UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________



Form 10-QSB

________





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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2008.



 ̈

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, Suite 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 April 30, 2008, 104,912,212 shares of the Registrants common stock were outstanding.



Transitional Small Business Disclosure Format:   Yes  o   No  x





Page 1 of 16



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INTEGRATED SECURITY SYSTEMS, INC.

INDEX



|                                                                                                              |     
|------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                              | Page
|                                                                                                              |     
|PART I.  FINANCIAL INFORMATION                                                                                |     
|                                                                                                              |     
|Item 1. Financial Statements                                                                                  |     
|Consolidated Balance Sheets at March 31, 2008 (unaudited) and June 30, 2007                                   | 3   
|Consolidated Statements of Operations (unaudited) for the three and nine months ended March 31, 2008 and 2007 | 4   
|Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, 2008 and 2007           | 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                                                                                    | 14  
|Item 6.  Exhibits                                                                                             | 14  
|                                                                                                              |     
|SIGNATURES                                                                                                    | 15  







Page 2 of 16



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PART I.  FINANCIAL INFORMATION



Item 1.  Financial Statements.



INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Balance Sheets



|                                                                                                                                    |             |              |          |   |             
|----------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------ | -------- | - | ------------
|                                                                                                                                    | March 31,   |              | June 30,
|                                                                                                                                    | 2008        |              | 2007    
|                                                                                                                                    | (Unaudited) |              |          |  
|ASSETS                                                                                                                              |             |              |          |   |             
|Current assets:                                                                                                                     |             |              |          |   |             
|Cash and cash equivalents                                                                                                           | $           | 61,961       |          | $ | 217,954     
|Accounts receivable, net of allowance for doubtful accounts of $223,996 and
$291,215, respectively                                  |             | 3,071,516    |          |   | 2,470,281   
|Inventories                                                                                                                         |             | 660,788      |          |   | 621,185     
|Other current assets                                                                                                                |             | 62,035       |          |   | 79,410      
|Total current assets                                                                                                                |             | 3,856,300    |          |   | 3,388,830   
|                                                                                                                                    |             |              |          |   |             
|Property and equipment, net                                                                                                         |             | 78,436       |          |   | 129,916     
|Goodwill                                                                                                                            |             | 2,620,517    |          |   | 2,553,409   
|Other assets                                                                                                                        |             | 204,899      |          |   | 279,654     
|Total assets                                                                                                                        | $           | 6,760,152    |          | $ | 6,351,809   
|                                                                                                                                    |             |              |          |   |             
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                               |             |              |          |   |             
|Current liabilities:                                                                                                                |             |              |          |   |             
|Accounts payable  trade                                                                                                            | $           | 1,588,327    |          | $ | 1,809,944   
|Accrued liabilities                                                                                                                 |             | 2,170,654    |          |   | 1,525,181   
|Demand note payable                                                                                                                 |             | 587,692      |          |   | 389,593     
|Current portion of long-term debt                                                                                                   |             | 5,117,455    |          |   | 107,958     
|Total current liabilities                                                                                                           | $           | 9,464,128    |          | $ | 3,832,676   
|                                                                                                                                    |             |              |          |   |             
|Long-term debt                                                                                                                      |             | 8,464,477    |          |   | 12,881,655  
|                                                                                                                                    |             |              |          |   |             
|Minority interest                                                                                                                   |             | 235,432      |          |   | 189,562     
|                                                                                                                                    |             |              |          |   |             
|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;
104,962,212 and 99,510,890 shares issued, respectively                 |             | 1,049,622    |          |   | 995,109     
|Additional paid in capital                                                                                                          |             | 35,230,568   |          |   | 34,924,238  
|Accumulated deficit                                                                                                                 |             | (47,566,333) |          |   | (46,353,689)
|Treasury stock, at cost - 50,000 common shares                                                                                      |             | (118,750)    |          |   | (118,750)   
|Total stockholders deficit                                                                                                         |             | (11,403,885) |          |   | (10,552,084)
|Total liabilities and stockholders deficit                                                                                         | $           | 6,760,152    |          | $ | 6,351,809   



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





Page 3 of 16



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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,
|                                                               | 2008                                 |             | 2007                                |   | 2008       |  | 2007
|Sales                                                          | $                                    | 2,774,548   |                                     | $ | 2,889,735  |  | $    | 8,928,840   |  | $ | 8,214,209  
|Cost of sales                                                  |                                      | 1,811,345   |                                     |   | 1,958,515  |  |      | 5,559,837   |  |   | 5,352,130  
|Gross margin                                                   |                                      | 963,203     |                                     |   | 931,220    |  |      | 3,369,003   |  |   | 2,862,079  
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Operating expenses:                                            |                                      |             |                                     |   |            |  |      |             |  |   |            
|Selling, general and administrative                            |                                      | 1,232,667   |                                     |   | 1,237,081  |  |      | 3,462,137   |  |   | 3,634,153  
|Research and product development                               |                                      | 84,091      |                                     |   | 79,598     |  |      | 248,574     |  |   | 254,063    
|                                                               |                                      | 1,316,758   |                                     |   | 1,316,679  |  |      | 3,710,711   |  |   | 3,888,216  
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Loss from operations                                           |                                      | (353,555)   |                                     |   | (385,459)  |  |      | (341,708)   |  |   | (1,026,137)
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Interest expense                                               |                                      | (287,387)   |                                     |   | (315,959)  |  |      | (854,726)   |  |   | (938,008)  
|Debt discount                                                  |                                      | 14,217      |                                     |   | (84,627)   |  |      | (155,036)   |  |   | (253,881)  
|Other Income                                                   |                                      | 43,176      |                                     |   | ---        |  |      | 47,285      |  |   | ---        
|Extinguishment of Liability                                    |                                      | ---         |                                     |   | ---        |  |      | 241,152     |  |   | ---        
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Loss before minority interest                                  |                                      | (583,549)   |                                     |   | (786,045)  |  |      | (1,063,033) |  |   | (2,218,026)
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Minority interest                                              |                                      | (73,180)    |                                     |   | (59,458)   |  |      | (149,611)   |  |   | (177,772)  
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Net loss                                                       |                                      | (656,729)   |                                     |   | (845,503)  |  |      | (1,212,644) |  |   | (2,395,798)
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Preferred dividends                                            |                                      | (41,400)    |                                     |   | (40,500)   |  |      | (124,200)   |  |   | (123,300)  
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Net loss allocable to common stockholders                      | $                                    | (698,129)   |                                     | $ | (886,003)  |  | $    | (1,336,844) |  | $ | (2,519,098)
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Weighted average common shares outstanding 
basic and diluted |                                      | 104,962,212 |                                     |   | 97,403,424 |  |      | 103,485,801 |  |   | 95,228,417 
|                                                               |                                      |             |                                     |   |            |  |      |             |  |   |            
|Net loss per share  basic and diluted                         | $                                    | (0.01)      |                                     | $ | (0.01)     |  | $    | (0.01)      |  | $ | (0.03)     



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





Page 4 of 16



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INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                            |                                     |             |      |   |            
|--------------------------------------------------------------------------- | ----------------------------------- | ----------- | ---- | - | -----------
|                                                                            | For the Nine Months Ended
March 31,
|                                                                            | 2008                                |             | 2007
|Cash flows from operating activities:                                       |                                     |             |      |   |            
|Net loss                                                                    | $                                   | (1,212,644) |      | $ | (2,395,798)
|Adjustments to reconcile net loss to net cash used by operating activities: |                                     |             |      |   |            
|Depreciation                                                                |                                     | 69,592      |      |   | 85,868     
|Amortization                                                                |                                     | 124,131     |      |   | 124,134    
|Provision for bad debt                                                      |                                     | 150,097     |      |   | 58,901     
|Provision for slow moving inventory                                         |                                     | 23,510      |      |   | ---        
|Provision for warranty reserve                                              |                                     | ---         |      |   | 6,907      
|Expenses paid with stock, warrants and options                              |                                     | 327,213     |      |   | 269,030    
|Stock option expense                                                        |                                     | 33,630      |      |   | 58,059     
|Extinguishment of liability                                                 |                                     | (241,152)   |      |   | ---        
|Amortization of debt discount                                               |                                     | 155,036     |      |   | 253,881    
|Minority interest                                                           |                                     | 149,611     |      |   | 177,772    
|Changes in operating assets and liabilities, net of effects of acquisition: |                                     |             |      |   |            
|Accounts receivable                                                         |                                     | (751,332)   |      |   | 696,230    
|Inventories                                                                 |                                     | (63,113)    |      |   | (65,975)   
|Other assets                                                                |                                     | (32,001)    |      |   | 33,728     
|Accounts payable                                                            |                                     | (221,617)   |      |   | (601,876)  
|Accrued liabilities                                                         |                                     | 906,078     |      |   | (438,491)  
|Net cash used in operating activities                                       |                                     | (582,961)   |      |   | (860,648)  
|                                                                            |                                     |             |      |   |            
|Cash flows from investing activities:                                       |                                     |             |      |   |            
|Purchase of property and equipment                                          |                                     | (18,112)    |      |   | (49,983)   
|Purchase of business, net of cash acquired                                  |                                     | (86,561)    |      |   | (16,326)   
|Net cash used in investing activities                                       |                                     | (104,673)   |      |   | (66,309)   
|                                                                            |                                     |             |      |   |            
|Cash flows from financing activities:                                       |                                     |             |      |   |            
|Employee stock option exercise                                              |                                     | ---         |      |   | 8,125      
|Net borrowings and net (payments) on debt and other liabilities             |                                     | 308,211     |      |   | (992,407)  
|Proceeds from notes payable and long-term debt                              |                                     | 327,171     |      |   | 1,537,725  
|Distribution to minority interest                                           |                                     | (103,741)   |      |   | (79,450)   
|Net cash provided by financing activities                                   |                                     | 531,641     |      |   | 473,993    
|                                                                            |                                     |             |      |   |            
|Decrease in cash and cash equivalents                                       |                                     | (155,993)   |      |   | (452,964)  
|Cash and cash equivalents at beginning of period                            |                                     | 217,954     |      |   | 702,274    
|Cash and cash equivalents at end of period                                  | $                                   | 61,961      |      | $ | 249,310    
|                                                                            |                                     |             |      |   |            
|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    



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





Page 5 of 16



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INTEGRATED SECURITY SYSTEMS, INC.

Notes to Consolidated Financial Statements (Unaudited)

Nine Months Ended March 31, 2008 and 2007



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 was recorded in the three months ended March 31, 2008 and $33,630 was recorded in the nine months ended March 31, 2008. The known amount of compensation expense to be recognized in future periods through fiscal 2008 is $11,210.



There were no grants made during the nine months ended March 31, 2008.



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.





Page 6 of 16



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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.



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:



|                                          |           |           |      |   |          
|----------------------------------------- | --------- | --------- | ---- | - | ---------
|                                          | March 31,
|                                          | 2008      |           | 2007
|Accounts receivable:                      |           |           |      |   |          
|Trade receivables                         | $         | 3,295,512 |      | $ | 2,895,176
|Less:  allowance for doubtful receivables |           | (223,996) |      |   | (203,477)
|                                          | $         | 3,071,516 |      | $ | 2,691,699



|                                    |                                     |           |      |   |          
|----------------------------------- | ----------------------------------- | --------- | ---- | - | ---------
|                                    | For the Nine Months Ended
March 31,
|                                    | 2008                                |           | 2007
|Allowance for doubtful receivables: |                                     |           |      |   |          
|Beginning Balance                   | $                                   | 291,215   |      | $ | 230,298  
|Bad debt expense                    |                                     | 150,097   |      |   | 58,901   
|Accounts written-off                |                                     | (217,316) |      |   | (120,722)
|Ending Balance                      | $                                   | 223,996   |      | $ | 203,477  



Note 5  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.





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The changes in our product warranty liability are as follows:



|                                  |           |        |      |   |         
|--------------------------------- | --------- | ------ | ---- | - | --------
|                                  | March 31,
|                                  | 2008      |        | 2007
|Liability, beginning of year      | $         | 93,448 |      | $ | 144,361 
|Expense for new warranties issued |           | ---    |      |   | 6,907   
|Warranty claims                   |           | ---    |      |   | (49,824)
|Liability, end of period          | $         | 93,448 |      | $ | 101,444 



Note 6  Preferred Stock Dividend Arrearage



At March 31, 2008, we had dividends in arrears in the amount of $677,928 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             |  |                      | 677,928
|             | 100,750            |  | $                    | 677,928



Note 7  Net Loss Per Share



We compute basic loss per common share using the weighted average number of common shares. At March 31, 2008 and 2007, there were 2,471,250 and 2,471,250 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, 2008 and 2007, we had approximately 183,334,366 and 138,635,012 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of our outstanding equity instruments.



Note  8  Debt



As of March 31, 2008, 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 (6.00% as of March 31,2008) 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 $23,845)                        | $     | 587,692  
|                                                                                                                                                                                                                                                                                                                                                                                  | $     | 587,692  
|                                                                                                                                                                                                                                                                                                                                                                                  |       |          
|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, 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





Page 8 of 16



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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 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, 2008                                                                                                                                                                                                                                      |   | 725,000    
|                                                                                                                                                                                                                                                                                                                                                                                      |   |            
|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 $9,910)                                               |   | 490,090    
|                                                                                                                                                                                                                                                                                                                                                                                      |   |            
|Line of credit with a bank; maximum borrowing amount of $400,000; renewed at interest rate (7.25% as of March 26,2008); expiring on July 26th, 2008                                                                                                                                                                                                                                   |   | 399,200    
|                                                                                                                                                                                                                                                                                                                                                                                      |   |            
|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                                                                                                                                                                                                                                                                                                                                                                                 |   | 46,256     
|                                                                                                                                                                                                                                                                                                                                                                                      |   | 13,581,932 
|Less current portion                                                                                                                                                                                                                                                                                                                                                                  |   | (5,117,455)
|                                                                                                                                                                                                                                                                                                                                                                                      | $ | 8,464,477  





Page 9 of 16



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Note  9  Business Segments



Information for the Companys reportable segments for the three and nine months ended March 31, 2008 and 2007 is as follows:



|                              |                                      |           |                                     |   |           |  |      |           |  |   |            
|----------------------------- | ------------------------------------ | --------- | ----------------------------------- | - | --------- |  | ---- | --------- |  | - | -----------
|                              | For the Three Months Ended
March 31, |           | For the Nine Months Ended
March 31,
|                              | 2008                                 |           | 2007                                |   | 2008      |  | 2007
|Sales                         |                                      |           |                                     |   |           |  |      |           |  |   |            
|B&B ARMR Corporation          | $                                    | 1,079,540 |                                     | $ | 923,661   |  | $    | 4,352,998 |  | $ | 2,971,001  
|B&B Roadway                   |                                      | 1,397,259 |                                     |   | 1,267,554 |  |      | 3,681,177 |  |   | 3,872,178  
|Intelli-Site, Inc.            |                                      | 135,720   |                                     |   | 98,794    |  |      | 414,157   |  |   | 361,088    
|DoorTek Corporation           |                                      | 162,029   |                                     |   | 599,726   |  |      | 480,508   |  |   | 1,009,942  
|                              | $                                    | 2,774,548 |                                     | $ | 2,889,735 |  | $    | 8,928,840 |  | $ | 8,214,209  
|                              |                                      |           |                                     |   |           |  |      |           |  |   |            
|Income (loss) from operations |                                      |           |                                     |   |           |  |      |           |  |   |            
|B&B ARMR Corporation          | $                                    | (321,719) |                                     | $ | (372,138) |  | $    | (57,219)  |  | $ | (786,934)  
|B&B Roadway                   |                                      | 217,639   |                                     |   | 178,322   |  |      | 456,265   |  |   | 537,849    
|Intelli-Site, Inc.            |                                      | (19,425)  |                                     |   | (61,967)  |  |      | (63,966)  |  |   | (165,053)  
|DoorTek Corporation           |                                      | (20,401)  |                                     |   | 77,127    |  |      | (82,541)  |  |   | 83,753     
|Corporate                     |                                      | (209,649) |                                     |   | (206,803) |  |      | (594,247) |  |   | (695,752)  
|                              | $                                    | (353,555) |                                     | $ | (385,459) |  | $    | (341,708) |  | $ | (1,026,137)



Note 10  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 11  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 $86,561 as payment as of the end of March 31,2008.  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 nine months ended March 31, 2008.





Page 10 of 16



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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, 2008 Compared to Three Months Ended March 31, 2007



Sales.  Our total sales decreased by $0.1 million, or approximately .4%, to $2.8 million during the quarter ended March 31, 2008 from $2.9 million during the quarter ended March 31, 2007.   Sales at B&B ARMR increased approximately $0.2 million in addition to an increase in overall sales volume of approximately $130,000 at B&B Roadway and an increase at Intelli-Site by approximately $37,000.  These increases were offset by a decrease in overall sales volume at DoorTek Corporation by approximately $0.4 million.



Gross Margin.  Gross margin increased by approximately $32,000 during the quarter ended March 31, 2008 to approximately $1.0 million.  Gross margin at B&B ARMR decreased approximately $42,000, an increase in gross margin of approximately $131,000 at B&B Roadway and an increase at Intelli-Site, of approximately $38,000.  In addition there was a decrease in gross margin at DoorTek by approximately $95,000.



Selling, General and Administrative.  Selling, general and administrative expenses decreased by approximately $4,000 or .36% during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007 primarily due to a reduction in expenses at B&B ARMR.



Research and Product Development.  Research and development remained fairly comparable for the three months ended March 31, 2008 and 2007.



Interest Expense.  Interest expense decreased by approximately $29,000 or 9% during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007 primarily due to a reduction in interest expense at B&B ARMR.  This decrease was primarily due to the sale of the Norwood, LA facility and elimination of the related mortgage note.





Page 11 of 16



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Debt Discount.  Debt discount decreased by approximately $99,000 during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007 primarily due to an over calculation in the second quarter that was corrected in the third quarter.



Nine Months Ended March 31, 2008 Compared to Nine Months Ended March 31, 2007



Sales.  Our total sales increased by $0.7 million, or approximately 9%, to $8.9 million during the nine months ended March 31, 2008 from $8.2 million during the nine months ended March 31, 2007.   Sales at B&B ARMR increased approximately $1.4 million in addition to an increase at Intelli-Site by approximately $53,000.  These increases were offset by a decrease at B&B Roadway of $193,000 and a decrease in overall sales volume at DoorTek by over $0.5 million.



Gross Margin.  Gross margin increased by over $.5 million during the nine months ended March 31, 2008 to $3.4 million.  Gross margin at our B&B ARMR subsidiary increased approximately $595,000 in addition to an increase in gross margin of approximately $54,000 at our at our Intelli-Site, Inc. (Intelli-Site) subsidiary. These increases were offset by a decrease in gross margin at B&B Roadway of $15,000 and at DoorTek of approximately $128,000.



Selling, General and Administrative.  Selling, general and administrative expenses decreased by approximately $172,000 or approximately 5.0% during the nine months ended March 31, 2008 compared to the quarter ended March 31, 2007 primarily due to a reduction in expenses at B&B ARMR and Intelli-Site and Corporate.  These decreases represented declines in personnel costs as well as improvements in operating costs at the divisional level and Corporate.



Research and Product Development.  Research and development remained fairly comparable for the nine months ended March 31, 2008 and 2007.



Interest Expense.  Interest expense decreased by approximately $83,000 or 9% during the nine months ended March 31, 2008 compared to the nine months ended March 31, 2007 primarily due to a reduction in interest expense at B&B ARMR.  This decrease was primarily due to the sale of the Norwood, LA facility and elimination of the related mortgage note.



Debt Discount.  Debt discount decreased by approximately $99,000 during the nine months ended March 31, 2008 compared to the nine months ended March 31, 2007 primarily due to full amortization of some discounts during the earlier part of the year.



Liquidity and Capital Resources



Our cash position decreased by $155,993 during the nine months ended March 31, 2008.  At March 31, 2008, we had $61,961 in cash and cash equivalents and had approximately $612,000 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, 2008, our operating activities used $0.6 million of cash compared to $.9 million of cash used in operations during the nine months ended March 31, 2007.



We used $18,000 for the purchase of property and equipment during the nine months ended March 31, 2008, compared to $50,000 for the nine months ended March 31, 2007.  We anticipate no significant capital expenditures for the remainder of fiscal 2008. We also paid an additional $86,561 during the nine months ended March 31, 2008 related to earn-out agreements executed as a part of the B&B ARMR acquisition.



During the nine months ended March 31, 2008, we financed our operations with cash flows from borrowings of $532,000, compared to $474,000 during the nine months ended March 31, 2007.  We made net borrowings on debt of $308,000 for the nine months ending March 31, 2008, compared to $1.0 million during the nine months ending March 31, 2007.





Page 12 of 16



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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 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 outstanding debt at March 31, 2008 are as follows:



|                     |   |           
|-------------------- | - | ----------
|Year Ending June 30,
|2008                 | $ | 1,811,429 
|2009                 |   | 6,531,010 
|2010                 |   | 5,850,596 
|Thereafter           |   | 10,344    
|Debt Discount        |   | (33,755)  
|                     | $ | 14,169,624



Our backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized.  At April 30, 2008, our backlog was approximately $3.2 million.  We expect to fill the majority of this backlog by December 31, 2008.



Item 3. Controls and Procedures.



(a)

Evaluation of Disclosure Controls and Procedures.  As of June 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 June 30, 2007, there existed a material weakness in our processes, procedures and controls related to the preparation of our quarterly and annual financial statements.  We had made changes to resolve the significant turnover and staffing deficiencies throughout our financial organization and felt that the turnover and lack of skilled personnel in our accounting department had contributed to the material weakness.  Effective July 1st, 2007 we had put procedures in place that we hoped would compensate for the material weakness previously discussed.  However, we are still experiencing ongoing issues in the preparation of reports and providing accurate and timely consolidated information and believe the material weakness as previously disclosed still exists.



(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.





Page 13 of 16



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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 14 of 16



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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 22, 2008 |  | /s/ VERNON H FOERSTERLING, JR.                                                              
|      |              |  | Vernon H. Foersterling, Jr.                                                                 
|      |              |  | Director, President, and Chief Executive Officer (Principal Executive and Financial Officer)







Page 15 of 16



---

EXHIBIT INDEX



31.1+

Officers Certificate Pursuant to Section 302



32.1+

Officers Certificate Pursuant to Section 906

________________



+

Filed herewith.









Page 16 of 16