INTEGRATED SECURITY SYSTEMS, INC.

10-K/A 1 f10ka063009.htm 10-K/A INTEGRATED SECURITY SYSTEMS, INC.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K /A

Amendment No. 1


x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 2009


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to

Commission file number 001-11900

INTEGRATED SECURITY SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


Delaware		75-2422983
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2009 Chenault Drive, Suite 114; Carrollton, TX 75006

(Address of principal executive offices)

(Zip Code)

(972) 444-8280

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock of $0.01 par value		OTC Bulletin Board

Securities registered pursuant to section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company x

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant on September 24, 2009 was approximately $2,531,974. This amount was calculated by reducing the total number of shares of the registrant’s common stock outstanding 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 as reported on the over-the-counter market.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date, 558,848,283 shares of Common Stock of $0.01 cents par value, as of September 15, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Page 2 of 52

TABLE OF CONTENTS


Item No.		Page

Part I

1.	Description of Business	4
1B.	Unresolved Staff Comments	6
2.	Property	7
3.	Legal Proceedings	7
4.	Submission of Matters to a Vote of Security Holders	7

Part II

5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	7
6.	Selected Financial Data	8
7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
8.	Financial Statements and Supplementary Data	14
9.	Changes in and Disagreement with Accountants on Accounting and Financial Disclosure	37
9A(T)	Controls and Procedures	37
9B.	Other Information	39

Part III

10.	Directors, Executive Officers and Corporate Governance	39
11.	Executive Compensation	41
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	42
13.	Certain Relationships and Related Transactions, and Director Independence	44
14.	Principal Accountant Fees and Services	45

Part IV

15.	Exhibits, Financial Statement Schedules	46
	Signatures	49
	Exhibit Index	50

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PART I

Forward Looking Statements

This annual report on Form 10-K 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-K, including the statements under “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere in this annual report on Form 10-K 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-K. 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-K.

Important factors that could cause actual results to differ materially from those in the forward-looking statements in this annual report on Form 10-K 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. Business

Business Overview

Integrated Security Systems, Inc. was 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 our wholly-owned subsidiary, B&B ARMR Corporation, 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. 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 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 manufactures and distributes all products relating to the road and bridge industry, including product lines specifically designed for that market.

Prior to July 31, 2008, we owned DoorTek Corporation, a manufacturer of access control systems and other physical security system products. On July 31, 2008 we completed the sale of substantially all of DoorTek’s operating assets, including equipment and inventory, pursuant to an asset purchase agreement of the same date with the managers and former owners of DoorTek. We retained the accounts receivable and accounts payable outstanding at the sale date. See Note 3 to the financial statements for further information regarding the sale of DoorTek.

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Prior to March 25, 2009, we owned a security component integration software business, Intelli-Site, Inc. On March 25, 2009, we completed the sale of substantially all of Intelli-Site, Inc.’s assets, including equipment and intellectual property related to its’ operations, pursuant to an asset purchase agreement dated March 6, 2009 with Vuance, Ltd. and its subsidiary, Vuance, Inc. On the date of closing, Vuance, Inc. agreed to pay $262,000 payable in twenty-five (25) consecutive installments; the first twelve (12) monthly installments shall be equal to $11,000 each, and the remaining thirteen (13) monthly installments shall be equal to $10,000 each (the “Cash Consideration”). In addition, Vuance, Ltd. issued to us 200,000 ordinary shares (the “Consideration Shares”). In addition to the Cash Consideration and Consideration Shares, Vuance, Inc. agreed to pay up to $600,000 of aggregate royalty payments on a quarterly basis, within 30 days following the quarter; these royalty payments will be made 50% in cash and 50% in ordinary shares (the “Royalty Shares”), and the number of Royalty Shares shall be calculated based on the weighted average closing price of the ordinary shares for the fifteen (15) days preceding the quarterly payment, subject to a minimum of $1.25. The shares are subject to certain transfer restrictions that expire in eight (8) equal quarterly installments. See Note 3 to the financial statements for further information regarding the sale of Intelli-Site.

On June 1, 2009, the Company and certain holders of its debt and certain holders of its Series D Preferred Stock agreed to convert their securities into shares of the Company’s common stock, par value $0.01 per share. Such conversions were accomplished pursuant to the Debt Conversion Agreements and Preferred Stock Conversion Agreements, the forms of which are filed as Exhibits to this Form 10-K. In the aggregate, $13,146,386 of indebtedness was converted, accrued interest thereon was waived, and 78,250 shares of Series D Preferred Stock were converted. A total of 420,953,422 shares of common stock were issued in connection with the conversions. In addition, the Company issued to the converting security holders common stock purchase warrants, to purchase an aggregate of up to 105,238,358 shares of common stock, at a purchase price of $0.06 per share. The warrants have a term of five (5) years from the date of issuance. A net gain of $6.6 million was recognized as a result of these conversions.

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, 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.

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, in large parts, 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.

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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 and extended warranties are sold to customers at additional cost. 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.

Backlog

Our backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At August 31, 2009, our backlog was approximately $2.8 million. We expect that we will fill the majority of this backlog by December 31, 2009.

Environmental Compliance

The manufacturing of the Company’s product is principally outsourced to third parties. Therefore, the Company does not incur any significant costs or risks for environmental compliance.

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 striving to grow 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 (HySecurity) 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, including competitive product manufacturers, may enter this market.

B&B Roadway, LLC

B&B Roadway has only one full line competitor to its gates and barriers product line, Federal Transit Safety Systems, which is a substantially smaller company than B&B Roadway. With regard to B&B Roadway’s navigational lights product line, most competitors (including Automatic Power) specialize in offshore and shoreline lighting markets, with bridge lighting making up a small portion of their overall sales. B&B Roadway believes it continues to hold the majority share of the bridge navigational lighting market.

Employees

As of June 30, 2009, we employed 27 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 1B. Unresolved Staff Comments

None.

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Item 2. Properties

Our principal executive offices are located at 2009 Chenault Drive, Suite 114, Carrollton, Texas 75006. B&B ARMR Corporation also maintains 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.

B&B ARMR Corporation also maintains office space located at 1934 Old Gallows Road, Suite 350, Vienna, Virginia 22182, where it occupies approximately 120 square feet. The lease for the Vienna facility expires in March 2010.

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 lease for this property 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 agreements described above are not renewed. Additionally, we believe that our existing facilities are suitable and adequate to meet our current requirements.

The B&B Roadway joint venture does not maintain its own employees, inventory or equipment but is run from the location of the joint venture partner. The joint venture pays a portion of the rent and a management fee to cover these shared costs.

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.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and 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.”

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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 2009
Fourth Quarter	$	0.04	$	0.01
Third Quarter		0.03		0.02
Second Quarter		0.05		0.02
First Quarter		0.07		0.02
Fiscal 2008
Fourth Quarter	$	0.07	$	0.01
Third Quarter		0.10		0.06
Second Quarter		0.10		0.05
First Quarter		0.11		0.05

On September 24, 2009, the last reported sales prices for the common stock as reported on the Over-the-Counter Bulletin Board was $0.02.

Holders

As of September 15, 2009, there were 558,848,283 shares of common stock outstanding. The shares of common stock are held of record by approximately 262 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 15, 2009 and 2008, we had 672,011,913 and 315,282,115 shares of common and common stock equivalents outstanding, respectively which comprise 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 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” below.

Recent Sales of Unregistered Securities

None.

Item 6. Selected Financial Data

There is no information required to be reported under this Item 6.

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Item 7. Management’s Discussion and Analysis or Financial Condition and Results of Operations

General

The audit report of Montgomery Coscia Greilich, L.L.P., our independent registered public accounting firm for our consolidated financial statements for the fiscal year ended June 30, 2009, states that due to our accumulated losses and limited access to capital there is substantial doubt about our ability to continue as a going concern. Management expects that we will be profitable on an operating basis in fiscal 2010; however, this expectation is dependent on the Company’s ability to draw additional funds on its factoring agreement or to obtain additional financing from alternative sources. In addition, added factoring of accounts receivable or alternative financing will also be necessary to meet the Company’s current liabilities as they become due. As the factoring agreement is a demand note and subject to termination with 30 days notice, plus the fact that the Company has been unable to find alternative financing to date, we can give no assurances that funds will be available to settle current liabilities as they become due. Ultimately, failure to obtain additional financing could jeopardize our ability to continue as a going concern.

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 reporting 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:

Going Concern

In general, our financial statements are prepared using generally accepted accounting principles on the basis that the company will continue to operate as a going concern, with the exception of deferred tax assets as described in Note 7 to the financial statements. In the event the company is forced into bankruptcy and liquidated, the liquidation value of the assets may be substantially different from the reported values.

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 generally 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 doubtful accounts.

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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.

Discontinued Operations

On July 31, 2008, we sold the operations of DoorTek Corporation, our wholly-owned subsidiary. On March 25, 2009, we sold the operations of Intelli-Site, our wholly-owned subsidiary. In accordance with generally accepted accounting principles, the operating results of DoorTek and Intelli-Site have been aggregated and reported on the Consolidated Statements of Operations as Loss from Discontinued Operations and the associated assets and liabilities are classified separately in the balance sheet. Prior periods have been reclassified to conform to the current-period presentation. Refer to Note 3, Discontinued Operations, for additional information on the sales of DoorTek and Intelli-Site, Inc.

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. There was no goodwill impairment in fiscal 2009. Goodwill impairment of $790,057 was recognized in fiscal 2008.

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.

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Results of Operations

Year Ended June 30, 2009 Compared to Year Ended June 30, 2008

Sales. Due to the well documented credit crisis and resulting recession, the federal government passed a stimulus package that included funds for infrastructure projects such as roads and bridges. Projects that had been budgeted for were placed on hold while states and federal agencies awaited the details of this stimulus package. While B&B ARMR was slightly affected by this curtailment on spending, B&B Roadway saw sales plummet during the second half of the fiscal year. Sales for the current fiscal year decreased by approximately 15.7% or $1.5 million to $8.5 million in fiscal year 2009 from $10.1 million in fiscal 2008. Sales at B&B ARMR decreased approximately $0.4 million, or 5.9%. Sales at B&B Roadway decreased approximately $1.2 million, or 27.1%. The projects funded by the stimulus package have begun to be released, and the backlog of orders at August 31, 2009 is approximately $2.2 million for B&B Roadway, with the majority scheduled to ship by December 2009.

Gross Margin. Overall gross margin decreased by approximately $0.3 million during the fiscal year ending 2009 to $3.1 million from $3.4 million for fiscal year ending 2008. This entire decrease is due to the reduction in sales of B&B Roadway as explained above. An improvement in gross margin at B&B ARMR, resulting from improved operating efficiencies, offset the reduction in sales.

Selling, General and Administrative. Selling, general and administrative expenses decreased by approximately $0.4 million during fiscal year 2009. B&B ARMR expenses decreased $0.3 million, which was attributable to a $0.1 million reduction in bad debt expense and $0.2 million reduction in employee costs. B&B Roadway expenses decreased $0.1 million due to reduction in bad debt and depreciation expense.

Impairment of Goodwill. Goodwill impairment of $790,057 was recognized during fiscal 2008. No impairment was recognized in fiscal 2009.

Interest Expense. Interest expense decreased by approximately $0.1 million to $1.2 million during fiscal 2009 from $1.3 million during fiscal 2008. This reduction is due to the conversion on June 1, 2009 of certain debt; as part of that conversion there was minimal interest expense during the fourth (4^th) quarter. See Note 4 to the consolidated financial statements for further information about the debt conversion.

Liquidity and Capital Resources

Cash Position

Our cash position decreased $0.1 million during fiscal year 2009. At June 30, 2009, we had $30,944 in cash and cash equivalents and $91,485 outstanding under our factoring agreement with Capital Funding Solutions. The factoring agreement, which is secured by substantially all of our assets, permits us to borrow up to $1.0 million based on eligible invoices.

Operating Activities

For the fiscal year ended June 30, 2009, our operating activities provided $542,281 of cash compared to $433,219 cash used during the fiscal year ended June 30, 2008, an increase of $975,500.

On June 1, 2009, the Company and certain holders of its debt and certain holders of its Series D Preferred Stock agreed to convert their securities into shares of the Company’s common stock, par value $0.01 per share. Such conversions were accomplished pursuant to the Debt Conversion Agreements and Preferred Stock Conversion Agreements, the forms of which are filed as Exhibits to this Form 10-K. In the aggregate, $13,146,386 of indebtedness was converted, accrued interest thereon was waived, and 78,250 shares of Series D Preferred Stock were converted. A total of 420,953,442 shares of common stock were issued in connection with the conversions. In addition, the Company issued to the converting security holders common stock purchase warrants, to purchase an aggregate of up to 105,238,355 shares of common stock, at a purchase price of $0.06 per share. The warrants have a term of five (5) years from the date of issuance. A net gain of $6.6 million was recognized as a result of these conversions.

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Credit Facility with Laurus Master Fund in Fiscal 2009

On August 3, 2005 we obtained a $3,000,000 credit facility with Laurus Master Fund, Ltd. 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 was 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. On June 30, 2008, the balance outstanding under the credit facility was $690,558.

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

Factoring and Security Agreement with Capital Funding Solutions in Fiscal 2009

On August 11, 2008, we entered into, and on August 15, 2008, closed a factoring and security agreement with Capital Funding Solutions. The factoring agreement provides that the Company will sell to Capital Funding certain of its accounts receivable. Moreover, the factoring agreement requires that we grant to Capital Funding a continuing first priority security interest in all of our now owned and hereafter acquired accounts, chattel paper, deposit accounts receivable, inventory, equipment, instruments, investment property, documents, letter of credit rights, commercial tort claims, general intangibles and supporting obligations. The factoring agreement does not require us to grant a security interest in any of the assets of B&B Roadway, LLC. The factoring agreement is for a one year term, which will be automatically extended for successive terms unless terminated by either party. The factoring agreement can be terminated at any time by either us or Capital Funding by giving 30 days written notice.

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

On August 15, 2008, we factored $445,699 of our receivables under the factoring agreement. The factored balance outstanding under the factoring agreement as of June 30, 2009 was $91,485.

Property and Equipment

There was no purchase of property and equipment during fiscal 2009 compared to $2,010 for the purchase of property and equipment during fiscal 2008. We do not have any material commitments to purchase property and equipment in fiscal 2010.

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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, 2009.


	Debt		Leases		Total
2010	$	295,642	$	144,415	$	440,057
2011		8,427		70,234		78,661
2012		6,872		--		6,872
Thereafter		--		--		--
	$	310,941	$	214,649	$	525,590

Backlog

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 and Federal purchasing cycles. 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.

Related Party

Causey Lyon Enterprises is the 35% minority owner of B&B Roadway and is also one of several outsourced fabrication vendors for B&B ARMR. See Note 13 to the financial statements for a summary of transactions.

Page 13 of 52

INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Item 8.

Financial Statements and Supplementary Data


	Page
Reports of Independent Registered Public Accounting Firms	15
Consolidated Balance Sheets as of June 30, 2009 and 2008	17
Consolidated Statements of Operations for the years ended June 30, 2009 and 2008	18
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended June 30, 2009 and 2008	19
Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008	20
Notes to Consolidated Financial Statements	21-36

Page 14 of 52

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and

Stockholders of Integrated Security Systems, Inc.

We have audited the accompanying consolidated balance sheet of Integrated Security Systems, Inc. as of June 30, 2009, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year 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 audit.

We conducted our audit in accordance with 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 financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 audit provides 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, 2009, and the consolidated results of their operations and consolidated cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company’s accumulated losses and limited access to capital raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

MONTGOMERY COSCIA GREILICH LLP

Plano, Texas

September 30, 2009

Page 15 of 52

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and

Stockholders of Integrated Security Systems, Inc.

We have audited the accompanying consolidated balance sheet of Integrated Security Systems, Inc. as of June 30, 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year 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 audit.

We conducted our audit 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 audit provides 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, 2008, and the consolidated results of their operations and their consolidated cash flows for the year 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 4 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.

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

Dallas, Texas

October 13, 2008

Page 16 of 52

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Balance Sheets


	June 30,		June 30,
	2009		2008
ASSETS
Current assets:
Cash and cash equivalents	$	30,944	$	169,056
Short term investments		56,000		-
Accounts receivable, net of allowance for doubtful accounts of $204,803 and $210,406, respectively		1,487,175		1,663,610
Inventory, net of reserves		314,430		511,457
Other current assets		242,509		84,143
Assets related to discontinued operations		-		351,076
Total current assets		2,131,058		2,779,342

Property and equipment, net		28,884		53,555
Goodwill		1,707,953		1,707,953
Other assets		218,199		116,818

Total Assets	$	4,086,094	$	4,657,668

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	1,252,517	$	925,179
Accrued liabilities		923,537		968,161
Accrued interest		-		1,314,861
Demand note payable		287,985		803,596
Current portion of long-term debt		7,657		1,116,791
Liabilities related to discontinued operations		20,892		113,612
Total current liabilities		2,492,588		5,242,200

Long-term debt		15,299		12,068,548

Minority interest		17,113		149,807

Stockholders’ equity/(deficit):
Convertible preferred stock, $0.01 par value, 750,000 shares authorized; 22,500 shares issued and outstanding ($450,000 and $2,015,000 of liquidation value, respectively)		225		1,008
Common stock, $0.01 par value, 800,000,000 shares authorized; 559,126,805 and 104,962,212 shares issued, respectively		5,591,268		1,049,622
Treasury stock, at cost – 278,522 and 50,000 common shares, respectively		(125,606)		(118,750)
Additional paid in capital		37,888,178		35,241,778
Accumulated deficit		(41,780,971)		(48,976,545)
Accumulated other comprehensive loss (available for sale security)		(12,000)		-

Total stockholders’ equity/(deficit)		1,561,094		(12,802,887)

Total liabilities and stockholders equity/(deficit)	$	4,086,094	$	4,657,668

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

Page 17 of 52

INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Operations


	For the Twelve Months Ended
	June 30,
	2009		2008
Revenue:
Sales	$	8,517,350	$	10,099,171
Other revenue		110,704		48,651
Total revenue		8,628,054		10,147,822
Cost of sales		5,494,942		6,743,210

Gross profit		3,133,112		3,404,612

Operating expenses:
Selling, general and administrative		3,164,909		3,403,124
Impairment of goodwill		-		790,057
Total operating expenses		3,164,909		4,193,181

Loss from operations		(31,797)		(788,569)

Interest expense		(1,172,806)		(1,512,441)
Gain on sale of assets		248,771		-
Gain on extinguishment of liability		-		241,152
Gain on conversion of debt		6,599,275		-

Income (loss) before minority interest		5,643,443		(2,059,858)

Minority interest – loss		(72,937)		(160,851)

Net income (loss) from continuing operations		5,570,506		(2,220,709)

Loss from discontinued operations		(111,862)		(402,146)

Net income (loss)	$	5,458,644	$	(2,622,855)

Preferred Dividends		-		(164,700)

Net income (loss) allocable to common stockholders	$	5,458,644	$	(2,787,555)

Weighted average common shares outstanding – basic		139,526,110		103,852,887

Weighted average common shares outstanding – diluted		140,041,110		103,852,887

Basic and diluted earnings per share – continuing operations	$	0.04	$	(0.02)

Basic and diluted earnings per share – net income	$	0.04	$	(0.03)

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

Page 18 of 52

INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Changes in Stockholders' Equity (Deficit)


													Accumulated
	Convertible								Additional				Other
	Preferred Stock			Common Stock			Treasury		Paid in		Accumulated		Comprehensive
	Shares	Amount		Shares	Amount		Stock		Capital		Deficit		Loss		Total
Balance at June 30, 2007	100,750	$	1,008	99,510,890	$	995,109	$	(118,750)	$	34,924,238	$	(46,353,689)	$	-	$	(10,552,085)

Common stock issuance				5,451,322		54,513				272,699						327,212
Stock option expense										44,841						44,841
Net loss												(2,622,856)				(2,622,856)

Balance at June 30, 2008	100,750	$	1,008	104,962,212	$	1,049,622	$	(118,750)	$	35,241,778	$	(48,976,545)	$	-	$	(12,802,887)

Common stock issuance				33,211,171		332,112				616,506						948,618
Stock option expense										54,279						54,279
Preferred Share conversion	(78,250)		(783)	57,972,448		579,724				(2,315,872)		1,736,930				0
Debt conversion				362,980,974		3,629,810				4,284,632						7,259,619
Sale of DoorTek								(6,856)		6,856						0
Unrealized holding loss														(12,000)		(12,000)
Net income												5,458,644				5,458,644

Balance at June 30, 2009	22,500	$	225	559,126,805	$	5,591,268	$	(125,606)	$	37,888,178	$	(41,780,971)	$	(12,000)	$	1,561,094

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

Page 19 of 52

INTEGRATED SECURITYS SYSTEMS INC

Consolidated Statements of Cash Flows


	June 30,		June 30,
	2009		2008
Cash flows from operating activities:
Net income (loss)	$	5,458,644	$	(2,622,856)
Loss from discontinued operations		111,862		402,146
Income (loss) from continuing operations		5,570,506		(2,220,710)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		27,886		61,167
Gain on sale of assets		(248,771)		-
Gain on conversion of debt		(6,599,275)		-
Provision for bad debt		(102,292)		172,433
Provision for warranty reserve		(13,065)		1,744
Provision for inventory reserve		79,839		23,510
Stock option expense		54,279		44,841
Gain on extinguishment of liability		-		241,152
Goodwill impairment		-		790,057
Expenses paid with stock		865,472		327,212
Minority interest		72,937		160,851
Changes in assets and liabilities:
Accounts receivable		278,727		463,622
Inventory		117,189		(37,213)
Intercompany		-		(548,842)
Other assets		82,513		(16,057)
Accounts payable		265,557		(798,887)
Accrued liabilities		(20,402)		556,038
Net cash provided by (used in) operating activities		431,100		(779,082)

Cash flows from investing activities:
Proceeds from sale of assets		5,300
Net cash provided by investing activities		5,300		-

Cash flows from financing activities:
Net Borrowings (Payments) of debt		(540,043)		481,014
Proceeds from notes payable and long-term debt		-		300,000
Amortization of deferred debt costs		111,181		345,865
Proceeds from issuance of stock		90,000		-
Distribution to minority interest		(205,632)		(200,606)
Net cash (used in) provided by financing activities		(544,494)		926,273

Cash flows from discontinued operations:
Operating activities		(30,018)		242,618
Investing activities		-		(69,121)
Financing activities		-		(351,642)
Net cash used in discontinued operations		(30,018)		(178,145)

Net decrease in cash		(138,112)		(30,954)

Cash at beginning of period		169,056		200,010
Cash at end of period	$	30,944	$	169,056

Supplemental disclosure of noncash financing activities:
Issuance of common stock in payment of accrued interest	$	1,367,332	$	-
Conversion of secured promissory notes into common stock		4,325,000		-
Conversion of unsecured promissory notes into common stock		8,821,386		-

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

Page 20 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ORGANIZATION AND DESCRIPTION OF BUSINESS

Integrated Security Systems, Inc. was formed in December 1991. The Company has one wholly-owned subsidiary, B&B ARMR Corporation, an anti-terrorist crash barrier and gate engineering and distribution company which has domestic and international installations and customers. 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.

SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The consolidated financial statements include the Company and its subsidiaries: B&B ARMR Corporation, the only subsidiary with continuing operations; Intelli-Site, Inc. whose operating assets were sold on March 25, 2009 and DoorTek Corporation, whose operating assets were sold on July 31, 2008. Both Intelli-Site, Inc. and DoorTek Corporation are reported as Discontinued Operations on all financial statements. Also included in the financial statements is 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 arises 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 generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding beyond the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time the accounts 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 on 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 52

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.

Discontinued Operations

On July 31, 2008 we sold substantially all of DoorTek Corporation’s assets, including equipment and inventory. Additionally, on March 25, 2009, we sold substantially all of Intelli-Site, Inc.’s assets, including equipment and intellectual property related to its’ operations. In accordance with generally accepted accounting principles, the operating results for both DoorTek and Intelli-Site have been aggregated and reported as discontinued operations in the Consolidated Statement of Operations and the associated assets and liabilities are classified separately in the balance sheet. Prior periods have been reclassified to conform to the current-period presentation. For additional information relative to the sales of DoorTek and Intelli-Site refer to Note 3, Discontinued Operations.

Revenue Recognition

The Company recognizes revenue from product sales at the time of shipment and 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 contract. 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.

Concentration of Credit Risk

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

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.

A major customer of B&B ARMR accounted for 10.6% and 9.8%, of our sales in fiscal 2009 and 2008, respectively.

Per the B&B Roadway Joint Venture agreement, Causey Lyon Enterprises (CLE) manufactures all products for B&B Roadway. CLE also manufactures some products for B&B ARMR. CLE accounted for 51.7% and 52.5% of cost of sales in fiscal 2009 and 2008, respectively. Another vendor of B&B ARMR accounted for 11.3% and 8.2% of our cost of sales in 2009 and 2008, respectively.

Page 22 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 short-term investments is the published trading value of publicly traded stock. The carrying value of long-term debt approximates fair value because it bears a prevailing market rate of interest.

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 $790,057 in fiscal 2008 related to the acquisition of ARMR Services Corporation. The changes in the carrying amount of goodwill for the periods ending June 30, 2009 and 2008 are as follows:


	For the Year Ended June 30,
	2009		2008
ARMR Services Corporation
Beginning balance:	$	1,707,953	$	2,498,010
Impairment loss		--		(790,057)
	$	1,707,953	$	1,707,953

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 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Income/Loss per Share

The Company computes basic income/loss per common share using the weighted average number of common shares outstanding. At June 30, 2009 and 2008, there were 515,000 and 2,471,250 shares, respectively, of in-the-money potentially dilutive common shares outstanding. These shares were not included in weighted average shares outstanding for year ending June 30, 2008 because their effect is antidilutive due to the Company’s reported net loss.

At June 30, 2009 and 2008, the Company had 669,711,909 and 228,906,292 shares, respectively, 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 2009 and 2008:


	June 30,
	2009		2008
Interest paid	$	221,223	$	95,030
Income taxes paid	$	-	$	-

Recent Accounting Pronouncements

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 were effective beginning this fiscal year ending June 30, 2009. There was 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 was effective as of the beginning of this fiscal year ending June 30, 2009. There was no material effect from the adoption of SFAS No. 159.

Page 24 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 requires (a) that noncontrolling (minority) interest be reported as a component of shareholders' equity; (b) that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations; (c) that changes in a parent's ownership interest while the parent retains its controlling interest be accounted for as equity transactions; (d) that any retained noncontrolling equity investment upon the deconsolidation of the subsidiary be initially measured at fair value; and (e) that sufficient disclosures are provided that clearly identify and distinguish between the interest of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will apply to the Company starting in its 2010 fiscal year. The Company anticipates a revision to its disclosures regarding minority interest, but there should be no material effect from the adoption of SFAS No. 160.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. This statement’s objective is to establish principles and requirements for subsequent events, including (a) the period after the balance sheet date to evaluate, (b) circumstances that would be considered a subsequent event and (c) disclosure requirements. SFAS No. 165 is effective for fiscal years ending after June 15, 2009 and does apply to this fiscal year ending June 30, 2009. There was no material effect from the adoption of SFAS No. 165.

In June 2009, the FASB issued SFAS No. 168, “FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 replace SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” This statement’s objective is communicate that FASB Accounting Standards Codification^TM will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and will be apply to the Company starting in its 2010 fiscal year.

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 20% rate, which averages out to an overall forfeiture rate of 48.8%. An expense of $54,279 and $44,841 was recorded in fiscal years 2009 and 2008, respectively. The known amount of compensation expense to be recognized in future periods is $153,563.

Four million options were granted during the fiscal year ended June 30, 2009.

Page 25 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. DISCONTINUED OPERATIONS

On July 31, 2008 we entered into an Asset Purchase Agreement with the managers and former owners of DoorTek for the sale of substantially all of DoorTek’s assets, including equipment and inventory. On March 25, 2009, we sold substantially all of Intelli-Site, Inc.’s assets, including equipment and intellectual property related to its’ operations. In accordance with generally accepted accounting principles, the operating results for both DoorTek and Intelli-Site have been aggregated and reported as discontinued operations in the Consolidated Statement of Operations and the associated assets and liabilities are classified separately in the balance sheet. Prior periods have been reclassified to conform to the current-period presentation.

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


	For the years ended
	June 30,		June 30,
	2009		2008
Sales	$	407,273	$	1,160,693
Cost of sales		32,691		421,797
Gross margin		374,582		738,896

Operating expenses:
Selling, general and administrative		482,119		686,724
Impairment of goodwill		-		122,508
Research and product development		4,282		331,414

Loss from operations		(111,819)		(401,750)

Interest expense		(43)		(396)

Net loss	$	(111,862)	$	(402,146)

Assets and liabilities reported in the Consolidated Balance Sheets as discontinued operations consist of the following:


	June 30,		June 30,
	2009		2008
Cash and cash equivalents	$	-	$	4,645
Accounts receivable		-		191,755
Inventories		-		110,362
Other current assets		-		33,960
Property and equipment, net		-		10,354
Total assets	$	-	$	351,076

Accounts payable		20,892		68,529
Accrued liabilities		-		45,083
Total liabilities	$	20,892	$	113,612

Page 26 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LIQUIDITY

We suffered losses from operations during fiscal 2009 and 2008. Management expects that we will be profitable on an operating basis in fiscal 2010; however, this expectation is dependent on the Company’s ability to draw additional funds on its factoring agreement or to obtain additional financing from alternative sources. In addition, added factoring of accounts receivable or alternative financing will also be necessary to meet the Company’s current liabilities as they become due. As the factoring agreement is a demand note and subject to termination with 30 days notice, plus the fact that the Company has been unable to find alternative financing to date, we can give no assurances that funds will be available to settle current liabilities as they become due. Ultimately, failure to obtain additional financing could jeopardize our ability to continue as a going concern.

On June 1, 2009, the Company and certain holders of its debt and certain holders of its Series D Preferred Stock agreed to convert their securities into shares of the Company’s common stock, par value $0.01 per share. Such conversions were accomplished pursuant to the Debt Conversion Agreements and Preferred Stock Conversion Agreements, the forms of which are filed as Exhibits to this Form 10-K. In the aggregate, $13,146,386 of indebtedness was converted, accrued interest thereon was waived, and 78,250 shares of Series D Preferred Stock were converted. A total of 420,953,422 shares of common stock were issued in connection with the conversions. In addition, the Company issued to the converting security holders common stock purchase warrants, to purchase an aggregate of up to 105,238,355 shares of common stock, at a purchase price of $0.06 per share. The warrants have a term of five (5) years from the date of issuance. A net gain of $6.6 million was recognized as a result of these conversions.

COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS

The composition of certain balance sheet accounts is as follows:


	June 30,		June 30,
	2009		2008
Accounts receivable
Trade receivables	$	1,691,978	$	1,874,016
Less: allowance for doubtful receivables		(204,803)		(210,406)
	$	1,487,175	$	1,663,610

Allowance for doubtful receivables:
Beginning balance	$	210,406	$	291,215
Bad debt expense		(102,292)		172,433
Accounts written-off or recovered		96,689		(253,242)
	$	204,803	$	210,406

Inventories:
Work in process	$	512,263	$	605,356
Finished goods		14,043		38,138
Less: Inventory reserve		(211,876)		(132,037)
	$	314,430	$	511,457

Property and equipment:
Office furniture and equipment	$	497,927	$	486,595
Vehicles		110,165		135,846
Less: accumulated depreciation		(579,208)		(568,886)
	$	28,884	$	53,555

Page 27 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DEBT

Factoring and Security Agreement with Capital Funding Solutions in Fiscal 2009

On August 15, 2008, we factored $445,699 of our receivables under the factoring agreement. The factored balance outstanding under the factoring agreement as of June 30, 2009 was $91,485.

Debt Conversion in Fiscal Year 2009

On June 1, 2009, the Company and certain holders of its debt agreed to convert their securities into shares of the Company’s common stock, par value $0.01 per share. Such conversions were accomplished pursuant to the Debt Conversion Agreements, the forms of which are filed as Exhibits to this Form 10-K. In the aggregate, $13,146,386 of indebtedness was converted and accrued interest thereon was waived. A total of 362,980,974 shares of common stock were issued in connection with the conversions. In addition, the Company issued to the converting security holders common stock purchase warrants, to purchase an aggregate of up to 90,745,250 shares of common stock, at a purchase price of $0.06 per share. The warrants have a term of five (5) years from the date of issuance. A net gain of $6.6 million was recognized as a result of these conversions.

Page 28 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2009 and June 30, 2008, our current and long-term debt consisted of the following:


	June 30,		June 30,
	2009		2008
Demand note payable:

Demand secured promissory note with a finance company to factor accounts receivable with recourse. This accounts receivable factoring facility has a factoring fee of 0.35% per 5 day period for which each invoice is outstanding	$	91,485	$	684,596

Line of credit with a bank secured with accounts receivable; maximum borrowing amount of $400,000; interest at Wall Street Journal prime rate (3.25% as of June 30, 2009 and 5.00% as of June 30, 2008) plus 2%; principal and accrued unpaid interest due on July 26, 2009		196,500		119,000
	$	287,985	$	803,596

Long-term debt:

Convertible notes payable; interest at 10% due in semi-annual installments of $192,150; 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); in default due to nonpayment of interest since May 2006; investor may require demand payment	$	-	$	3,843,000

Notes payable to stockholder; secured at issuance by first and priority security interest in substantially all of the assets of the company and by the shares of fully owned subsidiaries; interest at 8%; principal and accrued unpaid interest due September 30, 2009		-		1,700,000

Convertible notes payable to stockholder; secured at issuance by the equity interest of a majority owned joint venture; interest at 8% due in quarterly installments of $30,000; principal and accrued unpaid interest due September 30, 2009; convertible at the option of the shareholder at $0.25 per share; Company may call the note at $0.60 per share (based on certain restrictions)		-		1,500,000

Convertible notes payable to stockholder; interest at 6%; first year interest due, and paid, at date of issuance; subsequent interest payments due in quarterly installments of $16,500; principal and accrued unpaid interest due June 16, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)		-		1,100,000

Convertible notes 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 notes 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

Page 29 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	June 30,		June 30,
	2009		2008
Notes payable to stockholders; secured at issuance by subordinated security interest in the capital stock of the Company’s subsidiaries; interest at 8% due in monthly installments of $4,833; principal and accrued unpaid interest due September 30, 2009		-		725,000
Convertible note payable to stockholder; interest at 7%; principal and accrued unpaid interest due September 30, 2009; 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

Convertible note payable to stockholder; interest at 8%; principal and accrued unpaid interest due September 30, 2009; 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 $0 and $2,473, respectively)		-		497,527

Convertible notes payable to stockholder; interest at 8% due in quarterly installments of $9,000; principal and accrued unpaid interest due September 30, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)		-		450,000

Notes payable to stockholder; secured at issuance by first and priority security interest in substantially all of the assets of the company and by the shares of fully owned subsidiaries ; interest at 7% due in monthly installments of $2,333; principal and accrued unpaid interest due September 30, 2009		-		400,000

Note payable to stockholder; interest at 10% due in monthly installments of $2,737; principal and accrued unpaid interest due September 30 2009		-		328,386

Convertible note payable to stockholder; interest at 8% due in quarterly installments of $6,000; principal and accrued unpaid interest due September 30, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)		-		300,000

Note payable to stockholder; interest at 9% due in monthly installments of $750; principal and accrued unpaid interest due September 30, 2009		-		100,000

Note payable to stockholder; interest at 8%; principal and accrued unpaid interest due September 30, 2009		-		100,000

Note payable to stockholder; interest at 7%; principal and accrued unpaid interest due September 30, 2009		-		100,000


Other		22,956		41,426
		22,956		13,185,339
Less current portion		(7,657)		(1,116,791)
Long-term debt	$	15,299	$	12,068,548

Page 30 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Principal payments required under demand note payable and long-term debt at June 30, 2009 are as follows:


Year Ending June 30,
2010	$	295,642
2011		8,427
2012		6,872
Thereafter		--
	$	310,941

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

INCOME TAXES

Federal and certain state income tax returns have not been filed for the fiscal years ended 2005 through 2008 and are delinquent. We expect to be compliant with our filings by March 31, 2010.

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, 2009	June 30, 2008
Federal statutory benefit rate	34.0%	(34.0)%
Utilization of net operating losses	(34.0)%	--
Valuation allowance	--	34.0%
	--%	--%

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


	June 30, 2009		June 30, 2008
Deferred tax assets
Inventory reserve	$	72,000	$	45,000
Accounts receivable		70,000		85,000
Net operating loss carryforward		11,420,000		12,600,000
Other		63,000		23,000
Gross deferred tax asset		11,625,000		12,753,000

Deferred tax liabilities
Property and equipment		--		--
Net deferred tax asset		11,625,000		12,753,000
Valuation allowance		(11,625,000)		(12,753,000)
Net deferred tax asset	$	--	$	--

Page 31 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has unused net operating loss carryforwards of approximately $33.6 million at June 30, 2009. The carryforwards expire from 2018 through 2028. The annual use of these carryforwards is substantially limited as a result of the uncertainty of the Company’s ability to continue as a going concern as discussed in Note 4. 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.

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 adoption of this standard did not have a material impact on the Company's consolidated financial statements. No liabilities or assets have been recognized as a result of the implementation of FIN 48. Accordingly, the Company has not recognized any penalty, interest or tax impact related to uncertain tax positions.

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 $229,182 and $266,660 for the years ended June 30, 2009 and 2008, respectively. Future minimum payments for fiscal years subsequent to June 30, 2009 under these leases are as follows:


Year Ending June 30,
2010	$	144,415
2011		70,234
2012		--
	$	214,649

BENEFIT PLANS

The Company maintains a 401(k) savings and profit sharing plan. Participants include all employees who have completed one month of service. 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 three-year period. The Company recognized expense of $12,512 and $12,893 during fiscal 2009 and 2008, respectively.

10. 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.

Page 32 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

In fiscal 2009, the Board of Directors authorized the granting of 4,000,000 additional stock options to executives of the Company. These options were valued using a volatility rate of 149% and 195% and a risk-free interest rate of 3.1% and 1.65%. There were no grants made during the fiscal year ended June 30, 2008.

Changes for the years ending June 30, 2009 and 2008, with respect to options outstanding, is detailed in the following table:


	For the Year Ended June 30, 2009			For the Year Ended June 30, 2008
	Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding at beginning of period	3,553,934	$	0.42	4,351,943	$	0.42
Issued	4,000,000		0.03	--		--
Exercised	--		0.00	--		0.00
Expired	(1,253,934)		0.41	(798,009)		0.75
Outstanding at end of period	6,300,000	$	0.13	3,553.934	$	0.34
Exercisable at end of period	2,300,000	$	0.31	3,141,434	$	0.36
Weighted-average fair value of options granted during the period		$	0.05		$	--

Information about stock options outstanding at June 30, 2009 is summarized as follows:


	Options Outstanding			Options Exercisable
Range of Exercise Prices	Shares Outstanding	Weighted Average Remaining Contract Life	Weighted Average Exercise Price	Shares Exercisable	Weighted Average Exercise Price
$0.03-0.09	4,000,000	4.3 Years	$0.03	-	$ -
$0.10-0.19	100,000	6.3 Years	$0.15	100,000	$0.15
$0.20-0.29	1,000,000	6.7 Years	$0.20	1,000,000	$0.20
$0.30-0.39	600,000	2.8 Years	$0.35	600,000	$0.35
$0.40-0.49	500,000	4.6 Years	$0.44	500,000	$0.44
$0.50-0.70	100,000	0.5 Years	$0.59	100,000	$0.59
	6,300,000	4.5 Years	$0.13	2,300,000	$0.31

Warrants

The Company issued 105,238,358 additional warrants in fiscal 2009 in conjunction with the debt and preferred share conversions; see Note 4 to the Consolidated Financial Statements for further information. No warrants were issued during fiscal 2008. These warrants were valued using a volatility rate of 137% and a risk-free interest rate of 2.55%.

Page 33 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additional information with respect to warrants outstanding at June 30, 2009 and changes for the two years then ended are as follows:


	For the Year Ended June 30, 2009			For the Year Ended June 30, 2008
	Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding at beginning of period	6,005,473	$	0.40	6,005,473	$	0.40
Issued	105,238,358		0.06	--		--
Exercised	--		--	--		--
Expired	(1,173,727)		0.67	--		--
Outstanding at end of period	110,070,104	$	0.07	6,005,473	$	0.40
Exercisable at end of period	110,070,104	$	0.07	6,005,473	$	0.40

Common Stock Issuances

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


	Year Ended June 30, 2009			Year Ended June 30, 2008
	Number of shares	Fair value		Number of shares	Fair value
Payment of interest	28,601,779	$	780,880	4,583,761	$	250,824
Director fees	1,609,392		76,667	867,561		76,388
Total expenses paid	30,211,171		857,547	5,451,322		327,212
Conversion of debt	362,980,974		3,629,810	-		-
Conversion of preferred shares	57,972,448		579,724	-		-
Total non-cash transactions	451,164,593	$	5,067,081	5,451,322	$	327,212

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

11.

CONVERTIBLE PREFERRED STOCK

At June 30, 2009 and 2008, convertible preferred stock, $0.01 par value per share, consisted of the following:


	June 30, 2009					June 30, 2008
	Par Value		Shares Outstanding	Liquidation Value		Par Value		Shares Outstanding	Liquidation Value
Series A $20	$	95	9,500	$	190,000	$	95	9,500	$	190,000
Series D $20		130	13,000		260,000		913	91,250		1,825,000
	$	225	22,500	$	450,000	$	1,008	100,750	$	2,015,000

Series A $20 Convertible Preferred Stock. At June 30, 2009, 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 Preferred are entitled to receive $20 per share before the holders of common stock are entitled to receive any distribution.

Page 34 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Series D $20 Convertible Preferred Stock. At June 30, 2009 the Company had 13,000 shares of its Series D $20 Convertible Preferred Stock (the “Series D Preferred”) outstanding. Holders of the Series D Preferred are entitled to receive, out of funds of the company legally available, dividends at the annual rate of $1.80 per annum per share.

Since 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 since 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.

On June 1, 2009, the Company and certain holders of its Series D Preferred Stock agreed to convert their securities into shares of the Company’s common stock, par value $0.01 per share. Such conversions were accomplished pursuant to Preferred Stock Conversion Agreements, the forms of which are filed as Exhibits to this Form 10-K. In the aggregate, 78,250 shares of Series D Preferred Stock were converted. A total of 57,972,448 shares of common stock were issued in connection with the conversions. In addition, the Company issued to the converting security holders 14,493,112 common stock purchase warrants to purchase shares of common stock, at a purchase price of $0.06 per share. The warrants have a term of five (5) years from the date of issuance.

12.

SEGMENT REPORTING

The Company has a wholly-owned business segment, B&B ARMR Corporation and a 65% joint venture interest in B&B Roadway, LLC. These entities 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, 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.

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 comprises 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).

Page 35 of 52

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides financial data by segment for the fiscal years ended June 30, 2009 and 2008.


	B&B ARMR		B&B Roadway		Corporate		Total
2009
Sales	$	5,111,936	$	3,405,414	$	-	$	8,517,350
Income (loss) from operations		502,005		233,166		(766,968)		(31,797)
Interest expense		33,309		24,773		1,114,724		1,172,806
Total assets		3,209,928		395,001		481,165		4,086,094
Depreciation expense		25,624		-		2,262		27,886

2008
Sales	$	5,430,509	$	4,668,662	$	-	$	10,099,171
Income (loss) from operations		(666,472)		495,638		(617,735)		(788,569)
Interest expense		36,728		36,064		1,439,649		1,512,441
Total assets		2,467,748		654,392		1,535,528		4,657,668
Depreciation expense		59,177		-		1,990		61,167

13. RELATED PARTY TRANSACTIONS

During fiscal 2009 and 2008, we had the following transactions with Causey Lyon Enterprises (CLE):


	For the Year Ended June 30,
	2009		2008
Purchases (from)	$	2,836,660	$	3,544,342
Management Fees (paid to)		599,284		602,688

In addition, we had the following balances with CLE:


	June 30,
	2009		2008
Accounts Receivable	$	-	$	-
Accounts Payable		458,538		326,644

CLE is the 35% minority owner of B&B Roadway; per the B&B Roadway Joint Venture Agreement, CLE manufactures all products for B&B Roadway. CLE is also one of several outsourced fabrication vendors for B&B ARMR.

14. SUBSEQUENT EVENT

There were not significant or material subsequent events as of the evaluation date of September 30, 2009, which is the date the financial statements were issued.

Page 36 of 52

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On October 24, 2008, the Company’s Audit Committee approved of and the Board of Directors unanimously ratified the appointment of Montgomery Coscia Greilich L.L.P. (“Montgomery Coscia Greilich”) as the Company’s independent auditor commencing with work to be performed in relation to the Company’s fiscal year ending June 30, 2009. The Company has had no occasions in the past two years upon which it has consulted with Montgomery Coscia Greilich on any matters.

Weaver and Tidwell L.L.P. was the Company’s previous independent auditor, performing audits of the Company’s consolidated financial statements for the fiscal years ended June 30, 2005, 2006, 2007, and 2008. Weaver and Tidwell’s reports did not contain an adverse opinion or disclaimer of opinion, but were modified to include an explanatory paragraph related to uncertainties about the Company’s ability to continue as a going concern.

During the fiscal years ended June 30, 2005, 2006, 2007, and 2008, (i) there have been no disagreements with Weaver and Tidwell on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement(s), if not resolved to Weaver and Tidwell’s satisfaction, would have caused Weaver and Tidwell to make reference to the subject matter of the disagreement(s) in connection with its reports for such year, and (ii) there were no “reportable events” as such term is defined in Item 304(a)(1)(v) of Regulation S-K.

The Company provided Weaver and Tidwell with a copy of this Form 10-K prior to its filing with the SEC and Weaver and Tidwell provided a consent to the use of their audit report for the fiscal year ended June 30, 2008.

Item 9A(T). Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures . As indicated in the certifications in Exhibit 31 of this report, our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2009. Based on that evaluation, we have concluded that, as of June 30, 2009, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the officers, to allow timely decisions regarding required disclosure.

(b)

Management’s Annual Report on Internal Control Over Financial Reporting. Management, including the Company’s chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Management has conducted an evaluation of the company’s internal control over financial reporting based upon criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Page 37 of 52

A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected. As a result of our evaluation, we identified the following material weaknesses in our internal control over financial reporting:

Broadly, 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 and short tenure of qualified personnel in both senior management and staff positions, our control environment is reliant primarily on the review function to prevent or detect material misstatement from reaching the financial statements. We identified the following:

lack of qualified personnel at senior management and financial reporting positions for part of the fiscal year and subsequent turnover;

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

lack of sufficient awareness of, and timely and appropriate remediation of, financial reporting 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.

Based upon this assessment and the material weaknesses identified above, we have concluded that our internal control over financial reporting was not effective as of June 30, 2009, Due to these material weaknesses, in preparing our financial statements as of and for the fiscal year ending June 30, 2009, we performed compensating additional procedures designed to ensure that such financial statements were fairly presented in all material respects in accordance with generally accepted accounting principles.

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.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.

(c)

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.

Item 9B. Other Information

There is no information required to be reported under this Item 9B.

Page 38 of 52

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The following individuals are directors of the Company.

WILLIAM D. BREEDLOVE *, 69, 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 NCI Building Systems, Inc., and four 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, 70, has been a Director since February 2001 and served as Board Chairman during fiscal 2008. 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 RENN Global Entrepreneurs Fund, 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 Growth Investment Trust PLC, CaminoSoft Corp., Cover-All Technologies, Inc. and BPO Management Services, Inc. Mr. Cleveland is a graduate of the Wharton School of Commerce and Finance of the University of Pennsylvania.

ROBERT M. GALECKE *, 67, 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.

FRANK R. MARLOW *, 71, 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.

BROOKS SHERMAN, 49, has been Chairman of the Board and Chief Executive Officer of ISSI since August 29, 2008. Mr. Sherman has worked as an independent consultant in executive and financial roles since 2007, including serving as a consultant to Renn Capital Group, Inc. He previously served as President and CEO of Selkirk Americas, LP, a building products manufacturer specializing in venting and air distribution products. Prior to that, Mr. Sherman held several other positions, including President of Selkirk, Inc. and Chief Financial Officer of Eljer Industries, Inc., a building products manufacturer of plumbing and HVAC products which, at the time, was a publicly-held corporation. Mr. Sherman began his career with Arthur Andersen & Co., a public accounting firm. Mr. Sherman earned his B.B.A. degree in accounting from Texas Tech University.

Page 39 of 52

In addition to Mr. Sherman, the following individuals are significant employees of the Company and its subsidiaries.

PAUL MATTHEWS, 45, has been President and Chief Operations Officer of B&B ARMR since June 1, 2009 and an employee since 2004. Prior to holding this position, Mr. Matthews held the positions of Chief Operational Officer and Chief Technical Officer of B&B ARMR. Mr. Matthews’ background includes over twenty-five years of electro-mechanical product development and has over thirteen years experience in the security industry. He previously served as Six Sigma Leader for Honeywell Video Systems and as Vice President of Product Development (1996-2004) for Ultrak, their subsidiary. Prior to Ultrak, he supported multiple engineering programs with Texas Instruments DSEG. Mr. Matthews holds a BS in Mechanical Engineering from the University of Missouri and is a registered professional engineer in the state of Texas.

SHARON DOHERTY, 44, has been the Chief Financial Officer since January 2009. Prior to joining ISSI, Doherty served as Chief Financial Officer for Selkirk Americas, LP, an international building products manufacturer specializing in venting and air distribution products. Preceding Selkirk Americas, LP, Doherty held such positions as Controller for Selkirk, Inc. and Senior Financial Analyst for Eljer Industries, Inc., a building products manufacturer of plumbing and HVAC products. Ms. Doherty began her career with Ernst & Young, LP, a public accounting firm. Ms. Doherty earned her B.B.A. degree in accounting from the University of Texas at Arlington.

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 Exchange Act.

*Member of the Audit Committee for the Company

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act 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), Ms. Doherty had late filings during the fiscal year ending June 30, 2009.

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 each of these officers is a certified public accountant in Texas and bound to a code of ethics by the state board of accountancy.

Page 40 of 52

Item 11. 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, 2009 and 2008.


SUMMARY COMPENSATION TABLE
		Year	Salary		Bonus							NonEquity		Nonqualified
												Incentive		Deferred		All
Name and							Stock		Option			Plan		Compensation		Other
Principal Position							Awards		Awards			Compensation		Earnings		Compensation		Total
Brooks Sherman		2009	$	33,000	$	-	$	-	$	189,446	(6)	$	-	$	-	$	225	$	222,671
Board Chairman and CEO	(1)	2008		-		-		-		-			-		-		-		-
Sharon Doherty		2009	$	38,000	$	-	$	-	$	18,396	(7)	$	-	$	-	$	-	$	56,396
CFO	(2)	2008		-		-		-		-			-		-		-		-
Paul Matthews		2009	$	122,500	$	-	$	-	$	-		$	-	$	-	$	3,675	$	126,175
President and COO of		2008		-		-		-		-			-		-		-		-
B&B ARMR Corporation	(3)
Vernon H. Foersterling, Jr.		2009	$	160,000	$	-	$	-	$	-		$	-	$	-	$	101,600	$	261,600
Former President and Former CEO of		2008		160,000		-		-		-			-		-		-		160,000
B&B ARMR Corporation	(4)
Giovanni Ulibarri		2009	$	83,000	$	-	$	-	$	-		$	-	$	-	$	-	$	83,000
Former President and CEO of		2008		113,000		-		-		-			-		-		-		113,000
Intelli-Site, Inc.	(5)

(1) Began employment on August 29, 2008.

(2) Began employment on January 12, 2009

(3) Began employment on November 8, 2004.

(4) Began employment on March 1, 2006 and resigned June 1, 2009. Other compensation includes accrued severance payments pursuant to his letter of employment.

(5) Began employment on April 16, 2001 and resigned March 6, 2009 upon sale of operations of Intelli-Site, Inc.

(6) Awarded 3,000,000 shares August 29, 2008 at exercise price of $0.03. One third of shares vest on August 29, 2009, one-third vest on August 29, 2009 and final one third vest on August 29, 2011.

(7) Awarded 1,000,000 shares April 1, 2009 at exercise price of $0.03. One third of shares vest on April 1, 2010, one-third vest on April 1, 2011 and final one third vest on April 1, 2012.

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, 2009 or 2008.

Stock Option Grants

In fiscal 2009, the Board of Directors authorized the granting of 4,000,000 additional stock options to executives of the Company.

Page 41 of 52

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, 2009.


	Number of Securities Underlying Unexercised Options		Value of Unexercised In-The-Money Options
Name	Exercisable	Unexercisable	Exercisable	Unexercisable
Brooks Sherman	-	3,000,000	-	-
Sharon Doherty	-	1,000,000	-	-
Paul Matthews	150,000	-	-	-

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.


DIRECTOR COMPENSATION
Name	Fees Earned or Paid in Cash		Stock Awards		Option Awards		NonEquity Incentive Plan Compensation		Nonqualified Deferred Compensation Earnings		All Other Compensation		Total
Willaim Breedlove	$	6,250	$	8,333	$	-	$	-	$	-	$	-	$	14,583
Robert Galecke		10,000		13,333		-		-		-		-		23,333
Frank Marlow		6,250		8,333		-		-		-		-		14,583
Russell Cleveland		6,250		8,333		-		-		-		-		14,583

Item 12. 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 August 31, 2009, 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.

Page 42 of 52


Name of Beneficial Owner	Number of Shares Beneficially Owned (1)	Percent of Class (1)
Global Special Opportunities Trust, PLC. (2)	177,600,386	31.8%
Renaissance US Growth Investment Trust PLC (3)	139,846,666	25.0%
RENN Global Entrepreneurs Fund Inc (4)	127,236,141	22.8%
Russell Cleveland (5)(6)(7)	445,092,754	79.6%
C. A. Rundell, Jr. (5)(8)	61,100,432	10.9%
Brooks Sherman (5)(6)(9)	4,000,000	0.7%
Frank Marlow (5)(6)(10)	1,929,177	0.3%
Robert Galecke (5)(6)(11)	1,636,594	0.3%
William Breedlove (5)(6)	1,044,375	0.2%
Paul Matthews (5)(6)(12)	168,500	0.0%
All current directors and executive officers as a group (7 persons) (b)

_____________________

(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 31,666,333 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.

(3)

Includes 20,524,046 shares of common stock issuable upon the exercise of warrants within 60 days and 93,750 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 16,863,571 shares of common stock issuable upon the exercise of warrants within 60 days and 93,750 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.

(5)

The address for this person is 2009 Chenault Drive, Suite 114; Carrollton, Texas 75006.

(6)

Mr. Cleveland is a director and served as chairman of the board for part of fiscal 2009. Messrs. Breedlove, Marlow, and Galecke are directors of the company. Mr. Sherman is the chairman of the board and chief executive officer of the company. Mr. Matthews is president of B&B ARMR Corporation.

(7)

Includes 69,053,950 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 person is 8080 N. Central Expressway, Suite 210; Dallas, TX 75206.

(8)

Includes 11,214,050 shares of common stock issuable upon the exercise of warrants within 60 days and 411,000 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days.

(9)

Includes 1,000,000 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days.

(10)

Includes 212,577 shares of common stock issuable upon the exercise of warrants exercisable within 60 days.

(11)

Includes 83,613 shares of common stock issuable upon the exercise of warrants exercisable within 60 days.

(12)

Includes 150,000 shares of common stock issuable upon the exercise of outstanding options exercisable within 60 days.

Page 43 of 52

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, 2009:


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	2,300,000		0.31	4,093,000
TOTAL	2,300,000	$	0.31	4,593,000

Item 13. Certain Relationships and Related Transactions, and Director Independence

On June 1, 2009, the Company and Global Special Opportunities Trust PLC (“GSOT”), Renaissance US Growth Investment Trust PLC (“RUSGIT”), Renaissance RENN Global Entrepreneurs Fund, Inc. (“RENN”), and holders of certain debt and Series D Preferred Stock, agreed to convert their securities into shares of the Company’s common stock, par value $0.01 per share. Such conversions were accomplished pursuant to the Debt Conversion Agreements and Preferred Stock Conversion Agreements, the forms of which are filed as Exhibits to this Form 10-K. In the aggregate, $9,975,000 of indebtedness was converted, accrued interest thereon was waived, and 7,500 shares of Series D Preferred Stock were converted. A total of 261,928,429 shares of common stock were issued in connection with the conversions. In addition, the Company issued common stock purchase warrants, to purchase an aggregate of up to 65,482,111 shares of common stock, at a purchase price of $0.06 per share. The warrants have a term of five (5) years from the date of issuance. The table below shows the transactions with each related party entity.


	Converted			Issued
	Debt		Preferred Shares	Common Shares	Warrants
GSOT	$	4,525,000	-	123,206,507	30,801,628
RUSGIT		2,900,000	3,750	73,776,029	18,444,009
RENN		2,550,000	3,750	64,945,893	16,236,474
Aggregate	$	9,975,000	7,500	261,928,429	65,482,111

GSOT, RUSGIT and RENN are related parties to the Company in that (i) they are the beneficial owner of 31.8%, 25.0% and 22.8%, respectively, of the Company’s common stock (on a fully diluted basis), and (ii) Mr. Russell Cleveland, who served as a director of the Company during fiscal 2009 is the President of RENN.

Robert Galecke, William Breedlove and Frank Marlow are independent directors based on New York Stock Exchange definition of independence.

Page 44 of 52

Item 14. Principal Accountant Fees and Services

The following information summarizes the fees paid or payable to Montgomery Coscia Greilich L.L.P. for the fiscal year ended June 30, 2009 and to Weaver and Tidwell, L.L.P. for services rendered for the fiscal years ended June 30, 2009 and 2008.

Audit Fees. Fees for audit services to Montgomery Coscia Greilich L.L.P. were $74,733 in fiscal year 2009. Fees for audit services to Weaver and Tidwell, L.L.P. were $82,490 in fiscal year 2008. Audit fees include fees associated with the annual audit and the reviews of the Company’s quarterly reports on Form 10-Q.

Audit-Related Fees. The Company did not pay any audit-related service fees to Montgomery Coscia Greilich L.L.P. or Weaver and Tidwell, L.L.P., other than the fees described above, for services rendered during fiscal year 2009 or 2008.

Tax Fees. The Company did not pay any fees for tax compliance, tax consulting or advisory services to either Montgomery Coscia Greilich L.L.P. or Weaver and Tidwell, L.L.P. for services rendered during fiscal year 2009 or 2008.

All Other Fees. The Company was not billed for fees for any other services not described above in fiscal year 2009 or 2008.

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 45 of 52

Item 15. Exhibits, Financial Statement Schedules

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

Form of Stock Purchase Warrant. (12)

10.7

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

10.8

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

10.9

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

10.10

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

10.11

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

Page 46 of 52

10.12

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

10.13

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

10.14

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)

10.15

Form of Debt Conversion Agreement. (24)

10.16

Form of Preferred Stock Conversion Agreement. (24)

10.17

Form of Common Stock Purchase Warrant. (24)

10.18+

Integrated Security Systems, Inc. 2009 Long-Term Incentive Plan.

16.1

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

16.2

Letter of Weaver and Tidwell L.L.P., dated October 28, 2008, addressed to the Securities and Exchange Commission. (25)

21.1

Subsidiaries of Integrated Security Systems, Inc. (26)

23.1

Consent of Weaver & Tidwell, LLP (27)

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).

Page 47 of 52

(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.

(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.

(24)

Incorporated by reference to the Company’s Form 8-K filed on June 15, 2009.

(25)

Incorporated by reference to the Company’s Form 8-K/A filed on November 25, 2008.

(26)

Incorporated by reference to the Company’s Form 10-K filed on September 30, 2009

(27)

Incorporated by reference to the Company’s Form 10-K filed on September 30, 2009

Filed herewith.

Indicates management contract or compensatory plan or arrangement.

Page 48 of 52

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTEGRATED SECURITY SYSTEMS, INC.

(Registrant)

Date: April 22, 2010

/s/ Brooks Sherman

Brooks Sherman

Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, 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: April 22, 2010

/s/ Brooks Sherman

Brooks Sherman

Director, Chairman of the Board, Chief Executive Officer

(Principal Executive Officer)

Date: April 22, 2010

/s/ Sharon Doherty

Sharon Doherty

Chief Financial Officer

Date: April 22, 2010

/s/ William D. Breedlove

William D. Breedlove

Director

Date: April 22, 2010

/s/ Russell Cleveland

Russell Cleveland

Director

Date: April 22, 2010

/s/ Robert M. Galecke

Robert M. Galecke

Director

Date: April 22, 2010

/s/ Frank R. Marlow

Frank R. Marlow

Director

Page 49 of 52

EXHIBIT INDEX

2.1

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

Form of Stock Purchase Warrant. (12)

10.7

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

10.8

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

10.9

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

10.10

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

10.11

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

Page 50 of 52

10.12

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

10.13

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

10.14

10.15

Form of Debt Conversion Agreement. (24)

10.16

Form of Preferred Stock Conversion Agreement. (24)

10.17

Form of Common Stock Purchase Warrant. (24)

10.18+

Integrated Security Systems, Inc. 2009 Long-Term Incentive Plan.

16.1

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

16.2

Letter of Weaver and Tidwell L.L.P., dated October 28, 2008, addressed to the Securities and Exchange Commission. (25)

21.1

Subsidiaries of Integrated Security Systems, Inc. (26)

23.1

Consent of Weaver & Tidwell, LLP (27)

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.

Page 51 of 52

(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.

(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.

(24)

Incorporated by reference to the Company’s Form 8-K filed on June 15, 2009.

(25)

Incorporated by reference to the Company’s Form 8-K/A filed on November 25, 2008.

(26)

Incorporated by reference to the Company’s Form 10-K filed on September 30, 2009

(27)

Incorporated by reference to the Company’s Form 10-K filed on September 30, 2009

Filed herewith.

Indicates management contract or compensatory plan or arrangement.

Page 52 of 52