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 September 30, 2008
  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:
  oLarge accelerated filer
                oAccelerated
      filer
                oNon-accelerated
      filer
                xSmaller 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
      October 31, 2008Common
      Stock, no par value
                36,716,140
      shares
 
  INTERNATIONAL AUTOMATED SYSTEMS, INC.
 (A
Development Stage Company)
 
 
 
 
 TABLE   OF
CONTENTS
 
 
 
 
 PART
I – FINANCIAL INFORMATION
  Item
      1: Financial StatementsUnaudited Condensed Balance SheetsAs
      of September 30, 2008 (unaudited) and June 30, 2008
    (audited)
              1Unaudited Condensed Statements of
    OperationsFor
      the three months ended September 30, 2008 and 2007 and for the Period from
      September 26, 1986 (Date of Inception) through September 30,
      2008
              2Unaudited Condensed Statements of Cash
FlowsFor
      the three months ended September 30, 2008 and 2007 and for the Period from
      September 26, 1986 (Date of Inception) through September 30,
      2008
              3Notes to Unaudited Condensed Financial
      Statements
              4Item 2:  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
              7Item 4T:  Controls and
    Procedures
              9PART
      II – OTHER INFORMATIONItem 1:  Legal Proceedings
              9Item 2:  Unregistered Sales of Securities and Use
      of Proceeds
              9Item 3:  Defaults Upon Senior
      Securities
              10Item 4:  Submission of Matters to a Vote of Security
      Holders
              10Item 5:  Other Information
              10Item 6:  Exhibits
              10Signatures
              10
  i
  INTERNATIONAL AUTOMATED SYSTEMS, INC.
 (A
Development Stage Company)
 Condensed
Balance Sheets
  September
      30,
              
              
              June
      30,2008
              
              
              2008(unaudited)
              
              
              (audited)ASSETSCURRENT
      ASSETSCash
              
              $
              36,025
              
              
              $
              144,429Prepaid
      expenses
              
              
              2,000
              
              
              
              -Inventory
              
              
              151,859
              
              
              
              151,859Total
      Current Assets
              
              
              189,884
              
              
              
              296,288Property
      and Equipment, net of accumulated depreciation of $224,566and
      $202,965, respectively
              
              
              449,957
              
              
              
              471,614Patents,
      net of accumulated amortization of $16,589 and $15,176,
      respectively
              
              
              167,171
              
              
              
              167,827TOTAL
      ASSETS
              
              $
              807,012
              
              
              $
              935,729LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
              
              $
              402,135
              
              
              $
              335,413Accrued
      liabilities
              
              
              93,194
              
              
              
              72,391Related
      party payable
              
              
              1,050,309
              
              
              
              882,001Deposits
      from customers
              
              
              848,250
              
              
              
              803,250Notes
      payable-current portion
              
              
              11,873
              
              
              
              11,090Total
      Current Liabilities
              
              
              2,405,761
              
              
              
              2,104,145Long-term
      notes payable
              
              
              96,682
              
              
              
              108,655TOTAL
      LIABILITIES
              
              
              2,502,443
              
              
              
              2,212,800Commitments
      and contingenciesSTOCKHOLDERS'
      EQUITY (DEFICIT)Preferred
      stock, Class A, no par value; 22,000,000 shares
authorized,4,400,000
      and 4,400,000 shares issued and outstanding, respectively
              
              
              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 shares authorized,  31,373,722
      and 31,146,722 issued and outstanding,net
      of 5,362,818 and 5,589,818 shares held in escrowaccount,
      respectively
              
              
              28,380,264
              
              
              
              27,002,945Deficit
      accumulated during the development stage
              
              
              (30,492,959
              )
              
              
              (28,697,280
              )Total
      Stockholders' Deficit
              
              
              (1,695,431
              )
              
              
              (1,277,071
              )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
              
              $
              807,012
              
              
              $
              935,729
  See
accompanying notes to condensed financial statements.
  Return to Table of Contents
 1
  INTERNATIONAL AUTOMATED SYSTEMS, INC.
 (A
Development Stage Company)
 Unaudited
Condensed Statements of Operations
  For
      the PeriodFrom
      InceptionFor
      the Three Months Ended
              
              
              (September
      26,September
      30,
              
              
              1986)
      Through2008
              
              
              2007
              
              
              September
      30, 2008REVENUESSales
              
              $
              -
              
              
              $
              -
              
              
              $
              111,226Income
      from related party
              
              
              -
              
              
              
              -
              
              
              
              32,348Total
      Revenue
              
              
              
              
              
              
              
              
              
              
              143,574COST
      OF GOODS SOLDCost
      of sales
              
              
              -
              
              
              
              -
              
              
              
              81,927Write
      down of carrying value of inventories
              
              
              -
              
              
              
              -
              
              
              
              233,131Total
      Costs of Sales
              
              
              -
              
              
              
              -
              
              
              
              315,058GROSS
      LOSS
              
              
              -
              
              
              
              -
              
              
              
              (171,484
              )OPERATING
      EXPENSESGeneral
      and administrative
              
              
              1,634,614
              
              
              
              1,734,984
              
              
              
              23,941,324Research
      and development
              
              
              159,484
              
              
              
              75,139
              
              
              
              7,077,434Impairment
      of patents
              
              
              -
              
              
              
              -
              
              
              
              140,577License
      fees
              
              
              -
              
              
              
              -
              
              
              
              270,634Loss
      on impairment of assets
              
              
              -
              
              
              
              -
              
              
              
              583Loss
      (gain) on disposal of property and equipment
              
              
              -
              
              
              
              -
              
              
              
              16,901Total
      Operating Expenses
              
              
              1,794,098
              
              
              
              1,810,123
              
              
              
              31,447,453LOSS
      FROM OPERATIONS
              
              
              (1,794,098
              )
              
              
              (1,810,123
              )
              
              
              (31,618,937
              )OTHER
      INCOME (EXPENSES)Forfeiture
      of deposits
              
              
              -
              
              
              
              -
              
              
              
              (236,803
              )Interest
      income
              
              
              36
              
              
              
              1,068
              
              
              
              26,398Interest
      expense
              
              
              (1,617
              )
              
              
              (4,920
              )
              
              
              (16,343
              )Other
      income
              
              
              -
              
              
              
              -
              
              
              
              (29,297
              )Total
      Other Income (Expenses)
              
              
              (1,581
              )
              
              
              (3,852
              )
              
              
              (256,045
              )LOSS
      BEFORE EXTRAORDINARY GAIN
              
              
              (1,795,679
              )
              
              
              (1,813,975
              )
              
              
              (31,874,982
              )Extraordinary
      gain on sale of patents
              
              
              -
              
              
              
              -
              
              
              
              1,382,023NET
      LOSS
              
              $
              (1,795,679
              )
              
              $
              (1,813,975
              )
              
              $
              (30,492,959
              )Net
      loss per common share

                  Basic
      and diluted$
              (0.06
              )
              
              $
              (0.06
              )Weighted
      average common shares outstandingBasic
      and diluted
              
              
              31,218,029
              
              
              
              28,355,897
  See
accompanying notes to condensed financial statements.
  Return to Table of Contents
 2
  INTERNATIONAL AUTOMATED SYSTEMS, INC.
 (A
Development Stage Company)
 Unaudited
Condensed Statements of Cash Flows
  For
      the PeriodFrom
      InceptionFor
      the Three Months Ended
              
              
              (September
      26,September
      30,
              
              
              1986)
      Through2008
              
              
              2007
              
              
              September
      30, 2008Cash
      flows used in operating activitiesNet
      loss
              
              $
              (1,795,679
              )
              
              $
              (1,813,975
              )
              
              $
              (30,492,959Adjustments
      to reconcile net loss to net cash
      used in operating activities:Depreciation
      and amortization
              
              
              23,069
              
              
              
              18,176
              
              
              
              504,643Stock-based
      compensation
              
              
              1,291,146
              
              
              
              1,556,116
              
              
              
              16,512,675Forfeiture
      of deposits
              
              
              -
              
              
              
              -
              
              
              
              236,803Write
      down of inventory
              
              
              -
              
              
              
              -
              
              
              
              16,945Write
      off of equipment to research & development
              
              
              -
              
              
              
              -
              
              
              
              23,900(Gain)
      / loss on disposal of equipment
              
              
              -
              
              
              
              -
              
              
              
              17,484Impairment
      of patents and abandonment of in-process rights
      to technology
              
              
              -
              
              
              
              -
              
              
              
              387,128Gain
      on sale of patents
              
              
              -
              
              
              
              -
              
              
              
              (1,382,023Gain
      on settlement of debt
              
              
              -
              
              
              
              -
              
              
              
              (6,123Stock
      issued for expenses
              
              
              -
              
              
              
              -
              
              
              
              100,580Changes
      in current assets and liabilities:(Increase)
      / decrease in prepaid sales commissions
              
              
              (2,000
              )
              
              
              -
              
              
              
              (2,000(Increase)
      / decrease in inventory
              
              
              -
              
              
              
              (53,127
              )
              
              
              (151,859Increase
      / (decrease) in deposits from customers
              
              
              45,000
              
              
              
              -
              
              
              
              848,250Increase
      / (decrease) in accounts payable
              
              
              66,722
              
              
              
              (215,652
              )
              
              
              402,135Increase
      / (decrease) in related party payable
              
              
              18,000
              
              
              
              20,240
              
              
              
              126,000Increase
      / (decrease) in accrued liabilities
              
              
              20,803
              
              
              
              5,249
              
              
              
              193,193Net
      cash used in operating activities
              
              
              (332,939
              )
              
              
              (482,973
              )
              
              
              (12,665,228Cash
      flows used in investing activitiesPurchase
      of property and equipment
              
              
              -
              
              
              
              (96,143
              )
              
              
              (731,178Purchase
      of rights to technology
              
              
              (756
              )
              
              
              (3,978
              )
              
              
              (707,399Organization
      costs
              
              
              -
              
              
              
              -
              
              
              
              (1,880Net
      cash advanced to related party
              
              
              -
              
              
              
              -
              
              
              
              (1,644,988Proceeds
      from capital lease receivable
              
              
              -
              
              
              
              -
              
              
              
              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
              
              
              (756
              )
              
              
              (100,121
              )
              
              
              (1,603,448Cash
      flows provided by financing activitiesProceeds
      from issuance of common stock
              
              
              86,173
              
              
              
              18,665
              
              
              
              5,442,902Proceeds
      from reissuance of treasury stock
              
              
              -
              
              
              
              -
              
              
              
              751,573Cash
      from controlling shareholder
              
              
              -
              
              
              
              -
              
              
              
              6,270,559Payments
      for treasury stock
              
              
              -
              
              
              
              -
              
              
              
              (3,325Payments
      for stock offering costs
              
              
              -
              
              
              
              -
              
              
              
              (56,509Proceeds
      from net borrowings from related party
              
              
              163,001
              
              
              
              105,000
              
              
              
              2,005,021Payments
      on borrowings from related party
              
              
              (12,693
              )
              
              
              -
              
              
              
              (112,230Proceeds
      from notes payable
              
              
              -
              
              
              
              -
              
              
              
              29,857Payments
      on notes payable and capital lease obligations
              
              
              (11,190
              )
              
              
              (5,217
              )
              
              
              (178,806Proceeds
      from related party deposits
              
              
              -
              
              
              
              -
              
              
              
              224,400Purchases
      of equipment held for distribution
              
              
              -
              
              
              
              -
              
              
              
              (68,741Net
      cash provided by financing activities
              
              
              225,291
              
              
              
              118,448
              
              
              
              14,304,701Net
      change in cash
              
              
              (108,404
              )
              
              
              (464,646
              )
              
              
              36,025Cash
      at beginning of period
              
              
              144,429
              
              
              
              595,381
              
              
              
              -Cash
      at end of period
              
              $
              36,025
              
              
              $
              130,735
              
              
              $
              36,025
  See
accompanying notes to condensed financial statements.
  Return to Table of Contents
 3
  International Automated Systems, Inc.
 (A
Development Stage Company)
 Notes to
Unaudited Condensed Financial Statements
 September
30, 2008
 
 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, 2008 Annual
Report on Form 10-K.  The results of operations for the three
months ended September 30, 2008 are not necessarily indicative of the operating
results that may be expected for the year ending June 30, 2009.  The
Company’s significant accounting policies are set forth in Note 1 to the
financial statements in the June 30, 2008 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 September 30, 2008 the
Company had $36,025 of cash available and had a working capital deficit of
$2,215,877. The Company had no revenue and no operating income for the three
months ended September 30, 2008 and 2007. The Company used net cash for
operating activities of $332,939 and $482,973 for the three months ended
September 30, 2008 and 2007, respectively. As of September 30, 2008 the
Company’s losses accumulated from inception totaled $30,492,959. These factors,
among others, indicate that the Company may be unable to continue as a going
concern for a reasonable period of time. 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
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value
Measurements”(“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value, and requires enhanced disclosures about fair
value measurements.  SFAS 157 requires companies to disclose the fair value
of their financial instruments according to a fair value hierarchy as defined in
the standard.  Additionally, companies are required to provide enhanced
disclosure regarding financial instruments in one of the categories, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities.  In February 2008, the FASB issued FASB
Staff Position (FSP) No. FAS 157-2, which delays by one year the effective date
of SFAS No. 157 for certain types of non-financial assets and non-financial
liabilities.  As a result, SFAS 157 will be effective for financial
statements issued for fiscal years beginning after November 15, 2007, or the
Company’s fiscal year beginning July 1, 2008, for financial assets and
liabilities carried at fair value on a recurring basis, and on July 1, 2009, for
non-recurring non-financial assets and liabilities that are recognized or
disclosed at fair value.  The Company adopted SFAS No. 157 on July 1, 2008
for financial assets and liabilities carried at fair value on a recurring basis,
with no material impact on its financial statements.  The Company is
currently determining what impact the application of SFAS 157 on July 1, 2009
for non-recurring non-financial assets and liabilities that are recognized or
disclosed at fair value will have on its financial statements.
 
 In
October 2008, the FASB issued Staff Position No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active” (“FSP
157-3”).  FSP 157-3 clarifies the application of SFAS 157, which the
Company adopted as of July 1, 2008, in cases where a market is not
active.  The Company has considered the guidance provided by FSP 157-3
as of September 30, 2008, and the impact was not material.
 
  Return to Table of Contents
 4
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities – Including an amendment of FASB Statement No. 115
(“SFAS 159”).  SFAS 159 allows entities the option to measure eligible
financial instruments at fair value as of specified dates. Such election, which
may be applied on an instrument by instrument basis, is typically irrevocable
once elected.  The Company elected not to measure any additional
financial assets or liabilities at fair value at the time SFAS 159 was adopted
on July 1, 2008.  As a result, implementation of SFAS 159 had no
impact on the Company’s condensed financial statements.
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”), “Business Combinations” and
SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51". SFAS 141R will change how business acquisitions are accounted
for and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity. SFAS 141R and SFAS 160 are effective
for the Company beginning July 1, 2009. Early adoption is not
permitted.  The Company is evaluating the impact these statements will
have on its financial statements.
 
 In
June 2008, the FASB issued FASB Staff Position Emerging Issues Task
Force (EITF) No. 03-6-1, Determining Whether Instruments
Granted in Share-Based
Payment Transactions Are Participating Securities (“FSP EITF No.
03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment
awards that contain rights to receive nonforfeitable dividends (paid or unpaid)
are participating securities, and should be included in the two-class method of
computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years, and is not
expected to have a significant impact on the Company’s financial
statements.
 
 The
Company has reviewed all other recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on its results of
operation, financial position or cash flows.  Based on that review,
the Company believes that none of these pronouncements will have a significant
effect on its financial statements.
 
 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 months ended September 30, 2008 and
2007, 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
97,475,000 and 99,475,000 shares of common stock at September 30, 2008 and 2007,
respectively, which are not included in the basic earnings per share
calculation.  The Company had 5,362,818 and 5,681,318 of stock held in
trust at September 30, 2008 and 2007, respectively, which are not included in
the basic earnings per share calculation.  The Company had 300,000
Series B Preferred Shares that are convertible into options to purchase 600,000
shares of common stock at September 30, 2008 and 2007, 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 Statement of
Financial Accounting Standards No. 123R, “Share-Based Payments” (“SFAS
123R”).  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 three months ended September 30, 2008
and 2007, total stock-based compensation expense recognized was $1,291,146 and
$1,556,116, respectively and was included in general and administrative
expenses.
  During
the three months ended September 30, 2008 and 2007, there were no stock options
or warrants granted or exercised. 100,000 stock options vested during the three
months ended September 30, 2008 and 2007.
  As of
September 30, 2008, there was $5,597,883 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
..73 years.
   Return to Table of Contents
 5
  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 September 30, 2008, 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 solar alternate 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% on the first one billion
dollars of total gross sales revenue received by the Company for the sale of
power generation equipment.
  Legal- During the year ended
June 30, 2008, the Company was involved in various lawsuits to protect its
patents.  One counterclaim was filed against the Company in June 2008,
requesting an award for attorney fees and court costs, which may exceed
$1,000,000. The Company filed a motion to dismiss in August 2008 and intends to
defend itself against the counterclaim.  A hearing regarding this
counterclaim and the Company’s motion to dismiss is anticipated by the end of
calendar year 2008. No liability has been recorded at September 30, 2008 since
the Company believes the chances of any losses resulting from this counterclaim
is remote and currently can’t reasonably estimate potential losses, if
any.
 
 Customer Deposits - Of the
$848,250 Deposits from Customers at September 30, 2008, $704,250 of the deposits
relate to agreements for which the Company was to have delivered, installed and
started up solar energy technology energy systems on or prior to December 31,
2007.  These customers could request a return of their deposits and if
these customers request a return of their deposits, the Company may not have
sufficient funds to return the deposits.
 
 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 notes payable at September 30, 2008 was $108,555.  Both notes
payable mature in fiscal year 2017.
 
 Employment Agreements - 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 his employment for any
reason.  The Company has also entered into employment agreements or
contracts with other key employees for a period of five years.
 
 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 three
months ended September 30, 2008, 227,000 shares were sold for proceeds of
$86,173 at prices ranging from $0.33 to $.47 per share.  During the
three months ended September 30, 2007, 24,600 shares were sold for proceeds of
$18,665 at prices ranging from $0.70 to $0.88 per share.   The proceeds
were used to pay professional fees, rent, operating expenses and accrued
liabilities.   At September 30, 2008, there was a balance of 5,362,818
shares in the escrow accounts.  These shares are not accounted for as
issued or outstanding common shares.
 
 NOTE
8 – RELATED PARTY TRANSACTIONS
 
 During
the three months ended September 30, 2008, the Company received $163,001 from
its President.  The related party payable is non-interest bearing and
payable upon demand and is included in related party payables.  During
the three months ended September 30, 2008, the Company settled $12,693 of the
related party payable by paying the President’s personal legal
expenses.   The amount outstanding on the related party payable
at September 30, 2008 was $924,309.
 
 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 Company
accrued $18,000 for rent payable to the President during the three months ended
September 30, 2008 and 2007.  The amount payable to the President for
rent at September 30, 2008 was $126,000 and is included in related party
payables.
 
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 6
  NOTE
9 – DEPOSITS FROM CUSTOMERS
 
 During
the three months ended September 30, 2008 and 2007, the Company received
deposits from customers totaling $45,000 and $0, respectively, relating to
contract agreements to build, install and maintain solar alternate energy
systems. According to the terms of the agreements, the customer purchases a
solar alternate energy system which is to produce 250 million BTU’s per year for
a period of 35 years.  The customer makes a down payment of $9,000 and
then will have thirty annual installments of $700 starting five years after the
installation date.  The customers agree to sublet the lens
concentrators to a third-party power company that will use the lens
concentrators to generate energy. The Company has not yet completed the
production of the solar alternate energy systems and the deposits are recorded
as a liability under the line item “Deposits from Customers.”
 
 The total
amount of Deposits from Customers at September 30, 2008 was
$848,250.  Many of the agreements provide that the Company will
deliver, install and startup the solar alternate energy system on or prior to
December 31, 2007.  Therefore, for these agreements, the customers
could request a return of their deposits since the Company has not delivered,
installed and started up the solar alternate energy system.   Of
the $848,250 Deposits from Customers at September 30, 2008, $704,250 of the
deposits relate to agreements for which the Company was to have delivered,
installed and started up solar alternate energy systems prior to December 31,
2007.
 
 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, 2008 filed with the
Securities and Exchange Commission and management’s discussion and analysis
contained therein.  All information presented herein is based on the three
months ended September 30, 2008 and 2007.  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.  To date, the Company has primarily financed
its operations by the receipt of loan advances from its President and through
the private placement of equity securities. 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 three months
ended September 30, 2008, 227,000 shares were sold for proceeds of $86,173 at
prices ranging from $0.33 to $.47 per share.  At September 30, 2008,
there was a balance of 5,362,818 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 or lease agreements and is hopeful these
sales or leases 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 product
development, finance any marketing programs, and establish any distribution
networks.  The Company had $36,025 in cash as of September 30, 2008,
representing a decrease of $108,404 from June 30, 2008.  The decrease
relates to net cash used in operations and investing of $332,939 and $756,
respectively, offset by net cash provided by financing activities of
$225,291.
 
 As of
September 30, 2008, the Company has current assets of $189,884 and total assets
of $807,012.  Current liabilities were $2,405,761 and total liabilities of
$2,502,443. The ratio of current assets to current liabilities is approximately
0.08 to one. If the Company continues to have a negative cash flow 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, loans, 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.
 
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 7
  PLAN
OF OPERATION
 
 The
Company’s plan of operation for the next 12 months is to: (i) continue to build
its solar energy technology 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 solar energy technology 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 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.
 
 RESULTS
OF OPERATIONS
  Three
Months Ended September 30, 2008 compared to the Three Months Ended September 30,
2007
 
 For the
three months ended September 30, 2008 and 2007, the Company had no revenue and
no cost of sales.  Operations during the three months ended September
30, 2008 and 2007, primarily pertained to research and development and other
activities.  Research and development expenses increased by $84,345 or
112% to $159,484 for the three months ended September 30, 2008 from $75,139 for
the three months ended September 30, 2007.  The increase is primarily
due to purchasing additional research and development materials for the solar
thermal and bladeless turbine in addition to an increase in research and
development wages during 2008 as compared to 2007.
  General
and administrative expenses decreased by $100,370 or 6% from $1,734,984 for the
three months ended September 30, 2007 to $1,634,614 for the three months ended
September 30, 2008.  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 2008 offset by an increase in legal costs
related primarily to defending itself in the counterclaim discussed further in
Part II Item 1.
 
 Net loss
decreased by $18,296 from $1,813,975 for the three months ended September 30,
2007 to $1,795,679 for the three months ended September 30, 2008 due to the
items noted above.  Net loss per common share was $0.06 for three
months ended September 30, 2008 and 2007.
  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 September 30, 2008, 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 solar alternate 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% on the first one billion
dollars of total gross sales revenue received by the Company for the sale of
power generation equipment.
  Legal- During the year ended
June 30, 2008, the Company was involved in various lawsuits to protect its
patents.  One counterclaim was filed against the Company in June 2008,
requesting an award for attorney fees and court costs, which may exceed
$1,000,000. The Company filed a motion to dismiss in August 2008 and intends to
defend itself against the counterclaim.  A hearing regarding this
counterclaim and the Company’s motion to dismiss is anticipated by the end of
calendar year 2008. No liability has been recorded at September 30, 2008 since
the Company believes the chances of any losses resulting from this counterclaim
is remote and currently can’t reasonably estimate potential losses, if
any.
  Customer Deposits - Of the
$848,250 Deposits from Customers at September 30, 2008, $704,250 of the deposits
relate to agreements for which the Company was to have delivered, installed and
started up solar energy technology energy systems on or prior to December 31,
2007.  These customers could request a return of their deposits and if
these customers request a return of their deposits, the Company may not have
sufficient funds to return the deposits.
 
  Return to Table of Contents
 8
  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 notes payable at September 30, 2008 was $108,555.  Both notes
payable mature in fiscal year 2017.
 
 Employment Agreements - 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 his employment for any
reason.  The Company has also entered into employment agreements or
contracts with other key employees for a period of five years.
 
 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 filed a patent infringement lawsuit against Digital Persona, Inc and
Microsoft Corporation in January 2006. This lawsuit was based upon an alleged
infringement, by the above mentioned parties, of United States Patent No.
5,598,474 (“the 474 patent”) for certain fingerprint technology invented by
Neldon P. Johnson, the Company’s President, and assigned to Company. Each
defendant responded to the complaint denying all counts, raising affirmative
defenses and asserting counterclaims of non-infringement and invalidity. In
January 2008, the court entered an order declaring the 474 patent invalid.
Subsequent to the order, all claims and counter claims were settled between the
Company and Digital Persona, Inc and Microsoft Corporation.
 
 The
Company filed a patent infringement lawsuit against IBM; IBM Corporation; IBM
Personal Computing Division; Lenovo (United States) Inc.; Lenovo Group Ltd; and
John Does 1-20 in February 2006. UPEK, Inc. was subsequently added as a
defendant.  This lawsuit was also based upon an alleged infringement,
by the above mentioned parties, of the 474 patent.  In January 2008,
this case was consolidated with the above mentioned Digital Persona and
Microsoft Corporation case.  In June 2008 UPEK filed a motion for
further declaration of patent invalidity.  UPEK also filed a separate
motion for attorneys’ fees and costs based upon assertions that the case is an
“exceptional case” under 35 U.S.C. §285.  UPEK has not indicated the
specific amount of attorneys’ fees and costs, but has indicated that they are in
excess of $1,000,000.
 
 The
Company filed briefs in opposition to both motions in August 2008 and intends to
vigorously defend itself against the UPEK motions.  The Company also
intends to prosecute a reissue application for the 474 patent which has been
declared invalid.
 
 No
liability has been recorded by the Company for the UPEK motions as of September
30, 2008.  While the Company currently believes the probability of any
losses resulting from these motions is remote, no reliable estimate of the
probability of or the amount of potential losses, if any, can be made at this
time.  The Company understands that these motions will come before the
court and that a decision will likely be rendered before the end of December
2008. The Company will reevaluate the likelihood of an adverse award in this
case as new information becomes available.
 
 Additional
litigation to enforce patents, to protect proprietary information, or to defend
the Company against alleged infringement of the rights of others may occur. Such
litigation would be costly, could divert our resources from other planned
activities and could have a material adverse effect on our results of operations
and financial condition.
  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 September 30, 2008, 227,000 shares were sold for proceeds of $86,173 at
prices ranging from $0.33 to $.47 per share. The proceeds were used to pay
professional fees, operating expenses and accounts payable.
   Return to Table of Contents
 9
  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
 
 
  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:  November 10,
      2008
              By
              /s/ Neldon
      JohnsonNeldon
      JohnsonExecutive
      Officer, DirectorDate:
      November 10, 2008
              By
              /s/
      LaGrand
      JohnsonLaGrand
      JohnsonChief
      Financial Officer
   Return to Table of Contents 10