UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C.  20549




FORM 10-Q


______________________




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


Securities
Exchange Act of 1934






For
the Quarterly Period Ended December 31, 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:




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 December 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 December 31, 2008 (unaudited) and June 30, 2008
    (audited)
                                                        1Unaudited
      Condensed Statements of OperationsFor
      the three and six months ended December 31, 2008 and 2007 and for the
      Period from September 26, 1986 (Date of Inception) through December 31,
      2008
                                                        2Unaudited
      Condensed Statements of Cash FlowsFor
      the six months ended December 31, 2008 and 2007 and for the Period from
      September 26, 1986 (Date of Inception) through December 31,
      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
                                                        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





December
      31,
                                                          
                                                          
                                                          June
      30,2008
                                                          
                                                          
                                                          2008(unaudited)
                                                          
                                                          
                                                          (audited)ASSETSCURRENT
      ASSETSCash
                                                          
                                                          $
                                                          625,285
                                                          
                                                          
                                                          $
                                                          144,429Prepaid
      expenses
                                                          
                                                          
                                                          2,000
                                                          
                                                          
                                                          
                                                          -Total
      Current Assets
                                                          
                                                          
                                                          627,285
                                                          
                                                          
                                                          
                                                          144,429Property
      and equipment, net of accumulated depreciation of $244,256 and
      $202,965, respectively
                                                          
                                                          
                                                          650,411
                                                          
                                                          
                                                          
                                                          623,473Patents,
      net of accumulated amortization of $18,001 and $15,176,
      respectively
                                                          
                                                          
                                                          168,686
                                                          
                                                          
                                                          
                                                          167,827TOTAL
      ASSETS
                                                          
                                                          $
                                                          1,446,382
                                                          
                                                          
                                                          $
                                                          935,729LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
                                                          
                                                          $
                                                          443,159
                                                          
                                                          
                                                          $
                                                          335,413Accrued
      liabilities
                                                          
                                                          
                                                          277,844
                                                          
                                                          
                                                          
                                                          72,391Related
      party payable
                                                          
                                                          
                                                          1,188,711
                                                          
                                                          
                                                          
                                                          882,001Deposits
      from customers
                                                          
                                                          
                                                          1,568,250
                                                          
                                                          
                                                          
                                                          803,250Notes
      payable-current portion
                                                          
                                                          
                                                          11,873
                                                          
                                                          
                                                          
                                                          11,090Total
      Current Liabilities
                                                          
                                                          
                                                          3,489,837
                                                          
                                                          
                                                          
                                                          2,104,145Long-term
      notes payable
                                                          
                                                          
                                                          96,682
                                                          
                                                          
                                                          
                                                          108,655TOTAL
      LIABILITIES
                                                          
                                                          
                                                          3,586,519
                                                          
                                                          
                                                          
                                                          2,212,800Commitments
      and contingencies - Note 6STOCKHOLDERS'
      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 shares authorized,
      300,000 shares issued and outstanding
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Common
      stock, no par value, 225,000,000 shares authorized,  31,772,622
      and 31,146,722 issued and outstanding, net
      of 4,963,918, and 5,589,818 shares held in escrow account,
      respectively
                                                          
                                                          
                                                          29,776,681
                                                          
                                                          
                                                          
                                                          27,002,945Deficit
      accumulated during the development stage
                                                          
                                                          
                                                          (32,334,082
                                                          )
                                                          
                                                          
                                                          (28,697,280
                                                          )Total
      Stockholders' Deficit
                                                          
                                                          
                                                          (2,140,137
                                                          )
                                                          
                                                          
                                                          (1,277,071
                                                          )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                                                          
                                                          $
                                                          1,446,382
                                                          
                                                          
                                                          $
                                                          935,729




See
accompanying notes to condensed financial statements.





1





INTERNATIONAL
AUTOMATED SYSTEMS, INC.


(A
Development Stage Company)


Unaudited
Condensed Statements of Operations





For
      the PeriodFrom
      InceptionFor
      the Three Months Ended
                                                      
                                                      
                                                      For
      the Six Months Ended
                                                      
                                                      
                                                      (September
      26,December
      31,
                                                      
                                                      
                                                      December
      31,
                                                      
                                                      
                                                      1986)
      Through2008
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      December
      31, 2008RevenuesSales
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      111,226Income
      from related party
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      32,348Total
      Revenue
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      143,574Cost
      of goods soldCost
      of sales
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      81,927Write
      down of inventories
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      233,131Total
      Costs of sales
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      315,058Gross
      loss
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (171,484
                                                      )Operating
      expensesGeneral
      and administrative
                                                      
                                                      
                                                      1,641,929
                                                      
                                                      
                                                      
                                                      1,896,005
                                                      
                                                      
                                                      
                                                      3,276,543
                                                      
                                                      
                                                      
                                                      3,630,989
                                                      
                                                      
                                                      
                                                      25,583,253Research
      and development
                                                      
                                                      
                                                      197,364
                                                      
                                                      
                                                      
                                                      191,434
                                                      
                                                      
                                                      
                                                      356,848
                                                      
                                                      
                                                      
                                                      266,573
                                                      
                                                      
                                                      
                                                      7,274,798Impairment
      of patents
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      140,577License
      fees
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      270,634Loss
      on disposal of property
      and equipment
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      16,901Total
      operating expenses
                                                      
                                                      
                                                      1,839,293
                                                      
                                                      
                                                      
                                                      2,087,439
                                                      
                                                      
                                                      
                                                      3,633,391
                                                      
                                                      
                                                      
                                                      3,897,562
                                                      
                                                      
                                                      
                                                      33,286,163Loss
      from operations
                                                      
                                                      
                                                      (1,839,293
                                                      )
                                                      
                                                      
                                                      (2,087,439
                                                      )
                                                      
                                                      
                                                      (3,633,391
                                                      )
                                                      
                                                      
                                                      (3,897,562
                                                      )
                                                      
                                                      
                                                      (33,457,647
                                                      )Other
      income (expenses)Loss
      on impairment of assets
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (583
                                                      )Forfeiture
      of deposits
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (236,803
                                                      )Interest
      income
                                                      
                                                      
                                                      38
                                                      
                                                      
                                                      
                                                      177
                                                      
                                                      
                                                      
                                                      74
                                                      
                                                      
                                                      
                                                      1,245
                                                      
                                                      
                                                      
                                                      26,436Interest
      expense
                                                      
                                                      
                                                      (2,348
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (3,965
                                                      )
                                                      
                                                      
                                                      (4,920
                                                      )
                                                      
                                                      
                                                      (18,691
                                                      )Other
      income
                                                      
                                                      
                                                      480
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      480
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (28,817
                                                      )Total
      Other Income (Expenses)
                                                      
                                                      
                                                      (1,830
                                                      )
                                                      
                                                      
                                                      177
                                                      
                                                      
                                                      
                                                      (3,411
                                                      )
                                                      
                                                      
                                                      (3,675
                                                      )
                                                      
                                                      
                                                      (258,458
                                                      )Loss
      before extraordinary gain
                                                      
                                                      
                                                      (1,841,123
                                                      )
                                                      
                                                      
                                                      (2,087,262
                                                      )
                                                      
                                                      
                                                      (3,636,802
                                                      )
                                                      
                                                      
                                                      (3,901,237
                                                      )
                                                      
                                                      
                                                      (33,716,105
                                                      )Extraordinary
      gain on sale of patents
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,382,023Net
      loss
                                                      
                                                      $
                                                      (1,841,123
                                                      )
                                                      
                                                      $
                                                      (2,087,262
                                                      )
                                                      
                                                      $
                                                      (3,636,802
                                                      )
                                                      
                                                      $
                                                      (3,901,237
                                                      )
                                                      
                                                      $
                                                      (32,334,082
                                                      )Basic
      and diluted loss per shareLoss
      before extraordinary gain
                                                      
                                                      $
                                                      (0.06
                                                      )
                                                      
                                                      $
                                                      (0.07
                                                      )
                                                      
                                                      $
                                                      (0.12
                                                      )
                                                      
                                                      $
                                                      (0.14
                                                      )Extraordinary
      gain
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Net
      loss applicable tocommon shareholders
                                                      
                                                      $
                                                      (0.06
                                                      )
                                                      
                                                      $
                                                      (0.07
                                                      )
                                                      
                                                      $
                                                      (0.12
                                                      )
                                                      
                                                      $
                                                      (0.14
                                                      )Weighted
      average common sharesoutstanding - basic and
diluted
                                                      
                                                      
                                                      31,605,767
                                                      
                                                      
                                                      
                                                      28,889,161
                                                      
                                                      
                                                      
                                                      31,411,898
                                                      
                                                      
                                                      
                                                      28,622,802




See
accompanying notes to condensed financial statements.





2





INTERNATIONAL
AUTOMATED SYSTEMS, INC.


(A
Development Stage Company)


Unaudited
Condensed Statements of Cash Flows





For
      the PeriodFrom
      InceptionFor
      the Six Months Ended
                                      
                                      
                                      (September
      26, 1986)December
      31,
                                      
                                      
                                      Through2008
                                      
                                      
                                      2007
                                      
                                      
                                      December
      31, 2008Cash
      flows used in operating activitiesNet
      loss
                                      
                                      $
                                      (3,636,802
                                      )
                                      
                                      $
                                      (3,901,237
                                      )
                                      
                                      $
                                      (32,334,082
                                      )Adjustments
      to reconcile net loss to net cash
      from operating activities:Depreciation
      and amortization
                                      
                                      
                                      44,114
                                      
                                      
                                      
                                      36,726
                                      
                                      
                                      
                                      525,688Stock
      based compensation
                                      
                                      
                                      2,578,178
                                      
                                      
                                      
                                      3,107,511
                                      
                                      
                                      
                                      17,799,707Forfeiture
      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-processrights
      to technology
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      387,128Gain
      on sale of patents
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,382,023
                                      )Gain
      on settlement of debt
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (6,123
                                      )Stock
      issued for expenses
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      100,580Changes
      in current assets and liabilities:(Increase)
      / decrease in prepaid sales commissions
                                      
                                      
                                      (2,000
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (2,000
                                      )Increase
      / (decrease) in deposits from customers
                                      
                                      
                                      765,000
                                      
                                      
                                      
                                      81,000
                                      
                                      
                                      
                                      1,568,250Increase
      / (decrease) in accounts payable
                                      
                                      
                                      107,746
                                      
                                      
                                      
                                      (154,956
                                      )
                                      
                                      
                                      443,159Increase
      / (decrease) in related party payable
                                      
                                      
                                      21,999
                                      
                                      
                                      
                                      40,859
                                      
                                      
                                      
                                      129,999Increase
      / (decrease) in accrued liabilities
                                      
                                      
                                      187,406
                                      
                                      
                                      
                                      3,229
                                      
                                      
                                      
                                      359,796Net
      cash from operating activities
                                      
                                      
                                      65,641
                                      
                                      
                                      
                                      (786,868
                                      )
                                      
                                      
                                      (12,114,789
                                      )Cash
      flows used in investing activitiesPurchase
      of property and equipment
                                      
                                      
                                      (50,181
                                      )
                                      
                                      
                                      (173,381
                                      )
                                      
                                      
                                      (933,218
                                      )Purchase
      of rights to technology
                                      
                                      
                                      (3,683
                                      )
                                      
                                      
                                      (4,055
                                      )
                                      
                                      
                                      (710,326
                                      )Organization
      costs
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,880
                                      )Net
      cash advanced to related party
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,644,988
                                      )Proceeds
      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
                                      
                                      
                                      (53,864
                                      )
                                      
                                      
                                      (177,436
                                      )
                                      
                                      
                                      (1,808,415
                                      )Cash
      flows provided by financing activitiesProceeds
      from issuance of common stock
                                      
                                      
                                      195,558
                                      
                                      
                                      
                                      31,246
                                      
                                      
                                      
                                      5,552,287Proceeds
      from reissuance of treasury stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      166,873
                                      
                                      
                                      
                                      751,573Cash
      from controlling shareholder
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,270,559Payments
      for treasury stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (3,325
                                      )Payments
      for stock offering costs
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (56,509
                                      )Proceeds
      from net borrowings from related party
                                      
                                      
                                      353,002
                                      
                                      
                                      
                                      610,000
                                      
                                      
                                      
                                      2,195,022Payments
      on borrowings from related party
                                      
                                      
                                      (68,291
                                      )
                                      
                                      
                                      (4,444
                                      )
                                      
                                      
                                      (167,828
                                      )Proceeds
      from notes payable
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      29,857Payments
      on notes payable and capital lease obligations
                                      
                                      
                                      (11,190
                                      )
                                      
                                      
                                      (5,217
                                      )
                                      
                                      
                                      (178,806
                                      )Proceeds
      from related party deposits
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      224,400Purchases
      of equipment held for distribution
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (68,741
                                      )Net
      cash provided by financing activities
                                      
                                      
                                      469,079
                                      
                                      
                                      
                                      798,458
                                      
                                      
                                      
                                      14,548,489Net
      change in cash
                                      
                                      
                                      480,856
                                      
                                      
                                      
                                      (165,846
                                      )
                                      
                                      
                                      625,285Cash
      at beginning of period
                                      
                                      
                                      144,429
                                      
                                      
                                      
                                      595,381
                                      
                                      
                                      
                                      -Cash
      at end of period
                                      
                                      $
                                      625,285
                                      
                                      
                                      $
                                      429,535
                                      
                                      
                                      $
                                      625,285Supplemental
      non-cash flow informationProperty
      acquisition included in accrued liabilities
                                      
                                      $
                                      18,047
                                      
                                      
                                      $
                                      -Settlement
      of borrowings from related party in exchange for
      exercise of options
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      400,000




See
accompanying notes to condensed financial statements.





3





International
Automated Systems, Inc.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


December
31, 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 and
six months ended December 31, 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 December 31, 2008 the Company
had $625,285 of cash available and had a working capital deficit of $2,862,552.
The Company had no revenues and no operating income for the three and six months
ended December 31, 2008 and 2007. As of December 31, 2008 the Company’s losses
accumulated from inception totaled $32,334,082. 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
and the impact was not material.





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.





4




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 and six months ended December
31, 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 98,475,000 shares of common stock at December
31, 2008 and 2007, respectively, which are not included in the basic earnings
per share calculation.  The Company had 4,963,918 and 5,374,618 of
stock held in trust at December 31, 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 December 31, 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 six months ended December 31, 2008 and
2007, total stock-based compensation expense recognized was $2,578,178 and
$3,107,511, respectively.  For the three months ended December 31,
2008 and 2007, total stock-based compensation expense recognized was $1,287,032
and $1,551,395, respectively.  Stock-based compensation was included
in general and administrative expenses.




During
the six months ended December 31, 2008, there were no stock options or warrants
granted or exercised. During the six months ended December 31, 2007, 1,000,000
stock options or warrants were exercised.  100,000 stock options
vested during the six months ended December 31, 2008 and 2007.




As of
December 31, 2008, there was $4,310,851 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
..63 years.





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 December 31, 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
to show and demonstrate for marketing and sales purposes, 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 by a defendant against the
Company in June 2008, requesting an award for attorney fees and court costs,
which could have exceeded $1,000,000. The Company filed a motion to dismiss in
August 2008.  The Court has issued a Memorandum Decision and Order
denying the defendant’s motion for summary judgment and denying the motion for
an award of attorney fees under 35 U.S.C. §285.  The Court, however,
has made a very limited award of reasonable attorney fees incurred by the
defendant in filing the attorney’s fee motion. The amount of this limited award
has not been determined, but is estimated that it will not exceed
$50,000.  The Company has recorded an accrued liability for $50,000 at
December 31, 2008, related to the limited award of reasonable attorney
fees.





Customer Deposits – All of
the $1,568,250 Deposits from customers at December 31, 2008 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,
2008.  The Company has delivered, installed and started up the solar
alternate energy system, but the energy output has not been
verified.  Therefore, the customers may request a return of their
deposits since output has not been verified and if these customers request a
return of their deposits, the Company may not have sufficient funds to return
the deposits.  During the last year, one customer has requested a
return of their $9,000 deposit.





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 December 31, 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 Company’s 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 six months
ended December 31, 2008, 625,900 shares were sold for proceeds of $195,558 at
prices ranging from $0.16 to $0.47 per share.   The proceeds were used to
pay professional fees, rent, operating expenses and accrued liabilities.
  At December 31, 2008, there was a balance of 4,963,918 shares in the
escrow accounts.  These shares are not accounted for as issued or
outstanding common shares.





NOTE
8 – RELATED PARTY TRANSACTIONS





During
the six months ended December 31, 2008, the Company received $353,002 in
advances from its President.  The related party borrowing is
non-interest bearing and payable upon demand and is included in related party
payables.  During the six months ended December 31, 2008, the Company
settled $68,291 of the related party borrowings by paying the President’s
personal expenses.   The amount outstanding on the related party
borrowings at December 31, 2008 was $1,058,711.





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 Company
accrued $36,000 for rent payable to the President during the six months ended
December 31, 2008 and 2007, and paid $14,000 of the rent payable during the six
months ended December 31, 2008.  The amount payable to the President
for rent at December 31, 2008 was $130,000 and is included in related party
payables.





6





NOTE
9 – DEPOSITS FROM CUSTOMERS





During
the six months ended December 31, 2008 and 2007, the Company received deposits
from customers totaling $765,000 and $81,000, 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 make 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 verified the energy
output and has not yet delivered electricity from the solar alternate energy
systems to a third party and the deposits are recorded as a liability under the
line item “Deposits from customers.”





The total
amount of Deposits from customers at December 31, 2008 was
$1,568,250.  All of the agreements provide that the Company will
deliver, install and startup the solar alternate energy system on or prior to
December 31, 2008.  The Company has delivered, installed and started
up the solar alternate 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 – RECLASSIFICATION





Certain
prior year amounts have been reclassified to conform to the current year
presentation.  The inventory balance at June 30, 2007 has been
reclassified to construction-in-process, which is included in property and
equipment per the balance sheet.  Consequently, 2007 increases in
inventory for the six months ended December 31, 2007 have been moved from cash
used in operating activities to cash used in investing activities per the
Statement of Cash Flows for the six month period ended December 31,
2007.  Furthermore, net proceeds of $605,556 received during the six
months ended December 31, 2007 from related party borrowings have been moved
from the change in related party payable included in cash flows from operating
activities to cash flows from financing activities.





NOTE
11 – SUBSEQUENT EVENTS





The
Company issued 505,000 shares of restricted stock to employees on January 13,
2009 at a grant price of $0.25 per share.  The Company’s President
exercised 1,575,000 of his warrants with an exercise price of $0.40 on January
13, 2009 in exchange for settlement of $630,000 of the related party borrowing
discussed in Note 8.





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
and six months ended December 31, 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 six months ended
December 31, 2008, 625,900 shares were sold for proceeds of $195,558 at prices
ranging from $0.16 to $0.47 per share.  At December 31, 2008, there
was a balance of 4,963,918 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.





7




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.  The Company entered into
various sales agreements to build, install and maintain solar alternate energy
systems and received $765,000 during the six months ended December 31, 2008 in
customer deposits related to these sales agreements.  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 product
development, finance any marketing programs and establish any distribution
networks.  The Company had $625,285 in cash as of December 31, 2008,
representing an increase of $480,856 from June 30, 2008.  The increase
relates to net cash provided by operating and financing activities of $65,641
and $469,079, respectively, offset by net cash used in financing activities of
$53,864. The net cash provided by operating activities was primarily due to the
receipt of customer deposits totaling $765,000 offset by increases in accounts
payable and accrued liabilities. The cash provided by financing activities was
primarily due to proceeds from the sale common stock and proceeds from related
party borrowings.





As of
December 31, 2008, the Company has current assets of $627,285 and total assets
of $1,446,382.  Current liabilities were $3,489,837 and total liabilities
of $3,586,519. The ratio of current assets to current liabilities is
approximately 0.18 to one. If the Company is unable to deliver electricity from
its solar alternate energy systems to a third party and be able 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.





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 fully operational to begin
delivering electricity; (ii) market and sell the solar energy technology system;
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 December 31, 2008 compared to the Three Months Ended December 31,
2007





For the
three months ended December 31, 2008 and 2007, the Company had no revenue and no
cost of sales.  Operations during the three months ended December 31,
2008 and 2007, primarily pertained to research and development and other
activities.  Research and development expenses remained relatively
flat for the three months ended December 31, 2008 as compared to December 31,
2007.





General
and administrative expenses decreased by $254,076 or 13% from $1,896,005 for the
three months ended December 31, 2007 to $1,641,929 for the three months ended
December 31, 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 $246,139 from $2,087,262 for the three months ended December 31,
2007 to $1,841,123 for the three months ended December 31, 2008 due primarily to
the decrease in stock-based compensation noted above.  Net loss per
common share was $0.06 and $0.07 for three months ended December 31, 2008 and
2007, respectively.





Six
Months Ended December 31, 2008 compared to the Six Months Ended December 31,
2007





For the
six months ended December 31, 2008 and 2007, the Company had no revenue and no
cost of sales.  Operations during the six months ended December 31,
2008 and 2007, primarily pertained to research and development and other
activities.  Research and development expenses increased by $90,275 or
34% to $356,848 for the six months ended December 31, 2008 from $266,573 for the
six months ended December 31, 2007.  The increase is primarily due to
increased wages in addition to purchasing additional research and development
materials for the solar thermal and bladeless turbine technology.





8





General
and administrative expenses decreased by $354,446 or 10% from $3,630,989 for the
six months ended December 31, 2007 to $3,276,543 for the six months ended
December 31, 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 $264,435 from $3,636,802 for the six months ended December 31, 2007
to $3,901,237 for the six months ended December 31, 2008 due to the items noted
above.  Net loss per common share was $0.12 and $0.14 for the six
months ended December 31, 2008 and 2007, respectively.





CONTRACTUAL
OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS





Sales Commitments- During
December 2005, the Company entered into a purchase and installation contract
with Solar Renewable Energy-1, LLC for a solar thermal power plant. The contract
is contingent on several factors and provides for certain progress payments. As
of December 31, 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 by a defendant against the
Company in June 2008, requesting an award for attorney fees and court costs,
which could have exceeded $1,000,000. The Company filed a motion to dismiss in
August 2008.  The Court has issued a Memorandum Decision and Order
denying the defendant’s motion for summary judgment and denying the motion for
an award of attorney fees under 35 U.S.C. section 285.  The Court,
however, has made a very limited award of reasonable attorney fees incurred by
the defendant in filing the attorney’s fee motion. The amount of this limited
award has not been determined, but is estimated that it will not exceed
$50,000.  The Company has recorded an accrued liability for $50,000 at
December 31, 2008, related to the limited award of reasonable attorney
fees.





Customer Deposits – All of
the $1,568,250 Deposits from customers at December 31, 2008 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,
2008.  The Company has delivered, installed and started up the solar
alternate energy system, but the energy output has not been
verified.  Therefore, the customers may request a return of their
deposits since output has not been verified and if these customers request a
return of their deposits, the Company may not have sufficient funds to return
the deposits.  During the last year, one customer has requested a
return of their $9,000 deposit.




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 December 31, 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, Company’s 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.





9




PART
II - OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





In June
2008, subsequent to a court order declaring the United States Patent No.
5,598,474 (“the 474 patent”) in January 2008, UPEK, Inc. filed a motion for
further declaration of patent invalidity and 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 did not indicate the specific amount
of attorneys’ fees and costs, but indicated that they were in excess of
$1,000,000.





The
Company filed briefs in opposition to both motions in August
2008.  The Court issued a Memorandum Decision and Order denying UPEK’s
motion for summary judgment and denying UPEK’s motion for an award of attorney
fees under 35 U.S.C. §285.  The Court did, however, make a very
limited award of reasonable attorney fees incurred by UPEK in filing the
attorney’s fee motion.  The amount of this limited award has not yet
been determined by the Court.  Our best estimate is that the amount of
the award is likely to be less than $50,000.  Therefore, the Company
has recorded an accrued liability for $50,000 at December 31, 2008.





The
Company intends to prosecute a reissue application for the 474 patent which has
been declared invalid.





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 six months ended
December 31, 2008, 625,900 shares were sold for proceeds of $195,558 at prices
ranging from $0.16 to $.47 per share. The proceeds were used to pay professional
fees, operating expenses, accounts payable and accrued liabilities.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.







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





None.







ITEM
5. OTHER INFORMATION.





None.








ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K





a.
Exhibits





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





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





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





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




10




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




INTERNATIONAL AUTOMATED SYSTEMS,
INC.







Date:  February
      13, 2009
                By
                /s/ Neldon
    JohnsonNeldon
      JohnsonPresident,
      Chief Executive Officer, DirectorDate:
      February 13, 2009
                By
                /s/ LaGrand
    JohnsonLaGrand
      JohnsonChief
      Financial Officer








11