UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

________



Form 10-Q

________



ý

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2009.



 ̈

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) |  | (I.R.S. Employer Identification No.)



|                                               |  |           
|---------------------------------------------- |  | ----------
|2009 Chenault Drive, Suite 114, Carrollton, TX |  | 75006     
|(Address of principal executive offices)       |  | (Zip Code)



(972) 444-8280

(Issuers telephone number)





Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o    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



Indicate by check mark whether the registrant is a (See definitions in Rule 12b-2 of the Exchange Act:



Large accelerated filer  ̈       Accelerated filer  ̈       Non-accelerated filer  ̈       Smaller reporting company ý



As of January 31, 2010, 560,764,951 shares of the registrants common stock were outstanding.



Page 1 of 17



---





INTEGRATED SECURITY SYSTEMS, INC.

INDEX

|                                                                                                                       |     
|---------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                       | Page
|                                                                                                                       |     
|PART I.  FINANCIAL INFORMATION                                                                                         |     
|                                                                                                                       |     
|Item 1. Financial Statements                                                                                           |     
|Consolidated Balance Sheets at December 31, 2009 (unaudited) and June 30, 2009                                         | 3   
|Consolidated Statements of Operations (unaudited) for the three months and six months ended December 31, 2009 and 2008 | 4   
|Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2009 and 2008                  | 5   
|Notes to Financial Statements                                                                                          | 6   
|Item 2.  Managements Discussion and Analysis or Plan of  Operation                                                    | 12  
|Item 4.  Controls and Procedures                                                                                       | 14  
|                                                                                                                       |     
|PART II.  OTHER INFORMATION                                                                                            |     
|                                                                                                                       |     
|Item 1.  Legal Proceedings                                                                                             | 15  
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                   | 15  
|Item 3.  Defaults upon Senior Securities                                                                               | 15  
|Item 4.  Submission of Matters to a Vote of Security Holders                                                           | 15  
|Item 5.  Other Information                                                                                             | 15  
|Item 6.  Exhibits                                                                                                      | 15  
|                                                                                                                       |     
|SIGNATURES                                                                                                             | 16  





Page 2 of 17



---







PART I. FINANCIAL INFORMATION



Item 1. Financial Statements.



INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Balance Sheets





|                                                                                                                                              |              |              |          |   |             
|--------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------------ | -------- | - | ------------
|                                                                                                                                              | December 31, |              | June 30,
|                                                                                                                                              | 2009         |              | 2009    
|ASSETS                                                                                                                                        | Unaudited    |              |          |  
|Current assets:                                                                                                                               |              |              |          |   |             
|Cash and cash equivalents                                                                                                                     | $            | 23,092       |          | $ | 30,944      
|Short term investments                                                                                                                        |              | 40,525       |          |   | 56,000      
|Accounts receivable, net of allowances of $219,432 and $204,803, respectively                                                                 |              | 1,130,398    |          |   | 1,487,175   
|Inventory, net of reserves                                                                                                                    |              | 325,819      |          |   | 314,430     
|Other current assets                                                                                                                          |              | 254,033      |          |   | 242,509     
|Total current assets                                                                                                                          |              | 1,773,867    |          |   | 2,131,058   
|                                                                                                                                              |              |              |          |   |             
|Property and equipment, net                                                                                                                   |              | 21,580       |          |   | 28,884      
|Goodwill                                                                                                                                      |              | 1,707,953    |          |   | 1,707,953   
|Other assets                                                                                                                                  |              | 162,454      |          |   | 218,199     
|                                                                                                                                              |              |              |          |   |             
|Total Assets                                                                                                                                  | $            | 3,665,854    |          | $ | 4,086,094   
|                                                                                                                                              |              |              |          |   |             
|LIABILITIES AND EQUITY                                                                                                                        |              |              |          |   |             
|Current liabilities:                                                                                                                          |              |              |          |   |             
|Accounts payable                                                                                                                              | $            | 978,956      |          | $ | 1,252,517   
|Accrued liabilities                                                                                                                           |              | 744,540      |          |   | 923,537     
|Demand note payable                                                                                                                           |              | 362,615      |          |   | 287,985     
|Current portion of long-term debt                                                                                                             |              | 8,033        |          |   | 7,657       
|Liabilities related to discontinued operations                                                                                                |              | 15,612       |          |   | 20,892      
|Total current liabilities                                                                                                                     |              | 2,109,756    |          |   | 2,492,588   
|                                                                                                                                              |              |              |          |   |             
|Long-term debt                                                                                                                                |              | 11,187       |          |   | 15,299      
|                                                                                                                                              |              |              |          |   |             
|                                                                                                                                              |              |              |          |   |             
|Equity:                                                                                                                                       |              |              |          |   |             
|Convertible preferred stock, $0.01 par value, 750,000 shares authorized; 22,500 shares issued and outstanding ($450,000 of liquidation value) |              | 225          |          |   | 225         
|Common stock, $0.01 par value, 800,000,000 shares authorized; 561,043,473 and 559,126,805 shares issued, respectively                         |              | 5,610,435    |          |   | 5,591,268   
|Treasury stock, at cost, 278,522 common shares                                                                                                |              | (125,606)    |          |   | (125,606)   
|Additional paid in capital                                                                                                                    |              | 37,947,058   |          |   | 37,888,178  
|Accumulated deficit                                                                                                                           |              | (41,864,994) |          |   | (41,780,971)
|Accumulated other comprehensive loss; (available for sale security)                                                                           |              | (28,289)     |          |   | (12,000)    
|Total stockholders equity                                                                                                                    |              | 1,538,829    |          |   | 1,561,094   
|Noncontrolling interest                                                                                                                       |              | 6,082        |          |   | 17,113      
|Total equity                                                                                                                                  |              | 1,544,911    |          |   | 1,578,207   
|                                                                                                                                              |              |              |          |   |             
|Total liabilities and equity                                                                                                                  | $            | 3,665,854    |          | $ | 4,086,094   



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





Page 3 of 17



---





INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Operations

(Unaudited)



|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|------------------------------------------------------------ | -------------------------- | ----------- | ------------------------ | - | ----------- |  | ---- | ----------- |  | - | -----------
|                                                             | For the Three Months Ended |             | For the Six Months Ended
|                                                             | December 31,               |             | December 31,            
|                                                             | 2009                       |             | 2008                     |   | 2009        |  | 2008
|Revenue:                                                     |                            |             |                          |   |             |  |      |             |  |   |            
|Sales                                                        | $                          | 1,830,303   |                          | $ | 2,057,700   |  | $    | 3,753,904   |  | $ | 4,076,946  
|Other revenue                                                |                            | 2,189       |                          |   | 3,753       |  |      | 8,347       |  |   | 31,491     
|Total revenue                                                |                            | 1,832,492   |                          |   | 2,061,453   |  |      | 3,762,251   |  |   | 4,108,437  
|Cost of sales                                                |                            | 1,191,705   |                          |   | 1,352,151   |  |      | 2,434,014   |  |   | 2,624,628  
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Gross profit                                                 |                            | 640,787     |                          |   | 709,302     |  |      | 1,328,237   |  |   | 1,483,809  
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Operating expenses:                                          |                            |             |                          |   |             |  |      |             |  |   |            
|Selling, general and administrative                          |                            | 674,878     |                          |   | 796,853     |  |      | 1,360,615   |  |   | 1,506,975  
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Loss from operations                                         |                            | (34,091)    |                          |   | (87,551)    |  |      | (32,378)    |  |   | (23,166)   
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Interest expense                                             |                            | (13,782)    |                          |   | (334,930)   |  |      | (23,257)    |  |   | (738,781)  
|Loss on sale of assets                                       |                            | -           |                          |   | -           |  |      | -           |  |   | (110,541)  
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Net loss from continuing operations                          |                            | (47,873)    |                          |   | (422,481)   |  |      | (55,635)    |  |   | (872,489)  
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Loss from discontinued operations                            |                            | (1,041)     |                          |   | (6,174)     |  |      | (2,319)     |  |   | (71,008)   
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Net loss                                                     |                            | (48,914)    |                          |   | (428,655)   |  |      | (57,954)    |  |   | (943,497)  
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Income allocable to the noncontrolling interest              |                            | (276)       |                          |   | (34,717)    |  |      | (26,069)    |  |   | (57,797)   
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Net loss allocable to common stockholders                    | $                          | (49,190)    |                          | $ | (463,372)   |  | $    | (84,023)    |  | $ | (1,001,294)
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Weighted average common shares                               |                            |             |                          |   |             |  |      |             |  |   |            
|outstanding - basic & diluted                                |                            | 559,327,450 |                          |   | 110,350,267 |  |      | 559,087,867 |  |   | 110,350,267
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Basic and diluted earnings per share - continuing operations | $                          | -           |                          | $ | -           |  | $    | -           |  | $ | (0.01)     
|                                                             |                            |             |                          |   |             |  |      |             |  |   |            
|Basic and diluted earnings per share - net loss              | $                          | -           |                          | $ | -           |  | $    | -           |  | $ | (0.01)     



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





Page 4 of 17



---







INTEGRATED SECURITYS SYSTEMS INC

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                          |              |           |              |   |            
|----------------------------------------------------------------------------------------- | ------------ | --------- | ------------ | - | -----------
|                                                                                          | December 31, |           | December 31,
|                                                                                          | 2009         |           | 2008        
|Cash flows from operating activities:                                                     |              |           |              |   |            
|Net loss                                                                                  | $            | (84,023)  |              | $ | (1,001,294)
|Loss from discontinued operations                                                         |              | 2,319     |              |   | 71,008     
|Loss from continuing operations                                                           |              | (81,704)  |              |   | (930,286)  
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |              |           |              |   |            
|Depreciation                                                                              |              | 11,904    |              |   | 15,292     
|Gain on sale of assets                                                                    |              | -         |              |   | 110,541    
|Amortization of deferred debt costs                                                       |              | -         |              |   | 50,026     
|Bad debt expense                                                                          |              | (22,325)  |              |   | (26,201)   
|Provision for warranty reserve                                                            |              | -         |              |   | 22,124     
|Provision for inventory reserve                                                           |              | 18,737    |              |   | -          
|Stock option expense                                                                      |              | 34,922    |              |   | 21,453     
|Gain on extinguishment of liability                                                       |              | (114,137) |              |   | -          
|Expenses paid with stock                                                                  |              | 43,125    |              |   | 262,058    
|Noncontrolling interest                                                                   |              | 26,069    |              |   | 57,797     
|Changes in assets and liabilities:                                                        |              |           |              |   |            
|Accounts receivable                                                                       |              | 379,101   |              |   | 324,639    
|Inventory                                                                                 |              | (30,125)  |              |   | 19,963     
|Other assets                                                                              |              | 43,408    |              |   | (56,970)   
|Accounts payable                                                                          |              | (273,561) |              |   | (10,966)   
|Accrued liabilities                                                                       |              | (60,653)  |              |   | 407,744    
|Net cash (used in) provided by operating activities                                       |              | (25,239)  |              |   | 267,214    
|                                                                                          |              |           |              |   |            
|Cash flows from investing activities:                                                     |              |           |              |   |            
|Purchase of property and equipment                                                        |              | (4,600)   |              |   | -          
|Net cash used in investing activities                                                     |              | (4,600)   |              |   | -          
|                                                                                          |              |           |              |   |            
|Cash flows from financing activities:                                                     |              |           |              |   |            
|Net proceeds/(payments) of debt                                                           |              | 70,893    |              |   | (206,718)  
|Distribution to non-controlling interest                                                  |              | (37,100)  |              |   | (132,132)  
|Net cash provided by (used in) financing activities                                       |              | 33,793    |              |   | (338,850)  
|                                                                                          |              |           |              |   |            
|Cash flows from discontinued operations:                                                  |              |           |              |   |            
|Operating activities                                                                      |              | (11,806)  |              |   | (30,987)   
|Net cash used in discontinued operations                                                  |              | (11,806)  |              |   | (30,987)   
|                                                                                          |              |           |              |   |            
|Net decrease in cash                                                                      |              | (7,852)   |              |   | (102,623)  
|                                                                                          |              |           |              |   |            
|Cash at beginning of period                                                               |              | 30,944    |              |   | 173,701    
|Cash at end of period                                                                     | $            | 23,092    |              | $ | 71,078     



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





Page 5 of 17



---





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Six Months Ended December 31, 2009 and 2008





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, 2010. Prior periods have been reclassed to conform to the current period presentation.



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 2009 Annual Report on Form 10-K filed on October 1, 2009 with the Securities and Exchange Commission.



Note 2  Stock-based Compensation



The Company accounts for equity instruments issued to employees in accordance with ASC 718 Compensation  Stock Compensation (formerly SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R)). Under ASC 718, the cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award, and that cost is recognized over the vesting period.  Our forfeiture rate is a graded 20% rate, which averages out to an overall forfeiture rate of 48.8%. An expense of $34,922 was recorded in the six months ended December 31, 2009. The known amount of compensation expense to be recognized in future periods through fiscal 2012 is $118,641.



Note 3  Recent Accounting Pronouncements



In June 2009, the FASB issued ASC 105, Generally Accepted Accounting Principles (formerly SFAS No. 168, FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 replace SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles)  This statements objective is to communicate that the FASB Accounting Standards Codification will become the single official source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009; and the Company adopted this standard in the first quarter of 2010. The adoption of ASC 105 did not have a material effect on the Companys financial statements.



In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The ASU introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial statements or disclosures.





Page 6 of 17



---





In May 2009, the FASB issued ASC 855, Subsequent Events (formerly SFAS No. 165, Subsequent Events). This statements objective is to establish principles and requirements for subsequent events, including (a) the period after the balance sheet date to evaluate, (b) circumstances that would be considered a subsequent event and (c) disclosure requirements. ASC 855 is effective for fiscal years ending after June 15, 2009.  There was no material effect from the adoption of ASC 855.



In December 2007, the FASB issued ASC 810 Consolidation (formerly SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160")). ASC 810 requires (a) that noncontrolling (minority) interest be reported as a component of shareholders' equity; (b) that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations; (c) that changes in a parent's ownership interest while the parent retains its controlling interest be accounted for as equity transactions; (d) that any retained noncontrolling equity investment upon the deconsolidation of the subsidiary be initially measured at fair value; and (e) that sufficient disclosures are provided that clearly identify and distinguish between the interest of the parent and the interests of the noncontrolling owners. ASC 810 is effective for fiscal years beginning after December 15, 2008, and applied to the Company in the quarter ended September 30, 2009. The Company revised its disclosures regarding minority interest, but there was no material effect from the adoption of ASC 810.



Note 4  Discontinued Operations



On July 31, 2008, the Company sold the operations of DoorTek back to the managers and former owners. The substantive details of the sale were:



·

Company assigned all DoorTek assets (including all inventory, fixtures, data, records and rights to the DoorTek name) to DoorTek management (the buyer).

·

Company retained accounts receivable.

·

Buyer assumed all liabilities of DoorTek after the effective date of transfer.

·

Buyer transferred back to the Company 228,552 shares of common stock in the Company. Such shares constituted the original purchase consideration when DoorTek was acquired.

·

There were no proceeds from the sale which resulted in a loss of $117,397.



On March 25, 2009, the Company sold the operations of Intelli-Site, Inc. The substantive details of the sale were:



·

Company assigned all Intelli-Site, Inc. assets (including all fixtures, data, records, intellectual property and rights to the Intelli-Site, Inc. name) to the buyer.

·

Company retained some accounts receivable and accounts payable.

·

Buyer assumed all liabilities of Intelli-Site, Inc. after the effective date of transfer.

·

Buyer transferred to the Company 200,000 shares of common stock.

·

A receivable was recorded for cash consideration to be paid over a 24 month period.

·

Proceeds from the sale were $512,263 which resulted in a gain of $354,012.

·

A receivable was recorded for estimated royalty payments to be made over a 36 month period, half of which will be paid in cash and half in common stock.



The operating results for both DoorTek and Intelli-Site have been aggregated and reported as discontinued operations in the Consolidated Statement of Operations and the associated assets and liabilities are classified separately in the balance sheet. Prior periods have been reclassified to conform to the current-period presentation.





Page 7 of 17



---





Loss from Discontinued Operations reported in the Consolidated Statements of Operations consists of the following:



|                                      |                          |         |              |   |         
|------------------------------------- | ------------------------ | ------- | ------------ | - | --------
|                                      | For the six months ended
|                                      | December 31,             |         | December 31,
|                                      | 2009                     |         | 2008        
|Sales                                 | $                        | -       |              | $ | 240,856 
|Cost of sales                         |                          | -       |              |   | 30,413  
|Gross margin                          |                          | -       |              |   | 210,443 
|                                      |                          |         |              |   |         
|Operating expenses:                   |                          |         |              |   |         
|Selling, general and administrative   |                          | 2,319   |              |   | 136,255 
|Research and product development      |                          | -       |              |   | 145,153 
|                                      |                          |         |              |   |         
|Loss from operations                  |                          | (2,319) |              |   | (70,965)
|                                      |                          |         |              |   |         
|Interest expense                      |                          | -       |              |   | (43)    
|                                      |                          |         |              |   |         
|Net loss from discontinued operations | $                        | (2,319) |              | $ | (71,008)



Liabilities from discontinued operations reported in the Consolidated Balance Sheets for December 31, 2009 and June 30, 2009 consisted of accounts payable of $15,612 and $20,892, respectively.



Note 5  Accounts Receivable



The majority of our accounts receivable are due from companies in the perimeter security and road and bridge industries. Credit is extended based on evaluation of a customer's financial condition and credit history and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts and sales allowance. 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. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.



Note 6  Inventory



Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out (FIFO) method of valuation.  The establishment of inventory allowances for excess and obsolete inventories is based on estimated exposure on specific inventory items.



At December 31, 2009 and June 30, 2009, respectively, inventories were comprised of the following:



|                           |              |           |          |   |          
|-------------------------- | ------------ | --------- | -------- | - | ---------
|                           | December 31, |           | June 30,
|                           | 2009         |           | 2009    
|Inventories:               |              |           |          |   |          
|Work in process            | $            | 535,233   |          | $ | 512,263  
|Finished goods             |              | 21,198    |          |   | 14,043   
|Less: Inventory reserve    |              | (230,612) |          |   | (211,876)
|Inventory, net of reserves | $            | 325,819   |          | $ | 314,430  



Note 7  Accrued Liabilities



Accrued liabilities include delinquent trade payables that are in dispute. The Company wrote off $114,137 in delinquent payables during the quarter ending December 31, 2009, resulting in a gain which was netted against SG&A, because they had reached specific legal criteria attributable to their accounts and we believe they are no longer a legal debt.



The amount of disputed trade payables included in accrued liabilities at December 31, 2009 and June 30, 2009 was $305,570 and 436,923, respectively.



Page 8 of 17



---







Note 8  Product Warranties



We have one-year, two-year and five-year limited warranties on products we manufacture both internally and externally.  The length of the warranty is generally 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 and manufacturing services, the warranties of the other manufacturers are passed to the dealers and end users.   In some instances, we absorb the cost of these warranties internally.  To date, the servicing and replacement of defective software components and products have not been material.



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 assess the adequacy of our warranty liability based on changes in these factors.



Note 9  Net Loss per Share



The Company computes basic loss per common share using the weighted average number of common shares outstanding. At December 31, 2009 and 2008, there were 515,000 and 2,015,000 shares, respectively, of in-the-money potentially dilutive common shares outstanding. These shares were not included in weighted average shares outstanding for the six months ended December 31, 2009 and 2008 because their effect is antidilutive due to the Companys reported net loss.



At December 31, 2009 and 2008, we had 674,602,261 and 313,455,240 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of the Companys outstanding equity instruments.



Note 10  Debt



As of December 31 and June 30, 2009, our current and long-term debt consisted of the following:



|                                                                                                                                                                                                                                                                             |              |         |          |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------- | -------- | - | -------
|                                                                                                                                                                                                                                                                             | December 31, |         | June 30,
|                                                                                                                                                                                                                                                                             | 2009         |         | 2009    
|Demand note payable:                                                                                                                                                                                                                                                         |              |         |          |   |        
|                                                                                                                                                                                                                                                                             |              |         |          |   |        
|Demand secured promissory note with a finance company to factor accounts receivable with recourse.  This accounts receivable factoring facility has a factoring fee of 0.35% per 5 day period for which each invoice is outstanding                                          | $            | 26,215  |          | $ | 91,485 
|                                                                                                                                                                                                                                                                             |              |         |          |   |        
|Line of credit with a bank secured with accounts receivable; maximum borrowing amount of $400,000; interest at Wall Street Journal prime rate (3.25% as of June 30, 2009 and 5.00% as of June 30, 2008) plus 2%; principal and accrued unpaid interest due onAugust 2, 2010. |              | 336,400 |          |   | 196,500
|                                                                                                                                                                                                                                                                             | $            | 362,615 |          | $ | 287,985
|                                                                                                                                                                                                                                                                             |              |         |          |   |        
|Long-term debt:                                                                                                                                                                                                                                                              |              |         |          |   |        
|                                                                                                                                                                                                                                                                             |              |         |          |   |        
|Other                                                                                                                                                                                                                                                                        |              | 19,220  |          |   | 22,956 
|                                                                                                                                                                                                                                                                             |              | 19,220  |          |   | 22,956 
|Less current portion                                                                                                                                                                                                                                                         |              | (8,033) |          |   | (7,657)
|Long-term debt                                                                                                                                                                                                                                                               | $            | 11,187  |          | $ | 15,299 





Page 9 of 17



---





Note 11  Business Segments



Information for our reportable segments for the three and six months ended December 31, 2009 and 2008 are as follows:



|                              |                            |           |                          |   |           |  |      |           |  |   |          
|----------------------------- | -------------------------- | --------- | ------------------------ | - | --------- |  | ---- | --------- |  | - | ---------
|                              | For the Three Months
Ended |           | For the Six Months
Ended
|                              | December 31,               |           | December 31,            
|                              | 2009                       |           | 2008                     |   | 2009      |  | 2008
|Revenue                       |                            |           |                          |   |           |  |      |           |  |   |          
|B&B ARMR Corporation          | $                          | 1,038,461 |                          | $ | 1,026,046 |  | $    | 2,105,125 |  | $ | 2,227,893
|B&B Roadway, LLC              |                            | 792,608   |                          |   | 1,035,407 |  |      | 1,653,145 |  |   | 1,880,544
|Corporate                     |                            | 1,423     |                          |   | -         |  |      | 3,981     |  |   | -        
|                              | $                          | 1,832,492 |                          | $ | 2,061,453 |  | $    | 3,762,251 |  | $ | 4,108,437
|                              |                            |           |                          |   |           |  |      |           |  |   |          
|Income (loss) from operations |                            |           |                          |   |           |  |      |           |  |   |          
|B&B ARMR Corporation          | $                          | 172,380   |                          | $ | (8,276)   |  | $    | 289,047   |  | $ | 157,466  
|B&B Roadway, LLC              |                            | 6,132     |                          |   | 106,061   |  |      | 82,279    |  |   | 175,548  
|Corporate                     |                            | (212,603) |                          |   | (185,336) |  |      | (403,704) |  |   | (356,180)
|                              | $                          | (34,091)  |                          | $ | (87,551)  |  | $    | (32,378)  |  | $ | (23,166) 



Note 12  Comprehensive Loss



The following table provides a summary of total comprehensive loss for the six months ended December 31, 2009 and 2008:



|                            |                          |           |              |   |            
|--------------------------- | ------------------------ | --------- | ------------ | - | -----------
|                            | For the Six Months Ended
|                            | December 31,             |           | December 31,
|                            | 2009                     |           | 2008        
|Consolidated net loss       | $                        | (84,023)  |              | $ | (1,001,294)
|Other comprehensive income: |                          |           |              |   |            
|Unrealized holding loss     |                          | (16,289)  |              |   | -          
|Total comprehensive loss    | $                        | (100,312) |              | $ | (1,001,294)



Note 13  Noncontrolling interest



Causey Lyon Enterprises (CLE) is the 35% owner of the B&B Roadway joint venture; per the joint venture agreement, CLE manufactures all products for B&B Roadway. CLE is also one of several outsourced fabrication vendors for B&B ARMR.



Changes in noncontrolling interest for the six months ended December 31, 2009 and 2008 were as follows:



|                                               |      |          |      |   |          
|---------------------------------------------- | ---- | -------- | ---- | - | ---------
|                                               | 2009 |          | 2008
|Noncontrolling interest at July 1              | $    | (17,113) |      | $ | (149,807)
|Income attributable to noncontrolling interest |      | (26,069) |      |   | (57,797) 
|Distributions paid to noncontrolling interest  |      | 37,100   |      |   | 132,132  
|Noncontrolling interest at December 31         | $    | (6,082)  |      | $ | (75,472) 





Page 10 of 17



---





Note 14  Related Party Transactions



For the six months ended December 31, 2009 and 2008, the Company had the following transactions with Causey Lyon Enterprises (CLE):



|                          |              |           |          |   |          
|------------------------- | ------------ | --------- | -------- | - | ---------
|                          | December 31,
|                          | 2009         |           | 2008    
|Purchases (from)          | $            | 1,592,102 |          | $ | 1,404,100
|Management Fees (paid to) |              | 280,919   |          |   | 301,344  
|Rental Fees (paid to)     |              | 32,490    |          |   | 32,490   
|                          |              |           |          |   |          
|                          | December 31, |           | June 30,
|                          | 2009         |           | 2009    
|Accounts Payable          |              | 547,300   |          |   | 458,538  



Note 15  Credit Facility with Laurus Master Fund



On August 3, 2005, the Company closed a financing transaction with Laurus Master Fund, Ltd. to obtain a $3,000,000 credit facility. The agreement with Laurus expired on July 29, 2008. At that time, we had not yet finalized the new factoring agreement with Capital Funding Solutions, and we were therefore unable to pay the balance on the due date.  As a result, we were in default under the terms of this facility.  Laurus added an additional penalty of $77,000 to our final balance of $236,673, which was paid by Capital Funding as a part of our initial factoring of receivables to them on August 15, 2008.



Note 16  Factoring and Security Agreement with Capital Funding Solutions



On August 15, 2008, the Company closed a security agreement with Capital Funding Solutions. The Factoring Agreement provides that the Company will sell to Capital Funding certain of its accounts receivable. Moreover, the factoring agreement requires that we grant to Capital Funding a continuing first priority security interest in all of our now owned and hereafter acquired accounts, chattel paper, deposit accounts, inventory, equipment, instruments, investment property, documents, letter of credit rights, commercial tort claims, general intangibles and supporting obligations. The factoring agreement does not require us to grant a security interest in any of the assets B&B Roadway, Inc. The factoring agreement was initially for a one-year term and was automatically extended by one year on August 15, 2009. The factoring agreement can be terminated at any time by either us or Capital Funding by giving 30 days written notice.



For each account, Capital Funding will pay 80% of the face amount due on such Account at the time of purchase. Upon customer payment of the amount due, Capital Funding will pay 20% of the face amount due less the factoring fee (as defined in the factoring agreement).  The factoring fee is calculated as follows: .35% of the face amount due on an Account at the time of purchase for each 5 day period, computed from the end of the 5 day period following the date on which the purchase price is paid to us for such account and ending when such account is paid by the account debtor.



The factored balance outstanding under the factoring agreement as of December 31, 2009 and June 30, 2009 was $26,215 and $91,485, respectively.



Note 17  Concentrations of Credit Risk



The Company maintains cash balances, at times, with financial institutions, which are in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC). Management monitors the soundness of these institutions and has not experienced any collection losses with these institutions.



Note 18  Subsequent Event



There were no significant or material subsequent events as of the evaluation date of February 11, 2010, which is the date the financial statements were issued.



Page 11 of 17



---





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



Forward Looking Statements



This quarterly report on Form 10-Q 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-Q, including the statements under Part I. - Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations and located elsewhere in this quarterly report on Form 10-Q 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-Q. 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-Q.



Important factors that could cause actual results to differ materially from those in the forward-looking statements in this quarterly report on Form 10-Q 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, 2009 Compared to Three Months Ended December 31, 2008



Sales. Total sales decreased by $0.23 million, or 11.1%, to $1.83 million during the quarter ended December 31, 2009 as compared to $2.06 million during the quarter ended December 31, 2008. This decrease was attributed to B&B Roadway as state and local transportation spending decreased. Sales at B&B ARMR were up 1%.



Gross Profit. Gross profit decreased by $0.07 million during the quarter ended December 31, 2009 to $0.64 million as compared to the quarter ending December 31, 2008. This decrease was due to the decrease in sales at B&B Roadway. Gross profit at B&B ARMR remained flat.



Selling, General and Administrative. Selling, general and administrative expenses decreased $0.12 million for the quarter ended December 31, 2009 compared to the quarter ended December 31, 2008 primarily due to a write off of $0.11 million in delinquent payables at B&B ARMR, resulting in a gain which was netted against SG&A, because they had reached specific legal criteria attributable to their accounts and we believe they are no longer a legal debt.



Interest Expense. Interest expense decreased by $0.32 million during the quarter ended December 31, 2009 to $0.01 million compared to the quarter ended December 31, 2008. Of this decrease, $0.29 million was due to the debt conversion that occurred in the prior fiscal year and $0.03 was due to reduced borrowing on the current credit lines.



Six Months Ended December 31, 2009 Compared to Six Months Ended December 31, 2008



Sales. Total sales decreased by $0.32 million, or 7.9%, to $3.75 million during the six months ended December 31, 2009 from $4.08 million during the six months ended December 31, 2008. Sales at B&B ARMR decreased approximately $0.10 million due to a decline in Service business. Sales at B&B Roadway decreased $0.22 million as state and local transportation spending decreased.





Page 12 of 17



---





Gross Profit. Gross profit decreased by $0.16 million during the six months ended December 31, 2009 to $1.33 million. B&B ARMR gross profit decreased by $0.08 million for the six months ended December 31, 2009 compared to the six months ended December 31, 2008 due to reduced sales and product mix. B&B Roadway experienced a decrease of $0.08 million in gross margin relating to the decrease in sales.



Selling, General and Administrative. Selling, general and administrative expenses decreased by $0.15 million during the six months ended December 31, 2009 compared to the six months ended December 31, 2008 primarily due to a write off of $0.11 million in delinquent payables at B&B ARMR, resulting in a gain which was netted against SG&A, because they had reached specific legal criteria attributable to their accounts and we believe they are no longer a legal debt.



Interest Expense. Interest expense decreased by $0.72 million during the six months ended December 31, 2009 to $0.02 million compared to the six months ended December 31, 2008. Of this decrease, $0.58 million was due to the debt conversion that occurred in the prior fiscal year, $0.08 million was due to a penalty incurred in the prior year upon default on the credit line, and an additional $0.06 million was due to reduced borrowing on current credit lines.



Liquidity and Capital Resources



During the six months ended December 31, 2009, the Company suffered a loss from operations, increasing our accumulated deficit. Management expects that we will be profitable on an operating basis in fiscal 2010; however, this expectation is dependent on the Companys ability to draw additional funds on its factoring agreement or to obtain additional financing from alternative sources. In addition, added factoring of accounts receivable or alternative financing will also be necessary to meet the Companys current liabilities as they become due. As the factoring agreement is a demand note and subject to termination with 30 days notice, plus the fact that the Company has been unable to find alternative financing to date, we can give no assurances that funds will be available to settle current liabilities as they become due. Ultimately, failure to obtain additional financing could jeopardize our ability to continue as a going concern.



Our cash position decreased by $0.01 million during the six months ended December 31, 2009. At December 31, 2009, we had $0.02 million in cash and cash equivalents and $0.36 million outstanding under our factoring and debt agreements. The factoring and debt agreements, which are secured by substantially all of our assets, permit us to borrow up to $1.4 million based on eligible invoices.



For the six months ended December 31, 2009, our operating activities used $0.03 million of cash compared to $0.27 million of cash provided in operations during the six months ended December 31, 2008. We anticipate no significant capital expenditures for the remainder of fiscal 2010. Net proceeds from debt were $0.07 million during the six months ended December 31, 2009 compared to $0.2 million of net payments on debt during the six months ended December 31, 2008.



Prinicipal payments required under outstanding debt at December 31, 2009 are as follows:



|           |  |              |        
|---------- |  | ------------ | -------
|           |  | December 31,
|2010       |  | $            | 370,648
|2011       |  |              | 8,841  
|2012       |  |              | 2,346  
|Thereafter |  |              | -      
|           |  | $            | 381,835



Our backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At January 31, 2010, the Companys backlog was $2.7 million.  We expect to fill the majority of this backlog by June 30, 2010.



Page 13 of 17



---





Item 4. Controls and Procedures.



(a) Evaluation of Disclosure Controls and Procedures.  As of December 31, 2009, an evaluation was carried out under the supervision and with the participation of our senior management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), 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 Exchange Act.  This evaluation included consideration of the various processes carried out under the direction of our CEO and CFO in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms and that information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures.



Based upon this evaluation, our CEO and CFO concluded that, as of December 31, 2009, there existed a material weakness in our processes, procedures and controls related to the preparation of our quarterly and annual financial statements. Due to this material weakness internal controls over financial reporting were not effective as of December 31, 2009. However, we are making changes to resolve the significant turnover, staffing deficiencies and lack of segregation of duties throughout our financial organization. While we believe that we are taking 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.



Page 14 of 17



---





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 Certificates Pursuant to Section 302



32.1+

Officers Certificates Pursuant to Section 906

________________________



+

Filed herewith.









Page 15 of 17



---





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 11, 2010 |  | /s/ Brooks Sherman                                                                    
|      |                   |  | Brooks Sherman                                                                        
|      |                   |  | Director, Chairman of the Board, Chief Executive Officer (Principal Executive Officer)
|      |                   |  |                                                                                       
|Date: | February 11, 2010 |  | /s/ Sharon Doherty                                                                    
|      |                   |  | Sharon Doherty                                                                        
|      |                   |  | Chief Financial Officer                                                               
|      |                   |  |                                                                                       







Page 16 of 17



---





EXHIBIT INDEX



31.1+

Officers Certificate Pursuant to Section 302



32.1+

Officers Certificate Pursuant to Section 906

________________________



+

Filed herewith.





Page 17 of 17