-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AZGzD86z85SFln6JwfZ/9BuX49Y1N2YsgOPCB1KXrNiQsqWKQ3cxo8TiPQLGObwt n0J6hqVwTtY2xsZvYe9FNw== 0001158957-07-000234.txt : 20071015 0001158957-07-000234.hdr.sgml : 20071015 20071015171326 ACCESSION NUMBER: 0001158957-07-000234 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20071015 DATE AS OF CHANGE: 20071015 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000741114 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 752422983 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11900 FILM NUMBER: 071172485 BUSINESS ADDRESS: STREET 1: 8200 SPRINGWOOD DR STE 230 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 9724448280 MAIL ADDRESS: STREET 1: 8200 SPRINGWOOD DR SUITE 230 CITY: IRVING STATE: TX ZIP: 75063 10KSB 1 f10ksb063007.htm 10KSB Integrated Security Systems, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

_______________


Form 10-KSB

_____________________


x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 2007.


o

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.

(Name of Small Business Issuer in its Charter)


Delaware

 

75-2422983

(State of Incorporation)

 

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


2009 Chenault Drive, Suite 114, Carrollton, TX  75006                (972) 444-8280

(Address including zip code, area code and telephone number of Registrant’s principal executive offices.)

_____________________


Securities registered under to Section 12(b) of the Exchange Act: None


Securities registered under to Section 12(g) of the Exchange Act:

Title of Each Class

Common stock, $.01 par value


Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  o


Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities 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


Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  o


Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes o     No x


Issuer’s revenues for its most recent fiscal year:  $10,713,437


On September 28, 2007, the aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $1,446,980.  This amount was calculated by reducing the total number of shares of the registrant’s common stock outstanding on September 28, 2007 by the total number of shares of common stock held by officers and directors, and stockholders owning in excess of 5% of the registrant’s common stock, and multiplying the remainder by the closing price of the registrant’s common stock on September 28, 2007, as reported on the over-the-counter market.


As of September 28, 2007, 100,926,339 shares of the Registrant’s common stock were outstanding.


Transitional Small Business Disclosure Format (check one):  Yes o     No x


Documents Incorporated by Reference: None.



Page 1 of 57





TABLE OF CONTENTS


Item No.

Page

 

 

Part I

 

 

1.        Description of Business

3

2.        Description of Property

7

3.        Legal Proceedings

7

4.        Submission of Matters to a Vote of Security Holders

7

 

 

Part II

 

 

5.       Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

8

6.       Management's Discussion and Analysis or Plan of Operation

9

7.       Financial Statements

15

8.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

37

8A.    Controls and Procedures

37

8B.    Other Information

38

 

 

Part III

 

 

9.       Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

39

10.     Executive Compensation

41

11.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

43

12.     Certain Relationships and Related Transactions

45

13.     Exhibits

46

14.     Principal Accountant Fees and Services

51





Page 2 of 57





PART I


Forward Looking Statements


This annual report on Form 10-KSB 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 annual report on Form 10-KSB, including the statements under “Item 1. Description of Business” and “Item 6. Management’s Discussion and Analysis or Plan of Operation” and located elsewhere in this annual report on Form 10-KSB regarding the financial position and liquidity of Integrated Security Systems, Inc. (the “Company”) are forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it 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 the Company’s expectations, are disclosed in this annual report on Form 10-KSB. The Company does not undertake any obligation to publicly revise its forward-looking statements to reflect events or circumstances that arise after the date of this annual report on Form 10-KSB.


Important factors that could cause actual results to differ materially from those in the forward-looking statements in this annual report on Form 10-KSB 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 customers, access to capital, casualty to or other disruption of the Company’s production facility and equipment, delays and disruptions in the shipment of the Company’s products, government regulations and the ability of the Company to meet its stated business goals.


Item 1. Description of Business


General


We were formed in December 1991 as a Delaware corporation and became publicly traded in April 1993.  We design, develop, manufacture, distribute and service security and traffic control products used in the commercial, industrial and government sectors through three wholly-owned subsidiaries, B&B ARMR Corporation, DoorTek Corporation and Intelli-Site, Inc., and a joint venture entity, B&B Roadway, LLC.


On September 5, 2003, we acquired all of the issued and outstanding shares of common stock of ARMR Services Corporation.  ARMR Services Corporation, which has been renamed B&B ARMR Corporation, is a manufacturing company that engineers and manufactures high security anti-terrorist crash rated barriers, parking control equipment and other security systems for business and government use.  By acquiring B&B ARMR, we have significantly enhanced our service, product offerings and growth opportunities.  As a part of the consideration that we paid for ARMR Services Corporation, we issued 10,000,000 shares of our common stock to B&B ARMR’s former stockholders.


On December 15, 2004, we acquired all of the issued and outstanding shares of common stock of DoorTek Corporation.  DoorTek is a manufacturer of access control systems and other physical security system products.


On March 4, 2005, we entered into a joint venture agreement with Causey Lyon Enterprises, Inc., d/b/a Roadway Manufacturing, to form B&B Roadway, LLC in order to consolidate the two companies’ core competencies in the city, state and federal road and bridge market.  We own 65% of B&B Roadway, LLC.  Causey Lyon Enterprises owns the remaining 35% of B&B Roadway, LLC, manages their operations and sells, manufactures and distributes all products relating to the road and bridge industry, including product lines specifically designed for that market.  




Page 3 of 57





B&B ARMR Corporation


B&B ARMR designs, markets and sells anti-terrorist crash barriers, bollards, wedges and gates, warning and crash gates, gate panels, soft-stop gates, high occupancy vehicle lane changers, navigational lighting, and perimeter security gates and operators.  A 24/7 service and maintenance group is based in Washington, DC, servicing and maintaining a wide range of internally and competitor’s manufactured products for federal and government organizations.  These products compete primarily in the homeland security, perimeter security and road and bridge construction and refurbishment markets.  These products are used for:

 

·

anti-terrorist crash barriers used to prevent malevolent use of vehicles;

·

24/7 service and maintenance for competitors and internally manufactured products;

·

operators and gates used in perimeter security;

·

navigational lights used primarily with waterways;

·

tow-able barriers for event and temporary closures;

·

gating and barricading movable bridges;

·

locking down sections of roads under construction;

·

gates for reversible lane changer systems; and

·

HOV control gates, typically soft-stop.


B&B ARMR sells its products through integrators, contractors, electrical sub-contractors and distributors.  B&B ARMR maintains Governmental Services Administration, or GSA, schedule agreements for three product families, and license agreements both in North America and internationally.  In certain instances, sales are made directly to end-users.  B&B ARMR’s products are manufactured by third party subcontractors.


B&B Roadway, LLC


B&B Roadway is a distributor of products relating to the road and bridge industry, including product lines specifically designed for that market.  B&B Roadway’s products are sold and distributed in the city, state and federal road & bridge markets.  B&B Roadway also services the maritime and vehicular traffic control needs of the movable bridge and highway industries.  We own 65% of B&B Roadway, LLC as part of a joint venture with Causey Lyon Enterprises, Inc.


Intelli-Site, Inc.


Our Intelli-Site® software product, designed and developed by Intelli-Site, Inc., allows automated security and facility controls system integration.  This software allows a customer to decouple the selection of software from hardware, so that a customer can mix and match different hardware, from various manufacturers, into a single, integrated system.  The open system design provided by Intelli-Site® provides a solution that is tailored to unique customer requirements.


More specifically, Intelli-Site® allows customers to integrate a wide variety of devices from various manufacturers, such as access control, closed circuit television, badge systems, fire alarm systems, lighting control and heating, ventilation and air conditioning systems.  In addition to providing centralized control, Intelli-Site® users can tailor the interface for ease of operation based on their unique functional requirements.


No two companies, facilities or workgroups are identical, so each has different security requirements. Intelli-Site®, while a standard product, allows users to define the following aspects of a security system:


·

Configuration - what is to be integrated;

·

Graphical User Interface (GUI) - how the operator controls the system;

·

Functionality - what the system does; and

·

Databases - what and how data is stored.




Page 4 of 57





In the past, only a custom-designed system could provide this level of user-specific features. Other standard software products either cannot be tailored or attempt to provide limited “customization” through a fixed set of user options. With Intelli-Site®, user-defined restrictions are limited only by the capabilities of the integrated devices.


DoorTek Corporation


DoorTek Corporation is a manufacturer of card access control and corrections security hardware and software products.  DoorTek’s product offerings fall into two broad categories: The DT2001 access control product line, and the DoorTek Corrections Electronics product line.  These two product lines may be sold separately or as part of a complete, integrated, corrections electronics control package.  Additionally, DoorTek supports a thriving business in card access control devices, readers, and ancillary devices.


DoorTek’s DT2001 access control system was designed from the ground up to provide a powerful, user friendly operations and administration platform within an advanced, networked environment.  A key component of the DT2001 system is the advanced NP200 node processor that provides high-speed distributed processing for all user transactions and can operate independent of the host control network without degradation in performance.  The system is completely scalable, supporting anywhere from two access control portals up to thousands of portals, input/output points and other security-related devices.  DoorTek has also adopted a specially-branded and enhanced version of the Intelli-Site® software product that provides the DT2001 system with the ability to integrate with a broad range of security products, including closed circuit television, badge systems, fire alarm systems, lighting control and heating, ventilation and air conditionin g systems.


DoorTek Corrections Electronics products include stand-alone door control with optional interlock capabilities, a line of net-workable door/gate controllers that can be integrated into any cell control system, a similar line of corrections audio control products that can route intercom audio throughout a facility, and a complete line of cable interface devices that facilitate interconnection wiring in the field.


DoorTek enjoys a strong existing installation base from which a regular flow of retrofit and upgrade business is derived.  Many DoorTek systems have been installed and have been online continuously for more than 10 years.  An example is the DoorTek access control system installed, and still in full operation after 15 years, at the CARA laboratory at the USNSF station at McMurdo Sound, Antarctica.

                                                                                                                                                                      &n bsp;                                                                                                                                                      New Business


B&B ARMR’s 24/7 service and maintenance group continues to see an increasing volume of requests for its services, operating in and around Washington, DC, where there is a large concentration of customers.  This group offers front line maintenance of our own and our competitor’s products as well as third party products, frequently on an annual contract basis.


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.




Page 5 of 57





Backlog


Our backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At September 30, 2007, our backlog was approximately $4.4 million. We expect that we will fill the majority of this backlog by March 31, 2008.


Product Design and Development


As of September 30, 2007, we had two employees dedicated to research, development and product engineering. We spent $336,143 and $334,241 during fiscal 2007 and 2006, respectively, related to the continual development and enhancement of the Intelli-Site® software product as well as the development of several new product lines in the anti-terrorist crash barrier and perimeter security divisions at B&B ARMR.


Competition


B&B ARMR Corporation


B&B ARMR’s competition can be divided into three categories:  Anti-terrorism, hydraulic gate operators and 24/7 service and maintenance.  We believe anti-terrorism competition continues to increase as the market grows worldwide.  B&B ARMR is not as large as its two main competitors (Delta Scientific and Nasatka Barriers) in the anti-terrorism marketplace, but B&B ARMR is growing in this market sector and is using its years of engineering experience in this area to help secure that growth.  In the hydraulic gate operator business, B&B ARMR has one main competitor (Hy Security) and its new product lines offer a growth platform to increase market share in the future.    B&B ARMR has a unique position within the 24/7 service and maintenance business; however, we believe others may enter this market.


B&B Roadway, LLC


B&B Roadway, LLC, a joint venture in which we own a 65% interest, administrates, sells and distributes products relating to the road and bridge industry, including product lines specifically designed for that market.  B&B Roadway sells its product line both directly and through distributors to the city, state and federal road & bridge market.


Intelli-Site, Inc.


Many companies across the industry use the term “integrated security system” to describe their products and services. In fact, an integrated security system can range from very limited fixed function systems “integrating” as few as two sub-systems to feature-rich, real-time sophisticated software systems, including custom coded integrated solutions. Differences in functionality, performance, and price among integrated security systems vary greatly. Intelli-Site® has the capability to compete across the entire spectrum of integrated security systems, but currently has less than a one percent share of this market. Consequently, Intelli-Site® has a diverse set of competitors, depending on the complexity of the integration effort. Intelli-Site®’s competitors generally fall into one of three categories: Access control manufacturers, “pure” integrated systems platforms and custom software developers.


Through our three subsidiaries, we face intense competition in the security industry.  Some of our competitors are large, well-financed and established companies that have greater name recognition and resources for research and development, manufacturing and marketing than us. These competitors may be better able to compete for market share.




Page 6 of 57





DoorTek Corporation

 

DoorTek’s competitors include manufacturers of card access control and detention control equipment.  Card access control manufacturers tend to compete on terms of scalability and within vertical markets.  In terms of scalability, most manufacturers concentrate on the small to mid sized installation (up to 32 doors).  There are relatively few players in the large installation market (32 to 256 doors) and even fewer in the “enterprise” market (more than 256 doors).  DoorTek’s technology allows it to participate at any level, but its offerings are largely concentrated in the small to mid range.  Increasingly, DoorTek has been successful in the corrections and detention markets at the mid range.  DoorTek’s longevity of more than 25 years in the business and its large existing installation base provides it with some advantage in the retr ofit and upgrade markets.


Employees


As of June 30, 2007, we employed 43 people, all in full-time positions.  None of our employees are subject to collective bargaining agreements.  We believe that relations with our employees are good.


Item 2. Description of Property


Our principal executive offices are located at 2009 Chenault Drive, Suite 114, Carrollton, Texas 75006.  B&B ARMR Corporation and Intelli-Site, Inc. also maintain their principal offices at this location.  This facility consists of approximately 12,000 square feet of office space.  The lease for the Carrollton facility expires in January 2011.  The monthly rent for this property is $11,559, plus the costs of utilities, property taxes, insurance, repair and maintenance expenses and common area utilities.


B&B ARMR Corporation also maintains executive office space located at 1934 Old Gallows Road, Suite 350, Vienna, Virginia 22182, where it occupies approximately 750 square feet.  The monthly rent for this property is $2,890 and includes various amenities provided by the landlord.  The lease for this property is on a month-to-month basis.


B&B ARMR Corporation also maintains warehouse space located at 8451-L Hilltop Road, Fairfax, Virginia 22031, where it occupies approximately 1,500 square feet.  The monthly rent for this property is $2,088, plus the cost of utilities, property taxes, insurance, repair and maintenance expenses and common area utilities.  The lease for this property is on a month-to-month basis.


DoorTek Corporation maintains its principal location at 9107 Marbach Road, Suite 230, San Antonio, Texas 78245, where it occupies 2,105 square feet of office space.  The monthly amount of rent for this property is $2,240 and the lease is on a month-to-month basis.


We believe that the Texas and Virginia properties are in good condition and that the properties, equipment, fixtures and other assets located within each of our facilities are in good condition, are adequately insured against loss and that suitable alternative facilities are readily available if the lease and mortgage agreements described above are not renewed.  Additionally, we believe that our existing facilities are suitable and adequate to meet our current requirements.


Item 3. Legal Proceedings


We are subject to certain legal actions and claims arising in the ordinary course of our business. Although management recognizes the uncertainties of litigation, based upon the dollar amount involved, the nature and management’s understanding of the facts and circumstances which give rise to such actions and claims, management believes that such litigation and claims will be resolved without material effect on our financial position, results of operations or cash flows.


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


None.




Page 7 of 57





PART II


Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities


Our preferred stock is not publicly traded. Our common stock is quoted on the Over-the-Counter Bulletin Board under the symbol “IZZI.”


The following table sets forth, for the periods indicated, the high and low bid quotations for our common stock on the Over-the-Counter Bulletin Board market. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The trading market in our securities may at times be illiquid due to low volume.


 

Common Stock

 

High

 

Low

Fiscal 2007

 

 

 

 

 

Fourth Quarter

$

0.12

 

$

0.07

Third Quarter

 

0.15

 

 

0.09

Second Quarter

 

0.18

 

 

0.11

First Quarter

 

0.20

 

 

0.12

Fiscal 2006

 

 

 

 

 

Fourth Quarter

$

0.20

 

$

0.12

Third Quarter

 

0.26

 

 

0.15

Second Quarter

 

0.22

 

 

0.09

First Quarter

 

0.23

 

 

0.15


On September 28, 2007, the last reported sales prices for the common stock as reported on the Over-the-Counter Bulletin Board was $0.07.


Holders


As of September 28, 2007, there were 100,926,339 shares of common stock outstanding.  The shares of common stock are held of record by approximately 221 holders, including those brokerage firms and/or clearing houses holding our common stock for their clientele, with each such brokerage house and/or clearing house being considered as one holder.


At September 30, 2007 and 2006, we had 184,823,333 and 135,569,520 shares of common and common stock equivalents outstanding, which comprises all of our outstanding equity instruments.


Dividend Policy


We have never declared or paid any dividends on our common stock. We currently intend to retain future earnings, if any, for the operation and development of our business and to repay outstanding debt. We do not intend to pay any dividends on our common stock in the foreseeable future.


Securities Authorized for Issuance Under Equity Compensation Plans


See “Item 10. Executive Compensation” below.


Recent Sales of Unregistered Securities


During fiscal 2007, we issued unregistered convertible promissory notes and promissory notes in conjunction with stock purchase warrants in connection with the transactions described below in this Item 5.  The issuance of promissory notes and stock purchase warrants was exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as transactions not involving a public offering, and an appropriate restrictive legend was affixed to the securities.



Page 8 of 57






Convertible Promissory Notes Issued on October 6, 2006 and November 21, 2006


On October 6, 2006 and November 21, 2006, we issued two unsecured convertible promissory notes to each of Renaissance US Growth Investment Trust PLC (“RUSGIT”) and US Special Opportunities Trust PLC (“USSO”) (formerly known as BFS US Special Opportunities Trust (“BFS”)) in exchange for an aggregate $1,500,000 cash investment. Each of the convertible promissory notes is in the original principal amount of $375,000, mature on October 6, 2009 and November 23, 2009, respectively, and bear interest at an annual rate of 6%. Interest to be accrued during the first year the notes are outstanding was paid in cash on the date of issuance of the notes, and interest accruing after the first year will be payable in cash in quarterly installments. The notes are 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 notes is subject to registration rights agreements previously entered into with each of RUSGIT and USSO. Under the registration rights agreements, we agreed to file a registration statement with the Securities and Exchange Commission to register for resale the shares of common stock issuable to RUSGIT and USSO upon conversion of the notes.


Simultaneously with the execution of the notes issued on October 6, 2006, we and our subsidiaries entered into an Amended Royalty Agreement with Renaissance Capital Growth & Income Fund III, Inc. (“Renn III”), RUSGIT and USSO, replacing the prior Royalty Agreement with Renn III, RUSGIT and USSO entered into on June 16, 2006. Under the terms of the Amended Royalty Agreement, we and our subsidiaries are to pay the lenders a fixed percentage of sales made from narrowly defined new projects. The total royalty payments cannot exceed $100,000 in any year, or $25,000 in any calendar quarter.


Convertible Promissory Notes Issued on May 15, 2007, May30, 2007 and June 22, 2007


On May 15, 2007, May 30, 2007 and June 22, 2007, we issued unsecured convertible promissory notes to Renaissance Capital Growth & Income Fund III, Inc. (“Renn III”) in exchange for an aggregate $450,000 cash investment. Each of the convertible promissory notes is in the original principal amount of $150,000, mature on May 15, 2008, May 30, 2008 and June 22, 2008, respectively, and bear interest at an annual rate of 8% payable in cash in quarterly installments.  The notes are 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 notes is subject to registration rights agreements previously entered into with Renn III. Under the registration rights agreements, 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 notes.


Item 6. Management’s Discussion and Analysis or Plan of Operation


General


The audit report of Weaver and Tidwell, L.L.P., our independent registered public accounting firm for our consolidated financial statements for the fiscal year ended June 30, 2007, states that in fiscal 2007 and 2006, we suffered significant losses from operations.  The audit reports further state that these matters raise substantial doubt about our ability to continue as a going concern.




Page 9 of 57





We cannot predict any material trends, events or uncertainties that may affect us, our subsidiaries, or our subsidiaries’ businesses, financial condition or liquidity.


Critical Accounting Policies


The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. As you might expect, the actual results or outcomes are generally different than the estimated or assumed amounts. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial repo rting process, actual results could differ from those estimates.


Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements fairly present in all material respects our and our subsidiaries’ financial condition, results of operations and cash flows as of, and for, the periods presented in this report. However, we do not suggest that other general risk factors, such as those discussed elsewhere in this report as well as changes in our growth objectives or performance could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.


We consider the following to be critical accounting policies:


Software Development Costs


Software development costs that are deemed to be recoverable are capitalized and amortized over the greater of the revenue method or the straight-line method over five years.  At June 30, 2007 and 2006, software development costs had not been capitalized because of uncertainty regarding their recoverability.


Accounts Receivable


The majority of our accounts receivable are due from companies in the anti-terrorist crash barrier, 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 the 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, and the condition of the general economy and the industry as a whole.  We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for do ubtful accounts.  


Inventories


Inventories are carried at the lower of average cost or market.  Inventory reserves are specifically identified by both item usage and overall management estimation.

 

Income Taxes


We account for income taxes using the liability method. Under the liability method, deferred taxes are provided for tax effects of differences in the basis of assets and liabilities arising from differing treatments for financial reporting and income tax purposes using currently enacted tax rates. Valuation allowances are recorded when it is more likely than not that a tax benefit will not be realized.





Page 10 of 57





Goodwill


Goodwill represents the excess of the purchase price over the fair value of net assets acquired.  On an annual basis, we compare the fair value of our reporting units with their carrying values.  If the carrying value of a reporting unit exceeds its fair value, we recognize an impairment equal to the excess of the carrying value of the operating unit’s goodwill over the fair value of its goodwill.  The fair value of reporting units is estimated using the discounted present value of estimated future cash flows.  We recognized a goodwill impairment loss of $1,527,707 in fiscal 2007 and no goodwill impairment loss in fiscal 2006.


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.


Results of Operations


Year Ended June 30, 2007 Compared to Year Ended June 30, 2006


Sales.  Sales for the current fiscal year decreased by approximately 12.7% or $1.6 million to $10.7 million in fiscal year 2007 from $12.3 million in fiscal 2006.  Sales at B&B ARMR decreased approximately $2.3 million in addition to a decrease of approximately $0.2 million at our Intelli-Site subsidiary due to a decrease in overall sales volume.  These decreases were offset by an increase in overall sales volume at our DoorTek Corporation subsidiary of approximately $0.5 million, in addition to an increase in sales volume at our B&B Roadway joint venture partnership of approximately $0.4 million.

Gross Margin.  Gross margin decreased by approximately $0.3 million during the fiscal year ending 2007 to $3.5 million from $3.8 million for fiscal year ending 2006.  This decrease is due to a reduction in contribution margin of approximately $0.2 million at B&B ARMR coupled with decrease of $0.2 million at Intelli-Site.  These decreases were offset by an increase in gross margin of approximately $0.2 million at B&B Roadway and $0.1 million at DoorTek.


Selling, General and Administrative. Selling, general and administrative expenses decreased by approximately $1.3 million during fiscal period 2007 primarily due to a reduction in expenses at B&B ARMR.


Impairment of Goodwill.  Goodwill impairment of $1,527,707 was recognized during fiscal 2007.  This amount represents the excess carrying value as compared to the computed fair value of the goodwill recognized as the result of the acquisition of ARMR Services Corporation in September 2003 (see Note 2 to the consolidated financial statements for further explanation).


Research and Product Development.  Research and development expenses remained comparable for the fiscal years ending 2007 and 2006.


Interest Expense.  Interest expense increased by approximately $0.1 million to $1.6 million during fiscal 2007 from $1.5 million during fiscal 2006 due to increased borrowings obtained in order to finance company operations.  The additional debt incurred during fiscal year 2007 is described below in this Item 6.




Page 11 of 57





Liquidity and Capital Resources


Cash Position


Our cash position decreased $484,320 during fiscal year 2007. At June 30, 2007, we had $217,954 in cash and cash equivalents and $467,087 outstanding under our asset based lending facility. This asset based lending facility is explained in greater detail below in this section.


Operating Activities


For the fiscal year ended June 30, 2007, our operating activities used $825,740 of cash compared to $3,208,840 cash used during the fiscal year ended June 30, 2006, a decrease of $2,383,100.


Credit Facility with Laurus Master Fund in Fiscal 2006


On July 29, 2005, we entered into, and, on August 3, 2005, closed a financing transaction with Laurus Master Fund, Ltd. to obtain a $3,000,000 credit facility.  The financing was completed pursuant to a security agreement among us, B&B ARMR Corporation, Intelli-Site, Inc., DoorTek Corporation and Laurus.  Under the Security Agreement, we issued to Laurus a $1,000,000 secured convertible minimum borrowing note and a $3,000,000 secured revolving note.  The amount of funds available for borrowing under the credit facility is based upon our and our subsidiaries’ eligible inventory and accounts receivable, with an advance rate equal to:


·

30% of eligible inventory, up to $1,000,000; plus

·

90% of eligible accounts receivable.


On August 3, 2005, we made initial borrowings of $1,836,000 under the credit facility.  The current balance outstanding under the credit facility is $467,087.


The notes mature on July 29, 2008 and carry an interest rate of prime plus one and one half percent, subject to potential downward adjustment based upon the future trading price of our common stock.  Laurus may convert all or a portion of the notes, including accrued interest, into shares of our common stock at a conversion price of $0.25 per share, subject to anti-dilution adjustments.


As part of the financing, we issued to Laurus a warrant to purchase 1,723,077 shares of our common stock. The warrant has an exercise price of $0.325 per share for the first 923,077 shares of common stock and $0.375 per share for the remaining 800,000 shares of common stock, and expires on July 29, 2012.


Convertible Promissory Notes Issued on October 6, 2006 and November 21, 2006


On October 6, 2006 and November 21, 2006, we issued two unsecured convertible promissory notes to each of Renaissance US Growth Investment Trust PLC (“RUSGIT”) and US Special Opportunities Trust PLC (“USSO”) (formerly known as BFS US Special Opportunities Trust (“BFS”)) in exchange for an aggregate $1,500,000 cash investment. Each of the convertible promissory notes is in the original principal amount of $375,000, mature on October 6, 2009 and November 23, 2009, respectively, and bear interest at an annual rate of 6%. Interest to be accrued during the first year the notes are outstanding was paid in cash on the date of issuance of the notes, and interest accruing after the first year will be payable in cash in quarterly installments. The notes are 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.




Page 12 of 57





The common stock to be issued upon conversion of the notes is subject to registration rights agreements previously entered into with each of RUSGIT and USSO. Under the registration rights agreements, we agreed to file a registration statement with the Securities and Exchange Commission to register for resale the shares of common stock issuable to RUSGIT and USSO upon conversion of the notes.


Simultaneously with the execution of the notes issued on October 6, 2006, we and our subsidiaries entered into an Amended Royalty Agreement with Renaissance Capital Growth & Income Fund III, Inc. (“Renn III”), RUSGIT and USSO, replacing the prior Royalty Agreement with Renn III, RUSGIT and USSO entered into on June 16, 2006. Under the terms of the Amended Royalty Agreement, we and our subsidiaries are to pay the lenders a fixed percentage of sales made from narrowly defined new projects. The total royalty payments cannot exceed $100,000 in any year, or $25,000 in any calendar quarter.


Convertible Promissory Notes Issued on May 15, 2007, May30, 2007 and June 22, 2007


On May 15, 2007, May 30, 2007 and June 22, 2007, we issued unsecured convertible promissory notes to Renaissance Capital Growth & Income Fund III, Inc. (“Renn III”) in exchange for an aggregate $450,000 cash investment. Each of the convertible promissory notes is in the original principal amount of $150,000, mature on May 15, 2008, May 30, 2008 and June 22, 2008, respectively, and bear interest at an annual rate of 8% payable in cash in quarterly installments.  The notes are 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 notes is subject to registration rights agreements previously entered into with Renn III. Under the registration rights agreements, 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 notes.


Additional Debt Service Obligations


As described in greater detail in “Item 5.  Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities – Recent Sales of Unregistered Securities,” and elsewhere in this “Item 6. Management’s Discussion and Analysis or Plan of Operation,” during the fiscal year ended June 30, 2007, we financed our operations with cash flows from long-term borrowings of $1,987,725.  During that period, we made payments of $1,424,204 on debt.


Property and Equipment


We used $51,382 for the purchase of property and equipment during fiscal 2007 compared to $18,372 for the previous fiscal 2006 period.  In May 2007, we sold our property located in Norwood, Louisiana, the location of the B&B ARMR manufacturing facility, which ceased manufacturing operations on August 19, 2005 as the result of outsourcing its manufacturing process to domestic third party subcontractors.  This property, consisting of buildings and land, had a net book value of $309,133 and was sold to an unrelated party for $335,818, the outstanding balance of the mortgage on the date of sale.  Other costs related to the final sale of $5,202 and an adjustment for accrued repairs totaling $27,450 yielded a net gain on sale of $48,933.  We do not have any material commitments to purchase property and equipment in fiscal 2008. We do not have any material funding requirements for software and other products under development.




Page 13 of 57





Maturities and Commitments


The following table presents certain of our obligations and commitments to make future payments, excluding interest payments, under contracts and contingent commitments as of June 30, 2007.


 

 

Debt

 

Leases

 

Total

2008

 

$

497,551

 

$

141,972

 

$

639,523

2009

 

 

7,515,093

 

 

148,492

 

 

7,663,585

2010

 

 

5,350,596

 

 

155,011

 

 

5,505,607

Thereafter

 

 

15,996

 

 

79,136

 

 

95,102

 

 

$

13,379,206

 

$

524,611

 

$

13,903,817


Backlog


Our backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At September 30, 2007, our backlog was approximately $4.4 million. We expect that we will fill the majority of this backlog by March 31, 2008.


Effects of Inflation


We believe that the relatively moderate rate of inflation over the past few years has not had a significant impact on our sales or operating results.


Seasonality


Historically we have experienced seasonality in our business due to fluctuations in the weather. We typically experience a decline in sales and operating results during the quarter ended March 31 due to winter weather conditions.


Environmental Matters


We believe that we are currently in compliance with all applicable environmental regulations. Compliance with these regulations has not had, and is not anticipated to have, any material impact upon our capital expenditures, earnings or competitive position.





Page 14 of 57





INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




Item 7.

Financial Statements



 

Page

 

 

Report of Independent Registered Public Accounting Firm

16

Consolidated Balance Sheets as of June 30, 2007 and 2006

17

Consolidated Statements of Operations for the years ended June 30, 2007 and 2006

18

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 30, 2007 and 2006

19

Consolidated Statements of Cash Flows for the years ended June 30, 2007 and 2006

20

Notes to Consolidated Financial Statements

21-36








Page 15 of 57





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of Directors and

Stockholders of Integrated Security Systems, Inc.



We have audited the accompanying consolidated balance sheets of Integrated Security Systems, Inc. as of June 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Security Systems, Inc. as of June 30, 2007 and 2006, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.


The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 3 to the consolidated financial statements, the Company has suffered significant losses from operations.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


As discussed in Note 2 to the financial statements, in July 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) “Accounting for Stock-Based Compensation”.


/s/ WEAVER AND TIDWELL, L.L.P.


Dallas, Texas

October 15, 2007





Page 16 of 57





INTEGRATED SECURITY SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS


 

June 30,

 

2007

 

2006

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

217,954 

 

$

702,274 

Accounts receivable, net of allowance for doubtful accounts of $291,215 and $230,298, respectively

 

2,470,281 

 

 

3,446,830 

Inventories, net of reserves

 

621,185 

 

 

726,050 

Other current assets

 

79,410 

 

 

130,691 

Total current assets

 

3,388,830 

 

 

5,005,845 

 

 

 

 

 

 

Property and equipment, net

 

129,916 

 

 

494,432 

Goodwill

 

2,553,409 

 

 

4,051,722 

Other assets

 

279,654 

 

 

476,175 

Total assets

$

6,351,809 

 

$

10,028,174 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable – trade

$

1,809,944 

 

$

2,504,546 

Accrued liabilities

 

1,525,181 

 

 

1,313,798 

Demand note payable

 

389,593 

 

 

1,491,335 

Current portion of long-term debt

 

107,958 

 

 

842,593 

Total current liabilities

 

3,832,676 

 

 

6,152,272 

 

 

 

 

 

 

Long-term debt

 

12,881,655 

 

 

10,754,069 

 

 

 

 

 

 

Minority interest

 

189,562 

 

 

105,297 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Convertible preferred stock, $.01 par value, 750,000 shares authorized; 100,750 issued and outstanding (liquidation value of $2,015,000)

 

1,008 

 

 

1,008 

Common stock, $.01 par value, 150,000,000 shares authorized; 99,510,890 and 90,628,108 shares, respectively, issued

 

995,109 

 

 

906,281 

Additional paid in capital

 

34,924,238 

 

 

33,750,307 

Accumulated deficit

 

(46,353,689)

 

 

(41,522,310)

Treasury stock, at cost – 50,000 common shares

 

(118,750)

 

 

(118,750)

Total stockholders’ equity (deficit)

 

(10,552,084)

 

 

(6,983,464)

Total liabilities and stockholders’ equity (deficit)

$

6,351,809 

 

$

10,028,174 




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



Page 17 of 57





INTEGRATED SECURITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



 

For the Years Ended

June 30,

 

2007

 

2006

Sales

$

10,713,437 

 

$

12,278,165 

Cost of sales

 

7,187,181 

 

 

8,465,868 

Gross margin

 

3,526,256 

 

 

3,812,297 

 

 

  

 

 

  

Operating expenses:

 

  

 

 

  

   Selling, general and administrative

 

4,696,682 

 

 

5,989,537 

   Impairment of goodwill

 

1,527,707 

 

 

-- 

   Research and product development

 

336,143 

 

 

334,241 

 

 

6,560,532 

 

 

6,323,778 

 

 

  

 

 

  

Loss from operations

 

(3,034,276)

 

 

(2,511,481)

 

 

  

 

 

  

Other income (expense):

 

  

 

 

  

   Interest expense

 

(1,563,387)

 

 

(1,492,861)

 

 

  

 

 

  

Loss before minority interest

 

(4,597,663)

 

 

(4,004,342)

 

 

 

 

 

 

Minority interest

 

(233,716)

 

 

(204,639)

 

 

 

 

 

 

Net loss

 

(4,831,379)

 

 

(4,208,981)

 

 

 

 

 

 

Preferred dividend requirement

 

(164,250)

 

 

(164,250)

 

 

  

 

 

  

Net loss allocable to common stockholders

$

(4,995,629)

 

$

(4,373,231)

 

 

  

 

 

  

 

 

  

 

 

  

Weighted average common shares outstanding

 

96,147,197 

 

 

88,698,971 

 

 

  

 

 

  

Basic and diluted loss per share

$

(0.05)

 

$

(0.05)




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



Page 18 of 57






INTEGRATED SECURITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)



 

Convertible

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid In

 

Acumulated

 

Treasury

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Stock

 

Total


Balance at July 1, 2005


100,750 

 

$


1,008 

 


86,271,402 

 

$


862,714 

 

$


32,842,075 

 

$


(37,128,194)

 

$


(118,750)

 

$


(3,541,147)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issuance

 

 

 

 

 

3,591,545 

 

 

35,915 

 

 

421,247 

 

 

 

 

 

 

 

 

 457,162 

Preferred stock dividend

Conversion

 

 

 

 

 


680,161 

 

 


6,802 

 

 


178,333 

 

 


(185,135)

 

 

 

 

 


-- 

Stock option exercise

 

 

 

 

 

85,000 

 

 

850 

 

 

9,775 

 

 

 

 

 

 

 

 

 10,625 

Debt discount

 

 

 

 

 

 

 

 

 

 

 

298,877 

 

 

 

 

 

 

 

 

298,877 

Net loss

 

 

 

 

 

 

 

 

 

 

 

  

 

 

(4,208,981)

 

 

 

 

 

(4,208,981)


Balance at June 30, 2006


100,750 

 

 


1,008 

 


90,628,108 

 

 


906,281 

 

 


 33,750,307 

 

 


(41,522,310)

 

 


(118,750)

 

 


(6,983,464)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issuance

 

 

 

 

 

7,717,782 

 

 

77,178 

 

 

 827,253 

 

 

 

 

 

 

 

 

904,431 

Note payable conversion

 

 

 

 

 

1,100,000 

 

 

11,000 

 

 

264,000 

 

 

 

 

 

 

 

 

275,000 

Stock option exercise

 

 

 

 

 

65,000 

 

 

650 

 

 

7,475 

 

 

 

 

 

 

 

 

8,125 

Stock option expense

 

 

 

 

 

 

 

 

 

 

 

75,2 03 

 

 

 

 

 

 

 

 

75,203 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,831,379)

 

 

 

 

 

(4,831,379)


Balance at June 30, 2007


 100,750 

 

$


1,008 

 


99,510,890 

 

$


995,109 

 

$


 34,924,238 

 

$


(46,353,689)

 

$


(118,750)

 

$


(10,552,084)





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



Page 19 of 57





INTEGRATED SECURITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


 

For the Years Ended

June 30,

 

2007

 

2006

Cash flows from operating activities:

 

 

 

 

 

   Net loss

$

(4,831,379)

 

$

(4,208,981)

   Adjustments to reconcile net loss to net cash

 

 

 

 

 

     used in operating activities:

 

 

 

 

 

     Depreciation

 

106,765 

 

 

141,426 

     Gain on sale of assets

 

(48,933)

 

 

(21,597)

     Amortization

 

165,511 

 

 

227,924 

     Provision for bad debt

 

193,698 

 

 

223,921 

     Provision for warranty reserve

 

6,907 

 

 

38,227 

     Provision for inventory reserve

 

12,247 

 

 

93,842 

     Stock option expense

 

75,203 

 

 

-- 

     Amortization of debt discount and beneficial conversion feature

 

338,508 

 

 

325,108 

     Expenses paid with stock

 

425,512 

 

 

457,162 

     Minority interest

 

233,716 

 

 

204,639 

     Goodwill impairment

 

1,527,707 

 

 

-- 

     Changes in operating assets and liabilities,

        net of effects of acquisition:

 

 

 

 

 

         Accounts receivable

 

782,851 

 

 

(811,668)

         Inventories

 

92,618 

 

 

(131,863)

         Other assets

 

82,291 

 

 

(106,683)

         Accounts payable – trade

 

(692,015)

 

 

241,806 

         Accrued liabilities

 

703,054 

 

 

117,897 

             Net cash used in operating activities

 

(825,740)

 

 

(3,208,840)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

    Purchase of property and equipment

 

(51,382)

 

 

(18,372)

    Proceeds from sale of assets

 

-- 

 

 

101,050 

    Purchase of business, net of cash acquired

 

(29,394)

 

 

(179,046)

             Net cash used in investing activities

 

(80,776)

 

 

(96,368)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

    Employee stock option exercise

 

8,125 

 

 

10,625 

    Payments of debt

 

(1,424,204)

 

 

(678,241)

    Proceeds from debt

 

1,987,725 

 

 

4,472,153 

    Distribution to minority interest

 

(149,450)

 

 

(102,550)

             Net cash provided by financing activities

 

422,196 

 

 

3,701,987 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

(484,320)

 

 

396,779 

Cash and cash equivalents at beginning of year

 

702,274 

 

 

305,495 

Cash and cash equivalents at end of year

$

217,954 

 

$

702,274 


Supplemental disclosure of noncash financing activities:

 

 

 

 

 

   Issuance of common stock in payment of accrued interest

$

478,919 

 

$

-- 

   Sale of property

 

335,818 

 

 

-- 

   Conversion of unsecured promissory notes into common stock

 

275,000 

 

 

-- 

   Debt payment made directly to lender for debt refinancing

 

-- 

 

 

1,160,867 

   Fair market value of warrants issued regarding credit facility

 

-- 

 

 

298,877 

   Issuance of common stock in payment of preferred stock dividends

 

-- 

 

 

185,135 

   Issuance of promissory note in exchange of indebtedness

 

-- 

 

 

328,386 


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



Page 20 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.

ORGANIZATION AND DESCRIPTION OF BUSINESS


Integrated Security Systems, Inc. was formed in December 1991. The Company has three wholly-owned subsidiaries: B&B ARMR Corporation, an anti-terrorist crash barrier and gate engineering and distribution company; Intelli-Site, Inc., a developer and retail seller of PC-based control systems which integrate discrete security devices; and DoorTek Corporation, a manufacturer of access control systems and other physical security systems products.  The Company also has a 65% joint venture interest in B&B Roadway, LLC, a distributor of products relating to the road and bridge industry.  The Company’s wholly-owned subsidiaries have domestic and international installations and customers.


2.

SIGNIFICANT ACCOUNTING POLICIES


Consolidation


The consolidated financial statements include the Company and its subsidiaries: B&B ARMR Corporation, Intelli-Site, Inc. and DoorTek Corporation, as well as the Company’s joint venture partner, B&B Roadway, LLC.  All significant intercompany transactions and balances have been eliminated.


Cash and Cash Equivalents


Cash and cash equivalents are comprised of highly-liquid instruments with original maturities of three months or less.


Accounts Receivable


The majority of the Company's accounts receivable are due from companies in the anti-terrorist crash barrier, perimeter security and road and bridge industries.  Credit is extended based on evaluation of a customers' 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.  The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, 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 o n such receivables are credited to the allowance for doubtful accounts.  


Inventories


Inventories are carried at the lower of average cost or market.  Inventory reserves are specifically identified by both item usage and overall management estimation.  Inventories are periodically evaluated for both obsolescence and net realizable valuations.




Page 21 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Property and Equipment and Depreciation


Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods. Leased property and equipment under capital leases are amortized on the straight-line method over the lesser of the life of the asset or the remaining term of the lease. Estimated useful lives range from 3 to 7 years.  Property and equipment is periodically evaluated for market valuation and related generation of future cash flow value.


Income Taxes


The Company accounts for income taxes using the liability method. Under the liability method, deferred taxes are provided for tax effects of differences in the basis of assets and liabilities arising from differing treatments for financial reporting and income tax purposes using currently enacted tax rates. Valuation allowances are recorded when it is more likely than not that a tax benefit will not be realized.


Revenue Recognition


The Company recognizes revenue from product sales at the time of shipment and we recognize revenue from services at the time the services are rendered.  Revenue from our service and maintenance contracts is recognized on a straight-line basis over the term of the contracts.  The Company’s accounts receivable are generated from a large number of customers in the security integration, construction contractor and electrical subcontractor and governmental markets. No single customer accounted for 10% or more of revenues during the years ended June 30, 2007 or 2006.


Software Development Costs


Software development costs that are deemed to be recoverable are capitalized and amortized over the greater of the revenue method or the straight-line method over five years.  At June 30, 2007 and 2006, software development costs had not been capitalized because of uncertainty regarding their recoverability.


Fair Value of Financial Instruments


The carrying values of the Company’s cash and cash equivalents, accounts receivable and current portion of term notes payable approximate fair value due to their relatively short-term maturity.  The carrying value of long-term debt approximates fair value because it bears a prevailing market rate of interest.  The fair value of the remaining debt instruments is undeterminable due to their related party nature.




Page 22 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Goodwill


Goodwill represents the excess of the purchase price over the fair value of net assets acquired.  On an annual basis, we compare the fair value of our reporting units with their carrying values.  If the carrying value of a reporting unit exceeds its fair value, we recognize an impairment equal to the excess of the carrying value of the operating unit’s goodwill over the fair value of its goodwill.  The fair value of reporting units is estimated using the discounted present value of estimated future cash flows.  We recognized an impairment loss of $1,527,707 in fiscal 2007 and no impairment loss in fiscal 2006 related to the acquisition of ARMR Services Corporation.  We believe that no impairment of goodwill exists at June 30, 2007 and 2006 related to the acquisition of DoorTek Corporation. The changes in the carrying amount of goodwill for the periods ending June 30, 2007 and 2006 are as follows:


 

For the Year Ended June 30,

 

2007

 

2006

ARMR Services Corporation

 

 

 

 

 

Beginning balance:

$

4,009,391 

 

$

3,850,168 

Earn-out agreement

 

16,326 

 

 

159,223 

Impairment loss

 

(1,527,707)

 

 

 

$

2,498,010 

 

$

4,009,391 

 

 

 

 

 

 

DoorTek Corporation

 

 

 

 

 

Beginning balance:

$

42,331 

 

$

22,508 

Earn-out agreement

 

13,068 

 

 

19,823 

Impairment loss

 

 

 

 

$

55,399 

 

$

42,331 

 

 

 

 

 

 

Total

 

 

 

 

 

Beginning balance:

$

4,051,722 

 

$

3,872,676 

Earn-out agreements

 

29,394 

 

 

179,046 

Impairment losses

 

(1,527,707)

 

 

 

$

2,553,409 

 

$

4,051,722 


Valuation of Long-Lived Assets


The Company periodically reviews the net realizable value of its long-lived assets whenever events and circumstances indicate an impairment may have occurred.  In the event the Company determines that the carrying value of long-lived assets is in excess of estimated gross future cash flows for those assets, the Company will write-down the value of the assets to a level commensurate with a discounted cash flow analysis of the estimated future cash flows.


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.




Page 23 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.


The changes in our product warranty liability are as follows:


 

June 30,

 

2007

 

2006

Liability, beginning of year

$

144,361 

 

$

250,017 

Expense for new warranties issued

 

6,907 

 

 

38,227 

Warranty claims

 

(57,820)

 

 

(143,883)

Liability, end of period

$

93,448 

 

$

144,361 


Net Loss Per Share


The Company computes basic loss per common share using the weighted average number of common shares outstanding. At June 30, 2007 and 2006, there were 2,471,250 and 3,968,910 shares of in-the-money potentially dilutive common shares, respectively, outstanding, which were not included in weighted average shares outstanding because their effect is antidilutive due to the Company’s reported net loss.  


At June 30, 2007 and 2006, the Company had 176,954,904 and 138,349,099 shares of common stock and common stock equivalents outstanding, which comprises all of the Company’s outstanding equity instruments.  


Estimates


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


Statements of Cash Flows


Supplemental cash flow information for fiscal years 2007 and 2006:


 

June 30,

 

2007

 

2006

Interest paid

$

220,783 

 

$

380,945 


Concentration of Credit Risk


Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. The Company follows the practice of filing statutory liens on construction projects where collection problems are anticipated.  The Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk attendant in its business.




Page 24 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.  The Company is in the process of determining the impact of this Interpretation on the Company's consolidated financial statements.

 

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


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


Stock-based Compensation


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 2 0% rate, which averages out to an overall forfeiture rate of 48.8%.  An expense of $75,203 recorded in fiscal year 2007.  The known amount of compensation expense to be recognized in future periods through fiscal 2008 is $44,841.




Page 25 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


 

For the Year Ended

June 30, 2006

Expected volatility

99.29% - 109.96%

Risk-free interest rate

3.80% - 4.63%


There were no grants made during the fiscal year ended June 30, 2007.


If we had recognized compensation expense as permitted under Statement of Financial Accounting Standards No. 123 (“SFAS 123”) for the fiscal year ended June 30, 2006, based on the fair value at the grant dates, our pro forma net loss and net loss per share would have been as follows:


 

For the Year Ended

June 30, 2006

Net loss, as reported

$

(4,208,981)

Add:  Stock-based employee compensation

expense determined under the intrinsic

value method included in reported net loss

 

--

Deduct:  Total stock-based employee

compensation expense determined

under fair value based method

 

(422,010)

Pro forma net loss

$

(4,630,991)

Earnings per share:

 

 

Basic and Diluted-as reported

$

(0.05)

Basic and Diluted-pro forma

$

(0.05)




Page 26 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.

LIQUIDITY


We have experienced significant losses during fiscal 2007 and 2006.  Management anticipates positive performance during fiscal 2008. However, in order to meet working capital needs, we will need to receive additional financing either through the sale of assets, equity placement and/or additional debt. Failure to receive such financing could jeopardize our ability to continue as a going concern.


4.

COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS


The composition of certain balance sheet accounts is as follows:


 

June 30,

 

2007

 

2006

 

 

 

 

 

 

Accounts receivable:

 

 

 

 

 

     Trade receivables

$

2,761,496 

 

$

3,677,128

     Less:  allowance for doubtful receivables

 

(291,215)

 

 

(230,298)

 

$

2,470,281 

 

$

3,446,830

 

 

 

 

 

 

Allowance for doubtful receivables:

 

 

 

 

 

     Beginning Balance

$

230,298 

 

$

127,197

          Bad debt expense

 

193,698 

 

 

223,921

          Accounts written-off

 

(132,781)

 

 

(120,820)

     Ending Balance

$

291,215 

 

$

230,298

 

 

 

 

 

 

Inventories:

 

 

 

 

 

     Raw materials

$

636,217 

 

$

748,988

     Finished goods

 

91,057 

 

 

70,904

     Reserves

 

(106,089)

 

 

(93,842)

 

$

621,185 

 

$

726,050

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

     Land

$

-- 

 

$

40,164

     Building

 

-- 

 

 

613,468

     Leasehold improvements

 

11,547 

 

 

89,174

     Office furniture and equipment

 

750,683 

 

 

737,025

     Vehicles

 

163,821 

 

 

126,097

 

 

926,051 

 

 

1,605,928

     Less: accumulated depreciation

 

(796,135)

 

 

(1,111,496)

 

$

129,916 

 

$

494,432




Page 27 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.

DEBT


 

June 30,

 

2007

 

2006

 

 

 

 

 

 

Demand note payable:

 

 

 

 

 

 

 

 

 

 

 

Secured convertible minimum borrowing note and secured revolving note with a financial institution; interest at Wall Street Journal prime rate (7.75% as of June 30, 2007) plus 1.5%; principal and accrued unpaid interest due July 29, 2008; convertible at the option of the financial institution at $0.25 per share (net of debt discount of $77,494 and $149,026, respectively)

$

389,593 

 

$

1,491,335 

 

$

389,593 

 

$

1,491,335 

 

 

 

 

 

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

Convertible notes payable; interest at 10% due in semi-annual installments of $192,150 and 205,900, respectively; principal and accrued unpaid interest due November 30, 2009; convertible at the option of the shareholder at $0.38 per share; Company may call the notes at $0.60 per share (based on certain restrictions)

$

3,843,000 

 

$

4,118,000 

 

 

 

 

 

 

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 

 

 

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 

 

 

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 

 

 

1,100,000 

 

 

 

 

 

 

Convertible note payable to stockholder; interest at 6%; first year interest due, and paid, at date of issuance; subsequent interest payments due in quarterly installments of $11,250; principal and accrued unpaid interest due October 6, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)

 

750,000 

 

 

-- 

 

 

 

 

 

 

Convertible note payable to stockholder; interest at 6%; first year interest due, and paid, at date of issuance; subsequent interest payments due in quarterly installments of $11,250; principal and accrued unpaid interest due November 23, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)

 

750,000 

 

 

-- 

 

 

 

 

 

 

Notes payable to stockholders; interest at 8% due in monthly installments of $4,833; principal and accrued unpaid interest due September 30, 2008 (net of debt discount of $79,076 and $237,226, respectively)

 

645,924 

 

 

408,698 

 

 

 

 

 

 

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 

 

 

500,000 

 

 

 

 

 

 

(continued…)

 

 

 

 

 




Page 28 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.

DEBT (continued)


 

June 30,

 

2007

 

2006

 

 

 

 

 

 

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 

 

$

500,000 

 

 

 

 

 

 

Convertible note payable to stockholder; interest at 8% due in monthly installments of $3,333; principal and accrued unpaid interest due September 30, 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 $32,221 and $61,969, respectively)

 

467,779 

 

 

438,031 

 

 

 

 

 

 

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 

 

 

328,386 

 

 

 

 

 

 

Line of credit with a bank; maximum borrowing amount of $300,000; interest at Wall Street Journal prime rate (7.75% as of June 30, 2007) plus 2%; principal and accrued unpaid interest due on March 16, 2008

 

195,000 

 

 

298,000 

 

 

 

 

 

 

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 

 

 

100,000 

 

 

 

 

 

 

Term note payable to a bank; due in monthly principal and interest installments of $10,500; interest at 10% at June 30, 2006; secured by first mortgage on real estate; paid in full on May 8, 2007 upon sale of real estate

 

-- 

 

 

357,971 

 

 

 

 

 

 

Other

 

59,024 

 

 

80,247 

 

 

12,989,613 

 

 

11,596,662 

Less current portion

 

(107,958)

 

 

(842,593)

 

$

12,881,655 

 

$

10,754,069 


Principal payments required under long-term debt outstanding at June 30, 2007 are as follows:


Year Ending June 30,

2008

$

107,958

2009

 

7,515,093

2010

 

5,350,596

Thereafter

 

15,966

 

$

12,989,613




Page 29 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.

INCOME TAXES


A reconciliation of the income tax provision and the amount computed by applying the federal statutory benefit rate to loss before income taxes follows:


 

For the Years Ended

 

June 30, 2007

 

June 30, 2006

Federal statutory benefit rate

(34.0)%

 

(34.0)%

 


 


Valuation allowance

  34.0%

 

  34.0%

 

 --%

 

 --%


Deferred tax assets (liabilities) are comprised of the following at:


 

June 30, 2007

 

June 30, 2006

Deferred tax assets

 

 

 

 

 

   Inventory reserve

$

36,000 

 

$

32,000 

   Accounts receivable

 

99,000 

 

 

78,000 

   Net operating loss  carryforward

 

11,700,000 

 

 

10,611,000 

   Other

 

32,000 

 

 

49,000 

   Gross deferred tax asset

 

11,867,000 

 

 

10,770,000 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

   Property and equipment

 

-- 

 

 

-- 

Net deferred tax asset

 

11,867,000 

 

 

10,770,000 

Valuation allowance

 

(11,867,000)

 

 

(10,770,000)

Net deferred tax asset

$

-- 

 

$

-- 


The Company has unused net operating loss carryforwards of approximately $34.5 million at June 30, 2007.  The carryforwards expire from 2009 through 2023. The annual use of these carryforwards is substantially limited as a result of changes in ownership of the Company’s common stock.  The Company has recorded a valuation allowance to the extent it is more likely than not that a tax benefit will not be realized prior to expiration of the carryforward periods.




Page 30 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.

COMMITMENTS AND CONTINGENCIES


The Company is subject to certain legal actions and claims arising in the ordinary course of business. Management recognizes the uncertainties of litigation; however, based upon the nature and management’s understanding of the facts and circumstances which give rise to such actions and claims, management believes that such litigation and claims will be resolved without material effect on the Company’s financial position, results of operations or cash flows.


Operating Leases


The Company leases facilities under leases accounted for as operating leases. Rent expense for operating leases was $286,810 and $301,905 for the years ended June 30, 2007 and 2006, respectively.  Future minimum payments for fiscal years subsequent to June 30, 2007 under these leases are as follows:


Year Ending June 30,

2008

$

141,972

2009

 

148,492

2010

 

155,011

2011

 

79,136

 

$

524,611


Capital Leases


The Company leases certain equipment under leases accounted for as capital leases, with the resulting liability recorded as a component of both current and long-term debt, in the accompanying consolidated balance sheet.  Future minimum payments for fiscal years subsequent to June 30, 2007 under these leases are as follows:


Year Ending June 30,

2008

$

25,742

2009

 

17,943

2010

 

9,534

2011

 

9,534

2012

 

7,945

 

 

70,698

Less amount

  representing interest

 

(11,674)

 

$

59,024


The following is a summary of the assets under capital leases at June 30, 2007:


Production and office equipment

$

100,585 

Less accumulated depreciation

 

(93,852)

 

$

6,733 


8.

BENEFIT PLANS


The Company maintains a 401(k) savings and profit sharing plan. Participants include all employees who have completed six months of service and are at least 21 years of age. Employees can contribute up to 15% of compensation and the Company may at its option make discretionary contributions. Vesting on the Company’s contributions occurs over a five-year period. The Company recognized expense of $11,656 and $6,904 during fiscal 2007 and 2006, respectively.




Page 31 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.

STOCK OPTIONS, WARRANTS AND COMMON STOCK ISSUANCES


Stock Options


The Company’s 1993 Stock Option Plan provides for grants of options for up to 500,000 shares of common stock. Under the plan, options must be granted with an exercise price not less than the fair market value on the date of grant.


The Company’s 1997 Omnibus Stock Plan provides for the granting of 7,500,000 incentive stock options, non-statutory stock options, stock appreciation rights, awards of stock and stock purchase opportunities to its directors, employees and consultants. Under the plan, incentive stock options may only be granted to employees or directors of the Company.


Option exercise prices, in general, are equal to the market price at date of grant. Shares under grant generally become exercisable over three years and expire after ten years.


Changes for the two years ending June 30, 2007, with respect to options outstanding, is detailed in the following table:


 

For the Year Ended

June 30, 2007

 

For the Year Ended

June 30, 2006

 

 

Shares

 

Weighted

Average

Exercise Price

 

Shares

 

Weighted

Average

Exercise Price

Outstanding at beginning of period

6,460,824 

 

$ 0.37

 

5,275,748 

 

$ 0.45

     Issued

-- 

 

       --

 

2,710,000 

 

   0.20

     Exercised

(65,000)

 

   0.13

 

(85,000)

 

   0.13

     Expired

(2,043,881)

 

   0.27

 

(1,439,924)

 

   0.38

Outstanding at end of period

4,351,943 

 

$ 0.42

 

6,460,824 

 

$ 0.37

Exercisable at end of period

3,424,443 

 

$ 0.47

 

3,550,824 

 

$ 0.47

Weighted-average fair value of options granted during the period

 

 

$     --

 

 

 

$ 0.20


Information about stock options outstanding at June 30, 2007 is summarized as follows:


 

 

Options Outstanding

 

Options Exercisable

Range of

Exercise

Prices

 

Number

Of Shares

 

Weighted

Average

Remaining Life

 

Weighted

Average

Exercise Price

 

Number

Of Shares

 

Weighted

Average

Exercise Price

$0.125-0.195

 

150,000

 

6.6 Years

 

$0.14

 

100,000

 

$0.14

$0.20-0.22

 

1,621,428

 

8.2 Years

 

  0.21

 

846,428

 

  0.21

$0.30-0.39

 

1,058,389

 

4.8 Years

 

  0.34

 

1,043,389

 

  0.34

$0.40-0.49

 

877,500

 

6.6 Years

 

  0.44

 

790,000

 

  0.44

$0.5625-1.96

 

644,626

 

1.1 Years

 

  1.11

 

644,626

 

  1.11

 

 

4,351,643

 

5.9 Years

 

$0.47

 

3,424,443

 

$0.42





Page 32 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Warrants


In connection with debt financings, the Company issued warrants to purchase 2,423,077 shares of common stock in fiscal.  The warrants provide for the purchase of common stock from $0.375 to $0.25 per share, are exercisable at date of issuance and expire five to seven years from date of issuance.  The Company valued the warrants using the Black-Scholes model, which resulted in a fair value of $298,877 for fiscal year 2006.  The Company will amortize the value of these warrants as interest expense in future fiscal years, according to the term of the debt.

 

Additional information with respect to warrants outstanding at June 30, 2007 and changes for the two years then ended are as follows:


 

For the Year Ended

June 30, 2007

 

For the Year Ended

June 30, 2006

 

 

Shares

 

Weighted

Average

Exercise Price

 

Shares

 

Weighted

Average

Exercise Price

Outstanding at beginning of period

6,505,473 

 

$ 0.38

 

8,161,455 

 

$ 0.67

     Issued

-- 

 

       --

 

2,423,077 

 

   0.32

     Exercised

-- 

 

       --

 

-- 

 

       --

     Expired

(500,000)

 

   0.20

 

(4,079,059)

 

   0.92

Outstanding at end of period

6,005,473 

 

$ 0.40

 

6,505,473 

 

$ 0.38

Exercisable at end of period

6,005,473 

 

$ 0.40

 

6,505,473 

 

$ 0.38


Common Stock Issuances


The Company issued common stock in the following non-cash transactions:


 

For the Year Ended

June 30, 2007

 

For the Year Ended

June 30, 2006

 

 

Number of Shares

 

Fair Value

 

Number of Shares

 

Fair Value

Payment of interest

7,177,312

 

$

825,535

 

3,209,758

 

$

393,471

Employee and director bonuses

    527,970

 

 

     77,396

 

   370,676

 

 

     62,191

Consultants

      12,500

 

 

         1,500

 

     11,111

 

 

         1,500

 

7,717,782

 

 

904,431

 

3,591,545

 

 

457,162

Conversion of notes payable

  1,100,000

 

 

      275,000

 

   680,161

 

 

      185,135

 

  8,817,782

 

$

1,179,431

 

4,271,706

 

$

642,297


The shares issued in these transactions are subject to restrictions on sale.  




Page 33 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.

CONVERTIBLE PREFERRED STOCK


At June 30, 2007 and 2006, convertible preferred stock, $0.01 par value per share, consisted of the following:


 

Shares

Outstanding

 

Par Value

 

Liquidation

Value

Series A $20

9,500

 

$

95

 

$

190,000

Series D $20

91,250

 

 

913

 

 

1,825,000

 

100,750

 

$

1,008

 

$

2,015,000


Series A $20 Convertible Preferred Stock.  At June 30, 2007, the Company had 9,500 shares of its Series A $20 Convertible Preferred Stock (the “Series A Preferred”) outstanding. Holders of the Series A Preferred are not entitled to receive any dividends, and have no voting rights unless otherwise required pursuant to Delaware law. Each share of the Series A Preferred may, at the option of the Company, be converted into 20 shares of common stock at any time after (i) the closing bid price of the common stock is at least $2.00 for at least 20 trading days during any 30 trading day period, and (ii) the shares of common stock to be received on conversion have been registered or otherwise qualified for sale under applicable securities laws. The holders of the Series A Preferred have the right to convert each share into 20 shares of common stock at any time. Upon any liquidation, dissolution, or winding up of the Company, the holders of the Series A Preferr ed are entitled to receive $20 per share before the holders of common stock are entitled to receive any distribution.


Series D $20 Convertible Preferred Stock.  At June 30, 2007 the Company had 91,250 shares of its Series D $20 Convertible Preferred Stock (the “Series D Preferred”) outstanding. Holders of the Series D Preferred are entitled to receive dividends at the annual rate of 9% per share paid quarterly in cash.  Since June 30, 2001, the holders of the Series D Preferred have been offered the option to receive the quarterly dividend in the common stock of the Company.  The holders who elected this option have received the restricted stock based on a 25% discount from the market price on a 20 day average based on the 10 days before and the 10 days after the dividend due date.  The holders of the Series D Preferred have voting rights of one vote for each share of common stock into which the Preferred Stock is convertible. Beginning on November 15, 2004 the Company may redeem the Series D Preferred upon not less than 30 days’ notice, in whole or in part, plus all accrued but unpaid dividends. After notice and prior to the expiration of the 30-day notice period, holders of the Series D Preferred will have the option to convert the Series D Preferred into common stock prior to the redemption. Each share of the Series D Preferred may, at the option of the Company beginning on November 15, 2000, be converted into 25 shares of common stock at any time after (i) the closing bid price of the common stock exceeds $2.00 for at least 20 trading days during any 30 trading day period, and (ii) the Company has sustained positive earnings per share of common stock for the two previous quarters. The holders of the Series D Preferred have the right to convert each share into 25 shares of common stock at any time.  The holders of the Series D Preferred are entitled to receive $20 per share before the holders of common stock are entitled to receive any distribution.  Each holder also received a stock purchase warrant to purchase 16.67 shares of common st ock at $1.00 per share for each share of Series D Preferred purchased. These warrants expired on October 10, 2004.  At June 30, 2007, dividends in arrears on the Series D preferred stock totaled $553,728.




Page 34 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.

SEGMENT REPORTING


The Company has three wholly-owned business segments: B&B ARMR Corporation, Intelli-Site, Inc. and DoorTek Corporation.  The Company also has a 65% joint venture interest in B&B Roadway, LLC. These segments, as well as the joint venture, are differentiated by the products they produce and the customers they service as follows:


B&B ARMR Corporation.  This segment consists of anti-terrorist crash barriers, perimeter security and railroad physical security products such as warning gates, crash barriers, HOV lane changers, navigational lighting, airport lighting and hydraulic gates and operators, and aluminum gate panels.


B&B Roadway, LLC.  This segment consists of products related to the road and bridge industry, including product lines specifically designed for that market.


Intelli-Site, Inc. This segment consists of the development and marketing of programmable security systems that integrate multiple security devices and subsystems for governmental, commercial and industrial facilities utilizing the Intelli-Site® software product through systems integrators and original equipment manufacturers to end users.


DoorTek Corporation.  This segment consists of card access control and connections security hardware and software products, as well as card access control cards, readers and ancillary devices.


The Company’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting. The Company evaluates performance based on income (loss) from operations before income tax and other income and expense. The corporate column includes corporate overhead-related items. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 2).


The following table provides financial data by segment for the fiscal years ended June 30, 2007 and 2006.


  

B&B ARMR

 

B&B Roadway

 

Intelli-Site

 

DoorTek

 

Corporate

 

Total

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

$

3,957,907 

 

$

5,054,717 

 

$

536,579 

 

$

1,164,234 

 

$

-- 

 

$

10,713,437 

Income (Loss) from operations

 

(2,681,560)

 

 

701,852 

 

 

(167,388)

 

 

73,293 

 

 

(960,473)

 

 

(3,034,276)

Interest expense

 

113,008 

 

 

34,097 

 

 

-- 

 

 

608 

 

 

1,415,674 

 

 

1,563,387 

Total assets

 

3,906,148 

 

 

1,108,550 

 

 

143,955 

 

 

10,973 

 

 

1,182,183 

 

 

6,351,809 

Depreciation expense

 

94,988 

 

 

-- 

 

 

9,481 

 

 

-- 

 

 

2,296 

 

 

106,765 

Capital additions

 

38,784 

 

 

-- 

 

 

11,657 

 

 

-- 

 

 

941 

 

 

51,382 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

$

6,255,735 

 

$

4,653,964 

 

$

700,358 

 

$

668,108 

 

$

-- 

 

$

12,278,165 

Income (Loss) from operations

 

(2,268,943)

 

 

612,396 

 

 

2,489 

 

 

(18,107)

 

 

(839,316)

 

 

(2,511,481)

Interest expense

 

128,597 

 

 

27,712 

 

 

-- 

 

 

606 

 

 

1,335,946 

 

 

1,492,861 

Total assets

 

7,122,922 

 

 

1,138,262 

 

 

191,573 

 

 

23,375 

 

 

1,552,042 

 

 

10,028,174 

Depreciation expense

 

131,693 

 

 

-- 

 

 

8,735 

 

 

-- 

 

 

998 

 

 

141,426 

Capital additions

 

9,083 

 

 

-- 

 

 

2,040 

 

 

-- 

 

 

7,249 

 

 

18,372 




Page 35 of 57





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.  RELATED PARTY TRANSACTIONS


During fiscal 2007 and 2006, B&B Roadway, our joint venture partnership, owned 65% by our wholly owned subsidiary B&B ARMR Corporation and 35% by Causey Lyon Enterprises, Inc. (“CLE”), had the following transactions with CLE:


 

For the Year Ended June 30,

 

2007

 

2006

Purchases (from)

$

3,498,548

 

$

3,242,707

Management Fees (paid to)

 

597,631

 

 

489,330


In addition, B&B Roadway had the following balances with CLE:


 

June 30,

 

2007

 

2006

Accounts Receivable

$

1,377

 

$

808

Accounts Payable

 

365,681

 

 

56,529


These transactions and resultant balances are in accordance with the terms and conditions of the joint venture agreement entered into by B&B ARMR Corporation and CLE on March 4, 2005.





Page 36 of 57





Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


There are no changes or disagreements required to be reported under this Item 8.


Item 8A.  Controls and Procedures


(a)

Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our senior management, including our Chief Executive Officer (CEO) (our principal executive officer) and our Chief Financial Officer (CFO) (our principal financial and accounting officer), of the effectiveness and the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  This evaluation included consideration of the various processes carried out under the direction of our CEO and 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 informati on 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 the end of the period covered by this report, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.  Due to this material weakness, in preparing our financial statements as of and for the fiscal year ending June 30, 2007, we performed compensating additional procedures and processes designed to ensure that such financial statements were fairly presented in all material respects in accordance with generally accepted accounting principles.

 

Material Weakness

 

There exists a material weakness in our processes, procedures and controls related to the preparation of our quarterly and annual financial statements.  Due to our significant turnover, lack of qualified personnel in both senior management and staff positions, as the result of the inability to adequately staff the accounting and finance function due to cash flow constraints, our control environment is reliant primarily on the review function to prevent or detect material misstatement from reaching the financial statements.  Our CEO and CFO identified the following:


·

significant turnover, and resulting lack of qualified personnel, at senior management and financial reporting positions (including the chief financial officer and controller positions);


·

lack of timeliness and precision of the preparation and review of detailed account reconciliations;


·

lack of a clear organization and accountability structure within the accounting function, including insufficient review and supervision;


·

lack of sufficient awareness of, and timely and appropriate remediation of, internal control issues by company personnel; and


·

lack of sufficient awareness and formal communication of accounting policies and procedures, resulting in the inconsistent application of and adherence to corporate policies.




Page 37 of 57





We continue to evaluate and make every attempt to take 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.  Accordingly, we will continue to monitor vigorously 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.  We will endeavor to improve both the quality and the quantity of staffing in order to effect significant improvements in our internal control structure.  


Our CFO (our principal financial and accounting officer) has given notice to us that he will be resigning his position with the Company.  As of the end of the period covered by this report, we have not yet identified a replacement to serve in the capacity of our CFO/CAO or principal financial and accounting officer.


Item 8B.  Other Information


There is no information required to be reported under this Item 8B.




Page 38 of 57





PART III


Item 9.

Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act


The following individuals are directors of the Company.


C. A. RUNDELL, JR., 75, has been a Director since March 1999 and served as Chief Executive Officer from August 2000 until March 2006.  Mr. Rundell is also Chairman of the Board of Directors of both Intelli-Site, Inc. and DoorTek Corporation.  Since 1988, Mr. Rundell has owned and operated Rundell Enterprises, a sole proprietorship engaged in providing acquisition and financial services to business enterprises.  From October 1996 until December 1998, Mr. Rundell served as the Chief Executive Officer of Tyler Corporation.  From April 1989 until July 2000, Mr. Rundell served as a director and the Chairman of the Board of NCI Building Systems, Inc.   Mr. Rundell earned an M.B.A. with Distinction from Harvard University and a B.S. in Chemical Engineering from The University of Texas at Austin.


WILLIAM D. BREEDLOVE, 67, has been a Director since May 2001.  Mr. Breedlove has served as President of HBW Investments, Inc., a private investment firm, since August 1996.  Mr. Breedlove has held senior management positions in commercial and merchant banking for over 30 years.  Prior to HBW’s formation in 1996, Mr. Breedlove was chairman, managing director and co-founder of Breedlove Wesneski & Co., a private merchant banking firm.  From 1984 to 1989, Mr. Breedlove also served as president and director of Equus Capital Corporation, the corporate general partner of three public and private limited partnerships operating as management leveraged buyout funds.  Mr. Breedlove’s experience also includes 22 years at First National Bank in Dallas, the last three years of which he served as chairman and chief executive officer of the lead bank and vice chairman of InterFirst Corporation.  Mr. Breedlove currently serves as a director of N CI Building Systems, Inc., and five private companies.  He has previously served as director of several other publicly-held companies, including InterFirst Corporation, Texas Oil and Gas Corporation, Dillard’s Department Stores, Local Financial Corporation, and Cronus Industries, Inc.  Mr. Breedlove received his B.B.A. degree in finance and banking from the University of Texas at Austin.


RUSSELL CLEVELAND, 68, has been a Director since February 2001.  Mr. Cleveland is the President, Chief Executive Officer, sole Director and the majority shareholder of Renn Capital Group, Inc.  He has served as President, Chief Executive Officer and director of Renaissance Capital Growth & Income Fund III, Inc. since its inception in 1994.  Mr. Cleveland is a Chartered Financial Analyst with more than 41 years experience as a specialist in investments for smaller capitalization companies.  Mr. Cleveland has also served as President of the Dallas Association of Investment Analysts.  He serves on the Boards of Directors of Renaissance US Investment Trust PLC, CaminoSoft Corp., Cover-All Technologies, Inc. and Tutogen Medical, Inc.  Mr. Cleveland is a graduate of the Wharton School of Commerce and Finance of the University of Pennsylvania.


VERNON H. ‘Jay’ FOERSTERLING, JR., 49, has been a Director since March 2006. Mr. Foersterling has been the President and Chief Executive officer of ISSI since March 2006 and the President and Chief Executive Officer B&B ARMR Corporation since April 2006. He has over 25 years of experience with manufacturing companies in a variety of senior management and advisory roles. Prior to joining ISSI, Mr. Foersterling held a Division President role with Roper Industries, Inc. and various senior consulting roles with RSM McGladrey, Inc., A.T. Kearney and Ernst & Young. Mr. Foersterling holds an MBA and Bachelor’s degrees from Utah State University.


ROBERT M. GALECKE, 65, has been a Director since May 1996.  Mr. Galecke is currently Senior Vice President of Finance and Administration for the University of Dallas.  Prior to that, from 1993 to May 1996, he was a principal in the corporate consulting firm of Pate, Winters & Stone, Inc.  From 1986 until 1992, he served as Executive Vice President, Chief Operating Officer and Chief Financial Officer of Southmark Corporation, a financial services insurance and real estate holding company.  From 1989 to 1995, Mr. Galecke served as Chairman of the board, President and Chief Executive Officer of National Heritage, Inc.  Mr. Galecke received a graduate degree from the School of Banking at the University of Wisconsin, Madison, and a B.S. in Economics from the University of Wisconsin at Stevens Point.





Page 39 of 57





FRANK R. MARLOW, 69, has been a Director since May 1995.  Mr. Marlow served as Vice President, Sales and Marketing from October 1993 to February 1995.  Mr. Marlow is currently a Senior Partner with SMI Consulting, a sales and marketing consulting firm.  Mr. Marlow was Vice President of Sales, Western Region, for ACI, a publicly traded company headquartered in Omaha, Nebraska from March 2003 until May 2007 and was also Vice President of Sales for Cofiniti, formerly Money Star, a technology company based in Austin, Texas from 1998 until 2001.  From 1995 until 1998, Mr. Marlow was Vice President of Hogan Systems, a publicly traded company subsequently purchased by Computer Sciences Corp.  Previously, Mr. Marlow served in various executive sales and training positions at IBM, Docutel Corporation, UCCEL Corporation and Syntelligence Corporation.


In addition to Messrs. Rundell and Foersterling, the following individuals are significant employees of the Company and its subsidiaries.


RICHARD B. POWELL, 43, is currently the Vice President, Chief Financial Officer and Secretary.  Mr. Powell joined our company in April 1998 as Corporate Controller, became Vice President, Chief Accounting Officer in April 2001, and Secretary in May 2001.  Prior to joining our company, Mr. Powell was the Accounting Manager at Medical City Dallas Hospital from 1995 to 1998, Accounting Manager of HealthCor, Inc., a home health care company, from 1993 to 1995 and Accounting Supervisor of Signature Home Care Group, Inc., a home health care company, from 1989 to 1993.  Mr. Powell holds a B.S. in Accounting from McNeese State University.


ROBERT “BOB” GARDNER, 73, is the President of DoorTek Corporation.  Mr. Gardner joined our company in December 2004, when we acquire DoorTek.  Mr. Gardner has served as the President of DoorTek since 1998.  Prior to his employment at DoorTek, Mr. Gardner held senior management and sales positions with EO-Integrated Systems, Xetron Corporation, Kidde Automated Systems and Dukane Automated Systems, Inc.


G.M. “JOHN” ULIBARRI, 50, is the President and Chief Executive Officer of Intelli-Site, Inc.  Mr. Ulibarri joined our company in April 2001 as Vice President of Engineering and Operations, was promoted to Executive Vice President in December of 2002, and President in January of 2004.  Prior to joining our company, Mr. Ulibarri served in various senior management and engineering positions with major security and communications systems integration concerns throughout the US.  Mr. Ulibarri holds a B.S. in Computer Engineering from the University of New Mexico.


The SEC has adopted rules to implement certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to audit committees.  One of the rules adopted by the SEC requires a company to disclose whether it has an “audit committee financial expert” serving on its audit committee.  Based on its review of the criteria of an audit committee financial expert under the rules adopted by the SEC, our board of directors has determined that Mr. Galecke is an “audit committee financial expert,” as that term is defined in Item 401(e) of Regulation S-B promulgated by the Securities and Exchange Commission.  Mr. Galecke is “independent,” as that term is used in Item 7(a)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended.


Section 16(a) Beneficial Ownership Reporting Compliance


Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, executive officers and persons who own more than ten percent of the Company’s Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon a review of Forms 3, 4 and 5 and amendments thereto provided to the Company pursuant to Rule 16a-3(e), Messrs. Breedlove, Foersterling, Galecke, Marlow and Rundell had late filings during the fiscal year ending June 30, 2007.  


Code of Ethics


We have not adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions because of our current and intense focus on attaining overall company profitability.  We plan to adopt a code of ethics in the near future.





Page 40 of 57





Item 10. Executive Compensation


Summary Compensation Table


The following table shows the compensation of the Chief Executive Officers and the executive officers of the company and its subsidiaries whose compensation exceeded $100,000 for the fiscal years ended June 30, 2007, 2006 and 2005.


 

 

Annual Compensation

 

Long-Term Compensation Award

Name and

Principal Position

 

Year

 

Salary

 

Bonus

 

Other

Annual

Compensation

 

Restricted

Stock

Awards

 

Securities

Underlying

Options/

SARs

 



LTIP

Payouts

 


All

Other

Compensation

C. A. Rundell, Jr.

 

2007

 

$

31,000

 

$

--

 

--

 

147,146

 

--

 

--

 

--

  Chairman of the Board

 

2006

 

 

50,000

 

 

--

 

--

 

78,783

 

--

 

--

 

--

 

 

2005

 

 

66,667

 

 

--

 

--

 

43,700

 

200,000

 

--

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vernon H. Foersterling, Jr.

 

2007

 

$

160,000

 

$

--

 

--

 

--

 

--

 

--

 

--

  President and CEO

 

2006

 

 

53,333

 

 

--

 

--

 

--

 

1,000,000

 

--

 

--

  President and CEO of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    B&B ARMR Corporation (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peter Beare

 

2007

 

$

10,000

 

$

--

 

--

 

--

 

--

 

--

 

--

  Former President

 

2006

 

 

158,292

 

 

--

 

--

 

--

 

1,000,000

 

--

 

--

  Former President and CEO of

 

2005

 

 

173,000

 

 

--

 

--

 

--

 

--

 

--

 

--

   B&B ARMR Corporation (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paul Roland

 

2007

 

$

--

 

$

--

 

--

 

--

 

--

 

--

 

--

  Former President

 

2006

 

 

10,458

 

 

10,000

 

--

 

--

 

--

 

--

 

--

    B&B ARMR Corporation (3)

 

2005

 

 

125,500

 

 

10,000

 

--

 

--

 

--

 

--

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scott Rosenbloom

 

2007

 

$

--

 

$

--

 

--

 

--

 

--

 

--

 

--

  Former Exec. Vice-President

 

2006

 

 

26,146

 

 

10,000

 

--

 

--

 

--

 

--

 

--

    B&B ARMR Corporation (4)

 

2005

 

 

125,500

 

 

10,000

 

--

 

--

 

--

 

--

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

____________________


(1) Began employment on March 1, 2006.

(2) Began employment on May 19, 2003 and resigned as of September 29, 2006.

(3) Began employment on September 5, 2003 and resigned as of July 26, 2005.

(4) Began employment on September 5, 2003 and resigned as of September 16, 2005.


No other executive officer’s salary and bonus exceeded $100,000 annually and no executive had any form of long-term incentive plan compensation arrangement with the company during the fiscal years ended June 30, 2007, 2006 or 2005.


Stock Option Grants


There were no stock option grants made to any executive officer during the twelve months ended June 30, 2007.




Page 41 of 57





Option Exercises and Holdings


The following table provides information related to the number of shares received upon exercise of options, the aggregate dollar value realized upon exercise, and the number and value of options held by the named executive officers of the Company at June 30, 2007.


 

Number of Securities

Underlying Unexercised

Options/SARs At

Fiscal Year End

 

Value of Unexercised

In-The-Money Options/SARs

At Fiscal Year End

Name

Exercisable

 

Unexercisable

 

Exercisable

 

Unexercisable

 C. A. Rundell, Jr.

1,223,298

 

50,000

 

$

--

 

$

--

 Vernon H. Foersterling, Jr.

500,000

 

500,000

 

 

--

 

 

--

 Gerald K. Beckmann

300,00

 

--

 

 

--

 

 

--


Director Compensation


Currently, directors are compensated by either restricted stock awards or incentive stock options, at the choice of the individual director, in an amount equivalent to $10,000 annually for serving on the board in addition to $1,250 for each committee on which they serve.  In addition, Mr. Robert Galecke is paid $10,000 annually for his services as our audit committee chairman.  All directors are reimbursed for their out-of-pocket expenses incurred in connection with their attendance at board meetings.




Page 42 of 57





Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


The following table sets forth the number and percentage of outstanding shares of common stock and other classes of our equity securities entitled to vote on all matters submitted to a vote by holders of common stock, beneficially owned as of September 30, 2007 by (a) each director and named executive officer of the company, (b) all persons who are known by the company to be beneficial owners of 5% or more of the company’s outstanding common stock and (c) all officers and directors of the company as a group.  Unless otherwise noted, each of the persons listed below has sole voting and investment power with respect to the shares indicated as beneficially owned by such person.  Our common stock and Series D preferred stock are our only classes of voting securities.  All of the Series D preferred stock is convertible into shares of common stock at any time.  The holder of each share of Series D preferred stock is entitled to one vote for each share of common stock into which such share of Series D preferred stock could then be converted.  Presently, the holder of each share of Series D preferred stock is entitled to 25 votes.  For purposes of the beneficial ownership calculations below, the Series D preferred stock is included in this table on an “as converted” basis.


Name of Beneficial Owner

 

Number of Shares

Beneficially

Owned (1)

 

Percent

of Class (1)

Renaissance US Growth Investment Trust PLC (2)

 

37,190,898

 

36.8%

Renaissance Capital Growth & Income Fund III, Inc. (3)

 

35,920,394

 

35.6%

US Special Opportunities Trust PLC (4)

 

19,287,446

 

19.1%

Russell Cleveland (5)(6)(7)

 

92,398,738

 

91.6%

C. A. Rundell, Jr. (5)(6)(8)

 

7,935,678

 

7.9%

G.M. “John” Ulibarri (5)(6)(9)

 

625,000

 

0.6%

William D. Breedlove (5)(6)(10)

 

563,394

 

0.6%

Vernon H. “Jay” Foersterling, Jr. (5)(6)(11)

 

500,000

 

0.5%

Robert M. Galecke (5)(6)(12)

 

463,872

 

0.5%

Frank R. Marlow (5)(6)(13)

 

434,947

 

0.4%

Richard B. Powell (5)(6)(14)

 

303,200

 

0.3%

Robert “Bob” Gardner (5)(6)

 

114,286

 

0.1%

All current directors and executive officers as a group (8 persons)

 

103,339,115

 

102.4%

_____________________


(1)

Pursuant to the rules of the Securities and Exchange Commission, shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.


(2)

Includes 3,000,000 shares of common stock issuable upon the exercise of outstanding convertible promissory notes within 60 days; 11,439 shares of common stock issuable upon the exercise of outstanding options excercisable within 60 days; 1,114,706 shares of common stock issuable upon the exercise of warrants within 60 days; and 187,500 shares of common stock issuable upon the conversion of Series D preferred stock within 60 days.  The address for this company is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206.


(3)

Includes 2,000,000 shares of common stock issuable upon the exercise of outstanding convertible promissory notes within 60 days; 11,858 shares of common stock issuable upon the exercise of outstanding options excercisable within 60 days; 838,235 shares of common stock issuable upon the exercise of warrants within 60 days; and 187,500 shares of common stock issuable upon the conversion of Series D preferred stock within 60 days.    The address for this company is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206.


(4)

Includes 10,250,000 shares of common stock issuable upon the exercise of outstanding convertible promissory notes within 60 days and 864,706 shares of common stock issuable upon the exercise of warrants within 60 days.  The address for this company is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206.


(5)

The address for this person is 8200 Springwood Drive, Suite 230, Irving, TX 75063.




Page 43 of 57





(6)

Mr. Rundell is a director, chairman of the board and chief executive officer of the company. Messrs. Breedlove, Cleveland, Marlow, and Galecke are directors of the company.  Mr. Ulibarri is the president and chief executive officer of Intelli-Site, Inc.  Mr. Foersterling is the president and chief executive officer of the company and B&B ARMR Corporation.  Mr. Powell is vice president, chief financial officer and secretary of the company.   Mr. Gardner retained is President of DoorTek Corporation.


(7)

Includes 15,250,000 shares of common stock issuable upon the exercise of outstanding convertible promissory notes within 60 days; 23,297 shares of common stock issuable upon the exercise of outstanding options excercisable within 60 days; 2,817,647 shares of common stock issuable upon the exercise of warrants within 60 days; and 375,000 shares of common stock issuable upon the conversion of Series D preferred stock within 60 days.  The address for this person is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206.


(8)

Includes 1,223,298 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days; 760,544 shares of common stock issuable upon the exercise of warrants within 60 days; 600,000 shares of common stock issuable upon the exercise of outstanding convertible promissory notes within 60 days; and 331,250 shares of common stock issuable upon the conversion of Series D preferred stock within 60 days.


(9)

Includes 625,000 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days.


(10)

Includes 26,626 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days.


(11)

Includes 500,000 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days.


(12)

Includes 45,011 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days and 12,500 shares of common stock issuable upon the conversion of Series D preferred stock within 60 days.


(13)

Includes 45,011 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days and 31,250 shares of common stock issuable upon the conversion of Series D preferred stock within 60 days.


(14)

Includes 303,200 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days.


Equity Compensation Plan Information


The following table provides information about securities that have been issued or are issuable under equity compensation plans as of June 30, 2007:




Plan Category

Number of Securities

to be Issued upon

Exercise of

Outstanding Options,

Warrants and Rights

Weighted Average

Exercise Price of

Outstanding

Options, Warrants

And Rights

Number of Securities

Remaining Available

For Future Issuance

Under Equity

Compensation Plans

Equity compensation plans

approved by security holders

 

 

 

1993 Stock Option Plan

--

$       --

500,000

1997 Omnibus Stock Plan

4,351,943

    0.42

2,041,057

TOTAL

4,351,943

$  0.42

2,541,057





Page 44 of 57





Item 12. Certain Relationships and Related Transactions


On October 6, 2006 and November 21, 2006, we issued two unsecured convertible promissory notes to each of Renaissance US Growth Investment Trust PLC (“RUSGIT”) and US Special Opportunities Trust PLC (“USSO”) (formerly known as BFS US Special Opportunities Trust (“BFS”)) in exchange for an aggregate $1,500,000 cash investment. Each of the convertible promissory notes is in the original principal amount of $375,000, mature on October 6, 2009 and November 23, 2009, respectively, and bear interest at an annual rate of 6%. Interest to be accrued during the first year the notes are outstanding was paid in cash on the date of issuance of the notes, and interest accruing after the first year will be payable in cash in quarterly installments. The notes are 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 notes is subject to registration rights agreements previously entered into with each of RUSGIT and USSO. Under the registration rights agreements, we agreed to file a registration statement with the Securities and Exchange Commission to register for resale the shares of common stock issuable to RUSGIT and USSO upon conversion of the notes.


Simultaneously with the execution of the notes issued on October 6, 2006, we and our subsidiaries entered into an Amended Royalty Agreement with Renaissance Capital Growth & Income Fund III, Inc. (“Renn III”), RUSGIT and USSO, replacing the prior Royalty Agreement with Renn III, RUSGIT and USSO entered into on June 16, 2006. Under the terms of the Amended Royalty Agreement, we and our subsidiaries are to pay the lenders a fixed percentage of sales made from narrowly defined new projects. The total royalty payments cannot exceed $100,000 in any year, or $25,000 in any calendar quarter.


On May 15, 2007, May 30, 2007 and June 22, 2007, we issued unsecured convertible promissory notes to Renaissance Capital Growth & Income Fund III, Inc. (“Renn III”) in exchange for an aggregate $450,000 cash investment. Each of the convertible promissory notes is in the original principal amount of $150,000, mature on May 15, 2008, May 30, 2008 and June 22, 2008, respectively, and bear interest at an annual rate of 8% payable in cash in quarterly installments.  The notes are 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 notes is subject to registration rights agreements previously entered into with Renn III. Under the registration rights agreements, 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 notes.





Page 45 of 57





Item 13.  Exhibits


2.1

Agreement and Plan of Merger, by and among Integrated Security Systems, Inc., ARMR Services Corporation, ISSI Merger Sub, Inc. and the Officers and Shareholders of ARMR Corporation, dated September 5, 2003. (9)


3.1

Amended and Restated Certificate of Incorporation of Integrated Security Systems, Inc., as amended to date. (17)


3.2

Amended and Restated Bylaws of Integrated Security Systems, Inc. (1)


4.1

Specimen certificate for Common Stock of Integrated Security Systems, Inc. (1)


4.2

Certificate of Designation, Preferences and Rights of Series A $20 Convertible Preferred Stock. (2)   


4.3

Minimum Borrowing Note Registration Rights Agreement, dated July 29, 2005, by and among Integrated Security Systems, Inc. and Laurus Master Fund, Ltd. (19)


4.4

Registration Rights Agreement, dated October 13, 2005, between Integrated Security Systems, Inc. and Renaissance US Growth Investment Trust PLC. (20)


4.5

Registration Rights Agreement, dated October 13, 2005, between Integrated Security Systems, Inc. and BFS US Special Opportunities Trust PLC. (20)

4.6

Registration Rights Agreement, dated December 14, 2005, between Integrated Security Systems, Inc. and Renaissance Capital Growth & Income Fund III, Inc. (21)


10.1*

Integrated Security Systems, Inc. 1993 Stock Option Plan, dated September 7, 1993, as amended on December 30, 1994. (1)


10.2*

Form of Integrated Security Systems, Inc. 1993 Incentive Stock Option Agreement. (1)


10.3*

Form of Integrated Security Systems, Inc. 1993 Non-Qualified Stock Option Agreement. (1)


10.4*

Integrated Security Systems, Inc. 1997 Long-Term Incentive Plan. (7)


10.5*

Form of Indemnification Agreement by and between Integrated Security Systems, Inc. and its officers and directors. (1)


10.6

Lease Agreement, dated November 7, 2003, between TPLP Office Park Properties and Integrated Security Systems, Inc. for property located in Irving, TX. (17)


10.7

Form of Warrant Agreement for purchase of Common Stock, executed March 29, 1996. (3)


10.8

Form of Convertible Promissory Note. (6)


10.9

Form of Non-Convertible Promissory Note. (6)


10.10

Form of Stock Purchase Warrant. (12)


10.11

Promissory Note, dated October 1, 2003, payable to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. in the amount of $200,000. (10)




Page 46 of 57





10.12

Promissory Note, dated October 1, 2003, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $200,000. (10)


10.13

Stock Purchase Warrant, dated October 1, 2003, issued to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. (10)


10.14

Stock Purchase Warrant, dated October 1, 2003, issued to Frost National Bank FBO Renaissance US Growth Investment Trust PLC. (10)


10.15

Convertible Promissory Note, dated September 5, 2003, payable to BFS US Special Opportunities Trust PLC in the amount of $500,000. (11)


10.16

Promissory Note, dated September 26, 2003, payable to C. A. Rundell, Jr. in the amount of $100,000. (12)


10.17

Stock Purchase Warrant, dated September 26, 2003, issued to C. A.  Rundell, Jr. (12)


10.18

Promissory Note, dated July 28, 2004, payable to C. A. Rundell,  Jr. in the amount of $150,000. (14)


10.19

Promissory Note, dated August 5, 2004, payable to BFS US Special Opportunities Trust PLC in the amount of $1,000,000. (13)


10.20

Amended and Restated Pledge Agreement, dated August 5, 2004, between Integrated Security Systems, Inc., Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS US Special Opportunities Trust PLC and Renaissance Capital Group, Inc. (13)


10.21

Amended and Restated Security Agreement, dated August 5, 2004, between Integrated Security Systems, Inc., B&B ARMR Corporation, Intelli-Site, Inc., Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS US Special Opportunities Trust PLC and Renaissance Capital Group, Inc. (13)


10.22

Letter Agreement by Integrated Security Systems, Inc., B&B ARMR Corporation and Intelli-Site, Inc. in favor of, and agreed to and accepted on August 20, 2004 by, Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS US Special Opportunities Trust PLC and Renaissance Capital Group, Inc. (13)


10.23

Loan Agreement, dated November 30, 2004, by and among Integrated Security Systems, Inc. and those certain Investors set forth on the signature page to the Loan Agreement. (15)  


10.24

Form of Subordinated 10% Convertible Promissory Note due November 30, 2009, issued by Integrated Security Systems, Inc. to each of the Investors set forth on the signature page to the Loan Agreement. (15)


10.25

Promissory Note, dated May 5, 2005, payable to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. in the amount of $175,000. (18)


10.26

Stock Purchase Warrant, dated May 5, 2005, issued to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. (18)


10.27

Promissory Note, dated May 5, 2005, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $175,000. (18)


10.28

Stock Purchase Warrant, dated May 5, 2005, issued to Frost National Bank FBO Renaissance US Growth Investment Trust PLC. (18)



Page 47 of 57






10.29

Promissory Note, dated May 5, 2005, payable to Frost National Bank FBO BFS US Special Opportunities Trust PLC in the amount of $175,000. (18)


10.30

Stock Purchase Warrant, dated May 5, 2005, issued to Frost National Bank FBO BFS US Special Opportunities Trust PLC. (18)


10.31

Promissory Note, dated May 4, 2005, payable to C. A. Rundell, Jr. in the amount of $200,000. (18)


10.32

Stock Purchase Warrant, dated May 4, 2005 issued to C. A. Rundell, Jr. (18)


10.33

Security Agreement, dated July 29, 2005, by and among Integrated Security Systems, Inc., B&B ARMR Corporation, Intelli-Site, Inc., DoorTek Corporation and Laurus Master Fund, Ltd. (19)


10.34

Minimum Borrowing Note Registration Rights Agreement, dated July 29, 2005, by and among Integrated Security Systems, Inc. and Laurus Master Fund, Ltd. (19)


10.35

Secured Revolving Note, dated July 29, 2005, issued by Integrated Security Systems, Inc. to Laurus Master Fund, Ltd. (19)


10.36

Form of Secured Convertible Minimum Borrowing Note, issued by Integrated Security Systems, Inc. to Laurus Master Fund, Ltd. (19)


10.37

Form of Common Stock Purchase Warrant, dated July 29, 2005, issued by Integrated Security Systems, Inc. to Laurus Master Fund, Ltd. (19)


10.38

Stock Pledge Agreement, dated July 29, 2005, by and among Integrated Security Systems, Inc., Laurus Master Fund, Ltd. and the wholly-owned subsidiaries of Integrated Security Systems, Inc. (19)


10.39

Convertible Promissory Note, dated October 13, 2005, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $250,000. (20)


10.40

Stock Purchase Warrant, dated October 13, 2005, issued to Frost National Bank FBO Renaissance US Growth Investment Trust PLC. (20)


10.41

Convertible Promissory Note, dated October 13, 2005, payable to Frost National Bank FBO BFS US Special Opportunities Trust PLC in the amount of $250,000. (20)


10.42

Stock Purchase Warrant, dated October 13, 2005, issued to Frost National Bank FBO BFS US Special Opportunities Trust PLC. (20)


10.43

Convertible Promissory Note, dated December 14, 2005, payable to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. in the amount of $500,000.


10.44

Convertible Promissory Note, dated December 14, 2005, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $500,000. (21)


10.45

Convertible Promissory Note, dated December 14, 2005, payable to Frost National Bank FBO BFS US Special Opportunities Trust PLC in the amount of $500,000. (21)


10.46

Security Agreement, dated December 14, 2005, between Integrated Security Systems, Inc., B&B ARMR Corporation, Renaissance Capital Growth & Income Fund III, Inc., BFS US Special Opportunities Trust PLC, Renaissance US Growth Investment Trust PLC, and Renn Capital Group, Inc., as Agent. (21)



Page 48 of 57






10.47

Convertible Promissory Note, dated June 16, 2006, payable to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. in the amount of $400,000. (22)


10.48

Convertible Promissory Note, dated June 16, 2006, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $400,000. (22)


10.49

Convertible Promissory Note, dated June 16, 2006, payable to Frost National Bank FBO BFS US Special Opportunities Trust PLC in the amount of $300,000. (22)


10.50

Convertible Promissory Note, dated October 6, 2006, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $375,000. (23)


10.51

Convertible Promissory Note, dated October 6, 2006, payable to Frost National Bank FBO US Special Opportunities Trust PLC in the amount of $375,000. (23)


10.52

Amended Royalty Agreement, dated October 6, 2006, between Integrated Security Systems, Inc., B&B ARMR Corporation, Intelli-Site, Inc., DoorTek Corporation, Renaissance Capital Growth & Income Fund III, Inc., US Special Opportunities Trust PLC, Renaissance US Growth Investment Trust PLC, and Renn Capital Group, Inc., as Agent. (23)


16.1

Letter of Grant Thornton LLP on Change in Certifying Accountant. (16)


21.1+

Subsidiaries of Integrated Security Systems, Inc.


23.1+

Consent of Weaver & Tidwell, LLP


31.1+

Officer’s Certificate Pursuant to Section 302


32.1+

Officer’s Certificate Pursuant to Section 906


32.2+

Officer’s Certificate Pursuant to Section 906

__________


(1)

Incorporated by reference to the Company’s Registration Statement on Form SB-2 (No. 33-59870-FW).


(2)

Incorporated by reference to the Company’s Registration Statement on Form SB-2 (No. 333-5023).


(3)

Incorporated by reference to the Company’s Form 10-QSB for the quarter ended March 31, 1996, accession number 0000950134-96-002226, SEC file number 001-11900, film number 96567733.


(4)

Incorporated by reference to the Company’s Form 8-K filed on June 14, 1999, accession number 0000950134-99-005489, SEC file number 001-11900, film number 99646148.


(5)

Incorporated by reference to the Company’s Form 10-KSB for the year ended June 30, 1999, accession number 0000950134-99-010485, SEC file number 001-11900, film number 99761099.


(6)

Incorporated by reference to the Company’s Form 10-KSB for the year ended June 30, 2001, accession number 0000950134-01-507281, SEC file number 001-11900, film number 1759307.


(7)

Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-76558).


(8)

Incorporated by reference to the Company’s Form 10-KSB for the year ended June 30, 2002.


(9)

Incorporated by reference to the Company’s Form 8-K filed on September 22, 2003.


(10)

Incorporated by reference to the Company’s Form 8-K filed on October 3, 2003, accession number 0001158957-03-000198.




Page 49 of 57





(11)

Incorporated by reference to the Company’s Form 8-K filed on October 3, 2003, accession number 0001158957-03-000194.


(12)

Incorporated by reference to the Company’s Form 8-K filed on October 3, 2003, accession number 0001158957-03-000196.


(13)

Incorporated by reference to the Company’s Form 8-K filed on August 31, 2004.


(14)

Incorporated by reference to the Company’s Form 10-QSB for the quarter ended September 30, 2004.


(15)

Incorporated by reference to the Company’s Form 8-K filed on December 3, 2004.


(16)

Incorporated by reference to the Company’s Form 8-K filed on January 18, 2005.


(17)

Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form SB-2 (No. 333-122849) filed on April 8, 2005.


(18)

Incorporated by reference to the Company’s Form 10-QSB for the quarter ended March 31, 2005.


(19)

Incorporated by reference to the Company’s Form 8-K filed on August 5, 2005.


(20)

Incorporated by reference to the Company’s Form 8-K filed on October 28, 2005.


(21)

Incorporated by reference to the Company’s Form 8-K filed on December 16, 2005.


(22)

Incorporated by reference to the Company’s Form 8-K filed on June 19, 2006.


(23)

Incorporated by reference to the Company’s Form 8-K filed on October 11, 2006.


+

Filed herewith.


*

Indicates management contract or compensatory plan or arrangement.




Page 50 of 57





Item 14.  Principal Accountant Fees and Services


The following information summarizes the fees paid or payable to Weaver and Tidwell, L.L.P. for services rendered for the fiscal years ended June 30, 2007 and June 30, 2006.


Audit Fees.  Fees for audit services totaled $67,600 in fiscal year 2007 and $49,294 in fiscal year 2006. Audit fees in fiscal years 2007 and 2006 include fees associated with the annual audit and the reviews of the Company’s quarterly reports on Form 10-QSB.


Audit-Related Fees.  The Company did not pay any audit-related service fees to Weaver and Tidwell, L.L.P., other than the fees described above, for services rendered during fiscal year 2007 or 2006.


Tax Fees.  The Company did not pay any fees for tax compliance, tax consulting or advisory services to Weaver and Tidwell, L.L.P. for services rendered during fiscal year 2007 or 2006.


All Other Fees.  The Company was not billed for fees for any other services not described above in fiscal year 2007 or 2006.


Consistent with SEC policies regarding auditor independence, the audit committee has responsibility for appointing, setting compensation, approving and overseeing the work of the independent auditor.  In recognition of this responsibility, the audit committee pre-approves all audit and permissible non-audit services provided by the independent auditor.





 


 



Page 51 of 57





SIGNATURES


In accordance with Section 13 or 15(d) 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: October 15, 2007

/s/ VERNON H. FOERSTERLING, JR.

Vernon H. Foersterling, Jr.

President and Chief Executive Officer


In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Date: October 15, 2007

/s/ C. A. RUNDELL, JR.

C. A. Rundell, Jr.

Director, Chairman of the Board



Date: October 15, 2007

/s/ VERNON H. FOERSTERLING, JR.

Vernon H. Foersterling, Jr.

Director, President and Chief Executive Officer

(Principal Executive Officer)



Date: October 15, 2007

/s/ RICHARD B. POWELL

Richard B. Powell

Vice President, Chief Financial Officer, Secretary

(Principal Financial and Accounting Officer)



Date: October 15, 2007

/s/ WILLIAM D. BREEDLOVE

William D. Breedlove

Director



Date: October 15, 2007

/s/ RUSSELL CLEVELAND

Russell Cleveland

Director



Date: October 15, 2007

/s/ ROBERT M. GALECKE

Robert M. Galecke

Director



Date: October 15, 2007

/s/ FRANK R. MARLOW

Frank R. Marlow

Director






Page 52 of 57





EXHIBIT INDEX


2.1

Agreement and Plan of Merger, by and among Integrated Security Systems, Inc., ARMR Services Corporation, ISSI Merger Sub, Inc. and the Officers and Shareholders of ARMR Corporation, dated September 5, 2003. (9)


3.1

Amended and Restated Certificate of Incorporation of Integrated Security Systems, Inc., as amended to date. (17)


3.2

Amended and Restated Bylaws of Integrated Security Systems, Inc. (1)


4.1

Specimen certificate for Common Stock of Integrated Security Systems, Inc. (1)


4.2

Certificate of Designation, Preferences and Rights of Series A $20 Convertible Preferred Stock. (2)   


4.3

Minimum Borrowing Note Registration Rights Agreement, dated July 29, 2005, by and among Integrated Security Systems, Inc. and Laurus Master Fund, Ltd. (19)


4.4

Registration Rights Agreement, dated October 13, 2005, between Integrated Security Systems, Inc. and Renaissance US Growth Investment Trust PLC. (20)


4.5

Registration Rights Agreement, dated October 13, 2005, between Integrated Security Systems, Inc. and BFS US Special Opportunities Trust PLC. (20)

4.6

Registration Rights Agreement, dated December 14, 2005, between Integrated Security Systems, Inc. and Renaissance Capital Growth & Income Fund III, Inc. (21)


10.1*

Integrated Security Systems, Inc. 1993 Stock Option Plan, dated September 7, 1993, as amended on December 30, 1994. (1)


10.2*

Form of Integrated Security Systems, Inc. 1993 Incentive Stock Option Agreement. (1)


10.3*

Form of Integrated Security Systems, Inc. 1993 Non-Qualified Stock Option Agreement. (1)


10.4*

Integrated Security Systems, Inc. 1997 Long-Term Incentive Plan. (7)


10.5*

Form of Indemnification Agreement by and between Integrated Security Systems, Inc. and its officers and directors. (1)


10.6

Lease Agreement, dated November 7, 2003, between TPLP Office Park Properties and Integrated Security Systems, Inc. for property located in Irving, TX. (17)


10.7

Form of Warrant Agreement for purchase of Common Stock, executed March 29, 1996. (3)


10.8

Form of Convertible Promissory Note. (6)


10.9

Form of Non-Convertible Promissory Note. (6)


10.10

Form of Stock Purchase Warrant. (12)


10.11

Promissory Note, dated October 1, 2003, payable to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. in the amount of $200,000. (10)


10.12

Promissory Note, dated October 1, 2003, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $200,000. (10)



Page 53 of 57






10.13

Stock Purchase Warrant, dated October 1, 2003, issued to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. (10)


10.14

Stock Purchase Warrant, dated October 1, 2003, issued to Frost National Bank FBO Renaissance US Growth Investment Trust PLC. (10)


10.15

Convertible Promissory Note, dated September 5, 2003, payable to BFS US Special Opportunities Trust PLC in the amount of $500,000. (11)


10.16

Promissory Note, dated September 26, 2003, payable to C. A. Rundell, Jr. in the amount of $100,000. (12)


10.17

Stock Purchase Warrant, dated September 26, 2003, issued to C. A.  Rundell, Jr. (12)


10.18

Promissory Note, dated July 28, 2004, payable to C. A. Rundell,  Jr. in the amount of $150,000. (14)


10.19

Promissory Note, dated August 5, 2004, payable to BFS US Special Opportunities Trust PLC in the amount of $1,000,000. (13)


10.20

Amended and Restated Pledge Agreement, dated August 5, 2004, between Integrated Security Systems, Inc., Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS US Special Opportunities Trust PLC and Renaissance Capital Group, Inc. (13)


10.21

Amended and Restated Security Agreement, dated August 5, 2004, between Integrated Security Systems, Inc., B&B ARMR Corporation, Intelli-Site, Inc., Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS US Special Opportunities Trust PLC and Renaissance Capital Group, Inc. (13)


10.22

Letter Agreement by Integrated Security Systems, Inc., B&B ARMR Corporation and Intelli-Site, Inc. in favor of, and agreed to and accepted on August 20, 2004 by, Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS US Special Opportunities Trust PLC and Renaissance Capital Group, Inc. (13)


10.23

Loan Agreement, dated November 30, 2004, by and among Integrated Security Systems, Inc. and those certain Investors set forth on the signature page to the Loan Agreement. (15)  


10.24

Form of Subordinated 10% Convertible Promissory Note due November 30, 2009, issued by Integrated Security Systems, Inc. to each of the Investors set forth on the signature page to the Loan Agreement. (15)


10.25

Promissory Note, dated May 5, 2005, payable to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. in the amount of $175,000. (18)


10.26

Stock Purchase Warrant, dated May 5, 2005, issued to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. (18)


10.27

Promissory Note, dated May 5, 2005, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $175,000. (18)


10.28

Stock Purchase Warrant, dated May 5, 2005, issued to Frost National Bank FBO Renaissance US Growth Investment Trust PLC. (18)


10.29

Promissory Note, dated May 5, 2005, payable to Frost National Bank FBO BFS US Special Opportunities Trust PLC in the amount of $175,000. (18)


10.30

Stock Purchase Warrant, dated May 5, 2005, issued to Frost National Bank FBO BFS US Special Opportunities Trust PLC. (18)



Page 54 of 57






10.31

Promissory Note, dated May 4, 2005, payable to C. A. Rundell, Jr. in the amount of $200,000. (18)


10.32

Stock Purchase Warrant, dated May 4, 2005 issued to C. A. Rundell, Jr. (18)


10.33

Security Agreement, dated July 29, 2005, by and among Integrated Security Systems, Inc., B&B ARMR Corporation, Intelli-Site, Inc., DoorTek Corporation and Laurus Master Fund, Ltd. (19)


10.34

Minimum Borrowing Note Registration Rights Agreement, dated July 29, 2005, by and among Integrated Security Systems, Inc. and Laurus Master Fund, Ltd. (19)


10.35

Secured Revolving Note, dated July 29, 2005, issued by Integrated Security Systems, Inc. to Laurus Master Fund, Ltd. (19)


10.36

Form of Secured Convertible Minimum Borrowing Note, issued by Integrated Security Systems, Inc. to Laurus Master Fund, Ltd. (19)


10.37

Form of Common Stock Purchase Warrant, dated July 29, 2005, issued by Integrated Security Systems, Inc. to Laurus Master Fund, Ltd. (19)


10.38

Stock Pledge Agreement, dated July 29, 2005, by and among Integrated Security Systems, Inc., Laurus Master Fund, Ltd. and the wholly-owned subsidiaries of Integrated Security Systems, Inc. (19)


10.39

Convertible Promissory Note, dated October 13, 2005, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $250,000. (20)


10.40

Stock Purchase Warrant, dated October 13, 2005, issued to Frost National Bank FBO Renaissance US Growth Investment Trust PLC. (20)


10.41

Convertible Promissory Note, dated October 13, 2005, payable to Frost National Bank FBO BFS US Special Opportunities Trust PLC in the amount of $250,000. (20)


10.42

Stock Purchase Warrant, dated October 13, 2005, issued to Frost National Bank FBO BFS US Special Opportunities Trust PLC. (20)


10.43

Convertible Promissory Note, dated December 14, 2005, payable to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. in the amount of $500,000.


10.44

Convertible Promissory Note, dated December 14, 2005, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $500,000. (21)


10.45

Convertible Promissory Note, dated December 14, 2005, payable to Frost National Bank FBO BFS US Special Opportunities Trust PLC in the amount of $500,000. (21)


10.46

Security Agreement, dated December 14, 2005, between Integrated Security Systems, Inc., B&B ARMR Corporation, Renaissance Capital Growth & Income Fund III, Inc., BFS US Special Opportunities Trust PLC, Renaissance US Growth Investment Trust PLC, and Renn Capital Group, Inc., as Agent. (21)


10.47

Convertible Promissory Note, dated June 16, 2006, payable to Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. in the amount of $400,000. (22)


10.48

Convertible Promissory Note, dated June 16, 2006, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $400,000. (22)


10.49

Convertible Promissory Note, dated June 16, 2006, payable to Frost National Bank FBO BFS US Special Opportunities Trust PLC in the amount of $300,000. (22)



Page 55 of 57






10.50

Convertible Promissory Note, dated October 6, 2006, payable to Frost National Bank FBO Renaissance US Growth Investment Trust PLC in the amount of $375,000. (23)


10.51

Convertible Promissory Note, dated October 6, 2006, payable to Frost National Bank FBO US Special Opportunities Trust PLC in the amount of $375,000. (23)


10.52

Amended Royalty Agreement, dated October 6, 2006, between Integrated Security Systems, Inc., B&B ARMR Corporation, Intelli-Site, Inc., DoorTek Corporation, Renaissance Capital Growth & Income Fund III, Inc., US Special Opportunities Trust PLC, Renaissance US Growth Investment Trust PLC, and Renn Capital Group, Inc., as Agent. (23)


16.1

Letter of Grant Thornton LLP on Change in Certifying Accountant. (16)


21.1+

Subsidiaries of Integrated Security Systems, Inc.


23.1+

Consent of Weaver & Tidwell, LLP


31.1+

Officer’s Certificate Pursuant to Section 302


32.1+

Officer’s Certificate Pursuant to Section 906


32.2+

Officer’s Certificate Pursuant to Section 906

__________


(1)

Incorporated by reference to the Company’s Registration Statement on Form SB-2 (No. 33-59870-FW).


(2)

Incorporated by reference to the Company’s Registration Statement on Form SB-2 (No. 333-5023).


(3)

Incorporated by reference to the Company’s Form 10-QSB for the quarter ended March 31, 1996, accession number 0000950134-96-002226, SEC file number 001-11900, film number 96567733.


(4)

Incorporated by reference to the Company’s Form 8-K filed on June 14, 1999, accession number 0000950134-99-005489, SEC file number 001-11900, film number 99646148.


(5)

Incorporated by reference to the Company’s Form 10-KSB for the year ended June 30, 1999, accession number 0000950134-99-010485, SEC file number 001-11900, film number 99761099.


(6)

Incorporated by reference to the Company’s Form 10-KSB for the year ended June 30, 2001, accession number 0000950134-01-507281, SEC file number 001-11900, film number 1759307.


(7)

Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-76558).


(8)

Incorporated by reference to the Company’s Form 10-KSB for the year ended June 30, 2002.


(9)

Incorporated by reference to the Company’s Form 8-K filed on September 22, 2003.


(10)

Incorporated by reference to the Company’s Form 8-K filed on October 3, 2003, accession number 0001158957-03-000198.


(11)

Incorporated by reference to the Company’s Form 8-K filed on October 3, 2003, accession number 0001158957-03-000194.


(12)

Incorporated by reference to the Company’s Form 8-K filed on October 3, 2003, accession number 0001158957-03-000196.


(13)

Incorporated by reference to the Company’s Form 8-K filed on August 31, 2004.


(14)

Incorporated by reference to the Company’s Form 10-QSB for the quarter ended September 30, 2004.


(15)

Incorporated by reference to the Company’s Form 8-K filed on December 3, 2004.


(16)

Incorporated by reference to the Company’s Form 8-K filed on January 18, 2005.




Page 56 of 57





(17)

Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form SB-2 (No. 333-122849) filed on April 8, 2005.


(18)

Incorporated by reference to the Company’s Form 10-QSB for the quarter ended March 31, 2005.


(19)

Incorporated by reference to the Company’s Form 8-K filed on August 5, 2005.


(20)

Incorporated by reference to the Company’s Form 8-K filed on October 28, 2005.


(21)

Incorporated by reference to the Company’s Form 8-K filed on December 16, 2005.


(22)

Incorporated by reference to the Company’s Form 8-K filed on June 19, 2006.


(23)

Incorporated by reference to the Company’s Form 8-K filed on October 11, 2006.


+

Filed herewith.


*

Indicates management contract or compensatory plan or arrangement.





Page 57 of 57




EX-21 2 exhibit211.htm EXHIBIT 21.1 Exhibit 21.1

Exhibit 21.1



SUBSIDIARIES OF THE COMPANY



B&B ARMR Corporation


B&B Roadway, LLC


Intelli-Site, Inc.


DoorTek Corporation



EX-23 3 exhibit231.htm EXHIBIT 23.1 Exhibit 23.1

Exhibit 23.1



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



We have issued our report dated October 15, 2007, accompanying the consolidated financial statements included in the Annual Report of Integrated Security Systems, Inc. on Form 10-KSB for the year ended June 30, 2007.  We hereby consent to the incorporation by reference of said report in the Registration Statements of Integrated Security Systems, Inc. on Form S-3 (File No. 33-89218) and on Form S-8 (File No. 33-59870-S and File No. 333-76558).




/s/ WEAVER AND TIDWELL, L.L.P.


Dallas, Texas

October 15, 2007





EX-31 4 exhibit311.htm EXHIBIT 31.1 Exhibit 31.1

Exhibit 31.1


OFFICER’S CERTIFICATE PURSUANT TO SECTION 302


I, Vernon H. Foersterling, Jr., the Chief Executive Officer of Integrated Security Systems, Inc., certify that:


1.

I have reviewed this Annual Report on Form 10-KSB of Integrated Security Systems, Inc.;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;


4.

I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:


(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)

Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(c)

Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and


5.

I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):


(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and


(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.


Date:  October 15, 2007


/s/ VERNON H. FOERSTERLING, JR.

Vernon H. Foersterling, Jr.

Chief Executive Officer




EX-32 5 exhibit321.htm EXHIBIT 32.1 Exhibit 32.1


Exhibit 32.1


OFFICER’S CERTIFICATE PURSUANT TO SECTION 906


Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned Chief Executive Officer of Integrated Security Systems, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:


The annual report on Form 10-KSB for the fiscal year ended June 30, 2007 (the “Form 10-KSB”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and the information contained in the Form 10-KSB fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-KSB.



Date:  October 15, 2007



/s/ VERNON H. FOERSTERLING, JR.

Vernon H. Foersterling, Jr.,

Chief Executive Officer

Principal Executive Officer




The foregoing certification is being furnished as an exhibit to the Form 10-KSB pursuant to Item 601(b)(32) of Regulation S-B and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-KSB for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.






EX-32 6 exhibit322.htm EXHIBIT 32.2 Exhibit 32.2

Exhibit 32.2


OFFICER’S CERTIFICATE PURSUANT TO SECTION 906


Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned Chief Financial and Accounting Officer of Integrated Security Systems, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:


The annual report on Form 10-KSB for the fiscal year ended June 30, 2007 (the “Form 10-KSB”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and the information contained in the Form 10-KSB fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-KSB.



Date:  October 15, 2007




/s/ RICHARD B. POWELL

Richard B. Powell,

Chief Financial Officer

Principal Financial and Accounting Officer




The foregoing certification is being furnished as an exhibit to the Form 10-KSB pursuant to Item 601(b)(32) of Regulation S-B and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-KSB for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.







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