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 March 31, 2010




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)




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes 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 May
      11, 2010Common
      Stock, no par value
            40,255,100
      shares





INTERNATIONAL
AUTOMATED SYSTEMS, INC.


(A
Development Stage Company)







TABLE
OF CONTENTS










PART
      I – FINANCIAL INFORMATIONItem
      1:
            
            Financial
      StatementsUnaudited
      Condensed Balance SheetsAs
      of March 31, 2010 (unaudited) and June 30, 2009 (audited)
            1Unaudited
      Condensed Statements of OperationsFor
      the three and nine months ended March 31, 2010 and 2009 and for the Period
      from September 26, 1986 (Date of Inception) through March 31,
      2010
            2Unaudited
      Condensed Statements of Cash FlowFor
      the nine months ended March 31, 2010 and 2009 and for the Period from
      September 26, 1986 (Date of Inception) through March 31,
    2010
            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










-i-


INTERNATIONAL AUTOMATED SYSTEMS,
INC.


(A
Development Stage Company)


Condensed
Balance Sheets








March
      31,
            
            
            June
      30,2010
            
            
            2009(unaudited)
            
            
            (audited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
            
            $
            48,015
            
            
            $
            47,537Prepaid
      expenses
            
            
            2,000
            
            
            
            11,833Total
      Current Assets
            
            
            50,015
            
            
            
            59,370Alternate
      solar energy systems
            
            
            541,882
            
            
            
            413,520Property
      and Equipment, net of accumulated depreciation of $357,088and
      $291,390, respectively
            
            
            432,666
            
            
            
            481,512Patents,
      net of accumulated amortization of $25,061 and $20,825,
      respectively
            
            
            70,965
            
            
            
            75,201TOTAL
      ASSETS
            
            $
            1,095,528
            
            
            $
            1,029,603LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
            
            $
            70,481
            
            
            $
            417,136Accrued
      liabilities
            
            
            298,986
            
            
            
            181,327Related
      party payable - Note 8
            
            
            399,235
            
            
            
            505,382Customer
      deposits - Note 9
            
            
            2,360,250
            
            
            
            1,757,250Notes
      payable-current portion
            
            
            38,881
            
            
            
            52,543Total
      Current Liabilities
            
            
            3,167,833
            
            
            
            2,913,638Long-term
      notes payable
            
            
            83,834
            
            
            
            96,682TOTAL
      LIABILITIES
            
            
            3,251,667
            
            
            
            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,  36,630,482
      and 34,501,322 issued and outstanding,net
      of 3,624,618 and 4,344,818 shares held in escrowaccount,
      respectively - Note 7
            
            
            35,927,111
            
            
            
            32,936,636Deficit
      accumulated during the development stage
            
            
            (38,500,514
            )
            
            
            (35,334,617
            )Total
      Stockholders' Deficit
            
            
            (2,156,139
            )
            
            
            (1,980,717
            )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            $
            1,095,528
            
            
            $
            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 Nine Months Ended
                
                
                (September
      26,March
      31,
                
                
                March
      31,
                
                
                1986)
      Through2010
                
                
                2009
                
                
                2010
                
                
                2009
                
                
                March
      31, 2010RevenuesSales
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                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
                
                
                284,128
                
                
                
                1,374,698
                
                
                
                2,825,025
                
                
                
                4,651,241
                
                
                
                31,053,960Research
      and development
                
                
                118,297
                
                
                
                189,371
                
                
                
                334,668
                
                
                
                546,219
                
                
                
                7,957,507Impairment
      of patents
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                140,577License
      fees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                270,634Loss
      (gain) on disposal ofproperty and equipment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                16,901Total
      operating expenses
                
                
                402,425
                
                
                
                1,564,069
                
                
                
                3,159,693
                
                
                
                5,197,460
                
                
                
                39,439,579Loss
      from operations
                
                
                (402,425
                )
                
                
                (1,564,069
                )
                
                
                (3,159,693
                )
                
                
                (5,197,460
                )
                
                
                (39,611,063
                )Other
      income (expenses)Loss
      on impairment of assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (583
                )Forfeiture
      of deposits
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (236,803
                )Interest
      income
                
                
                32
                
                
                
                -
                
                
                
                91
                
                
                
                74
                
                
                
                26,580Interest
      expense
                
                
                (2,084
                )
                
                
                (1,756
                )
                
                
                (6,692
                )
                
                
                (5,721
                )
                
                
                (29,789
                )Other
      income (expenses)
                
                
                (293
                )
                
                
                (223
                )
                
                
                397
                
                
                
                257
                
                
                
                (30,879
                )Total
      other income (expenses)
                
                
                (2,345
                )
                
                
                (1,979
                )
                
                
                (6,204
                )
                
                
                (5,390
                )
                
                
                (271,474
                )Loss
      before extraordinary gain
                
                
                (404,770
                )
                
                
                (1,566,048
                )
                
                
                (3,165,897
                )
                
                
                (5,202,850
                )
                
                
                (39,882,537
                )Extraordinary
      gain on sale of patents
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,382,023Net
      loss
                
                $
                (404,770
                )
                
                $
                (1,566,048
                )
                
                $
                (3,165,897
                )
                
                $
                (5,202,850
                )
                
                $
                (38,500,514
                )Net
      loss per common shareBasic
      and diluted
                
                $
                (0.01
                )
                
                $
                (0.05
                )
                
                $
                (0.09
                )
                
                $
                (0.16
                )Weighted
      average common shares outstandingBasic
      and diluted
                
                
                36,123,465
                
                
                
                33,760,989
                
                
                
                35,157,660
                
                
                
                32,183,497






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 Nine Months Ended
            
            
            (September
      26,March
      31,
            
            
            1986)
      Through2010
            
            
            2009
            
            
            March
      31, 2010Cash
      flows from operating activitiesNet
      loss
            
            $
            (3,165,897
            )
            
            $
            (5,202,850
            )
            
            $
            (38,500,514
            )Adjustments
      to reconcile net loss to netcash
      from operating activities:Depreciation
      and amortization
            
            
            69,933
            
            
            
            68,016
            
            
            
            645,581Stock-based
      compensation
            
            
            2,286,923
            
            
            
            3,768,260
            
            
            
            22,350,141Forfeiture
      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
            
            
            (128,362
            )
            
            
            (193,514
            )
            
            
            (541,882
            )Increase
      / (decrease) in customer deposits
            
            
            603,000
            
            
            
            837,000
            
            
            
            2,360,250Increase
      / (decrease) in accounts payable
            
            
            (346,655
            )
            
            
            110,650
            
            
            
            70,481Increase
      / (decrease) in related party payable
            
            
            (8,001
            )
            
            
            (8,000
            )
            
            
            57,000Increase
      / (decrease) in accrued liabilities
            
            
            117,659
            
            
            
            128,487
            
            
            
            398,985Net
      cash provided by (used in) operating activities
            
            
            (561,567
            )
            
            
            (493,951
            )
            
            
            (13,737,764
            )Cash
      flows used in investing activitiesPurchase
      of property and equipment
            
            
            (16,851
            )
            
            
            (13,800
            )
            
            
            (771,387
            )Purchase
      of rights to technology
            
            
            -
            
            
            
            (12,957
            )
            
            
            (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
            
            
            (16,851
            )
            
            
            (26,757
            )
            
            
            (1,642,901
            )Cash
      flows provided by financing activitiesProceeds
      from issuance of common stock
            
            
            303,552
            
            
            
            281,577
            
            
            
            6,092,783Proceeds
      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
            
            
            373,082
            
            
            
            385,101
            
            
            
            2,772,203Payments
      on cash advances from related party
            
            
            (71,228
            )
            
            
            (97,237
            )
            
            
            (344,509
            )Proceeds
      from notes payable
            
            
            -
            
            
            
            -
            
            
            
            29,857Payments
      on notes payable and capital lease obligations
            
            
            (26,510
            )
            
            
            (15,190
            )
            
            
            (239,611
            )Proceeds
      from related party deposits
            
            
            -
            
            
            
            -
            
            
            
            224,400Purchases
      of equipment held for distribution
            
            
            -
            
            
            
            -
            
            
            
            (68,741
            )Net
      cash provided by financing activities
            
            
            578,896
            
            
            
            554,251
            
            
            
            15,428,680Net
      change in cash
            
            
            478
            
            
            
            33,543
            
            
            
            48,015Cash
      at beginning of period
            
            
            47,537
            
            
            
            144,429
            
            
            
            -Cash
      at end of period
            
            $
            48,015
            
            
            $
            177,972
            
            
            $
            48,015Supplemental
      non-cash flow informationAcquisition
      of property and equipment with note payable
            
            $
            -
            
            
            $
            74,965Settlement
      of borrowings from related party in exchangefor
      exercise of options
            
            $
            400,000
            
            
            $
            630,000






See
accompanying notes to condensed financial statements.


3


International
Automated Systems, Inc.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


March 31,
2010





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 nine
months ended March 31, 2010 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 March 31, 2010 the Company
had $48,015 of cash available and had a working capital deficit of $3,117,818.
The Company had no revenue and no operating income for the nine months ended
March 31, 2010 and 2009. As of March 31, 2010 the Company’s losses accumulated
from inception and cash used in operating activities totaled $38,500,514 and
$13,737,764, respectively. These factors, among others raise substantial doubt
about the Company’s ability 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 of 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.





As a
result of incurring a net loss for the three and nine months ended March 31,
2010 and 2009, 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 94,900,000 and 95,900,000 shares of common stock at March
31, 2010 and 2009, respectively, which are not included in the basic earnings
per share calculation.  The Company had 3,624,618 and 4,647,918 shares
of stock held in trust at March 31, 2010 and 2009, 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 March
31, 2010 and 2009, 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
nine months ended March 31, 2010 and 2009, total stock-based compensation
expense recognized was $2,286,923 and $3,768,260, respectively.  For
the three months ended March 31, 2010 and 2009, total stock-based compensation
expense recognized was $125,062, and $1,190,082,
respectively.  Stock-based compensation was included in general and
administrative expenses.




During
the nine months ended March 31, 2010 and 2009, the Company granted 300,000 and
505,000 shares of restricted stock, respectively, to employees, which vested
immediately.   The grant date fair value of the restricted stock
awards was estimated using the closing market price of the Company’s common
stock on the grant date, with the compensation expense being recognized
immediately.  The stock based compensation recognized during the nine
months ended March 31, 2010 and 2009 for the grants of restricted shares was
$105,000 and $126,250, respectively, as included in the stock-based compensation
expenses mentioned in the above paragraph.  The weighted average grant
date fair value of restricted stock awards granted during the nine months March
31, 2010 and 2009 was $0.35 and $0.25, respectively.




During
the nine months ended March 31, 2010, no stock options or warrants were granted
and 1,000,000 stock options or warrants were exercised.  During the
nine months ended March 31, 2010, 65,100,000 stock options vested.




As of
March 31, 2010, there was no unrecognized compensation cost related to
non-vested stock-based compensation awards.




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 March 31, 2010, 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 March 31, 2010 was $96,548.  Both notes
payable mature in fiscal year 2016.





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
$26,167 at March 31, 2010.  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 $218,750
for services rendered by its President during fiscal year 2009 and the fiscal
year-to-date 2010, which is included in accrued liabilities at March 31,
2010.


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 nine months
ended March 31, 2010, 720,200 shares were sold for proceeds of $278,551 at
prices ranging from $0.24 to $.62 per share.  The proceeds were used
to pay professional fees, rent, operating expenses and accrued liabilities.
  At March 31, 2010, there was a balance of 3,624,618 shares in the
escrow accounts.  These shares are not accounted for as issued or
outstanding common shares.





In March
2010, the Company sold 108,960 shares of restricted common stock to employees
for proceeds of $25,000 at a price of $0.23.





Common Stock Issued for Settlement
of Related Party Borrowings - As described in Note 8, during the
nine months ended March 31, 2010, the Company issued 1,000,000 shares of common
stock upon the exercise of options by its President at $0.40 per share for
settlement of cash advances.





NOTE
8 – RELATED PARTY TRANSACTIONS





The
Company received cash advances of $373,082 and $385,101 from its President
during the nine months ended March 31, 2010 and 2009,
respectively.  The advances are non-interest bearing, payable upon
demand and included in related party payables.  During the nine months
ended March 31, 2010, the Company settled $71,228 of the cash advances by paying
the President’s personal expenses.  During the nine months ended March
31, 2009, the Company settled $97,237 of the cash advances by paying the
President’s personal expenses.  During the nine months ended March 31,
2010, the Company settled $400,000 of the cash advances by issuing 1,000,000
shares of common stock to it President upon the exercise of options at $0.40 per
share.  During the nine months ended March 31, 2009, the Company
settled $630,000 of the related party payable by issuing 1,575,000 shares of
common stock to it President upon the exercise of options at $0.40 per share. As
of March 31, 2010 and June 30, 2009, the cash advance balances, included in
related party payables, was $342,235 and $440,382, respectively.





During
2003, the Company commenced leasing office and research and development space on
a month-to-month basis from its 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 March 31, 2010 and June 30, 2009 was $57,000 and
$65,000, respectively, and is included in related party payables.





NOTE
9 – DEPOSITS FROM CUSTOMERS





During
the nine months ended March 31, 2010 and 2009, the Company received deposits
from customers totaling $621,000 and $837,000, 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 March 31, 2010 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.


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 nine months ended March 31, 2010 and 2009.  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
nine months ended March 31, 2010, 720,200 shares were sold for proceeds of
$278,551 at prices ranging from $0.24 to $.62 per share.  At March 31,
2010, there was a balance of 3,624,618 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
$48,015 in cash as of March 31, 2010, representing an increase of $478 from June
30, 2009.  The increase relates to net cash provided from financing of
$578,896, respectively, offset by net cash used in operating and investing
activities of $561,567 and $16,851, respectively.





As of
March 31, 2010, the Company had current assets of $50,015 and total assets of
$1,095,528.  Current liabilities were $3,167,833 and total liabilities of
$3,251,667. The ratio of current assets to current liabilities is approximately
0.02 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 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 March 31, 2010 compared to the Three Months Ended March 31,
2009





For the
three months ended March 31, 2010 and 2009, the Company had no revenue and no
cost of sales.  Operations during the three months ended March 31,
2010 and 2009, primarily pertained to research and development and other
activities.  Research and development expenses decreased by $71,074 or
38% to $118,297 for the three months ended March 31, 2010 from $189,371 for the
three months ended March 31, 2009.  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 2010 as compared to 2009 with more effort expended on
building the alternate solar energy systems.





General
and administrative expenses decreased by $1,090,570 or 79% from $1,374,698 for
the three months ended March 31, 2009 to $284,128 for the three months ended
March 31, 2010.  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 $1,161,278 from $1,566,048 for the three months ended March 31,
2009 to $404,770 for the three months ended March 31, 2010 due to the items
noted above.  Net loss per common share was $0.01 and $0.05 for three
months ended March 31, 2010 and 2009, respectively.





Nine
Months Ended March 31, 2010 compared to the Nine Months Ended March 31,
2009





For the
nine months ended March 31, 2010 and 2009, the Company had no revenue and no
cost of sales.  Operations during the nine months ended March 31, 2010
and 2009, primarily pertained to research and development and other
activities.  Research and development expenses decreased by $211,551
or 39% to $334,668 for the nine months ended March 31, 2010 from $546,219 for
the nine months ended March 31, 2009.  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 2010 as compared to 2009 since more effort was expended
on building the alternate solar energy systems.





General
and administrative expenses decreased by $1,826,216 or 39% from $4,651,241 for
the nine months ended March 31, 2009 to $2,825,025 for the nine months ended
March 31, 2010.  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 $2,036,953 from $5,202,850 for the nine months ended March 31, 2009
to $3,165,987 for the nine months ended March 31, 2010 due to the items noted
above.  Net loss per common share was $0.09 and $0.16 for the nine
months ended March 31, 2010 and 2009, 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 March 31, 2010, 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.  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 March 31, 2010 was $96,548.  Both notes
payable mature in fiscal year 2016.





9




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
$26,167 at March 31, 2010.  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 $218,750 for services rendered by its
President during fiscal year 2009 and the fiscal year-to-date 2010, which is
included in accrued liabilities at March 31, 2010.




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 March 31, 2010, 237,100 shares from the escrow accounts were sold for
proceeds of $79,088 at prices ranging from $0.24 to $0.40 per
share.   During the three months ended March 31, 2010, 108,961
shares of restricted common stock were sold to employees for $0.23 and 300,000
shares of restricted stock were granted to employees as stock-based
compensation. The proceeds were used to pay professional fees, operating
expenses and accounts payable.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.




ITEM
4. RESERVED





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:  May
      14, 2010
            By
            /s/ Neldon
      JohnsonNeldon
      JohnsonPresident,
      Chief Executive Officer, DirectorDate:
      May 14, 2010
            By
            /s/
      LaGrand
      JohnsonLaGrand
      JohnsonChief
      Financial Officer









11