UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C.  20549




FORM 10-Q




______________________






Quarterly
Report Pursuant to Section 13 or 15(d) of the


Securities
Exchange Act of 1934




For
the Quarterly Period Ended December 31, 2009




Commission
File Number 33-16531-D




INTERNATIONAL AUTOMATED
SYSTEMS, INC.


(Exact
name of registrant as specified in its charter)





Utah
            87-0447580(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)




326 North SR 198, Salem,
Utah 84653


(Address
of principal executive offices, including zip code)




(801)
423-8132


(Registrant’s
telephone number, including area code)






Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.  Yes x  No o




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




o Large
      accelerated filer
            o Accelerated
      filer
            o Non-accelerated
      filer
            x Smaller
      reporting company





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




State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.




Class
            Outstanding as of
      January 31, 2010Common
      Stock, no par value
            39,846,140
      shares





INTERNATIONAL
AUTOMATED SYSTEMS, INC.


(A
Development Stage Company)














TABLE   OF
CONTENTS














PART
      I – FINANCIAL INFORMATIONItem
      1: Financial StatementsUnaudited
      Condensed Balance SheetsAs
      of December 31, 2009 (unaudited) and June 30, 2009
    (audited)
            1Unaudited
      Condensed Statements of OperationsFor
      the three and six months ended December 31, 2009 and 2008 and for the
      Period from September 26, 1986 (Date of Inception) through December 31,
      2009
            2Unaudited
      Condensed Statements of Cash FlowsFor
      the six months ended December 31, 2009 and 2008 and for the Period from
      September 26, 1986 (Date of Inception) through December 31,
      2009
            3Notes
      to Unaudited Condensed Financial Statements
            4Item
      2:  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            8Item
      4T:  Controls and Procedures
            10PART
      II – OTHER INFORMATIONItem
      1:  Legal Proceedings
            10Item
      2:  Unregistered Sales of Securities and Use of
      Proceeds
            10Item
      3:  Defaults Upon Senior Securities
            10Item
      4:  Submission of Matters to a Vote of Security
      Holders
            10Item
      5:  Other Information
            10Item
      6:  Exhibits
            10Signatures
            11










INTERNATIONAL AUTOMATED SYSTEMS,
INC.


(A
Development Stage Company)


Condensed
Balance Sheets





December
      31,
            
            
            June
      30,2009
            
            
            2009(unaudited)
            
            
            (audited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
            
            $
            155,872
            
            
            $
            47,537Prepaid
      expenses
            
            
            2,000
            
            
            
            11,833Total
      Current Assets
            
            
            157,872
            
            
            
            59,370Alternate
      solar energy systems
            
            
            511,215
            
            
            
            413,520Property
      and Equipment, net of accumulated depreciation of $336,950 and
      $291,390, respectively
            
            
            451,889
            
            
            
            481,512Patents,
      net of accumulated amortization of $23,649 and $20,825,
      respectively
            
            
            72,377
            
            
            
            75,201TOTAL
      ASSETS
            
            $
            1,193,353
            
            
            $
            1,029,603LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
            
            $
            118,021
            
            
            $
            417,136Accrued
      liabilities
            
            
            239,285
            
            
            
            181,327Related
      party payable - Note 8
            
            
            721,995
            
            
            
            505,382Customer
      deposits - Note 9
            
            
            2,360,250
            
            
            
            1,757,250Notes
      payable-current portion
            
            
            50,487
            
            
            
            52,543Total
      Current Liabilities
            
            
            3,490,038
            
            
            
            2,913,638Long-term
      notes payable
            
            
            83,834
            
            
            
            96,682TOTAL
      LIABILITIES
            
            
            3,573,872
            
            
            
            3,010,320Commitments
      and contingencies - Note 6STOCKHOLDERS'
      EQUITY (DEFICIT)Preferred
      stock, Class A, no par value; 22,000,000 shares authorized,4,400,000 shares issued and outstanding
            
            
            417,264
            
            
            
            417,264Preferred
      stock, Class B, no par value, 3,000,000 sharesauthorized, 300,000
      shares issued and outstanding
            
            
            -
            
            
            
            -Common
      stock, no par value, 225,000,000 sharesauthorized,  34,984,422 and 34,501,322 issued and
      outstanding, net of 3,861,718 and 4,344,818 shares held in escrow account,
      respectively - Note 7
            
            
            35,297,961
            
            
            
            32,936,636Deficit
      accumulated during the development stage
            
            
            (38,095,744
            )
            
            
            (35,334,617
            )Total
      Stockholders' Deficit
            
            
            (2,380,519
            )
            
            
            (1,980,717
            )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            $
            1,193,353
            
            
            $
            1,029,603







See
accompanying notes to condensed financial statements.


1


INTERNATIONAL
AUTOMATED SYSTEMS, INC.


(A
Development Stage Company)


Unaudited
Condensed Statements of Operations




For
      the PeriodFrom
      InceptionFor
      the Three Months Ended
            
            
            For
      the Six Months Ended
            
            
            (September
      26,December
      31,
            
            
            December
      31,
            
            
            1986)
      Through2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            December
      31, 2009RevenuesSales
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            111,226Income
      from related party
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            32,348Total
      revenues
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            143,574Costs
      of salesCost
      of sales
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            81,927Write
      down of carrying valueof inventory
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            233,131Total
      costs of sales
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            315,058Gross
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (171,484
            )Operating
      expensesGeneral
      and administrative
            
            
            1,177,066
            
            
            
            1,641,929
            
            
            
            2,540,897
            
            
            
            3,276,543
            
            
            
            30,769,832Research
      and development
            
            
            101,975
            
            
            
            197,364
            
            
            
            216,371
            
            
            
            356,848
            
            
            
            7,839,210Impairment
      of patents
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            140,577License
      fees
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            270,634Loss
      (gain) on disposal ofproperty and equipment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            16,901Total
      operating expenses
            
            
            1,279,041
            
            
            
            1,839,293
            
            
            
            2,757,268
            
            
            
            3,633,391
            
            
            
            39,037,154Loss
      from operations
            
            
            (1,279,041
            )
            
            
            (1,839,293
            )
            
            
            (2,757,268
            )
            
            
            (3,633,391
            )
            
            
            (39,208,638
            )Other
      income (expenses)Loss
      on impairment of assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (583
            )Forfeiture
      of deposits
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (236,803
            )Interest
      income
            
            
            -
            
            
            
            38
            
            
            
            59
            
            
            
            74
            
            
            
            26,548Interest
      expense
            
            
            (2,078
            )
            
            
            (2,348
            )
            
            
            (4,608
            )
            
            
            (3,965
            )
            
            
            (27,705
            )Other
      income (expenses)
            
            
            416
            
            
            
            480
            
            
            
            690
            
            
            
            480
            
            
            
            (30,586
            )Total
      other income (expenses)
            
            
            (1,662
            )
            
            
            (1,830
            )
            
            
            (3,859
            )
            
            
            (3,411
            )
            
            
            (269,129
            )Loss
      before extraordinary gain
            
            
            (1,280,703
            )
            
            
            (1,841,123
            )
            
            
            (2,761,127
            )
            
            
            (3,636,802
            )
            
            
            (39,477,767
            )Extraordinary
      gain on sale of patents
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,382,023Net
      loss
            
            $
            (1,280,703
            )
            
            $
            (1,841,123
            )
            
            $
            (2,761,127
            )
            
            $
            (3,636,802
            )
            
            $
            (38,095,744
            )Net
      loss per common shareBasic
      and diluted
            
            $
            (0.04
            )
            
            $
            (0.06
            )
            
            $
            (0.08
            )
            
            $
            (0.12
            )Weighted
      average common shares outstandingBasic
      and diluted
            
            
            34,802,711
            
            
            
            31,605,767
            
            
            
            34,685,256
            
            
            
            31,411,898






See
accompanying notes to condensed financial statements.


2


INTERNATIONAL
AUTOMATED SYSTEMS, INC.


(A
Development Stage Company)


Unaudited
Condensed Statements of Cash Flows





For
      the PeriodFrom
      InceptionFor
      the Six Months Ended
            
            
            (September
      26,December
      31,
            
            
            1986)
      Through2009
            
            
            2008
            
            
            December
      31, 2009Cash
      flows from operating activitiesNet
      loss
            
            $
            (2,761,127
            )
            
            $
            (3,636,802
            )
            
            $
            (38,095,744
            )Adjustments
      to reconcile net loss to netcash from operating
      activities:Depreciation
      and amortization
            
            
            48,384
            
            
            
            44,114
            
            
            
            624,032Stock-based
      compensation
            
            
            2,161,861
            
            
            
            2,578,178
            
            
            
            22,225,079Forfeiture
      of deposits
            
            
            -
            
            
            
            -
            
            
            
            236,803Write
      down of carrying value of inventory
            
            
            -
            
            
            
            -
            
            
            
            16,945Write
      off of equipment to research and development
            
            
            -
            
            
            
            -
            
            
            
            23,900(Gain)
      / loss on disposal of equipment
            
            
            -
            
            
            
            -
            
            
            
            17,484Impairment
      of patents and abandonment of in-processrights to
      technology
            
            
            -
            
            
            
            -
            
            
            
            387,128Extraordinary
      gain on sale of patents
            
            
            -
            
            
            
            -
            
            
            
            (1,382,023
            )Gain
      on settlement of debt
            
            
            -
            
            
            
            -
            
            
            
            (6,123
            )Stock
      issued for services
            
            
            9,833
            
            
            
            -
            
            
            
            130,080Changes
      in current assets and liabilities:(Increase)
      / decrease in prepaid expenses
            
            
            -
            
            
            
            (2,000
            )
            
            
            (2,000
            )(Increase)
      / decrease in alternate solar energy systems
            
            
            (97,695
            )
            
            
            (68,228
            )
            
            
            (511,215
            )Increase
      / (decrease) in customer deposits
            
            
            603,000
            
            
            
            765,000
            
            
            
            2,360,250Increase
      / (decrease) in accounts payable
            
            
            (299,115
            )
            
            
            107,746
            
            
            
            118,021Increase
      / (decrease) in related party payable
            
            
            (5,000
            )
            
            
            21,999
            
            
            
            60,001Increase
      / (decrease) in accrued liabilities
            
            
            57,958
            
            
            
            205,453
            
            
            
            339,284Net
      cash provided by (used in) operating activities
            
            
            (281,901
            )
            
            
            15,460
            
            
            
            (13,458,098
            )Cash
      flows used in investing activitiesPurchase
      of property and equipment
            
            
            (15,937
            )
            
            
            -
            
            
            
            (770,473
            )Purchase
      of rights to technology
            
            
            -
            
            
            
            (3,683
            )
            
            
            (706,643
            )Organization
      costs
            
            
            -
            
            
            
            -
            
            
            
            (1,880
            )Net
      cash advanced to related party
            
            
            -
            
            
            
            -
            
            
            
            (1,644,988
            )Commitments
      and contingencies - Note 6
            
            
            -
            
            
            
            -
            
            
            
            44,220Proceeds
      from sale of equipment
            
            
            -
            
            
            
            -
            
            
            
            2,500Repayment
      of cash loaned to related party
            
            
            -
            
            
            
            -
            
            
            
            53,254Net
      proceeds from sale of patents
            
            
            -
            
            
            
            -
            
            
            
            1,382,023Net
      cash used in investing activities
            
            
            (15,937
            )
            
            
            (3,683
            )
            
            
            (1,641,987
            )Cash
      flows provided by financing activitiesProceeds
      from issuance of common stock
            
            
            199,464
            
            
            
            195,558
            
            
            
            5,988,695Proceeds
      from reissuance of treasury stock
            
            
            -
            
            
            
            -
            
            
            
            751,573Contributed
      capital
            
            
            -
            
            
            
            -
            
            
            
            6,270,559Payments
      for treasury stock
            
            
            -
            
            
            
            -
            
            
            
            (3,325
            )Payments
      for stock offering costs
            
            
            -
            
            
            
            -
            
            
            
            (56,509
            )Proceeds
      from cash advances from related party
            
            
            278,000
            
            
            
            353,002
            
            
            
            2,677,121Payments
      on cash advances from related party
            
            
            (56,387
            )
            
            
            (68,291
            )
            
            
            (329,668
            )Proceeds
      from notes payable
            
            
            -
            
            
            
            -
            
            
            
            29,857Payments
      on notes payable and capital lease obligations
            
            
            (14,904
            )
            
            
            (11,190
            )
            
            
            (228,005
            )Proceeds
      from related party deposits
            
            
            -
            
            
            
            -
            
            
            
            224,400Purchases
      of equipment held for distribution
            
            
            -
            
            
            
            -
            
            
            
            (68,741
            )Net
      cash provided by financing activities
            
            
            406,173
            
            
            
            469,079
            
            
            
            15,255,957Net
      change in cash
            
            
            108,335
            
            
            
            480,856
            
            
            
            155,872Cash
      at beginning of period
            
            
            47,537
            
            
            
            144,429
            
            
            
            -Cash
      at end of period
            
            $
            155,872
            
            
            $
            625,285
            
            
            $
            155,872





See
accompanying notes to condensed financial statements.


3





International
Automated Systems, Inc.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


December
31, 2009





NOTE
1 – INTERIM FINANCIAL STATEMENTS





The
accompanying condensed financial statements have been prepared without
audit.  In the opinion of management, all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the Company’s
condensed financial position, results of operations and cash flows as of the
dates and for the periods presented herein have been made.




Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission’s rules and regulations.  These
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company’s June 30, 2009 Annual
Report on Form 10-K.  The results of operations for the six
months ended December 31, 2009 are not necessarily indicative of the operating
results that may be expected for the year ending June 30, 2010.  The
Company’s significant accounting policies are set forth in Note 1 to the
financial statements in the June 30, 2009 Annual Report on
Form 10-K.




NOTE
2 - BUSINESS CONDITION/GOING CONCERN





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.  As of December 31, 2009 the Company
had $155,872 of cash available and had a working capital deficit of $3,332,166.
The Company had no revenue and no operating income for the six months ended
December 31, 2009 and 2008. As of December 31, 2009 the Company’s losses
accumulated from inception and cash used in operating activities totaled
$38,095,744 and $13,458,098, respectively. These factors, among others, indicate
that the Company may be unable to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company’s ability to continue as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain successful operations. Management is in the
process of negotiating various sales agreements and is hopeful these sales will
generate sufficient cash flow for the Company to continue as a going concern. If
the Company is unsuccessful in these efforts and cannot attain sufficient sales
to permit profitable operations or if it cannot obtain a source of funding or
investment, it may substantially curtail or terminate its
operations.





NOTE
3 – ACCOUNTING PRONOUNCEMENTS





Adoption
of New Accounting Pronouncements




In June
2009, the FASB issued guidance under Accounting Standards Codification (“ASC”)
Topic 105, “Generally Accepted Accounting Principles” (SFAS No. 168, The
FASB Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles). This guidance
establishes the FASB ASC as the single source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative U.S. GAAP for SEC registrants. SFAS 168 and the
ASC are effective for financial statements issued for interim and annual periods
ending after September 15, 2009. The ASC supersedes all existing non-SEC
accounting and reporting standards. All other non-grandfathered, non-SEC
accounting literature not included in the ASC have become non-authoritative.
Following SFAS 168, the FASB will no longer issue new standards in the form of
Statements, FSPs, or EITF Abstracts. Instead, the FASB will issue Accounting
Standards Updates, which will serve only to update the ASC, provide background
information about the guidance, and provide the bases for conclusions on the
change(s) in the ASC. The Company adopted ASC 105 effective for its financial
statements issued as of September 30, 2009. The adoption of this guidance did
not have an impact on the Company’s financial statements but will alter the
references to accounting literature within the financial
statements.





In April
2009, the FASB issued guidance under ASC 825-10, Financial Instruments (FSP
SFAS 107-1 and APB Opinion No. 28-1, “Interim Disclosures about Fair Value of
Financial Instruments”).  This guidance amends FASB Statement No. 107,
“Disclosures about Fair Values of Financial Instruments,” to require disclosures
about fair value of financial instruments in interim financial statements as
well as in annual financial statements.  The guidance is effective for
interim periods ending after June 15, 2009. The Company adopted this
guidance for the period ending September 30, 2009 and included the required
disclosures in Note 10.


4





In April 2009, the FASB issued
guidance under ASC 820, Fair
Value Measurements and Disclosures,(FSP SFAS 157-4, “Determining Whether
a Market Is Not Active and a Transaction Is Not Distressed”).  This
guidance provides guidelines in determining whether a market for a financial
asset is not active and a transaction is not distressed for fair value
measurement purposes as defined in the previous standard SFAS 157, “Fair Value
Measurements.”  This guidance is effective for interim periods ending
after June 15, 2009, and the Company adopted the guidance for the period ending
September 30, 2009.  This guidance did not have a significant impact
on the Company’s financial statements.





In April
2009, the FASB issued guidance under ASC 320, Investments – Debt and Equity
Securities(FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments”).  This guidance provides clarity
and consistency in determining whether impairments in debt securities are other
than temporary, and modifies the presentation and disclosures surrounding such
instruments.  This guidance is effective for interim periods ending
after June 15, 2009, and the Company adopted its provisions for first quarter
2010.  This guidance did not have a significant impact on the
Company’s financial statements.




In August
2009, the FASB issued guidance under Accounting Standards Update (“ASU”) No.
2009-05, “Measuring Liabilities at Fair Value”.  This guidance
clarifies how the fair value a liability should be determined.  This
guidance is effective for the first reporting period after
issuance.  The Company adopted this guidance for its second fiscal
quarter 2010. This guidance did not have a significant impact on the
Company’s financial statements.





Recent
Accounting Pronouncements





In June
2009, the FASB issued guidance under SFAS No. 166, “Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 166”), which
was subsequently codified into ASC Topic 860.  SFAS 166 amends SFAS
140 by including: the elimination of the qualifying special-purpose entity
(QSPE) concept; a new participating interest definition that must be met for
transfers of portions of financial assets to be eligible for sale accounting;
clarifications and changes to the derecognition criteria for a transfer to be
accounted for as a sale; and a change to the amount of recognized gain or loss
on a transfer of financial assets accounted for as a sale when beneficial
interests are received by the transferor.  Additionally, the standard
requires extensive new disclosures regarding an entity’s involvement in a
transfer of financial assets.  Finally, existing QSPEs (prior to the
effective date of SFAS 166) must be evaluated for consolidation by reporting
entities in accordance with the applicable consolidation guidance upon the
elimination of this concept.  This guidance is effective for the Company
beginning on July 1, 2010.  The Company has not yet determined the
impact that adoption of this guidance will have on its financial
statements.
 
 In June
2009, the FASB issued guidance under SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)”, which was subsequently codified into ASC Topic 810.
Among other items, this guidance responds to concerns about the application of
certain key provisions of FIN 46(R), including those regarding the transparency
of the involvement with variable interest entities. This guidance is
effective for the Company beginning on July 1, 2010.  The Company has
not yet determined the impact that adoption of this guidance will have on its
financial statements.
 
 In
October, 2009, the FASB issued ASC Update 2009-13, “Multiple-Deliverable Revenue
Arrangements” (“ASC Update 2009-13”). This guidance provides amendments to the
criteria in Subtopic 605-24 for separating consideration in multiple-deliverable
revenue arrangements. It establishes a hierarchy of selling prices to determine
the selling price of each specific deliverable which includes vendor-specific
objective evidence (if available), third-party evidence (if vendor-specific
evidence is not available) or estimated selling price if neither of the first
two are available.  The guidance also eliminates the residual method
for allocating revenue between the elements of an arrangement and requires that
arrangement consideration be allocated at the inception of the arrangement.
Finally, the guidance expands the disclosure requirements regarding a vendor’s
multiple-deliverable revenue arrangements.  ASC Update 2009-13 should
be applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
The Company is evaluating the impact of the adoption of this guidance on its
financial statements.




In
October, 2009, the FASB issued ASC Update 2009-14, “Certain Revenue Arrangements
That Include Software Elements” (“ASC Update 2009-14”).  This guidance
amends existing guidance to exclude tangible products that include software and
non-software components that function together to deliver the product’s
essential functionality. ASC Update 2009-14 shall be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010.  The Company does not
expect the adoption of this guidance to have material impact on its financial
statements.


5





NOTE
4 – BASIC AND DILUTED NET LOSS PER COMMON SHARE





The basic
earnings per common share is computed by dividing the net loss applicable to
common shares by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing the net income or loss by the
sum of the weighted average number of common shares plus the weighted average
common stock equivalents which would arise from the exercise of outstanding
stock options, issuance of stock held in trust and conversion of Series B
Preferred Shares into options, using the treasury stock method and the average
market price per share during the period.





As a
result of incurring a net loss for the three and six months ended December 31,
2009 and 2008, no outstanding common stock equivalents are included in the
calculation of diluted earnings per share because such effect would be
anti-dilutive. The Company had outstanding stock options and warrants to
purchase a total of 95,900,000 and 97,475,000 shares of common stock at December
31, 2009 and 2008, respectively, which are not included in the basic earnings
per share calculation.  The Company had 3,861,718 and 4,963,918 shares
of stock held in trust at December 31, 2009 and 2008, respectively, which are
not included in the basic earnings per share calculation because they would be
anti-dilutive.  The Company had 300,000 Series B Preferred Shares that
are convertible into options to purchase 600,000 shares of common stock at
December 31, 2009 and 2008, which are not included in the basic earnings per
share calculation.





NOTE
5 – STOCK-BASED COMPENSATION





The
Company accounts for stock-based compensation in accordance with Accounting
Standards Codification (“ASC’) Topic 718.  The Company estimated the
fair value of options and warrants granted under stock-based compensation
arrangements at the grant date using the Black-Scholes model.  For the
six months ended December 31, 2009 and 2008, total stock-based compensation
expense recognized was $2,161,861 and $2,578,178, respectively.  For
the three months ended December 31, 2009 and 2008, total stock-based
compensation expense recognized was $1,079,096 and $1,287,032,
respectively.  Stock-based compensation was included in general and
administrative expenses.




During
the six months ended December 31, 2009 and 2008, there were no stock options or
warrants granted or exercised. 100,000 stock options vested during the six
months ended December 31, 2009 and 2008.




As of
December 31, 2009, there was $11,729 of total unrecognized compensation cost
related to non-vested stock-based compensation awards granted.  The
compensation cost is expected to be recognized over a weighted average period of
..25 years.




NOTE
6 – COMMITMENTS AND CONTINGENCIES





Sales Commitments- During
December 2005, the Company entered into a purchase and installation contract
with Solar Renewable Energy-1, LLC for a solar thermal power plant. The contract
is contingent on several factors and provides for certain progress payments. As
of December 31, 2009, the Company has not provided any services or equipment
required under this agreement and has recognized no revenues.




The
Company has entered into several solar lease bonus fee contracts with many of
the customers who made deposits on the alternate solar energy system discussed
in Note 9.  As additional consideration for making the deposit and
making the solar alternate energy system available to the Company as a reference
for marketing and sales purposes to show and demonstrate, the Company has agreed
to pay many of the customers a referral fee of .009% each on the first one
billion dollars of total gross sales revenue received by the Company for the
sale of power generation equipment.




Notes Payable – The Company
has entered into two notes payable with financing companies collateralized by a
deed of trust covering the underlying property.  The total amount owed
for the land notes payable at December 31, 2009 was $96,548.  Both
notes payable mature in fiscal year 2017.





The
Company entered into a note payable with a company to purchase equipment during
March 2009.  The note payable bears interest at a weighted average
interest rate of 4.65% and is payable in monthly installments of
$4,000.  The total amount owed for the equipment note payable was
$37,773 at December 31, 2009.  The note payable matures in October
2010.





Employment Agreement - The
Company has entered into an agreement with its president and CEO for a period of
ten years starting in July 2000. Per the agreement, the president is to be paid
$100,000 per anum and shall increase each calendar year by the percentage
increase in the Consumer Price Index.  The president may terminate the
agreement, but must give the Company six months advance notice.  The
Company can not voluntarily terminate its president’s employment for any
reason.  No additional payments are outlined in the agreement for a
change in control. The Company accrued $187,500 for services rendered by its
president during fiscal year 2009 and the fiscal year-to-date 2010, which is
included in accrued liabilities at December 31, 2009.


6





NOTE
7 - STOCKHOLDERS EQUITY





Common Stock Issued for Cash—
The Company has shares of common stock in escrow accounts. Proceeds from the
sale of stock from these escrow accounts are placed in separate escrow accounts
to be used at the Company’s and the trustee’s discretion. During the six months
ended December 31, 2009, 483,100 shares were sold for proceeds of $199,464 at
prices ranging from $0.31 to $.62 per share.  During the six months
ended December 31, 2008, 625,900 shares were sold for proceeds of $195,558 at
prices ranging from $0.16 to $0.47 per share.   The proceeds were used to
pay professional fees, rent, operating expenses and accrued liabilities.
  At December 31, 2009, there was a balance of 3,861,718 shares in the
escrow accounts.  These shares are not accounted for as issued or
outstanding common shares.





NOTE
8 – RELATED PARTY TRANSACTIONS





The
Company received cash advances of $278,000 and $353,002 from its president
during the six months ended December 31, 2009 and 2008.  The advances
are non-interest bearing, payable upon demand and included in related party
payables.  During the six months ended December 31, 2009, the Company
settled $56,387 of the cash advances by paying the president’s personal
expenses.  During the six months ended December 31, 2008, the Company
settled $68,291 of the cash advances by paying the president’s personal
expenses. As of December 31, 2009 and 2008, the cash advance balance, included
in related party payable, was $661,995 and $1,058,711,
respectively.





During
2003, the Company commenced leasing office and research and development space on
a month-to-month basis from the president and a third party.  The
lease is an operating lease and rent expense is $6,000 per month to the
President and $6,200 per month to the third party.  The amount payable
to the president for rent at December 31, 2009 and 2008 was $60,000 and
$130,000, respectively, and is included in related party payable.





NOTE
9 – DEPOSITS FROM CUSTOMERS





During
the six months ended December 31, 2009 and 2008, the Company received deposits
from customer totaling $621,000 and $765,000, respectively, and refunded
deposits totaling $18,000 and $0, respectively, relating to contract agreements
to build, install and maintain alternate solar energy systems.





The total
amount of customer deposits at December 31, 2009 was $2,360,250.  The
agreements provide that the Company will deliver, install and startup the
alternate solar energy system.  The Company has and continues to work
toward delivering, installing and starting up the alternate solar energy system,
but the energy output has not been verified.  Therefore, for all of
these agreements, the customers may request a return of their deposits since the
Company has not verified output of the energy.





NOTE
10 – FAIR VALUE OF FINANCIAL INSTRUMENTS





The
Company’s financial instruments consist of cash and cash equivalents, payables,
and notes payable.  The carrying amount of cash and cash equivalents
and payables approximates fair value because of the short-term nature of these
items.  The carrying amount of the notes payable approximates fair
value as the individual borrowings bear interest at rates that approximate
market interest rates for similar debt instruments.





NOTE
11 – SUBSEQUENT EVENTS





In
preparing the accompanying financial statements, the Company has reviewed, as
determined necessary by the Company’s management, events that have occurred
after December 31, 2009, up until the issuance of the financial statements,
which occurred on February 16, 2010.  The Company’s President
exercised 1,000,000 of his warrants with an exercise price of $0.40 on January
13, 2010 in exchange for settlement of $400,000 of the cash advances discussed
in Note 8.




7




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




This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this quarterly report on Form 10-Q contain
forward-looking statements that involve risks and uncertainties. 
Forward-looking statements can also be identified by words such as “intends,”
“anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar
terms.  Forward-looking statements are not guarantees of future performance
and our actual results may differ significantly from the results discussed in
the forward-looking statements.  Factors that might cause such differences
include, but are not limited to delays in product development, the development
of marketing and distribution channel and market acceptance of its products and
other risks that may be beyond the control of the Company. The following
discussion should be read in conjunction with our unaudited
condensed  financial statements and notes thereto included in this
Form 10-Q and our audited  financial statements included in our annual
report on Form 10-K  for the year ended June 30, 2009 filed with the
Securities and Exchange Commission and management’s discussion and analysis
contained therein.  All information presented herein is based on the three
and six months ended December 31, 2009 and 2008.  We assume no obligation
to revise or update any forward-looking statements for any reason, except as
required by law.




LIQUIDITY
AND CAPITAL RESOURCES





Historically,
the Company’s principal use of cash has been to fund ongoing research and
development activities and constructing the alternate solar energy
systems.  To date, the Company has primarily financed its operations
by the receipt of cash advances from its president, through the private
placement of equity securities and receipt of customer deposits for the
alternate solar energy system. The Company has no formal agreement as to any
future loans or advances, but the Company does anticipate receiving additional
advances from its president.





The
Company has shares of common stock in escrow accounts.  Proceeds from
the sale of stock from these escrow accounts are placed in separate escrow
accounts to be used at the Company’s and the trustee’s discretion. During the
six months ended December 31, 2009, 483,100 shares were sold for proceeds of
$199,464 at prices ranging from $0.31 to $.62 per share.  At December
31, 2009, there was a balance of 3,861,718 shares in the escrow accounts.
 The Company anticipates that a portion of these shares will be sold to
help fund ongoing operations, but there is no assurance that there will be
buyers for the shares.





The
Company has no line of credit with any financial institution and it doesn’t
believe it will be able to establish a line of credit from conventional sources
until the Company has consistent revenue.  Management is in the
process of negotiating various sales agreements and is hopeful these sales will
generate cash flow to help the Company fund continuing operations.





The
Company's liquidity is substantially limited given the current rate of
expenditures.  More funds will be required to support ongoing building of
the alternate solar energy systems, product development, finance any marketing
programs and establish any distribution networks.  The Company had
$155,872 in cash as of December 31, 2009, representing a increase of $108,335
from June 30, 2009.  The increase relates to net cash provided from
financing of $406,173, respectively, offset by net cash used in operating and
investing activities of $281,901 and $15,937, respectively.





As of
December 31, 2009, the Company had current assets of $157,872 and total assets
of $1,193,353.  Current liabilities were $3,490,038 and total liabilities
of $3,573,872. The ratio of current assets to current liabilities is
approximately 0.05 to one.  If the Company continues to need advances
from its president or if the Company is unable to generate sufficient revenues
to meet its operating expenses, the Company will continue to experience
liquidity difficulties.





The
Company's ability to continue its activities is dependent on it receiving funds
either as customer deposits, advances or sale of equity. As noted previously,
the Company’s president has provided funds, but there is no formal agreement
between the Company and the president to continue providing funds in the future.
If the Company had to seek funds from another source, there is no assurance that
funds would be available at all or on terms acceptable to the
Company.





PLAN
OF OPERATION





The
Company’s plan of operation for the next 12 months is to: (i) continue to build
its alternate solar energy system and get the system operational to begin
producing energy; (ii) market and sell the solar energy technology system once
it is operational; and (iii) continue to develop marketable products for its
technologies.





During
the next 12 months, additional financing will be required to fund the building
of the alternate solar energy system and the development of marketable
products.  To date, the Company has primarily financed operations by
the receipt of advances from the Company’s president, deposits from customers
for the alternate solar energy system and through the private placement of
equity securities.  The president and the Company have no formal
agreement as to any future advances.  However, it is anticipated that
the Company will continue to receive additional financing from receipt of
advances from its president to help fund continuing operations.  The
Company also anticipates receiving additional financing through the private
placement of equity securities.


8





RESULTS
OF OPERATIONS





Three
Months Ended December 31, 2009 compared to the Three Months Ended December 31,
2008





For the
three months ended December 31, 2009 and 2008, the Company had no revenue and no
cost of sales.  Operations during the three months ended December 31,
2009 and 2008, primarily pertained to research and development and other
activities.  Research and development expenses decreased by $95,389 or
48% to $101,975 for the three months ended December 31, 2009 from $197,364 for
the three months ended December 31, 2008.  The decrease is primarily
due to purchasing less research and development materials for the alternate
solar energy system and bladeless turbine in addition to a decrease in research
and development wages during 2009 as compared to 2008 with more effort expended
on building the alternate solar energy systems.





General
and administrative expenses decreased by $464,863 or 28% from $1,641,929 for the
three months ended December 31, 2008 to $1,177,066 for the three months ended
December 31, 2009.  The decrease in general and administrative
expenses is primarily due to a decrease in stock-based compensation since many
options fully vested in fiscal year 2009 and a decrease in legal costs since the
Company finalized the counterclaim filed against it in April 2009.





Net loss
decreased by $560,420 from $1,841,123 for the three months ended December 31,
2008 to $1,280,703 for the three months ended December 31, 2009 due to the items
noted above.  Net loss per common share was $0.04 and $0.06 for three
months ended December 31, 2009 and 2008, respectively.





Six
Months Ended December 31, 2009 compared to the Six Months Ended December 31,
2008





For the
six months ended December 31, 2009 and 2008, the Company had no revenue and no
cost of sales.  Operations during the six months ended December 31,
2009 and 2008, primarily pertained to research and development and other
activities.  Research and development expenses decreased by $140,477
or 39% to $216,371 for the six months ended December 31, 2009 from $356,848 for
the six months ended December 31, 2008.  The decrease is primarily due
to purchasing less research and development materials for the alternate solar
energy system and bladeless turbine in addition to a decrease in research and
development wages during 2009 as compared to 2008 since more effort was expended
on building the alternate solar energy systems.





General
and administrative expenses decreased by $735,646 or 22% from $3,276,543 for the
six months ended December 31, 2008 to $2,540,897 for the six months ended
December 31, 2009.  The decrease in general and administrative
expenses is primarily due to a decrease in stock-based compensation since many
options fully vested in fiscal year 2009 and a decrease in legal costs since the
Company finalized the counterclaim filed against it in April 2009.





Net loss
decreased by $875,675 from $3,636,802 for the six months ended December 31, 2008
to $2,761,127 for the six months ended December 31, 2009 due to the items noted
above.  Net loss per common share was $0.08 and $0.12 for the six
months ended December 31, 2009 and 2008, respectively.





CONTRACTUAL
OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS





Sales Commitments- During
December 2005, the Company entered into a purchase and installation contract
with Solar Renewable Energy-1, LLC for a solar thermal power plant. The contract
is contingent on several factors and provides for certain progress payments. As
of December 31, 2009, the Company has not provided any services or equipment
required under this agreement and has recognized no revenues.




The
Company has entered into several solar lease bonus fee contracts with many of
the customers who made deposits on the alternate solar energy system discussed
in Note 9.  As additional consideration for making the deposit and
making the solar alternate energy system available to the Company as a reference
for marketing and sales purposes to show and demonstrate, the Company has agreed
to pay many of the customers a referral fee of .009% each on the first one
billion dollars of total gross sales revenue received by the Company for the
sale of power generation equipment.




Notes Payable – The Company
has entered into two notes payable with financing companies collateralized by a
deed of trust covering the underlying property.  The total amount owed
for the land notes payable at December 31, 2009 was $96,548.  Both
notes payable mature in fiscal year 2017.





The
Company entered into a note payable with a company to purchase equipment during
March 2009.  The note payable bears interest at a weighted average
interest rate of 4.65% and is payable in monthly installments of
$4,000.  The total amount owed for the equipment note payable was
$37,773 at December 31, 2009.  The note payable matures in October
2010.





Employment Agreement - The
Company has entered into an agreement with its president and CEO for a period of
ten years starting in July 2000. Per the agreement, the president is to be paid
$100,000 per anum and shall increase each calendar year by the percentage
increase in the Consumer Price Index.  The president may terminate the
agreement, but must give the Company six months advance notice.  The
Company can not voluntarily terminate its president’s employment for any
reason.  No additional payments are outlined in the agreement for a
change in control. The Company accrued $187,500 for services rendered by its
president during fiscal year 2009 and the fiscal year-to-date 2010, which is
included in accrued liabilities at December 31, 2009.


9





ITEM
4T: CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls
and Procedures.  Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”)).  Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective.




Changes in Internal Control Over
Financial Reporting.  During the most recent fiscal quarter
covered by this report, there has been no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.





PART
II - OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





The
Company is a party to one lawsuit that it believes  will have an
immaterial effect on our operations, even if the Company does not
prevail.





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





The
Company has shares of common stock in escrow accounts. Proceeds from the sale of
stock from these escrow accounts are placed in separate escrow accounts to be
used at the Company’s and the trustee’s discretion. During the three months
ended December 31, 2009, 318,400 shares were sold for proceeds of $118,321 at
prices ranging from $0.31 to $.43 per share. The proceeds were used to pay
professional fees, operating expenses and accounts payable.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.




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





None.




ITEM
5. OTHER INFORMATION.





None.




ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K





a.
Exhibits





31.1
            Certification
      by the Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002





31.2
            Certification
      by the Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002





32.1
            Certification
      by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002





32.2
            Certification
      by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002




10




SIGNATURES




Pursuant
to the requirements 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 AUTOMATED
      SYSTEMS, INC.Date:  February
      16, 2010
            By
            /s/ Neldon
      JohnsonNeldon
      JohnsonPresident,
      Chief Executive Officer, DirectorDate:
      February 16, 2010
            By
            /s/
      LaGrand
      JohnsonLaGrand
      JohnsonChief
      Financial Officer








11


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