changeof control (defined below), Mr. Miller is entitled to the severance benefitsdescribed above, except that 100% of Mr. Miller’s outstanding stock options andrestricted stock awards will immediately vest.

On October 1, 2005, weentered into an amended employment agreement with Mr. Wetherell pursuantto which Mr. Wetherell will serve as our Chief Financial Officer. Thisagreement is for a three-year term ending September 30, 2008. This agreementprovides for annual base salary in the amount of $174,100, which amount will beincreased based on cost-of-living increases and may also be increased based onperformance reviews. Under this agreement, we will reimburse Mr. Wetherellfor reasonable expenses incurred in connection with our business. Under theterms of the agreement, Mr. Wetherell will be entitled to the followingseverance benefits if we terminate his employment without cause or in the eventof an involuntary termination (i) a lump sum cash payment equal to twelvemonths; (ii) continuation of Mr. Wetherell’s fringe benefits and medicalinsurance for a period of three years; (iii) immediate vesting of 50% ofMr. Wetherell’s outstanding stock options and restricted stock awards. In theevent that Mr. Wetherell’s employment is terminated within six months prior toor the thirteen months following a change of control (defined below), Mr.Wetherell is entitled to the severance benefits described above, except that100% of Mr. Wetherell’s outstanding stock options and restricted stock awardswill immediately vest.

 

                On October 31,2005, we entered into a Change of Control and Severance Benefits Agreement withMr. Charles AuBuchon, our Vice President of Sales.  This agreement has a three year term,commencing on October 31, 2005. Subject to the conditions and other limitationsset forth therein, Mr. AuBuchon will be entitled to the following severancebenefits if we terminate his employment without cause prior to the closing of anychange of control transaction: (i) a lump sum cash payment equal to sixmonths of base salary; and (ii) continuation of Mr. AuBuchon’s healthinsurance benefits until the earlier of six (6) months following the dateof termination, the date on which he is no longer entitled to continuationcoverage pursuant to COBRA or the date that he obtains comparable healthinsurance coverage.  In the event thatthe Mr. Aubuchon’s employment is terminated within the twelve months followinga change of control, he is entitled to the severance benefits described above,plus his stock options will immediately vest and become exercisable.  Mr. Aubuchon’s eligibility to receiveseverance payments or other benefits upon his termination is conditioned uponhim executing a general release of liability.

 

###         For purposes of each of the abovereferenced agreements, termination for “cause” generally means the executive’scommission of an act of fraud or similar conduct which is intended to result insubstantial personal enrichment of the executive, conviction or plea of *nolo contendere* to a felony, gross negligence or breach offiduciary duty that results in material injury to us, material breach ofexecutive’s proprietary information agreement that is materially injurious tous, willful and material failure to perform his duties as an officer oremployee of the Company or material breach of his employment agreement and thefailure to cure such breach in a specified period of time or a violation of amaterial Company policy that is materially injurious to the Company.  A “change in control” these agreementsgenerally means the occurrence of any of the following events:  (i)   the acquisition by anyperson or group of more than 50% or more of our outstanding voting stock, (ii)   the consummationof a merger, consolidation, reorganization, or similar transaction other than atransaction: (1) in which substantially all of the holders of theCompany’s Voting Stock hold or receive directly or indirectly fifty percent(50%) or more of the voting stock of the resulting entity or a parent companythereof, in substantially the same proportions as their ownership of theCompany immediately prior to the transaction; or (2) in which the holdersof the Company’s capital stock immediately before such transaction will,immediately after such transaction, hold as a group on a fully diluted basisthe ability to elect at least a majority of the directors of the survivingcorporation (or a parent company); (iii)  there isconsummated a sale, lease, exclusive license, or other disposition of all orsubstantially all of the consolidated assets of the Company and itsSubsidiaries, other than a sale, lease, license, or other disposition of all orsubstantially all of the consolidated assets of the Company and itsSubsidiaries to an entity, fifty percent (50%) or more of the combined votingpower of the voting securities of which are owned by stockholders of theCompany in substantially the same proportions as their ownership of the Companyimmediately prior to such sale, lease, license, or other disposition; or (iv)  individuals who,on the date this Plan is adopted by the Board, are Directors (the “IncumbentBoard”) cease for any reason to constitute at least a majority of theDirectors; provided, however, that if the appointment or election(or nomination for election) of any new Director was approved or recommended bya majority vote of the members of the Incumbent Board then still in office,such new member shall, for purposes of this Plan, be considered as a member ofthe Incumbent Board.

11

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### POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

Thefollowing tables summarize the potential payments to certain of our namedexecutive officers upon a termination of employment in variouscircumstances.  The amounts shown in thetables are only estimates and apply the assumption that employment terminatedon December 31, 2006.  The calculationsof payments related to equity reflect the closing price of our common stock onDecember 29, 2006 (the last business day before that date) on the AmericanStock Exchange.  The amounts set forthbelow do not include accrued obligations such as salary and other amountspayable with respect to days previously worked, accrued vacation time and otheraccrued amounts that were fully earned and vested as of December 31, 2006 andwould be payable in connection with the executive’s employment.

***S. James Miller,Jr.***The followingtable describes the potential payments upon termination or a change in controlfor Mr. Miller, our Chief Executive Officer.
|                                                    | ** ** | ** **      | ** ** | **Involuntary**             | ** ** | ** **         | ** ** |
|----------------------------------------------------|------------|-----------------|------------|-----------------------------|------------|--------------------|------------|
| **Executive Benefits and Payments** | ** ** | **Voluntary**   | ** ** | **Not for Cause** | ** ** | **Change in** | ** ** |
| **Upon Termination(1)**                       | ** ** | **Termination** | ** ** | **Termination**             | ** ** | **Control**        | ** ** |
|                                               |       |            |       |                        |       |               |       |
| Cash                                               |       | $               | —     |                        | $          | 603,460            | (2)        | $ | 603,460 | (2) |
| Equity                                             |       | $               | —     |                        | $          | 63,182             | (3)(4)     | $ | 126,364 | (3)(4) |
| Fringe Benefits                                    |       | $               | —     |                        | $          | 56,819             | (5)        | $ | 56,819 | (5) |

 

----

(1)          For purposes of this analysis, we assumed Mr.Miller’s compensation is based on current base salary of $301,730.

(2)          Mr. Miller’s cash severance benefit under aninvoluntary, good reason termination or a termination due to a change incontrol is equal 2 times annual compensation.

(3)           Mr. Miller’s equity severance benefit underan involuntary or good reason termination is the immediate vesting of 50% ofMr. Miller’s outstanding stock options and restricted stock awards.  In the event that Mr. Miller’s employment isterminated within six months prior to or thirteen months following a change incontrol, Mr. Miller is entitled to the immediate vesting of 100% of Mr. Miller’soutstanding stock options and restricted stock awards.

(4)          This amount was calculated from theunexercised unexercisable stock options and unvested stock awards held by Mr.Miller on December 31, 2006.  The stockoption award amount was calculated by multiplying the number of securitiesunderlying the unexercised unexercisable options by the difference between theoption price and the price per share of common stock on the date oftermination.  The unvested stock awardamount was calculated by multiplying the number of unvested shares of stock bythe price per share on the date of termination.

(5)          Mr. Miller’s fringe benefits consist ofmedical and life insurance for a period of three years.

***Wayne G. Wetherell***The following table describes the potentialpayments upon termination or a change in control for Mr. Wetherell, our

12

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Sr. Vice PresidentAdministration, Chief Financial Officer, Secretary and Treasurer.
|                                                    | ** ** | ** **      | ** ** | **Involuntary**             | ** ** | ** **         | ** ** |
|----------------------------------------------------|------------|-----------------|------------|-----------------------------|------------|--------------------|------------|
| **Executive Benefits and Payments** | ** ** | **Voluntary**   | ** ** | **Not for Cause** | ** ** | **Change in** | ** ** |
| **Upon Termination(1)**                       | ** ** | **Termination** | ** ** | **Termination**             | ** ** | **Control**        | ** ** |
|                                               |       |            |       |                        |       |               |       |
| Cash                                               |       | $               | —     |                        | $          | 180,522            | (2)        | $ | 180,522 | (2) |
| Equity                                             |       | $               | —     |                        | 31,766     | (3)(4)             | 63,532     | (3)(4) |
| Fringe Benefits                                    |       | $               | —     |                        | $          | 55,565             | (5)        | $ | 55,565 | (5) |

 

----

(1)          For purposes of this analysis, we assumed Mr.Wetherell’s compensation is based on current base salary of $180,522.

(2)          Mr. Wetherell’s cash severance benefit underan involuntary, good reason termination or a termination due to a change incontrol is equal 1 times annual compensation.

(3)           Mr. Wetherell’s equity severance benefitunder an involuntary or good reason termination is the immediate vesting of 50%of Mr. Wetherell’s outstanding stock options and restricted stock awards.  In the event that Mr. Wetherell’s employmentis terminated within six months prior to or thirteen months following a changein control, Mr. Wetherell is entitled to the immediate vesting of 100% of Mr.Wetherell’s outstanding stock options and restricted stock awards.

(4)          This amount was calculated from theunexercised unexercisable stock options and unvested stock awards held by Mr.Wetherell on December 31, 2006.  Thestock option award amount was calculated by multiplying the number ofsecurities underlying the unexercised unerercisable options by the differencebetween the option price and the price per share of common stock on the date oftermination.  The unvested stock award amountwas calculated by multiplying the number of unvested shares of stock by theprice per share on the date of termination.

(5)          Mr. Wetherell’s fringe benefits consist ofmedical and life insurance for a period of three years.

***Charles Aubuchon***The following table describes the potentialpayments upon termination or a change in control for Mr. Aubuchon, our  Vice President Business Development.
|                                                | ** ** | ** **      | ** ** | **Involuntary**             | ** ** | ** **         | ** ** |
|------------------------------------------------|------------|-----------------|------------|-----------------------------|------------|--------------------|------------|
| Executive Benefits and Payments | ** ** | **Voluntary**   | ** ** | **Not for Cause** | ** ** | **Change in** | ** ** |
| **Upon Termination(1)**                   | ** ** | **Termination** | ** ** | **Termination**             | ** ** | **Control**        | ** ** |
|                                           |       |            |       |                        |       |               |       |
| Cash                                           |       | $               | —     |                        | $          | 77,500             | (1)        | $ | 77,500 | (1) |
| Equity                                         |       | $               | —     |                        | $          | —             |       | $ | — |   |
| Fringe Benefits                                |       | $               | —     |                        | $          | 12,799             | (2)        | $ | 12,799 | (2) |

 

----

(1)          For purposes of this analysis, we assumed Mr.Aubuchon’s compensation is based on current base salary of $155,000.

(2)          Mr. Aubuchon’s cash severance benefit underan involuntary, good reason termination or a termination due to a change incontrol is equal 6 months of annual compensation.

(3)          Mr. Aubuchon’s fringe benefits consist of medicaland life insurance for a period of six months.

13

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**COMPENSATIONOF DIRECTORS**

Eachnon-employee director of the Company receives a monthly retainer of $2,000 forserving on the Board. Board members who also serve on the Audit Committeereceive additional compensation. The members of the Board of Directors are alsoeligible for reimbursement for their expenses incurred in attending Boardmeetings in accordance with Company policy. For the fiscal year endedDecember 31, 2006, the total amounts paid to non-employee directors ascompensation (excluding reimbursable expenses) was $145,575.

Non-employeedirectors of the Company are also eligible to receive stock option grants underthe Amended and Restated 1999 Stock Award Plan (the “1999 Plan”) or the 2001Equity Incentive Plan (the “2001 Plan”). Options granted under the 1999 Planand the 2001 Plan are intended by the Company not to qualify as incentive stockoptions under the Internal Revenue Code.

Theterm of options granted under the 1999 Plan and 2001 Plan is 10 years. Inthe event of a merger of the Company with or into another corporation or aconsolidation, acquisition of assets or other change-in-control transactioninvolving the Company, an equivalent option will be substituted by thesuccessor corporation, provided, however, that the Company may canceloutstanding options upon consummation of the transaction by giving at leastthirty (30) days notice.

Duringthe last fiscal year, the Company granted 40,000 options under the 1999 Plan tonon-employee directors of the Company. John Callan was granted 5,000 options atan exercise price per share of $1.99 under the 1999 Plan. The fair market valueof such common stock on the date of grant was $1.99 per share (based on theclosing sales price reported on the American Stock Exchange for the date ofgrant). Patrick Downs was granted 5,000 options at an exercise price per shareof $1.99 under the 1999 Plan. The fair market value of such common stock on thedate of grant was $1.99 per share (based on the closing sales price reported onthe American Stock Exchange for the date of grant). John Holleran was granted5,000 options at an exercise price per share of $1.99 under the 1999 Plan. Thefair market value of such common stock on the date of grant was $1.99 per share(based on the closing sales price reported on the American Stock Exchange forthe date of grant). David Loesch was granted 10,000 options at an exerciseprice per share of $1.99 under the 1999 Plan. The fair market value of suchcommon stock on the date of grant was $1.99 per share (based on the closingsales price reported on the American Stock Exchange for the date of grant). G.Steve Hamm was granted 5,000 options at an exercise price per share of $1.99under the 1999 Plan. The fair market value of such common stock on the date ofgrant was $1.99 per share (based on the closing sales price reported on theAmerican Stock Exchange for the date of grant). David Carey was granted 10,000options at an exercise price per share of $2.20 under the 1999 Plan.  The fair market value of such common stock onthe date of grant was $2.20 per share (based on the closing sales pricereported on the American Stock Exchange for the date of grant). As of April 15,2007, no options had been exercised by non-employee directors under any plansmaintained by the Company.

Thefollowing table sets forth the compensation of the Company’s directors for the2006 fiscal year.

14

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| ** **                                     | ** ** | **Fees**           | ** ** | ** ** | ** ** | ** **       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** |   |
|------------------------------------------------|------------|--------------------|------------|------------|------------|------------------|------------|--------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|--------|
| ** **                                     | ** ** | **Earned or** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **         | ** ** | ** ** | ** ** | **Grant Date**         | ** ** | **Option Awards**          | ** ** |   |
| ** **                                     | ** ** | **Paid in**   | ** ** | **Stock**  | ** ** | **Option**       | ** ** | **All Other** | ** ** | ** ** | ** ** | **Fair Value of** | ** ** | **Outstanding**                 | ** ** |   |
| ** **                                     | ** ** | **Cash**           | ** ** | **Awards** | ** ** | **Awards(1)(2)** | ** ** | **Compensation**   | ** ** | **Total**  | ** ** | **Option Awards**      | ** ** | **December 31, 2006** | ** ** |   |
| **Name and Principal Position** | ** ** | **($)**            | ** ** | **($)**    | ** ** | **($)**          | ** ** | **($)**            | ** ** | **($)**    | ** ** | **$**                       | ** ** | **#**                           | ** ** |   |
|                                           |       |               |       |       |       |             |       |               |       |       |       |                        |       |                            |       |   |
| John Callan                                    |       | 24,000             |       | —     |       | 13,368           |       | —             |       | 37,368     |       |                        |       |                            |       |
| 9/12/2001                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.41       |                            | 7,535      |   |   |
| 9/4/2002                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.21       |                            | 2,000      |   |   |
| 1/7/2003                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.39       |                            | 2,000      |   |   |
| 1/5/2004                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.31       |                            | 2,000      |   |   |
| 3/2/2005                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.07       |                            | 2,000      |   |   |
| 9/27/2005                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.72       |                            | 12,000     |   |   |
| 1/13/2006                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.45       |                            | 5,000      |   |   |
|                                           |       |               |       |       |       |             |       |               |       |       |       |                        |       | 32,535                          |       |   |
|                                           |       |               |       |       |       |             |       |               |       |       |       |                        |       |                            |       |   |
| Patrick Downs                                  |       | 24,000             |       | —     |       | 18,215           |       | —             |       | 42,215     |       |                        |       |                            |       |   |
| 3/26/2002                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.85       |                            | 5,261      |   |   |
| 9/4/2002                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.21       |                            | 2,000      |   |   |
| 1/7/2003                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.39       |                            | 2,000      |   |   |
| 1/5/2004                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.31       |                            | 2,000      |   |   |
| 3/2/2005                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.07       |                            | 2,000      |   |   |
| 9/27/2005                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.72       |                            | 18,000     |   |   |
| 1/13/2006                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.45       |                            | 5,000      |   |   |
|                                           |       |               |       |       |       |             |       |               |       |       |       |                        |       | 36,261                          |       |   |
| John Holleran                                  |       | 22,075             |       | —     |       | 13,368           |       | —             |       | 35,443     |       |                        |       |                            |       |   |
| 3/26/2002                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.85       |                            | 5,261      |   |   |
| 9/4/2002                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.21       |                            | 2,000      |   |   |
| 1/7/2003                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.39       |                            | 2,000      |   |   |
| 1/5/2004                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.31       |                            | 2,000      |   |   |
| 3/2/2005                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.07       |                            | 2,000      |   |   |
| 9/27/2005                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.72       |                            | 12,000     |   |   |
| 1/13/2006                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.45       |                            | 5,000      |   |   |
|                                           |       |               |       |       |       |             |       |               |       |       |       |                        |       | 30,261                          |       |   |
|                                           |       |               |       |       |       |             |       |               |       |       |       |                        |       |                            |       |   |
| David Loesch                                   |       | 27,125             |       | —     |       | 13,254           |       | —             |       | 40,379     |       |                        |       |                            |       |   |
| 9/24/2001                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 3.72       |                            | 10,000     |   |   |
| 9/4/2002                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.21       |                            | 2,000      |   |   |
| 1/7/2003                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.39       |                            | 2,000      |   |   |
| 1/5/2004                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.31       |                            | 2,000      |   |   |
| 3/2/2005                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.07       |                            | 2,000      |   |   |
| 9/27/2005                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.72       |                            | 9,000      |   |   |
| 1/13/2006                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.45       |                            | 10,000     |   |   |
|                                           |       |               |       |       |       |             |       |               |       |       |       |                        |       | 37,000                          |       |   |
|                                           |       |               |       |       |       |             |       |               |       |       |       |                        |       |                            |       |   |
| Guy Steven Hamm                                |       | 26,375             |       | —     |       | 6,559            |       | —             |       | 32,934     |       |                        |       |                            |       |   |
| 11/3/2004                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.67       |                            | 10,000     |   |   |
| 3/2/2005                                       |       |               |       |       |       |             |       |               |       |       |       | $                           | 2.07       |                            | 2,000      |   |   |
| 1/13/2006                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.45       |                            | 5,000      |   |   |
|                                           |       |               |       |       |       |             |       |               |       |       |       |                        |       | 17,000                          |       |   |
| David Carey                                    |       | 22,000             |       | —     |       | 5,108            |       | —             |       | 27,108     |       |                        |       |                            |       |   |
| 3/22/2006                                      |       |               |       |       |       |             |       |               |       |       |       | $                           | 1.60       |                            | 10,000     |   |   |
|                                                |            |                    |            |            |            |                  |            |                    |            |            |            |                             |            |                                 |            |        |  |  |  |  |  |  |  |  |  |  |  |

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(1) The grant date per share fair value of optionsissued to Messrs. Callan, Downs, Holleran, Loesch and Hamm in 2006 was $1.45;the grant date per share fair value of options issued to Mr. Carey in 2006 was1.60.

(2) The amounts reflect the dollar amount recognizedfor financial statement reporting purposes for the fiscal year ended December31, 2006, in accordance with the provisions of FAS 123R and thus may includeamounts from awards granted prior to 2006. Assumptions used in the calculation of these amounts are included infootnote 2 to the Company's audited financial statements for the fiscal yearended December 31, 2006 included in the Company's annual report on Form 10-Kfiled with the Securities and Exchange Commission on April 17, 2007.

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**ITEM 12. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters.**

Thefollowing table sets forth certain information regarding the ownership of theCompany’s common stock as of April 15, 2006 by: (i) each director;(ii) each of the executive officers named in the Summary CompensationTable; (iii) all executive officers and directors of the Company as agroup; and (iv) all those known by the Company to be beneficial owners ofmore than five percent of its common stock.
| ** **                                                                           | ** ** | **Beneficial Ownership(1)** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Name and Address of Beneficial Owner**                    | ** ** | **Number of  Shares**       | ** ** | **Percent of  Class** | ** ** |
| S. James  Miller, Jr.(2)                                                        |       | 584,406                          |       | 3.9 | % |
| John Callan(3)                                                                       |       | 64,145                           |       |   | * |
| Patrick Downs(4)                                                                     |       | 68,032                           |       |   | * |
| G. Steve Hamm  (5)                                                                   |       | 11,940                           |       |   | * |
| John Holleran(6)                                                                     |       | 22,533                           |       |   | * |
| David Loesch(7)                                                                      |       | 35,936                           |       |   | * |
| Wayne  Wetherell(8)                                                                  |       | 263,265                          |       | 1.8 | % |
| William Willis  (9)                                                                  |       | 141,500                          |       |   | * |
| Charles AuBuchon  (10)                                                               |       | 117,000                          |       |   | * |
| David  Harding(11)                                                                   |       | 33,400                           |       |   | * |
| David Carey(12)                                                                      |       | 8,336                            |       |   | * |
|                                                                                 |       |                             |       |   |   |
| Gruber &  McBaine Capital Management LLC  50 Osgood Place  San Francisco, CA(13) |       | 3,673,045                        |       | 25.2 | % |
| Total Shares Held By  Directors And Executive Officers                               |       | 1,350,492                        |       | 8.8 | % |

 

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*                                         Lessthan one percent.

(1)                                  Thistable is based upon information supplied by officers, directors and principalshareholders and Form S-3 filed with the SEC on April 23, 2007 Unless otherwiseindicated in the footnotes to this table and subject to community property lawswhere applicable, the Company believes that each of the shareholders named inthis table has sole voting and investment power with respect to the sharesindicated as beneficially owned. Applicable percentages are based on 14,543,341shares of common stock outstanding on April 15, 2006, calculated on anas-converted basis and adjusted as required by rules promulgated by the SEC.Unless otherwise indicated, the address for each listed shareholder is c/oImageWare Systems, Inc. 10883 Thornmint Road, San Diego, CA 92127.

(2)                                  Mr. Millerserves as Chairman of the Board of Directors and Chief Executive Officer of theCompany. Includes 269,908 options exercisable within 60 days of the datereported and vesting of 9,141 shares within 60 days of the date reported.

(3)                                  Includes24,145 options exercisable within 60 days of the date reported.

(4)                                  Includes25,381 options exercisable within 60 days of the date reported.

(5)                                  Includes11,940 options exercisable within 60 days of the date reported.

(6)                                  Includes21,871 options exercisable within 60 days of the date reported.

(7)                                  Includes26,936 options exercisable within 60 days of the date reported.

(8)                                  Includes122,536 options exercisable within 60 days of the date reported andvesting of 4,383 shares within 60 days of the date reported.

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(9)                                  Includes141,500 options exercisable within 60 days of the date reported.

(10)                            Includes97,000 options exercisable within 60 days of the date reported.

(11)                            Includes33,400 options exercisable within 60 days of the date reported.

(12)                            Includes3,336 options exercisable within 60 days of the date reported.

(13)                            Includes635,864 shares issuable upon the exercise of warrants.

EquityCompensation Plan Information is incorporated by reference to Item 5 of thisreport.

**ITEM13. Certain Relationships and Related Transactions and Director Independence**

**TRANSACTIONSWITH RELATED PERSONS**

There have been no transactions, since the beginning of the Company’slast fiscal year, or any currently proposed transactions, in which the Companywas or is to be a participant and the amount involved exceeds $120,000, and inwhich any director or executive officer or any security holder who is known tothe Company to own of record or beneficially more than 5% of the Company’sCommon Stock, or any member of the immediate family of any of the foregoingpersons, had a material interest.

**REVIEW,APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS**

As provided in thecharter of the Company’s Audit Committee, it is the Company’s policy that itwill not enter into any transactions required to be disclosed under Item 404 ofthe SEC’s Regulation S-K unless the Audit Committee or another independent bodyof the Board of Directors first reviews and approves the transactions.

In addition,pursuant to the Company’s Code of Ethical Conduct and Business Practices, allemployees, officers and directors of the Company and its subsidiaries areprohibited from engaging in any relationship or financial interest that is anactual or potential conflict of interest with the Company withoutapproval.  Employees, officers and directors are required to providewritten disclose to the Chief Executive Officer as soon as they have anyknowledge of a transaction or proposed transaction with an outside individual,business or other organization that would create a conflict of interest or theappearance of one.

**DIRECTORINDEPENDENCE**

The Board ofDirectors has established two committees: the Audit Committee and theCompensation Committee.  All members of the Audit Committee areindependent under the both the standards of the American Stock Exchange andSecurities Exchange Commission rules and regulations pertaining to listedcompany audit committees. Although we are not required to have a separateCompensation Committee, we have determined that it is in the best interests ofthe Company to maintain an independent Compensation Committee.  Inaddition to the independence standards of the American Stock Exchange, theBoard of Directors considered stock ownership in the Company in determiningwhich directors are independent.

In addition to theemployment agreements described above, the Company has entered into indemnityagreements with certain officers and directors which provide, among otherthings, that the Company will indemnify such officer or director, under thecircumstances and to the extent provided for therein, for expenses, damages,judgments, fines and settlements he or she may be required to pay in actions orproceedings which he or she is or may be made a party by reason of his or herposition as a director, officer or other agent of the Company, and otherwise tothe fullest extent permitted under California law and the Company’s Bylaws.

**Item 14.  Principal Accountant Fees andServices.**

Thefollowing table represents aggregate fees billed to the Company for the fiscalyears ended December 31, 2006 and 2005 by Stonefield Josephson, Inc., theCompany’s principal accountant for the fiscal years ended December 31, 2006 and2005:

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|                     | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Audit Fees          |       | $                               | 181,478    |   | $ | 84,526 |   |
|                |       |                            |       |   |   |
| Audit-Related  Fees |       | 19,887                          |       | 54,922 |   |
|                |       |                            |       |   |   |
| Tax Fees            |       | —                          |       | — |   |
|                |       |                            |       |   |   |
| All Other Fees      |       | —                          |       | — |   |
|                |       |                            |       |   |   |
| Total Fees          |       | $                               | 201,365    |   | $ | 139,448 |   |

 

All fees described abovewere approved by the Audit Committee of the Company’s Board of Directors.

The AuditCommittee has adopted a policy and procedures for the pre-approval of audit andnon-audit services rendered by our independent auditor, Stonefield Josephson,Inc. The policy generally pre-approves specified services in the definedcategories of audit services, audit-related services, and tax services up tospecified amounts. Pre-approval may also be given as part of the Audit Committee’sapproval of the scope of the engagement of the independent auditor or on anindividual explicit case-by-case basis before the independent auditor isengaged to provide each service. The pre-approval of services may be delegatedto one or more of the Audit Committee’s members, but the decision must bereported to the full Audit Committee at its next scheduled meeting.

**Item 15.   Exhibits**

**(b)           Exhibits**

**                The following exhibits are filedherewith:**
| Exhibit Number | ** ** | **Description**                                                                                                  |
|----------------|------------|------------------------------------------------------------------------------------------------------------------|
| 31.1           |       | Certification of the Principal Executive Officer, Pursuant  to Rule 13a-14(a) and 15d-14(a) of the Exchange Act. |
| 31.2           |       | Certification pf the Principal Financial and  Accounting Officer, Pursuant to Rule 13a-14(a) and 15d-14(a).      |

 

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**SIGNATURES**

Inaccordance with Section 13 or 15(d) of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                      |   | IMAGEWARE SYSTEMS, INC. |
|----------------------|--------|------------------------------|
|                 |   |                         |
|                 |   |                         |
| April 30,  2007 |   | By:                          | /s/ Wayne G.  Wetherell |
|                 |   |                         | Wayne G.  Wetherell |
|                 |   |                         | Chief Financial  Officer |

 

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