<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                  FORM 10-QSB

                  Quarterly Report Under Section 13 or 15 (d)
                    of the Securities Exchange Act of 1934


For Quarter Ended            February 28, 1999
                 --------------------------------------------------------

Commission File Number           2-91218-B
                      ---------------------------------------------------


                        International Electronics, Inc.
--------------------------------------------------------------------------------
       (Exact name of small business issuer as specified in its charter)



     Massachusetts                                       04-2654231
--------------------------------------------------------------------------------
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                       Identification Number)



               427 Turnpike Street, Canton, Massachusetts       02021
--------------------------------------------------------------------------------
           (Address of principal executive offices)          (Zip Code)



                                (781) 821-5566
--------------------------------------------------------------------------------
               (Issuer's telephone number, including area code)


                                Not applicable
--------------------------------------------------------------------------------
                    (former name, former address and former
                  fiscal year, if changed since last report)


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

          1,493,301 common shares were outstanding at March 30, 1999.
<PAGE>
 
               INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
               ------------------------------------------------
                                     Index
                                     -----

<TABLE> 
<CAPTION> 
<S>                                                             <C>      

Part I.  Financial Statements (unaudited)
         -------------------------------- 

         Condensed Consolidated Balance Sheets, February 28,
         1999 and August 31, 1998                                 2
 
         Condensed Consolidated Statements of Operations,
         three and six months ended February 28, 1999 and
         1998                                                     3
 
         Condensed Consolidated Statement of Shareholders'
         Equity, six months ended February 28, 1999               4
 
         Condensed Consolidated Statements of Cash Flows, six
         months ended February 28, 1999 and 1998                  5
 
         Notes to Condensed Consolidated Financial Statements     6-9
 
         Item 2: Management's Discussion and Analysis of
                 ---------------------------------------
                 Financial Condition and Results of Operations    10-15
                 ---------------------------------------------
 
Part II. Other Information:
 
         Item 4: Submission of Matters to a Vote of Security
                 -------------------------------------------
                 Holders                                          16
                 -------

         Item 6: Exhibits and Reports on Form 8-K                 16
                 --------------------------------
         Signature                                                16
         ---------
</TABLE> 

                                       1
<PAGE>
 
               INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
               ------------------------------------------------ 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     -------------------------------------
                                  (unaudited)
 
<TABLE> 
<CAPTION> 
                                                                Feb. 28, 1999                August 31, 1998
                                                                -------------                ---------------
<S>                                                         <C>                            <C> 
ASSETS                                                                                  
------
Current assets:                                                                         
     Cash and equivalents                                        $1,178,566                   $   895,876
     Accounts receivable, net                                       971,095                       986,403
     Inventories                                                  1,026,454                       746,570
     Other current assets                                           164,403                       153,816
                                                                 ----------                    ----------
     Total current assets                                         3,340,518                     2,782,665
                                                                                        
Equipment, furniture and                                                                
   improvements, net                                                392,706                       368,965
                                                                                        
Other assets:                                                                           
     Goodwill and other intangibles, net                            105,191                       148,432
     Other                                                           11,950                        11,950
                                                                 ----------                    ----------
                                                                    117,141                       160,382
                                                                 ----------                    ----------
                                                                 $3,850,365                    $3,312,012        
                                                                 ==========                    ==========
LIABILITIES AND SHAREHOLDERS' EQUITY                                                    
------------------------------------
Current liabilities:                                                                    
     Accounts payable                                            $  466,474                   $   138,894
     Accrued expenses                                             1,034,611                     1,089,267
     Income taxes                                                    86,921                        44,000
     Current portion of long-term                                                       
       obligations                                                   86,057                        64,030
                                                                 ----------                    ----------
     Total current liabilities                                    1,674,063                     1,336,191
                                                                                        
Long-term obligations                                               106,595                        82,859
Commitments                                                                             
                                                                                        
Shareholders' equity:                                                                   
     Common stock, $.01 par value:                                                      
       Authorized 5,984,375 shares                                                        
       Issued 1,528,301 shares                                       15,283                        15,283
     Capital in excess of par value                               4,797,090                     4,796,149
     Accumulated deficit                                         (2,704,022)                   (2,879,826)
     Less treasury stock, at cost:                                                        
       35,000 shares                                                (38,644)                      (38,644)
                                                                 ----------                    ----------
       Total shareholders' equity                                 2,069,707                     1,892,962
                                                                 ----------                    ----------
                                                                 $3,850,365                   $ 3,312,012
                                                                 ==========                    ==========
 
</TABLE>
See notes to unaudited condensed consolidated financial statements.

                                       2
<PAGE>
 
               INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
               ------------------------------------------------
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                -----------------------------------------------
                                  (unaudited)

<TABLE>
<CAPTION>
 
 
                                                Three months ended              Six months ended
                                     ---------------------------------    -----------------------------
                                     Feb. 28, 1999       Feb. 28, 1998    Feb. 28, 1999   Feb. 28, 1998
                                     -------------       -------------    -------------   -------------
<S>                               <C>                  <C>                <C>            <C>
 
Net sales                             $2,403,159         $2,232,020         $4,534,272      $4,592,952
                                                                      
Cost of sales                          1,301,546          1,208,964          2,399,849       2,506,315
                                      ----------         ----------         ----------      ----------
                                                                      
Gross profit                           1,101,613          1,023,056          2,134,423       2,086,637
                                                                      
Research and development costs           181,485            126,037            325,607         228,760
                                                                      
Selling, general and                                                  
 administrative expenses                 813,890            756,596          1,611,090       1,562,297
                                      ----------         ----------         ----------      ----------
                                                                      
Income from operations                   106,238            140,423            197,726         295,580
                                                                      
Interest expense                          (3,292)            (3,322)            (7,381)         (6,458)
                                                                      
Other income (expense)                    13,830               (463)            29,459             580
                                      ----------         ----------         ----------      ----------
                                                                      
Income before taxes                      116,776            136,638            219,804         289,702
                                                                      
Provision for taxes                       20,000             28,000             44,000          72,000
                                      ----------         ----------         ----------      ----------
                                                                      
Net income                            $   96,776         $  108,638         $  175,804      $  217,702
                                      ==========         ==========         ==========      ==========
Net income per share:                                                 
                                                                      
   Basic                                    $.06               $.07               $.12            $.15
   Diluted                                  $.06               $.07               $.11            $.14
                                      ==========         ==========         ==========      ==========
                                                                      
Shares used in computing                                              
   net income per share:                                              
                                                                      
   Basic                               1,493,301          1,493,301          1,493,301       1,493,301
   Diluted                             1,583,585          1,569,802          1,570,914       1,580,718
                                      ==========         ==========         ==========      ==========
 
</TABLE>
See notes to unaudited condensed consolidated financial statements.

                                       3
<PAGE>
 
               INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
               ------------------------------------------------ 
           CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
           --------------------------------------------------------
                                  (unaudited)




<TABLE> 
<CAPTION> 


                                                                       
                              Common Stock        Capital in                        Treasury Stock
                              ------------        excess of       Accumulated       --------------
                           Shares     Amount      par value        Deficit        Shares      Cost         Total
                           ------     ------      ---------        ----------     ------      ----         -----  
<S>                    <C>         <C>        <C>             <C>             <C>        <C>          <C> 
Balances,
September 1, 1998       1,528,301   $15,283     $4,796,149       ($2,879,826)   35,000    ($38,644)     $1,892,962

Issuance of stock
warrants                    -          -               941            -            -           -               941

Net income                  -          -              -              175,804       -           -           175,804
                        ---------   -------     ----------         ---------    ------    --------      ----------
Balances,
February 28, 1999       1,528,301   $15,283     $4,797,090       ($2,704,022)   35,000    ($38,644)     $2,069,707
                        =========   =======     ==========        ==========    ======    ========      ==========
</TABLE> 

See notes to unaudited condensed consolidated financial statements.

                                       4
<PAGE>
 
               INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
               ------------------------------------------------ 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                -----------------------------------------------
                                  (unaudited)
<TABLE> 
<CAPTION> 
                                                                  Six months ended
                                                      ----------------------------------------
                                                      Feb. 28, 1999               Feb. 28, 1998
                                                      -------------               ------------
<S>                                              <C>                         <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:     
     Net income                                       $  175,804               $    217,702
     Adjustments to reconcile net income
     to net cash provided by operating
     activities:
     Depreciation and amortization                       139,762                     94,577
     Stock warrants issued for professional
        services                                             941                        942
     Changes in operating assets and liabilities:
        Accounts receivable                               15,308                     48,674
        Inventories                                     (279,884)                    97,053
        Other current assets                             (10,587)                   (19,359)
        Income taxes                                      42,921                     33,000
        Accounts payable and accrued expenses            272,924                   (106,364)
                                                      ----------               ------------
     Net cash provided by operating activities           357,189                    366,225
 
CASH FLOWS FROM INVESTING ACTIVITIES
AND OTHER:
     Net purchase of equipment,
        furniture and improvements                      (120,262)                  (121,118)
     Other assets                                              0                      9,911
                                                      ----------               ------------
     Net cash used in investing
        activities and other                            (120,262)                  (111,207)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
     Additions of notes payable
        and debt obligations                              77,342                     62,672
     Reduction of notes payable and debt
        obligations                                      (31,579)                   (15,744)
                                                      ----------               ------------
     Net cash provided by
       financing activities                               45,763                     46,928
                                                      ----------               ------------
 
CASH AND EQUIVALENTS:
     Net increase during period                          282,690                    301,946
     Balances, beginning of period                       895,876                    160,075
                                                      ----------               ------------
     Balances, end of period                          $1,178,566               $    462,021
                                                      ==========               ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.

                                       5
<PAGE>
 
               INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
               ------------------------------------------------
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             ----------------------------------------------------
                                  (unaudited)




A.  Financial Statements:
    --------------------
    In the opinion of the Company, the unaudited condensed consolidated
    financial statements contain all adjustments (consisting only of normal
    recurring adjustments) necessary to present fairly the financial position as
    of February 28, 1999 and the results of operations for the three and six
    months then ended.

    Certain disclosures normally included have been condensed or omitted
    pursuant to the rules and regulations of the Securities and Exchange
    Commission, although the Company believes the disclosures are adequate to
    make the information presented not misleading. It is suggested that these
    financial statements be read in conjunction with the financial statements
    and notes thereto included in the Company's annual report on Form 10-KSB for
    the year ended August 31, 1998.

B.  Principles of Consolidation:
    ---------------------------
    The accompanying condensed consolidated financial statements include the
    accounts of the Company, its majority owned subsidiary, Ecco Industries,
    Inc. and its wholly owned subsidiary, International Electronics Europe
    Limited. All material intercompany transactions, balances and profits have
    been eliminated.

C.  Income Taxes:
    ------------
    The Company provides for income taxes at the end of each interim period
    based on the estimated effective tax rate for the full fiscal year.
    Cumulative adjustments to the tax provision are recorded in the interim
    period in which a change in the estimated annual effective rate is
    determined.

D.  Significant Estimates and Assumptions:
    --------------------------------------
    The preparation of consolidated financial statements in conformity with
    generally accepted accounting principles 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 reporting period. Actual results could differ from those
    estimates.

                                       6
<PAGE>
 
               INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
               ------------------------------------------------
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             ----------------------------------------------------
                                  (continued)
                                  (unaudited)


E.  Net Income per Share:
    ---------------------


     Basic net income per share is computed by dividing net income by the
weighted average common shares outstanding during the periods.  Diluted net
income per share is computed by dividing net income by the weighted average
number of common and dilutive option and warrant shares outstanding based on the
average market price of the Company's common stock (under the treasury stock
method).


The following table sets forth the computation of basic and diluted net income
per share:

<TABLE>
<CAPTION>

                                           Three months ended              Six months ended
                                  --------------------------------    ---------------------------
                                  Feb. 28, 1999      Feb. 28, 1998    Feb. 28, 1999  Feb. 28, 1998
                                  -------------      -------------    -------------- -------------
<S>                             <C>                 <C>               <C>           <C>
 
Net income                           $   96,776        $  108,638     $  175,804     $  217,702
                                    ===========       ===========     ==========     ========== 
Shares used in computation:
 
  Weighted average
  shares outstanding for
  basic income per share              1,493,301         1,493,301      1,493,301      1,493,301
 
   Effect of dilutive option
     and warrant shares                  90,284            76,501         77,613         87,417
                                     ----------         ---------       --------       --------
 Total shares for diluted income
     per share                        1,583,585         1,569,802      1,570,914      1,580,718
                                    ===========       ===========     ==========     ========== 
                                   
Net income per share:

    Basic                                  $.06              $.07           $.12           $.15
    Diluted                                $.06              $.07           $.11           $.14
                                    ===========       ===========     ==========     ========== 
</TABLE> 

The calculations for diluted net income per share did not include an aggregate 
out of the money options and warrants of 109,037 and 118,871 for the three 
months ended February 28, 1999 and 1998, respectively.

                                       7
<PAGE>
 
               INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
               ------------------------------------------------

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             ----------------------------------------------------
                                  (continued)
                                  (unaudited)

F.   Long-term Obligations:
     ----------------------

     Long-term obligations are summarized as follows:

<TABLE> 
<CAPTION> 
                                               Feb. 28, 1999     Aug. 31, 1998
                                               -------------     -------------
<S>                                            <C>               <C> 

Equipment line of credit, 7.75-8.5% (Note G)     $ 148,570          $ 90,160

7-18% capitalized lease obligations, due 
through April 2001 (Note H)                         28,046            38,134

8% equipment loan, collateralized by
equipment, final payment due Nov., 2001             16,036            18,595
                                                 ---------          --------

                                                   192,652           146,889

Less current portion                               (86,057)          (64,030)
                                                 ---------          --------
                                                 $ 106,595          $ 82,859
                                                 =========          ========
</TABLE> 

     The aggregate principal payments on long-term obligations as of February
     28, 1999, excluding capital leases are $69,092 (2000), $63,685 (2001) and
     $31,829 (2002).


G.   Bank Arrangements:
     ------------------

     As of February 28, 1999, the Company has available up to $1,000,000 for a 
bank working capital demand line of credit and a $148,000 equipment line of 
credit until April 29, 1999. Available borrowings under the working capital line
are based on a percentage of eligible accounts receivable and inventory. Both 
lines of credit are at the bank's prime rate of interest and all of the 
Company's assets are collateralized under these arrangements. The credit 
agreements contain certain restrictive covenants including covenants limiting 
the payment of dividends and a required minimum current ratio and debt to
tangible net worth ratio. As of February 28, 1999, no borrowings have been made
under the working capital line of credit and the Company has $148,570 in
borrowings under the equipment line of credit at interest rates ranging from
7.75%-8.5% which is payable in monthly installments through February 2002.

                                      -8-
<PAGE>
 
 
               INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
               ------------------------------------------------

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             ----------------------------------------------------
                                  (continued)
                                  (unaudited)

H.   Capital Lease Commitments:
     -------------------------

     The Company leases certain equipment under capital leases and, accordingly,
     the present value of the net minimum payments has been reflected in
     equipment, furniture and improvements and capitalized lease obligations.

     Future minimum capital lease payments under lease terms in excess of one
     year at February 28, 1999 are as follows:

<TABLE> 
                <S>                              <C> 

                2000                              $19,157
                2001                                9,473
                2002                                2,417
                                                  -------

           Total minimum lease payments            31,047

           Less interest                           (3,001)
                                                  -------

           Net minimum lease payments              28,046

           Less current portion                   (16,965)
                                                  -------

           Long-term portion                      $11,081
                                                  =======
</TABLE> 

                                      -9-
                


<PAGE>
 
                    Management's Discussion and Analysis of
                    ---------------------------------------
                 Financial Condition and Results of Operations
                 ---------------------------------------------


Liquidity and Capital Resources

As of February 28, 1999, the Company had working capital of $1,666,455 compared 
to $1,446,474 at August 31, 1998. The ratio of current assets to current 
liabilities was 2.0 at February 28, 1999 and 2.1 at August 31, 1998. The debt to
equity ratio was .9 at February 28, 1999 and .7 at August 31, 1998. The increase
in working capital is primarily the result of the Company's operating cash flow,
offset in part by the purchase of fixed assets for fiscal 1999. The decrease in 
current ratio and increase in debt to equity ratio is primarily the result of an
increase in accounts payable and accrued expenses.

Net capital expenditures were $120,262 and $121,118 for the six months ended 
February 28, 1999 and 1998, respectively. The Company has no current commitments
for any material capital expenditures, but the Company anticipates up to 
$400,000 in capital expenditures for the purchase of office and manufacturing 
equipment, regulatory testing and tooling costs over the next twelve months.

Management believes that its current cash position, together with internally 
generated funds at present sales levels and its available bank financing, will 
provide adequate cash reserves to satisfy its cash requirements for the next 
twelve months. Depending upon whether or not sufficient revenue and working 
capital is generated from profitable operations, the Company may require 
additional external funding. There is no assurance that profits will be 
generated, or additional external funding will be obtainable, if such a need 
should arise.

Results of Operations

Net sales for the second quarter of fiscal 1999 increased 8% as compared to the 
second quarter of fiscal 1998. The increase in sales for the second quarter 
primarily reflects an increase in access control and keypad sales, offset in 
part by a reduction in glassbreak detector sales. Net sales for the first six 
months of fiscal 1999 decreased 1% as compared to the first six months of fiscal
1998.

The ratio of gross profit to sales for the three months ended February 28, 1999 
and 1998 were both 46%. The ratio of gross profit to sales for the six months 
ended February 28, 1999 and 1998 were 47% and 45%, respectively. The increase in
gross profit percentage is primarily the result of decreases in warranty 
expense, lower product costs and product mix.

Research and development expenses were $181,485 and $325,607 for the second 
quarter and six months ended February 28, 1999, respectively, compared to 
$126,037 and $228,760 for the comparable periods of fiscal 1998. The increases 
in this discretionary expense are primarily due to the hiring of additional 
personnel and outside consultants. The Company anticipates that future research 
and development costs will be comparable as a percentage of net sales to the 
amounts incurred during this fiscal quarter.

As a percentage of net sales, selling, general and administrative expenses were 
34% for both the three months ended February 28, 1999 and 1998 and were 36% and 
34% for the six months ended February 28, 1999 and 1998, respectively. The 
increase in expenses as a percentage of net sales for the first six months of 
fiscal 1999 as compared to the first six months of fiscal 1998 is primarily due 
to an increase in promotion expense, and sales personnel and associated costs.

                                     -10-
<PAGE>
 
                    Management's Discussion and Analysis of
                    ---------------------------------------
                 Financial Condition and Results of Operations
                 ---------------------------------------------
                                  (continued)

The provision for income taxes represents foreign, federal alternative minimum 
taxes and state income tax expense. The Company's effective income tax rate for 
the six months ended February 28, 1999 of 20% was less than the combined federal
and state statutory income tax rates, primarily as a result of the utilization 
of available net operating loss carryforwards.

Year 2000 Compliance

There are issues associated with the programming code in existing computer 
systems as the year 2000 approaches. The "year 2000 problem" is pervasive and 
complex, as virtually every computer operation will be affected in some way by 
the rollover of the two-digit year value to 00. The issue is whether computer 
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate 
erroneous data or cause a system to fail. The Company considers its products to 
be Year 2000 compliant. The Company's products do not perform any date 
calculations requiring the year digits, nor do they have any report generating 
software that would present a problem with the Year 2000.

The Company is in the process of developing a definitive timetable, including a
contingency plan, to address the Year 2000 problem regarding both its internal 
systems and external relationships. The Company's internal systems include the 
manufacturing and inventory control system, internal reporting and the Company's
existing manufacturing equipment. The Company has been in contact with its 
software vendors to plan the installation of upgrades to these systems. The 
Company's testing and implementation of its business and manufacturing systems 
is in the early stages and, at this point, the Company cannot accurately 
quantify the impact of its most likely worst case Year 2000 scenario. The 
Company relies on commercially distributed software and has determined that 
upgrades, conforming to the Year 2000 date function, exist. Based upon this 
information, the Company does not anticipate that it will incur significant 
operating expenses or be required to invest heavily in computer system 
improvements or new manufacturing equipment to be Year 2000 compliant. However, 
significant uncertainty exists concerning the potential costs and effects 
associated with Year 2000 compliance.

During the year the Company plans to survey its largest customers, and is in the
process of surveying its vendors, to determine their state of readiness
regarding this issue and to estimate the impact, if any, on the Company's
financial position or results of operations if any of its vendors' or customers'
systems should fail due to their non-compliance with Year 2000 requirements.
Based upon the results of this survey, the Company will then plan its best
course of action to prevent any negative impact on its financial position and
results of operations.

The Company believes that the greatest potential risk is the failure of its 
external business partners to achieve Year 2000 compliance in a timely manner. 
Any Year 2000 compliance problem of either the Company or its users, customers, 
vendors or advertisers could have a material, adverse effect on the Company's 
business, results of operations and financial condition. In addition, the 
Company may be affected by the failure of any global infrastructure including 
national banking systems, communications and governmental activities.

The Company is in the process of developing a contingency plan to address the 
most critical operational issues regarding the Year 2000. The Company plans to 
communicate with its external business partners to determine their Year 2000 
contingency plans and to coordinate, to the extent possible, with such plan. 
However, there may be no practical alternative source of action available to the
Company.

                                     -11-
<PAGE>
 
                   Management's Discussion and Analysis of 
                   ----------------------------------------
                 Financial Condition and Results of Operations
                 ---------------------------------------------
                                  (continued)


New Accounting Pronouncement

Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for 
Derivative Instruments and Hedging Activities" is effective for all quarters of 
fiscal years beginning after June 15, 1999. The Company has not determined the 
effects, if any, that SFAS No. 133 will have on its consolidated financial 
statements and disclosures.

Factors that May Affect Future Results

Information provided by the Company in writing and orally, from time to time may
contain certain "forward-looking" information as this term is defined by: (1) 
the Private Securities Litigation Reform Act of 1995 (the "Act") and (2) in 
releases made by the Securities and Exchange Commission. These Cautionary 
Statements are being made pursuant to the provisions of the Act and with the 
intention of obtaining the benefits of the "safe harbor" provisions of the Act. 
The Company cautions investors that any forward-looking statements made by the 
Company involve risks and uncertainties, which could cause actual results to 
differ materially from those projected.

The Company has identified certain risks and uncertainties as factors which may 
impact on its operating results that are detailed below. All of these factors 
are difficult for the Company to forecast, and these or other factors can 
materially adversely affect the Company's business and operating results for one
quarter or a series of quarters.

Limited Financial Resources and Losses from Operations. The Company has limited 
financial resources. It is therefore subject to all the risks generally 
associated with a small business having limited financial resources. For the 
years ended August 31, 1996, 1997 and 1998, and the six months ended February 
28, 1999, the Company had net income of approximately $162,000, $70,000, 
$530,000 and $176,000, respectively. There can be no assurance that the Company 
will continue profitable operations. Continued operations after the expenditure 
of the Company's existing cash reserves may require additional working capital 
to be generated by profitable operations or use of the bank lines of credit 
and/or additional financing. There can be no assurance that profits will 
continue or that additional external funding will be obtainable, if such a need 
should arise.

Dependence on Key Employees. The business of the Company is dependent upon the 
efforts of John Waldstein and certain other key management and technical 
employees. The loss or prolonged disability of such personnel could have a 
significant adverse effect on the business of the Company. The Company presently
maintains a key man life insurance policy of $1,000,000 on John Waldstein, 
President and Treasurer.

Limited Design Engineering Staff. The Company is engaged in an industry which, 
as a result of extensive research and development, introduces new products on a 
regular basis. Current competitors or new market entrants may develop new 
products with features that could adversely affect the competitive position of 
the Company's products. There can be no assurance that the Company will be 
successful in selecting, developing, manufacturing and marketing new products or
enhancing its existing products or that the Company will be able to respond 
effectively to technological changes or product announcements by competitors. 
Any failure or delay in these goals could have a material adverse effect on the 
Company.

                                     -12-
<PAGE>
 
                    Management's Discussion and Analysis of
                    ---------------------------------------   
                 Financial Condition and Results of Operations
                 ---------------------------------------------   
                                  (continued)

Fluctuations in Sales and Operating Results. The quarterly growth rates recently
experienced by the Company are not necessarily indicative of future quarterly
growth rates. Operating results may also fluctuate due to factors such as the
timing of new product announcements and introductions by the Company, its major
customers and its competitors, market acceptance of new or enhanced versions of
the Company's products, changes in the product mix of sales, changes in the
relative proportions of sales among distribution channels or among customers
within each distribution channel, changes in manufacturing costs, competitive
pricing pressures, the gain or loss of significant customers, increased research
and development expenses associated with new product introductions and general
economic conditions. A limited number of customers have accounted for a
significant portion of sales in any particular quarter. In addition, the Company
typically operates with a relatively small backlog. As a result, quarterly sales
and operating results generally depend on the volume, timing of, and ability to
fulfill orders received within the quarter which are difficult to forecast. In
this regard, the Company may recognize a substantial portion of its sales in a
given quarter from sales booked and shipped in the last weeks of that quarter. A
delay in customer orders, resulting in a shift of product shipment from one
quarter to another, could have a significant effect on the Company's operating
results. In addition, competitive pressure on pricing in a given quarter could
adversely affect the Company's operating results, or such price pressure over an
extended period could adversely affect the Company's long-term profitability.

The Company establishes its expenditure levels for sales and marketing and other
expenses based, in large part, on its expected future results. As a result, if
sales fall below expectations, there would likely be a material adverse effect
on operating results because only a small portion of the Company's expenses vary
with its sales in the short-term.

Concentration of Customers. Although the Company has a substantial number of
customers, a significant portion of the Company's sales are to a small number
of large customers. This concentration of customers may cause net sales and
operating results to fluctuate from quarter to quarter based on major
customers' requirements and the timing of their orders and shipments. Sales to
the Company's largest customer accounted for approximately 36% of the Company's
total net sales for the fiscal year ended August 31, 1998. The Company's
agreements with its customers generally do not include minimum purchase
requirements. There can be no assurance that the Company's major customers will
place additional orders, or that the Company will obtain orders of similar
magnitude from other customers. The Company's operating results could be
materially and adversely affected if any present or future major customer were
to choose to reduce its level of orders, were to experience financial,
operational or other difficulties that resulted in such a reduction in orders to
the Company or were to delay paying or fail to pay the Company's receivables
from such customer. In fiscal 1995, the Company lost a major domestic
distributor who filed for bankruptcy with accounts receivable due the Company of
approximately $80,000.

Competition. Other companies in the industry offer products in competition with
those of the Company. Many of the companies with which the Company competes are
substantially larger, have greater resources and market a larger line of
products. The Company expects competition to increase significantly in the
future from existing competitors and new companies that may enter the Company's
existing or future markets. Increased competition could adversely affect the 
Company's sales and profitability. There can be no assurance that the Company
will be able to continue to compete successfully with its existing competitors
or with new competitors.

                                     -13-

<PAGE>
 
                    Management's Discussion and Analysis of
                    ---------------------------------------
                 Financial Condition and Results of Operations
                 ---------------------------------------------
                                  (continued)


Lack of Patent Protection. Although the Company has obtained some patent and 
copyright protection for certain of its products and software, management 
believes that competitors may be able to market certain products similar to 
those sold by the Company.

Production in Asia. The Company presently maintains certain manufacturing molds 
in Asia and has a significant amount of components for some products 
manufactured in Asia. There can be no assurance that the Asian political or 
economic environment will remain sufficiently stable to allow reliable and 
consistent delivery of product.

Dependence on Single Source of Supply. The Company is dependent upon sole source
suppliers for a number of key components and parts used in the Company's 
products. There can be no assurance that these suppliers will be able to meet 
the Company's future requirements for such components or that the components 
will be available to the Company at favorable prices. Any extended interruption 
in the supply or significant increase in price of any such components could have
a material adverse effect on the Company's operating results in any given 
period.

Foreign Sales. During the year ended August 31, 1998, the Company's foreign 
sales represented approximately 12% of net sales. There may be a reduction in 
the Company's foreign sales in the event of significant changes in foreign 
exchange rates or political and economic instability in foreign countries. 

Year 2000 Compliance. There are issues associated with the programming code in 
existing computer systems as the year 2000 approaches. The "year 2000 problem" 
is pervasive and complex, as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is 
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such 
information could generate erroneous data or cause a system to fail. The Company
is in the process of developing a definitive timetable, including a contingency 
plan, to address the Year 2000 problem regarding both its internal systems and 
external relationships.

The Company believes that the greatest potential risk is the failure of its 
external business partners to achieve Year 2000 compliance in a timely manner. 
Any Year 2000 compliance problem of either the Company or its users, customers, 
vendors or advertisers could have a material, adverse effect on the Company's 
business, results of operations and financial condition. In addition, the 
Company may be affected by the failure of any global infrastructure including 
national banking systems, communications and governmental activities.

The Company is in the process of developing a contingency plan to address the
most critical operational issues regarding the Year 2000. The Company plans to
communicate with its external business partners to determine their Year 2000
contingency plans and to coordinate, to the extent possible, with such plan.
However, there may be no practical alternative source of action available to the
Company.

Limited Market for Common Stock. There is a limited market for the Company's 
common stock and there can be no assurance that even this limited market will be
sustained. Holders of the Company's common stock may have difficulty selling 
their shares or may have difficulty selling them at a favorable price.

                                     -14-
<PAGE>
 
                   Management's Discussion and Analysis of 
                   ---------------------------------------
                 Financial Condition and Results of Operations
                 ---------------------------------------------
                                  (continued)

Maintain Listing on NASDAQ. In February, 1998, the NASD changed its standards 
for a company's stock to maintain its listing on NASDAQ. The revised standards 
include maintaining a minimum bid price of $1.00 per share for ten consecutive 
trading days and tangible shareholders' equity with a minimum balance of 
$2,000,000 or alternatively net income of $500,000 for the last fiscal year. The
Company met the test of $500,000 of net income during fiscal 1998.

However, there can be no assurance that the Company will continue to meet the
new standards as implemented and maintain its listing in NASDAQ. If the Company
is unable to maintain its listing on NASDAQ, holders of the Company's common
stock may have additional difficulty selling their shares at a favorable price.

Volatility of Stock Price. The Company's stock price is subject to significant
volatility. If revenues or earnings in any quarter fail to meet the investment
community's expectations, announcements of new products by the Company or its
competitors and other events or factors could have an immediate impact on the
Company's stock price. The stock price may also be affected by broader market
trends unrelated to the Company's performance.

                                     -15- 


<PAGE>
 
                   Management's Discussion and Analysis of 
                   ---------------------------------------
                 Financial Condition and Results of Operations
                 ---------------------------------------------
                                  (Continued)


Part II.  Other Information:
----------------------------

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

               On April 7, 1999, the Company held its Special Meeting in Lieu of
               the Annual Meeting of Shareholders.  At the meeting, shareholders
               elected the following Board of Directors for the ensuing year:

               John Waldstein, Heath Paley, Diane Balcom and Kenneth Moyes

               In addition, the shareholders approved a 1999 stock option plan
               providing for the issuance of up to 175,000 shares of common
               stock.
 
       Item 6. Exhibits and Reports on Form 8-K
               --------------------------------

               (a)  Exhibits:

                    None

               (b)  There were no reports on Form 8-K filed for the
                    three months ended February 28, 1999.

                                   SIGNATURE
                                   ---------

Pursuant to the requirements of the Exchange Act, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, who is duly
authorized to sign and is Chief Financial and Accounting Officer.


                                      International Electronics, Inc.


Date: 4/13/99                          /s/ John Waldstein
      -------                         -------------------------------
                                      John Waldstein, President,
                                      Treasurer & Chief Financial and Accounting
                                      Officer and duly authorized to sign.

                                       16