10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

________

Form 10-Q

________

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2011.

¨

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 1-11900

Integrated Security Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware	75-2422983
(State of incorporation)	(IRS 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)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ¨    No  ý

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

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

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

As of January 31, 2011, 5,607,315 shares of the registrant’s common stock were outstanding.

Page 1 of 12

INTEGRATED SECURITY SYSTEMS, INC.

INDEX

	Page
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
Consolidated Balance Sheets at December 31, 2011 (unaudited) and June 30, 2011	3
Consolidated Statements of Operations (unaudited) for the three and six months ended December 31, 2011 and 2010	4
Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2011 and 2010	5
Notes to Consolidated Financial Statements	6
Item 2.  Management’s Discussion and Analysis or Plan of Operation	9
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	9
Item 4.  Controls and Procedures	10
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings	10
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	10
Item 3.  Defaults upon Senior Securities	10
Item 4.  (Removed and Reserved)	10
Item 5.  Other Information	10
Item 6.  Exhibits	10
SIGNATURES	11

Page 2 of 12

PART I.  FINANCIAL STATEMENTS

Item 1.  Financial Statements

INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Balance Sheets
	December 31,		June 30,
	2011		2011
ASSETS	Unaudited
Current assets:
Cash and cash equivalents	$	3,845,369	$	3,767,427
Restricted cash (Note 3)		275,128		275,058
Short term investments		18,859		25,146
Other current assets		20,608		87,937
Assets related to discontinued operations		2,355		81,585
Total current assets		4,162,319		4,237,153
Other assets		600,000		900,000
Total Assets	$	4,762,319	$	5,137,153
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	17,894	$	736
Accrued liabilities		91,467		104,180
Liabilities related to discontinued operations		-		2,961
Total current liabilities		109,361		107,877
Equity:
Convertible preferred stock, $0.01 par value, 750,000 shares authorized; 22,500 shares issued and outstanding ($450,000 of liquidation value)		225		225
Common stock, $0.01 par value, 56,250,000 shares authorized; 5,610,100 shares issued		56,101		56,101
Treasury stock, at cost; 2,785 common shares		(125,606)		(125,606)
Additional paid in capital		43,589,386		43,584,771
Accumulated deficit		(38,816,362)		(38,441,716)
Accumulated other comprehensive loss (available for sale security)		(50,786)		(44,499)
Total stockholders’ equity		4,652,958		5,029,276
Total liabilities and stockholders’ equity	$	4,762,319	$	5,137,153

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

Page 3 of 12

INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Statements of Operations
(Unaudited)
	For the Three Months Ended				For the Six Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
Revenue		-		-		-		-
Selling, general and administrative expenses		92,537		233,622		182,987		411,229
Loss from operations		(92,537)		(233,622)		(182,987)		(411,229)
Interest income		11,350		3,981		22,972		9,464
Other income		10,001		-		28,537		-
Interest expense		-		(17,640)		-		(31,344)
Impairment of other assets		(300,000)		-		(300,000)		-
Loss from continuing operations		(371,186)		(247,281)		(431,478)		(433,109)
Net income from discontinued operations (Note 8)		59,258		235,790		56,832		660,616
Net (loss) income		(311,928)		(11,491)		(374,646)		227,507
Income from discontinued operations attributable to the noncontrolling interest		-		(90,411)		-		(182,682)
Net (loss) income attributable to common stockholders	$	(311,928)	$	(101,902)	$	(374,646)	$	44,825
Net (loss) income per common share (basic and diluted):
From continuing operations	$	(0.07)	$	(0.04)	$	(0.08)	$	(0.08)
From discontinued operations		0.01		0.02		0.01		0.09
Net (loss) income per common share (basic and diluted)	$	(0.06)	$	(0.02)	$	(0.07)	$	0.01
Weighted average shares outstanding:
Basic		5,607,315		5,590,885		5,607,315		5,590,018
Assuming dilution		5,612,465		5,596,035		5,612,465		5,595,168

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

Page 4 of 12

INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
	For the Six Months Ended
	December 31,
	2011		2010
Cash flows from operating activities:
Net (loss) income	$	(374,646)	$	44,825
Income from discontinued operations (Note 8)		(56,832)		(660,616)
Income from discontinued operations attributable to the noncontrolling interest		-		182,682
Loss from continuing operations		(431,478)		(433,109)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		-		1,311
Stock option expense		4,615		56,468
Expenses paid with stock or options		-		12,500
Changes in assets and liabilities:
Other assets		367,259		130,151
Accounts payable		17,158		(23,048)
Accrued liabilities		(12,713)		146,191
Net cash used in operating activities		(55,159)		(109,536)
Cash flows from investing activities:
Net cash provided by investing activities		-		-
Cash flows from financing activities:
Net payments of debt		-		(80,049)
Net cash used in financing activities		-		(80,049)
Cash flows from discontinued operations:
Operating activities		133,101		413,726
Investing activities		-		(4,691)
Financing activities		-		(30,868)
Net cash provided by discontinued operations		133,101		378,167
Net increase in cash		77,942		188,582
Cash at beginning of period		3,767,427		22,690
Cash at end of period	$	3,845,369	$	211,272

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

Page 5 of 12

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Six Months Ended December 31, 2011 and 2010

Note 1:  Basis of Presentation

The consolidated financial statements include the accounts of Integrated Security Systems, Inc. (the “Company”) and its wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated. The consolidated balance sheet as of December 31, 2011, the consolidated statements of operations for the three and six months ended December 31, 2011 and 2010, and the consolidated statements of cash flows for the six months ended December 31, 2011 and 2010, are unaudited.  The preparation of interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Management does not believe these estimates or assumptions will change significantly in the future, however, actual results could differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, all adjustments (generally consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying financial statements. Prior periods have been reclassified to conform to the current period presentation. We suggest you read these financial statements in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended June 30, 2011. The results of operations for the six months ended December 31, 2011 are not necessarily indicative of operating results for the full year.

Note 2:  Concentration of Credit Risks

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

Note 3:  Restricted Cash

Restricted cash represents the portion of the cash consideration paid pursuant to the sale of B&B ARMR that was deposited to an escrow fund in order to secure the Company’s and B&B ARMR’s indemnification obligations under the Purchase Agreement as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.  This escrow period terminates on January 31, 2012.

Note 4:  Other Assets

Other assets at December 31, 2011 are comprised of a promissory note of Buyer in the original principal amount of $450,000, and a $450,000 equity investment in B&B Roadway Holdings, LLC, a Delaware limited liability company and the parent of Buyer, as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.  The note matures on January 31, 2016 and bears interest at 8% per annum, payable quarterly.  Each of these investments was valued at $300,000 at December 31, 2011 to reflect the subsequent selling price, which created an impairment of $300,000; see Note 11:  Subsequent Events.

Note 5:  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.

Page 6 of 12

Note 6:  Noncontrolling Interest in Discontinued Operations

Causey Lyon Enterprises (CLE) was the 35% owner of the B&B Roadway joint venture; per the joint venture agreement, CLE manufactured all products for B&B Roadway, and was also one of several outsourced fabrication vendors for XARMR.  XARMR’s investment in the joint venture was sold on January 31, as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.

Note 7:  Comprehensive (Loss) Income

The following table provides a summary of total comprehensive (loss) income:

	For the Six Months Ended
	December 31,
	2011		2010
Consolidated net (loss) income	$	(374,646)	$	44,825
Other comprehensive income:
Unrealized holding loss		(6,287)		(18,583)
Total comprehensive (loss) income	$	(380,933)	$	26,242

Note 8:  Discontinued Operations

The Company’s wholly-owned subsidiary, XARMR Corporation (“XARMR”) sold substantially all of the assets of XARMR on January 31, 2011. Such assets included, but were not limited to, the accounts receivable, fixed assets and intellectual property constituting XARMR’s business of providing anti-terrorist barriers, security gates and gate operators for perimeter security applications, along with its investment in the joint venture B&B Roadway, LLC (“B&B Roadway”), as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.

The operating results for both XARMR and B&B Roadway have been aggregated and reported as discontinued operations in the Consolidated Statements 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.

Income from discontinued operations:

Income from discontinued operations reported in the Consolidated Statements of Operations consists of the following:

	For the Six Months Ended
	December 31,
	2011		2010
Sales	$	-	$	5,020,593
Cost of sales		-		3,262,181
Gross profit		-		1,758,412
Selling, general and administrative		(56,832)		917,596
Income from discontinued operations		56,832		840,816
Interest expense		-		(27,819)
Transaction costs				(152,381)
Net income from discontinued operations		56,832		660,616
Income from discontinued operations attributable to the noncontrolling interest		-		(182,682)
Income from discontinued operations attributable to common stockholders	$	56,832	$	477,934

Page 7 of 12

Assets related to discontinued operations of $2,355 and $81,585 at December 31 and June 30, 2011, respectively, were accounts receivable that were assigned to the Company in accordance with the Purchase Agreement, as described in Note 17 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.

Note 9:  Earnings per Share

Earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. At December 31, 2011 and 2010 there were 5,150 shares of in-the-money potentially dilutive common shares outstanding.

At December 31, 2011 and 2010, we had 6,771,320 and 6,773,851 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of the Company’s outstanding equity instruments.  

Note 10:  Related Party Transactions

The Company had the following transactions with Causey Lyon Enterprises:

	For the Six Months Ended
	December 31,
	2011		2010
Purchases	$	-	$	2,455,652
Management fee expense		-		280,920
Rent expense		-		32,490

Note 11:  Subsequent Events

On January 3, 2012 the Board of Directors of the Company approved the retirement of the 2,785 shares of common stock in treasury.

On January 6, 2012, the Company sold its equity investment in B&B Roadway Holdings, LLC to certain affiliates of Strait Lane Capital Partners LLC for a purchase price of $300,000.  In addition, on January 6, 2012, XARMR Corporation sold a promissory note of B&B Roadway and Security Solutions, LLC (“Solutions”), in the original principal amount of $450,000, to Solutions for a purchase price of $300,000.

Page 8 of 12

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

Forward Looking Statements

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “believe,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “estimate,” or “continue” or the negative of those words or other variations or comparable terminology.  

All statements other than statements of historical fact included in this quarterly report on Form 10-Q, including the statements under “Part I. - Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere in this quarterly report on Form 10-Q regarding our financial position and liquidity are forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors regarding forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from our expectations, are disclosed in this quarterly report on Form 10-Q. We do not undertake any obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report on Form 10-Q.

Important factors that could cause actual results to differ materially from those in the forward-looking statements in this quarterly report on Form 10-Q include changes from anticipated levels of operations, valuation of investments, anticipated levels of revenues, future national or regional economic and competitive conditions, changes in relationships with our employees, access to capital, casualty to or other disruption of the operations that the Company is invested in, government regulations and our ability to meet our stated business goals.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by our cautionary statements.

Results of Operations

General and administrative: General and administrative expenses represent the operating expenses for the corporate parent, and decreased $0.14 million for the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010, and $0.23 million for the six months ended December 31, 2011 compared to six months ended December 31, 2010. This decrease was due to decreased headcount and operating expenses from transitioning to a shell company, offset by transaction costs of $0.03 for the quarter and six months ended December 31, 2011 incurred related to the search for a business engaged in active operations.

Other income: Other income represents income on the equity investment in B&B Roadway Holdings, LLC, which was acquired on January 31, 2011 and sold on January 6, 2012.

Interest expense: Interest expense decreased $0.02 million for the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010, and $0.03 million for the six months ending December 31, 2011 compared to the six months ended December 31, 2010, due to the elimination of debt.  

Impairment of other assets: Impairment of other assets of $0.3 million for the quarter and six months ended December 31, 2011 was due to the sale of investments subsequent to the quarter.

Liquidity and Capital Resources

Our cash position increased $.08 million during the six months ended December 31, 2011 to $3.85 million and is expected to be sufficient to cover ongoing operating costs for the foreseeable future.

Our operating activities used $0.06 million of cash for the six months ended December 31, 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There is no information required to be reported under this Item 3.

Page 9 of 12

Item 4. 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 (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2011.  Based on that evaluation, we have concluded that, as of December 31, 2011, 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.

Based upon this assessment, our CEO and CFO concluded that, as of December 31, 2011, there existed a material weakness in our processes, procedures and controls related to the preparation of our quarterly financial statements. We have concluded that our internal control over financial reporting was not effective as of December 31, 2011. Due to this material weakness, in preparing our quarterly financial statements, 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.

(b) Changes in Internal Controls. There were no changes to our internal controls over financial reporting during our last completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings.

None.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved)

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1+

Officer’s Certificates Pursuant to Section 302

31.2+

Officer’s Certificates Pursuant to Section 302

32.1+

Officer’s Certificates Pursuant to Section 906

32.2+

Officer’s Certificates Pursuant to Section 906

101.INS+ XBRL Instance Document

101.SCH+ XBRL Schema Document

101.CAL+ XBRL Calculation Linkbase Document

101.DEF+ XBRL Definition Linkbase Document

101.LAB+ XBRL Labels Linkbase Document

101.PRE+ XBRL Presentation Linkbase Document

________________________

+

Filed herewith.

Page 10 of 12

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:	February 6, 2012	/s/ Russell Cleveland
		Russell Cleveland
		Chairman of the Board, Chief Executive Officer
Date:	February 6, 2012	/s/ Sharon T. Doherty
		Sharon T. Doherty
		Chief Financial Officer

Page 11 of 12

EXHIBIT INDEX

31.1+

Officers’ Certificate Pursuant to Section 302

31.2+

Officers’ Certificate Pursuant to Section 302

32.1+

Officers’ Certificate Pursuant to Section 906

32.2+

Officers’ Certificate Pursuant to Section 906

101.INS+ XBRL Instance Document

101.SCH+ XBRL Schema Document

101.CAL+ XBRL Calculation Linkbase Document

101.DEF+ XBRL Definition Linkbase Document

101.LAB+ XBRL Labels Linkbase Document

101.PRE+ XBRL Presentation Linkbase Document

________________________

+

Filed herewith.

Page 12 of 12

EX-31

Exhibit 31.1

CERTIFICATION

I, Russell Cleveland, certify that:

1.  

I have reviewed this quarterly report on Form 10-Q of Integrated Security Systems, Inc.;

2.  

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

3.  

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

4.  

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

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

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

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

(d)

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

5.  

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

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

(b)

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

Date:  February 6, 2012	/s/ Russell Cleveland
	Russell Cleveland
	Chairman and Chief Executive Officer Principal Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION

I, Sharon Doherty, certify that:

1.  

I have reviewed this quarterly report on Form 10-Q of Integrated Security Systems, Inc.;

2.  

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

3.  

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

4.  

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

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

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

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

(d)

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

5.  

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

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

(b)

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

Date:  February 6, 2012	/s/ Sharon T. Doherty
	Sharon T. Doherty
	Chief Financial Officer Principal Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned, Russell Cleveland, the chief executive officer of Integrated Security Systems, Inc. (the “Company”), hereby certifies that, to his knowledge:

(i)

the Quarterly Report on Form 10-Q for the quarter ended December 31, 2011 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and;

(ii)

the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.

February 6, 2012	/s/ Russell Cleveland
	Russell Cleveland
	Chairman and Chief Executive Officer Principal Executive Officer

A signed original of this written statement required by Section 906 has been provided to Integrated Security Systems, Inc. and will be retained by Integrated Security Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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

EX-32

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned, Sharon T. Doherty, the chief financial officer of Integrated Security Systems, Inc. (the “Company”), hereby certifies that, to her knowledge:

(i)

the Quarterly Report on Form 10-Q for the quarter ended December 31, 2011 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and;

(ii)

the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.

February 6, 2012	/s/ Sharon T. Doherty
	Sharon T. Doherty
	Chief Financial Officer Principal Financial Officer

A signed original of this written statement required by Section 906 has been provided to Integrated Security Systems, Inc. and will be retained by Integrated Security Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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

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Other Assets

6 Months Ended

Dec. 31, 2011

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Other Assets

Note 4:  Other Assets

Other assets at December 31, 2011 are comprised of a promissory note of Buyer in the original principal amount of $450,000, and a $450,000 equity investment in B&B Roadway Holdings, LLC, a Delaware limited liability company and the parent of Buyer, as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.  The note matures on January 31, 2016 and bears interest at 8% per annum, payable quarterly.  Each of these investments was valued at $300,000 at December 31, 2011 to reflect the subsequent selling price, which created an impairment of $300,000; see Note 11:  Subsequent Events.

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Restricted Cash

6 Months Ended

Dec. 31, 2011

Cash and Cash Equivalents [Abstract]

Restricted Cash

Note 3:  Restricted Cash

Restricted cash represents the portion of the cash consideration paid pursuant to the sale of B&B ARMR that was deposited to an escrow fund in order to secure the Company’s and B&B ARMR’s indemnification obligations under the Purchase Agreement as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.  This escrow period terminates on January 31, 2012.

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Consolidated Balance Sheets (December 31, 2011 unaudited) (USD $)	Dec. 31, 2011	Jun. 30, 2011
Current assets:
Cash and cash equivalents	$ 3,845,369	$ 3,767,427
Restricted cash (note 3)	275,128	275,058
Short term investments	18,859	25,146
Other current assets	20,608	87,937
Assets related to discontinued operations	2,355	81,585
Total current assets	4,162,319	4,237,153
Other assets	600,000	900,000
Total Assets	4,762,319	5,137,153
Current liabilities:
Accounts payable	17,894	736
Accrued liabilities	91,467	104,180
Liabilities related to discontinued operations	0	2,961
Total current liabilities	109,361	107,877
Equity:
Convertible preferred stock	225	225
Common stock	56,101	56,101
Treasury stock, at cost	(125,606)	(125,606)
Additional paid in capital	43,589,386	43,584,771
Accumulated deficit	(38,816,362)	(38,441,716)
Accumulated other comprehensive loss (available for sale security)	(50,786)	(44,499)
Total stockholders' equity	4,652,958	5,029,276
Total liabilities and stockholders'	$ 4,762,319	$ 5,137,153

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Basis of Presentation

6 Months Ended

Dec. 31, 2011

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

Note 1:  Basis of Presentation

The consolidated financial statements include the accounts of Integrated Security Systems, Inc. (the “Company”) and its wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated. The consolidated balance sheet as of December 31, 2011, the consolidated statements of operations for the three and six months ended December 31, 2011 and 2010, and the consolidated statements of cash flows for the six months ended December 31, 2011 and 2010, are unaudited.  The preparation of interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Management does not believe these estimates or assumptions will change significantly in the future, however, actual results could differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, all adjustments (generally consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying financial statements. Prior periods have been reclassified to conform to the current period presentation. We suggest you read these financial statements in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended June 30, 2011. The results of operations for the six months ended December 31, 2011 are not necessarily indicative of operating results for the full year.

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Concentration of Credit Risks

6 Months Ended

Dec. 31, 2011

Risks and Uncertainties [Abstract]

Concentration of Credit Risks

Note 2:  Concentration of Credit Risks

The Company maintains cash balances with financial institutions which are, at times, 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.

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Consolidated Balance Sheets (Parenthetical notes) (USD $)	Dec. 31, 2011	Jun. 30, 2011
Convertible preferred stock, par value per share in dollars	$ 0.01	$ 0.01
Convertible preferred stock, shares authorized	750,000	750,000
Convertible preferred stock, shares issued	22,500	22,500
Convertible preferred stock, shares outstanding	22,500	22,500
Convertible preferred stock, liquidation value	$ 450,000	$ 450,000
Common stock, par value in dollars	$ 0.01	$ 0.01
Common stock, shares authorized	56,250,000	56,250,000
Common stock, shares issued	5,610,100	5,610,100
Common stock, shares outstanding	5,610,100	5,610,100
Treasury stock, at cost; common shares	2,785	2,785

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Document and Entity Information	6 Months Ended
	Dec. 31, 2011	Jan. 31, 2012
Document and Entity Information
Entity Registrant Name	INTEGRATED SECURITY SYSTEMS INC
Document Type	10-Q
Document Period End Date	Dec. 31, 2011
Amendment Flag	false
Entity Central Index Key	0000741114
Current Fiscal Year End Date	--06-30
Entity Common Stock, Shares Outstanding		5,607,315
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2

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Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2011	Dec. 31, 2010
Revenue	$ 0	$ 0	$ 0	$ 0
Selling, general and administrative expenses	92,537	233,622	182,987	411,229
Loss from operations	(92,537)	(233,622)	(182,987)	(411,229)
Interest income	11,350	3,981	22,972	9,464
Other income	10,001	0	28,537	0
Interest expense	0	(17,640)	0	(31,344)
Impairment of other assets	(300,000)	0	(300,000)	0
Loss from continuing operations	(371,186)	(247,281)	(431,478)	(433,109)
Net income from discontinued operations (Note 8)	59,258	235,790	56,832	660,616
Net (loss) income	(311,928)	(11,491)	(374,646)	227,507
Income from discontinued operations attributable to the noncontrolling interest	0	(90,411)	0	(182,682)
Net (loss) income attributable to common stockholders	$ (311,928)	$ (101,902)	$ (374,646)	$ 44,825
Net (loss) income per common share (basic and diluted):
From continuing operations	$ (0.07)	$ (0.04)	$ (0.08)	$ (0.08)
From discontinued operations	$ 0.01	$ 0.02	$ 0.01	$ 0.09
Net (loss) income per common share (basic and diluted)	$ (0.06)	$ (0.02)	$ (0.07)	$ 0.01
Weighted average shares outstanding:
Basic	5,607,315	5,590,885	5,607,315	5,590,018
Assuming dilution	5,612,465	5,596,035	5,612,465	5,595,168

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Comprehensive (loss) Income

6 Months Ended

Dec. 31, 2011

Comprehensive Loss Income [Abstract]

Comprehensive (loss) Income

Note 7:  Comprehensive (Loss) Income

The following table provides a summary of total comprehensive (loss) income:

	For the Six Months Ended
	December 31,
	2011		2010
Consolidated net (loss) income	$	(374,646)	$	44,825
Other comprehensive income:
Unrealized holding loss		(6,287)		(18,583)
Total comprehensive (loss) income	$	(380,933)	$	26,242

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Noncontrolling Interest in Discontinued Operations

6 Months Ended

Dec. 31, 2011

Noncontrolling Interest [Abstract]

Noncontrolling Interest in Discontinued Operations

Note 6:  Noncontrolling Interest in Discontinued Operations

Causey Lyon Enterprises (CLE) was the 35% owner of the B&B Roadway joint venture; per the joint venture agreement, CLE manufactured all products for B&B Roadway, and was also one of several outsourced fabrication vendors for XARMR.  XARMR’s investment in the joint venture was sold on January 31, as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.

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Related Party Transactions

6 Months Ended

Dec. 31, 2011

Related Party Transactions [Abstract]

Related Party Transactions

Note 10:  Related Party Transactions

The Company had the following transactions with Causey Lyon Enterprises:

	For the Six Months Ended
	December 31,
	2011		2010
Purchases	$	-	$	2,455,652
Management fee expense		-		280,920
Rent expense		-		32,490

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Discontinued Operations

6 Months Ended

Dec. 31, 2011

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

Note 8:  Discontinued Operations

The Company’s wholly-owned subsidiary, XARMR Corporation (“XARMR”) sold substantially all of the assets of XARMR on January 31, 2011. Such assets included, but were not limited to, the accounts receivable, fixed assets and intellectual property constituting XARMR’s business of providing anti-terrorist barriers, security gates and gate operators for perimeter security applications, along with its investment in the joint venture B&B Roadway, LLC (“B&B Roadway”), as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.

The operating results for both XARMR and B&B Roadway have been aggregated and reported as discontinued operations in the Consolidated Statements 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.

Income from discontinued operations:

Income from discontinued operations reported in the Consolidated Statements of Operations consists of the following:

	For the Six Months Ended
	December 31,
	2011		2010
Sales	$	-	$	5,020,593
Cost of sales		-		3,262,181
Gross profit		-		1,758,412
Selling, general and administrative		(56,832)		917,596
Income from discontinued operations		56,832		840,816
Interest expense		-		(27,819)
Transaction costs				(152,381)
Net income from discontinued operations		56,832		660,616
Income from discontinued operations attributable to the noncontrolling interest		-		(182,682)
Income from discontinued operations attributable to common stockholders	$	56,832	$	477,934

Assets related to discontinued operations of $2,355 and $81,585 at December 31 and June 30, 2011, respectively, were accounts receivable that were assigned to the Company in accordance with the Purchase Agreement, as described in Note 17 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.

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Earnings Per Share

6 Months Ended

Dec. 31, 2011

Earnings Per Share [Abstract]

Earnings Per Share

Note 9:  Earnings per Share

Earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. At December 31, 2011 and 2010 there were 5,150 shares of in-the-money potentially dilutive common shares outstanding.

At December 31, 2011 and 2010, we had 6,771,320 and 6,773,851 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of the Company’s outstanding equity instruments.

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Subsequent Events

6 Months Ended

Dec. 31, 2011

Subsequent Events [Abstract]

Subsequent Events

Note 11:  Subsequent Events

On January 3, 2012 the Board of Directors of the Company approved the retirement of the 2,785 shares of common stock in treasury.

On January 6, 2012, the Company sold its equity investment in B&B Roadway Holdings, LLC to certain affiliates of Strait Lane Capital Partners LLC for a purchase price of $300,000.  In addition, on January 6, 2012, XARMR Corporation sold a promissory note of B&B Roadway and Security Solutions, LLC (“Solutions”), in the original principal amount of $450,000, to Solutions for a purchase price of $300,000.

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Consolidated Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Cash flows from operating activities:
Net (loss) income	$ (374,646)	$ 44,825
Income from discontinued operations (note 8)	(56,832)	(660,616)
Income from discontinued operations attributable to the noncontrolling interest	0	182,682
Loss from continuing operations	(431,478)	(433,109)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	0	1,311
Stock option expense	4,615	56,468
Expenses paid with stock or options	0	12,500
Changes in assets and liabilities:
Other assets	367,259	130,151
Accounts payable	17,158	(23,048)
Accrued liabilities	(12,713)	146,191
Net cash used in operating activities	(55,159)	(109,536)
Cash flows from investing activities:
Net cash provided by investing activities	0	0
Cash flows from financing activities:
Net payments of debt	0	(80,049)
Net cash used in financing activities	0	(80,049)
Cash flows from discontinued operations:
Operating activities	133,101	413,726
Investing activities	0	(4,691)
Financing activities	0	(30,868)
Net cash provided by discontinued operations	133,101	378,167
Net increase in cash	77,942	188,582
Cash at beginning of period	3,767,427	22,690
Cash at end of period	$ 3,845,369	$ 211,272

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Commitments and Contingencies

6 Months Ended

Dec. 31, 2011

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 5:  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.