<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                  FORM 10-KSB

               Annual Report Pursuant to Section 13 or 15(d) of
                      the Securities Exchange Act of 1934

                     For fiscal year ended August 31, 1998
                       Commission File Number: 2-91218-B

                        International Electronics, Inc.
-------------------------------------------------------------------------------
                (Name of small business issuer in its charter)

       Massachusetts                                             04-2654231
--------------------------------------------------------------------------------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

427 Turnpike Street
Canton, Massachusetts                                               02021
-------------------------------------------------------------------------------
(Address of principal executive office)                          (Zip code)

Issuer's telephone number:  (781) 821-5566

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

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

                         Common Stock, $.01 par value
-------------------------------------------------------------------------------
                               (Title of class)

     Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.  Yes   X    No
                                         ---     ---

     Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  (    )

     State issuer's revenues for its most recent fiscal year:  $9,651,603

     As of October 27, 1998, 1,355,020 shares of the registrant's voting stock
was held by non-affiliates of the registrant.  In arriving at this number,
registrant has considered officers and directors to be affiliates.  Based on a
price of $1.78 per share, (the average of the closing bid and asked price on
October 27, 1998) the aggregate market value of the non-affiliate shares so held
was approximately $2,400,000.

     As of October 27, 1998, 1,493,301 shares of the registrant's common stock
were outstanding.

     Documents incorporated by reference:  None
<PAGE>
 
                                    PART I

ITEM 1.                            BUSINESS

     International Electronics, Inc. (the "Company") was formed in 1977 as a
Massachusetts corporation.  The Company designs, manufactures, markets and sells
electronic products for the security industry and other commercial applications.

     The Company manufactures and markets a line of access control and digital
keypad products sold under the trade names Door-Gard(TM) and Secured Series(TM).
The Company also manufactures and markets electronic glassbreak detectors sold
under the trade names Tri-Gard(TM), Glass-Gard(TM) and Viper.  The Company's
subsidiary, Ecco Industries, Inc. ("Ecco"), manufactures voice verification
products.

     The Company's products are sold principally in the United States to many of
the leading distributors and installation companies servicing the security
industry.  The financial information relating to the Company is set forth in
Item 7.

PRODUCTS

ACCESS CONTROL AND DIGITAL KEYPAD PRODUCTS AND TECHNOLOGY

     The Company manufactures and markets a line of access control and digital
keypad products sold under the trade names Door-Gard(TM) and Secured Series(TM).
These products are sold in a variety of configurations including indoor and
outdoor models, with magnetic card readers, short-range proximity readers and
keypads.  They are also sold with several different hardware and software
configurations.  The Company also sells to OEM customers private label products
containing its access control and keypad based technology.

     The command and control software can be used to add programmability by user
and time to any existing switch.  This software allows for up to 120 different
users, each with his/her own unique code and can be used to control machinery,
lights, closed circuit TV or doors.  The Company markets a line of industrial
access control products sold under the trade name PowerKey(TM).

     The access control version of the Door-Gard(TM) software includes features
which apply specifically to electronic door access control.  These features
include request to exit input, door ajar and door position monitoring.

     The Company also has a Secured Series Door-Gard(TM) access control product
line.  This line of products includes magnetic card readers and proximity
readers as well as digital keypads.  Features in the Secured Series product line
include: 500 users, transaction buffer for up to 500 events, hard copy printing
via hand held infrared printer, 8 time zones and the ability to tie up to 8
doors together.

     Approximate prices paid by installing dealers for the digital keypads are
$50 to $300 and for the Secured Series product line $150 to $400.


GLASSBREAK DETECTOR PRODUCTS

     A detector is the component in an alarm system that is activated by an
intrusion or entry into a protected premises.  When activated, it sends a signal
to a central control panel, the portion

                                       2
<PAGE>
 
of the system that triggers the alarm. The Company's glassbreak products serve
only the detection function, but are compatible with systems made and sold by
most major manufacturers of central control panels, and can be incorporated into
both hard wired and certain wireless systems. These products are used in a
system in conjunction with other forms of detectors such as those which detect
the opening of a door or window.

     There are four principal types of glassbreak sensors:  foil, piezoelectric,
audio detectors, and shock sensors.  The Company markets all of these glassbreak
detectors with the exception of foil.  Each has its own advantages and
disadvantages when used in proper installations.  See "Tri-Gard"(TM), "Viper
Vibration Detector" and "Glass-Gard"(TM).  Although foil is inexpensive, it is
expensive in terms of labor cost to install, and is unsightly.

  TRI-GARD/(TM)/

     In 1987, the Company began to market an audio glassbreak detector under the
trade name Tri-Gard(TM).  Audio detectors work much like the human ear.  All
noises are heard by the detector and then compared to a certain set of criteria.
If the sound made meets certain criteria, then the unit determines the sound is
breaking glass and activates an alarm.  Because of the wide variety of noise in
the background which can easily confuse an audio detector, stability is a major
factor if the unit is to be successful.  The Tri-Gard(TM) can be installed on
either a wall or ceiling.  Because the Tri-Gard(TM) detects the sound signals
produced by breaking glass, it can cover a bank of windows or multi-pane
windows.  Audio detectors are used in residential, commercial and industrial
applications.  The cost of these units to the installing dealers is
approximately $22 to $40 per unit.  The Tri-Gard(TM) models:  550, 552, 510 and
511 have received Underwriters Laboratories listing.

     In November 1986, the Company signed an agreement with A American Automatic
Alarm Co. ("AAAA") of Westminister, Colorado to act as its exclusive worldwide
sales agent for AAAA's passive audio glassbreak detector.  While the Company did
not sell enough units manufactured by AAAA to meet its minimum purchase
obligations under the agreement, the Company believes that it had the right
under the agreement to manufacture and sell the product.  The Company in 1988
redesigned the Tri-Gard(TM) audio detector in order to reduce both the physical
size of the detector and the manufacturing cost.  The Company does not have a
royalty agreement with AAAA for the circuit design of this product, however the
Company makes royalty payments to AAAA for all sales of the redesigned unit.
The Company believes its royalty payments to AAAA, which are based on a
percentage of sales, have been reasonable.

     In 1992 the Company began selling an additional audio detector which
utilizes microprocessor technology developed by the Company.  The Company has
received a utility patent on this new detector.  In 1994, the Company introduced
an additional microprocessor-based audio detector.

  VIPER VIBRATION DETECTOR

     A vibration sensor is used to detect vibrations of a set magnitude in
certain materials such as glass, wood, plastic, concrete, or metal.  The Viper
has a custom integrated circuit that does internal signal processing so that it
can be adjusted for different materials and shock values.  The cost of these
units to the installing dealers is approximately $15 to $20 per unit.

     Prior to November 1992 the Company had an agreement with Weyrad
Electronics, Ltd. ("Weyrad") of Weymouth, England to act as a distributor for
their Viper vibration detector in North, South and Central America.  Weyrad
manufactures the Viper, and its primary market has been the United Kingdom and
Europe.  The agreement continues in force unless either the Company or Weyrad
terminate by providing three months written notice.

                                       3
<PAGE>
 
  GLASS-GARD/(TM)/

     The Glass-Gard/(TM)/ unit, which is based on piezoelectric technology, is
placed on each pane of glass to be protected and is used primarily in industrial
and commercial applications.  When glass is broken, it emits particular
distinctive ultrasonic frequencies.  The Company's Glass-Gard(TM) detector
responds to the ultrasonic frequency generated when glass breaks.

     The Glass-Gard/(TM)/ unit contains a piezoelectric crystal which is "tuned"
to a particular frequency of breaking glass. When glass to which the unit is
attached is broken, these frequencies cause the crystal to vibrate, and
therefore to generate tiny electric currents.  These currents are then passed to
the central control panel of the alarm system, which detects them and sounds the
alarm.  The result is a unit which, while somewhat more expensive to purchase
than units of other types, is inexpensive to install, reliable and not prone to
accidental alarms.  Glass-Gard(TM) costs the installing dealer approximately $8
to $15 per unit.  Some other types of competitive glassbreak detectors cost the
installing dealer between $4 to $10 per unit.  Most of the Glass-Gard(TM) models
have received Underwriters Laboratories listing.  The Company has a utility
patent on its Glass-Gard units, and a patent on a tester which is an improvement
to the units.

     As of February 1, 1998 the Company has agreed to discontinue sales of one
of its Glass-Gard(TM) models in conjunction with a patent settlement agreement.
This model had net sales of approximately $60,000 in fiscal 1997.

VOICE VERIFICATION PRODUCTS AND TECHNOLOGY

     In June 1990, the Company acquired substantially all of the outstanding
common, and all preferred stock of Ecco in exchange for 379,699 unregistered
shares of the Company's common stock.  Ecco is engaged in designing,
manufacturing, and selling voice verification systems.  Ecco, which was founded
in 1983, financed its operations and development efforts through private sales
of securities resulting in net proceeds of approximately $5,500,000.  The
acquisition has been accounted for under the purchase method of accounting.

     During fiscal 1994, Ecco signed a contract for its voice verification
technology with BI, Inc. ("BI") of Boulder, Colorado for use in conjunction with
substance abuse in the home incarceration market.  The agreement provided for a
one-time license fee, ongoing royalty payments and an order for the manufacture
of voice verification boards.  In September 1996, BI informed the Company that
effective January 1997, BI would no longer make royalty payments to the Company,
but would continue to utilize the Company to manufacture its voice verification
boards.  In October 1998, BI informed the Company that it was working to develop
its own voice verification technology.  The Company anticipates that if the BI
development effort is successful after beta testing, BI will no longer purchase
any of Ecco's products.

     Ecco's initial product is called VoiceKey/(TM)/, which is a stand-alone
access control system that grants or denies access to a location based on
verifying a person's voice.  VoiceKey(TM) can be configured for stand-alone or
network applications.  Typical applications of VoiceKey(TM) include the control
of or access to locations requiring security such as:  offices, apartment and
condominium buildings, banks, computer rooms, and hospital pharmacies. Standard
VoiceKey(TM) features include access control management functions such as:  time
zone programming, door alarm monitoring, and time-stamped audit trail reporting.
Options include expanded user capacity and weatherproofing.  Each VoiceKey(TM)
can monitor and provide control for forty people, or up to two hundred twenty-
five with expansion memory.

     The VoiceKey/(TM)/ technology is the basis for the products sold to BI.
During 1998, the Company ported the voice algorithms from the V40 platform used
in the VoiceKey(TM) to an Analog Devices digital signal processing chip.  The
new platform significantly enhances processing speeds.

                                       4
<PAGE>
 
SALES AND MARKETING

     The principal market for the Company is the United States, where it sells
its products through a network of security equipment distributors and
installation companies.  The Company also sells and markets its products in
North and South America, Europe, Asia, South Africa, Middle East and
Australia/New Zealand.

     The Company presently employs fifteen people in sales and marketing.  The
Company's Vice President of Sales and Marketing coordinates the activities of
the outside sales representatives and inside sales personnel.  The outside sales
personnel contact dealers and distributors to provide ongoing sales and
technical support for the Company's products.  The inside sales personnel are
responsible for incoming sales calls and telemarketing.  The Company also
utilizes manufacturer's representatives for certain territories.

     The Company sells its products primarily to installers and distributors of
alarm security equipment.  The Company's customers include: ADI, Sprint North
Supply, Ameritech,  Simplex Time Recorder and Honeywell.  The Company's largest
customer accounted for approximately 36% of net sales for the fiscal year ended
August 31, 1998.

     While the Company's relationship with large customers provides it with a
substantial market for its products, the dependence on large volume sales to
such large customers creates a vulnerability.  The loss of one such customer
could have a serious adverse effect on the Company's sales.  In fiscal 1995, the
Company lost a major domestic distributor who filed for bankruptcy with accounts
receivable due the Company of approximately $80,000.  See "Item 6 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."

     The Company is also aware that manufacturers in Europe, Asia and elsewhere
fabricate products similar to the Company's products.  Some of these
manufacturers may produce their units at a lower cost than the Company's cost.
The introduction of such a product to the United States market could have a
substantial adverse effect on the Company's sales.

     The Company provides sales support through national advertising, periodic
national mailings, and by participation at national and regional industry trade
shows.  The Company presently attends several national trade shows per year, and
complements these shows by displaying its products at regional alarm association
shows.  Several visits to Europe are made each year including attending foreign
trade shows.  In fiscal 1997, the Company established a wholly-owned subsidiary,
International Electronics Europe Limited, located in the United Kingdom to
market and sell the Company's products.  The Company also participates with some
of its distributors in cooperative advertising programs.

OVERSEAS COMPONENTS

     The Company sources a significant amount of components and maintains
certain molds for its products in Asia.  The Company believes that such sourcing
reduces its cost of sales through lower parts, labor, and tooling costs.  There
can be no guarantee that the Asian political or economic environment will remain
sufficiently stable to allow reliable and consistent delivery of product.

                                       5
<PAGE>
 
PRODUCT SOURCES OF REVENUE

     The Company's various products have provided revenues during the last three
fiscal years as follows:
<TABLE>
<CAPTION>
                                       VOICE
        ACCESS CONTROL  GLASSBREAK  VERIFICATION
          AND KEYPAD    DETECTORS      & OTHER      TOTAL
        --------------  ----------  ------------  ----------
<S>     <C>             <C>         <C>           <C>
1996      $6,296,748    $2,038,058    $275,566    $8,610,372
1997       7,036,132     1,806,972     330,476     9,173,580
1998       8,066,417     1,272,313     312,873     9,651,603
</TABLE>

DOMESTIC AND FOREIGN SALES

     The percentages of domestic and foreign sales for the Company's products
for the last three fiscal years are as follows:
<TABLE>
<CAPTION>
                                   DOMESTIC   FOREIGN
                                   ---------  --------
<S>                                <C>        <C>
 
               1996                   88%       12%
               1997                   84        16
               1998                   88        12
</TABLE> 

MANUFACTURING AND RAW MATERIALS

     The Company performs in-house manufacturing for its Access Control, Keypad,
Glass-Gard/(TM)/, Tri-Gard/(TM)/ and VoiceKey/(TM)/ product lines.

     The Company is dependent upon sole source suppliers for a number of key
components and parts used in the Company's products.  Some of the Company's
largest principal suppliers include: Future Electronics, Inc., Eastern Micro
Devices, Inc. and Motorola Corporation.  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 of any such components could
have a material adverse effect on the Company's operating results in any given
period.

BACKLOG

     The Company's backlog of firm scheduled orders as of August 31, 1998, was
approximately $420,000.  Its backlog as of August 31, 1997, was approximately
$475,000.  The Company believes that the majority of the 1998 backlog will be
shipped during fiscal 1999.

COMPETITION

     Other companies in the security and related industries 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.  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.

     The Company's Glass-Gard/(TM)/ product line is slightly more expensive than
other similar devices marketed by the Company's competitors.  The Company's
other products are competitively priced against the competition.  The Company
believes that installing dealers will

                                       6
<PAGE>
 
use, on a repetitive basis, detectors which can be installed easily, work when
an intrusion occurs, and do not cause false alarms.

     There are numerous manufacturers of audio detectors and shock sensors
selling in the United States market.  Competitors selling audio detectors
include:  Sentrol, Inc., Visonic Ltd., Litton Security Products, Inc.
("Litton"), Detection Systems, Inc., Intellisense, Inc., Ademco Manufacturing,
Inc. ("Ademco"), DSC and Caddx-Caddi Controls, Inc.  There are several
competitors selling vibration detectors including:  Ultrak, Inc., Sentrol, Inc.,
Ademco, United Security Products, Inc. ("USP") and Litton.

     The Company is aware of two major competitors which market "on glass"
glassbreak detectors in the United States:  USP and Sentrol, Inc.  There are
several European manufacturers of this type of product, but the Company believes
that they to date have not had any significant impact on the United States
market.

     There are many manufacturers of access control equipment including
Westinghouse, Casi Rusco Electronics Systems, Inc., Northern Computers, Inc.,
Cardkey, Inc., Software House, Inc., Continental Instruments, Inc., American
Magnetics Corporation, Keri Systems, Kantech, Radionics, Ademco and Corby, Inc.

     There are numerous manufacturers of keypads selling in the United States
market including the following competitors:  Corby, Inc., Visonic Ltd., USP,
Inc., Crow Electronics Engineering, Inc., Aleph, Inc., Securitron Magnalock
Corp., Locknetics Security Engineering, Security Door Controls, Alarm Lock,
Inc., Ilco Unican Engineering, Inc., Essex Electronics, Inc., Nel-Tec, Inc.,
STA, Inc., and Sentrol, Inc.

     To the best of the Company's knowledge, the Company's voice verification
product line has competition from:  Voice Strategies, Inc., T-Netix, Inc.,
Keyware Technologies, Q Voice, ITT, VeriVoice, Inc., Princeton Voice Radar,
Veritel Corporation of America, Electronic Warfare Assoc., Inc. and Technologia
Systems Limited in the United States, and Zetetic International Limited
in the United Kingdom and ABS, Inc. in Germany.

     The Company also faces competition in the positive identification access
control market from other biometric systems. These other biometric systems, and
some of the companies that produce them include:  fingerprint, (BII, Inc.,
Identix, Inc., American Biometric Company, Keytronics, Sony, Ultra-Scan, NRI,
and Thompson-CFS), hand geometry (Recognition Systems), palm print, face
(Visionics), optical systems (Eye Dentify Systems), signature (Pen Op,
Communication Intelligence and AEA) and facial recognition (Miros, Inc.,
Visionics and Viisage).

WORKING CAPITAL

     During fiscal 1998, the Company depended on its existing cash balances to
provide working capital.  As of August 31, 1998, the Company has bank lines of
credit available for working capital financing of up to $1,000,000 and $225,000
for equipment purchases.  The Company expects its working capital requirements
for fiscal 1999 to be provided from its cash reserves and its line of credit
plus anticipated cash from operations.  As of August 31, 1998, there were no
borrowings outstanding under the working capital line of credit and
approximately $90,000 in borrowings outstanding under the equipment line of
credit.  See "Item 6-Management's Discussion and Analysis of Financial Condition
and Results of Operations".

                                       7
<PAGE>
 
RESEARCH AND DEVELOPMENT

     The Company presently employs eight people in research and development.
The Company also utilizes certain consultants and subcontractors on an as-needed
basis with the Company's employees supervising such work.  Research and
development expenditures were approximately $537,000, $521,000 and $381,000
during fiscal 1998, 1997 and 1996, respectively.

EMPLOYEES

     As of November 1, 1998, the Company had 69 employees, of which 63 were
full-time employees.  Of these 69 employees, 15 were engaged in sales and
marketing, 8 were involved in product development, 32 in manufacturing, 4 in
customer service and 10 employees were providing management and administrative
services.

SEASONALITY

     The Company is subject to normal business slowdowns during the summertime
and around the Christmas holiday season.  In addition, overseas sales,
specifically to Europe, slow down in the summer because many European companies
take substantial vacation time in July and August.

GOVERNMENTAL CONTROLS/ENVIRONMENTAL COMPLIANCE

     None of the Company's business is subject to renegotiation of profits or
termination of contracts at the election of the Government.  The Company has not
been materially affected by compliance with any governmental regulation relating
to protection of the environment, and no material capital expenditures are
expected by the Company for environmental control facilities.

ITEM 2.                           PROPERTIES

     The Company's administrative and manufacturing operations are located at
427 Turnpike Street, Canton, Massachusetts, and currently consist of
approximately 15,540 square feet of space.  The Company occupies this facility
under a lease expiring April 14, 2000, at a minimum monthly rental of $7,666
plus utilities, maintenance and certain real estate taxes.

ITEM 3.                        LEGAL PROCEEDINGS

                                     None

ITEM 4.                  SUBMISSION OF MATTERS TO A VOTE
                               OF SECURITY HOLDERS


     The Company held a special meeting in lieu of annual meeting of
stockholders on June 26, 1998.  After electing directors, the meeting was
adjourned until July 14, 1998.  At the portion of the meeting held on June 26,
1998, the following directors were elected to that office and the votes for,
against or abstained are indicated next to their name.

                      1,202,887  shares for John Waldstein
                         27,701  shares against John Waldstein
                              0  shares abstain John Waldstein


                                       8
<PAGE>
 
                    1,204,437  shares for Heath Paley
                       26,151  shares against Heath Paley
                            0  shares abstain Heath Paley

                    1,204,307  shares for Diane Balcom
                       26,281  shares against Diane Balcom
                            0  shares abstain Diane Balcom

     At the adjourned meeting on July 14, 1998, the stockholders acted upon a
proposal to amend the Company's Articles of Organization to authorize 1,500,000
shares of preferred stock and to amend Article IV of the Company's Articles of
Organization to authorize the directors to establish one or more series of the
authorized preferred stock. The stockholders voted 696,514 shares for this
proposal, 118,395 shares against this proposal and 6,133 shares abstained from
voting on this proposal. The proposal was not approved because the proposal
required a two-thirds vote of all stock for approval and that two-thirds
approval was not reached. Also at the adjourned meeting, the stockholders were
requested to act upon a proposal to amend the Articles of Organization so that
future amendments to the Articles of Organization could be made by a majority
vote of stockholders. The stockholders voted 708,745 shares for this proposal,
104,273 shares against this proposal and 8,024 shares abstained from voting on
this proposal. The proposal was not approved because the proposal required a 
two-thirds vote of all stock for approval and that two-thirds approval was not
reached.

                                       9
<PAGE>
 
                                    PART II

ITEM 5.               MARKET FOR REGISTRANT'S COMMON EQUITY
                         AND RELATED STOCKHOLDER MATTERS

     The Company's securities have been traded in the over-the-counter market
since July 5, 1983.  Since October 30, 1987, the Company's common stock has been
quoted by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ").  The Company's common stock trades on the NASDAQ SmallCap
Market.

     In March 1992, the National Association of Securities Dealers, Inc.
("NASD") changed its standards for a company's stock to maintain its listing on
NASDAQ.  The changed standards include maintaining a minimum bid price of $1.00
per share for ten consecutive trading days and shareholders' equity with a
minimum balance of $1,000,000. Although the Company has maintained its NASDAQ
listing, the Company has, at times, been unable to maintain the $1.00 minimum
bid price criteria.

     Effective February 23, 1998, the NASD adopted new, more stringent standards
for a company to maintain its stock listing on NASDAQ.  The Company did not meet
the new net tangible assets/market capitalization/net income requirements, but
applied for an exception to allow it time to achieve compliance with such
requirements.  After a hearing, NASDAQ granted the Company a temporary exception
(expiring November 30, 1998) to the net tangible assets/market capitalization/
net income requirement implemented by NASDAQ. After the hearing, the "C" was
added to the Company's NASDAQ symbol to designate the Company's conditional
status. The Company believes that it is now in compliance with all NASDAQ
requirements. The Company's common stock will continue to be traded on the
NASDAQ SmallCap Market, subject to the NASDAQ Listing Panel reviewing the
Company's 1998 Form 10-KSB filing to satisfy NASDAQ that the Company is in
compliance with all NASDAQ SmallCap listing requirements. The Company's common
stock will continue to be traded using the symbol "IEIBC" until the NASDAQ
Listing Panel completes its review process. After this process, and assuming the
Company maintains its NASDAQ listing, the trading symbol will become "IEIB".

     The prices set forth below are based on information provided to the Company
by NASDAQ.  These sales prices reflect interdealer prices, without retail mark-
ups, mark-downs or commissions.
<TABLE>
<CAPTION>
                                             SALES PRICES
                                        ----------------------
                                          HIGH           LOW
                                        --------       ------- 
<S>                                    <C>            <C>
     FISCAL YEAR 1997:
          First Quarter                  $3.88          $1.88
          Second Quarter                  3.31           2.25
          Third Quarter                   3.00           1.63
          Fourth Quarter                  1.94           1.31
 
     FISCAL YEAR 1998:
          First Quarter                   2.13           1.50
          Second Quarter                  2.13           1.06
          Third Quarter                   2.06           1.38
          Fourth Quarter                  2.00           1.00
</TABLE>

     In January 1996, the Company sold, in a private placement, 68,182 shares of
unregistered common stock at $1.32 per share for net proceeds of $89,057 with
issuance costs of $943.  There

                                       10
<PAGE>
 
was no underwriter involved in this transaction. John Waldstein, President and
Treasurer, purchased 7,576 shares of restricted common stock in this private
placement. The other purchasers were accredited investors or sophisticated
private investors familiar with the affairs of the Company. The Company relied
on Section 4(2) of the Securities Act of 1934 or Regulation D thereof for the
exemption from registration.

     As of October 27, 1998 there were approximately 640 shareholders of record
of the Company's common stock.  The Company believes that a substantial number
of shares of the Company's common stock are held by nominees and estimates that
there are approximately 1,700 beneficial owners of the Company's shares.  The
Company has never paid dividends to its shareholders, and does not anticipate
that it will do so in the foreseeable future. The Company's credit agreements
contain certain restrictive covenants including restricting the payment of
dividends.

ITEM 6.                MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

     As of August 31, 1998, the Company had $1,446,474 in working capital as
compared to $800,653 at August 31, 1997.  The ratio of current assets to current
liabilities as of August 31, 1998 was 2.1, as compared to 1.5 in 1997 and 1.7 in
1996.  The debt to equity ratio was .7 at August 31, 1998, as compared to 1.2 in
1997 and 1.4 in 1996.  The increases in working capital and current ratios and
the decrease in the debt to equity ratio in 1998 from 1997 are the result of the
Company's net income and cash flow for the year.  The decreases in working
capital and current ratios in 1997 from 1996 are the result of the repayment of
the loan due the Federal Deposit Insurance Corporation (FDIC).  The decrease in
the debt to equity ratio in 1997 from 1996 is the result of a reduction in the
FDIC debt, offset in part by increases in accounts payable and accrued expenses.

     Net capital expenditures were $214,156, $251,217 and $178,541 in fiscal
years ending August 31, 1998, 1997 and 1996, respectively.  The Company
anticipates having up to $450,000 in total capital expenditures for the purchase
of equipment, regulatory testing and tooling costs during the next twelve
months.  The increase in anticipated expenditures from the Company's historical
level is primarily due to the need of the Company to continue to upgrade its
production facility, an increase in tooling costs and purchases of additional
engineering equipment.

     In February 1997, the Company repaid approximately $358,000 representing
the balance due the FDIC for the outstanding note originally payable on December
31, 1997.  In February 1997, the Company also established two bank lines of
credit. As of August 31, 1998, the Company has available a demand line of credit
for working capital financing of up to $1,000,000 and a line of credit of
$225,000 for equipment purchases. See Notes 5 and 6 to the Consolidated
Financial Statements. As of August 31, 1998, the Company had no outstanding
borrowings under the working capital line of credit and had approximately
$90,000 in borrowings outstanding under the equipment line of credit.

     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 that additional external funding will be obtainable, if such a
need should arise.

                                       11
<PAGE>
 
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
vendors to determine their state of readiness regarding this issue and to
estimated 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.

RESULTS OF OPERATIONS

FISCAL YEARS ENDED AUGUST 31, 1998, 1997 AND 1996

     Net sales in 1998 increased 5% from 1997, while 1997 sales increased 7%
from 1996.  The increases in sales for the years 1998 and 1997 are primarily the
result of increases in access control and keypad product sales of 15% and 12%,
respectively, offset in part by reductions in glassbreak detector sales.

                                       12
<PAGE>
 
     The ratios of gross profit to sales were 47% in 1998 and 41% in both 1997
and 1996.  The increase in gross profit in 1998 from 1997 is the result of
decreases in warranty costs, a reduction in product costs resulting from
favorable pricing terms from vendors, and an increase in the price of the
Company's products to its customers effective January 1998.  The Company expects
a reduction in its current gross profit percentage in the future and believes
that such percentage will be comparable to its past historical levels.

     Research and development expenses were $537,426 in 1998, as compared to
$520,629 in 1997 and $381,245 in 1996.  The increase in costs in 1998 from 1997
is due to project costs associated with enhancing the Company's voice
verification technology.  The increase in costs in 1997 from 1996 is primarily
due to the hiring of additional personnel and related expenses and an increase
in consultants.

     As a percentage of net sales, selling, general and administrative expenses
were 35% in 1998 and 34% in both 1997 and 1996.  The increase in expenses as a
percentage of net sales in 1998 from 1997 is primarily the result of increased
personnel and related expenses.

     The increase in other income in 1998 from 1997 is due primarily to an
increase in interest income.  The decrease in other income in 1997 from 1996 is
primarily the result of a reduction in commission revenue.  The extraordinary
gain of $10,446 in 1997 represents a prepayment discount from the FDIC, net of
income tax expense of $1,000.

     The provision for income taxes represents foreign, federal alternative
minimum taxes and state income tax expense.  The Company's effective income tax
rate is 19% for 1998, 35% for 1997 and 20% for 1996.  Differences between the
effective tax rates and the combined federal and state statutory rates are the
result of permanent differences offset in part by the utilization of net
operating loss carryforwards.

IMPACT OF INFLATION AND CHANGING PRICES

     The Company does not believe that inflation or changing prices have had a
significant impact on its operations.

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.

                                       13
<PAGE>
 
     The Company has identified certain risks and uncertainties as factors which
may impact on its operating results which 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, 1998, 1997 and 1996 the Company had net income of
approximately $530,000, $70,000 and $162,000, 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 effect 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
affect on the Company.

     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.

                                       14
<PAGE>
 
     CONCENTRATION OF CUSTOMERS.  The Company has a substantial number of
customers but principally sells its products 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 effected 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.

     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 considers its products to be Year 2000 compliant.  The
Company's products do not

                                       15
<PAGE>
 
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
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.

     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.

     MAINTAIN LISTING ON NASDAQ. In March 1992, 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 shareholders' equity with a minimum balance of $1,000,000.
Although the Company has maintained its NASDAQ listing, the Company has, at
times, been unable to maintain the $1.00 minimum bid price criteria.

     Effective February 23, 1998, the NASD adopted new more stringent standards
for a company to maintain its stock listing on NASDAQ. The Company believes that
it is now in compliance with all NASDAQ SmallCap listing requirements.  However,
there can be no assurance that the Company will continue to meet the new
standards as implemented and maintain its listing on NASDAQ.  If the Company is
unable to maintain its listing on NASDAQ,

                                       16
<PAGE>
 
holders of the Company's common stock may have difficulty selling their shares
at a favorable price. See Item 5-"Market for Registrant's Common Equity and
Related Stockholder Matters."

     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.

ITEM 7.            FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of International Electronics, Inc.
and subsidiaries filed as a part of this Annual Report on Form 10-KSB begin on
page F-1.

ITEM 8.                 CHANGES IN AND DISAGREEMENTS WITH
                ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

                                Not Applicable

                                       17
<PAGE>
 
                                   PART III

ITEM 9.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
                                   FIRST ELECTED
          NAME              AGE      DIRECTOR                   POSITION
------------------------    ---    -------------   -----------------------------------
<S>                         <C>    <C>            <C>                           
John Waldstein               45    1982            President, Chief Executive Officer,
                                                   Treasurer and Chairman of the Board
James C. Brierley, Jr.       47      -             Vice President of Sales and
                                                   Marketing
Christopher Hentschel        54      -             Vice President of Engineering
Heath Paley                  50    1990            Director
Diane Balcom                 56    1989            Director
Kenneth Moyes                42    1998            Director
</TABLE>

     The term of office of each director expires on the date of the next meeting
of shareholders.  The Company anticipates that an annual meeting of shareholders
will be held in March 1999.

     John Waldstein has been employed by the Company since 1978, has been
Treasurer since March 1982, was Vice President between January 1983 and May
1988, Chief Operating Officer from February 1988 to May 1988, President and
Chief Executive Officer since May 1988, and Chairman of the Board since November
1990.  Mr. Waldstein is a graduate of Harvard College.  See "Item 10-Executive
Compensation."

     James C. Brierley, Jr. has been employed by the Company since October 1995.
Initially engaged as a consultant to develop a business strategy for the
Company's line of industrial access control products, he was appointed Director
of Sales and Marketing in October 1997 and was appointed Vice President of
Sales and Marketing in April 1998.  Prior to joining the Company, from September
1994 to September 1995, he was the Vice President of Product Marketing for The
Shareholders Services Group, a division of First Data Corporation.  From 1981 to
June 1994, he was employed by Digital Equipment Corporation where he became
Director of Product Management specializing in distributed database client
server products.  Prior to that, Mr. Brierley was a Certified Public Accountant
with Coopers & Lybrand.

     Christopher Hentschel was appointed the Company's Vice President of
Engineering in March 1995 and had previously been Chief Engineer since 1989.
Before joining the Company, Mr. Hentschel was a founder and Vice President of
Engineering of Guard Aware, Inc.  Mr. Hentschel is a graduate of Wentworth
Institute.

     Heath Paley became a member of the Board of Directors in 1990.  Since May
1996, Mr. Paley has been a self-employed computer consultant.  He had been the
Company's Director of Management Information Systems from September 1994 until
May 1996 and was the Company's Chief Operating Officer and Executive Vice
President from June 1990 to August 1994.  From 1983 to June 1990, Mr. Paley was
President and a founder of Ecco Industries, Inc.  From 1980 to 1983, he was
President of the Maine Woods Shoe Division of Bennett Industries.  Heath Paley
is the son of Warren Paley.  See "Item 11-Security Ownership of Certain
Beneficial Owners and Management."

     Diane Balcom became a member of the Board of Directors in July 1989.  Since
October 1998, Ms. Balcom has been the Executive Director of the Pittsburgh Mercy
Foundation.  From

                                       18
<PAGE>
 
September 1997 to September 1998, she held the position of Director of
Development for Children's Hospital of Pittsburgh. From August 1994 to August
1997, Ms. Balcom was the Chapter Director of the Juvenile Diabetes Foundation of
Western Pennsylvania. She has been an adviser to the Company on corporate and
financial matters since 1985. From January 1989 to August 1994, Ms. Balcom
operated a consulting practice, which provided services related to private and
public financing for small and medium-sized companies. From March 1987 to
January 1989, she served as Vice President and Chief Financial Officer for
Environmental Diagnostics, Inc., a publicly held company. Prior to that, Ms.
Balcom held various senior management positions in Corporate Finance and
Research for 13 years with brokerage firms on the West Coast.

     Kenneth Moyes was appointed to the Board of Directors in October 1998.
Since August 1994, Mr. Moyes has been the President and founder of EH
Publishing, Inc., an information provider for the home systems industry.  From
January 1990 to May 1994, Mr. Moyes served as President and Chief Executive
Officer of Arius, Inc., an international distributor of security products. 
During May, 1995 Arius filed for bankruptcy. Prior to that, Mr. Moyes was
employed by Geneva Merchant Bankers as a junior partner, founded Moyes and
Company, a management consulting firm, and was a Certified Public Accountant
with Peat, Marwick, Mitchell and Company.

     In October 1998, Messrs. Moyes and Waldstein each received options under
the Company's non-qualified stock option plan to purchase 5,000 and 4,500
shares, respectively, of common stock at an exercise price of $ 1.17.  The
options vest over a four-year period.

ITEM 10.                    EXECUTIVE COMPENSATION

     The following table sets forth information concerning the compensation for
each of the last three fiscal years ended August 31, 1998, of the Company's
President and Chief Executive Officer, and two other executive officers of the
Company who received at least $100,000 of compensation during any of these years
(the "Named Executive Officers"):

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                            
                                                                               LONG-TERM    
                                                                              COMPENSATION 
                                         ANNUAL COMPENSATION( 2)              ------------
                           -------------------------------------------------     OPTIONS        ALL OTHER           
          NAME             YEAR          SALARY           COMMISSION/BONUS(3)    (SHARES)    COMPENSATION(1)
-------------------------  ----       ------------        -------------------  ------------  ---------------
<S>                        <C>       <C>                  <C>                  <C>           <C>
John Waldstein             1998         $137,947                $27,000          15,000           $9,180
President,                 1997          135,000                  2,100          10,000(5)         9,180
Chief Executive Officer    1996          135,519                  4,750             -              9,180
 
James Brierley             1998           89,250                 25,100          10,000               -
Vice President of          1997           85,000                 18,000             -                 -
Sales and Marketing        1996           63,096                 15,000          20,000               -
 
Robert Voosen (4)          1998           51,539                     -              -                 -
Executive Vice             1997          100,000                     -            9,000(5)            -
President                  1996          100,416                 12,349             -                 -
</TABLE>

(1)  Represents the cost of a split dollar whole life insurance policy with a
     face value of $755,000 as of August 31, 1998.  The Company is a beneficiary
     of such policy to the extent of all premiums paid upon the death of John
     Waldstein.  Mr. Waldstein may purchase this policy upon termination of his
     employment for the then current cash surrender value.

(2)  Does not include perquisites which do not exceed 10% of annual salary.

                                       19
<PAGE>
 
(3)  Amount represents commissions and/or bonus earned during the applicable
     year.

(4)  Mr. Voosen resigned as an officer of the Company in September 1997.

(5)  Represents warrants to purchase 10,000 and 9,000 shares of common stock
     granted to Messrs. Waldstein and Voosen, respectively, at an exercise price
     of $2.12 per share exercisable for a ten-year period.

     The Company's Board of Directors commencing in fiscal 1993, established an
annual bonus plan for officers and certain key employees.  The available funds
for the plan shall be up to five percent of income before taxes.  The final
amount and subsequent distribution to employees shall be determined by the
Company's Compensation Committee.

COMPENSATION ON INVOLUNTARY TERMINATION

     John Waldstein has an employment contract with the Company which provides
for certain compensation to be paid to him if he is discharged by the Company
without cause before the end of the term of his contract.  Mr. Waldstein has a
three-year employment contract which self-renews for a three-year term on
January 1 of each year, the anniversary date of his employment contract.  John
Waldstein's current minimum annual salary under his contract is approximately
$140,000, subject to adjustment for inflation.  The salary of this officer is
subject to performance reviews and annual adjustment by the Board of Directors
of the Company.

     If the employment of John Waldstein is terminated by the Company without
cause, (including an involuntary relocation due to an acquisition), the Company
is obligated to pay the greater of an amount equal to one times his annual
salary on the date of termination or the salary to the conclusion of the
contract period.  As of November 1, 1998, John Waldstein's salary to the
conclusion of his contract period is approximately $303,000, plus cost of living
adjustment.

                                       20
<PAGE>
 
YEAR END OPTION TABLE


The following table sets forth the number and value of unexercised options held
as of August 31, 1998 by the Named Executive Officers:

                   AGGREGATED OPTION EXERCISES IN LAST FISCAL
                     YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
                                                           VALUE OF UNEXERCISED
                             NUMBER OF UNEXERCISED        IN-THE-MONEY OPTIONS AT
                         OPTIONS AT END OF FISCAL 1998     END OF FISCAL 1998 (2)
                         -----------------------------    --------------------------
NAME                     EXERCISABLE     UNEXERCISABLE    EXERCISABLE  UNEXERCISABLE
-----------------------  -----------     -------------    -----------  -------------
<S>                      <C>            <C>               <C>          <C>
John Waldstein (1)(3)      106,167           22,500         $68,689        $3,928
James Brierley (1)          10,000           20,000           3,663         7,975
</TABLE>

(1)  There were no options exercised during fiscal 1998.

(2)  Difference between the fair market value of the underlying common stock on
     October 27, 1998 and the exercise price.

(3)  Includes warrants to purchase an aggregate of 35,000 shares of common
     stock.  See "Summary Compensation Table - Note 5" herein and see Note 9 to
     the Consolidated Financial Statements.

COMPENSATION OF DIRECTORS

     Effective June 1998, the directors who are not officers receive $500 for
each Board of Directors meeting and $500 for each Committee meeting that they
attend in person or by telephone conference call.  For the fiscal year ended
August 31, 1998, Ms. Balcom was paid $1,000 in director's fees.  In June 1998,
Ms. Balcom and Mr. Paley, two of the Company's non-employee directors, each
received options under the Company's non-qualified stock option plan to purchase
2,500 shares of common stock at an exercise price of $1.67.  These options vest
monthly over a one-year period.

OTHER MATTERS

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors, and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
with the SEC and NASD.  Executive officers, directors, and greater than ten-
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.

     The Company believes that all filing requirements applicable under Section
16(a) to its executive officers, directors and 10% stockholders were complied
with for fiscal 1998, except that Mr. Brierley filed his Form 5 late.

                                       21
<PAGE>
 
ITEM 11.                 SECURITY OWNERSHIP OF CERTAIN
                        BENEFICIAL OWNERS AND MANAGEMENT

     Set forth below is information concerning ownership of the Company's common
stock as of October 27, 1998, (i) by all persons known by the Company to own
beneficially 5% or more of the outstanding common stock, (ii) each director and
Named Executive Officer of the Company and (iii) by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
                                                                  PERCENT OF
                                                   NUMBER OF     COMMON STOCK
NAME                                               SHARES(1)         OWNED
----------------------------------------------  ---------------  -------------
<S>                                             <C>              <C>
EXECUTIVE OFFICERS AND DIRECTORS:

     John Waldstein                               213,506/(2)/      13.3%
     c/o International Electronics, Inc.
     427 Turnpike Street
     Canton, Massachusetts

     James Brierley                                22,576/(5)/        1.5%
     c/o International Electronics, Inc.
     427 Turnpike Street
     Canton, Massachusetts

     Heath Paley                                   39,513/(3)/        2.6%
     c/o International Electronics, Inc.
     427 Turnpike Street
     Canton, Massachusetts

     Kenneth Moyes                                 14,000/(6)/         .9%
     526 Boston Post Road
     Wayland, Massachusetts

     Diane Balcom                                  15,100/(4)/        1.0%
     1709 Boulevard of the Allies, Suite 100
     Pittsburgh, Pennsylvania

     All directors and executive officers
     as a group (6 persons)                       329,829/(7)/       19.6%

5% SHAREHOLDERS:

     Warren Paley                                 217,267            14.5%
     3 Mill Street
     New Baltimore, New York
</TABLE>
     
(1) Except as otherwise indicated below, the named owner has sole voting and
    investment power with respect to the shares set forth.  No arrangements are
    known to the Company, which may result in a change in control.  The number
    of shares shown does include shares which may be acquired through the
    exercise of options and warrants which are exercisable currently or within
    sixty (60) days after October 27, 1998.

(2) Includes vested options and warrants to purchase an aggregate 108,667 shares
    of the Company's common stock granted at prices ranging from $.74-$2.12 per
    share.  Includes 6,234 shares of common stock held by Mr. Waldstein's wife.
    Mr. Waldstein disclaims beneficial ownership of these shares.

(3) Includes vested options to purchase an aggregate 30,828 shares of the
    Company's common stock granted at prices ranging from $.75 - $6.48 per
    share.

                                       22
<PAGE>
 
(4) Includes vested options and warrants to purchase an aggregate 13,553 shares
    of the Company's common stock granted to Diane Balcom and Balcom &
    Associates at prices ranging from $.72 - $2.12 per share.

(5) Includes vested options to purchase an aggregate 15,000 shares of the
    Company's common stock granted at prices ranging from $1.36-$1.58 per
    share.

(6) Includes 4,000 shares of common stock held in trust for the benefit of Mr.
    Moyes' minor children.  Mr. Moyes serves as co-trustee of two such trusts.

(7) Includes vested options and warrants to purchase an aggregate 191,547 shares
    of the Company's common stock granted at prices ranging from $.72 - $6.48
    per share.

                                       23
<PAGE>
 
                                    PART IV

ITEM 12.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                     None

ITEM 13.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                             REPORTS ON FORM 8-K.

    (a)1. The following Consolidated Financial Statements are included in
          Item 7:

          Independent Auditors' Report

          Consolidated Balance Sheets as of August 31, 1998 and 1997

          Consolidated Statements of Income for the Years Ended August 31,
          1998, 1997 and 1996

          Consolidated Statements of Shareholders' Equity for the Years Ended
          August 31, 1998, 1997 and 1996

          Consolidated Statements of Cash Flows for the Years Ended August 31,
          1998, 1997 and 1996

          Notes to Consolidated Financial Statements

    (a)2. The following schedule is included in Item 7:

          Valuation and qualifying accounts

    (a)3. Exhibits:

          (3)     Restated Articles of Organization and By-Laws are incorporated
                  by reference to Exhibit 3 to the Company's Registration
                  Statement on Form S-18 (2-91218-B), filed on May 18, 1984
                  (hereinafter referred to as the Company's S-18).

          (3)(a)  Amendment to Articles of Organization are incorporated by
                  reference to Exhibit 3.1(a) of the Company's Registration
                  Statement on Form S-1 (Registration No. 33-16333 which became
                  effective on October 8, 1987 hereinafter referred to as the
                  Company's S-1).

          (4)     Instruments defining the rights of securities holders include
                  the Restated Articles of Organization, By-Laws, Stock
                  Certificate and Stock Purchase Warrant which are incorporated
                  by reference to Exhibits 3, 4b and 4c to the Company's S-18.

          (10)(a) A American Automatic Alarm Company Supplies Contract and Non-
                  Competition Agreement is incorporated by reference to Exhibit
                  (10)(w) of the Company's Annual Report on Form 10-K for the
                  year ended August 31, 1986.

                                       24
<PAGE>
 
          (10)(b) Nonqualified Stock Option Plan is incorporated by reference to
                  Exhibit 10.1(ll) of Post-Effective Amendment No. 2 of the
                  Company's S-1.

          (10)(c) Stock Purchase Agreement dated as of June 19, 1990 by and
                  among the Company and Ecco Industries, Inc. is incorporated by
                  reference to Exhibit (2.1) on Form 8-K dated July 2, 1990.

          (10)(d) Lease, Canton, Massachusetts between Turnpike Realty Trust and
                  the Registrant dated March 6, 1991, is incorporated by 
                  reference to Exhibit 6.1 on Form 10-Q for the quarter ended 
                  February 28, 1991.

          (10)(e) Distributor Agreement between the Registrant and Weyrad
                  Electronics, Limited dated November 3, 1992 is incorporated by
                  reference to Exhibit 10(V) on Form 10-K for the year ended
                  August 31, 1992.

          (10)(f) Distributor Agreement between the Registrant and Weyrad
                  Electronics, Limited dated April 1, 1993 is incorporated by
                  reference to Exhibit 6.1 on Form 10-Q for the quarter ended
                  February 28, 1993.

          (10)(g) Employment, Non-Disclosure and Non-Compete Agreement for John
                  Waldstein dated June 20, 1994 and amendment dated December 8,
                  1994 is incorporated by reference to Exhibit 10(t) on Form 
                  10-KSB for the year ended August 31, 1994.

          (10)(h) Workout Agreement, Amended and Restated Loan and Security
                  Agreement and Promissory Note between the Registrant and 
                  Federal Deposit Insurance Corporation dated December 1, 1994
                  is incorporated by reference to Exhibit 10(u) on Form 10-KSB
                  for the year ended August 31, 1994.

          (10)(i) Employment, Non-Disclosure and Non-Compete Agreement for
                  Robert Voosen dated January 15, 1995 is incorporated by
                  reference to Exhibit 6.1 on Form 10-QSB for the quarter ended
                  February 28, 1995.

          (10)(j) Lease, Canton, Massachusetts between 427 Turnpike Street
                  Realty Trust and the Registrant dated March 28, 1995 is
                  incorporated by reference to Exhibit 10(w) on Form 10-KSB for
                  the year ended August 31, 1995.

          (10)(k) Amendment to original lease of March 28, 1995, Canton,
                  Massachusetts between 427 Turnpike Realty Trust and the
                  Registrant dated April 1, 1998.

          (10)(l) Second amendment dated May 1, 1998 to the Employment, Non-
                  Disclosure and Non-Compete Agreement originally dated June 20,
                  1994 for John Waldstein.

          (22)    Subsidiaries of the Registrant.

          (27)    Financial data schedule.

          (b)     Reports on Form 8-K
                  No reports on Form 8-K were filed during the last quarter of
                  the period covered by this report.

                                       25
<PAGE>
 
SIGNATURES

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

                                INTERNATIONAL ELECTRONICS, INC.

Date:  November 23, 1998     By: /s/ John Waldstein
                                ----------------------------------------------
                                John Waldstein, President and 
                                Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature                         Title                        Date
--------------------------------  ---------------------------  -----------------


     /s/ John Waldstein           President and Chief          November 23, 1998
--------------------------------  Executive Officer,
         John Waldstein           Treasurer and Chief 
                                  Financial and Accounting
                                  Officer, and Chairman of
                                  the Board


      /s/ Heath Paley             Director                     November 23, 1998
--------------------------------
          Heath Paley


      /s/ Kenneth Moyes           Director                     November 23, 1998
--------------------------------
          Kenneth Moyes


       /s/ Diane Balcom           Director                     November 23, 1998
--------------------------------
           Diane Balcom

                                       26
<PAGE>
 
-------------------------------------
INTERNATIONAL 
ELECTRONICS, INC. AND 
SUBSIDIARIES


Consolidated Financial Statements
and Schedule for the Years Ended
August 31, 1998, 1997, and 1996
and Independent Auditors' Report for
the Annual Report on Form 10-KSB
for the Year Ended August 31, 1998
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS
-------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                               PAGE
                                                       
<S>                                                            <C>
INDEPENDENT AUDITORS' REPORT                                    F-2
                                                       
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
 AUGUST 31, 1998, 1997 and 1996:                                        
                                                       
 Consolidated Balance Sheets                                    F-3
                                                       
 Consolidated Statements of Income                              F-4
                                                       
 Consolidated Statements of Shareholders' Equity                F-5
                                                       
 Consolidated Statements of Cash Flows                          F-6
                                                       
 Notes to Consolidated Financial Statements                    F-7-16
                                                       
FINANCIAL STATEMENT SCHEDULE FURNISHED PURSUANT TO THE 
 REQUIREMENTS OF FORM 10-KSB:                          
                                                       
 Schedule II  Valuation and Qualifying Accounts                 F-18

</TABLE>

All other schedules are omitted because they are inapplicable, not required
under the instructions, or because the information is reflected in the
consolidated financial statements or notes thereto.

                                      F-1
<PAGE>
 
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
 International Electronics, Inc.


Canton, Massachusetts

We have audited the accompanying consolidated balance sheets of International
Electronics, Inc. and subsidiaries (the "Company") as of August 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended August 31, 1998.
Our audits also included the financial statement schedule listed in the Table of
Contents.  These financial statements and the financial statement schedule are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on the financial statements and the financial statement
schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of August 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended August 31, 1998, in conformity with generally
accepted accounting principles.  Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.


Deloitte & Touche, LLP

October 9, 1998

Boston, Massachusetts

                                      F-2
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 AND 1997
-----------------------------------------------------------------------
<TABLE>
<CAPTION>                                                   
ASSETS                                            1998          1997        
<S>                                           <C>           <C>          
CURRENT ASSETS:                                                          
 Cash and cash equivalents                     $  895,876    $  160,075  
 Accounts receivable, net of allowance for
  doubtful accounts and returns of $176,000
  and $185,000 in 1998 and 1997, respectively     986,403     1,035,596  
 Inventories                                      746,570     1,078,561  
 Other current assets                             153,816       133,274  
                                               ----------    ----------
   Total current assets                         2,782,665     2,407,506  
                                               ----------    ----------
EQUIPMENT AND FURNITURE, Net of
 accumulated depreciation and amortization        368,965       357,289  
                                               ----------    ----------
OTHER ASSETS:                                                            
 Goodwill and other                                                      
  intangibles, net of accumulated amortization
  of $1,093,000 and $1,006,000 in 1998 and
  1997, respectively                              148,432       235,029  
 Other                                             11,950        26,349  
                                               ----------    ----------
    Total other assets                            160,382       261,378  
                                               ----------    ----------
                                               $3,312,012    $3,026,173  
                                               ==========    ==========

<CAPTION> 
LIABILITIES AND SHAREHOLDERS'                                             
EQUITY                                            1998          1997      
<S>                                           <C>           <C>         
CURRENT LIABILITIES:                                                     
Accounts payable                              $   138,894   $   684,431 
Accrued expenses                                1,089,267       847,210 
Income taxes payable                               44,000        39,000 
Current portion of long-term obligations           64,030        36,212 
                                               ----------    ----------
Total current liabilities                       1,336,191     1,606,853 
                                               ----------    ----------
LONG-TERM OBLIGATIONS, Less                                               
 current portion                                   82,859        68,369  
                                               ----------    ----------
SHAREHOLDERS' EQUITY:                                                   
Common stock, $.01 par value - authorized,                              
 5,984,375 shares; issued, 1,528,301 shares                              
 in 1998 and 1997                                 15,283        15,283 
Capital in excess of par value                  4,796,149     4,784,267 
Accumulated deficit                            (2,879,826)   (3,409,955)
Less treasury stock, at cost -  35,000 shares     (38,644)      (38,644)
                                               ----------    ----------
Total shareholders' equity                      1,892,962     1,350,951 
                                               ----------    ----------
                                               $3,312,012    $3,026,173  
                                               ==========    ==========
</TABLE> 
See notes to consolidated financial statements.

                                      F-3
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1998 1997 AND 1996
----------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

                                           1998         1997         1996
<S>                                     <C>          <C>          <C> 
NET SALES                               $9,651,603   $9,173,580   $8,610,372
                                        
COST OF SALES                            5,152,016    5,439,461    5,051,387
                                        ----------   ----------   ---------- 
GROSS PROFIT                             4,499,587    3,734,119    3,558,985
                                        ----------   ----------   ---------- 
OPERATING EXPENSES:
 Research and development costs            537,426      520,629      381,245
 Selling, general and administrative
  expenses                               3,332,544    3,106,376    2,950,660
                                        ----------   ----------   ----------  
         Total operating expenses        3,869,970    3,627,005    3,331,905
                                        ----------   ----------   ----------    
INCOME FROM OPERATIONS                     629,617      107,114      227,080

INTEREST EXPENSE                           (16,411)     (30,826)     (53,467) 

OTHER INCOME                                37,923       21,410       28,377
                                        ----------   ----------   ----------
INCOME BEFORE INCOME TAXES AND 
 EXTRAORDINARY GAIN                        651,129       97,698      201,990

PROVISION FOR INCOME TAXES                 121,000       38,000       40,000
                                        ----------   ----------   ---------- 
INCOME BEFORE EXTRAORDINARY GAIN           530,129       59,698      161,990

EXTRAORDINARY GAIN ON PREPAYMENT OF
 LONG-TERM OBLIGATIONS, NET OF
 INCOME TAX EXPENSE OF $1,000                   -        10,446           -
                                        ----------   ----------   ----------
NET INCOME                              $  530,129   $   70,144   $  161,990
                                        ==========   ==========   ========== 
NET INCOME PER SHARE:
  Basic                                 $     0.36   $     0.05   $     0.11
  Diluted                                     0.34         0.04         0.10
                                        ==========   ==========   ========== 
SHARES USED IN COMPUTING NET INCOME
 PER SHARE:
  Basic                                  1,493,301    1,493,046    1,451,442
  Diluted                                1,577,203    1,598,799    1,603,593  
                                        ==========   ==========   ========== 

</TABLE> 

See notes to consolidated financial statements.



                                      F-4
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------------------
                                                                    CAPITAL IN
                                                COMMON STOCK        EXCESS OF   ACCUMULATED       TREASURY STOCK
                                           SHARES          AMOUNT    PAR VALUE    DEFICIT       SHARES      COST        TOTAL
<S>                                        <C>           <C>       <C>         <C>              <C>      <C>         <C> 
BALANCE, SEPTEMBER 1, 1995                  1,442,669    $ 14,427  $4,668,050  $(3,642,089)     35,000   $ (38,644)  $1,001,744
                                                                                                                               
  Stock issued upon exercise of stock                                                                                          
    warrants                                   16,200         162      11,988            -           -           -       12,150
                                                                                                                               
  Issuance of stock warrants                        -           -      11,000            -           -           -       11,000
                                                                                                                               
  Stock issued in a private placement          68,182         682      88,375            -           -           -       89,057
                                                                                                                               
  Net income                                        -           -           -      161,990           -           -      161,990
                                                                                                                               
BALANCE, AUGUST 31, 1996                    1,527,051      15,271   4,779,413   (3,480,099)     35,000     (38,644)   1,275,941
                                           ----------  ----------  ----------  -----------  ----------  ----------   ---------- 
   Stock issued upon exercise of                                                                                              
       stock options                            1,250          12       1,328            -           -           -        1,340
                                                                                                                              
   Issuance of stock warrants                       -           -       3,526            -           -           -        3,526
                                                                                                                              
   Net income                                       -           -           -       70,144           -           -       70,144 
                                           ----------  ----------  ----------  -----------  ----------  ----------   ----------
BALANCE, AUGUST 31, 1997                    1,528,301      15,283   4,784,267   (3,409,955)     35,000     (38,644)   1,350,951
                                                                                                                               
   Issuance of stock warrants                       -           -      11,882            -           -           -       11,882
                                                                                                                              
   Net income                                       -           -           -      530,129           -           -      530,129
                                           ----------  ----------  ----------  -----------  ----------  ----------   ----------
BALANCE, AUGUST 31, 1998                    1,528,301    $ 15,283  $4,796,149  $(2,879,826)     35,000   $ (38,644)  $1,892,962 
                                           ==========  ==========  ==========  ===========  ==========  ==========   ==========
</TABLE> 
         
See notes to consolidated financial statements. 

                                      F-5
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
-------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                     1998          1997          1996
<S>                                                                                <C>            <C>          <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                       $ 530,129     $  70,144     $ 161,990
  Adjustments to reconcile net income to net cash provided by operating
    activities:
      Depreciation and amortization                                                  289,077       285,512       247,851
      Stock warrants  issued for professional services                                11,882         1,626        11,000
      Changes in operating assets and liabilities:
          Accounts receivable                                                         49,193      (103,341)      (95,550)
          Inventories                                                                331,991      (250,113)     (204,535)
          Other current assets                                                       (20,542)        8,544       (37,367)
          Accounts payable and accrued expenses                                     (303,480)      236,371       212,705
          Income taxes payable                                                         5,000        (1,000)       40,000 
                                                                                   ---------     ---------     ---------
           Net cash provided by operating activities                                 893,250       247,743       336,094 
                                                                                   ---------     ---------     ---------
 
CASH FLOWS FROM INVESTING ACTIVITIES AND OTHER:
  Net purchase of equipment and furniture                                           (214,156)     (208,891)     (139,033)
  Other assets                                                                        14,399       (12,050)        2,986 
                                                                                   ---------     ---------     ---------

           Net cash used in investing activities and other                          (199,757)     (220,941)     (136,047) 
                                                                                   ---------     ---------     ---------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
  Additions to debt obligations                                                      111,066        24,353        35,000
  Issuance of common stock and stock warrants                                              -         3,240       101,207
  Payments of debt obligations                                                       (68,758)     (451,065)     (107,321) 
                                                                                   ---------     ---------     ---------

           Net cash provided by (used in) financing activities                        42,308      (423,472)       28,886 
                                                                                   ---------     ---------     ---------

CASH AND CASH EQUIVALENTS - Increase (decrease) during the year                      735,801      (396,670)      228,933

BALANCES, BEGINNING OF YEAR                                                          160,075       556,745       327,812 
                                                                                   ---------     ---------     ---------

BALANCES, END OF YEAR                                                              $ 895,876     $ 160,075     $ 556,745 
                                                                                   =========     =========     =========

SUPPLEMENTARY DISCLOSURE OF CASH FLOW
  INFORMATION - Interest paid                                                      $  16,411     $  30,826     $  53,467 
                                                                                   =========     =========     =========

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS -
   Equipment acquired under capitalized leases                                     $       -     $  42,326     $  39,508 
                                                                                   =========     =========     =========
</TABLE> 

See notes to consolidated financial statements.

                                      F-6
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

   DESCRIPTION OF THE BUSINESS--International Electronics, Inc. and subsidiaries
   (the "Company") designs, manufactures, markets and sells electronic products
   for the security industry and other commercial applications.

   PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
   statements include the accounts of International Electronics, Inc. and its
   majority owned subsidiary, Ecco Industries, Inc. ("Ecco"), and its wholly
   owned subsidiary, International Electronics Europe Limited.  All material
   intercompany transactions, balances and profits have been eliminated.

   CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
   instruments purchased with a remaining maturity of three months or less to be
   cash equivalents.

   FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of the Company's assets
   and liabilities which constitute financial instruments approximate their
   recorded value.

   CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
   the Company to concentrations of credit risk are cash and accounts
   receivable.  The majority of the Company's cash is maintained with a
   commercial bank.  Concentration of credit risk with respect to accounts
   receivable is limited to certain customers to whom the Company makes
   substantial sales (see Note 11).

   INVENTORIES--Inventories are stated at the lower of cost or market.  Cost is
   determined on a first-in, first-out basis.  Allowances are made for slow-
   moving, obsolete, unsalable or unusable items.

   EQUIPMENT AND FURNITURE--Equipment and furniture are stated at cost.
   Expenditures for maintenance and repairs are charged to expense as incurred,
   whereas major betterments are capitalized as additions to equipment and
   furniture.  Depreciation and amortization are provided using the straight-
   line method over the estimated useful lives of the applicable assets,
   including capital leases.

<TABLE>
<CAPTION>
                                                               ESTIMATED          
                                                                 LIVES            
<S>                                                        <C>                    
     Machinery and equipment                                   3-5 years          
     Office furniture and equipment                            3-7 years          
 
</TABLE>

   GOODWILL AND OTHER INTANGIBLES--Goodwill and other intangibles are amortized
   over five- to ten-year periods.


   During the year ended August 31, 1997, the Company adopted Financial
   Accounting Standards Board ("FASB") Statement of Financial Accounting
   Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
   Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires
   that long-lived assets, certain identifiable intangibles, and goodwill to be
   held and used by an entity be reviewed for impairment whenever circumstances
   indicate that the carrying amount of an asset may not be recoverable. The
   adoption of SFAS No. 121 had no impact on the Company's financial position or
   results of operations.    

                                      F-7
<PAGE>
 
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   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.

   REVENUE RECOGNITION--Revenue from product sales is recognized upon shipment.
   An allowance for estimated future returns is recorded at the time revenue is
   recognized based on the Company's historical experience.  Estimated product
   warranty costs are also provided for at the time of sale.

   RESEARCH AND DEVELOPMENT COSTS--All research and development costs are
   charged to operations as incurred.

   NET INCOME PER SHARE--In 1997, the FASB issued SFAS No. 128, "Earnings per
   Share," which replaced the previously reported primary and fully diluted net
   income per share with basic and diluted net income per share.  Unlike primary
   net income per share, basic net income per share excludes any dilutive
   effects of options and warrants.  Diluted net income per share is very
   similar to the previously reported fully diluted net income per share.  All
   net income per share amounts for all years have been presented and, where
   necessary, restated to conform to SFAS No. 128 requirements.

   Basic net income per share is computed by dividing net income by weighted-
   average common shares outstanding during the year.  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> 
                                                       1998              1997              1996
<S>                                                <C>               <C>               <C> 
Net income                                         $  530,129        $   70,144        $  161,990 
                                                   ==========        ==========        ==========
Shares used in computation:                      
  Weighted-average shares outstanding for        
    basic net income per share                      1,493,301         1,493,046         1,451,442
                                                 
  Effect of dilutive option and warrant shares         83,902           105,753           152,151 
                                                   ----------        ----------       -----------
Total shares for diluted net income per share       1,577,203         1,598,799         1,603,593 
                                                   ==========        ==========        ==========
                                                 
Basic net income per share:                      
  Income before extraordinary gain                 $      .36        $      .04        $      .11
  Extraordinary gain                                    -                   .01             - 
                                                   ----------        ----------       -----------
                                                 
  Net income                                       $      .36        $      .05        $      .11 
                                                   ==========        ==========        ==========
                                                 
Diluted net income per share:                    
  Income before extraordinary gain                 $      .34        $      .03        $      .10
  Extraordinary gain                                    -                   .01             - 
                                                   ----------        ----------       -----------
                                                 
  Net income                                       $      .34        $      .04        $    $ .10 
                                                   ==========        ==========        ==========

</TABLE> 

                                      F-8
<PAGE>
 
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   NET INCOME PER SHARE (CONTINUED)--The calculations for diluted net income per
   share did not include an aggregate out of money options and warrants of
   156,304, 107,371 and 371,000 for the years ended August 31, 1998, 1997 and
   1996, respectively.

   EMPLOYEE STOCK-BASED COMPENSATION--The Company uses the intrinsic value-based
   method of Accounting Principles Board Opinion No. 25, as allowed under SFAS
   No. 123, "Accounting for Stock-Based Compensation," to account for all of its
   employee and director stock-based compensation plans.

   NONEMPLOYEE STOCK-BASED COMPENSATION--The Company complies with the
   provisions of SFAS No. 123 relating to the accounting for awards of stock-
   based compensation to nonemployees.  Accordingly, stock-based compensation
   awarded to nonemployees is accounted for using the "fair value" method.

   NEW ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting
   Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments
   and Hedging Activities," which will require recognition of all derivatives as
   either assets or liabilities on the balance sheet at fair value.  The Company
   is currently evaluating the effect, if any, of implementing SFAS No. 133,
   which will be effective for fiscal 2000.

   RECLASSIFICATIONS--Certain reclassifications have been made to the prior
   year's financial statements to conform to the 1998 presentation.

2. INVENTORIES

   Inventories at August 31 consist of the following:

<TABLE> 
<CAPTION> 
                                                             1998             1997   
<S>                                                       <C>             <C>        
          Raw materials and subassemblies                $  455,740        $  785,088
          Work in process                                    79,935            83,959
          Finished goods                                    210,895           209,514 
                                                         ----------        ----------  
                                                         $  746,570        $1,078,561 
                                                         ==========        ==========
</TABLE> 

3. EQUIPMENT AND FURNITURE

   Equipment and furniture at August 31 consist of the following:

<TABLE>   
<CAPTION> 
                                                             1998              1997    
<S>                                                       <C>               <C>          
          Machinery and equipment                        $  902,769        $  783,880  
          Office furniture and equipment                    632,393           582,116  
                                                         ----------        ----------  
                                                          1,535,162         1,365,996  
                                                                                       
          Less accumulated depreciation and 
             amortization                                (1,166,197)       (1,008,707) 
                                                         ----------        ----------  
                                                         $  368,965        $  357,289  
                                                         ==========        ==========
</TABLE>

                                      F-9
<PAGE>
 
4. ACCRUED EXPENSES

   Accrued expenses at August 31 consist of the following:
 
<TABLE> 
<CAPTION> 
                      
                                                       1998             1997
<S>                                                <C>              <C> 
   Payroll and related amounts                     $  235,629       $ 183,492
   Warranty                                           651,077         528,430
   Professional fees                                  152,301         119,965
   Other                                               50,260          15,323 
                                                   ----------       ---------
                                                   $1,089,267       $ 847,210 
                                                   ==========       =========
</TABLE> 

5. LONG-TERM OBLIGATIONS

   Long-term obligations at August 31 consist of the following:
<TABLE>
<CAPTION>
                                                                  1998            1997    
<S>                                                           <C>              <C>
Capitalized lease obligations, 7%-18%, due through                             
  April 2001 (Note 7)                                           $ 38,134        $ 60,627  
Equipment line of credit, 8.5% (Note 6)                           90,160          24,352  
Collateralized 8-13% equipment loans, final payments                           
  through November 2001                                           18,595           5,602  
Other                                                                 -           14,000  
                                                               ---------        --------  
                                                                 146,889         104,581  
Less current portion                                             (64,030)        (36,212) 
                                                               ---------        --------   
                                                                $ 82,859        $ 68,369   
                                                               =========        ========  
</TABLE>

   The aggregate principal payments on long-term obligations as of August 31,
   1998, excluding capital leases, are $43,084 in 1999, $43,514 in 2000, $20,550
   in 2001 and $1,607 in 2002.

   Capital lease and equipment loans at August 31, 1998 are collateralized by
   the related equipment with a carrying value of approximately $152,000.

6. BANK ARRANGEMENTS

   As of August 31, 1998, the Company had a bank working capital demand line of
   credit that provided for borrowings up to $1,000,000 and a $225,000 equipment
   line of credit.  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 August 31, 1998, no borrowings have been
   made under the working capital line of credit and the Company has $90,160 in
   borrowings under the equipment line of credit at an interest rate of 8.5%
   which is payable in monthly installments through April 2001.

                                      F-10
<PAGE>
 
7. COMMITMENTS

   LEASES--The Company leases an administrative and production facility under an
   operating lease which expires in April 2000.  The Company is responsible for
   certain real estate taxes, utilities and maintenance costs.  Total rental
   expense for operating leases for the years ended August 31, 1998, 1997 and
   1996 amounted to $138,322, $137,033 and $102,198, respectively.

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

   Future minimum lease payments under noncancelable lease terms in excess of
   one year at August 31, 1998 are as follows:

<TABLE> 
<CAPTION> 

                                          CAPITAL       OPERATING
                                          LEASES         LEASES
<S>                                     <C>           <C> 
1999                                     $ 24,486       $  91,997
2000                                       12,761          57,498
2001                                        6,042              - 
                                         --------       ---------
Total minimum lease payments               43,289       $ 149,495 
                                                        =========
Less interest                              (5,155) 
                                         --------
Net minimum lease payments                 38,134
                                 
Less current portion                      (20,946) 
                                         --------  
Long-term portion                        $ 17,188 
                                         ========

</TABLE> 

   EMPLOYMENT AGREEMENTS--The Company has an employment agreement with an
   officer of the Company providing minimum annual aggregate compensation of
   $140,000 in 1999 and 2000, and $47,000 in 2001.

8. INCOME TAXES

   The provision for income taxes, including income taxes on extraordinary gain
   in 1997, is comprised of the following for the years ended August 31:

<TABLE>
<CAPTION>
   
                                          1998           1997           1996    
<S>                                    <C>            <C>            <C>
Current:                                                                        
  Federal                               $  15,000      $  2,000       $  4,000  
  State                                    95,000        36,000         36,000  
  Foreign                                  11,000         1,000              - 
                                        ---------      --------       --------  
                                        $ 121,000      $ 39,000       $ 40,000  
                                        =========      ========       ========  
</TABLE>                   

                                      F-11
<PAGE>
 
8. INCOME TAXES (CONTINUED)

   The Company's effective tax rate differs from the statutory federal income
   tax rate due to the following for the years ended August 31:

<TABLE> 
<CAPTION> 
                                                                                1998        1997        1996
<S>                                                                       <C>          <C>         <C> 
    Statutory federal income tax rate                                           34.0 %       34.0 %      34.0 %
    State income taxes, net of federal benefit                                   9.6         21.4        11.8
    Amortization of goodwill                                                     4.5         27.2        14.6
    Federal alternative minimum and foreign taxes                                2.6          1.8         1.3
    Utilization of federal net operating loss carryforwards            
      and tax credits                                                          (39.4)       (55.5)      (47.0)
    Other                                                                        7.3          6.2         5.1 
                                                                               -----        -----       -----
    Effective tax rate                                                          18.6 %       35.1 %      19.8 %
                                                                               =====        =====       =====
</TABLE> 

As of August 31, 1998, the Company has net operating loss carryforwards for
financial reporting and income tax purposes of approximately $1,224,000,
expiring in varying amounts from 2003 to 2010 (primarily 2003 to 2008).
Aggregate investment and research and development credit carryforwards of
$78,000 at August 31, 1998 expire in varying amounts through the year 2005.
The Company also has $394,000 of federal net operating loss carryforwards
which are limited to use against income of Ecco.

Net operating loss carryforwards are limited in the event of certain
circumstances, including significant changes in ownership interests.  Upon
completion of the Company's 1987 public offering and 1990 acquisition of
Ecco, the maximum net operating loss carryforward that may be used in any
year for losses incurred prior to the aforementioned events is approximately
$212,000.  However, use of the Company's net operating loss carryforwards,
incurred since the completion of the 1987 offering and 1990 acquisition,
approximating $727,000, will not be limited in any year.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts for income tax purposes.  Valuation
allowances have been recorded to offset net deferred tax assets due to the
uncertainty of realizing the benefit of these assets.

The following is a summary of the significant components of the Company's
deferred tax assets and liabilities at August 31,:

<TABLE>
<CAPTION>
                                                           1998              1997
<S>                                                 <C>                  <C>         
Deferred tax assets (liabilities):                                                   
  Net operating loss carryforwards                    $   550,000        $   718,000 
  Tax credits                                              78,000             78,000 
  Accounts receivable reserves                             70,000             58,000 
  Inventories and related reserves                        359,000            282,000 
  Other                                                   (17,000)           (25,000)
  Depreciation                                             31,000             20,000 
  Valuation allowance                                  (1,071,000)        (1,131,000) 
                                                      -----------         ---------- 
                                                      $         -          $       -
                                                      ===========         ==========  
</TABLE> 

                                      F-12
<PAGE>
 
9. CAPITAL TRANSACTIONS

   COMMON STOCK--In January 1996, the Company sold, in a private placement,
   68,182 shares of restricted common stock for net proceeds of $89,057,
   including issuance costs of $943.

   STOCK OPTIONS--In 1983, the Company approved and reserved shares of common
   stock for an incentive stock option plan for key employees.  No option may be
   granted to any employee who owns in excess of 10% of the total outstanding
   voting stock.  No option granted under the plan shall have a term in excess
   of ten years.  The purchase price per share for the stock options shall not
   be less than the fair market value of the common stock at the time of grant.

   Since 1988, the Company has approved and reserved shares of common stock for
   nonqualified stock option plans for the benefit of certain employees,
   nonemployee directors, and key advisors.  The option plans are administered
   by a committee appointed by the Board of Directors (the "Committee"), which
   determines the terms of options including the exercise price, expiration date
   (no longer than 10 years), number of shares and vesting provisions.  All
   options vest at the rate of 25% per year with the exception of options issued
   to certain officers, nonemployee directors and key advisors with vesting
   provisions established by the Committee.  At August 31, 1998, 22,922 shares
   remain available for future grants.

   A summary of activity of the stock option plans is as follows:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED AVERAGE      
                                                                                      EXERCISE          
                                                                   SHARES          PRICE PER SHARE      
    <S>                                                         <C>              <C>                 
    Outstanding, September 1, 1995                                271,573             $ 1.29            
      Granted (weighted-average fair value of $0.89)               84,200               1.44            
      Canceled                                                    (41,739)              1.53            
                                                                 --------                               
    Outstanding, August 31, 1996                                  314,034               1.30            
      Granted (weighted-average fair value of $0.94)               38,000               2.12            
      Canceled                                                    (30,300)              1.65            
                                                                 --------                               
    Outstanding, August 31, 1997                                  321,734               1.37              
                                                                                                        
      Granted (weighted-average fair value of $1.01)               61,500               1.50              
      Canceled/expired                                            (61,467)              1.27            
                                                                 --------                               
    Outstanding, August 31, 1998                                  321,767             $ 1.41            
                                                                 ========             ====== 
</TABLE> 

                                      F-13
<PAGE>
 
9. CAPITAL TRANSACTIONS (CONTINUED) 
                             
    STOCK OPTIONS (CONTINUED)- 
 
    The following table summarizes information concerning outstanding and
    exercisable options as of August 31, 1998:                           

<TABLE> 
<CAPTION> 

                                       OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                         ------------------------------------------------     --------------------------------
                                           WEIGHTED
                                            AVERAGE
                                           REMAINING
                                          CONTRACTUAL      WEIGHTED                         WEIGHTED
        RANGE OF            NUMBER           LIFE           AVERAGE        NUMBER            AVERAGE
      EXERCISE PRICE(S)   OUTSTANDING       (YEARS)     EXERCISE PRICE   EXERCISABLE     EXERCISE PRICE
--------------------------------------------------------------------------------------------------------------
<S>                       <C>               <C>              <C>            <C>             <C>     
       $ .72 -$1.00         78,350          3.84             $ .81           77,225           $ .81
        1.01-  2.00        177,213          6.88              1.41           92,648            1.36
        2.01-  2.17         65,833          5.88              2.10           45,583            2.08
           6.48                371          1.79              6.48              371            6.48
                           -------                                          -------                
                           321,767          5.93            $ 1.41          215,827          $ 1.33 
                           =======          ====            ======          =======          ====== 
</TABLE> 

   STOCK WARRANTS--In September 1995, the Company granted warrants to a
   financial consultant to purchase 1,000 shares of common stock at an exercise
   price of $1.36 per share, exercisable for a ten-year period.

   In January 1996, the Company granted warrants to a public relations firm to
   purchase 10,000 shares of common stock at an exercise price of $1.65 per
   share exercisable for a ten-year period.  Pursuant to SFAS No. 123, the
   Company recorded compensation expense of $11,000 for the year ended August
   31, 1996 in connection with the issuance of these warrants.

   In September 1996, the Company granted warrants to two officers to purchase
   an aggregate 19,000 shares of common stock at an exercise price of $2.12 per
   share, exercisable for a ten-year period.  Each of the warrants was assigned
   a value of $.10 per share which was paid by the officers.

   In August 1997, the Company granted warrants to a financial consultant to
   purchase 3,500 shares of common stock at an exercise price of $1.69,
   exercisable for a ten-year period.  The Company valued these warrants and
   recorded compensation expense of $1,882 and $1,626 for the years ended August
   31, 1998 and 1997, respectively.

   In June 1998, the Company granted warrants to a financial consultant to
   purchase 6,667 shares of common stock at an exercise price of $1.67,
   exercisable for a ten-year period.  Pursuant to SFAS No. 123, the Company
   valued these warrants and recorded compensation expense of $10,000 for the
   year ended August 31, 1998.

   The Company has granted rights to certain warrant holders with respect to the
   registration of such shares underlying the warrants with the Securities and
   Exchange Commission.

                                      F-14
<PAGE>
 
9. CAPITAL TRANSACTIONS (CONTINUED)

   The following is a summary of transactions relating to the Company's
   outstanding common stock warrants:

<TABLE> 
<CAPTION> 
                                                                                      PRIVATE
                                       CONSULTANTS       OFFICERS          DEBT      PLACEMENTS        TOTAL
<S>                                    <C>             <C>             <C>         <C>             <C> 
Outstanding, September 1, 1995             40,238          25,000          2,512       16,200          83,950
  Exercised                                     -               -              -      (16,200)        (16,200)
  Granted (weighted-average
    fair value of $1.12)                   11,000               -              -            -          11,000 
                                        ---------       ---------      ---------    ---------       ---------  
Outstanding, August 31, 1996               51,238          25,000          2,512            -          78,750
  Expired                                  (3,571)              -              -            -          (3,571)
  Granted (weighted-average
    fair value of $2.05)                    3,500          19,000              -            -          22,500 
                                        ---------       ---------      ---------    ---------       ---------  

Outstanding, August 31, 1997               51,167          44,000          2,512            -          97,679
  Expired                                  (6,667)         (9,000)             -            -         (15,667)
  Granted (weighted-average
    fair value of $1.13)                    6,667               -              -            -           6,667 
                                        ---------       ---------      ---------    ---------       ---------  

Outstanding, August 31, 1998
  (weighted-average exercise
    price of $1.22)                        51,167          35,000          2,512           -           88,679 
                                        =========       =========      =========    =========       ========= 
Exercisable                                49,417          27,500          2,512           -           79,429 
                                        =========       =========      =========    =========       ========= 

Exercise price(s)                     $.72 - $2.07    $.74 - $2.12         $ .99            -     $.72 - $2.12
                                      ============    ============     =========    =========     ============ 

</TABLE> 
   EMPLOYEE STOCK-BASED COMPENSATION--With respect to employee and directors'
   stock-based compensation, the Company has adopted the disclosure only
   requirements of SFAS No. 123. Accordingly, no compensation cost has been
   recognized in the accompanying consolidated financial statements for employee
   and directors' stock-based compensation awarded under employee stock option
   plans. If compensation cost had been determined for awards granted commencing
   September 1, 1995 under the Company's employee and directors' stock option
   plans based on the fair value of the awards at the date of grant in
   accordance with the provisions of SFAS No. 123, the Company's net income and
   net income per share for the years ended August 31, 1998, 1997 and 1996 would
   have decreased to the pro forma amounts indicated below: 

<TABLE> 

                                                              1998            1997           1996
<S>                                                   <C>               <C>            <C> 
   Net income - as reported                               $ 530,129        $ 70,144       $ 161,990
   Net income - pro forma                                   484,380          39,634         141,458
   Net income per share - diluted - as reported                0.34            0.04            0.10
   Net income per share - diluted - pro forma                  0.31            0.02            0.09
</TABLE> 

   The pro forma disclosures presented are not necessarily representative of the
   effects on reported net income for future years.

                                      F-15
<PAGE>
 
9. CAPITAL TRANSACTIONS (CONTINUED)

   EMPLOYEE STOCK-BASED COMPENSATION (CONTINUED)--The fair value of each option
   grant is estimated on the date of the grant using the Black-Scholes option-
   pricing model with an assumed risk-free interest rate of 5.5%  in 1998, 6% in
   1997, and 7% in 1996, an expected life of five years, an expected volatility
   of 80% in 1998, 42% in 1997, and 80% in 1996 and assumes no dividends will be
   paid.

 
<TABLE> 
<CAPTION> 
   COMMON STOCK RESERVED            SHARES
<S>                            <C> 
   Stock warrants                    88,679
   Stock options                    344,689 
                                   --------
                                    433,368 
                                   ========    
</TABLE> 

10. BENEFIT PLAN 
                 
   The Company sponsors a savings plan for its employees which has been
   qualified under Section 401(k) of the Internal Revenue Code. Eligible
   employees are permitted to contribute to the 401(k) plan through payroll
   deductions within statutory and plan limits. Contributions from the Company
   are made at the discretion of the Board of Directors. The Company has made no
   contributions to the 401(k) plan to date.
   
11. VENDORS, CUSTOMER AND INTERNATIONAL SALES 
                                              
   The Company is dependent upon sole source suppliers for a number of key
   components of its 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 at favorable terms. Any extended
   interruption in the supply of any such components or any significant price
   increase could have a material adverse effect on the Company's operating
   results in any given period.
   
   Sales to one customer accounted for 36% of net sales in 1998 and 1997, and
   33% of net sales in 1996. The accounts receivable from this customer amounted
   to approximately $207,000 and $402,000 at August 31, 1998 and 1997,
   respectively.

   The Company sources a significant amount of components and maintains certain
   molds for its products in Asia. The Company believes that such sourcing
   reduces its cost of sales through lower parts, labor and tooling costs. There
   can be no guarantee that the Asian political or economic environment will
   remain sufficiently stable to allow reliable and consistent delivery of
   product. Any extended interruption in the supply or significant increase in
   the price of any such components could have a material adverse effect on the
   Company's operating results in any given period. International sales,
   primarily to Canada, Europe and Asia, were approximately $1,196,000 in 1998,
   $1,435,000 in 1997 and $1,057,000 in 1996.
   
12. OTHER INCOME 
                 
   Other income consists of the following for the years ended August 31: 
                                                                         
 <TABLE>                                                                 
 <CAPTION>                                                               
                          1998          1997           1996  
 <S>                 <C>            <C>            <C>       
   Interest               $ 26,248       $ 7,592        $ 6,641
   Commissions               3,357        13,818         21,736
   Other                     8,318             -              - 
                          --------      --------       -------- 
                          $ 37,923      $ 21,410       $ 28,377 
                          ========      ========       ======== 
</TABLE> 

                                  * * * * * *

                                      F-16
<PAGE>
 
                  FINANCIAL STATEMENT SCHEDULE
                  FURNISHED PURSUANT TO THE
                  REQUIREMENTS OF FORM 10-KSB

                                      F-17
<PAGE>
 
                                                                     SCHEDULE II

INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

                                                                          ADDITIONS
                                                BALANCE AT      CHARGED TO       CHARGED TO                       BALANCE AT
                                                BEGINNING        COSTS AND         OTHER         DEDUCTIONS         END OF
                 DESCRIPTION                     OF YEAR         EXPENSES         ACCOUNTS          (A)              YEAR

<S>                                            <C>              <C>                <C>          <C>                  <C> 
Allowance for doubtful accounts and returns:

  August 31, 1998                                 $ 185,000        $ 35,000              $ -       $ (44,000)       $ 176,000

  August 31, 1997                                   131,000          74,000                -         (20,000)         185,000

  August 31, 1996                                   113,000          44,000                -         (26,000)         131,000

</TABLE> 

(A)  Net write-offs of bad debts (net of recoveries) and returns.

                                     F-18