UNITED
STATES
  SECURITIES
AND EXCHANGE COMMISSION
  Washington,
D.C.  20549
  FORM 10-Q
  ______________________
   Quarterly
Report Pursuant to Section 13 or 15(d) of the
 Securities
Exchange Act of 1934
   For
the Quarterly Period Ended March 31, 2009
   Commission
File Number 33-16531-D
  INTERNATIONAL AUTOMATED
SYSTEMS, INC.
 (Exact
name of registrant as specified in its charter)
  
 Utah
                87-0447580(State
      or other jurisdiction of incorporation or organization)
                (IRS
      Employer Identification No.)
  326 North SR 198, Salem,
Utah 84653
 (Address
of principal executive offices, including zip code)
  (801)
423-8132
 (Registrant’s
telephone number, including area code)
   Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.  Yes xNoo
  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 oNo 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
      March 31, 2009Common
      Stock, no par value
                38,866,540
      shares
  
  INTERNATIONAL
AUTOMATED SYSTEMS, INC.
 (A
Development Stage Company)
 
 
  TABLE   OF
CONTENTS
 
  
 PART
I – FINANCIAL INFORMATION
  Item
      1: Financial StatementsUnaudited
      Condensed Balance SheetsAs
      of March 31, 2009 (unaudited) and June 30, 2008 (audited)
                                                1Unaudited
      Condensed Statements of OperationsFor
      the three and nine months ended March 31, 2009 and 2008 and for the Period
      fromSeptember
      26, 1986 (Date of Inception) through March 31, 2009
                                                2Unaudited
      Condensed Statements of Cash FlowsFor
      the nine months ended March 31, 2009 and 2008 and for the Period
      fromSeptember
      26, 1986 (Date of Inception) through March 31, 2009
                                                3Notes
      to Unaudited Condensed Financial Statements
                                                4Item
      2:  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                                                8Item
      4T:  Controls and Procedures
                                                10PART
      II – OTHER INFORMATIONItem
      1:  Legal Proceedings
                                                10Item
      2:  Unregistered Sales of Securities and Use of
      Proceeds
                                                11Item
      3:  Defaults Upon Senior Securities
                                                11Item
      4:  Submission of Matters to a Vote of Security
      Holders
                                                11Item
      5:  Other Information
                                                11Item
      6:  Exhibits
                                                11Signatures
                                                12
 
  -i-
  INTERNATIONAL AUTOMATED SYSTEMS, INC.
 (A
Development Stage Company)
 Condensed
Balance Sheets
 
 
 March
      31,
                                                      
                                                      
                                                      June
      30,2009
                                                      
                                                      
                                                      2008(unaudited)
                                                      
                                                      
                                                      (audited)ASSETSCURRENT
      ASSETSCash
                                                      
                                                      $
                                                      177,972
                                                      
                                                      
                                                      $
                                                      144,429Prepaid
      expenses
                                                      
                                                      
                                                      2,000
                                                      
                                                      
                                                      
                                                      -Total
      Current Assets
                                                      
                                                      
                                                      179,972
                                                      
                                                      
                                                      
                                                      144,429Property
      and Equipment, net of accumulated depreciation of $266,392 and
      $202,965, respectively
                                                      
                                                      
                                                      842,326
                                                      
                                                      
                                                      
                                                      623,473Patents,
      net of accumulated amortization of $19,766 and $15,176,
      respectively
                                                      
                                                      
                                                      176,194
                                                      
                                                      
                                                      
                                                      167,827TOTAL
      ASSETS
                                                      
                                                      $
                                                      1,198,492
                                                      
                                                      
                                                      $
                                                      935,729LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
                                                      
                                                      $
                                                      446,063
                                                      
                                                      
                                                      $
                                                      335,413Accrued
      liabilities
                                                      
                                                      
                                                      200,878
                                                      
                                                      
                                                      
                                                      72,391Related
      party payable
                                                      
                                                      
                                                      531,865
                                                      
                                                      
                                                      
                                                      882,001Deposits
      from customers
                                                      
                                                      
                                                      1,640,250
                                                      
                                                      
                                                      
                                                      803,250Notes
      payable-current portion
                                                      
                                                      
                                                      57,538
                                                      
                                                      
                                                      
                                                      11,090Total
      Current Liabilities
                                                      
                                                      
                                                      2,876,594
                                                      
                                                      
                                                      
                                                      2,104,145Long-term
      notes payable
                                                      
                                                      
                                                      121,982
                                                      
                                                      
                                                      
                                                      108,655TOTAL
      LIABILITIES
                                                      
                                                      
                                                      2,998,576
                                                      
                                                      
                                                      
                                                      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,  34,168,622
      and 31,146,722 issued and outstanding, net
      of 4,647,918 and 5,589,818 shares held in escrow account,
      respectively
                                                      
                                                      
                                                      31,682,782
                                                      
                                                      
                                                      
                                                      27,002,945Deficit
      accumulated during the development stage
                                                      
                                                      
                                                      (33,900,130
                                                      )
                                                      
                                                      
                                                      (28,697,280
                                                      )Total
      Stockholders' Deficit
                                                      
                                                      
                                                      (1,800,084
                                                      )
                                                      
                                                      
                                                      (1,277,071
                                                      )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                                                      
                                                      $
                                                      1,198,492
                                                      
                                                      
                                                      $
                                                      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 Nine Months Ended
                                                  
                                                  
                                                  (September
      26,March
      31,
                                                  
                                                  
                                                  March
      31,
                                                  
                                                  
                                                  1986)
      Through2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  March
      31, 2009RevenuesSales
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  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
                                                  
                                                  
                                                  1,374,698
                                                  
                                                  
                                                  
                                                  1,799,395
                                                  
                                                  
                                                  
                                                  4,651,241
                                                  
                                                  
                                                  
                                                  5,430,384
                                                  
                                                  
                                                  
                                                  26,957,951Research
      and development
                                                  
                                                  
                                                  189,371
                                                  
                                                  
                                                  
                                                  174,398
                                                  
                                                  
                                                  
                                                  546,219
                                                  
                                                  
                                                  
                                                  440,971
                                                  
                                                  
                                                  
                                                  7,464,169Impairment
      of patents
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  10,275
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  10,275
                                                  
                                                  
                                                  
                                                  140,577License
      fees
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  270,634Loss
      on disposal of property
      and equipment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  16,901Total
      Operating Expenses
                                                  
                                                  
                                                  1,564,069
                                                  
                                                  
                                                  
                                                  1,984,068
                                                  
                                                  
                                                  
                                                  5,197,460
                                                  
                                                  
                                                  
                                                  5,881,630
                                                  
                                                  
                                                  
                                                  34,850,232Loss
      from operations
                                                  
                                                  
                                                  (1,564,069
                                                  )
                                                  
                                                  
                                                  (1,984,068
                                                  )
                                                  
                                                  
                                                  (5,197,460
                                                  )
                                                  
                                                  
                                                  (5,881,630
                                                  )
                                                  
                                                  
                                                  (35,021,716
                                                  )Other
      income (expenses)Loss
      on impairment of assets
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (583
                                                  )Forfeiture
      of deposits
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (236,803
                                                  )Interest
      income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  147
                                                  
                                                  
                                                  
                                                  74
                                                  
                                                  
                                                  
                                                  1,392
                                                  
                                                  
                                                  
                                                  26,436Interest
      expense
                                                  
                                                  
                                                  (1,756
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (5,721
                                                  )
                                                  
                                                  
                                                  (4,920
                                                  )
                                                  
                                                  
                                                  (20,447
                                                  )Other
      income (expense)
                                                  
                                                  
                                                  (223
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  257
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (29,040
                                                  )Total
      Other Income (Expenses)
                                                  
                                                  
                                                  (1,979
                                                  )
                                                  
                                                  
                                                  147
                                                  
                                                  
                                                  
                                                  (5,390
                                                  )
                                                  
                                                  
                                                  (3,528
                                                  )
                                                  
                                                  
                                                  (260,437
                                                  )Loss
      before extraordinary gain
                                                  
                                                  
                                                  (1,566,048
                                                  )
                                                  
                                                  
                                                  (1,983,921
                                                  )
                                                  
                                                  
                                                  (5,202,850
                                                  )
                                                  
                                                  
                                                  (5,885,158
                                                  )
                                                  
                                                  
                                                  (35,282,153
                                                  )Extraordinary
      gain on sale of patents
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,382,023Net
      loss
                                                  
                                                  $
                                                  (1,566,048
                                                  )
                                                  
                                                  $
                                                  (1,983,921
                                                  )
                                                  
                                                  $
                                                  (5,202,850
                                                  )
                                                  
                                                  $
                                                  (5,885,158
                                                  )
                                                  
                                                  $
                                                  (33,900,130
                                                  )Basic
      and Diluted Loss Per ShareLoss
      before extraordinary gain
                                                  
                                                  $
                                                  (0.05
                                                  )
                                                  
                                                  $
                                                  (0.07
                                                  )
                                                  
                                                  $
                                                  (0.16
                                                  )
                                                  
                                                  $
                                                  (0.20
                                                  )Extraordinary
      gain
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Net
      loss applicable to common
      shareholders
                                                  
                                                  $
                                                  (0.05
                                                  )
                                                  
                                                  $
                                                  (0.07
                                                  )
                                                  
                                                  $
                                                  (0.16
                                                  )
                                                  
                                                  $
                                                  (0.20
                                                  )Weighted
      average common shares outstanding - basic and diluted
                                                  
                                                  
                                                  33,760,989
                                                  
                                                  
                                                  
                                                  29,515,640
                                                  
                                                  
                                                  
                                                  32,183,497
                                                  
                                                  
                                                  
                                                  28,924,294
  See
accompanying notes to condensed financial statements.
  2
  INTERNATIONAL
AUTOMATED SYSTEMS, INC.
 (A
Development Stage Company)
 Unaudited
Condensed Statements of Cash Flows
 
 For
      the PeriodFrom
      InceptionFor
      the Nine Months Ended
                                                
                                                
                                                (September
      26,March
      31,
                                                
                                                
                                                1986)
      Through2009
                                                
                                                
                                                2008
                                                
                                                
                                                March
      31, 2009Cash
      flows from operating activitiesNet
      loss
                                                
                                                $
                                                (5,202,850
                                                )
                                                
                                                $
                                                (5,885,158
                                                )
                                                
                                                $
                                                (33,900,130
                                                )Adjustments
      to reconcile net loss to net cash
      used in operating activities:Depreciation
      and amortization
                                                
                                                
                                                68,016
                                                
                                                
                                                
                                                55,270
                                                
                                                
                                                
                                                549,590Stock
      based compensation
                                                
                                                
                                                3,768,260
                                                
                                                
                                                
                                                4,584,543
                                                
                                                
                                                
                                                18,989,789Forfeiture
      of deposits
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                236,803Write
      down of inventory
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                16,945Write
      off of equipment to research & development
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                23,900(Gain)
      / loss on disposal of equipment
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                17,484Impairment
      of patents and abandonment of in-process rights
      to technology
                                                
                                                
                                                -
                                                
                                                
                                                
                                                10,275
                                                
                                                
                                                
                                                387,128Gain
      on sale of patents
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,382,023
                                                )Gain
      on settlement of debt
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (6,123
                                                )Stock
      issued for expenses
                                                
                                                
                                                -
                                                
                                                
                                                
                                                36,980
                                                
                                                
                                                
                                                100,580Changes
      in current assets and liabilities:(Increase)
      / decrease in prepaid sales commissions
                                                
                                                
                                                (2,000
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (2,000
                                                )Increase
      / (decrease) in deposits from customers
                                                
                                                
                                                837,000
                                                
                                                
                                                
                                                99,000
                                                
                                                
                                                
                                                1,640,250Increase
      / (decrease) in accounts payable
                                                
                                                
                                                110,650
                                                
                                                
                                                
                                                (122,558
                                                )
                                                
                                                
                                                446,063Increase
      / (decrease) in related party payable
                                                
                                                
                                                (8,000
                                                )
                                                
                                                
                                                56,240
                                                
                                                
                                                
                                                100,000Increase
      / (decrease) in accrued liabilities
                                                
                                                
                                                128,487
                                                
                                                
                                                
                                                (620
                                                )
                                                
                                                
                                                300,877Net
      cash from operating activities
                                                
                                                
                                                (300,437
                                                )
                                                
                                                
                                                (1,166,028
                                                )
                                                
                                                
                                                (12,480,867
                                                )Cash
      flows used in investing activitiesPurchase
      of property and equipment
                                                
                                                
                                                (207,314
                                                )
                                                
                                                
                                                (185,372
                                                )
                                                
                                                
                                                (1,090,351
                                                )Purchase
      of rights to technology
                                                
                                                
                                                (12,957
                                                )
                                                
                                                
                                                (4,055
                                                )
                                                
                                                
                                                (719,600
                                                )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 from investing activities
                                                
                                                
                                                (220,271
                                                )
                                                
                                                
                                                (189,427
                                                )
                                                
                                                
                                                (1,974,822
                                                )Cash
      flows provided by financing activitiesProceeds
      from issuance of common stock
                                                
                                                
                                                281,577
                                                
                                                
                                                
                                                108,225
                                                
                                                
                                                
                                                5,638,306Proceeds
      from reissuance of treasury stock
                                                
                                                
                                                -
                                                
                                                
                                                
                                                258,268
                                                
                                                
                                                
                                                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
                                                
                                                
                                                385,101
                                                
                                                
                                                
                                                610,000
                                                
                                                
                                                
                                                2,227,121Payments
      on borrowings from related party
                                                
                                                
                                                (97,237
                                                )
                                                
                                                
                                                (4,444
                                                )
                                                
                                                
                                                (196,774
                                                )Proceeds
      from notes payable
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                29,857Payments
      on notes payable and capital lease obligations
                                                
                                                
                                                (15,190
                                                )
                                                
                                                
                                                (5,217
                                                )
                                                
                                                
                                                (182,806
                                                )Proceeds
      from related party deposits
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                224,400Purchases
      of equipment held for distribution
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (68,741
                                                )Net
      cash from financing activities
                                                
                                                
                                                554,251
                                                
                                                
                                                
                                                966,832
                                                
                                                
                                                
                                                14,633,661Net
      change in cash
                                                
                                                
                                                33,543
                                                
                                                
                                                
                                                (388,623
                                                )
                                                
                                                
                                                177,972Cash
      at beginning of period
                                                
                                                
                                                144,429
                                                
                                                
                                                
                                                595,381
                                                
                                                
                                                
                                                -Cash
      at end of period
                                                
                                                $
                                                177,972
                                                
                                                
                                                $
                                                206,758
                                                
                                                
                                                $
                                                177,972Supplemental
      non-cash flow informationAcquisition
      of property and equipment with note payable
                                                
                                                $
                                                74,965
                                                
                                                
                                                $
                                                -Settlement
      of borrowings from related party in exchange for
      exercise of options
                                                
                                                $
                                                630,000
                                                
                                                
                                                $
                                                400,000
  See
accompanying notes to condensed financial statements.
  3
  International
Automated Systems, Inc.
 (A
Development Stage Company)
 Notes to
Unaudited Condensed Financial Statements
 March 31,
2009
 
 NOTE
1 – INTERIM FINANCIAL STATEMENTS
 
 The
accompanying condensed financial statements have been prepared without
audit.  In the opinion of management, all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the Company’s
condensed financial position, results of operations and cash flows as of the
dates and for the periods presented herein have been made.
  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission’s rules and regulations.  These
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company’s June 30, 2008 Annual
Report on Form 10-K.  The results of operations for the three and
nine months ended March 31, 2009 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 March 31, 2009 the Company
had $177,972 of cash available and had a working capital deficit of $2,696,622.
The Company had no revenues and no operating income for the three and nine
months ended March 31, 2009 and 2008. As of March 31, 2009 the Company’s losses
accumulated from inception totaled $33,900,130. 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 was 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 will be effective 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.  These statements will affect the Company for combinations
after July 1, 2009
 
 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 Securitie”(“FSP EITF No. 03-6-1”).  Under FSP EITF No. 03-6-1,
unvested share-based payment awards that contain rights to receive
nonforfeitabledividends(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.
 
 In April
2009, the FASB released FASB Staff Position (“FSP”) SFAS 107-1 and Accounting
Principles Board (APB) Opinion No. 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (SFAS 107-1 and APB 28-1).  This FSP amends
FASB Statement No. 107, “Disclosures about Fair Values of Financial
Instruments,” to require disclosures about fair value of financial instruments
in interim financial statements as well as in annual financial
statements.  The FSP also amends APB Opinion No. 28, “Interim
Financial Reporting,” to require those disclosures in all interim financial
statements.  This proposal is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009.  The Company plans to adopt SFAS 107-1 and APB
28-1 and provide the additional disclosure requirements for the first quarter
for fiscal year end 2010.
 
 In April
2009, the FASB released FSP SFAS 157-4, “Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed” (SFAS 157-4).  This FSP
provides additional guidance in determining whether a market for a financial
asset is not active and a transaction is not distressed for fair value
measurement purposes as defined in SFAS 157, “Fair Value
Measurements.”  SFAS 157-4 is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009.  The Company plans to adopt the provisions of
SFAS 157-4 during fourth quarter 2009, but does not believe this guidance will
have a significant impact on the Company’s financial statements.
 
 In April
2009, the FASB released FSP SFAS 115-2 and SFAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.”  This proposal
provides guidance in determining whether impairments in debt securities are
other than temporary, and modifies the presentation and disclosures surrounding
such instruments.  This FSP is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009.  The Company plans to adopt the provisions of
this Proposed Staff Position during fourth quarter 2009, but does not believe
this guidance will 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 netloss 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
trustand 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
thethreeand ninemonthsendedMarch31, 2009and 2008, no outstanding common stock
equivalents are included in the calculation of diluted earnings per share
because such effect would
be anti-dilutive. The Company had outstanding stock optionsand warrantsto purchase a total of95,900,000 and 98,475,000shares of common stock atMarch31, 2009and 2008, respectively, which are not included in the basic
earnings per share calculation.  The Company had4,647,918and4,962,018of stock held in trust atMarch31, 2009 and 2008, respectively, which arenot 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 atMarch
31, 2009 and 2008, whichare not includedin the basic earnings per share
calculation.
  5
 
 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 nine months ended March 31, 2009 and
2008, total stock-based compensation expense recognized was $3,768,260 and
$4,584,543, respectively.  For the three months ended March 31, 2009
and 2009, total stock-based compensation expense recognized was $1,190,082 and
$1,477,032 respectively.  Stock-based compensation was included in
general and administrative expenses.
  During
the nine months ended March 31, 2009, the Company granted 505,000 shares of
restricted stock to employees, which vested immediately.   The
grant date fair value of the restricted stock awards was estimated on the
effective date of the restricted stock awards using the closing market price of
the Company’s common stock on the grant date, with the compensation expense
being recognized immediately.  The stock based compensation recognized
during the nine months ended March 31, 2009 for the grant of restricted shares
was $126,250, as included in the stock-based compensation expenses of $3,768,260
mentioned in the above paragraph.  The weighted average grant date
fair value of restricted stock awards granted during the nine months March 31,
2009 was $0.25.
  During
the nine months ended March 31, 2009, no stock options or warrants were granted
and 1,575,000 stock options or warrants were exercised. During the nine months
ended March 31, 2008, 1,000,000 stock options or warrants were
exercised.  10,100,000 stock options vested during the nine months
ended March 31, 2009 and 2008.
  As of
March 31, 2009, there was $3,247,019 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
0.5 years.
  NOTE
6 – COMMITMENTS AND CONTINGENCIES
 
 Sales Commitments- During
December 2005, the Company entered into a purchase and installation contract
with Solar Renewable Energy-1, LLC for a solar thermal power plant. The contract
is contingent on several factors and provides for certain progress payments. As
of March 31, 2009, the Company has not provided any services or equipment
required under this agreement and has recognized no revenues.
  The
Company has entered into several solar lease bonus fee contracts with many of
the customers who made deposits on the 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 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, 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 was $45,000
and was paid by the Company in April 2009. The Company recorded an accrued
liability for $45,000 at March 31, 2009, related to the limited award of
reasonable attorney fees.
 
 Customer Deposits – All of
the $1,640,250 Deposits from customers at March 31, 2009 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.  The Company has returned $9,000 in deposits during the
last year upon request from one customer.
 
 Notes Payable – The Company
has entered into two notes payable with financing companies collateralized by a
deed of trust covering the underlying property.  The total amount owed
for the land notes payable at March 31, 2009 was $108,555.  Both notes
payable mature in fiscal year 2017.
 
 The
Company entered into a note payable with a company to purchase equipment during
March 2009.  The note payable bears interest at a weighted average
interest rate of 4.65% and is payable in monthly installments of
$4,000.  The total amount owed for the equipment note payable was
$70,695 at March 31, 2009.  The note payable matures in October
2010.
 
 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.
  6
 
 NOTE
7 - STOCKHOLDERS EQUITY
  Common Stock Issued for Cash—
The Company has shares of common stock in escrow accounts. Proceeds from the
sale of stock from these escrow accounts are placed in separate escrow accounts
to be used at the Company’s and the trustee’s discretion. During the nine months
ended March 31, 2009, 941,900 shares were sold for proceeds of $281,577 at
prices ranging from $0.16 to $0.54 per share.   The proceeds were used to
pay professional fees, rent, operating expenses and accrued liabilities.
  At March 31, 2009, there was a balance of 4,647,918 shares in the
escrow accounts.  These shares are not accounted for as issued or
outstanding common shares.
 
 Common Stock Issued for Settlement
of Related Party Borrowings - As described in Note 8, during the
nine months ended March 31, 2009, the Company issued 1,575,000 shares of common
stock upon the exercise of options by its President at $0.40 per share for
settlement of debt.
 
 NOTE
8 – RELATED PARTY TRANSACTIONS
 
 During
the nine months ended March 31, 2009, the Company received $385,101 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 nine months ended March 31, 2009, the Company
settled $97,237 of the related party borrowings by paying the President’s
personal expenses.  During the nine months ended March 31, 2009, the
Company settled $630,000 of the related party payable by issuing 1,575,000
shares of common stock to it President upon the exercise of options at $0.40 per
share.  The amount outstanding on the related party borrowings at
March 31, 2009 was $431,865.
 
 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 $54,000 for rent payable to the President during the nine months ended
March 31, 2009 and 2008, and paid $48,000 of the rent payable during the nine
months ended March 31, 2009.  The amount payable to the President for
rent at March 31, 2009 was $100,000 and is included in related party
payables.
 
 NOTE
9 – DEPOSITS FROM CUSTOMERS
 
 During
the nine months ended March 31, 2009 and 2008, the Company received deposits
from customers totaling $837,000 and $99,000, 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 March 31, 2009 was
$1,640,240.  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, 2008 has been
reclassified to construction-in-process, which is included in property and
equipment on the balance sheet.  Consequently, 2008 increases in
inventory for the nine months ended March 31, 2008 have been moved from cash
flow from operating activities to cash flow from investing activities per the
Statement of Cash Flows for the nine month period ended March 31,
2008.  Furthermore, net proceeds of $610,000 received during the nine
months ended March 31, 2008 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.  Additionally,
payments of $4,444 paid during the nine months ended March 31, 2008 for
borrowings from a related party have been moved from the change in related party
payable included in cash flow from operating activities to cash flow from
financing activities.
 
 NOTE
11 – SUBSEQUENT EVENT
 
 The
Company issued 50,000 shares of common stock in April 2009 as part of a
consulting agreement.
  7
 
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
  This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this quarterly report on Form 10-Q contain
forward-looking statements that involve risks and uncertainties. 
Forward-looking statements can also be identified by words such as “intends,”
“anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar
terms.  Forward-looking statements are not guarantees of future performance
and our actual results may differ significantly from the results discussed in
the forward-looking statements.  Factors that might cause such differences
include, but are not limited to delays in product development, the development
of marketing and distribution channel and market acceptance of its products and
other risks that may be beyond the control of the Company. The following
discussion should be read in conjunction with our unaudited
condensed  financial statements and notes thereto included in this
Form 10-Q and our audited  financial statements included in our annual
report on Form 10-K  for the year ended June 30, 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 nine months ended March 31, 2009 and 2008.  We assume no obligation to
revise or update any forward-looking statements for any reason, except as
required by law.
  LIQUIDITY
AND CAPITAL RESOURCES
 
 Historically,
the Company’s principal use of cash has been to fund ongoing research and
development activities.  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 nine months ended
March 31, 2009, 941,900 shares were sold for proceeds of $281,577 at prices
ranging from $0.16 to $0.54 per share.  At March 31, 2009, there was a
balance of 4,647,918 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.
 
 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 $837,000 during the nine months ended March 31, 2009 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 $177,972 in cash at March 31, 2009,
representing an increase of $33,543 from June 30, 2008.  The increase
relates to net cash provided by financing activities of $554,251, offset by net
cash used in operating and investing activities of $300,437 and $220,271,
respectively.  The cash provided by financing activities was primarily
due to proceeds from the sale common stock and proceeds from related party
borrowings.
 
 As of
March 31, 2009, the Company has current assets of $179,972 and total assets of
$1,198,492.  Current liabilities were $2,876,594 and total liabilities of
$2,998,576. The ratio of current assets to current liabilities is approximately
0.06 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.
  8
 
 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 March 31, 2009 compared to the Three Months Ended March 31,
2008
 
 For the
three months ended March 31, 2009 and 2008, the Company had no revenue and no
cost of sales.  Operations during the three months ended March 31,
2009 and 2008, primarily pertained to research and development and other
activities.  Research and development expenses remained relatively
flat for the three months ended March 31, 2009 as compared to March 31,
2008.
 
 General
and administrative expenses decreased by $424,697 or 24% from $1,799,395 for the
three months ended March 31, 2008 to $1,374,698 for the three months ended March
31, 2009.  The decrease in general and administrative expenses is
primarily due to a decrease in stock-based compensation since many options fully
vested in fiscal year 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 $417,873 or 21% from $1,983,921 for the three months ended March
31, 2008 to $1,566,048 for the three months ended March 31, 2009 due primarily
to the decrease in stock-based compensation noted above.  Net loss per
common share was $0.05 and $0.07 for three months ended March 31, 2009 and 2008,
respectively.
 
 Nine
Months Ended March 31, 2009 compared to the Nine Months Ended March 31,
2008
 
 For the
nine months ended December 31, 2008 and 2007, the Company had no revenue and no
cost of sales.  Operations during the nine months ended March 31, 2009
and 2008, primarily pertained to research and development and other
activities.  Research and development expenses increased by $105,248
or 24% to $546,219 for the nine months ended March 31, 2009 from $440,971 for
the nine months ended March 31, 2008.  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.
 
 General
and administrative expenses decreased by $779,143 or 14% from $5,430,384 for the
nine months ended March 31, 2008 to $4,651,241 for the nine months ended March
31, 2009.  The decrease in general and administrative expenses is
primarily due to a decrease in stock-based compensation since many options fully
vested in fiscal year 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 $682,308 from $5,885,158 for the nine months ended March 31, 2008
to $5,202,850 for the nine months ended March 31, 2009 due to the items noted
above.  Net loss per common share was $0.16 and $0.20 for the nine
months ended March 31, 2009 and 2008, respectively.
 
 CONTRACTUAL
OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
 
 Sales Commitments- During
December 2005, the Company entered into a purchase and installation contract
with Solar Renewable Energy-1, LLC for a solar thermal power plant. The contract
is contingent on several factors and provides for certain progress payments. As
of March 31, 2009, the Company has not provided any services or equipment
required under this agreement and has recognized no revenues.
  The
Company has entered into several solar lease bonus fee contracts with many of
the customers who made deposits on the 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.
  9
  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, made a limited award of reasonable attorney fees incurred by the
defendant in filing the attorney’s fee motion. The amount of this limited award
was $45,000 and was paid by the Company in April 2009. The Company recorded an
accrued liability for $45,000 at March 31, 2009, related to the limited award of
reasonable attorney fees.
 
 Customer Deposits – All of
the $1,640,250 Deposits from customers at March 31, 2009 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 March 31, 2009 was $108,555.  Both notes
payable mature in fiscal year 2017.
 
 The
Company entered into a note payable with a company to purchase equipment during
March 2009.  The note payable bears interest at a weighted average
interest rate of 4.65% and is payable in monthly installments of
$4,000.  The total amount owed for the equipment note payable was
$70,965 at March 31, 2009.  The note payable matures in October
2010.
 
 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.
 
 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 limited
award of reasonable attorney fees incurred by UPEK in filing the attorney’s fee
motion.  The amount of this limited award was $45,000 and was paid by
the Company in April 2009. The Company recorded an accrued liability for $45,000
at March 31, 2009, related to the limited award of reasonable attorney
fees.
 
 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.
  10
  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 nine months ended
March 31, 2009, 941,900 shares were sold for proceeds of $281,577 at prices
ranging from $0.16 to $0.54 per share. The proceeds were used to pay
professional fees, operating expenses, accounts payable and accrued
liabilities.
 
 The
Company granted 505,000 compensatory shares of restricted stock to employees
during January 2009 at grant date value of $0.25.  The shares of
restricted stock vested immediately.
  
 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
 
 
  11
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  INTERNATIONAL AUTOMATED SYSTEMS,
INC.
  
  
  
  Date:  May
      14, 2009
                    By
                    /s/
      Neldon JohnsonNeldon
      JohnsonPresident,
      Chief Executive Officer, DirectorDate:
      May 14, 2009
                    By
                    /s/
      LaGrand JohnsonLaGrand
      JohnsonChief
      Financial Officer
 
  
 12