UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the Quarterly Period Ended June 30,
2012



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the Transition Period from _____ to
______



Commission file number: 1-12471



INTEGRATED SURGICAL SYSTEMS, INC.

(Exact name of registrant as specified in
its charter)



|Delaware                                                       |  | 68-0232575                       
|-------------------------------------------------------------- |  | ---------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) |  | (IRS Employer Identification No.)
|                                                               |  |                                  
|401 Wilshire Blvd., Suite 1020                                 |  |                                  
|Santa Monica, California                                       |  | 90401                            
|(Address of Principal Executive Offices)                       |  | (Zip Code)                       



(310) 526-5000

(Registrant’s Telephone Number, Including
Area Code)



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 (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yesþor No ̈



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþor No ̈



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):



|Large accelerated filer ̈                                            | Accelerated filer ̈        
|------------------------------------------------------------------- | --------------------------
|                                                                    |                           
|Non-accelerated filer ̈(Do not check if a smaller reporting company) | Smaller reporting companyþ



Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yesþor No ̈



As of August 13, 2012 there were 8,239,947 shares of the registrant’s
common stock outstanding.











Integrated Surgical Systems, Inc.

Form 10-Q

for the three months ended June 30, 2012



Table of Contents



|           |                       | Page                                                                                                                  
|---------- | --------------------- | ----------------------------------------------------------------------------------------------------------------------
|Part I.    | Financial Information |                                                                                                                       
|           |                       |                                                                                                                       
|           | Item 1.               | Financial Statements                                                                                                  
|           |                       |                                                                                                                       
|           |                       | Balance Sheets (unaudited) at June 30, 2012 and December 31, 2011                                                     
|           |                       |                                                                                                                       
|           |                       | Statements of Operations and Comprehensive Income (Loss) (unaudited) for the six months ended June 30, 2012 and 2011  
|           |                       |                                                                                                                       
|           |                       | Statements of Operations and Comprehensive Income (Loss) (unaudited) for the three months ended June 30, 2012 and 2011
|           |                       |                                                                                                                       
|           |                       | Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011                                  
|           |                       |                                                                                                                       
|           |                       | Statement of Changes in Stockholders’ Equity (unaudited) for six months ended June 30, 2012                           
|           |                       |                                                                                                                       
|           |                       | Notes to Financial Statements (unaudited)                                                                             
|           |                       |                                                                                                                       
|           | Item 2.               | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                 
|           |                       |                                                                                                                       
|           | Item 3.               | Quantitative and Qualitative Disclosures About Market Risk                                                            
|           |                       |                                                                                                                       
|           | Item 4.               | Controls and Procedures                                                                                               
|           |                       |                                                                                                                       
|Part II.   | Other Information     |                                                                                                                       
|           |                       |                                                                                                                       
|           | Item 1.               | Legal Proceedings                                                                                                     
|           |                       |                                                                                                                       
|           | Item 6.               | Exhibits                                                                                                              
|           |                       |                                                                                                                       
|Signatures | 19                   



2







Part I.  FINANCIAL INFORMATION



Item 1. Financial Statements.



Integrated Surgical Systems, Inc.

Balance Sheets

(Unaudited)



|                                                                                                                                                                         |  | June 30, |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | ----------- | - | ------------ | -
|                                                                                                                                                                         |  | 2012     |             |   | 2011         |  
|Assets                                                                                                                                                                   |  |          |             |   |              |  
|                                                                                                                                                                         |  |          |             |   |              |  
|Current assets:                                                                                                                                                          |  |          |             |   |              |  
|Cash and cash equivalents                                                                                                                                                |  | $        | 242,998     |   |              | $
|Investments in available-for-sale securities                                                                                                                             |  |          | 2,627,511   |   |              |  
|Other current assets                                                                                                                                                     |  |          | 18,271      |   |              |  
|Total current assets                                                                                                                                                     |  |          | 2,888,780   |   |              |  
|                                                                                                                                                                         |  |          |             |   |              |  
|Other assets:                                                                                                                                                            |  |          |             |   |              |  
|Investment in ClearSign                                                                                                                                                  |  |          | -           |   |              |  
|                                                                                                                                                                         |  |          |             |   |              |  
|Total Assets                                                                                                                                                             |  | $        | 2,888,780   |   |              | $
|                                                                                                                                                                         |  |          |             |   |              |  
|Liabilities and stockholders’ equity                                                                                                                                     |  |          |             |   |              |  
|                                                                                                                                                                         |  |          |             |   |              |  
|Current liabilities:                                                                                                                                                     |  |          |             |   |              |  
|Accounts payable                                                                                                                                                         |  | $        | 27,133      |   |              | $
|Accrued stock compensation                                                                                                                                               |  |          | 15,625      |   |              |  
|Income taxes payable                                                                                                                                                     |  |          | 7,213       |   |              |  
|Conversion feature liability                                                                                                                                             |  |          | 114,354     |   |              |  
|Total current liabilities                                                                                                                                                |  |          | 164,325     |   |              |  
|                                                                                                                                                                         |  |          |             |   |              |  
|Commitments and contingencies                                                                                                                                            |  |          |             |   |              |  
|                                                                                                                                                                         |  |          |             |   |              |  
|Redeemable convertible preferred stock, $0.01 par value, 1,000,000 shares authorized; 168 shares issued and outstanding ($168,496 aggregate liquidation value)           |  |          | 168,496     |   |              |  
|                                                                                                                                                                         |  |          |             |   |              |  
|Stockholders’ equity:                                                                                                                                                    |  |          |             |   |              |  
|Common stock, $0.01 par value, 100,000,000 shares authorized; 8,161,821 and 8,028,779 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively |  |          | 81,618      |   |              |  
|Additional paid-in capital                                                                                                                                               |  |          | 64,322,472  |   |              |  
|Accumulated deficit                                                                                                                                                      |  |          | (61,835,422 | ) |              |  
|Accumulated other comprehensive loss                                                                                                                                     |  |          | (12,709     | ) |              |  
|Total stockholders’ equity                                                                                                                                               |  |          | 2,555,959   |   |              |  
|Total liabilities and stockholders’ equity                                                                                                                               |  | $        | 2,888,780   |   |              | $



See accompanying notes to financial statements.



3







Integrated Surgical Systems, Inc.

Statements of Operations and Comprehensive
Income (Loss)

(Unaudited)



|                                                           |  | Six Months ended June 30, |          
|---------------------------------------------------------- |  | ------------------------- | ---------
|                                                           |  | 2012                      |          
|                                                           |  |                           |          
|Operating expenses                                         |  |                           |          
|                                                           |  |                           |          
|General and administrative expenses                        |  | $                         | 148,256  
|                                                           |  |                           |          
|Loss from operations                                       |  |                           | (148,256 
|                                                           |  |                           |          
|Other income (expense)                                     |  |                           |          
|Interest and dividend income, net                          |  |                           | 29,196   
|Change in fair value of conversion feature                 |  |                           | (33,253  
|Gain on distribution of investment in ClearSign            |  |                           | 811,713  
|Realized losses on available-for-sale securities           |  |                           | (1,141   
|                                                           |  |                           |          
|Income (loss) before provision for income taxes            |  |                           | 658,259  
|                                                           |  |                           |          
|Provision for income taxes                                 |  |                           | 8,013    
|                                                           |  |                           |          
|Net income (loss)                                          |  | $                         | 650,246  
|                                                           |  |                           |          
|Other comprehensive income                                 |  |                           |          
|Unrealized gains (losses) on available-for-sale securities |  |                           | 12,317   
|                                                           |  |                           |          
|Comprehensive income (loss)                                |  | $                         | 662,563  
|                                                           |  |                           |          
|Basic earnings (loss) per common share                     |  | $                         | 0.08     
|                                                           |  |                           |          
|Diluted earnings (loss) per common share                   |  | $                         | 0.07     
|                                                           |  |                           |          
|Weighted average number of shares outstanding:             |  |                           |          
|Basic                                                      |  |                           | 8,117,417
|Diluted                                                    |  |                           | 9,108,570



See accompanying notes to financial
statements.



4







Integrated Surgical Systems, Inc.

Statements of Operations and Comprehensive
Income (Loss)

(Unaudited)



|                                                         |  | Three Months ended June 30, |          
|-------------------------------------------------------- |  | --------------------------- | ---------
|                                                         |  | 2012                        |          
|                                                         |  |                             |          
|Operating expenses                                       |  |                             |          
|                                                         |  |                             |          
|General and administrative expenses                      |  | $                           | 67,352   
|                                                         |  |                             |          
|Loss from operations                                     |  |                             | (67,352  
|                                                         |  |                             |          
|Other income (expense)                                   |  |                             |          
|Interest and dividend income, net                        |  |                             | 9,539    
|Change in fair value of conversion feature               |  |                             | (29,158  
|Gain on distribution of investment in ClearSign          |  |                             | 811,713  
|Realized gains (losses) on available-for-sale securities |  |                             | 660      
|                                                         |  |                             |          
|Income (loss) before provision for income taxes          |  |                             | 725,402  
|                                                         |  |                             |          
|Provision for income taxes                               |  |                             | 8,013    
|                                                         |  |                             |          
|Net income (loss)                                        |  | $                           | 717,389  
|                                                         |  |                             |          
|Other comprehensive income                               |  |                             |          
|Unrealized gain (loss) on available-for-sale securities  |  |                             | 11,176   
|                                                         |  |                             |          
|Comprehensive income (loss)                              |  | $                           | 728,565  
|                                                         |  |                             |          
|Basic earnings (loss) per common share                   |  | $                           | 0.09     
|                                                         |  |                             |          
|Diluted earnings (loss) per common share                 |  | $                           | 0.08     
|                                                         |  |                             |          
|Weighted average number of shares outstanding:           |  |                             |          
|Basic                                                    |  |                             | 8,158,835
|Diluted                                                  |  |                             | 9,149,988



See accompanying notes to financial
statements.



5







Integrated Surgical Systems, Inc.

Statements of Cash Flows

(Unaudited)



|                                                                                    |  | Six Months ended June 30, |           
|----------------------------------------------------------------------------------- |  | ------------------------- | ----------
|                                                                                    |  | 2012                      |           
|                                                                                    |  |                           |           
|Cash flows from operating activities                                                |  |                           |           
|Net income (loss)                                                                   |  | $                         | 650,246   
|Adjustments to reconcile net income (loss) to net cash used in operating activities |  |                           |           
|Change in fair value of conversion feature                                          |  |                           | 33,253    
|Stock-based compensation                                                            |  |                           | 31,250    
|Realized losses on available-for-sale securities                                    |  |                           | 1,141     
|Gain on distribution of investment in ClearSign                                     |  |                           | (811,713  
|Changes in operating assets and liabilities                                         |  |                           |           
|Other current assets                                                                |  |                           | 3,597     
|Accounts payable                                                                    |  |                           | 21,683    
|Accrued stock compensation                                                          |  |                           | -         
|Income taxes payable                                                                |  |                           | 7,213     
|Rent deposit                                                                        |  |                           | -         
|Net cash used in operating activities                                               |  |                           | (63,330   
|                                                                                    |  |                           |           
|Cash flows from investing activities                                                |  |                           |           
|Purchases of available-for-sale securities                                          |  |                           | (1,112,656
|Proceeds received from sales of available-for-sale securities                       |  |                           | -         
|Proceeds received from maturities of available-for-sale securities                  |  |                           | 996,000   
|Investment in ClearSign                                                             |  |                           | -         
|Net cash provided by (used in) investing activities                                 |  |                           | (116,656  
|                                                                                    |  |                           |           
|Net increase (decrease) in cash and cash equivalents                                |  |                           | (179,986  
|                                                                                    |  |                           |           
|Cash and cash equivalents at beginning of period                                    |  |                           | 422,984   
|                                                                                    |  |                           |           
|Cash and cash equivalents at end of period                                          |  | $                         | 242,998   
|                                                                                    |  |                           |           
|Supplemental cash flow disclosure:                                                  |  |                           |           
|Income taxes paid                                                                   |  | $                         | 800       
|Supplemental non-cash disclosure                                                    |  |                           |           
|Unrealized gain (loss) on available-for-sale securities                             |  | $                         | 12,317    
|Dividend of investment in ClearSign common stock                                    |  | $                         | 1,803,808 



See accompanying notes to financial statements.



6







Integrated Surgical Systems, Inc.

Statement of Changes in Stockholders’
Equity

(Unaudited)



|                                                     |  | Common Stock |           |  | Additional Paid-in |   |        | Accumulated Other Comprehensive |  |   | Accumulated |  |  | Comprehensive |         |   | Total Stockholders' |  
|---------------------------------------------------- |  | ------------ | --------- |  | ------------------ | - | ------ | ------------------------------- |  | - | ----------- |  |  | ------------- | ------- | - | ------------------- | -
|                                                     |  | Shares       |           |  | Amount             |   |        | Capital                         |  |   | Income      |  |  | Deficit       |         |   | Income              |  
|                                                     |  |              |           |  |                    |   |        |                                 |  |   |             |  |  |               |         |   |                     |  
|Balance at December 31, 2011                         |  |              | 8,028,779 |  |                    | $ | 80,287 |                                 |  | $ | 64,292,551  |  |  | $             | (25,026 | ) |                     | $
|                                                     |  |              |           |  |                    |   |        |                                 |  |   |             |  |  |               |         |   |                     |  
|Stock-based compensation                             |  |              | 133,042   |  |                    |   | 1,331  |                                 |  |   | 29,921      |  |  |               | -       |   |                     |  
|Dividends                                            |  |              |           |  |                    |   |        |                                 |  |   |             |  |  |               |         |   |                     |  
|Comprehensive income                                 |  |              |           |  |                    |   |        |                                 |  |   |             |  |  |               |         |   |                     |  
|Net income                                           |  |              | -         |  |                    |   | -      |                                 |  |   | -           |  |  |               | -       |   |                     |  
|Other comprehensive income                           |  |              |           |  |                    |   |        |                                 |  |   |             |  |  |               |         |   |                     |  
|Net
    unrealized gain on investments in securities |  |              | -         |  |                    |   | -      |                                 |  |   | -           |  |  |               | 12,317  |   |                     |  
|Comprehensive
    income                             |  |              | -         |  |                    |   | -      |                                 |  |   | -           |  |  |               | -       |   |                     |  
|                                                     |  |              |           |  |                    |   |        |                                 |  |   |             |  |  |               |         |   |                     |  
|Balance at June 30, 2012                             |  |              | 8,161,821 |  |                    | $ | 81,618 |                                 |  | $ | 64,322,472  |  |  | $             | (12,709 | ) |                     | $



See accompanying notes to financial statements



7







Integrated Surgical Systems, Inc.



Notes to Financial Statements (unaudited)



1.  Organization and Operations



Integrated Surgical Systems, Inc. (the
“Company”) was incorporated in Delaware in 1990 to design, manufacture, sell and service image-directed, computer-controlled
robotic software and hardware products for use in orthopedic surgical procedures.  On June 28, 2007, the Company completed
the sale of substantially all of its operating assets.  After completion of the sale, the Company became inactive, and
it is no longer engaged in any business activities related to its former business described above. The Company’s current
operations are limited to raising additional funds to be used to maintain the Company’s public company status and to complete
a business combination or strategic alliance, if suitable candidate(s) are identified.



2.  Significant Accounting Policies



Basis of presentation



The accompanying unaudited financial statements
and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial statements and with the rules and regulations under Regulation S-X of the Securities and Exchange Commission
for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements presentation. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to present fairly the financial position as of June 30, 2012 and
the results of operations for the six months and three months then ended and cash flows for the six months then ended have been
included. These financial statements should be read in conjunction with the financial statements of the Company and the Company’s
management discussion and analysis included in the Company’s Form 10-K for the year ended December 31, 2011. Interim results
are not necessarily indicative of the results for a full year.



Use of estimates



The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses for the reporting period.  Actual results could differ
from those estimates.



8







Cash and cash equivalents



Cash and cash equivalents include checking
and money market accounts held in two financial institutions. The Company has a checking account at one institution with a balance
of approximately $16,000 at June 30, 2012. The funds in this account are fully guaranteed by the Federal Deposit Insurance Corporation
(“FDIC”) as of June 30, 2012. The Company has a money market account in a brokerage account with a second financial
institution, with a money market cash balance of approximately $227,000 at June 30, 2012. Assets in this brokerage account are
protected by the Securities Investor Protection Corporation (“SIPC”) up to $500,000.  The Company had no
uninsured cash and cash equivalents at June 30, 2012.



Stock-Based Compensation



Compensation costs for stock, warrants
or options issued to employees and non-employees are based on the fair value method and accounted for in accordance with FASB ASC
718, “ Compensation – Stock Compensation .”  The value of warrants and options are calculated
using a Black-Scholes Model, using the market price of the Company’s common stock on the date of issuance for the employee
options and the date of commitment for non-employee options, an expected dividend yield of zero, the expected life of the warrants
or options and the expected volatility of the Company’s common stock.  The Company expects the options to fully
vest and the forfeiture rate to be zero.



Investment in Available-for-Sale Securities



The Company has a portfolio of investments
in available-for-sale debt securities, which consist of fixed income debt securities and equity securities, which are accounted
for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
320, “Investments - Debt and Equity Securities.”  Management determines the appropriate classification of
the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date.  Available-for-sale
securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, if any, are
reported as other comprehensive income, a separate component of stockholders’ equity.



Fair Value Measurement



FASB ASC 820 “Fair Value Measurements
and Disclosures” clarifies that fair value is an exit price, representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based
measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a
basis for considering such assumptions, FASB ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used
in the valuation methodologies in measuring fair value:



| | · | Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
| | - | --------------------------------------------------------------------------------------------------------------------------



| | · | Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
| | - | ---------------------------------------------------------------------------------------------



| | · | Level 3 - Unobservable inputs which are supported by little or no market activity.
| | - | ----------------------------------------------------------------------------------



The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.



In accordance with FASB ASC 820, the Company
measures its cash equivalents, investments in available-for-sale securities, derivative liability and investment in ClearSign at
fair value. The Company’s cash equivalents and investments in available-for-sale securities are classified within Level 1
by using quoted market prices. The Company’s derivative liability is classified within Level
3.



The carrying value of other current assets
and liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.



ASC 825 “Financial Instruments”
permits entities to choose to measure at fair value many financial instruments and certain other items that had previously not
been required to be measured at fair value. Subsequent changes in fair value for designated items are required to be reported in
earnings in the current period. FASB ASC 825 also establishes presentation and disclosure requirements for similar types of assets
and liabilities measured at fair value.



9







Income Taxes



Deferred income taxes have been provided
for temporary differences between financial statement and income tax reporting under the liability method, using expected tax rates
and laws that are expected to be in effect when the differences are expected to reverse.  A valuation allowance is provided
when realization is not considered more likely than not.



The Company applies the provisions of FASB
ASC 740, “Income Taxes.”  ASC 740 clarifies the accounting for uncertainty in income taxes recognized
in the Company’s financial statements in accordance with ASC 740, “Income Taxes,” and prescribes a recognition
threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.



The Company’s policy is to classify
expenses as a result of income tax assessments as interest expense for interest charges and as penalties in general and administrative
expenses for penalty assessments.



Cost-Basis Method Valuation



The Company’s non-marketable equity
investment was previously recorded using the cost-basis method of accounting, and was classified as a long-term asset on the accompanying
balance sheet as permitted by FASB ASC 325, “Cost Method Investments”, as the Company owned less than 20% of the voting
securities and did not have the ability to exercise significant influence over operating and financial policies of the entity.
During the three months ended June 30, 2012, the Company distributed a majority of this investment to its stockholders and reclassified
the remaining shares as available-for-sale securities. During the same period, the investee’s stock became publicly traded
and its fair value became readily available. Therefore, as of June 30, 2012, the shares held by the Company have been accounted
for in accordance with FASB ASC 320, “Investment – Debt and Equity Securities”.   See Note 5, “Investment
in ClearSign” for more information.



Recently Adopted Accounting Pronouncements



In May 2011, the Financial Accounting Standards
Board ("FASB") issued Accounting Standards Update 2011-04, “Fair Value Measurement” (Topic 820): Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance amends the disclosure
requirements related to recurring and nonrecurring fair value measurements and includes the following provisions:  application
of the concepts of highest and best use and valuation premise, introduction of an option to measure groups of offsetting assets
and liabilities on a net basis, incorporation of certain premiums and discounts in fair value measurements, and the measurement
of fair value of certain instruments classified in shareholders’ equity. In addition, the amended guidance includes several
new fair value disclosure requirements, including, among other things, information about valuation techniques and unobservable
inputs used in Level 3 fair value measurements and a narrative description of Level 3 measurements’ sensitivity to changes
in unobservable inputs. The guidance became effective for the reporting period beginning January 1, 2012.  The Company
expects that adoption of this new guidance will not have a material impact on the Company’s financial statements.



In June 2011, the FASB issued Accounting
Standards Update 2011-05, “Comprehensive Income” (Topic 220): Presentation of Comprehensive Income. This amended guidance
eliminates the option for reporting entities to present components of other comprehensive income in the statement of stockholders’
equity. Instead, this amended guidance now requires reporting entities to present all non-owner changes in stockholders’
equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements. The guidance
became effective for the reporting period beginning December 15, 2011.  Early adoption is permitted. The Company adopted
this accounting standard for the reporting period ending December 31, 2011 and it did not have a material impact on the Company’s
financial statements. Subsequently in December 2011, the FASB issued Accounting Standards Update No. 2011-12, “Deferral
of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income”
(“ASU No. 2011-12”), which indefinitely defers the requirement in ASU No. 2011-05 to present on the face
of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net
income in the statement(s) where the components of net income and the components of other comprehensive income are presented.
The amendments in these standards do not change the items that must be reported in other comprehensive income, when an item of
other comprehensive income must be reclassified to net income, or change the option for an entity to present components of other
comprehensive income gross or net of the effect of income taxes. The amendments in ASU No. 2011-12 are effective for interim
and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The adoption of the provisions
of ASU No. 2011-12 did not have a material impact on the Company’s financial position or results of operations.





Recently Announced Accounting Pronouncements



Management does not believe that any other
recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying
financial statements.



10







3.  Earnings (Loss) Per Share



Basic earnings (loss) per share is computed
by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net
income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding
during the period plus dilutive common stock equivalents, using the treasury stock method.



Common stock equivalents for convertible
preferred stock of 991,153 shares were included in the calculation of earnings (loss) per share for the six month and three month
periods ended June 30, 2012 and 2011. Common stock equivalents for convertible preferred stock of 535,758 shares were excluded
from the calculation of loss per share for the six month and three month periods ended June 30, 2011 because they were not dilutive;
these shares would have been dilutive if the Company had not had a net loss for the those periods.



A warrant for 30,000 shares, and stock
options of 150,000 were excluded from the calculation of loss per share for the six months and three months ended June 30, 2012,
and a warrant for 30,000 shares, and stock options of 158,000 were excluded from the calculation of loss per share for the six
months and three months ended June 30, 2011, respectively, because their effect was anti-dilutive.



4.  Investments in Available-for-Sale
Securities



The following is a summary of the Company’s investments
in available-for-sale securities as of June 30, 2012:



|                               |  | Cost |           |  | Unrealized Gains |   |        | Unrealized Losses |  |   | Fair Value |  
|------------------------------ |  | ---- | --------- |  | ---------------- | - | ------ | ----------------- |  | - | ---------- | -
|U.S. federal agency securities |  | $    | 19,615    |  |                  | $ | 341    |                   |  | $ | -          |  
|Municipal securities           |  |      | 231,400   |  |                  |   | -      |                   |  |   | (36        | )
|Certificates of deposit        |  |      | 1,757,013 |  |                  |   | 7,667  |                   |  |   | (10,188    | )
|Corporate debt securities      |  |      | 624,287   |  |                  |   | 2,613  |                   |  |   | (29,562    | )
|Equity securities              |  |      | 7,905     |  |                  |   | 16,456 |                   |  |   | -          |  
|                               |  | $    | 2,640,220 |  |                  | $ | 27,077 |                   |  | $ | (39,786    | )



The following is a summary of the Company’s investments
in available-for-sale securities as of December 31, 2011:



|                               |  | Cost |           |  | Unrealized Gains |   |        | Unrealized Losses |  |   | Fair Value |  
|------------------------------ |  | ---- | --------- |  | ---------------- | - | ------ | ----------------- |  | - | ---------- | -
|U.S. federal agency securities |  | $    | 15,153    |  |                  | $ | 411    |                   |  | $ | -          |  
|Certificates of deposit        |  |      | 1,725,402 |  |                  |   | 11,154 |                   |  |   | (13,970    | )
|Corporate debt securities      |  |      | 776,244   |  |                  |   | 1,222  |                   |  |   | (23,843    | )
|                               |  | $    | 2,516,799 |  |                  | $ | 12,787 |                   |  | $ | (37,813    | )



The Company’s investment portfolio
had a net realized loss of $1,141 and $853 for the six months ended June 30, 2012 and 2011, respectively. The Company’s investment
portfolio had a net realized gain of $660 and a loss of $3,257 for the three months ended June 30, 2012 and 2011, respectively.



The cost and fair value of investments in available-for-sale
securities, by contractual maturity, as of June 30, 2012, were as follows:



|                                       |  | Cost |           |  | Fair Value |  
|-------------------------------------- |  | ---- | --------- |  | ---------- | -
|Due within one year                    |  | $    | 1,525,705 |  |            | $
|Due after one year through three years |  |      | 499,798   |  |            |  
|Due after three years                  |  |      | 606,812   |  |            |  
|No maturity                            |  |      | 7,905     |  |            |  
|                                       |  | $    | 2,640,220 |  |            | $



Expected maturities will differ from contractual
maturities because the issuers of certain debt securities have the right to call or prepay their obligations without any penalties.
Accordingly, the Company has classified the entire fair value of its investments in available-for-sale securities as current assets
in the accompanying balance sheets.



11







5.  Investment in ClearSign



On April 20, 2011, the Company purchased
363,636 shares of common stock of ClearSign Combustion Corporation, a privately-held Washington corporation (“ClearSign”),
for an aggregate purchase price of $1,000,000, or $2.75 per share, in connection with ClearSign’s private offering of up
to $3,000,000 of its common stock (the “ClearSign Offering”). Due to a 1.25-for-one stock split, which occurred subsequent
to this purchase, the Company held 454,545 shares of common stock of ClearSign. ClearSign is an early-stage clean energy company
focused on developing technology to increase energy efficiency in most types of industrial combustion systems.  Prior to June
30, 2012, this investment had been accounted for using the cost method, as the Company owned less than 20% of the voting securities
and did not have the ability to exercise significant influence over operating and financial policies of the entity.



ClearSign filed a registration statement
on Form S-1 (as amended) for the initial public offering of its common stock that was declared effective April 24, 2012. On April
25, 2012, ClearSign Combustion Corporation (“ClearSign”) completed an initial public offering selling 3,000,000 shares
of its common stock at $4.00 per share, and trading under the symbol CLIR on NASDAQ.  The shares of common stock of ClearSign
previously acquired in a private placement by the Company were registered for resale or distribution as part of the offering



On April 24, 2012, the Company’s
board of directors declared a dividend to the shareholders of the Company, of an aggregate of 450,000 shares of common stock of
ClearSign. The dividend was at the rate of 0.05513475 shares of ClearSign for each share of common stock of the Company, which
equates to one share of common stock of ClearSign for approximately 18,137 shares of the Company’s common stock. The record
date of the dividend was May 9, 2012, and the payment date of the dividend was May 23, 2012. A total of 450,952 shares of ClearSign
were distributed, including 952 rounding shares. During the three months ended June 30, 2012, the Company recorded a gain of $811,713
during the second quarter, equal to the increase in the fair value of the ClearSign investment which had been distributed, or $1,803,808,
as measured on April 25, 2012 less the cost basis of the investment.



The Company retained 3,593 shares of ClearSign
common stock, having a fair value of $24,361. An unrealized gain of $16,456 was recorded during the three months ended June 30,
2012. This investment is included in investments in available-for-sale securities.



6.  Redeemable Convertible Preferred
Stock



The Company’s Certificate of Incorporation
authorized 1,000,000 shares of undesignated, serial preferred stock. Preferred stock may be issued from time to time in one or
more series. The Board of Directors is authorized to determine the rights, preferences, privileges, and restrictions granted to
and imposed upon any wholly unissued series of preferred stock and designation of any such series without any further vote or action
by the Company’s stockholders.



As of June 30, 2012 and December 31, 2011,
the Company’s only outstanding series of convertible preferred stock is the Series G Convertible Preferred Stock (“Series
G”).



The Series G stock has a stated value of
$1,000 per share, and is convertible into common stock at a conversion price equal to 85% of the lowest sale price of the common
stock on its listed market over the five trading days preceding the date of conversion ("Beneficial Conversion Feature"),
subject to a maximum conversion price. The number of shares of common stock that may be converted is determined by dividing the
stated value of the number of shares of Series G to be converted by the conversion price. The Company may elect to pay the Series
G holder in cash at the current market price multiplied by the number of shares of common stock issuable upon conversion.



For the period ended June 30, 2012 and
the year ended December 31, 2011, no shares of Series G were converted into shares of common stock. At June 30, 2012 and December
31, 2011, the outstanding Series G shares were convertible into a minimum of 991,153 and 825,961 shares of common stock, respectively.



Upon a change in control, sale of or similar
transaction, as defined in the Certificate of Designation for the Series G, each holder of the Series G has the option to deem
such transaction as a liquidation and may redeem his or her shares at the liquidation value of $1,000, per share, for an aggregate
amount of $168,496.  The sale of all the assets on June 28, 2007 triggered the preferred stockholders’ redemption
of option.  As such redemption is not in the control of the Company, the Series G stock has been accounted for as if
it was redeemable preferred stock and is classified on the balance sheet between liabilities and stockholders’ equity.



The conversion feature of the preferred stock is considered
a derivative according to ASC 815 “Derivatives and Hedging”, therefore, the fair value of the derivative is reflected
in the financial statements as a liability, which was determined to be $114,354 as of June 30, 2012, and has been included as “conversion
feature liability” on the accompanying balance sheets. As of December 31, 2011, the fair value of the derivative was determined
to be $81,101.



7.  Stock-based Compensation



On August 15, 2008, the Company granted
25,000 non-qualified stock options to each of its four directors.  These options had a vesting period of one year from
the date of grant, and they became fully vested and exercisable on August 15, 2009.  These options expire on August,
15 2013 and have an exercise price of $0.38 per share.  As of June 30, 2012 and December 31, 2011, 100,000 options remain
outstanding under this grant.



12







The Company currently has one stock option
plan with outstanding options issued to its officers, employees, directors and consultants. The 1998 Stock Option Plan (“1998
Plan”) was established to grant up to 85,000 non-qualified options through May 12, 2008 to employees and other individuals
providing services to the Company. Options under the 1998 Plan vested from one year to four years from the date of grant, and vested
options must be exercised within 30 days of an employee’s termination. As of June 30, 2012 and December 31, 2011, 50,000
options remain outstanding and vested under the 1998 Plan.



FASB ASC 718 “Compensation-Stock
Compensation” requires entities to estimate the number of forfeitures expected to occur and record expense based upon
the number of awards expected to vest.   The outstanding stock options under the 1998 Plan have been fully vested and
related expenses were fully amortized for the six months and three months ended June 30, 2012.



For the six months and three months ended
June 30, 2012, option activity was as follows:





|                                   |  | Shares |         |  | Weighted- Average Exercise Price |   |      | Remaining Contractual Term |  |  | Aggregate Fair Value | 
|---------------------------------- |  | ------ | ------- |  | -------------------------------- | - | ---- | -------------------------- |  |  | -------------------- | 
|Outstanding at beginning of period |  |        | 150,000 |  |                                  | $ | 0.36 |                            |  |  | 0.79                 | 
|Granted                            |  |        | -       |  |                                  |   | -    |                            |  |  |                      | 
|Expired and forfeited              |  |        | -       |  |                                  |   | -    |                            |  |  |                      | 
|Exercised                          |  |        | -       |  |                                  |   | -    |                            |  |  |                      | 
|Outstanding at end of period       |  |        | 150,000 |  |                                  | $ | 0.36 |                            |  |  | 0.79                 | 
|                                   |  |        |         |  |                                  |   |      |                            |  |  |                      | 
|Exercisable at June 30, 2012       |  |        | 150,000 |  |                                  | $ | 0.36 |                            |  |  | 0.79                 | 





As of June 30, 2012, a summary of options
outstanding under the Company’s 1998 Plan and other non-qualified stock options was as follows:





|Range of  Exercise  Price |  | Weighted-Average Remaining  Contractual Life (Years) |      |  | Number Outstanding |  |         | Weighted- Average Exercise Price |  |   | Number Exercisable |  |  | Weighted- Average Exercise Price |        
|------------------------- |  | ---------------------------------------------------- | ---- |  | ------------------ |  | ------- | -------------------------------- |  | - | ------------------ |  |  | -------------------------------- | -------
|0.3275-0.3800             |  |                                                      | 0.79 |  |                    |  | 150,000 |                                  |  | $ | 0.36               |  |  |                                  | 150,000







In addition, the Company has outstanding 30,000 warrants issued
in lieu of consulting fees, which expire in July 2014 and have an exercise price of $0.63 per share.



The Company agreed to compensate two of
its directors by issuing common stock for services rendered in 2012 and 2011. Both directors are affiliated with the advisory services
firm that is currently providing investment banking services to the Company.  Beginning in the second quarter of 2011
and continuing through 2012, the Company agreed to provide one-half of the compensation of a third director in common stock.  The
number of shares issued to each director was determined based upon the equivalent cash compensation accrued divided by the closing
price of the Company’s common stock on the issuance date. The Company recorded accrued stock-based compensation of $15,625
as of December 31, 2011 for three directors.



On January 25, 2012, the Company issued
26,042 shares of common stock to each of two directors, and 13,022 shares to another director as compensation for the three months
ended December 31, 2011.  These shares, totaling 65,106, were valued at a per share price of $0.24, or a total value
of $15,625.



On April 4, 2012, the Company issued 27,174
shares of common stock to each of two directors, and 13,588 shares of common stock to another director, as compensation for the
three months ended March 31, 2012. These shares, totaling 67,936, were valued at a per share price of $0.23, or a total of $15,625.



On July 12, 2012, the Company issued 31,250
shares of common stock to each of two directors, and 15,626 shares of common stock to another director, as compensation for the
three months ended June 30, 2012. These shares, totaling 78,126, were valued at a per share price of $0.20, or a total of $15,625.



13







8.   Income Taxes



The Company accounts for income taxes under
FASB ASC 740 “Accounting for Income Taxes.”  Deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company’s
financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of enactment.



Federal and state income tax returns of
the Company for the years ended December 31, 2011, 2010, 2009 and 2008 are subject to review by the taxing authorities.



The Company has evaluated and concluded
that there are no uncertain tax positions requiring recognition in the Company’s financial statements for the six months
and three months ended June 30, 2012.  The provision for income tax expense for the six months ended June 30, 2012 was
$8,013, and for the six months ended June 30, 2011 was $800. The Company expects to utilize its net operating loss and tax credit
carryforwards to offset income taxes that would otherwise be due on its net earnings for 2012. The provision for income tax expense
for the six months ended June 30, 2012 includes a provision for alternative minimum tax.



As of June 30, 2012, and December 31, 2011,
the Company had deferred tax assets primarily consisting of its net operating loss carryforwards.  However, because of
the cumulative losses in several consecutive years, the Company has recorded a full valuation allowance such that its net deferred
tax asset is zero.



The Company must also make judgments as
to whether the deferred tax assets will be recovered from future taxable income. To the extent that the Company believes that recovery
is not likely, it must establish a valuation allowance.  A valuation allowance has been established for deferred tax
assets which the Company does not believe meet the “more likely than not” criteria.  The Company’s
judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies
or other factors.  If the Company’s assumptions and consequently its estimates change in the future, the valuation
allowances it has  established may be increased or decreased, resulting in a respective increase or decrease in income
tax expense.



9.   Related Party Transactions



The Company entered into an Investment
Banking Advisory Services agreement in November 2007 with MDB Capital Group, LLC (“MDB”), and the parties extended
this agreement indefinitely in April 2009.  The agreement may be terminated by either party upon 30-days written notice.
The Company has not paid, nor is it currently obligated to pay, any fees to MDB pursuant to this agreement.



The Company has a securities investment
account with MDB, consisting of (a) available-for-sale investments totaling $2,627,511, that include short-term federal securities
of $19,956, certificates of deposit, municipal securities and corporate bonds totaling $2,583,194, and equity securities of $24,361
at June 30, 2012, and (b) available-for-sale investments totaling $2,491,773, that included short-term federal securities of $15,564
and certificates of deposit and corporate bonds totaling $2,476,209, at December 31, 2011.



Mr. Christopher Marlett, the Chief Executive
Officer and director of the Company, is also the Chief Executive Officer and a director of MDB. Mr. Gary Schuman, who is the Chief
Financial Officer of the Company, is also the Chief Financial Officer and Chief Compliance Officer of MDB.  The Company
reimburses MDB for Mr. Schuman’s services in the amount of $3,000 per month, totaling $18,000 for the six months and $9,000
for the three months ended June 30, 2012 and 2011.  Mr. Robert Levande, who is an officer and director of the Company,
is also a senior managing director of MDB.



MDB acted as placement agent in connection
with the ClearSign Offering discussed in Note 5, and in consideration for its services was issued 109,091 shares of ClearSign’s
common stock (in lieu of a cash fee of 10% of the gross proceeds of the ClearSign Offering) and a 5-year warrant to purchase 109,091
shares of ClearSign’s common stock at an exercise price of $2.75 per share.  As described above, Messrs. Marlett
and Levande, each an officer, director and stockholder of the Company, are also the Chief Executive Officer and Senior Managing
Director, respectively, of MDB.



In addition, at the close of the offering,
MDB received 363,636 shares of ClearSign in consideration of other consulting services provided by MDB unrelated to its role as
a placement agent.



ClearSign completed its initial public offering of common stock
on April 25, 2012. MDB was the sole underwriter for the initial public offering and received compensation of $1,207,500 and a warrant
to purchase 345,000 shares of ClearSign’s common stock in connection with the public offering.



14







10. Commitments and Contingencies



From time to time, the Company may be subject
to other claims and litigation arising in the ordinary course of business.  The Company is not currently a party to any
legal proceedings that it believes would reasonably be expected to have a material adverse effect on the Company’s business,
financial condition or results of operations.



11. Subsequent Event



On July 12, 2012, the Company issued 31,250
shares of common stock to each of two directors, and 15,626 shares of common stock to another director, as compensation for the
three months ended June 30, 2012. These shares, totaling 78,126, were valued at an average of $0.20, or a total of $15,625.



Item 2.  Management’s
Discussion and Analysis of Financial Condition and Results of Operations



Forward-Looking Statements



The discussion in this Quarterly Report
on Form 10-Q contains forward-looking statements. Such forward-looking statements are based on current expectations, estimates
and projections and certain assumptions made by management of Integrated Surgical Systems, Inc. (the “Company”). Words
such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” “could,” “would,” “may,” “on target,” “envisions,”
and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements
are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements.
Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result
of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports
or documents the Company files from time to time with the Securities and Exchange Commission (“SEC”), particularly
the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.



The following discussion should be read
in conjunction with the unaudited financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q
and with the audited financial statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition
and Results of Operations that are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2011 as filed with the SEC.



Overview



The Company was incorporated in Delaware
in 1990 and was founded to design, manufacture, sell and service image-directed, computer-controlled robotic software and hardware
products for use in orthopedic surgical procedures. On June 28, 2007, the Company completed the sale of substantially all of its
operating assets.  After completion of the sale, the Company became inactive, and it is no longer engaged in any business
activities related to its former business described above. The Company’s current operations are limited to raising additional
funds to be used to maintain the Company’s public company status and to complete a business combination or strategic alliance,
if suitable candidate(s) are identified.



On April 20, 2011, the Company purchased
363,636 shares of common stock of ClearSign Combustion Corporation, a privately-held Washington corporation (“ClearSign”),
for an aggregate purchase price of $1,000,000, or $2.75 per share, in connection with ClearSign’s private offering of up
to $3,000,000 of its common stock (the “ClearSign Offering”). Due to a 1.25-for-one stock split, which occurred subsequent
to this purchase, the Company held 454,545 shares of common stock of ClearSign.  ClearSign is an early-stage clean energy
company focused on developing technology to increase energy efficiency in most types of industrial combustion systems.  ClearSign
filed a registration statement on Form S-1 (as amended) for the initial public offering of its common stock that was declared effective
April 24, 2012. On April 25, 2012, ClearSign Combustion Corporation (“ClearSign”) completed an initial public offering
selling 3,000,000 shares of its common stock at $4.00 per share, and trading under symbol CLIR on the NASDAQ.  The shares
of common stock of ClearSign previously acquired in a private placement by the Company were registered as part of the offering.



On April 24, 2012, the Company’s
board of directors of declared a dividend to the shareholders of the Company, of an aggregate of 450,000 shares of common stock
of ClearSign. The dividend was at the rate of 0.05513475 shares of ClearSign for each share of common stock of the Company, which
equates to one share of common stock of ClearSign for approximately 18.137 shares of the Company’s common stock. The record
date of the dividend was May 9, 2012, and the payment date of the dividend was May 23, 2012. See Note 5 of the accompanying financial
statements.



As of June 30, 2012, the Company had no
employees.



15







Results of Operations



Six Months Ended June 30, 2012 and 2011



For the six months ended June 30, 2012
and 2011, the Company had net income of $650,246 and a net loss of $170,534, respectively. The increase in net income was due primarily
to the recording of a gain on the Company’s investment in ClearSign of approximately $811,700. General and administrative
expenses were $148,256 and $143,480 for the six months ended June 30, 2012 and 2011, respectively. Legal fees decreased by approximately
$6,900 for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 due primarily to efforts to reduce
costs. Outside services expense increased from approximately $5,900 in the six months ended June 30, 2011 to approximately $15,700
in the six months ended June 30, 2012 due to costs associated with the issuance of a dividend. Net interest income was approximately
$29,200 and $39,100, for the six months ended June 30, 2012 and 2011, respectively. Change in fair value of conversion feature
was $33,200 for the six months ended June 30, 2012, due to the change in fair value of the conversion feature of the Company’s
convertible preferred stock; the change in value was $64,500 for the same period in 2011.



Three Months Ended June 30, 2012 and 2011



For the three months ended June 30, 2012
and 2011, the Company had net income of $717,389 and a net loss of $135,583, respectively. The increase in net income was due primarily
to the recording of a gain on the Company’s investment in ClearSign of approximately $811,700. General and administrative
expenses were $67,352 and $78,933 for the three months ended June 30, 2012 and 2011, respectively.  The decrease in general
and administrative expenses from 2011 to 2012 was primarily due to a decrease in accounting fees and legal fees of approximately
$14,100 and $5,300, respectively, offset by an increase in outside services of approximately $8,300. The Company has no employees,
so it relies on outside contractors to perform basic and necessary services. The change in fair value of conversion feature was
approximately $29,000 and $64,500 in the three months ended June 30, 2012, respectively.



Liquidity and Capital Resources



The Company believes that existing cash,
cash equivalents, and short-term available-for-sale securities will provide sufficient working capital for the Company to meet
its operating plan for the balance of 2012.   The Board of Directors has retained its directors, including a director
as its Chief Executive Officer, another director as its Secretary, and the Chief Financial Officer of a related party as the Company’s
Chief Financial Officer, to assist with its continuing obligations under the federal securities laws and to assist with the Company’s
plan to evaluate various merger, acquisition, or strategic alliance opportunities.  The Company does not have an estimate
as to when it will identify a qualified merger, acquisition, or strategic alliance candidate.  There is no assurance
that such opportunities will be available, or if available, upon favorable terms.  If the Company is unsuccessful in
completing a suitable merger, acquisition or strategic alliance, then the Board of Directors may liquidate the Company and distribute
all its remaining assets, which consist primarily of cash and available-for-sale securities, to its stockholders.



The Company anticipates that it will incur
operating losses from operations in the next twelve months, until it enters into a suitable merger, acquisition or strategic alliance
transaction or until its liquidation.



Cash used in operating activities for the
six months ending June 30, 2012 was approximately $63,000, which primarily consisted of operating income of approximately $650,000
and an increase in accounts payable of $22,000, and adjustments for non-cash expenses consisting of stock-based compensation of
$31,000 and conversion feature liability of $33,000 related to the Company’s Series G Convertible Preferred Stock, offset
by an adjustment for a non-cash gain in investment in ClearSign of approximately $812,000.



Cash used in investing activities for the
six months ending June 30, 2012 of approximately $117,000 was from the purchase of available-for-sale securities of approximately
$1,113,000, offset by the maturity or sale of available-for-sale securities of approximately $996,000.



The Company does not have any material
commitments for capital expenditures.



Critical Accounting Policies and Estimates



The Company’s discussion and analysis
of the financial condition and results of operations are based upon the Company’s unaudited financial statements included
elsewhere in this Form 10-Q and has been prepared in accordance with accounting principles generally accepted in the United States
of America as disclosed in the Company’s annual financial statements in its Form 10-K for the year ended December 31, 2011.  Interim
results are not necessarily indicative of the results for a full year.



The Company has discussed its critical
accounting policies with the Board of Directors.



16







Estimates



The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during
the reporting period.  Actual results could differ from those estimates.



Investments in Available-for-Sale Securities



The Company has a portfolio of investments
in available-for-sale securities, which consist of fixed income securities and common stock of a publically traded company, which
are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 320, “Investments - Debt and Equity Securities.”  Management determines the appropriate
classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each
balance sheet date.  Available-for-sale securities are stated at fair value, and unrealized holding gains and losses,
net of the related deferred tax effect, if any, are reported as other comprehensive income, a separate component of stockholders’
equity.



Financial Instruments



The Company considers the carrying amounts
of financial instruments, including cash, other current assets and accounts payable to approximate their fair values because of
the short term nature of those instruments.



Item 3. Quantitative and Qualitative
Disclosures about Market Risk



Market risk represents the risk of loss
that may impact the Company’s financial position, operating results or cash flows due to changes in U.S. interest rates.  The
Company’s exposure to market risk is confined to its available-for-sale investments that it expects to hold less than one
year. The goals of the Company’s cash investment policy are the security of the principal amount invested and fulfillment
of liquidity needs.  The Company currently does not hedge interest rate exposure. Because of the short-term nature of
its investments, the Company does not believe that an increase in market rates would have any material negative impact on the value
of its investment portfolio.



As of June 30, 2012, the Company held approximately
$243,000 in money market and checking accounts at two institutions.  The Company has a checking account at one institution
with a balance of approximately $16,000 at June 30, 2012.  The funds in this account are fully insured by the Federal
Deposit Insurance Corporation (“FDIC”) as of June 30, 2012.    The Company has a money market account
in a brokerage account with a second financial institution, invested in short-term federal securities and corporate bonds, with
a money market cash balance of approximately $228,000 at June 30, 2012. Assets in this brokerage account are protected by the Securities
Investor Protection Corporation (“SIPC”) up to $500,000.  The Company had no uninsured cash and cash equivalents
at June 30, 2012.



Item 4. Controls and Procedures



Evaluation of Disclosure Controls and
Procedures



The Company’s management has established
and maintains a system of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). As of December 31, 2011, the Company’s management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the Company’s disclosure controls and procedures.  Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that, as of that date, the Company’s disclosure controls
and procedures were effective.



Management’s Report on Internal
Control Over Financial Reporting



Management is responsible for the fair
presentation of the financial statements of the Company. Management is also responsible for establishing and maintaining a system
of internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. These internal
controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures
are adequate and that the judgments inherent in the preparation of financial statements are reasonable.



Changes in Internal Controls over Financial
Reporting



During the quarter ended June 30, 2012,
there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting.



A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of management override or improper acts, if any, have been detected. Because of the inherent limitations in a control
system, misstatements due to management override, error or improper acts may occur and not be detected.  Any resulting
misstatement or loss may have an adverse and material effect on the Company’s business, financial condition and results of
operations.



17







Part II. OTHER INFORMATION



Item 1.  Legal Proceedings



From time to time, the Company may be subject
to claims and litigation arising in the ordinary course of business.  The Company is not currently a party to any legal
proceedings that it believes would reasonably be expected to have a material adverse effect on the Company’s business, financial
condition or results of operations.



Item 6.  Exhibits



|Exhibit
No. |  | Description                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Articles of Incorporation (1)                                                                                                                                           
|            |  |                                                                                                                                                                         
|3.2         |  | By-laws (1)                                                                                                                                                             
|            |  |                                                                                                                                                                         
|10.1        |  | ClearSign Combustion Corporation Subscription Agreement, dated April 20, 2011, by and between Integrated Surgical Systems, Inc. and ClearSign Combustion Corporation (2)
|            |  |                                                                                                                                                                         
|31.1        |  | Certification Pursuant to Exchange Act Rule 13a-14(a) of Christopher A. Marlett *                                                                                       
|            |  |                                                                                                                                                                         
|31.2        |  | Certification Pursuant to Exchange Act Rule 13a-14(a) of Gary A. Schuman *                                                                                              
|            |  |                                                                                                                                                                         
|32.1        |  | Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of Christopher A. Marlett  *                                                                   
|            |  |                                                                                                                                                                         
|32.2        |  | Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of Gary A. Schuman *                                                                           
|            |  |                                                                                                                                                                         
|101         |  | Interactive Data File (Form 10-Q for the quarterly period ended June 30, 2012) furnished in XBRL.**                                                                     



|(1) | Incorporated by reference to Form SB-2 filed on July 30, 1996 (file no. 333-09207)
|--- | ----------------------------------------------------------------------------------
|(2) | Incorporated by reference to Form 10-Q filed on May 16, 2011                      
|*   | Filed herewith                                                                    
|**  | To be filed by amendment.                                                         



18







SIGNATURES



Pursuant to the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        | INTEGRATED SURGICAL SYSTEMS, INC.       
|----------------------- | ----------------------------------------
|                        |                                         
|                        | By:                                     
|                        | Gary A. Schuman, Chief Financial Officer
|                        |                                         
|Dated:  August 13, 2012 |                                         



19