----

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

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**INTERNATIONAL      AUTOMATED SYSTEMS, INC.**

***(A      Development Stage Company)***

**TABLE      OF CONTENTS**

|                                                                                                                                                                                                                                                                      |                                                                           | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|----------|
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| **PART                I - FINANCIAL INFORMATION**                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                1.                                                                                                                                                                                                                                                    | Financial                Statements                                            | 2        |
|                                                                                                                                                                                                                                                                      |                                                                           |
| Unaudited                Condensed Balance Sheets as of March 31, 2007 and June 30,                2006                                                                                                                                                                   | 2                                                                              |
|                                                                                                                                                                                                                                                                      |                                                                           |
| Unaudited                Condensed Statements of Operations for the Three and Nine Months                Ended                March 31, 2007 and 2006 and for the Period from September 26, 1986                (Date                of Inception) through March 31, 2007 | 3                                                                              |
|                                                                                                                                                                                                                                                                      |                                                                           |
| Unaudited                Condensed Statements of Cash Flows for the Nine Months Ended March                31,                2007 and 2006 and for the Period from September 26, 1986 (Date of                Inception) through March 31, 2007                          | 4                                                                              |
|                                                                                                                                                                                                                                                                      |                                                                           |
| Notes                to Unaudited Condensed Financial Statements                                                                                                                                                                                                          | 5                                                                              |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                2.                                                                                                                                                                                                                                                    | Management’s                Discussion and Analysis or Plan of Operation | 13       |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                3.                                                                                                                                                                                                                                                    | Controls                and Procedures                                         | 15       |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| **PART                II - OTHER INFORMATION**                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                1.                                                                                                                                                                                                                                                    | Legal                Proceedings                                               | 16       |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                2.                                                                                                                                                                                                                                                    | Changes                in Securities                                           | 16       |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                3.                                                                                                                                                                                                                                                    | Commitments                and Contingencies                                   | 17       |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                4.                                                                                                                                                                                                                                                    | Defaults                Upon Senior Securities                                 | 17       |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                5.                                                                                                                                                                                                                                                    | Submission                of Matters to a Vote of Security Holders             | 17       |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                6.                                                                                                                                                                                                                                                    | Other                Information                                               | 17       |
|                                                                                                                                                                                                                                                                      |                                                                           |     |
| Item                7.                                                                                                                                                                                                                                                    | Exhibits                and Reports on Form 8-K                                | 17       |

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**INTERNATIONAL        AUTOMATED SYSTEMS, INC.**

|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|-------------|---------------------------|--------|
|                                                                                                                                                                                                                                                         |   | Unaudited                  |        | Audited                   |   |
|                                                                                                                                                                                                                                                         |   | March                  31, |        | June                  30, |   |
|                                                                                                                                                                                                                                                         |   | 2007                       |        | 2006                      |   |
| **ASSETS**                                                                                                                                                                                                                                                   |
| **CURRENT                  ASSETS**                                                                                                                                                                                                                          |   |                       |        |                      |   |   |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| Cash                                                                                                                                                                                                                                                         |   | $                          | 195,122     |                      | $      | 708,379 |   |
| Prepaid                  expenses                                                                                                                                                                                                                            |   |                       | 2,166       |                      |   | - |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| **Total                  Current Assets**                                                                                                                                                                                                                    |   |                       | 197,288     |                      |   | 708,379 |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| Property                  and Equipment, net of $125,351 and $98,430 accumulated depreciation,                  respectively                                                                                                                                 |   |                       | 365,719     |                      |   | 196,791 |   |
| Patents,                  net of $13,679 and $11,174 accumulated amortization,                  respectively                                                                                                                                                 |   |                       | 237,816     |                      |   | 203,473 |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| **TOTAL                  ASSETS**                                                                                                                                                                                                                            |   | $                          | 800,823     |                      | $      | 1,108,643 |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| **LIABILITIES                  AND STOCKHOLDERS' DEFICIT**                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| **CURRENT                  LIABILITIES**                                                                                                                                                                                                                     |   |                       |        |                      |   |   |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| Accounts                  payable                                                                                                                                                                                                                            |   | $                          | 37,788      |                      | $      | 128,995 |   |
| Accrued                  payroll taxes                                                                                                                                                                                                                       |   |                       | 44,345      |                      |   | 59,829 |   |
| Related                  party payable                                                                                                                                                                                                                       |   |                       | 680,332     |                      |   | 392,886 |   |
| Deposits                  from customers                                                                                                                                                                                                                     |   |                       | 585,000     |                      |   | 459,000 |   |
| Notes                  payable-current portion                                                                                                                                                                                                               |   |                       | 9,330       |                      |   | 9,330 |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| **Total                  Current Liabilities**                                                                                                                                                                                                               |   |                       | 1,356,795   |                      |   | 1,050,040 |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| Net                  Long-Term Liabilities - Notes Payable                                                                                                                                                                                                   |   |                       | 124,994     |                      |   | 68,287 |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| **TOTAL                  LIABILITIES**                                                                                                                                                                                                                       |   |                       | 1,481,789   |                      |   | 1,118,327 |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| **STOCKHOLDERS'                  DEFICIT**                                                                                                                                                                                                                   |   |                       |        |                      |   |   |   |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| Preferred                  stock, Class A, no par value; 4,400,000 shares authorized, 3,400,000                  shares issued and outstanding                                                                                                               |   |                       | 294,786     |                      |   | 294,786 |   |
| Preferred                  stock, Class B, no par value, 600,000 shares authorized, 300,000                  shares                  issued and outstanding                                                                                                  |   |                       | -           |                      |   | - |   |
| Common                  stock, no par value, 45,000,000 shares authorized, 26,920,122 and                  25,532,622 shares issued and outstanding, net 5,080,418 and 842,918                  shares                  held in escrow account, respectively |   |                       | 17,780,298  |                      |   | 12,083,707 |   |
| Deficit                  accumulated during the development stage                                                                                                                                                                                            |   |                       | (18,756,050 | )                         |   | (12,388,177 | ) |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| **Total                  Stockholders' Deficit**                                                                                                                                                                                                             |   |                       | (680,966    | )                         |   | (9,684 | ) |
|                                                                                                                                                                                                                                                         |   |                       |        |                      |   |   |   |
| **TOTAL                  LIABILITIES AND STOCKHOLDERS' DEFICIT**                                                                                                                                                                                             |   | $                          | 800,823     |                      | $      | 1,108,643 |   |

----

**INTERNATIONAL        AUTOMATED SYSTEMS, INC.**

|                                                             |   | For                      the Three MonthsEnded March 31, |       | For                      the Nine MonthsEnded March 31, |   | For                          the Period From Inception (September 26, 1986) Through March                          31, |   |
|------------------------------------------------------------------|--------|----------------------------------------------------------|------------|---------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------|--------|
|                                                             |   | 2007                                                     |       | 2006                                                    |   | 2007                                                                                                                   |   | 2006 |   |  2007 |   |
| **REVENUE**                                                      |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                            |   | $                                                        | -          |                                                    | $      | -                                                                                                                      |   | $ | - |   | $ | - |   | $ | 111,226 |   |
| Income                    from related party                     |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | 32,348 |   |
| **Total                    Revenue**                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   | 143,574 |   |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **COST                    OF GOODS SOLD**                        |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Cost                    of sales                                 |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | 81,927 |   |
| Write                    down of carrying value of inventories   |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | 233,131 |   |
| **Total                    Costs of Sales**                      |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | 315,058 |   |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **GROSS                    LOSS**                                |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | (171,484 | ) |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **OPERATING                    EXPENSES**                        |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| General                    and administrative                    |   |                                                     | 1,971,354  |                                                    |   | 347,197                                                                                                                |   |   | 5,857,702 |   |   | 663,014 |   |   | 13,317,709 |   |
| Research                    and development                      |   |                                                     | 113,924    |                                                    |   | 235,453                                                                                                                |   |   | 510,171 |   |   | 357,975 |   |   | 6,006,471 |   |
| Impairment                    of patents                         |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | 110,082 |   |
| License                    fees                                  |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | 270,634 |   |
| Loss                    on disposal of property and equipment    |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | 17,359 |   |
| **Total                    Operating Expenses**                  |   |                                                     | 2,085,278  |                                                    |   | 582,650                                                                                                                |   |   | 6,367,873 |   |   | 1,020,989 |   |   | 19,722,255 |   |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **LOSS                    FROM OPERATIONS**                      |   |                                                     | (2,085,278 | )                                                       |   | (582,650                                                                                                               | )      |   | (6,367,873 | ) |   | (1,020,989 | ) |   | (19,893,739 | ) |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **OTHER                    INCOME (EXPENSES)**                   |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Forfeiture                    of deposits                        |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | (236,803 | ) |
| Loss                    on impairment of assets                  |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | (583 | ) |
| Interest                    income                               |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | 22,444 |   |
| Other                                                            |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | (29,392 | ) |
| **Total                    Other Income (Expenses)**             |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | (244,334 | ) |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **LOSS                    BEFORE EXTRAORDINARY GAIN**            |   |                                                     | (2,085,278 | )                                                       |   | (582,650                                                                                                               | )      |   | (6,367,873 | ) |   | (1,020,989 | ) |   | (20,138,073 | ) |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **Extraordinary                    Gain on Sale of Patents**     |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   | 1,382,023 |   |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **NET                    LOSS**                                  |   | $                                                        | (2,085,278 | )                                                       | $      | (582,650                                                                                                               | )      | $ | (6,367,873 | ) | $ | (1,020,989 | ) | $ | (18,756,050 | ) |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Basic                    and Diluted Loss Per Share              |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Loss                    before extraordinary gain                |   | $                                                        | (0.08      | )                                                       | $      | (0.02                                                                                                                  | )      | $ | (0.24 | ) | $ | (0.04 | ) |   |   |   |
| Extraordinary                    gain                            |   |                                                     | -          |                                                    |   | -                                                                                                                      |   |   | - |   |   | - |   |   |   |   |
| Net                    Loss Applicable to                        |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Common                    Shareholders                           |   | $                                                        | (0.08      | )                                                       | $      | (0.02                                                                                                                  | )      | $ | (0.24 | ) | $ | (0.04 | ) |   |   |   |
|                                                             |   |                                                     |       |                                                    |   |                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Weighted                    Shares Used in Per Share Calculation |   |                                                     | 26,848,810 |                                                    |   | 24,107,500                                                                                                             |   |   | 26,412,325 |   |   | 23,756,012 |   |   |   |   |

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**INTERNATIONAL        AUTOMATED SYSTEMS, INC.**

|                                                                                                       |   | For                    the Nine MonthsEnded March 31, |       | For                        the Period From Inception (September 26, 1986) Through March                        31, |   |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                       |   | 2007                                                  |       | 2006                                                                                                               |   | 2007 |   |
| **CASH                  FLOWS FROM OPERATING ACTIVITIES**                                                  |   |                                                  |       |                                                                                                               |   |   |   |
| Net                  loss                                                                                  |   | $                                                     | (6,367,873 | )                                                                                                                  | $      | (1,020,989 | ) | $ | (18,756,050 | ) |
| Adjustments                  to reconcile net loss to net cash                  from operating activities: |   |                                                  |       |                                                                                                               |   |   |   |   |   |   |
| Depreciation                  and amortization                                                             |   |                                                  | 29,424     |                                                                                                               |   | 15,193 |   |   | 382,626 |   |
| Stock                  based compensation                                                                  |   |                                                  | 5,006,513  |                                                                                                               |   | 35,400 |   |   | 7,692,320 |   |
| Settlement                  of liability                                                                   |   |                                                  | -          |                                                                                                               |   | 63,600 |   |   | - |   |
| Forfeiture                  of deposits                                                                    |   |                                                  | -          |                                                                                                               |   | - |   |   | 236,803 |   |
| Write                  down of inventory                                                                   |   |                                                  | -          |                                                                                                               |   | - |   |   | 16,945 |   |
| Write                  off of equipment to research & development                                      |   |                                                  | -          |                                                                                                               |   | - |   |   | 23,900 |   |
| Loss                  on disposal of equipment                                                             |   |                                                  | -          |                                                                                                               |   | - |   |   | 17,942 |   |
| Impairment                  of patents and abandonment of in-process rights to                  technology |   |                                                  | -          |                                                                                                               |   | - |   |   | 356,632 |   |
| Gain                  on sale of patents                                                                   |   |                                                  | -          |                                                                                                               |   | - |   |   | (1,382,023 | ) |
| Gain                  on settlement of debt                                                                |   |                                                  | -          |                                                                                                               |   | - |   |   | (6,123 | ) |
| Stock                  issued for expenses                                                                 |   |                                                  | -          |                                                                                                               |   | - |   |   | 63,600 |   |
| Changes                  in current assets and liabilities:                                                |   |                                                  |       |                                                                                                               |   |   |   |   |   |   |
| Prepaid                  expenses                                                                          |   |                                                  | (2,166     | )                                                                                                                  |   | 4,000 |   |   | (2,166 | ) |
| Deposits                  from customers                                                                   |   |                                                  | 126,000    |                                                                                                               |   | 392,000 |   |   | 585,000 |   |
| Accounts                  payable                                                                          |   |                                                  | (91,208    | )                                                                                                                  |   | (60,601 | ) |   | 37,787 |   |
| Related                  party payable                                                                     |   |                                                  | 537,447    |                                                                                                               |   | - |   |   | 930,333 |   |
| Accrued                  liabilities                                                                       |   |                                                  | (15,484    | )                                                                                                                  |   | (91,015 | ) |   | 144,344 |   |
| **Net                  Cash From Operating Activities**                                                    |   |                                                  | (777,347   | )                                                                                                                  |   | (662,412 | ) |   | (9,658,130 | ) |
|                                                                                                       |   |                                                  |       |                                                                                                               |   |   |   |   |   |   |
| **CASH                  FLOWS FROM INVESTING ACTIVITIES**                                                  |   |                                                  |       |                                                                                                               |   |   |   |   |   |   |
| Purchase                  of property and equipment                                                        |   |                                                  | (129,847   | )                                                                                                                  |   | (41,783 | ) |   | (532,716 | ) |
| Proceeds                  from sale of property and equipment                                              |   |                                                  | -          |                                                                                                               |   | 11,237 |   |   | - |   |
| Purchase                  of rights to technology                                                          |   |                                                  | (36,848    | )                                                                                                                  |   | (22,488 | ) |   | (693,582 | ) |
| Organization                  costs                                                                        |   |                                                  | -          |                                                                                                               |   | - |   |   | (1,880 | ) |
| Net                  cash advanced to related party                                                        |   |                                                  | -          |                                                                                                               |   | - |   |   | (1,644,988 | ) |
| Proceeds                  from capital lease receivable                                                    |   |                                                  | -          |                                                                                                               |   | - |   |   | 44,220 |   |
| Repayment                  of cash loaned to related party                                                 |   |                                                  | -          |                                                                                                               |   | - |   |   | 53,254 |   |
| Net                  proceeds from sale of patents                                                         |   |                                                  | -          |                                                                                                               |   | - |   |   | 1,382,023 |   |
| **Net                  Cash From Investing Activities**                                                    |   |                                                  | (166,695   | )                                                                                                                  |   | (53,034 | ) |   | (1,393,669 | ) |
|                                                                                                       |   |                                                  |       |                                                                                                               |   |   |   |   |   |   |
| **CASH                  FLOWS FROM FINANCING ACTIVITIES**                                                  |   |                                                  |       |                                                                                                               |   |   |   |   |   |   |
| Proceeds                  from issuance of common stock                                                    |   |                                                  | 440,078    |                                                                                                               |   | 821,719 |   |   | 4,925,616 |   |
| Cash                  from controlling shareholder                                                         |   |                                                  | -          |                                                                                                               |   | - |   |   | 6,270,559 |   |
| Payments                  for treasury stock                                                               |   |                                                  | -          |                                                                                                               |   | - |   |   | (3,325 | ) |
| Payments                  for stock offering costs                                                         |   |                                                  | -          |                                                                                                               |   | - |   |   | (56,509 | ) |
| Proceeds                  from net borrowings from related party                                           |   |                                                  | -          |                                                                                                               |   | 237,175 |   |   | 78,101 |   |
| Proceeds                  from notes payable                                                               |   |                                                  | -          |                                                                                                               |   | - |   |   | 29,857 |   |
| Payments                  on note payable and obligations capital lease                                    |   |                                                  | (9,293     | )                                                                                                                  |   | (2,069 | ) |   | (153,037 | ) |
| Proceeds                  from related party deposits                                                      |   |                                                  | -          |                                                                                                               |   | - |   |   | 224,400 |   |
| Purchases                  of equipment held for distribution                                              |   |                                                  | -          |                                                                                                               |   | - |   |   | (68,741 | ) |
| **Net                  Cash From Financing Activities**                                                    |   |                                                  | 430,785    |                                                                                                               |   | 1,056,825 |   |   | 11,246,921 |   |
|                                                                                                       |   |                                                  |       |                                                                                                               |   |   |   |   |   |   |
| **NET                  CHANGE IN CASH**                                                                    |   |                                                  | (513,257   | )                                                                                                                  |   | 341,379 |   |   | 195,122 |   |
| **CASH                  AT BEGINNING OF PERIOD**                                                           |   |                                                  | 708,379    |                                                                                                               |   | 40,885 |   |   | - |   |
| **CASH                  AT END OF PERIOD**                                                                 |   | $                                                     | 195,122    |                                                                                                               | $      | 382,264 |   | $ | 195,122 |   |

----

**INTERNATIONAL        AUTOMATED SYSTEMS, INC.**

|                                                                                |   | For                  the Nine |    |
|-------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                |   | Months                  Ended |    |
|                                                                                |   | March                  31,    |    |
|                                                                                |   | 2007                          |    | 2006 |   |
| SUPPLEMENTAL                  DISCLOSURES OF CASH                  FLOW INFORMATION |   |                          |    |   |   |
|  Purchase                  of land with notes payable                          |   | $                             | 66,000  |   | $ | - |   |
|  Issuance                  of common stock in exchange for payment of debt     |   | $                             | 250,000 |   | $ | - |   |

----

**International        Automated Systems, Inc.**

**(A        Development Stage Company)**

**Notes        to Unaudited Condensed Financial Statements**

**March        31, 2007**

**NOTE        1 - INTERIM FINANCIAL STATEMENTS**

**NOTE        2 - BUSINESS CONDITION/GOING CONCERN**

**NOTE        3 - STOCK BASED COMPENSATION**

----

**International        Automated Systems, Inc.**

**(A        Development Stage Company)**

**Notes        to Unaudited Condensed Financial Statements**

**March        31, 2007**

|                                                  |   | May                        14, 2004 |
|-------------------------------------------------------|--------|-------------------------------------|
|                                                  |   |  Agreement:                    |
| Expected                        life (in years) (1)   |   | 10                                  |
| Risk-free                        interest rate (2)    |   | 4.79%                               |
| Expected                        volatility factor (3) |   | 138.76%                             |
| Expected                        dividend yield        |   | 0.00%                               |

----

**International          Automated Systems, Inc.**

**(A          Development Stage Company)**

**Notes          to Unaudited Condensed Financial Statements**

**March          31, 2007**

|   | (1) | For                    the three and nine months ended March 31, 2007, the expected                    lives of                    options were determined based on the “simplified” method under the                    provisions of SAB 107. Due to limited history, we believe that                    we do not                    have appropriate historical experience to estimate future exercise                    patterns. As more information becomes available, we may revise                    this                    estimate on a prospective basis. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The                    risk-free rate for periods within the contractual life of the                    options is                    based on the Federal risk free rate on a ten year t-bill in effect                    at the                    time of grant. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | For                    the three and nine months ended March 31, 2007, we estimated                    the expected                    volatility based on historical share price                    data. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                              |   | August                    2000 |
|---------------------------------------------------|--------|--------------------------------|
|                                              |   |  Agreement:               |
| Expected                    life (in years) (1)   |   | 10                             |
| Risk-free                    interest rate (2)    |   | 5.73%                          |
| Expected                    volatility factor (3) |   | 137.47%                        |
| Expected                    dividend yield        |   | 0.00%                          |

|   | (1) | For                    the three and nine months ended March 31, 2007, the expected                    lives of                    options were determined based on the “simplified” method under the                    provisions of SAB 107. Due to limited history, we believe that                    we do not                    have appropriate historical experience to estimate future exercise                    patterns. As more information becomes available, we may revise                    this                    estimate on a prospective basis. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The                    risk-free rate for periods within the contractual life of the                    options is                    based on the Federal risk free rate on a ten year t-bill in effect                    at the                    time of grant. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | For                    the three and nine months ended March 31, 2007, we estimated                    the expected                    volatility based on historical share price                    data. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                |   | August                      2000 |
|-----------------------------------------------------|--------|----------------------------------|
|                                                |   |  Agreement:                 |
| Expected                      life (in years) (1)   |   | 5                                |
| Risk-free                      interest rate (2)    |   | 5.73%                            |
| Expected                      volatility factor (3) |   | 137.47%                          |
| Expected                      dividend yield        |   | 0.00%                            |

|   | (1) | For                    the three and nine months ended March 31, 2007, the expected                    lives of                    options were determined based on the “simplified” method under the                    provisions of SAB 107. Due to limited history, we believe that                    we do not                    have appropriate historical experience to estimate future exercise                    patterns. As more information becomes available, we may revise                    this                    estimate on a prospective basis. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**International          Automated Systems, Inc.**

**(A          Development Stage Company)**

**Notes          to Unaudited Condensed Financial Statements**

**March          31, 2007**

|   | (2) | The                    risk-free rate for periods within the contractual life of the                    options is                    based on the Federal risk free rate on a ten year t-bill in effect                    at the                    time of grant. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | For                    the three and nine months ended March 31, 2007, we estimated                    the expected                    volatility based on historical share price                    data. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                             |   | Options |        | WeightedAverageExercisePrice |   | WeightedAverageRemainingLife                    in Years |   | AggregateIntrinsicValue |   |
|--------------------------------------------------|--------|---------|-------------|------------------------------|--------|----------------------------------------------------------|--------|-------------------------|--------|
|                                             |   |    |        |                         |   |                                                     |   |                    |   |
| Outstanding                    at June 30, 2006  |   |    | 101,600,000 |                         | $      | 0.44                                                     |   |  27.9              |   |   |   |   |
|                                             |   |    |        |                         |   |                                                     |   |                    |   |   |   |   |   |
| Activity                    during the period:   |   |    |        |                         |   |                                                     |   |                    |   |   |   |   |   |
| Exercised                                        |   |    | (625,000    | )                            | $      | 0.40                                                     |   |                    |   |   |   |   |   |
|                                             |   |    |        |                         |   |                                                     |   |                    |   |   |   |   |   |
| Outstanding                    at March 31, 2007 |   |    | 100,975,000 |                         | $      | 0.44                                                     |   |  27.2              |   | $ | 39,750,000 |   |
| Exercisable                    at March 31, 2007 |   |    | 15,675,000  |                         | $      | 0.62                                                     |   |  25.5              |   | $ | 5,750,000 |   |

|                                            |   | Warrants                    /Options |       | WeightedAverageGrant                    DateFair                    Value |   |
|-------------------------------------------------|--------|--------------------------------------|------------|---------------------------------------------------------------------------|--------|
|                                            |   |                                 |       |                                                                      |   |
| Non-vested                    at June 30, 2006  |   |                                 | 90,400,000 |                                                                      | $      | 0.37 |   |
|                                            |   |                                 |       |                                                                      |   |   |   |
| Activity                    during the period:  |   |                                 |       |                                                                      |   |   |   |
| Vested                                          |   |                                 | (5,100,000 | )                                                                         | $      | 0.41 |   |
| Non-vested                    at March 31, 2007 |   |                                 | 85,300,000 |                                                                      | $      | 0.37 |   |

| Warrants                    / OptionsOutstanding                  atMar.                  31, 2007 | Weighted                  AverageRemaining                  Contractual Life | Weighted                  AverageExercise                  Price | NumberExercisable                  atMar.                  31, 2007 | Weighted                  AverageExercisable                  Price |
|----------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|------------------------------------------------------------------|---------------------------------------------------------------------|---------------------------------------------------------------------|
| 1,600,000                                                                                          | 3.4                  years                                                   | $                  3.00                                          | 1,300,000                                                           | $                  3.00                                             |
| 99,375,000                                                                                         | 27.55                  years                                                 | $                  0.40                                          | 14,375,000                                                          | $                  0.40                                             |

----

**International            Automated Systems, Inc.**

**(A            Development Stage Company)**

**Notes            to Unaudited Condensed Financial Statements**

**March            31, 2007**

|                                                                                                                                                  |   | For                    the Three MonthsEndedMarch                    31, 2006 |       | For                    the Nine MonthsEndedMarch                    31, 2006 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|--------|
|                                                                                                                                                  |   |                                                                          |       |                                                                         |   |
| Net                    loss, as reported                                                                                                              |   | $                                                                             | (582,650   | )                                                                            | $      | (1,020,989 | ) |
|                                                                                                                                                  |   |                                                                          |       |                                                                         |   |   |   |
| Add:                     Total                    stock-based employee compensation expensed                    under intrinsic value method     |   |                                                                          | -          |                                                                         |   | - |   |
|                                                                                                                                                  |   |                                                                          |       |                                                                         |   |   |   |
| Deduct:                    Total stock-based employee compensation expense determined under                    fair-value based method for all awards |   |                                                                          | (1,711,204 | )                                                                            |   | (5,782,192 | ) |
| Pro                    forma net loss, as restated                                                                                                    |   |                                                                          | (2,293,854 | )                                                                            | $      | (6,803,181 | ) |
|                                                                                                                                                  |   |                                                                          |       |                                                                         |   |   |   |
| Pro                    forma loss per common share:                                                                                                   |   |                                                                          |       |                                                                         |   |   |   |
| Basic                                                                                                                                                 |   | $                                                                             | 0.10       |                                                                         | $      | 0.29 |   |
| Diluted                                                                                                                                               |   | $                                                                             | 0.10       |                                                                         | $      | 0.29 |   |

**NOTE          4 - COMMITMENTS AND CONTINGENCIES**

*Sales          Commitments*

*Legal          - *

**NOTE          5 - STOCKHOLDERS EQUITY**

***Common          Stock Issued for Cash***

----

**International            Automated Systems, Inc.**

**(A            Development Stage Company)**

**Notes            to Unaudited Condensed Financial Statements**

**March            31, 2007**

**NOTE          6 - LOAN FROM SHAREHOLDER**

**NOTE          7 - CUSTOMER DEPOSITS**

----

**ITEM      2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF      OPERATION**

**FORWARD      LOOKING STATEMENTS**

**LIQUIDITY      AND CAPITAL RESOURCES**

**RESULTS      OF OPERATIONS**

**Three      Months Ended **
**March      31, 2007**
**compared      to Three Months Ended **
**March      31, 2006**

----

**Nine      Months Ended March 31, 2007 compared to Nine Months Ended March 31,      2006**

**FUTURE      BUSINESS**

----

**ITEM      3: CONTROLS AND PROCEDURES**

**Evaluation      of Disclosure Controls and Procedures**

**Changes      in Internal Control over Financial Reporting**

----

**PART      II - OTHER INFORMATION**

**ITEM      1. LEGAL PROCEEDINGS**

**ITEM      2. CHANGES IN SECURITIES**

----

**ITEM      3. COMMITMENTS AND CONTINGENCIES**

**ITEM      4. DEFAULTS UPON SENIOR SECURITIES.**

**ITEM      5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

**ITEM      6. OTHER INFORMATION.**

**ITEM      7. EXHIBITS AND REPORTS ON FORM 8-K**

**a.      Exhibits**

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

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

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

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

----

**SIGNATURES**

**International      Automated Systems, Inc.**

----