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 ENDED December 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.)



|                                                |  |           
|----------------------------------------------- |  | ----------
|2009 Chenault Drive, Ste 114, Carrollton, Texas |  | 75006     
|(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 January 31, 2008, 104,962,212 shares of the Registrants common stock were outstanding.



Transitional Small Business Disclosure Format:    Yes  o        No  x







Page 1 of 17



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INTEGRATED SECURITY SYSTEMS, INC.

INDEX



|                                                                                                                |     
|--------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                | Page
|                                                                                                                |     
|PART I.  FINANCIAL INFORMATION                                                                                  |     
|                                                                                                                |     
|Item 1.  Financial Statements                                                                                   |     
|Consolidated Balance Sheets at December 31, 2007 (unaudited) and June 30, 2007                                  | 3   
|Consolidated Statements of Operations (unaudited) for the three
and six months ended December 31, 2007 and 2006 | 4   
|Consolidated Statements of Cash Flows (unaudited) for the six months ended
December 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                                                                                     |     
|                                                                                                                |     
|Item 1.  Legal Proceedings                                                                                      | 14  
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                            | 14  
|Item 3.  Defaults Upon Senior Securities                                                                        | 14  
|Item 4.  Submission of Matters to a Vote of Security Holders                                                    | 14  
|Item 5.  Other Information                                                                                      | 15  
|Item 6.  Exhibits                                                                                               | 15  
|                                                                                                                |     
|SIGNATURES                                                                                                      | 16  









Page 2 of 17



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PART I.  FINANCIAL INFORMATION



Item 1.  Financial Statements.



INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Balance Sheets



|                                                                                                                                                 |              |              |          |   |             
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------------ | ------------ | -------- | - | ------------
|                                                                                                                                                 | December 31, |              | June 30,
|                                                                                                                                                 | 2007         |              | 2007    
|                                                                                                                                                 | (Unaudited)  |              |          |  
|ASSETS                                                                                                                                           |              |              |          |   |             
|Current assets:                                                                                                                                  |              |              |          |   |             
|Cash and cash equivalents                                                                                                                        | $            | 177,439      |          | $ | 217,954     
|Accounts receivable, net of allowance for doubtful                                                                                               |              |              |          |   |             
|accounts of $357,955 and $291,215, respectively                                                                                                  |              | 3,190,445    |          |   | 2,470,281   
|Inventories                                                                                                                                      |              | 688,141      |          |   | 621,185     
|Other current assets                                                                                                                             |              | 98,552       |          |   | 79,410      
|Total current assets                                                                                                                             |              | 4,154,577    |          |   | 3,388,830   
|                                                                                                                                                 |              |              |          |   |             
|Property and equipment, net                                                                                                                      |              | 80,058       |          |   | 129,916     
|Goodwill                                                                                                                                         |              | 2,620,518    |          |   | 2,553,409   
|Other assets                                                                                                                                     |              | 260,132      |          |   | 279,654     
|Total assets                                                                                                                                     | $            | 7,115,285    |          | $ | 6,351,809   
|                                                                                                                                                 |              |              |          |   |             
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                            |              |              |          |   |             
|Current liabilities:                                                                                                                             |              |              |          |   |             
|Accounts payable  trade                                                                                                                         | $            | 1,613,623    |          | $ | 1,809,944   
|Accrued liabilities                                                                                                                              |              | 1,588,425    |          |   | 1,525,181   
|Demand note payable                                                                                                                              |              | 889,359      |          |   | 389,593     
|Current portion of long-term debt                                                                                                                |              | 5,120,027    |          |   | 107,958     
|Total current liabilities                                                                                                                        |              | 9,211,434    |          |   | 3,832,676   
|                                                                                                                                                 |              |              |          |   |             
|Long-term debt                                                                                                                                   |              | 8,468,324    |          |   | 12,881,655  
|                                                                                                                                                 |              |              |          |   |             
|Minority interest                                                                                                                                |              | 193,893      |          |   | 189,562     
|                                                                                                                                                 |              |              |          |   |             
|Stockholders deficit:                                                                                                                           |              |              |          |   |             
|Convertible 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;
104,962,212 and 99,510,890 shares issued, respectively                              |              | 1,049,622    |          |   | 995,109     
|Additional paid in capital                                                                                                                       |              | 35,219,358   |          |   | 34,924,238  
|Accumulated deficit                                                                                                                              |              | (46,909,604) |          |   | (46,353,689)
|Treasury stock, at cost - 50,000 common shares                                                                                                   |              | (118,750)    |          |   | (118,750)   
|Total stockholders deficit                                                                                                                      |              | (10,758,366) |          |   | (10,552,084)
|Total liabilities and stockholders deficit                                                                                                      | $            | 7,115,285    |          | $ | 6,351,809   





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



Page 3 of 17



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INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Operations

(Unaudited)





|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|-------------------------------------------------------------- | --------------------------------------- | ----------- | ------------------------------------- | - | ---------- |  | ---- | ----------- |  | - | -----------
|                                                               | For the Three Months Ended
December 31, |             | For the Six Months Ended
December 31,
|                                                               | 2007                                    |             | 2006                                  |   | 2007       |  | 2006
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Sales                                                          | $                                       | 2,954,550   |                                       | $ | 2,436,443  |  | $    | 6,154,292   |  | $ | 5,324,474  
|Cost of sales                                                  |                                         | 1,800,120   |                                       |   | 1,537,674  |  |      | 3,748,492   |  |   | 3,393,614  
|Gross profit                                                   |                                         | 1,154,430   |                                       |   | 898,769    |  |      | 2,405,800   |  |   | 1,930,860  
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Operating expenses:                                            |                                         |             |                                       |   |            |  |      |             |  |   |            
|Selling, general and administrative                            |                                         | 1,083,979   |                                       |   | 1,176,245  |  |      | 2,229,470   |  |   | 2,397,072  
|Research and product development                               |                                         | 83,840      |                                       |   | 85,452     |  |      | 164,483     |  |   | 174,465    
|                                                               |                                         | 1,167,819   |                                       |   | 1,261,697  |  |      | 2,393,953   |  |   | 2,571,537  
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Income from operations                                         |                                         | (13,389)    |                                       |   | (362,928)  |  |      | 11,847      |  |   | (640,677)  
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Interest expense                                               |                                         | (289,189)   |                                       |   | (293,178)  |  |      | (567,339)   |  |   | (622,051)  
|Debt discount                                                  |                                         | (84,627)    |                                       |   | (84,627)   |  |      | (169,253)   |  |   | (169,253)  
|Other Income                                                   |                                         | 1,004       |                                       |   | ---        |  |      | 4,109       |  |   | ---        
|Gain from extinguishment of liability                          |                                         | 241,152     |                                       |   | ---        |  |      | 241,152     |  |   | ---        
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Loss before minority interest                                  |                                         | (145,049)   |                                       |   | (740,733)  |  |      | (479,484)   |  |   | (1,431,981)
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Minority interest  loss                                       |                                         | (10,518)    |                                       |   | (25,291)   |  |      | (76,431)    |  |   | (118,314)  
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Net loss                                                       |                                         | (155,567)   |                                       |   | (766,024)  |  |      | (555,915)   |  |   | (1,550,295)
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Preferred dividends                                            |                                         | (41,400)    |                                       |   | (41,400)   |  |      | (82,800)    |  |   | (82,800)   
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Net loss allocable to common stockholders                      | $                                       | (196,967)   |                                       | $ | (807,424)  |  | $    | (638,715)   |  | $ | (1,633,095)
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Weighted average common shares outstanding  basic and diluted |                                         | 104,407,011 |                                       |   | 92,082,601 |  |      | 102,755,620 |  |   | 91,654,795 
|                                                               |                                         |             |                                       |   |            |  |      |             |  |   |            
|Net loss per share  basic and diluted                         | $                                       | (0.00)      |                                       | $ | (0.01)     |  | $    | (0.01)      |  | $ | (0.02)     





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



Page 4 of 17



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INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                            |                                       |           |      |   |            
|--------------------------------------------------------------------------- | ------------------------------------- | --------- | ---- | - | -----------
|                                                                            | For the Six Months Ended
December 31,
|                                                                            | 2007                                  |           | 2006
|                                                                            |                                       |           |      |   |            
|Cash flows from operating activities:                                       |                                       |           |      |   |            
|Net loss                                                                    | $                                     | (555,915) |      | $ | (1,550,295)
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                       |           |      |   |            
|Depreciation                                                                |                                       | 49,860    |      |   | 61,077     
|Amortization                                                                |                                       | 82,755    |      |   | 82,755     
|Provision for bad debt                                                      |                                       | 66,013    |      |   | --         
|Provision for slow moving and obsolete inventory                            |                                       | 23,510    |      |   | --         
|Provision for warranty reserve                                              |                                       |           |      |   | 6,907      
|Expenses paid with stock, warrants and options                              |                                       | 327,213   |      |   | 170,334    
|Stock option expense                                                        |                                       | 22,420    |      |   | 40,915     
|Extinguishment of liability                                                 |                                       | 241,152   |      |   | --         
|Amortization of debt discount                                               |                                       | 169,253   |      |   | 169,253    
|Minority interest                                                           |                                       | 76,431    |      |   | 118,314    
|Changes in operating assets and liabilities,                                |                                       |           |      |   |            
|net of effects of acquisition:                                              |                                       |           |      |   |            
|Accounts receivable                                                         |                                       | (786,177) |      |   | 699,828    
|Inventories                                                                 |                                       | (90,466)  |      |   | 14,715     
|Other assets                                                                |                                       | (82,372)  |      |   | (5,977)    
|Accounts payable                                                            |                                       | (196,321) |      |   | (729,003)  
|Accrued liabilities                                                         |                                       | (177,911) |      |   | 289,100    
|Net cash used in operating activities                                       |                                       | (830,555) |      |   | (632,077)  
|                                                                            |                                       |           |      |   |            
|Cash flows from investing activities:                                       |                                       |           |      |   |            
|Purchase of property and equipment                                          |                                       | ---       |      |   | (12,258)   
|Purchase of businesses, net of cash acquired                                |                                       | (67,109)  |      |   | (16,326)   
|Net cash used in investing activities                                       |                                       | (67,109)  |      |   | (28,584)   
|                                                                            |                                       |           |      |   |            
|Cash flows from financing activities:                                       |                                       |           |      |   |            
|Employee stock option exercise                                              |                                       | ---       |      |   | 8,125      
|Borrowings (payments) on debt and other liabilities                         |                                       | 629,249   |      |   | (948,254)  
|Proceeds from notes payable and long-term debt                              |                                       | 300,000   |      |   | 1,500,000  
|Distribution to minority interest                                           |                                       | (72,100)  |      |   | (26,950)   
|Net cash provided by financing activities                                   |                                       | 857,149   |      |   | 532,921    
|                                                                            |                                       |           |      |   |            
|Increase (decrease) in cash and cash equivalents                            |                                       | (40,515)  |      |   | (127,740)  
|Cash and cash equivalents at beginning of period                            |                                       | 217,954   |      |   | 702,274    
|Cash and cash equivalents at end of period                                  | $                                     | 177,439   |      | $ | 574,534    



|                                                           |   |     |  |   |        
|---------------------------------------------------------- | - | --- |  | - | -------
|Supplemental disclosure of non-cash financing activities   |   |     |  |   |        
|Conversion of unsecured promissory notes into common stock | $ | --- |  | $ | 200,000





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



Page 5 of 17



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INTEGRATED SECURITY SYSTEMS, INC.

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended December 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, 2008.



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 2007 Annual Report on Form 10-KSB filed on October 15, 2007 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 $11,210 and $22,420 was recorded in the three and six months ended December 31, 2007, respectively. The known amount of compensation expense to be recognized in future periods through fiscal 2008 is $22,420.



There were no grants made during the six months ended December 31, 2007.



Note 3  Recent Accounting Pronouncements



In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109." FIN 48 clarifies the accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for years beginning after December 15, 2006.  We adopted FIN 48 in the quarter ended September 30, 2007 without impact to our financial position or results of operations.



In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements."  This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements.  SFAS No. 157  does  not  require  any  new  fair value measurements  but  rather eliminates  inconsistencies  in  guidance  found in various prior accounting pronouncements.  The  provisions  of  SFAS  No. 157 are effective for fiscal years  beginning  after  November 15, 2007,  and  will  apply to the Company starting in its 2008 fiscal year. The Company anticipates no material effect from the adoption of SFAS No. 157.



In February 2007, the FASB issued SFAS No. 159 "Fair Value Option for Financial Assets and Financial Liabilities."  This statement's objective is to reduce both complexity in accounting for financial instruments and volatility in earnings caused by measuring related assets and liabilities
differently.  This  statement also  requires information  to be  provided to the readers of financial statements to explain the choice  to use fair value on earnings  and  to  display  the  fair value of the assets and liabilities chosen on the balance sheet. This statement is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007.  The Company anticipates no material effect from the adoption of SFAS No. 159.



Page 6 of 17



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Note 4  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 debited to the allowance for doubtful accounts, credited to accounts receivable, debited to cash and credited to Other Income.



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



|                                          |                                       |           |      |   |          
|----------------------------------------- | ------------------------------------- | --------- | ---- | - | ---------
|                                          | December 31,                         
|                                          | 2007                                  |           | 2006
|Accounts receivable:                      |                                       |           |      |   |          
|Trade receivables                         | $                                     | 3,548,400 |      | $ | 2,866,805
|Less:  allowance for doubtful receivables |                                       | (357,955) |      |   | (119,803)
|                                          | $                                     | 3,190,445 |      | $ | 2,747,002
|                                          |                                       |           |      |   |          
|                                          | For the Six Months Ended
December 31,
|                                          | 2007                                  |           | 2006
|Allowance for doubtful receivables:       |                                       |           |      |   |          
|Beginning Balance                         | $                                     | 294,296   |      | $ | 230,298  
|Bad debt expense                          |                                       | 66,013    |      |   | --       
|Accounts written-off                      |                                       | (2,354)   |      |   | (110,495)
|Ending Balance                            | $                                     | 357,955   |      | $ | 119,803  



Note 5  Product Warranties



The Company offers one-year, two-year and five-year warranties on products it manufactures.  The length of the warranty is dictated by competition.  The Company provides for repair or replacement of components and/or products that contain defects of material or workmanship. When the Company uses other manufacturers components, the warranties of the other manufacturers are passed to the dealers and end users.



The Company records a liability for an estimate of costs that it expects to incur under its basic limited warranty when product revenue is recognized.  Factors affecting the Companys warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim.  The Company periodically assesses the adequacy of its warranty liability based on changes in these factors.



The changes in the Companys product warranty liability are as follows:



|                                  |              |        |      |   |         
|--------------------------------- | ------------ | ------ | ---- | - | --------
|                                  | December 31,
|                                  | 2007         |        | 2006
|Liability, beginning of year      | $            | 93,448 |      | $ | 144,361 
|Expense for new warranties issued |              | ---    |      |   | 6,907   
|Warranty Claims                   |              | ---    |      |   | (30,128)
|Liability, end of period          | $            | 93,448 |      | $ | 121,140 







Page 7 of 17



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Note 7  Preferred Stock Dividend Arrearage



At December 31, 2007, we had dividends in arrears in the amount of $636,528 related to our outstanding Series A and Series D preferred stock, which consisted of the following:



|             |                    |                     
|------------ | ------------------ | --------------------
|             | Shares
Outstanding | Dividends
In Arrears
|Series A $20 | 9,500              | $            --     
|Series D $20 | 91,250             | 636,528             
|             | 100,750            | $  636,528          



Note 8  Net Loss Per Share



We compute basic loss per common share using the weighted average number of common shares. At December 31, 2007 and 2006, there were 2,471,250 and 2,697,918 shares, respectively, of in-the-money potentially dilutive common shares outstanding, which were not included in weighted average shares outstanding because their effect is anti-dilutive due to our reported net loss.



At December 31, 2007 and 2006, we had approximately 183,334,366 and 134,377,681 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of the our outstanding equity instruments.



Note 9  Debt



As of December 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 (7.50% as of December 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 $41,728)                      |  | $     | 889,359  
|                                                                                                                                                                                                                                                                                                                                                                                    |  | $     | 889,359  
|                                                                                                                                                                                                                                                                                                                                                                                    |  |       |          
|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 holder 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, 2008                                                                                                                                                                                                                                  |  |       | 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
|                                                                                                                                                                                                                                                                                                                                                                                    |  |       |          
|Notes payable to stockholders; interest at 8% due in monthly installments of $4,833; principal and accrued unpaid interest due November 11, 2008 (net of debt discount of $39,538)                                                                                                                                                                                                  |  |       | 764,538  
|                                                                                                                                                                                                                                                                                                                                                                                    |  |       |          
|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  



Page 8 of 17



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|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -----------
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|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    
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|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, 2008                                                                                                                                                                                                                                     |  |   | 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 $17,347)                                              |  |   | 482,653    
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|Line of credit with a bank; maximum borrowing amount of $300,000; interest at Wall Street Journal prime rate (7.50% as of December 31, 2007) plus 2%; principal and accrued unpaid interest due on March 14, 2008                                                                                                                                                                     |  |   | 370,000    
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|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 September 30, 2008                                                                                                                                                                                                               |  |   | 328,386    
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|Convertible note payable to stockholder; interest at 8% due in quarterly installments of $3,000; principal and accrued unpaid interest due December 12, 2008; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)                                                                                        |  |   | 300,000    
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|Convertible note payable to stockholder; interest at 8% due in quarterly installments of $3,000; principal and accrued unpaid interest due September 30, 2008; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)                                                                                       |  |   | 150,000    
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|Convertible note payable to stockholder; interest at 8% due in quarterly installments of $3,000; principal and accrued unpaid interest due September 30, 2008; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)                                                                                       |  |   | 150,000    
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|Convertible note payable to stockholder; interest at 8% due in quarterly installments of $3,000; principal and accrued unpaid interest due September 30, 2008; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)                                                                                       |  |   | 150,000    
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|Note payable to stockholder; interest at 9% due in monthly installments of $750; principal and accrued unpaid interest due September 30, 2008                                                                                                                                                                                                                                         |  |   | 100,000    
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   |            
|Other                                                                                                                                                                                                                                                                                                                                                                                 |  |   | 49,774     
|                                                                                                                                                                                                                                                                                                                                                                                      |  |   | 13,588,351 
|Less current portion                                                                                                                                                                                                                                                                                                                                                                  |  |   | (5,120,027)
|                                                                                                                                                                                                                                                                                                                                                                                      |  | $ | 8,468,324  





Page 9 of 17



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Note 10 Business Segments



Information for our reportable segments for the three and six months ended December 31, 2007 and 2006 is as follows:



|                              |                                         |           |                                       |   |           |  |      |           |  |   |          
|----------------------------- | --------------------------------------- | --------- | ------------------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                              | For the Three Months Ended
December 31, |           | For the Six Months Ended
December 31,
|                              | 2007                                    |           | 2006                                  |   | 2007      |  | 2006
|Sales                         |                                         |           |                                       |   |           |  |      |           |  |   |          
|B&B ARMR Corporation          | $                                       | 1,695,634 |                                       | $ | 1,060,388 |  | $    | 3,273,458 |  | $ | 2,047,340
|B&B Roadway, LLC              |                                         | 915,274   |                                       |   | 1,004,275 |  |      | 2,283,918 |  |   | 2,604,624
|Intelli-Site, Inc.            |                                         | 144,544   |                                       |   | 108,957   |  |      | 278,437   |  |   | 262,294  
|DoorTek Corporation           |                                         | 199,098   |                                       |   | 262,823   |  |      | 318,479   |  |   | 410,216  
|                              | $                                       | 2,954,550 |                                       | $ | 2,436,443 |  | $    | 6,154,292 |  | $ | 5,324,474
|                              |                                         |           |                                       |   |           |  |      |           |  |   |          
|Income (loss) from operations |                                         |           |                                       |   |           |  |      |           |  |   |          
|B&B ARMR Corporation          | $                                       | 169,630   |                                       | $ | (132,218) |  | $    | 264,499   |  | $ | (414,796)
|B&B Roadway, LLC              |                                         | 41,313    |                                       |   | 82,393    |  |      | 238,626   |  |   | 359,526  
|Intelli-Site, Inc.            |                                         | (11,004)  |                                       |   | (63,389)  |  |      | (44,541)  |  |   | (103,086)
|DoorTek Corporation           |                                         | (28,226)  |                                       |   | 11,294    |  |      | (62,140)  |  |   | 6,627    
|Corporate                     |                                         | (185,102) |                                       |   | (261,008) |  |      | (384,597) |  |   | (488,948)
|                              | $                                       | (13,389)  |                                       | $ | (362,928) |  | $    | 11,847    |  | $ | (640,677)



Note 11  Financing



On December 12, 2007, we issued an unsecured convertible promissory note to Renaissance Capital Growth & Income Fund III, Inc. (Renn III) in exchange for a $300,000 cash investment. The convertible promissory note is in the original principal amount of $300,000, matures on December 12, 2008, and bears interest at an annual rate of 8% payable quarterly in cash.  The note is convertible at the option of the holder into shares of our common stock at the then-current market price, subject to standard anti-dilution adjustments upon:



·The conversion of all or substantially all of our outstanding convertible indebtedness into shares of our capital stock; or

·A change of control of the Company.



The common stock to be issued upon conversion of the note is subject to a registration rights agreement previously entered into with Renn III. Under the registration rights agreement, we agreed to file a registration statement with the Securities and Exchange Commission to register for resale the shares of common stock issuable to Renn III upon conversion of the note.



Note 12  Settlement Agreement



In the quarter ended December 31, 2007, we reached a settlement agreement relating to the Companys acquisition of B&B ARMR Corporation in 2003.  The former owners of B&B ARMR Corporation filed a lawsuit against the Company relating the earn-out provisions of the acquisition agreement.  The Company has a provision for the settlement agreement and has incurred a total of $74,061 as payment as of the end of the quarter.  The known amount of payment to be recognized in future periods through the last quarter of 2009 is $87,500.  Due to the settlement, the Company recognized a gain on extinguishment of liability in the amount of $241,152 for the three and six months ended December 31, 2007.





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



Sales.  Our total sales increased by $.5 million, or 21.3%, to $2.9 million during the quarter ended December 31, 2007 from $2.4 million during the quarter ended December 31, 2006.   Sales at our B&B ARMR Corporation (B&B ARMR) subsidiary increased approximately $0.6 million due to an overall increase in sales volume.  Sales at our Intelli-Site, Inc. (Intelli-Site) subsidiary increased approximately $0.04 million to $0.14 million, but were offset by a decrease at our DoorTek Corporation (DoorTek) subsidiary of approximately $0.06 million.  Sales at our B&B Roadway, LLC (B&B Roadway) joint venture partnership decreased by approximately $.09 million due to normal fluctuation of customer project schedules.  Some customers moved their orders to the next quarter.



Gross Margin.  Gross margin increased by approximately $0.3 million during the quarter ended December 31, 2007 to $1.2 million.  B&B ARMR experienced an increase of approximately $0.3 million (73.3%) in gross margin due largely to cost improvements in manufacturing.  DoorTek experienced an increase of 4% offset by a decrease in B&B Roadway and Intelli-Site.



Selling, General and Administrative.  Selling, general and administrative expenses decreased approximately $0.1 million for the quarter ended December 31, 2007 compared to the quarter ended December 31, 2006 due partially to a reduction in facilities costs resulting from the corporate office move to Carrollton, TX and partially due to staff consolidations.



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



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



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





Page 11 of 17



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Other Income.  Other income increased by $1,004 for the quarter ended December 31, 2007 compared to the quarter ended December 31, 2006 due to collection of previously charged off accounts.



Gain from Extinguishment of Liability.  The Company recognized $.2 million for the quarter and six months ended December 31, 2007 compared to the quarter and six months ended December 31, 2006 due to the extinguishment of a liability related to the B&B ARMR Corporation acquisition agreement discussed above.



Six Months Ended December 31, 2007 Compared to Six Months Ended December 31, 2006



Sales.  Our total sales increased by $.8 million, or 15.6%, to $6.2 million during the six months ended December 31, 2007 from $5.3 million during the six months ended December 31, 2006.   Sales at our B&B ARMR Corporation (B&B ARMR) subsidiary increased approximately $1.2 million due to an overall increase in sales volume.  Sales at our Intelli-Site, Inc. subsidiary increased slightly by $16 thousand, but was offset by a decrease at our B&B Roadway joint venture partnership of approximately $.3 million and DoorTek of approximately $92,000.



Gross Margin.  Gross margin increased by approximately $0.5 million during the six months ended December 31, 2007 to $2.4 million.  B&B ARMR experienced an increase of approximately $0.7 million in gross margin due largely to cost improvements in manufacturing.  Gross margin at our Intelli-Site, Inc. (Intelli-Site) subsidiary increased slightly by $16,000, but was offset by a decrease at our B&B Roadway, LLC (B&B Roadway) joint venture partnership of approximately $.2 million and DoorTek of approximately $33,000.



Selling, General and Administrative.  Selling, general and administrative expenses decreased by approximately $0.2 million or 7% during the six months ended December 31, 2007 compared to the six months ended December 31, 2006.  This decrease is due partially to a reduction in facilities costs resulting from the corporate office move to Carrollton, TX and partially due to staff reduction.



Research and Product Development.  Research and product development expenses decreased by approximately $10,000 for the six months ended December 31, 2007 from $174,465 in 2006 to $164,483 due to allocation of a portion of salaries to cost of sales.



Interest Expense.  Interest expense decreased by approximately $54,000 during the six months ended December 31, 2007 compared to the six months ended December 31, 2006.  This decrease is primarily due to the sale of the Norwood, LA facility and elimination of the related mortgage note.



Debt Discount.  Debt discount remained comparable for the six months ended December 31, 2007 and 2006.



Other Income.  Other income increased by $4,109 for the six months ended December 31, 2007 compared to the six months ended December 31, 2006 due to collection of previously charged off accounts.



Gain from Extinguishment of Liability.  The Company recognized $.2 million for the six months ended December 31, 2007 compared to the six months ended December 31, 2006 due to the extinguishment of liability related to the earn-out agreement.



Liquidity and Capital Resources



Our cash position decreased by $40,515 during the six months ended December 31, 2007.  At December 31, 2007, we had $177,439 in cash and cash equivalents and had $931,087 outstanding under our revolving credit 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 six months ended December 31, 2007, our operating activities used $.8 million of cash compared to approximately $.6 million of cash used in operations during the six months ended December 31, 2006.





Page 12 of 17



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We used $67,109 for the last part of the buy-out purchase agreement for DoorTek during the six months ended December 31, 2007, compared to $28,584 for the six months ended December 31, 2006.  We anticipate no significant capital expenditures for the remainder of fiscal 2008.



During the six months ended December 31, 2007, we financed our operations with cash flows from borrowings of $.3 million, compared to $1.5 million during the six months ending December 31, 2006.  We made net borrowings on debt of $629,249 during the six months ended December 31, 2007 compared to $948,254 of net payments during the six months ended December 31, 2006.



The cash that we receive from our revolving credit facility is utilized to support Company-wide operations.  Our working capital requirements 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, 2007.  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 2008, 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 long-term debt outstanding at December 31, 2007 are as follows:



|                     |  |   |           
|-------------------- |  | - | ----------
|Year Ending June 30,
|2008                 |  | $ | 2,101,450 
|2009                 |  |   | 6,533,112 
|2010                 |  |   | 5,850,596 
|Thereafter           |  |   | 12,089    
|Debt Discount        |  |   | (19,537)  
|                     |  | $ | 14,477,710



Our backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized.  At January 31, 2008, the Companys backlog was approximately $3.6 million.  We expect to fill the majority of this backlog by June 30, 2008.



Item 3. Controls and Procedures.



(a)

Evaluation of Disclosure Controls and Procedures.  As of September 30, 2007, an evaluation was carried out under the supervision and with the participation of our senior management, including our Chief Executive Officer (CEO), 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 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, to allow timely decisions regarding required disclosures.



Based upon this evaluation, our CEO concluded that, as of September 30, 2007, there existed a material weakness in our processes, procedures and controls related to the preparation of our quarterly and annual financial statements.  However, for the period covered by this report, the three months ended December 31, 2007, we have made changes to resolve the significant turnover and staffing deficiencies throughout our financial organization. We feel that these issues have been largely resolved and that the problems experienced prior to September 30, 2007 represented legacy issues. We feel that the turnover and lack of skilled personnel in our accounting department coupled with inadequate oversight by the previous manager contributed to the material weakness prior to September 30, 2007.  Effective July 1st, 2007 we put procedures in place that we hope will compensate for the material weakness previously discussed.





Page 13 of 17



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While 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, we are still in the process of evaluating these controls.  Accordingly, we will continue to vigorously monitor the effectiveness of these processes, procedures and controls and will make any further changes management determines appropriate.



(b)

Changes in Internal Controls. There were no changes to our internal controls over financial reporting during our last completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal controls over financial reporting, except as described above.  Additionally, we have and will continue to improve both the quality and the quantity of staffing in order to effect significant improvements in our internal control structure.



PART II.  OTHER INFORMATION



Item 1. Legal Proceedings.



None.



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



On December 12, 2007, we issued an unsecured convertible promissory note to Renaissance Capital Growth & Income Fund III, Inc. (Renn III) in exchange for a $300,000 cash investment. The convertible promissory note is in the original principal amount of $300,000, matures on December 12, 2008, and bears interest at an annual rate of 8% payable quarterly in cash.  The note is convertible at the option of the holder into shares of our common stock at the then-current market price, subject to standard anti-dilution adjustments upon:



·The conversion of all or substantially all of our outstanding convertible indebtedness into shares of our capital stock; or

·A change of control of the Company.



The common stock to be issued upon conversion of the note is subject to a registration rights agreement previously entered into with Renn III. Under the registration rights agreement, we agreed to file a registration statement with the Securities and Exchange Commission to register for resale the shares of common stock issuable to Renn III upon conversion of the note.



The issuances of convertible promissory note was exempt from the registration requirements of the Securities Act of 1933, as amended by virtue of Section 4(2) thereof, as a transaction not involving a public offering.



Item 3.  Defaults Upon Senior Securities.



None.



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



None.





Page 14 of 17



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Item 5.  Other Information.



None.



Item 6.  Exhibits.



10.1+

Convertible Promissory Note, dated December 12, 2007, payable to Frost National Bank FBO Renaissance Capital Growth and Income Fund III, Inc., in the amount of $300,000.



31.1+

Officers Certificate Pursuant to Section 302



32.1+

Officers Certificate Pursuant to Section 906

________________________



+

Filed herewith.





Page 15 of 17



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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: | February 14, 2008 |  | /s/ VERNON H FOERSTERLING, JR.                                                              
|      |                   |  | Vernon H. Foersterling, Jr.                                                                 
|      |                   |  | Director, President, and Chief Executive Officer (Principal Executive and Financial Officer)
|      |                   |  |                                                                                             







Page 16 of 17



---







EXHIBIT INDEX



10.1+

Convertible Promissory Note, dated December 12, 2007, payable to Frost National Bank FBO Renaissance Capital Growth and Income Fund III, Inc., in the amount of $300,000.



31.1+

Officers Certificate Pursuant to Section 302



32.1+

Officers Certificate Pursuant to Section 906

________________________



+

Filed herewith.





Page 17 of 17