----

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

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**INTERNATIONAL        AUTOMATED SYSTEMS**
**,        INC.**

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

**TABLE        OF CONTENTS**

|                                                                                                                                                                                                                                                                                     |                                                                             | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|----------|
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| PART                  I - FINANCIAL INFORMATION                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  1.                                                                                                                                                                                                                                                                 | Financial                  Statements                                            |     |
|                                                                                                                                                                                                                                                                                     |                                                                             |
| Unaudited                  Condensed Balance Sheets as of December 31, 2006 and June 30,                  2006                                                                                                                                                                           | 3                                                                                |
|                                                                                                                                                                                                                                                                                     |                                                                             |
| Unaudited                  Condensed Statements of Operations for the Three and Six Months                  Ended                  December 31, 2006 and 2005 and for the Period from September 26,                  1986                  (Date of Inception) through December 31, 2006 | 4                                                                                |
|                                                                                                                                                                                                                                                                                     |                                                                             |
| Unaudited                  Condensed Statements of Cash Flows for the Six Months Ended December                  31,                  2006 and 2005 and for the Period from September 26, 1986 (Date                  of                  Inception) through December 31, 2006           | 5                                                                                |
|                                                                                                                                                                                                                                                                                     |                                                                             |
| Notes                  to Unaudited Condensed Financial Statements                                                                                                                                                                                                                       | 7                                                                                |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  2.                                                                                                                                                                                                                                                                 | Management’s                  Discussion and Analysis or Plan of Operation | 13       |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  3.                                                                                                                                                                                                                                                                 | Controls                  and Procedures                                         | 14       |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| PART                  II - OTHER INFORMATION                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  1.                                                                                                                                                                                                                                                                 | Legal                  Proceedings                                               | 15       |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  2.                                                                                                                                                                                                                                                                 | Changes                  in Securities                                           | 15       |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  3.                                                                                                                                                                                                                                                                 | Commitments                  and Contingencies                                   | 16       |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  4.                                                                                                                                                                                                                                                                 | Defaults                  Upon Senior Securities                                 | 16       |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  5.                                                                                                                                                                                                                                                                 | Submission                  of Matters to a Vote of Security Holders             | 16       |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  6.                                                                                                                                                                                                                                                                 | Other                  Information                                               | 16       |
|                                                                                                                                                                                                                                                                                     |                                                                             |     |
| Item                  7.                                                                                                                                                                                                                                                                 | Exhibits                  and Reports on Form 8-K                                | 16       |

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**INTERNATIONAL        AUTOMATED SYSTEMS, INC.**

| **ASSETS**                                                                                                                                                                                                                                                   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                         |   | Unaudited |   | Audited |   |
|                                                                                                                                                                                                                                                         |   | December                  31, |   | June                  30, |   |
|                                                                                                                                                                                                                                                         |   | 2006 |   | 2006 |   |
| **CURRENT                  ASSETS**                                                                                                                                                                                                                          |   |   |   |   |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |
| Cash                                                                                                                                                                                                                                                         |   | $ | 288,229 |   | $ | 708,379 |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| **Total                  Current Assets**                                                                                                                                                                                                                    |   |   | 288,229 |   |   | 708,379 |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| Property                  and Equipment, net of $115,154 and $98,430 accumulated depreciation,                  respectively                                                                                                                                 |   |   | 375,914 |   |   | 196,791 |   |
| Prepaid                  Expense                                                                                                                                                                                                                             |   |   | 3,370 |   |   | - |   |
| Patents,                  net of $12,844 and $11,174 accumulated amortization,                  respectively                                                                                                                                                 |   |   | 224,833 |   |   | 203,473 |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| **TOTAL                  ASSETS**                                                                                                                                                                                                                            |   | $ | 892,346 |   | $ | 1,108,643 |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| **LIABILITIES                  AND STOCKHOLDERS' DEFICIT**                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| **CURRENT                  LIABILITIES**                                                                                                                                                                                                                     |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| Accounts                  payable                                                                                                                                                                                                                            |   | $ | 25,213 |   | $ | 128,995 |   |
| Accrued                  payroll taxes                                                                                                                                                                                                                       |   |   | 47,320 |   |   | 59,829 |   |
| Related                  party payable                                                                                                                                                                                                                       |   |   | 406,796 |   |   | 392,886 |   |
| Deposits                  from customers                                                                                                                                                                                                                     |   |   | 495,000 |   |   | 459,000 |   |
| Notes                  payable-current portion                                                                                                                                                                                                               |   |   | 14,598 |   |   | 9,330 |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| **Total                  Current Liabilities**                                                                                                                                                                                                               |   |   | 988,927 |   |   | 1,050,040 |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| Net                  Long-Term Liabilities - Notes Payable                                                                                                                                                                                                   |   |   | 119,726 |   |   | 68,287 |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| **TOTAL                  LIABILITIES**                                                                                                                                                                                                                       |   |   | 1,108,653 |   |   | 1,118,327 |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| **STOCKHOLDERS'                  DEFICIT**                                                                                                                                                                                                                   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| Preferred                  stock, Class A, no par value; 4,400,000 shares authorized, 3,400,000                  shares issued and outstanding                                                                                                               |   |   | 294,786 |   |   | 294,786 |   |
| Preferred                  stock, Class B, no par value, 600,000 shares authorized, 300,000                  shares                  issued and outstanding                                                                                                  |   |   | - |   |   | - |   |
| Common                  stock, no par value, 45,000,000 shares authorized, 26,783,202 and                  25,532,622 shares issued and outstanding, net 5,217,338 and 842,918                  shares                  held in escrow account, respectively |   |   | 16,159,679 |   |   | 12,083,707 |   |
| Deficit                  accumulated during the development stage                                                                                                                                                                                            |   |   | (16,670,772 | ) |   | (12,388,177 | ) |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| **Total                  Stockholders' Deficit**                                                                                                                                                                                                             |   |   | (216,307 | ) |   | (9,684 | ) |
|                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
| **TOTAL                  LIABILITIES AND STOCKHOLDERS' DEFICIT**                                                                                                                                                                                             |   | $ | 892,346 |   | $ | 1,108,643 |   |

----

**INTERNATIONAL        AUTOMATED SYSTEMS, INC.**

|                                                           |   | For                  the Three MonthsEnded                  December 31, |       | For                  the Six MonthsEnded                  December 31, |   | For                  the Period From Inception (September 26,1986)ThroughDecember                  31, |   |
|----------------------------------------------------------------|--------|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|--------|
|                                                           |   | 2006                                                                     |       | 2005                                                                   |   | 2006                                                                                                   |   | 2005 |   | 2006 |   |
| **REVENUE**                                                    |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                          |   | $                                                                        | -          |                                                                   | $      | -                                                                                                      |   | $ | - |   | $ | - |   | $ | 111,226 |   |
| Income                  from related party                     |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | 32,348 |   |
| **Total                  Revenue**                             |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   | 143,574 |   |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **COST                  OF GOODS SOLD**                        |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Cost                  of sales                                 |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | 81,927 |   |
| Write                  down of carrying value of inventories   |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | 233,131 |   |
| **Total                  Costs of Sales**                      |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | 315,058 |   |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **GROSS                  LOSS**                                |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | (171,484 | ) |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **OPERATING                  EXPENSES**                        |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| General                  and administrative                    |   |                                                                     | 1,960,676  |                                                                   |   | 174,022                                                                                                |   |   | 3,886,348 |   |   | 315,817 |   |   | 11,346,355 |   |
| Research                  and development                      |   |                                                                     | 250,573    |                                                                   |   | 48,784                                                                                                 |   |   | 396,247 |   |   | 122,522 |   |   | 5,892,547 |   |
| Impairment                  of patents                         |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | 110,082 |   |
| License                  fees                                  |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | 270,634 |   |
| Loss                  on disposal of property and equipment    |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | 17,359 |   |
| **Total                  Operating Expenses**                  |   |                                                                     | 2,211,249  |                                                                   |   | 222,806                                                                                                |   |   | 4,282,595 |   |   | 438,339 |   |   | 17,636,977 |   |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **LOSS                  FROM OPERATIONS**                      |   |                                                                     | (2,211,249 | )                                                                      |   | (222,806                                                                                               | )      |   | (4,282,595 | ) |   | (438,339 | ) |   | (17,808,461 | ) |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **OTHER                  INCOME (EXPENSES)**                   |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Forfeiture                  of deposits                        |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | (236,803 | ) |
| Loss                  on impairment of assets                  |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | (583 | ) |
| Interest                  income                               |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | 22,444 |   |
| Other                                                          |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | (29,392 | ) |
| **Total                  Other Income (Expenses)**             |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | (244,334 | ) |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **LOSS                  BEFORE EXTRAORDINARY GAIN**            |   |                                                                     | (2,211,249 | )                                                                      |   | (222,806                                                                                               | )      |   | (4,282,595 | ) |   | (438,339 | ) |   | (18,052,795 | ) |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **Extraordinary                  Gain on Sale of Patents**     |   |                                                                     | -          |                                                                   |   | -                                                                                                      |   |   | - |   |   | - |   |   | 1,382,023 |   |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **NET                  LOSS**                                  |   | $                                                                        | (2,211,249 | )                                                                      | $      | (222,806                                                                                               | )      | $ | (4,282,595 | ) | $ | (438,339 | ) | $ | (16,670,772 | ) |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Basic                  and Diluted Loss Per Share              |   | $                                                                        | (0.08      | )                                                                      | $      | (0.01                                                                                                  | )      | $ | (0.16 | ) | $ | (0.02 | ) |   |   |   |
|                                                           |   |                                                                     |       |                                                                   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Weighted                  Shares Used in Per Share Calculation |   |                                                                     | 26,518,834 |                                                                   |   | 23,854,507                                                                                             |   |   | 26,194,083 |   |   | 23,584,095 |   |   |   |   |

----

**INTERNATIONAL        AUTOMATED SYSTEMS, INC.**

|                                                                                                       |   | For                  the Six Months Ended December 31, |       | For                  the Period From Inception (September 26,1986) Through December                  31, |   |
|------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                       |   | 2006                                                   |       | 2005                                                                                                     |   | 2006 |   |
| **CASH                  FLOWS FROM OPERATING ACTIVITIES**                                                  |   |                                                   |       |                                                                                                     |   |   |   |   |   |   |
| Net                  loss                                                                                  |   | $                                                      | (4,282,595 | )                                                                                                        | $      | (438,339 | ) | $ | (16,670,772 | ) |
| Adjustments                  to reconcile net loss to net cash from operating                  activities: |   |                                                   |       |                                                                                                     |   |   |   |   |   |   |
| Depreciation                  and amortization                                                             |   |                                                   | 18,394     |                                                                                                     |   | 9,605 |   |   | 371,596 |   |
| Stock                  based compensation                                                                  |   |                                                   | 3,479,202  |                                                                                                     |   | 35,400 |   |   | 6,165,009 |   |
| Forfeiture                  of deposits                                                                    |   |                                                   | -          |                                                                                                     |   | - |   |   | 236,803 |   |
| Write                  down of inventory                                                                   |   |                                                   | -          |                                                                                                     |   | - |   |   | 16,945 |   |
| Write                  off of equipment to research & development                                      |   |                                                   | -          |                                                                                                     |   | - |   |   | 23,900 |   |
| Loss                  on disposal of equipment                                                             |   |                                                   | -          |                                                                                                     |   | - |   |   | 17,942 |   |
| Impairment                  of patents and abandonment of in-process rights to                  technology |   |                                                   | -          |                                                                                                     |   | - |   |   | 356,632 |   |
| Gain                  on sale of patents                                                                   |   |                                                   | -          |                                                                                                     |   | - |   |   | (1,382,023 | ) |
| Gain                  on settlement of debt                                                                |   |                                                   | -          |                                                                                                     |   | - |   |   | (6,123 | ) |
| Stock                  issued for expenses                                                                 |   |                                                   | -          |                                                                                                     |   | - |   |   | 63,600 |   |
| Changes                  in current assets and liabilities:                                                |   |                                                   |       |                                                                                                     |   |   |   |   |   |   |
| Prepaid                  Expenses                                                                          |   |                                                   | (3,370     | )                                                                                                        |   | - |   |   | (3,370 | ) |
| Deposits                  from customers                                                                   |   |                                                   | 36,000     |                                                                                                     |   | 54,000 |   |   | 495,000 |   |
| Accounts                  payable                                                                          |   |                                                   | (103,781   | )                                                                                                        |   | (69,524 | ) |   | 25,214 |   |
| Related                  party payable                                                                     |   |                                                   | 263,910    |                                                                                                     |   | - |   |   | 656,796 |   |
| Accrued                  liabilities                                                                       |   |                                                   | (12,509    | )                                                                                                        |   | (22,628 | ) |   | 147,319 |   |
| **Net                  Cash From Operating Activities**                                                    |   |                                                   | (604,749   | )                                                                                                        |   | (431,486 | ) |   | (9,485,532 | ) |
|                                                                                                       |   |                                                   |       |                                                                                                     |   |   |   |   |   |   |
| **CASH                  FLOWS FROM INVESTING ACTIVITIES**                                                  |   |                                                   |       |                                                                                                     |   |   |   |   |   |   |
| Purchase                  of property and equipment                                                        |   |                                                   | (129,847   | )                                                                                                        |   | - |   |   | (532,716 | ) |
| Proceeds                  from sale of property and equipment                                              |   |                                                   | -          |                                                                                                     |   | 11,237 |   |   | - |   |
| Purchase                  of rights to technology                                                          |   |                                                   | (23,031    | )                                                                                                        |   | (8,171 | ) |   | (679,765 | ) |
| Organization                  costs                                                                        |   |                                                   | -          |                                                                                                     |   | - |   |   | (1,880 | ) |
| Net                  cash advanced to related party                                                        |   |                                                   | -          |                                                                                                     |   | - |   |   | (1,644,988 | ) |
| Proceeds                  from capital lease receivable                                                    |   |                                                   | -          |                                                                                                     |   | - |   |   | 44,220 |   |
| Repayment                  of cash loaned to related party                                                 |   |                                                   | -          |                                                                                                     |   | - |   |   | 53,254 |   |
| Net                  proceeds from sale of patents                                                         |   |                                                   | -          |                                                                                                     |   | - |   |   | 1,382,023 |   |
| **Net                  Cash From Investing Activities**                                                    |   |                                                   | (152,878   | )                                                                                                        |   | 3,066 |   |   | (1,379,852 | ) |
|                                                                                                       |   |                                                   |       |                                                                                                     |   |   |   |   |   |   |
| **CASH                  FLOWS FROM FINANCING ACTIVITIES**                                                  |   |                                                   |       |                                                                                                     |   |   |   |   |   |   |
| Proceeds                  from issuance of common stock                                                    |   |                                                   | 346,770    |                                                                                                     |   | 460,579 |   |   | 4,832,308 |   |
| Cash                  from controlling shareholder                                                         |   |                                                   | -          |                                                                                                     |   | - |   |   | 6,270,559 |   |
| Payments                  for treasury stock                                                               |   |                                                   | -          |                                                                                                     |   | - |   |   | (3,325 | ) |
| Payments                  for stock offering costs                                                         |   |                                                   | -          |                                                                                                     |   | - |   |   | (56,509 | ) |
| Proceeds                  from net borrowings from related party                                           |   |                                                   | -          |                                                                                                     |   | 257,333 |   |   | 78,101 |   |
| Proceeds                  from notes payable                                                               |   |                                                   | -          |                                                                                                     |   | - |   |   | 29,857 |   |
| Payments                  on note payable and obligations capital lease                                    |   |                                                   | (9,293     | )                                                                                                        |   | (1,586 | ) |   | (153,037 | ) |
| Proceeds                  from related party deposits                                                      |   |                                                   | -          |                                                                                                     |   | - |   |   | 224,400 |   |
| Purchases                  of equipment held for distribution                                              |   |                                                   | -          |                                                                                                     |   | - |   |   | (68,741 | ) |
| **Net                  Cash From Financing Activities**                                                    |   |                                                   | 337,477    |                                                                                                     |   | 716,326 |   |   | 11,153,613 |   |
|                                                                                                       |   |                                                   |       |                                                                                                     |   |   |   |   |   |   |
| **NET                  CHANGE IN CASH**                                                                    |   |                                                   | (420,150   | )                                                                                                        |   | 287,906 |   |   | 288,229 |   |
| **CASH                  AT BEGINNING OF PERIOD**                                                           |   |                                                   | 708,379    |                                                                                                     |   | 40,885 |   |   | - |   |
| **CASH                  AT END OF PERIOD**                                                                 |   | $                                                      | 288,229    |                                                                                                     | $      | 328,791 |   | $ | 288,229 |   |

----

**INTERNATIONAL        AUTOMATED SYSTEMS, INC.**

|                                                                      |   | For                  the Six MonthsEnded                  December 31, |    |
|---------------------------------------------------------------------------|--------|------------------------------------------------------------------------|---------|
|                                                                      |   | 2006                                                                   |    | 2005 |   |
| SUPPLEMENTAL                  DISCLOSURES OF CASH FLOW INFORMATION        |   |                                                                   |    |   |   |
| Purchase                  of land with notes payable                      |   | $                                                                      | 66,000  |   | $ | - |   |
| Issuance                  of common stock in exchange for payment of debt |   | $                                                                      | 250,000 |   | $ | - |   |

----

**International        Automated Systems, Inc.**

**(A        Development Stage Company)**

**Notes        to Unaudited Condensed Financial Statements**

**December        31, 2006**

**NOTE        1 - INTERIM FINANCIAL STATEMENTS**

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

**NOTE        3 - STOCK BASED COMPENSATION**

----

**International        Automated Systems, Inc.**

**(A        Development Stage Company)**

**Notes        to Unaudited Condensed Financial Statements**

**December        31, 2006**

----

**International        Automated Systems, Inc.**

**(A        Development Stage Company)**

**Notes        to Unaudited Condensed Financial Statements**

**December        31, 2006**

|                                            |   | For                  the Three MonthsEnded                  December                  31, |    | For                  the Six MonthsEnded                  December                  31, |   | For                  the Period From Inception, (September 26, 1986)throughDecember                  31, |   |
|-------------------------------------------------|--------|-------------------------------------------------------------------------------------------|---------|-----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|
|                                            |   | 2006                                                                                      |    | 2005                                                                                    |   | 2006                                                                                                     |   | 2005 |   | 2006 |   |
|                                            |   |                                                                                      |    |                                                                                    |   |                                                                                                     |   |   |   |   |   |
| Expected                  life (in years) (1)   |   |                                                                                      | 10      |                                                                                    |   | 10                                                                                                       |   |   | 10 |   |   | 10 |   |   | 10 |   |
| Risk-free                  interest rate (2)    |   |                                                                                      | 4.79%   |                                                                                    |   | 4.79%                                                                                                    |   |   | 4.79% |   |   | 4.79% |   |   | 4.79% |   |
| Expected                  volatility factor (3) |   |                                                                                      | 138.76% |                                                                                    |   | 138.76%                                                                                                  |   |   | 138.76% |   |   | 138.76% |   |   | 138.76% |   |
| Expected                  dividend yield        |   |                                                                                      | 0.00%   |                                                                                    |   | 0.00%                                                                                                    |   |   | 0.00% |   |   | 0.00% |   |   | 0.00% |   |

|   | (1) | For                  the three and six months ended December 31, 2006, the expected                  lives of                  options were determined based on the “simplified” method under the                  provisions of SAB 107. Due to limited history, we believe that                  we do not                  have appropriate historical experience to estimate future exercise                  patterns. As more information becomes available, we may revise                  this                  estimate on a prospective basis. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | (3) | For                  the three and six months ended December 31, 2006, we estimated                  the                  expected volatility based on historical share price                  data. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                            |   | For                  the Three MonthsEnded                  December 31, |    | For                  the Six MonthsEnded                  December 31, |   | For                  the Period From Inception (September 26, 1986)throughDecember                  31, |   |
|-------------------------------------------------|--------|--------------------------------------------------------------------------|---------|------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|
|                                            |   | 2006                                                                     |    | 2005                                                                   |   | 2006                                                                                                    |   | 2005 |   | 2006 |   |
|                                            |   |                                                                     |    |                                                                   |   |                                                                                                    |   |   |   |   |   |
| Expected                  life (in years) (1)   |   |                                                                     | 10      |                                                                   |   | 10                                                                                                      |   |   | 10 |   |   | 10 |   |   | 10 |   |
| Risk-free                  interest rate (2)    |   |                                                                     | 5.73%   |                                                                   |   | 5.73%                                                                                                   |   |   | 5.73% |   |   | 5.73% |   |   | 5.73% |   |
| Expected                  volatility factor (3) |   |                                                                     | 137.47% |                                                                   |   | 137.47%                                                                                                 |   |   | 137.47% |   |   | 137.47% |   |   | 137.47% |   |
| Expected                  dividend yield        |   |                                                                     | 0.00%   |                                                                   |   | 0.00%                                                                                                   |   |   | 0.00% |   |   | 0.00% |   |   | 0.00% |   |

|   | (1) | For                  the three and six months ended December 31, 2006, the expected                  lives of                  options were determined based on the “simplified” method under the                  provisions of SAB 107. Due to limited history, we believe that                  we do not                  have appropriate historical experience to estimate future exercise                  patterns. As more information becomes available, we may revise                  this                  estimate on a prospective basis. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | (3) | For                  the three and six months ended December 31, 2006, we estimated                  the                  expected volatility based on historical share price                  data. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**International        Automated Systems, Inc.**

**(A        Development Stage Company)**

**Notes        to Unaudited Condensed Financial Statements**

**December        31, 2006**

|                                            |   | For                  the Three MonthsEnded                  December 31, |    | For                  the Six MonthsEnded                  December 31, |   | For                  the Period From Inception (September 26, 1986)throughDecember                  31, |   |
|-------------------------------------------------|--------|--------------------------------------------------------------------------|---------|------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|
|                                            |   | 2006                                                                     |    | 2005                                                                   |   | 2006                                                                                                    |   | 2005 |   | 2006 |   |
|                                            |   |                                                                     |    |                                                                   |   |                                                                                                    |   |   |   |   |   |
| Expected                  life (in years) (1)   |   |                                                                     | 5       |                                                                   |   | 5                                                                                                       |   |   | 5 |   |   | 5 |   |   | 5 |   |
| Risk-free                  interest rate (2)    |   |                                                                     | 5.73%   |                                                                   |   | 5.73%                                                                                                   |   |   | 5.73% |   |   | 5.73% |   |   | 5.73% |   |
| Expected                  volatility factor (3) |   |                                                                     | 137.47% |                                                                   |   | 137.47%                                                                                                 |   |   | 137.47% |   |   | 137.47% |   |   | 137.47% |   |
| Expected                  dividend yield        |   |                                                                     | 0.00%   |                                                                   |   | 0.00%                                                                                                   |   |   | 0.00% |   |   | 0.00% |   |   | 0.00% |   |

|   | (1) | For                  the three and six months ended December 31, 2006, the expected                  lives of                  options were determined based on the “simplified” method under the                  provisions of SAB 107. Due to limited history, we believe that                  we do not                  have appropriate historical experience to estimate future exercise                  patterns. As more information becomes available, we may revise                  this                  estimate on a prospective basis. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | (3) | For                  the three and six months ended December 31, 2006, we estimated                  the                  expected volatility based on historical share price                  data. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                              |   |    |        | Weighted |   | Weighted                       |   |      |   |
|---------------------------------------------------|--------|---------|-------------|----------|--------|--------------------------------|--------|-----------|--------|
|                                              |   |    |        | Average  |   | Average                        |   | Aggregate |   |
|                                              |   |    |        | Exercise |   | Remaining                      |   | Intrinsic |   |
|                                              |   | Options |        | Price    |   | Life                  in Years |   | Value     |   |
|                                              |   |    |        |     |   |                           |   |      |   |
| Outstanding                  at June 30, 2006     |   |    | 101,600,000 |     | $      | 0.44                           |   |      | 27.9   |   |   |   |   |
|                                              |   |    |        |     |   |                           |   |      |   |   |   |   |   |
| Activity                  during the period       |   |    |        |     |   |                           |   |      |   |   |   |   |   |
| Exercised                                         |   |    | (625,000    | )        | $      | 0.40                           |   |      |   |   |   |   |   |
|                                              |   |    |        |     |   |                           |   |      |   |   |   |   |   |
| Outstanding                  at December 31, 2006 |   |    | 100,975,000 |     | $      | 0.44                           |   |      | 27.4   |   | $ | 7,950,000 |   |
| Exercisable                  at December 31, 2006 |   |    | 10,675,000  |     | $      | 0.69                           |   |      | 24.0   |   | $ | 750,000 |   |

|                                             |   |    |       | Weighted                    |   |
|--------------------------------------------------|--------|---------|------------|-----------------------------|--------|
|                                             |   |    |       | Average                     |   |
|                                             |   |    |       | Grant                  Date |   |
|                                             |   | Options |       | Fair                  Value |   |
|                                             |   |    |       |                        |   |
| Non-vested                  at June 30, 2006     |   |    | 90,400,000 |                        | $      | 0.37 |   |
|                                             |   |    |       |                        |   |   |   |
| Activity                  during the period:     |   |    |       |                        |   |   |   |
| Vested                                           |   |    | (100,000   | )                           | $      | 2.19 |   |
|                                             |   |    |       |                        |   |   |   |
| Non-vested                  at December 31, 2006 |   |    | 90,300,000 |                        | $      | 0.37 |   |

----

**International        Automated Systems, Inc.**

**(A        Development Stage Company)**

**Notes        to Unaudited Condensed Financial Statements**

**December        31, 2006**

| Options                      Outstanding atDec. 31, 2006 |   | Weighted                    AverageRemaining Contractual Life |                        | Weighted                    AverageExercise Price |   | NumberExercisable                    atDec. 31, 2006 |   | Weighted                    AverageExercisable Price |      |
|----------------------------------------------------------|--------|---------------------------------------------------------------|-----------------------------|---------------------------------------------------|--------|------------------------------------------------------|--------|------------------------------------------------------|-----------|
|                    1,600,000                        |   |                                                          | 3.6                  years  |                                              | $      | 3.00                                                 |   |                                                 | 1,300,000 |   | $ | 3.00 |   |
| 99,375,000                                               |   |                                                          | 27.8                  years |                                              | $      | 0.40                                                 |   |                                                 | 9,375,000 |   | $ | 0.40 |   |

|                                                                                                                                              |   | For                  the Three MonthsEnded                  December 31, 2005 |       | For                  the Six MonthsEnded                  December 31, 2005 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|--------|
|                                                                                                                                              |   |                                                                          |       |                                                                        |   |
| Net                  loss, as reported                                                                                                            |   | $                                                                             | (222,806   | )                                                                           | $      | (438,339 | ) |
|                                                                                                                                              |   |                                                                          |       |                                                                        |   |   |   |
| Deduct:                  Total stock-based employee compensation expense determined under                  fair-value based method for all awards |   |                                                                          | (2,032,196 | )                                                                           |   | (4,070,988 | ) |
|                                                                                                                                              |   |                                                                          |       |                                                                        |   |   |   |
| Pro                  forma net loss, as restated                                                                                                  |   |                                                                          | (2,255,002 | )                                                                           | $      | (4,509,327 | ) |
|                                                                                                                                              |   |                                                                          |       |                                                                        |   |   |   |
| Pro                  forma loss per common share:                                                                                                 |   |                                                                          |       |                                                                        |   |   |   |
| Basic                                                                                                                                             |   | $                                                                             | 0.09       |                                                                        | $      | 0.19 |   |
| Diluted                                                                                                                                           |   | $                                                                             | 0.09       |                                                                        | $      | 0.19 |   |

**NOTE        4 - COMMITMENTS AND CONTINGENCIES**

*Sales        Commitments*

*Legal        - *

----

**International        Automated Systems, Inc.**

**(A        Development Stage Company)**

**Notes        to Unaudited Condensed Financial Statements**

**December        31, 2006**

**NOTE        5 - STOCKHOLDERS EQUITY**

***Common        Stock Issued for Cash***

**NOTE        6 - LOAN FROM SHAREHOLDER**

**NOTE        7 - CUSTOMER DEPOSITS**

----

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

**FORWARD        LOOKING STATEMENTS**

**LIQUIDITY        AND CAPITAL RESOURCES**

**RESULTS        OF OPERATIONS**

**Three        Months Ended **
**December        31, 2006**
**compared        to Three Months Ended **
**December        31, 2005**

**Six        Months Ended December 31, 2006 compared to Six Months Ended December 31,        2005**

----

**FUTURE        BUSINESS**

**ITEM        3: CONTROLS AND PROCEDURES**

**Evaluation        of Disclosure Controls and Procedures**

**Changes        in Internal Control over Financial Reporting**

----

**PART        II - OTHER INFORMATION**

**ITEM        1. LEGAL PROCEEDINGS**

**ITEM        2. CHANGES IN SECURITIES**

----

**ITEM        3. COMMITMENTS AND CONTINGENCIES**

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

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

**ITEM        6. OTHER INFORMATION.**

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

**a.        Exhibits**

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

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

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

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

----

**SIGNATURES**

**International        Automated Systems, Inc.**

----