SecProbe.io

CORRESP
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filename1.htm

May
19, 2005

Mr.
Craig Wilson

United
States Securities and Exchange Commission

Mail
Stop 4-06

Washington,
D.C.  20549

Re:       SEC
Comments to ImageWare Systems, Inc.

                        (File No.
001-15757) Form 10-K: For

                        the Fiscal
Year Ended Deember 31, 2004

Dear
Mr. Wilson:

Thank
you for the Commission’s comments regarding compliance with applicable
disclosure requirements with the mutual goal of enhancing the overall
disclosure in our filings.

In
connection with our response to the Commission’s comments, we hereby acknowledge
that:

•                  The
company is responsible for the adequacy and accuracy of the disclosures in
filings with the Commission

•                  Staff
comments or changes to disclosures in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing, and

•                  The
Company may not assert staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States

Following
is our response to the Commission’s comments dated April 21, 2005.

Form 10-K: For the Fiscal Year Ended December 31, 2004

Audited Financial Statements

Note 2. Summary of Significant Accounting Policies – Revenue
Recognition

1.  We note that a number of the
Company’s contracts are with government agencies.  Supplementally tell us how you considered
paragraph 32 – 33 of SOP 97-2 in accounting for fiscal funding clauses included
in your software arrangements.  Also tell
us how fiscal funding clauses or other government contract contingencies impact
your revenue recognition  for other
services and product you provide.

We
considered the guidance of SOP 97-2 paragraphs 32 through 33 regarding Fiscal
Funding Clauses.  We generally deliver
all product-related items (software, hardware, consumables, and services)
pursuant to customer purchase orders or executed customer contracts issued by
governmental agencies subsequent to the approval of funding.  In these instances, which represent the vast
majority of our product related sales, the related legislature or funding
authority has appropriated the funds necessary for the governmental unit to
fulfill its obligations under the related purchase order or executed contract
and therefore there are no fiscal funding clauses which provide for the
cancellation of product related items if the legislature or funding authority
does not appropriate the necessary funds. Delivery and implementation of
product-related items generally occurs within a three to six month timeframe.

We
occasionally enter into multi-year maintenance contracts with governmental
customers which span multiple fiscal budget years.  In these instances, we generally require
prepayment at the beginning of the contract maintenance period and recognize
revenue ratably over the corresponding maintenance period provided no
significant obligations remain.

2.  Supplementally explain each
revenue stream and the related revenue recognition policy for each revenue
source (i.e., long-term contracts involving customization, license fees,
maintenance agreements, multi-element

arrangements and other software sales).
Cite the accounting literature that supports each policy and at a
minimum, address the applicability of SOP 97-2, SOP 81-1, SAB 104, EITF 00-21
and EITF 03-05 in your response.  We may
have further comments based on your response.

We
currently generate revenue primarily from the following major revenue sources;
the approximate percentage of each revenue source to total 2004 revenues is
also indicated:

•                  Long-term
fixed-price contracts involving significant customization (9%)

•                  Fixed-price
contracts involving minimal customization (22%)

•                  Software
licensing (31%)

•                  Sales
of computer hardware and identification media (18%)

•                  Postcontract
customer support (PCS) (20%)

The related revenue recognition policy for each of
the above identified sources is set forth below:

Long-term fixed-price contracts involving
significant customization.

We
recognize revenue and profit as work progresses on long-term, fixed-priced
contracts involving significant amounts of software and hardware customization
using the percentage of completion method based on costs incurred to date
compared to total estimated costs at completion.  Historically, delivery of the elements of
these type arrangements are completed within a three to six month period with
the exception of PCS services, which typically are entered into for one year increments
after completion.

We
utilize the guidance in SOP 97-2, paragraph 74 which states that “If an
arrangement to deliver software or a software system, either alone or together
with other product and services, requires significant production, modification,
or customization of software, the service element does meet the criteria for
separate accounting.  The entire
arrangement should be accounted for in conformity with ARB 45, using the
relevant guidance in SOP 81-1.

Upon
determination that sufficient customization does meet the criteria to apply
contract accounting, a determination is made in accordance with SOP 81-1,
paragraphs 21- 33 as to the most appropriate recognition method, the
percentage-of-completion method or the completed contract method.

For
those instances in which the percentage-of-completion method is used, we have
determined, based on the guidance in SOP 97-2 paragraphs 78 through 91 and SOP
81-1, paragraphs 46 through 51 that the most meaningful measure of the extent
of progress towards completion is based upon input measures, specifically,
labor hours incurred.

In
accordance with EITF 03-05, Applicability of AICPA Statement of Position 97-2
to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental
Software, the composition of an arrangement is reviewed to determine whether
non-software deliverables should be included within the scope of SOP 97-2.  We evaluate if the software is essential to
the functionality of the non-software deliverable.  If the determination is made that the
software is essential to the functionality of the non-software deliverable, the
deliverable is included within the scope of SOP 97-2.

Fixed-price contracts involving minimal
customization

We
recognize revenue on fixed-price contracts involving minimal amounts of
software and hardware customization when delivery of all the elements of the
arrangement have been completed.
Delivery times on these minimal customization arrangements are typically
3 months or less.  These arrangements
typically involve multiple elements, (i.e. software, hardware and
services).  In accordance with SOP 97-2,
paragraph 12, we review the components of such arrangements to determine if
Vendor Specific Objective Evidence (“VSOE”) exists for each element.  If sufficient VSOE does not exist for all
elements in the arrangement, all revenue from the arrangement is deferred until
either sufficient VSOE does exist or all elements of the arrangement have been
delivered.  Based on the relative short
delivery time of the Company’s arrangements, in instances where sufficient VSOE
does not exist, revenue is typically recognized upon delivery of all elements
contained in the arrangement.

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We
have considered the guidance in SOP 98-9, but have not encountered
multiple-element arrangements in which there is VSOE of the fair values of all
undelivered elements but VSOE does not exist for one or more of the delivered
elements in the arrangement that would call for the application of the residual
method.  Should such circumstances be
encountered in the future, we will apply the provisions of SOP 98-9.

In
arrangements where VSOE does exist for all elements contained in an
arrangement, we recognize revenue upon delivery of the element provided that
any undelivered elements are not essential to the functionality of the
delivered elements in accordance with SOP 97-2, paragraph 13.

Software licensing

We
recognize revenue from software license arrangements.  Such arrangements involve the sale of
off-the-shelf software, defined by SOP 97-2 as software marketed as a stock
item that customers can use with little or no customization.  We utilize the guidance in SOP 97-2,
paragraph 8 which states that revenue shall be recognized when all of the
following criteria are met:

•                  Persuasive
evidence of an arrangement exists

•                  Delivery
has occurred

•                  The
vendor’s fee is fixed or determinable

•                  Collectibility
is probable

Evidence
of an arrangement is provided by customer purchase orders; delivery is based
upon the shipment of software; the fee is based upon a mutually agreed upon
price as evidenced by the customer purchase order.  We use the guidance in SOP 97-2 paragraph 14
with respect to probable collectibility.
There are no portions of our fee that are subject to forfeiture, refund
or other concession.

Sales of computer hardware and identification media

We
recognize revenue from the sale of hardware and identification media upon
delivery of such items to the customer.
This revenue source involves the resale of computer hardware and
identification media purchased from third party vendors.  There is no customization to be performed by
the company and all obligations are completed upon delivery to the customer.

Postcontract customer support

Based
upon several years of providing postcontract customer support, we have
established Vendor Specific Objective Evidence for this element.  In accordance with SOP 97-2, paragraph 57,
PCS fees from arrangements are allocated based on the fair value of the PSC
fees as determined by VSOE.  The portion
of the fee allocated to PCS is recognized ratably over the term of the PCS
arrangement.  Based on the nature of our
PCS agreements, we have considered the guidance in SOP 97-2, paragraph 59 and
determined that the Company does not meet the criteria for recognition of PCS
fees simultaneously with the initial license fees.

3.  Explain how you identify the
elements included in a software arrangement (i.e., software license, support,
training, consulting, etc) and how you establish VSOE for each of the elements
in a multiple element arrangements.
Clarify whether or not you apply the residual method of accounting to
your arrangements and the basis for that accounting.  In this regard, address the extent to which
you have established VSOE for each of the undelivered elements.

Elements
of a software arrangement are identified by review of an agreed-upon scope of
work (“SOW”).  Such SOW’s are typically
contained as an exhibit to an executed contract or addendum to a customer
purchase order.  The SOW will state the
specifications of deliverables such as software, hardware, consumables,
services which typically include items such as installation, training, and
database conversions.  VSOE is
established by analyzing historical pricing information over time and represent
averages of recent, actual transactions priced within a reasonable range.

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Note 17. Subsequent Events

4.                                      We note that the Company sold
your wholly-owned, Singapore subsidiary on March 3, 2005.  Supplementally tell us how you considered
paragraphs 30 and 42-43 of SFAS 144 in determining that classification of the operations
of Digital Imaging Asia Pacific as discontinued operations was not warranted at
December 31, 2004.

We
considered that the appropriate classification of the results of operations of
our Digital Imaging Asia Pacific (“DIAP”) subsidiary as a discontinued
operation was not warranted at December 31, 2004 due to the following:

In
accordance with paragraph 30, of SFAS 144, a long-lived asset (disposal group)
to be sold shall be classified as held for sale in the period in which all of
the following criteria are met:

a. Management, having the authority to approve the
action, commits to a plan to sell the asset (disposal group).

b. The asset (disposal group) is available for
immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets (disposal groups).

c. An active program to locate a buyer and other
actions required to complete the plan to sell the asset (disposal group) have
been initiated.

d. The sale of the asset (disposal group) is
probable, and transfer of the asset (disposal group) is expected to qualify for
recognition as a completed sale, within one year, except as permitted by
paragraph 31.

e. The asset (disposal group) is being actively
marketed for sale at a price that is reasonable in relation to its current fair
value.

f. Actions required to complete the plan indicate
that it is unlikely that significant changes to the plan will be made or that
the plan will be withdrawn.

We
did not commit to a plan to sell our DIAP subsidiary until late January 2005.  Therefore, the criteria in SFAS 144,
paragraph 30(a) was not met until January 2005.  The results of operations for our DIAP
subsidiary will be reported in discontinued operations in accordance with
paragraph 43 of SFAS 144 for current and prior periods beginning with the
Company’s quarterly filing for the three month period ended March 31, 2005
on Form 10-QSB.

If
you have any questions, please call me at (858) 673-8600 , x 138.

Very
truly yours,

  /s/ Wayne Wetherell

Wayne
Wetherell,

Chief
Financial Officer

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