UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-QSB



ý

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDEDMarch 31, 2007.



 ̈

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________.



Commission file number 1-11900



Integrated Security Systems, Inc.

(Exact name of small business issuer as specified in its charter)



|                         |  |                                  
|------------------------ |  | ---------------------------------
|Delaware                 |  | 75-2422983                       
|(State of incorporation) |  | (IRS Employer Identification No.)



|                                                |  |           
|----------------------------------------------- |  | ----------
|8200 Springwood Drive, Suite 230, Irving, Texas |  | 75063     
|(Address of principal executive offices)        |  | (Zip Code)



(972) 444-8280

(Issuers telephone number)





Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.  Yes  x  No  o



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes  o  No  x



As of April 30, 2007, 98,741,553 shares of the Registrants common stock were outstanding.



Transitional Small Business Disclosure Format:

Yes  o

No  x







Page 1 of 19



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INTEGRATED SECURITY SYSTEMS, INC.

INDEX



|                                                                                                              |     
|------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                              | Page
|                                                                                                              |     
|Part I.     Financial Information                                                                             | 3   
|                                                                                                              |     
|Item 1.     Financial Statements                                                                              | 3   
|Consolidated Balance Sheets at March 31, 2007 (unaudited) and June 30, 2006                                   | 3   
|Consolidated Statements of Operations (unaudited) for the three and nine months ended March 31, 2007 and 2006 | 4   
|Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, 2007 and 2006           | 5   
|Notes to Financial Statements                                                                                 | 6   
|                                                                                                              |     
|Item 2.     Management's Discussion and Analysis or Plan of Operation                                         | 11  
|Item 3.     Controls and Procedures                                                                           | 13  
|                                                                                                              |     
|Part II.    Other Information                                                                                 | 15  
|                                                                                                              |     
|Item 1.     Legal Proceedings                                                                                 | 15  
|Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds                                       | 15  
|Item 3.     Defaults Upon Senior Securities                                                                   | 15  
|Item 4.     Submission of Matters to a Vote of Security Holders                                               | 15  
|Item 5.     Other Information                                                                                 | 15  
|Item 6.     Exhibits                                                                                          | 15  
|                                                                                                              |     
|Signatures                                                                                                    | 16  









Page 2 of 19



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PART I.  FINANCIAL INFORMATION



Item 1.  Financial Statements.



INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Balance Sheets



|                                                                                                                                    |             |              |          |   |             
|----------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------ | -------- | - | ------------
|                                                                                                                                    | March 31,   |              | June 30,
|                                                                                                                                    | 2007        |              | 2006    
|                                                                                                                                    | (Unaudited) |              |          |  
|ASSETS                                                                                                                              |             |              |          |   |             
|Current assets:                                                                                                                     |             |              |          |   |             
|Cash and cash equivalents                                                                                                           | $           | 249,310      |          | $ | 702,274     
|Accounts receivable, net of allowance for doubtful
accounts of $203,477 and $230,298, respectively                                  |             | 2,691,699    |          |   | 3,446,050   
|Inventories                                                                                                                         |             | 792,025      |          |   | 726,050     
|Other current assets                                                                                                                |             | 106,816      |          |   | 130,691     
|Total current assets                                                                                                                |             | 3,839,850    |          |   | 5,005,845   
|                                                                                                                                    |             |              |          |   |             
|Property and equipment, net                                                                                                         |             | 458,547      |          |   | 494,432     
|Goodwill                                                                                                                            |             | 4,068,048    |          |   | 4,051,722   
|Other assets                                                                                                                        |             | 342,188      |          |   | 476,175     
|Total assets                                                                                                                        | $           | 8,708,633    |          | $ | 10,028,174  
|                                                                                                                                    |             |              |          |   |             
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                               |             |              |          |   |             
|Current liabilities:                                                                                                                |             |              |          |   |             
|Accounts payable  trade                                                                                                            | $           | 1,902,671    |          | $ | 2,504,546   
|Accrued liabilities                                                                                                                 |             | 1,280,278    |          |   | 1,313,798   
|Demand note payable                                                                                                                 |             | 738,466      |          |   | 1,491,335   
|Current portion of long-term debt                                                                                                   |             | 3,274,414    |          |   | 842,593     
|Total current liabilities                                                                                                           | $           | 7,195,829    |          | $ | 6,152,272   
|                                                                                                                                    |             |              |          |   |             
|Long-term debt                                                                                                                      |             | 9,599,315    |          |   | 10,754,069  
|                                                                                                                                    |             |              |          |   |             
|Minority interest                                                                                                                   |             | 203,619      |          |   | 105,297     
|                                                                                                                                    |             |              |          |   |             
|Stockholders deficit:                                                                                                              |             |              |          |   |             
|Preferred stock, $.01 par value, 750,000 shares authorized;
100,750 shares issued and outstanding (liquidation value of $2,015,000) |             | 1,008        |          |   | 1,008       
|Common stock, $.01 par value, 150,000,000 shares authorized;
97,757,716 and 90,628,108 shares issued, respectively                  |             | 977,577      |          |   | 906,281     
|Additional paid in capital                                                                                                          |             | 34,768,143   |          |   | 33,750,307  
|Accumulated deficit                                                                                                                 |             | (43,918,108) |          |   | (41,522,310)
|Treasury stock, at cost - 50,000 common shares                                                                                      |             | (118,750)    |          |   | (118,750)   
|Total stockholders deficit                                                                                                         |             | (8,290,130)  |          |   | (6,983,464) 
|Total liabilities and stockholders deficit                                                                                         | $           | 8,708,633    |          | $ | 10,028,174  







The accompanying notes are an integral part of the consolidated financial statements.



Page 3 of 19



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INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Operations

(Unaudited)





|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|-------------------------------------------------------------- | ------------------------------------ | ---------- | ----------------------------------- | - | ---------- |  | ---- | ----------- |  | - | -----------
|                                                               | For the Three Months Ended
March 31, |            | For the Nine Months Ended
March 31,
|                                                               | 2007                                 |            | 2006                                |   | 2007       |  | 2006
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Sales                                                          | $                                    | 2,889,735  |                                     | $ | 3,186,084  |  | $    | 8,214,209   |  | $ | 8,557,874  
|Cost of sales                                                  |                                      | 1,958,515  |                                     |   | 2,084,122  |  |      | 5,352,130   |  |   | 6,035,192  
|Gross margin                                                   |                                      | 931,220    |                                     |   | 1,101,962  |  |      | 2,862,079   |  |   | 2,522,682  
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Operating expenses:                                            |                                      |            |                                     |   |            |  |      |             |  |   |            
|Selling, general and administrative                            |                                      | 1,237,081  |                                     |   | 1,299,876  |  |      | 3,634,153   |  |   | 4,478,138  
|Research and product development                               |                                      | 79,598     |                                     |   | 82,580     |  |      | 254,063     |  |   | 247,946    
|                                                               |                                      | 1,316,679  |                                     |   | 1,382,456  |  |      | 3,888,216   |  |   | 4,726,084  
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Loss from operations                                           |                                      | (385,459)  |                                     |   | (280,494)  |  |      | (1,026,137) |  |   | (2,203,402)
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Interest expense                                               |                                      | (315,959)  |                                     |   | (340,823)  |  |      | (938,008)   |  |   | (806,146)  
|Debt discount                                                  |                                      | (84,627)   |                                     |   | (84,626)   |  |      | (253,881)   |  |   | (254,659)  
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Loss before minority interest                                  |                                      | (786,045)  |                                     |   | (705,943)  |  |      | (2,218,026) |  |   | (3,264,207)
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Minority interest                                              |                                      | (59,458)   |                                     |   | (48,439)   |  |      | (177,772)   |  |   | (131,272)  
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Net loss                                                       |                                      | (845,503)  |                                     |   | (754,382)  |  |      | (2,395,798) |  |   | (3,395,479)
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Preferred dividends                                            |                                      | (40,500)   |                                     |   | (40,500)   |  |      | (123,300)   |  |   | (123,300)  
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Net loss allocable to common stockholders                      | $                                    | (886,003)  |                                     | $ | (794,882)  |  | $    | (2,519,098) |  | $ | (3,518,779)
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Weighted average common shares outstanding  basic and diluted |                                      | 97,403,424 |                                     |   | 89,256,589 |  |      | 95,228,417  |  |   | 88,127,332 
|                                                               |                                      |            |                                     |   |            |  |      |             |  |   |            
|Net loss per share  basic and diluted                         | $                                    | (0.01)     |                                     | $ | (0.01)     |  | $    | (0.03)      |  | $ | (0.04)     







The accompanying notes are an integral part of the consolidated financial statements.



Page 4 of 19



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INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                            |                                     |             |      |   |            
|--------------------------------------------------------------------------- | ----------------------------------- | ----------- | ---- | - | -----------
|                                                                            | For the Nine Months Ended
March 31,
|                                                                            | 2007                                |             | 2006
|                                                                            |                                     |             |      |   |            
|Cash flows from operating activities:                                       |                                     |             |      |   |            
|Net loss                                                                    | $                                   | (2,395,798) |      | $ | (3,395,479)
|Adjustments to reconcile net loss to net cash used by operating activities: |                                     |             |      |   |            
|Depreciation                                                                |                                     | 85,868      |      |   | 112,545    
|Gain on sale of assets                                                      |                                     | --          |      |   | (12,490)   
|Amortization                                                                |                                     | 124,134     |      |   | 186,548    
|Provision for bad debt                                                      |                                     | 58,901      |      |   | 57,439     
|Provision for warranty reserve                                              |                                     | 6,907       |      |   | 7,673      
|Expenses paid with stock, warrants and options                              |                                     | 269,030     |      |   | 368,673    
|Stock option expense                                                        |                                     | 58,059      |      |   | --         
|Amortization of debt discount                                               |                                     | 253,881     |      |   | 228,559    
|Debt discount on notes receivable sold                                      |                                     | --          |      |   | 84,280     
|Minority interest                                                           |                                     | 177,772     |      |   | 131,272    
|Changes in operating assets and liabilities, net of effects of acquisition: |                                     |             |      |   |            
|Accounts receivable                                                         |                                     | 696,230     |      |   | (312,585)  
|Inventories                                                                 |                                     | (65,975)    |      |   | 65,224     
|Other assets                                                                |                                     | 33,728      |      |   | 43,532     
|Accounts payable                                                            |                                     | (601,876)   |      |   | (126,705)  
|Accrued liabilities                                                         |                                     | (438,491)   |      |   | (70,171)   
|Net cash used in operating activities                                       |                                     | (860,648)   |      |   | (2,631,685)
|                                                                            |                                     |             |      |   |            
|Cash flows from investing activities:                                       |                                     |             |      |   |            
|Purchase of property and equipment                                          |                                     | (49,983)    |      |   | (14,900)   
|Proceeds from sale of assets                                                |                                     | --          |      |   | 100,000    
|Purchase of business, net of cash acquired                                  |                                     | (16,326)    |      |   | (135,366)  
|Net cash used in investing activities                                       |                                     | (66,309)    |      |   | (50,266)   
|                                                                            |                                     |             |      |   |            
|Cash flows from financing activities:                                       |                                     |             |      |   |            
|Employee stock option exercise                                              |                                     | 8,125       |      |   | 8,125      
|Payments on debt and other liabilities                                      |                                     | (992,407)   |      |   | (492,615)  
|Proceeds from notes payable and long-term debt                              |                                     | 1,537,725   |      |   | 3,077,166  
|Distribution to minority interest                                           |                                     | (79,450)    |      |   | (24,000)   
|Net cash provided by financing activities                                   |                                     | 473,993     |      |   | 2,568,676  
|                                                                            |                                     |             |      |   |            
|Decrease in cash and cash equivalents                                       |                                     | (452,964)   |      |   | (113,275)  
|Cash and cash equivalents at beginning of period                            |                                     | 702,274     |      |   | 305,495    
|Cash and cash equivalents at end of period                                  | $                                   | 249,310     |      | $ | 192,220    



|                                                                 |   |         |  |   |          
|---------------------------------------------------------------- | - | ------- |  | - | ---------
|Supplemental disclosure of noncash financing activities          |   |         |  |   |          
|Issuance of common stock in payment of accrued interest          | $ | 478,918 |  | $ | --       
|Conversion of unsecured promissory notes into common stock       |   | 275,000 |  |   | --       
|Debt payment made directly to lender for debt refinancing        |   | --      |  |   | 1,160,867
|Issuance of promissory note in exchange of indebtedness          |   | --      |  |   | 328,386  
|Fair market value of warrants issued regarding credit facility   |   | --      |  |   | 298,877  
|Issuance of common stock in payment of preferred stock dividends |   | --      |  |   | 185,135  



The accompanying notes are an integral part of the consolidated financial statements.







Page 5 of 19



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INTEGRATED SECURITY SYSTEMS, INC.

Notes to Consolidated Financial Statements (Unaudited)

Nine Months Ended March 31, 2007 and 2006



Note 1 - Basis of Presentation



The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  Accordingly, they do not include all of the information and footnotes required for complete financial statements.  In the opinion of management, all adjustments (all of which are normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2007.



The accompanying financial statements include the accounts of Integrated Security Systems, Inc. (the Company) and all of its subsidiaries, with all significant intercompany accounts and transactions eliminated.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys fiscal 2006 Annual Report on Form 10-KSB filed on October 13, 2006 with the Securities and Exchange Commission.



Note 2  Stock Options



In December, 2004, the Financial Accounting Standards Board (FASB) issued a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123R).  SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and recognize that cost over the vesting period.  SFAS No. 123R was effective for fiscal years beginning after December 15, 2005 and therefore we began recognizing option expense as of July 1, 2006. In implementing FAS 123R, we have adopted the modified prospective approach under which options which were unvested at July 1, 2006 will continue to be accounted for under FAS 123, except that the expense will be recorded in the statement of operations. Our forfeiture rate is a graded 20% rate, which averages out to an overall forfeiture rate of 48.8%.  An expense of $17,144 and $58,059 was recorded in the three and nine months ended March 31, 2007, respectively. The known amount of compensation expense to be recognized in future periods through fiscal 2008 is $61,985.



Prior to July 1, 2006, we accounted for stock-based compensation to employees using the intrinsic value method.  Accordingly, compensation cost for stock options to employees was measured as the excess, if any, of the quoted market price of our common stock at the date of the grant over the amount an employee must pay to acquire the stock. The fair value of these options was estimated at the date of grant using the Black-Sholes option pricing model with the following weighted average assumptions used for grants in fiscal 2006 and 2005:  no dividend yield, expected lives of three and five years with historical volatility and risk-free interest rates as outlined in the following table:



|                        |                                 
|----------------------- | --------------------------------
|                        | For the Year Ended
June 30, 2006
|Expected volatility     | 99.29% - 109.96%                
|Risk-free interest rate | 3.80% - 4.63%                   





Page 6 of 19



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There were no grants made during the nine months ended March 31, 2007.



If we had recognized compensation expense as permitted under Statement of Financial Accounting Standards No. 123 (SFAS 123) for the three and nine months ended March 31, 2006, based on the fair value at the grant dates, our pro forma net loss and net loss per share would have been as follows:



|                                                                                                                          |                                           |           |                                          |   |            
|------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | --------- | ---------------------------------------- | - | -----------
|                                                                                                                          | For the Three Months Ended
March 31, 2006 |           | For the Nine Months Ended
March 31, 2006
|Net loss, as reported                                                                                                     | $                                         | (754,382) |                                          | $ | (3,395,479)
|Add:  Stock-based employee compensation
expense determined under the intrinsic
value method included in reported net loss |                                           | --        |                                          |   | --         
|Deduct:  Total stock-based employee
compensation expense determined
under fair value based method                         |                                           | (105,503) |                                          |   | (316,508)  
|Pro forma net loss                                                                                                        | $                                         | (859,876) |                                          | $ | (3,711,987)
|Earnings per share:                                                                                                       |                                           |           |                                          |   |            
|Basic and Diluted-as reported                                                                                             | $                                         | (0.01)    |                                          | $ | (0.04)     
|Basic and Diluted-pro forma                                                                                               | $                                         | (0.01)    |                                          | $ | (0.04)     



Note 3  Reclassifications



Certain reclassifications of prior year amounts have been made to conform to the current period presentation.



Note 4  Recent Accounting Pronouncements



In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 (FIN 48).  FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 requires that we recognize in the financial statements the impact of a tax position if that position will more likely than not be sustained on audit, based on the technical merits of the position.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition provisions.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  We are in the process of evaluating the provisions of FIN 48 to determine the effect, if any, the adoption of FIN 48 will have on our consolidated financial statements.



Note 5  Accounts Receivable



The majority of our accounts receivable are due from companies in the perimeter security and road and bridge industries.  Credit is extended based on evaluation of a customer's financial condition and credit history and, generally, collateral is not required.  Accounts receivable are due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts.  Accounts outstanding longer than the contractual payment terms are considered past due.  We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customers current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole.  We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.





Page 7 of 19



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The changes in our accounts receivable and allowance for doubtful accounts are as follows:



|                                          |                                     |           |      |   |          
|----------------------------------------- | ----------------------------------- | --------- | ---- | - | ---------
|                                          | March 31,                          
|                                          | 2007                                |           | 2006
|Accounts receivable:                      |                                     |           |      |   |          
|Trade receivables                         | $                                   | 2,895,176 |      | $ | 3,241,426
|Less:  allowance for doubtful receivables |                                     | (203,477) |      |   | (127,197)
|                                          | $                                   | 2,691,699 |      | $ | 3,114,229
|                                          |                                     |           |      |   |          
|                                          |                                     |           |      |   |          
|                                          | For the Nine Months Ended March 31,
|                                          | 2007                                |           | 2006
|Allowance for doubtful receivables:       |                                     |           |      |   |          
|Beginning Balance                         | $                                   | 230,298   |      | $ | 127,197  
|Bad debt expense                          |                                     | 58,901    |      |   | 57,439   
|Accounts written-off                      |                                     | (120,722) |      |   | (57,439) 
|Revenue adjustment                        |                                     | 35,000    |      |   | (57,439) 
|Ending Balance                            | $                                   | 203,477   |      | $ | 127,197  



Note 6  Product Warranties



We offer one-year, two-year and five-year warranties on products we manufacture.  The length of the warranty is dictated by competition.  We provide for repair or replacement of components and/or products that contain defects of material or workmanship. When we use other manufacturers components, the warranties of the other manufacturers are passed to the dealers and end users.



We record a liability for an estimate of costs that we expect to incur under our basic limited warranty when product revenue is recognized.  Factors affecting our warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim.  We periodically assesses the adequacy of our warranty liability based on changes in these factors.



The changes in our product warranty liability are as follows:



|                                  |           |          |      |   |          
|--------------------------------- | --------- | -------- | ---- | - | ---------
|                                  | March 31,
|                                  | 2007      |          | 2006
|Liability, beginning of year      | $         | 144,361  |      | $ | 250,017  
|Expense for new warranties issued |           | 6,907    |      |   | 7,673    
|Warranty claims                   |           | (49,824) |      |   | (127,204)
|Liability, end of period          | $         | 101,444  |      | $ | 130,486  



Note 7  Preferred Stock Dividend Arrearage



At March 31, 2007, we had dividends in arrears in the amount of $512,778 related to our outstanding Series A and Series D preferred stock, which consists of the following:



|             |                    |  |                      |        
|------------ | ------------------ |  | -------------------- | -------
|             | Shares
Outstanding |  | Dividends
In Arrears
|Series A $20 | 9,500              |  | $                    | --     
|Series D $20 | 91,250             |  |                      | 512,778
|             | 100,750            |  | $                    | 512,778





Page 8 of 19



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Note 8  Net Loss Per Share



We compute basic loss per common share using the weighted average number of common shares. At March 31, 2007 and 2006, there were 2,471,250 and 3,221,252 shares, respectively, of in-the-money potentially dilutive common shares outstanding, which were not included in weighted average shares outstanding because their effect is antidilutive due to our reported net loss.



At March 31, 2007 and 2006, we had approximately 138,635,012 and 144,394,822 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of our outstanding equity instruments.



Note 9  Debt



As of March 31, 2007, our current and long-term debt consisted of the following:



|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ---------
|                                                                                                                                                                                                                                                                                                                                                                                      |  | Total
|Demand note payable:                                                                                                                                                                                                                                                                                                                                                                  |  |       |          
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|Secured convertible minimum borrowing note and secured revolving note with a financial institution; interest at Wall Street Journal prime rate (8.25% as of March 31, 2007) plus 1.5%; principal and accrued unpaid interest due July 29, 2008; convertible at the option of the financial institution at $0.25 per share (net of debt discount of $95,377)                           |  | $     | 738,466  
|                                                                                                                                                                                                                                                                                                                                                                                      |  | $     | 738,466  
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|Long-term debt:                                                                                                                                                                                                                                                                                                                                                                       |  |       |          
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|Convertible notes payable; interest at 10% due in semi-annual installments of $195,900; principal and accrued unpaid interest due November 30, 2009; convertible at the option of the shareholder at $0.25 per share; we may call the notes at $0.60 per share (based on certain restrictions)                                                                                        |  | $     | 3,843,000
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|Notes payable to stockholders; interest at 8% due in monthly installments of $11,333; principal and accrued unpaid interest due September 30, 2007                                                                                                                                                                                                                                    |  |       | 1,800,000
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|Convertible note payable to stockholder; interest at 8% due in monthly installments of $10,000; principal and accrued unpaid interest due December 31, 2008; convertible at the option of the shareholder at $0.25 per share; Company may call the note at $0.60 per share (based on certain restrictions)                                                                            |  |       | 1,500,000
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|Convertible note payable to stockholder; interest at 6%; first year interest due, and paid, at date of issuance; subsequent interest payments due in quarterly installments of $16,500; principal and accrued unpaid interest due June 16, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)     |  |       | 1,100,000
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|Convertible note payable to stockholder; interest at 6%; first year interest due, and paid, at date of issuance; subsequent interest payments due in quarterly installments of $11,250; principal and accrued unpaid interest due October 6, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)   |  |       | 750,000  
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|Convertible note payable to stockholder; interest at 6%; first year interest due, and paid, at date of issuance; subsequent interest payments due in quarterly installments of $11,250; principal and accrued unpaid interest due November 23, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments) |  |       | 750,000  
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          
|Notes payable to stockholders; interest at 8% due in monthly installments of $4,833; principal and accrued unpaid interest due November 11, 2007 (net of debt discount of $138,382)                                                                                                                                                                                                   |  |       | 586,618  
|                                                                                                                                                                                                                                                                                                                                                                                      |  |       |          





Page 9 of 19



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|                                                                                                                                                                                                                                                                                                                                         |  |   |            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -----------
|Convertible note payable to stockholder; interest at 7% due in monthly installments of $2,917; principal and accrued unpaid interest due September 5, 2008; convertible at the option of the shareholder at $0.40 per share; Company may call the note at $0.60 per share (based on certain restrictions)                                |  |   | 500,000    
|                                                                                                                                                                                                                                                                                                                                         |  |   |            
|Notes payable to stockholders; interest at 7% due in monthly installments of $2,333; principal and accrued unpaid interest due September 30, 2007                                                                                                                                                                                        |  |   | 500,000    
|                                                                                                                                                                                                                                                                                                                                         |  |   |            
|Convertible note payable to stockholder; interest at 8% due in monthly installments of $3,333; principal and accrued unpaid interest due July 29, 2008; convertible at the option of the shareholder at $0.25 per share; Company may call the note at $0.60 per share (based on certain restrictions); (net of debt discount of $39,658) |  |   | 460,342    
|                                                                                                                                                                                                                                                                                                                                         |  |   |            
|Term note payable to a bank; due in monthly principal and interest installments of $10,500; interest at 10% and 10.5% at June 30, 2006 and 2005, respectively; secured by first mortgage on real estate; maturity date of February 26, 2008                                                                                              |  |   | 335,818    
|                                                                                                                                                                                                                                                                                                                                         |  |   |            
|Note payable to Chairman of the Board of Directors; interest at 10% due in monthly installments of $2,737; principal and accrued unpaid interest due June 30, 2007                                                                                                                                                                       |  |   | 328,386    
|                                                                                                                                                                                                                                                                                                                                         |  |   |            
|Line of credit with a bank; maximum borrowing amount of $400,000; interest at Wall Street Journal prime rate (8.25% as of March 31, 2007) plus 2%; principal and accrued unpaid interest due on March 16, 2008                                                                                                                           |  |   | 255,200    
|                                                                                                                                                                                                                                                                                                                                         |  |   |            
|Note payable to stockholder; interest at 9% due in monthly installments of $750; principal and accrued unpaid interest due September 30, 2007                                                                                                                                                                                            |  |   | 100,000    
|                                                                                                                                                                                                                                                                                                                                         |  |   |            
|Other                                                                                                                                                                                                                                                                                                                                    |  |   | 64,365     
|                                                                                                                                                                                                                                                                                                                                         |  |   | 12,873,729 
|Less current portion                                                                                                                                                                                                                                                                                                                     |  |   | (3,274,414)
|                                                                                                                                                                                                                                                                                                                                         |  | $ | 9,599,315  



Note 10  Business Segments



Information for the Companys reportable segments for the three and nine months ended March 31, 2007 and 2006 is as follows:



|                              |                                      |           |                                     |   |           |  |      |             |  |   |            
|----------------------------- | ------------------------------------ | --------- | ----------------------------------- | - | --------- |  | ---- | ----------- |  | - | -----------
|                              | For the Three Months Ended
March 31, |           | For the Nine Months Ended
March 31,
|                              | 2007                                 |           | 2006                                |   | 2007      |  | 2006
|Sales                         |                                      |           |                                     |   |           |  |      |             |  |   |            
|B&B ARMR Corporation          | $                                    | 923,661   |                                     | $ | 1,721,780 |  | $    | 2,971,001   |  | $ | 4,462,503  
|B&B Roadway                   |                                      | 1,267,554 |                                     |   | 1,112,239 |  |      | 3,872,178   |  |   | 3,072,506  
|Intelli-Site, Inc.            |                                      | 98,794    |                                     |   | 192,832   |  |      | 361,088     |  |   | 551,310    
|DoorTek Corporation           |                                      | 599,726   |                                     |   | 159,233   |  |      | 1,009,942   |  |   | 471,555    
|                              | $                                    | 2,889,735 |                                     | $ | 3,186,084 |  | $    | 8,214,209   |  | $ | 8,557,874  
|                              |                                      |           |                                     |   |           |  |      |             |  |   |            
|Income (loss) from operations |                                      |           |                                     |   |           |  |      |             |  |   |            
|B&B ARMR Corporation          | $                                    | (372,138) |                                     | $ | (227,182) |  | $    | (786,934)   |  | $ | (1,998,960)
|B&B Roadway                   |                                      | 178,322   |                                     |   | 147,095   |  |      | 537,849     |  |   | 396,632    
|Intelli-Site, Inc.            |                                      | (61,967)  |                                     |   | 18,954    |  |      | (165,053)   |  |   | 42,975     
|DoorTek Corporation           |                                      | 77,127    |                                     |   | (13,839)  |  |      | 83,753      |  |   | (26,011)   
|Corporate                     |                                      | (206,803) |                                     |   | (205,522) |  |      | (695,752)   |  |   | (618,038)  
|                              | $                                    | (385,459) |                                     | $ | (280,494) |  | $    | (1,026,137) |  | $ | (2,203,402)





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Item 2.  Managements Discussion and Analysis or Plan of Operation.



Forward Looking Statements



This quarterly report on Form 10-QSB includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements can be identified by the use of forward-looking terminology such as may, believe, expect, intend, plan, seek, anticipate, estimate, or continue or the negative of those words or other variations or comparable terminology.



All statements other than statements of historical fact included in this quarterly report on Form 10-QSB, including the statements under Part I. Item 2.  Managements Discussion and Analysis or Plan of Operation and located elsewhere in this quarterly report on Form 10-QSB regarding our financial position and liquidity are forward-looking statements.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct.  Important factors regarding forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from our expectations, are disclosed in this quarterly report on Form 10-QSB. We do not undertake any obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report on Form 10-QSB.



Important factors that could cause actual results to differ materially from those in the forward-looking statements in this quarterly report on Form 10-QSB include changes from anticipated levels of operations, customer acceptance of existing and new products, anticipated development schedules of new products, anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with our customers, access to capital, casualty to or other disruption of our contracted vendor production facilities and equipment, delays and disruptions in the shipment of our products, government regulations and our ability to meet our stated business goals.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by our cautionary statements.



Results of Operations



Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006



Sales.  Our total sales decreased by $0.3 million, or 9%, to $2.9 million during the quarter ended March 31, 2007 from $3.2 million during the quarter ended March 31, 2006.   Sales at our B&B ARMR Corporation (B&B ARMR) subsidiary decreased approximately $0.8 million, in addition to a decrease of approximately $0.1 million at our Intelli-Site, Inc. (Intelli-Site) subsidiary due to a decrease in overall sales volume.  These decreases were offset by an increase in overall sales volume at our DoorTek Corporation (DoorTek) subsidiary of approximately $0.4 million, in addition to an increase in sales volume at our B&B Roadway, LLC (B&B Roadway) joint venture partnership of approximately $0.2 million.



Gross Margin.  Gross margin decreased by approximately $0.2 million during the quarter ended March 31, 2007 to $0.9 million.  This decrease is due to a reduction in contribution margin of approximately $0.3 million at B&B ARMR coupled with decrease of $0.1 million at Intelli-Site.  These decreases were offset by an increase in gross margin at both B&B Roadway and DoorTek of approximately $0.1 million.



Selling, General and Administrative.  Selling, general and administrative expenses decreased by $0.1 million or 5% during the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006 primarily do to a reduction in expenses at B&B ARMR.



Research and Product Development.  Research and product development expenses remained comparable for the quarters ended March 31, 2007 and 2006.



Interest Expense.  Interest expense remained comparable for the quarters ended March 31, 2007 and 2006.



Debt Discount.  Debt discount remained comparable for the quarters ended March 31, 2007 and 2006.





Page 11 of 19



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Nine Months Ended March 31, 2007 Compared to Nine Months Ended March 31, 2006



Sales.  Our total sales decreased by $0.4 million, or 4%, to $8.2 million during the nine months ended March 31, 2007 from $8.6 million during the nine months ended March 31, 2006.   Sales at B&B ARMR decreased approximately $1.5 million and sales also decreased at Intelli-Site by approximately $0.2 million due to a decrease in overall sales volume.  These decreases were offset by an increase in overall sales volume at B&B Roadway of approximately $0.8 million and at DoorTek of approximately $0.5 million.



Gross Margin.  Gross margin increased by approximately $0.3 million during the nine months ended March 31, 2007 to $2.9 million.  This increase is due to a decline in contribution margin of approximately $0.3 million at B&B Roadway and by $0.1 million at both B&B ARMR and DoorTek.  These increases were offset by a decrease in gross margin Intelli-Site of approximately $0.2 million.



Selling, General and Administrative.  Selling, general and administrative expenses decreased by approximately $0.9 million, or 19%, during the nine months ended March 31, 2007 compared to the nine months ended March 31, 2006.  This decrease is due to a substantial reduction in overhead expenses at B&B ARMR of approximately $1.1 million but was offset by a slight increase in expenses at both B&B Roadway and the corporate office of approximately $0.1 million.



Research and Product Development.  Research and product development expenses remained comparable for the nine months ended March 31, 2007 and 2006.



Interest Expense.  Interest expense increased by approximately $0.1 million, or 22%, during the nine months ended March 31, 2007 compared to the nine months ended March 31, 2006.  This increase is due to increased borrowings obtained in order to finance company operations.



Debt Discount.  Debt discount remained comparable for the nine months ended March 31, 2007 and 2006.



Liquidity and Capital Resources



Our cash position decreased by $452,964 during the nine months ended March 31, 2007.  At March 31, 2007, we had $249,310 in cash and cash equivalents and had approximately $834,000 outstanding under our asset based lending facility.  This revolving credit facility, which is secured by substantially all of our assets, permits us to borrow up to $3.0 million, subject to availability under our borrowing base.



For the nine months ended March 31, 2007, our operating activities used $0.9 million of cash compared to $2.6 million of cash used in operations during the nine months ended March 31, 2006.



We used $49,983 for the purchase of property and equipment during the nine months ended March 31, 2007, compared to $14,900 for the nine months ended March 31, 2006.  We anticipate no significant capital expenditures for the remainder of fiscal 2007. We also incurred an additional $16,326 during the nine months ended March 31, 2007 related to earn-out agreements executed as a part of the B&B ARMR acquisition.



During the nine months ended March 31, 2007, we financed our operations with cash flows from borrowings of $1.5 million, compared to $3.1 million during the nine months ended March 31, 2006.  We made payments on debt of $992,407 for the nine months ending March 31, 2007, compared to $492,615 during the nine months ending March 31, 2006.





Page 12 of 19



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The cash that we receive from our revolving credit facility is utilized to support Company-wide operations.  Our working capital requirements will depend upon many factors, including future sales of our products, our operating results, the status of competitive products, and actual profits compared to the our business plan. We are currently experiencing declining liquidity, which makes it difficult for us to meet our current cash requirements and may jeopardize our ability to continue as a going concern.  Our auditor issued a going concern modification in their auditors report for the fiscal year ended June 30, 2006.  We intend to address our liquidity problems by controlling costs, seeking additional funding and maintaining focus on revenues and collections.  In the foreseeable future, we will need to obtain additional financing either through equity placement or additional debt.  There can be no assurance that we will be able to secure such financing.  If our liquidity does not improve by the end of fiscal 2007, we may have to seek a merger partner, limit or discontinue our operations or seek protection under the federal bankruptcy laws. Any of the foregoing options may be on terms that are unfavorable to us or disadvantageous to our stockholders.



Principal payments required under demand note payable and long-term debt outstanding at March 31, 2007 are as follows:



|                     |  |   |           
|-------------------- |  | - | ----------
|Year Ending June 30,
|2007                 |  | $ | 4,175,003 
|2008                 |  |   | 742,602   
|2009                 |  |   | 5,107,724 
|2010                 |  |   | 3,851,228 
|Thereafter           |  |   | 9,055     
|Debt Discount        |  |   | (273,417) 
|                     |  | $ | 13,612,195



Our backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized.  At April 30, 2007, our backlog was approximately $3.7 million.  We expect to fill the majority of this backlog by December 31, 2007.



Item 3.  Controls and Procedures.



(a)

Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our senior management, including our Chief Executive Officer (CEO) (our principal financial officer) and Chief Accounting Officer (CAO), of the effectiveness and the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)).  This evaluation included consideration of the various processes carried out under the direction of our CEO and CAO in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms and that information is accumulated and communicated to management, including the CEO and CAO, to allow timely decisions regarding required disclosures.



Based upon this evaluation, our CEO and CAO concluded that, as of the end of the period covered by this report, as a result of the potential material weakness discussed below, our disclosure controls and procedures may not be effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.  Due to the material weakness as discussed below, in preparing our financial statements as of and for the three and nine month periods ending March 31, 2007, we performed compensating additional procedures and processes designed to ensure that such financial statements were fairly presented in all material respects in accordance with generally accepted accounting principles.





Page 13 of 19



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Material Weakness



There exists a potential material weakness in our processes, procedures and controls related to the preparation of our quarterly and annual financial statements.  In connection with the preparation of our quarterly report on Form 10-QSB for the quarter ended September 30, 2005, we discovered that, due to our decentralized, predominately manual control processes, and our significant turnover and lack of qualified personnel at senior management positions at our B&B ARMR Corporation subsidiary, our control environment was reliant on the review function to prevent or detect material misstatement from reaching the financial statements. The ineffectiveness of these controls represented a material weakness that resulted in adjustments to revenue, inventory and cost of sales, accrued liabilities, and other current assets and liabilities in the consolidated financial statements as of and for the three month period ended September 30, 2005.



We believe that we have taken the steps necessary to remediate this material weakness in our processes, procedures and controls related to the preparation of our quarterly and annual financial statements.  In addition, we continue to vigorously monitor, evaluate and improve these controls in order to ensure their effectiveness related to the enhancement of our processes and procedures and we will make any further changes management determines appropriate.



(b)

Changes in Internal Controls. There were no specifically identifiable changes to our internal controls over financial reporting during our last completed fiscal quarter.  However, we believe that subsequent to the three month period ended September 30, 2005, during which a material weakness in our internal controls existed, we have implemented changes in our internal control structure that have materially enhanced the effectiveness of our internal controls over financial reporting.



Page 14 of 19



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PART II.  OTHER INFORMATION



Item 1. Legal Proceedings.



None.



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.



None.



Item 3.  Defaults Upon Senior Securities.



None.



Item 4.  Submission of Matters to a Vote of Security Holders.



None.



Item 5.  Other Information.



None.



Item 6.  Exhibits.



31.1+

Officers Certificate Pursuant to Section 302



32.1+

Officers Certificate Pursuant to Section 906

________________



+

Filed herewith.





Page 15 of 19



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SIGNATURES



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



|      |              |  |                                                                                  
|----- | ------------ |  | ---------------------------------------------------------------------------------
|      |              |  | Integrated Security Systems, Inc.                                                
|      |              |  | (Registrant)                                                                     
|      |              |  |                                                                                  
|      |              |  |                                                                                  
|      |              |  |                                                                                  
|Date: | May 15, 2007 |  | /s/ VERNON H. FOERSTERLING, JR.                                                  
|      |              |  | Vernon H. Foersterling, Jr.                                                      
|      |              |  | President and Chief Executive Officer (Principal Executive and Financial Officer)
|      |              |  |                                                                                  
|      |              |  |                                                                                  
|Date: | May 15, 2007 |  | /s/ RICHARD B. POWELL                                                            
|      |              |  | Richard B. Powell                                                                
|      |              |  | Vice President and Chief Accounting Officer (Principal Accounting Officer)       





Page 16 of 19



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EXHIBIT INDEX



31.1+

Officers Certificate Pursuant to Section 302



32.1+

Officers Certificate Pursuant to Section 906

________________



+

Filed herewith.







Page 17 of 19