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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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Annual Report Pursuant to Section 13 or 15(d) of

the Securities Exchange
Act of 1934



For fiscal year ended August 31, 2005

Commission File Number: 0-16305



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International
Electronics, Inc.

(Name of small business issuer in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Massachusetts                                                 |  | 04-2654231                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|427 Turnpike StreetCanton, Massachusetts 02021                |  | (781) 821-5566                     
|(Address of principal executive office including zip code)    |  | (Issuers telephone number)        



Securities
registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, $0.01 par value

(Title of class)



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Indicate by check mark whether the issuer (1) has 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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-B is not contained in this form and will not be contained, to the best of Registrants knowledge in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ̈



Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes ̈No  x



State issuers revenues for its most recent fiscal year: $12,646,997



As of November 4, 2005, 1,496,158 shares of the Registrants voting stock was held by non-affiliates of the Registrant. As of that date, the
aggregate market value of the non-affiliate shares so held was approximately $3,220,000.



As of November 4, 2005, 1,738,931 shares of the Registrants common stock were outstanding.



Documents incorporated by reference: None



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INTERNATIONAL ELECTRONICS,
INC.

ANNUAL REPORT ON FORM 10-KSB



TABLE OF CONTENTS



|     |  |                                                                                       |  |     
|---- |  | ------------------------------------------------------------------------------------- |  | ----
|Item |  |                                                                                       |  | Page
|     |  | PART I                                                                                |  |     
|     |  |                                                                                      
|1.   |  | Business                                                                              |  | 3   
|2.   |  | Properties                                                                            |  | 7   
|3.   |  | Legal Proceedings                                                                     |  | 7   
|4.   |  | Submission of Matters to a Vote of Security Holders                                   |  | 7   
|     |  |                                                                                      
|     |  | PART II                                                                               |  |     
|     |  |                                                                                      
|5.   |  | Market for Registrants Common Stock and Related Stockholder Matters                  |  | 8   
|6.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|7.   |  | Financial Statements and Supplementary Data                                           |  | 18  
|8.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 18  
|8A.  |  | Controls and Procedures                                                               |  | 18  
|8B.  |  | Other Information                                                                     |  | 18  
|     |  |                                                                                      
|     |  | PART III                                                                              |  |     
|     |  |                                                                                      
|9.   |  | Directors and Executive Officers of the Registrant                                    |  | 19  
|10.  |  | Executive Compensation                                                                |  | 21  
|11.  |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 25  
|12.  |  | Certain Relationships and Related Transactions                                        |  | 26  
|13.  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 26  
|14.  |  | Principal Accounting Fees and Services                                                |  | 30  
|     |  | Signatures                                                                            |  | 31  
|     |  | Financial Statements                                                                  |  | F-1 



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PART I



Item 1. Business



International Electronics, Inc. (IEI) was formed in 1977 as a Massachusetts corporation. IEI, an ISO 9001:2000 certified manufacturer, designs, manufactures, markets and sells electronic access control equipment and
browser-managed security platforms used in residential and commercial security systems and wireless access control and fleet management systems for industrial mobile asset applications.



IEI products include its Door-Gardand Secured Seriesaccess control lines, its LS line of
integrated battery operated door locks, its eMergebrowser-managed access and security management products and
its line of PowerKeyindustrial access control and fleet management products. IEI also manufactures and
markets electronic glassbreak detectors sold under the trade name Tri-Gard.



IEIs products are marketed and principally sold in the United States to
leading distribution and electronic security installation companies and directly to material handling equipment users worldwide.



Products



Access Control and Digital Keypad Products



IEI manufactures and markets a line of access control and digital keypad products sold under the trade names Door-Gardand Secured Series. These products are sold in a variety of
configurations including indoor and outdoor models, with magnetic card readers, proximity readers and keypads. They are also sold with several different hardware and software configurations. IEI also sells to original equipment manufacturer
(OEM) customers private label products containing its access control and keypad based technology.



The command and control software can be used to add programmability by user and time. This software allows for up to 120 different users, each with
his/her own unique code and can be used to control machinery, lights, closed circuit TV or doors.



The access control version of the Door-Gardsoftware includes features that apply specifically to electronic door access control. These features include request to exit input, door ajar and door position monitoring. IEI also sells a version of
its Door-Gardunder the trade name prox.pad. The prox.padincorporates the use of both keypad and proximity technology. The prox.padhas been jointly developed by IEI
and HID Corporation, a subsidiary of Assa Abloy of Sweden. The approximate list prices for the Door-Gardproducts range from $150 to $500, other than the LS lockset products.



In 2002, IEI introduced the Door-GardLS lockset. The LS combines IEI keypad and/or HID proximity
technology with a UL listed grade 1 lockset to enable a battery operated stand-alone system. The approximate list prices for the LS products range from $600 to $1,300.



IEI also markets and sells its Secured Seriesaccess control product line. This line of products includes magnetic card readers and proximity readers as well as digital keypads. Systems features in
the Secured Seriesproduct line include: 2,000 users, transaction buffer for



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event recording, hard copy printing of events, holiday schedules and time zone limitations (which allow users access depending upon time of day or day of
week) as well as the ability to tie up to 64 doors together. The approximate list prices for the Secured Seriesproducts range from $400 to $1,100.



In 2003,
IEI announced its LAN/WAN connectivity gateway, which is available on IEIs Secured Seriesaccess control
systems and prox.padplus products. In August 2004, IEI entered into an agreement with S2 Security Corporation
to resell a private label version of the S2 NetBox Product. In September 2004, IEI introduced its new product, the eMerge5000 Security Platform, at the American Society for Industrial Security (ASIS) 50th Annual Seminar and Exhibits. The eMerge5000 Security Platform is a browser based integrated physical security management system that delivers access control, alarm, video and temperature monitoring and intercom capability all in one box.



In September 2005, IEI introduced its eMerge50 and eMerge440 Browser-Managed Security Platforms at the 2005 ASIS International Annual Seminar and Exhibits. The eMerge50 provides the benefits of a network architecture to a basic access control security function. The eMerge440 handles a broader range of security functions to include access control, real time monitoring, elevator control, video monitoring and photo ID in an integrated package. The eMerge50 and 440, along with the full featured eMerge5000, are integrated security management systems with an easy-to-use web browser interface, Linux operating system, MySQL database and web server all
embedded within the product. The typical list price for the eMerge50, eMerge440 and eMerge5000 systems are $4,350, $6,000 and $9,250, respectively.



IEI also markets a line of industrial access control and asset management systems sold under the trade name PowerKey. These products control access to mobile assets such as forklifts and greatly reduce operating costs, improve operator safety and maximize
vehicle performance. Under the AC version of the product, only access to industrial machinery is controlled. The list price on a volume basis per unit of installation for the PowerKey2600, PowerKeyAC and PowerKey3600 are $360, $745 and $1,800, respectively.



In March 2005, IEI announced the introduction of the currently available RF
Gateway-Direct Connect as a product option in the IEI PowerKeyfleet product system. This product provides
complete control and data collection for industrial vehicles.



There are numerous suppliers of access control products that include a wider range of features and more sophisticated software than our products currently offer. The majority of our products sold are produced in relatively low volume.
Competitors whose products are produced in larger volumes or competitors who produce their products in a lower cost environment may be able to produce products at a lower cost to manufacture than our products.



Glassbreak Detector Products



A detector is the component in an alarm system that is activated by an
intrusion or entry into protected premises. When activated, it sends a signal to a central control panel, the portion of the system that triggers the alarm. IEIs glassbreak products serve only the detection function, but are compatible with
systems made and sold by most major manufacturers of central control panels, and can be incorporated into both hard wired and certain wireless systems. These products are used in a system in conjunction with other forms of detectors such as those
that detect the opening of a door or window. IEI markets an audio glassbreak detector under the trade name Tri-Gard. The approximate list prices for the glassbreak products range from $55 to $100.



Sales and Marketing



The principal market for IEI is the United States, where it sells its products through a network of security equipment distributors and installation companies. IEI also sells and markets its products in North and South America, Europe,
Asia, the Middle East and Australia.



IEI presently employs
sixteen people in sales and marketing. The outside sales personnel contact dealers and distributors to provide ongoing sales and technical support for IEIs products. The inside sales personnel are responsible for incoming sales calls and
telemarketing. IEI also utilizes manufacturers representatives for certain territories.



IEI sells its products primarily to installers and distributors of alarm security equipment. IEIs customers include: ADI (a subsidiary of Honeywell International, Inc.), Clark Security Products and Security
Lock. Sales to IEIs largest customer, ADI, accounted for approximately 32%, 35% and 38% of IEIs total net sales for the fiscal years ended August 31, 2005, 2004 and 2003, respectively.



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While IEIs relationship with large customers provides it with a substantial market for its
products, the dependence on large volume sales to such large customers creates a vulnerability. The loss of any such large customer could have a material adverse effect on IEIs sales.



IEI is also aware that manufacturers in Europe, Asia and elsewhere fabricate
products similar to IEIs products. Some of these manufacturers may produce their units at a lower cost than IEIs cost. The introduction of such a product to the United States market could have a material adverse effect on IEIs
sales.



IEI provides sales support through national
advertising, periodic mailings and by participation at national and regional industry trade shows. IEI presently attends several national trade shows per year, and complements these shows by displaying its products at regional alarm shows. IEI
generally sells into overseas markets through distributors in certain countries. IEI also participates with some of its distributors in cooperative advertising programs.



Overseas Components and Production



IEI estimates that approximately 32%, 13% and 17% of its finished goods were manufactured in Asia for the years ended August 31, 2005, 2004 and 2003,
respectively. IEI sources a significant amount of components and maintains certain molds for its products in Asia. IEI believes that such sourcing reduces its cost of sales through lower parts, labor and tooling costs. There can be no guarantee that
the Asian political or economic environments will remain sufficiently stable to allow reliable and consistent delivery of product.



Product Sources of Revenue



IEIs various products have provided revenues during the last three fiscal years as follows:



|     |  |                                    |            |           |   |                    |  |       |         |  |   |           
|---- |  | ---------------------------------- | ---------- | --------- | - | ------------------ |  | ----- | ------- |  | - | ----------
|     |  | Access ControlandStandAlone Keypad |            | PowerKey |   | GlassbreakDetector |  | Total
|2005 |  | $                                  | 11,665,399 |           | $ | 648,729            |  | $     | 332,869 |  | $ | 12,646,997
|2004 |  |                                    | 10,584,427 |           |   | 358,848            |  |       | 450,433 |  |   | 11,393,708
|2003 |  |                                    | 9,545,320  |           |   | 344,124            |  |       | 401,926 |  |   | 10,291,370



Domestic and Foreign Sales



The percentages of domestic and foreign sales for
IEIs products for the last three fiscal years are as follows:



|     |  |          |   |  |         |  
|---- |  | -------- | - |  | ------- | -
|     |  | Domestic |   |  | Foreign |  
|2005 |  | 89       | % |  | 11      | %
|2004 |  | 89       |   |  | 11      |  
|2003 |  | 90       |   |  | 10      |  



Manufacturing and Raw Materials



IEI performs in-house manufacturing for some of its
access control, stand alone keypad, PowerKeyand Tri-Gardproduct lines. IEI is dependent upon sole source suppliers for a number of key components and parts used in IEIs products. Some of IEIs
largest principal suppliers include



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HID Corporation, Future Electronics, Inc. and S2 Corporation. Another of IEIs significant suppliers is a manufacturer of our finished goods located in
Asia. There can be no assurance that these suppliers will be able to meet IEIs future inventory requirements or that they will be available to IEI at favorable prices. Any extended interruption in the supply of any such inventory could have a
material adverse effect on IEIs operating results in any given period. We believe IEI is in compliance with existing foreign laws and do not believe that compliance with such laws will have any material impact on our foreign operations.



Competition



The market for products within the security industry is very competitive,
subject to technological change and affected by new product introductions and other market activities of industry participants. Over the past several years there has been significant consolidation within the security industry. Many of our
competitors are both large multi-national companies as well as companies located in developing nations with access to lower cost sources of engineering as well as manufacturing. Many of these companies have greater financial resources than we do and
are able to devote greater resources to the development, promotion, sale and support of their products. Many of these companies have all the principal advantages that large companies have over smaller companies including: lower manufacturing costs,
worldwide distribution channels, significant research and development efforts and broad customer support capabilities. Although IEI has obtained some patent and copyright protection for certain aspects of its products and software, we believe that
competitors are able to market products similar to those sold by IEI.



Competitors for our access control and stand alone keypad products include: Assa Abloy, Bosch, General Electric, Honeywell International, Ingersoll Rand, Kaba and Tyco, some of whom have recently expanded their position in the marketplace
by acquiring companies that design, sell and/or manufacture competing products. In addition, there are other companies that we compete against including: Corby, Crow Electronics, Keri Systems, Napco, Visonic, United Security Products, Keyscan, and
Everfocus. Some of the competitors for PowerKeyinclude: ID Systems, Access Control Group, LLC, and Shockwatch
(Media Recover, Inc.).



Intellectual Property



We rely on a combination of patent, trademark, trade secret and copyright
law and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection for our technology. Due to changing technology, we believe that factors such as the creative skills of our
personnel, new product developments and enhancements to existing products are more important than the various legal protections.



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Working Capital



During fiscal 2005, IEI depended on its existing cash balances to provide for its working capital needs. IEI had available through February 28, 2005
an equipment line of credit, as amended on November 12, 2004, that provided for borrowings of up to $500,000 and a demand bank line of credit that provided for borrowings of up to $1,000,000. The equipment and demand line of credit expired on
February 28, 2005, and were not renewed. IEI expects its working capital requirements for fiscal 2006 to be provided from its existing cash reserves and its anticipated cash flow generated from operations. As of August 31, 2005, there were
no borrowings outstanding under the demand line of credit and approximately $238,000 in borrowings outstanding as equipment debt. See Item 6-Managements Discussion and Analysis of Financial Condition and Results of Operations.



Research and Development



IEI presently employs nine people in research and development. IEI also
utilizes certain consultants and subcontractors on an as-needed basis with IEIs employees supervising such work. Research and development expenditures were approximately $1,229,000, $1,177,000 and $1,091,000 for fiscal 2005, 2004 and 2003,
respectively. The 2005 expenditures included $135,000 related to a contract IEI entered into with S2 Security Corporation. The purpose of the contract was to reengineer the eMerge5000 product. IEIs net sales include research and development revenues from customers of approximately $421,000, $123,000 and $114,000 during fiscal
2005, 2004 and 2003, respectively.



Employees



As of November 4, 2005, IEI had 66 employees, of which 65 were
full-time employees. Of these 66 employees, 16 were in sales and marketing, 9 in research and development, 26 in manufacturing and purchasing, 6 in customer service and 9 in general and administration.



Seasonality



IEI is subject to normal business slowdowns during the summertime and around the Christmas holiday season.



Governmental Controls/Environmental Compliance



None of IEIs business is subject to renegotiation of profits or
termination of contracts. IEI has not been materially affected by compliance with any governmental regulation relating to protection of the environment during the past year, though there is expected legislation pertaining to the Restriction of
Hazardous Substances (RoHS) that will affect IEI in January 2007. This legislation mandates the reduction of six hazardous substances from the manufacturing process. IEI anticipates a cost of approximately $100,000 to become RoHS compliant. In
addition, the new process for manufacturing will add 3% to the cost of our products.



Item 2. Properties



IEIs administrative and manufacturing operations are located at 427 Turnpike Street, Canton, Massachusetts, and consist of approximately 20,740 square feet of space. IEI occupies this facility under a lease expiring April 30,
2006, at an annual rent of $161,000 plus utilities, maintenance and certain real estate taxes. The property used by IEI is in good condition.



Item 3. Legal Proceedings



None



Item 4. Submission of Matters to a Vote of Security Holders



No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2005.



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PART II



Item 5. Market for Registrants Common Stock and Related Stockholder Matters



IEIs securities have been traded in the over-the-counter market since July 5, 1983. From October 30, 1987 to July 13, 2005,
IEIs common stock was quoted by the National Association of Securities Dealers Automated Quotation System (NASDAQ). On July 14, 2005, IEIs stock was delisted from NASDAQ as a result of non-compliance with NASDAQ
marketplace rule 4310(c)(2)(B) which requires IEI to have a minimum of $2,500,000 in stockholders equity or $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal
year or two of the three most recently completed fiscal years. As of July 14, 2005, the stock was traded in the pink sheets. On August 12, 2005, Hudson Securities filed a Form 211 which allowed the stock to be traded on the
Over-the-Counter Bulletin Board (OTCBB). IEIs common stock currently trades under the symbol IEIB on both the OTCBB and the pink sheet markets.



In fiscal 2005, IEI met all reporting requirements pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.



The prices set forth below are based on information
provided to IEI by NASDAQ, pink sheets and the OTCBB. These sales prices reflect interdealer prices, without retail mark-ups, markdowns or commissions, and may not represent actual transactions.



|                  |  |              |       |     |   |     
|----------------- |  | ------------ | ----- | --- | - | ----
|                  |  | Sales Prices
|                  |  | High         |       | Low
|Fiscal Year 2005: |  |              |       |     |   |     
|First Quarter     |  | $            | 5.22  |     | $ | 2.53
|Second Quarter    |  |              | 4.38  |     |   | 1.85
|Third Quarter     |  |              | 2.75  |     |   | 1.62
|Fourth Quarter    |  |              | 2.27  |     |   | 1.50
|                  |  |             
|Fiscal Year 2004: |  |              |       |     |   |     
|First Quarter     |  |              | 4.10  |     |   | 2.57
|Second Quarter    |  |              | 4.10  |     |   | 3.10
|Third Quarter     |  |              | 15.40 |     |   | 2.75
|Fourth Quarter    |  |              | 4.93  |     |   | 2.16



As of November 4,
2005, there were approximately 400 shareholders of record of IEIs common stock. IEI believes that a substantial number of shares of IEIs common stock are held by nominees and estimates that there are approximately 1,100 beneficial owners
of IEIs shares. IEI has never paid dividends to its shareholders.



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Equity Compensation Plan Information



The following table sets forth a description of our equity compensation plans as of August 31, 2005:



|                                                    |  |                                                                                 |  |                                                                 |      |                                                          |       
|--------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | --------------------------------------------------------------- | ---- | -------------------------------------------------------- | ------
|                                                    |  | Number ofsecurities to beissued upon exerciseof outstandingoptions and warrants |  | Weighted-averageexercise priceof outstandingoptionsand warrants |      | Number ofsecuritiesremainingavailable forfuture issuance
|                                                    |  | (A)                                                                             |  | (B)                                                             |      | (Excludes A)                                            
|Stock option plan approved by shareholders          |  | 157,300                                                                         |  | $                                                               | 2.64 |                                                          | 17,700
|                                                    |  |                                                                                 | 
|Stock option plans not approved by shareholders (1) |  | 125,073                                                                         |  |                                                                 | 1.61 |                                                          | 410   
|                                                    |  |                                                                                 | 
|Warrants not approved by shareholders (2)           |  | 20,167                                                                          |  |                                                                 | 1.90 |                                                          |      
|                                                    |  |                                                                                 |  |                                                                 |      |                                                          |       
|                                                    |  | 302,540                                                                         |  | $                                                               | 2.15 |                                                          | 18,110
|                                                    |  |                                                                                 |  |                                                                 |      |                                                          |       

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|(1) | The August 1988, January and September 1989, June and August 1990, July 1992, October 1993, May 1994, and September 1995 nonqualified stock option plans
(the Stock Plans) were approved by our Board of Directors but not our shareholders. The Stock Plans provide for the grant of options to purchase shares of our common stock for employees (including officers and employee directors),
non-employee directors, consultants and key personnel. See Note 9 to our Consolidated Financial Statements for additional information. The term of the Stock Plans is 10 years and the plans are administered by a committee of the Board of Directors.
To date, all options issued under the Stock Plans have been granted at the fair market value of our common stock on the date of grant.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | All of the warrants were approved by our Board of Directors but were not approved by our shareholders. The current outstanding warrants to purchase shares of our common stock have
been granted to an executive officer and an advisor to IEI and each had an original term of 10 years. All the outstanding warrants have been granted with an exercise price equal to the fair market value of our common stock on the date of grant.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion should be read in conjunction with our consolidated financial statements and notes to those statements. The following discussion contains
forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the matters discussed in Risk
Factors and elsewhere in this report.



Critical Accounting
Policies



The preparation of consolidated financial
statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial
statements and accompanying notes. Note 1 to the consolidated financial statements in this Annual Report on Form 10-KSB for the year ended August 31, 2005 describes the significant accounting policies used in the preparation of our consolidated
financial statements. Management bases its estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances. Estimates are used for, but not limited to, the accounting for
allowance for doubtful accounts and sales returns, inventory reserves, warranty reserves, income taxes and contingencies. Actual results could materially differ from these estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.



Revenue recognition Revenue from product sales is recognized upon shipment provided there are no uncertainties
regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collection of the related receivable is probable. If uncertainties exist, IEI recognizes revenue when these uncertainties are
resolved. An allowance for estimated future returns is recorded at the time revenue is recognized based on IEIs historical experience. Estimated product warranty costs are recorded at the time of product revenue recognition.



Allowance for Doubtful Accounts and Sales
Returns - The allowance for doubtful accounts and sales returns is based on our assessment of the collectibility of specific customer accounts, the aging of our accounts receivable and trends in product returns. While we believe that our
allowance for doubtful accounts and sales returns is adequate and that the judgment applied is appropriate, if there is a deterioration of a major customers credit worthiness, actual defaults are higher than our previous experience, or actual
future returns do not reflect historical trends, our estimates of the recoverability of the amounts due us and our sales would be adversely affected.



Inventory Obsolescence Reserve - Inventory purchases and commitments are based upon future demand forecasts for our products
and our current level of inventory. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and requirements, we may be required to increase
our inventory reserve and as a result, our gross profit margin would be adversely affected.



Warranty Reserve - We accrue for warranty costs based on the historical rate of claims and costs to provide warranty
services as the sale is recognized. While we believe the accrual for warranty costs is adequate to address known warranty issues, if we experience an increase in warranty claims that are higher than our historical experience or our costs to provide
warranty services increase, we may be required to increase our warranty accrual and as a result, our gross profit margin would be adversely affected.



Deferred Income Taxes - SFAS No. 109, Accounting for Income Taxes, requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against our net deferred tax assets. We evaluate all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Our effective income tax rate may vary
from period to period based on changes in estimated taxable income or loss, changes to the valuation allowance, changes to federal, state or foreign tax laws and deductibility of certain costs and expenses.



Loss Contingencies - We are subject to the
possibility of various loss contingencies arising in the ordinary course of business. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be
reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be recognized or adjusted.



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Results of Operations



Fiscal years ended August 31, 2005, 2004 and 2003



Net Sales. Net sales in both 2005 and 2004 increased 11% from the previous year. The increase in net sales for 2005 compared to 2004 is
primarily due to increases in our OEM custom and keypad product lines. The increase in net sales for 2004 compared to 2003 is primarily due to increases in demand for our access control product line. In 2005, 2004 and 2003, one customer contributed
more than 10% of our net sales, representing 32%, 35% and 38%, respectively.



Cost of Sales/Gross Profit. Our cost of sales primarily consists of purchased materials, manufacturing salaries and related personnel expenses, facility overhead and amounts paid to third-party
manufacturers. The ratios of gross profit to net sales were 45% in 2005, 42% in 2004, and 44% in 2003. The decrease in the gross profit ratio for 2004 from the prior year is primarily due to product mix and an increase in manufacturing overhead
costs. The increase in gross profit ratio for 2005 is primarily due to product mix. Our gross profit as a percentage of net sales in a particular quarter is highly variable due to many factors such as sales volume. Gross profit may also be adversely
affected by increases in manufacturing costs, excess and obsolete inventory, warranty costs, increased price competition, geographic mix, and changes in sales channels or product mix.



Research and Development Expenses. Research and development expenses primarily consist of salaries and related
personnel expenses, consulting fees and prototype costs. Research and development expenses were $1,228,920 in 2005, $1,177,463 in 2004 and $1,090,604 in 2003. The 2005 expenditures included $135,000 related to a contract IEI entered into with S2
Security Corporation. The purpose of the contract was to reengineer the eMerge5000 product. The increase in
costs in 2004 from the prior year is primarily due to additional salaries and related expenses, and consulting fees due to the increased development efforts for the industrial access control product line. We believe that research and development is
critical to our strategic product development objectives and we intend to continue to enhance our products. We expect future research and development expenses to decrease slightly in absolute dollars from its current level.



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Selling, General and Administrative Expenses. Selling, general and administrative expenses
primarily consist of salaries and related personnel expenses, commissions, travel and entertainment expenses, trade shows, advertising, telephone, bad debts and professional fees. As a percentage of net sales, selling, general and administrative
expenses were 41% in 2005, 37% in 2004 and 33% in 2003. The aggregate increase in dollars in 2005 was approximately $906,000, with the largest increase attributed to payroll of $339,000. Other contributing factors were travel, sales and marketing,
trade shows, and legal costs resulting from the delisting from NASDAQ. The increase in expenses as a percentage of net sales in 2004 from the prior year is primarily due to an increase in the hiring of additional management personnel, increases in
advertising, trade shows and consulting fees and a reduction in bad debt expense. We expect future selling, general and administrative expenses to increase in absolute dollars from its current level as we introduce new products to the market and
expand our sales organization.



Other Income.
Other income primarily consists of interest earned on our cash balances, and to a lesser extent, sundry other non-operating items. Other income was $25,867 in 2005, $18,228 in 2004 and $23,578 in 2003. The increase in 2005 is primarily due to an
increase in interest rates on invested balances. The decrease in 2004 from 2003 was the result of a reduction in interest rates and invested balances.



Interest Expense. Interest expense consists of interest incurred on equipment financing. Interest expense was $20,097 in 2005, $24,929 in
2004 and $27,462 in 2003. These decreases are the result of a reduction in outstanding debt.



Income Taxes. IEIs effective income tax rate was .3% in 2005, 67% in 2004 and 28% for 2003. In the fourth quarter of 2005, upon completion of IEIs 2006 operating plan and 2005 financial
results, we decided to maintain a full valuation allowance against the calculated deferred tax asset due to the uncertainty of realizing the benefit of the assets. See Note 8 to the Consolidated Financial Statements. The difference between the
effective tax rate and the federal statutory rate is primarily due to the valuation allowance in 2005 and the utilization of net operating loss carryforwards in 2003.



Off-Balance Sheet Arrangements.



We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.



Liquidity and Capital Resources



As of August 31, 2005, IEI had $1,564,245 in working capital as compared to $2,312,446 at August 31, 2004. The ratio of current assets to
current liabilities as of August 31, 2005 was 1.6 as compared to 2.1 for 2004 and 2.8 for 2003. The debt to equity ratio, which is a measure of a companys financial leverage and is computed by dividing total liabilities over
shareholders equity, was 1.1 at August 31, 2005 as compared to 0.8 at August 31, 2004 and 0.5 at August 31, 2003. The decrease in working capital and current ratio in 2005 from 2004 is primarily due to a reduction in cash and
equivalents, and an increase in accounts payable, partially offset by an increase in accounts receivable. The increase in the debt to equity ratios in 2005 from 2004 is primarily due to an increase in accounts payable and IEIs net loss.



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Net cash flows used in operating activities were $652,207 in 2005, compared with net cash flows provided
by operating activities of $179,420 in 2004, and cash flows used in operating activities of $323,409 in 2003. The decrease in operating cash flows in 2005 is primarily due to the net loss, and increases in accounts receivable and inventory,
partially offset by an increase in accounts payable and accrued expenses.



Net capital expenditures were $107,225, $404,621, and $229,311 for 2005, 2004 and 2003, respectively. In 2004, IEI purchased certain expensive manufacturing equipment. These capital investments were aimed at
decreasing the manual labor costs and increasing the quality of the product. The total purchases for production equipment in 2004 totaled $266,000. As a result of these capital expenditures, there was a significant decrease in net capital
expenditures in 2005 and a significant increase in 2004. IEI anticipates having up to $300,000 in total capital expenditures in fiscal 2006 primarily for the purchase of production, engineering, and office equipment. We expect our 2006 capital
expenditures to be financed from cash flow from operations.



Net cash flows used in financing activities were $217,247 in 2005, while net cash flows provided by financing activities were $99,642 in 2004, and net cash flows used in financing activities were $97,562 in 2003. The increase in cash flows
used in financing activities in 2005 was primarily due to a reduction in the availability of the equipment and demand lines of credit. The increase in net cash flows provided by financing activities in 2004 compared to the prior year is primarily
the result of additional long-term obligations for equipment financing and proceeds from the exercise of stock options and warrants.



The following table summarizes our future contractual cash obligations as of August 31, 2005:



|                            |  |      |           |      |   |         |  |       |         |  |   |          
|--------------------------- |  | ---- | --------- | ---- | - | ------- |  | ----- | ------- |  | - | ---------
|                            |  | 2006 |           | 2007 |   | 2008    |  | Total
|Equipment line of credit    |  | $    | 238,385   |      | $ |        |  | $     |        |  | $ | 238,385  
|Employment agreement        |  |      | 184,641   |      |   | 184,641 |  |       | 184,641 |  |   | 553,923  
|Purchase commitments        |  |      | 1,944,066 |      |   | 96,013  |  |       | 6,400   |  |   | 2,046,479
|Operating lease obligations |  |      | 124,437   |      |   | 5,280   |  |       |        |  |   | 129,717  
|                            |  |      |           |      |   |         |  |       |         |  |   |          
|                            |  | $    | 2,491,529 |      | $ | 285,934 |  | $     | 191,041 |  | $ | 2,968,504
|                            |  |      |           |      |   |         |  |       |         |  |   |          



In February 2005 the
equipment line of credit expired and was not renewed, and therefore the debt was classified as a current liability on the balance sheet. Eastern Bank agreed to the original repayment schedule as dictated by the equipment line of credit. The
outstanding balance of $238,385 is scheduled to be paid as follows: $167,691 in fiscal 2006, $62,252 in fiscal 2007 and $8,442 in fiscal 2008.



Purchase commitments in the table above, represents outstanding purchase orders on materials, services and supplies. Some of these purchase orders are
extending over several years. The suppliers production is solely dependent on IEIs forecasted requirements which may vary over an extended period of time. Therefore, IEIs liability is limited to the releases of those forecasted
requirements that are scheduled within the next three to six months.



Based on our current expectations, we believe that our current cash position, together with internally generated funds at present sales levels, will provide adequate cash reserves to satisfy our cash requirements for the next twelve months.
Although it is difficult to predict future liquidity requirements with certainty, the rate at which we will consume cash will be dependent on the cash needs of future operations, including changes in working capital, which will, in turn, be directly
affected by the levels of demand for our products, the timing and rate of expansion of our business and the resources we devote to developing our products. We anticipate devoting substantial capital resources to continue our research and development
efforts, to maintain our sales and marketing, and for other general corporate activities. We may periodically review strategic and operational alternatives to improve our operating results and financial position. In this regard, we may consider,
among other things, changes in our capital structure, adjustment to our capital expenditures and overall spending and the restructuring of our operations. We cannot be assured that we will be successful in implementing any new strategic or
operational initiatives or, if implemented, that they will have the effect of improving our operating results and financial position. We may seek to sell additional equity or debt securities that could result in additional dilution to our
shareholders, and we cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned
product development and sales and marketing efforts, which could harm our business, financial condition and operating results.



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Recent Accounting Pronouncement



In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS Statement No. 151,
Inventory Costs, an Amendment of Accounting Principles Board Opinion No. 43, Chapter 4, or SFAS 151. SFAS 151 requires that items such as idle facility expense, freight, handling costs and wasted materials be recognized as current-period
charges rather than being included in the inventory regardless of whether the costs meet the criterion of abnormal as defined in Accounting Principles Board Opinion No. 43. SFAS 151 is applicable for inventory costs incurred during fiscal years
beginning after June 15, 2005. We will adopt this pronouncement on September 1, 2005 and we do not expect the adoption will have a material impact on our financial condition or results of operation.



In December 2004, the FASB issued Statement No. 123R, Share-Based
Payment (FAS 123R). FAS 123R is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123). IEI is required to adopt the provisions of FAS 123R as of the beginning of its
first fiscal quarter of 2007, beginning September 1, 2006. This statement establishes standards for and requires the recognition of the cost of employment-related services settled in share-based payment.



In March 2005, the SEC issued Staff Accounting Bulletin No. 107
(SAB 107) regarding the SECs interpretation of FAS 123R and the valuation of share-based payments for public companies. IEI will be evaluating the requirements of FAS 123R and SAB 107. The impact of FAS 123R and SAB 107 cannot be
predicted at this time because it will depend on the fair-market value of the awards issued and the amount of the share based awards granted in the future.



Risk Factors



Information provided by IEI in writing and orally, from time to time may contain certain forward-looking information as this term is defined
by: (1) the Private Securities Litigation Reform Act of 1995 (the Act) and (2) in releases made by the Securities and Exchange Commission. These risk factors are being described pursuant to the provisions of the Act and with
the intention of obtaining the benefits of the safe harbor provisions of the Act. IEI cautions investors that any forward-looking statements made by IEI involve risks and uncertainties, which could cause actual results to differ
materially from those projected.



IEI has identified certain
risks and uncertainties as factors, which may have an impact on its operating results that are detailed below. All of these factors are difficult for IEI to forecast, and these or other factors can materially adversely affect IEIs business and
operating results for one quarter or a series of quarters.



Concentration of Customers. IEI has a substantial number of customers but sells a large majority of its products to a small number of large customers. This concentration of customers may cause net sales and operating results
to fluctuate from quarter to quarter based on major customers requirements and the timing of their orders and shipments. Sales to IEIs largest customer accounted for approximately 32% and 35% of IEIs total net sales for the fiscal
year ended August 31, 2005 and 2004, respectively. IEIs industry has experienced significant consolidation, which may further increase IEIs concentration among its major customers. There can be no assurance that IEIs major
customers will place additional orders, or that IEI will obtain orders of similar magnitude from other customers. IEIs operating results could be materially and adversely affected if any present or future major customer were to choose to
reduce its level of orders, were to experience financial, operational or other difficulties that resulted in such a reduction in orders to IEI or were to delay paying or fail to pay IEIs receivables from such customer.



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Reliance on Distribution Partners. We have historically sold the majority of our products
through distribution. We believe that our future success is dependent upon retaining successful relationships with a variety of distribution partners. We have no long-term agreements with these partners and certain distribution partners also
manufacture and sell products that compete with some of our products. We cannot be certain that we will be able to retain our current distribution partners or that these partners will devote adequate resources to selling our products. If we are
unable to maintain our distribution partners or the partners do not devote adequate resources to the sale of our products, our operating results could be materially and adversely affected.



General Economic Conditions. Our business is subject to the
effects of general economic conditions in the United States and globally. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the global economic slowdown, we may experience adverse impacts
on our business, operating results and financial condition.



Limited Financial Resources. IEI has limited financial resources. It is therefore subject to all the risks generally associated with a small business having limited financial resources. For the year ended August 31, 2005
and 2004, IEI had net losses of approximately ($720,000) and ($1,125,000), respectively and for the year ended August 31, 2003 had net income of $23,000. There can be no assurance that IEI will return to profitable operations. Continued
operations after the expenditure of IEIs existing cash reserves may require additional working capital to be generated by profitable operations and/or additional financing. There can be no assurance that profits will return or that additional
external funding will be obtainable, if such a need should arise.



Dependence on Key Employees. The business of IEI is dependent upon the efforts of John Waldstein and certain other key management and technical employees. The loss or prolonged disability of such personnel could have a
significant adverse effect on the business of IEI. IEI presently maintains a key man life insurance policy of $1,000,000 on John Waldstein, President, Chief Executive Officer, Chief Financial Officer and Treasurer.



Lack of New Product Development. IEI is engaged in an industry,
which, as a result of extensive research and development, introduces new products on a regular basis. Current competitors or new market entrants may develop new products with features that could adversely affect the competitive position of
IEIs products. There can be no assurance that IEI will be successful in selecting, developing, manufacturing and marketing new products or enhancing its existing products or that IEI will be able to respond effectively to technological changes
or product announcements by competitors. Any failure or delay in these goals could have a material adverse effect on IEI.



Fluctuations in Sales and Operating Results. Operating results may fluctuate due to factors such as the timing of new product announcements
and introductions by IEI, its major customers and its competitors, market acceptance of new or enhanced versions of IEIs products, changes in the product mix of sales, changes in the relative proportions of sales among distribution channels or
among customers within each distribution channel, changes in manufacturing costs, competitive pricing pressures, the gain or loss of significant customers, increased research and development expenses associated with new product introductions and



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general economic conditions. A limited number of customers have accounted for a significant portion of sales in any particular quarter. In addition, IEI
typically operates with a relatively small backlog. As a result, quarterly sales and operating results generally depend on the volume, timing of, and ability to fulfill orders received within the quarter which are difficult to forecast. In this
regard, IEI may recognize a substantial portion of its sales in a given quarter from sales booked and shipped in the last weeks of that quarter. A delay in customer orders, resulting in a shift of product shipment from one quarter to another, could
have a significant effect on IEIs operating results in a quarter. In addition, competitive pressure on pricing in a given quarter could adversely affect IEIs operating results, or such price pressure over an extended period could
adversely affect IEIs long-term profitability.



IEI
establishes its expenditure levels for sales and marketing and other expenses based, in large part, on its expected future results. As a result, if sales fall below expectations, there would likely be a material adverse effect on operating results
because only a small portion of IEIs expenses vary with its sales in the short-term.



Competition. Other companies in the industry offer products in competition with those of IEI. Many of the companies with which IEI competes are substantially larger, have greater resources and market a
larger line of products. IEI expects competition to increase significantly in the future from existing competitors and new companies that may enter IEIs existing or future markets. IEI competes with a number of large multinational companies
including: Assa Abloy, Bosch, General Electric, Honeywell International, Ingersoll Rand, Kaba and Tyco, some of whom have recently expanded their position in the marketplace by acquiring companies that design competing products. We also compete
against a number of smaller companies. Some of our competitors sell significant amounts of other products to our current and prospective customers.



Our competitors broad product portfolios, coupled with already existing relationships, may cause our customers to buy our competitors products
or harm our ability to attract new customers. Increased competition could adversely affect IEIs sales and profitability. There can be no assurance that IEI will be able to continue to compete successfully with its existing competitors or with
new competitors.



Investments and Acquisitions.
Although we have no current agreements to do so, we intend to consider investing in or acquiring products, technologies or businesses. In the event of future investments or acquisitions, we could:



| |  |  | issue stock that would dilute our current shareholders percentage ownership; incur debt or assume liabilities;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | incur significant impairment charges related to the write-off of goodwill and purchased intangible assets;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | incur significant amortization expenses related to purchased intangible assets; or
| | - |  | ----------------------------------------------------------------------------------



| |  |  | incur large and immediate write-offs for in-process research and development and stock-based compensation.
| | - |  | ----------------------------------------------------------------------------------------------------------



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Our integration of any acquired products, technologies or businesses may also involve numerous risks including:



| |  |  | problems and unanticipated costs associated with combining the purchased products, technologies, or businesses;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | diversion of managements attention from our core business;
| | - |  | -----------------------------------------------------------



| |  |  | adverse effects on existing business relationships with suppliers and customers;
| | - |  | --------------------------------------------------------------------------------



| |  |  | risks associated with entering markets in which we have limited or no prior experience, and;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | potential loss of key employees, particularly those of the acquired organizations.
| | - |  | ----------------------------------------------------------------------------------



We may be unable to successfully integrate any products, technologies, businesses or personnel that we might acquire in the future.



Lack of Patent Protection. Although IEI has
obtained some patent, trademark, trade secret and copyright protection for certain of its products and software, management believes that competitors may be able to market products similar to those sold by IEI.



Offshore Production. IEI is currently having some of its
finished products manufactured in Asia. IEI presently maintains certain manufacturing molds in Asia and has a significant amount of components for some products manufactured in Asia. There can be no assurance that the Asian political or economic
environment will remain sufficiently stable or that other factors will allow for reliable and consistent delivery of product.



Dependence on Single Source of Supply. IEI is dependent upon sole source suppliers for a number of key components and parts used in
IEIs products. There can be no assurance that these suppliers will be able to meet IEIs future requirements for such components or that the components will be available to IEI at favorable prices, or at all. Any extended interruption in
the supply or significant increase in price of any such components could have a material adverse effect on IEIs operating results in any given period.



Foreign Sales. During the year ended August 31, 2005, IEIs foreign sales represented approximately 11% of net sales. There may be
a reduction in IEIs foreign sales from the 2005 level in the event of significant changes in foreign exchange rates or political and economic instability in foreign countries.



Limited Market for Common Stock. There is a limited market for IEIs common stock and there can be no
assurance that even this limited market will be sustained. Holders of IEIs common stock may have difficulty selling their shares or may have difficulty selling them at a favorable price.



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Volatility of Stock Price. IEIs stock price is subject to significant volatility. If
revenues or earnings in any quarter fail to meet the investment communitys expectations, announcements of new products by IEI or its competitors and other events or factors could have an immediate impact on IEIs stock price. The stock
price may also be affected by broader market trends unrelated to IEIs performance.



Item 7. Financial Statements and Supplementary Data



The consolidated financial statements of International Electronics, Inc. and subsidiaries filed as a part of this Annual Report on Form 10-KSB begin on page F-1.



Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



| | (a) | Change in Registrants certifying accountant. On February 25, 2005, Deloitte & Touche LLP (Deloitte) resigned as IEIs independent
registered public accounting firm. Deloittes reports on the financial statements for each of the past two fiscal years did not contain an adverse opinion, disclaimer of opinion, qualification or modification as to uncertainty, audit scope or
accounting principles. During the two most recent fiscal years and through the date of Deloittes resignation, there were no disagreements on any matter of accounting principles or practices, financial statement disclosure or auditing scope or
procedure which would have caused Deloitte to make reference to the subject matter of the disagreement in connection with its reports.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Change in Registrants certifying accountant. IEIs Audit Committee has engaged BDO Seidman, LLP effective March 10, 2005 to serve as IEIs
independent registered public accounting firm in connection with the audit of its financial statements for the fiscal year ending August 31, 2005.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 8A. Controls and Procedures



| | (a) | Evaluation of disclosure controls and procedures. Our management, with the participation of our principal executive and principal financial officers, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)), as of the end of the period covered by this annual report. Based
on that evaluation, our principal executive and principal financial officers have concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective to ensure that information required to
be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SECs rules and forms, and that information required to be disclosed in the reports
filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting (as defined in Rules 240.13a-15(f) and
15d-15(f) of the Exchange Act) during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 8B. Other Information



Not Applicable



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PART III



Item 9. Directors and Executive Officers of the Registrant



The following table sets forth our executive officers and directors, their respective ages and positions as of October 31, 2005:



|                      |  |     |  |                       |  |                             |  |                                     
|--------------------- |  | --- |  | --------------------- |  | --------------------------- |  | ------------------------------------
|Name                  |  | Age |  | First ElectedDirector |  | Yearcurrent termwill expire |  | Position                            
|John Waldstein        |  | 52  |  | 1982                  |  | 2006                        |  | President, Chief Executive Officer, 
|                      |  |     |  |                       |  |                             |  | Treasurer, Chief Financial Officer, 
|                      |  |     |  |                       |  |                             |  | Chairman of the Board and a Director
|Diane Balcom          |  | 63  |  | 1989                  |  | 2008                        |  | Director                            
|Heath Paley           |  | 57  |  | 1990                  |  | 2007                        |  | Director                            
|Leslie Charm          |  | 62  |  | 2005                  |  | 2007                        |  | Director                            
|Albert Janjigian      |  | 59  |  | 2005                  |  | 2006                        |  | Director                            
|Peter Demakis         |  | 60  |  |                      |  |                            |  | Chief Operating Officer             
|Christopher Hentschel |  | 61  |  |                      |  |                            |  | Vice President of Engineering       
|Robert Stewart        |  | 62  |  |                      |  |                            |  | Vice President of Manufacturing     



IEI anticipates that
the next annual meeting of shareholders will be held in April 2006. Directors serve staggered three-year terms and hold office until their successors are chosen and qualified.



John Waldstein has been employed by IEI since 1978, has been Treasurer since March 1982, was Vice President between January
1983 and May 1988, Chief Financial Officer since February 1988, Chief Operating Officer from February 1988 to May 1988, President and Chief Executive Officer since May 1988, and Chairman of the Board since November 1990. Mr. Waldstein is a
graduate of Harvard College. See Item 10-Executive Compensation.



Diane Balcom became a member of the Board of Directors in 1989. Since May 2005, Ms. Balcom has served as President of the Greater Pennsylvania Chapter of the Alzheimers Association, having served as
Regional Director of the Chapter from December 2003 to May 2005. From June 2002 to November 2003, Ms. Balcom served as Director of Development of Achieva, a non-profit agency providing services for people with disabilities and their family
members. From February 2001 to June 2002, Ms. Balcom served as an independent consultant to a variety of non-profit organizations in southwestern Pennsylvania. From October 1998 to February 2001, Ms. Balcom served as the Executive Director
of the Pittsburgh Mercy Foundation. Previously, she held the position of Director of Development for Childrens Hospital of Pittsburgh and Chapter Director of the Juvenile Diabetes Foundation of Western Pennsylvania. From January 1989 to August
1994, Ms. Balcom operated a consulting practice, which provided services related to private and public financing for small and medium-sized companies. From March 1987 to January 1989, she served as Vice President and Chief Financial Officer for
Environmental Diagnostics, Inc., a publicly held company. Prior to that, Ms. Balcom held various senior management positions in Corporate Finance and Research for 13 years with brokerage firms on the West Coast.



Heath Paley became a member of the Board of Directors in 1990. Since March
1997, Mr. Paley has served as President of Cormorant, Inc., a manufacturer and retailer of glass wind chimes marketed under the name Goose Rock Designs. From May 1996 to December 2002, Mr. Paley also served as a self-employed computer



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consultant. He had been IEIs Director of Management Information Systems from September 1994 until May 1996 and was IEIs Chief Operating Officer
and Executive Vice President from June 1990 to August 1994. Previously, Mr. Paley was President and a founder of Ecco Industries, Inc. and President of the Maine Woods Shoe Division of Bennett Industries.



Peter Demakis has been IEIs Chief Operating Officer since September
2003. From March 2002 to August 2003, Mr. Demakis was the Chief Financial Officer for Midland Farms Stores, Inc., a limited assortment supply grocery retailer. From March 1999 to November 2001, he was the Executive Vice President and General
Manager for the Vantage Group, a direct marketing services organization. From November 1995 to December 1998, Mr. Demakis was the Vice President of Central Services for the Retail Division of Reebok International. Prior to these positions,
Mr. Demakis held senior level positions in operations and finance. Mr. Demakis is a graduate of Stonehill College. See Item 10Executive Compensation.



Leslie Charm became a member of the Board of Directors in 2005. Leslie Charm has been, since 1972, a partner in the firm of
Youngman & Charm, a firm specializing in assisting companies that are experiencing operating and/or financial problems and also advises entrepreneurs in the strategies involved in the growing of companies. From 1989 to the present, he has
been a director of Moto Photo, Inc., a publicly held international franchisor of imaging centers that filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in November 2002. From 1994, he has been a director, and has
served on the audit committee and the compensation committee of CreditRiskMonitor.com, Inc., which is a worldwide leading provider of real time financial information analysis and news created specifically for the corporate credit professional.
Mr. Charm is an adjunct professor in entrepreneurial finance at Babson College and is a graduate of the Harvard Business School.



Albert Janjigian became a member of the Board of Directors in 2005. Albert Janjigian is president of Expedeum, Inc., a consulting firm formed by him in
2000, which provides strategic and marketing support to companies in the high technology, security, fire alarm and building system industries. He co-founded Detectronics in 1970, the security industrys first national wholesale distribution
company that evolved into an international operation. After the acquisition of Detectronics by ADT and its evolution into Aritech Corporation, he served as vice president and general manager until 1985. He subsequently joined Cerberus, a Swiss
organization, as president of the companys United States operations. In 1990, Mr. Janjigian became a principal of STAT Resources, a security industry leading market research organization. He served as president of the Security Industry
Association from 1982 to 1986 and from 1992 to 1993. He participates in numerous security industry organizations and has served as a security industry spokesperson in interviews with the national media. After graduating from Bowdoin College,
Mr. Janjigian earned an MS degree and an MBA from Northeastern Universitys Graduate School of Professional Accounting.



Christopher Hentschel has been IEIs Vice President of Engineering since March 1995 and had previously been Chief Engineer since 1989. Before joining
IEI, Mr. Hentschel was a founder and Vice President of Engineering of Guard Aware, Inc. Mr. Hentschel is a graduate of Wentworth Institute. See Item 10-Executive Compensation.



Robert Stewart has been IEIs Vice President of Manufacturing since
October 2003, and had previously been Director of Manufacturing from May 2003 to October 2003 and Manufacturing Engineering Manager from November 2000 to May 2003. Before joining IEI, from December 1997 to May 2000, Mr. Stewart was Group Plant
Manager for AMP/Tyco Electronics, an electronics manufacturer. Prior to 1997, Mr. Stewart held several positions in the manufacturing field. Mr. Stewart is a graduate of Fairleigh Dickinson University. See Item 10Executive
Compensation.



Audit Committee



The Company has an Audit Committee. The members of the Audit Committee are
independent. The members of the Audit Committee are Diane Balcom, Leslie Charm and Heath Paley.



Other Matters



Section 16(a) of the Securities Exchange Act of 1934 requires IEIs executive officers, directors, and persons who own more than ten percent of a registered class of IEIs equity securities to file reports of ownership with
the Securities and Exchange Commission (SEC) and NASD. Executive officers, directors, and greater than ten-percent stockholders are required by SEC regulation to furnish IEI with copies of all Section 16(a) forms they file.



IEI believes that all filing requirements applicable under
Section 16(a) to its executive officers, directors and 10% stockholders were complied with for fiscal 2005.



Code of Ethics



Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, IEI has adopted a code of ethics that applies to its principal executive officer and chief
financial and accounting officers. A copy of the code of ethics can be obtained without charge by written request to Investor Relations, International Electronics, Inc., 427 Turnpike Street, Canton, MA 02021 and is also available on IEIs
website at http://www.ieib.com.



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Item 10. Executive Compensation



The following table sets forth information concerning the compensation for each of the last three fiscal years ended August 31, 2005, of IEIs President and Chief Executive Officer, and the other executive officers of IEI who
received at least $100,000 of compensation during any of these years (the Named Executive Officers):



Summary Compensation Table



|                        |  |        |  |                     |         |                          |                       |        |                 |  |   |        |  |       
|----------------------- |  | ------ |  | ------------------- | ------- | ------------------------ | --------------------- | ------ | --------------- |  | - | ------ |  | ------
|Name                    |  | Year   |  | Annual Compensation |         | Long-TermCompensation(2)
|                        |  | Salary |  | Bonus               |         |                          | All OtherCompensation |        | Options(Shares)
|John Waldstein (1)      |  | 2005   |  | $                   | 183,421 |                          | $                     | 12,500 | (3)             |  | $ | 23,001 |  |      
|President and           |  | 2004   |  |                     | 179,087 |                          |                       |       | (5)             |  |   | 21,247 |  |      
|Chief Executive Officer |  | 2003   |  |                     | 172,190 |                          |                       |       |                 |  |   | 25,524 |  |      
|                        |  |        |  |                     |        
|Peter Demakis (4)       |  | 2005   |  |                     | 125,000 |                          |                       | 12,500 | (3)             |  |   |       |  |      
|Chief Operating         |  | 2004   |  |                     | 118,750 |                          |                       |       | (5)             |  |   |       |  | 30,000
|Officer                 |  | 2003   |  |                     |        |                          |                       |       |                 |  |   |       |  |      
|                        |  |        |  |                     |        
|Christopher Hentschel   |  | 2005   |  |                     | 130,000 |                          |                       | 3,750  | (3)             |  |   |       |  |      
|Vice President of       |  | 2004   |  |                     | 127,923 |                          |                       |       | (5)             |  |   |       |  |      
|Engineering             |  | 2003   |  |                     | 126,000 |                          |                       |       |                 |  |   |       |  |      
|                        |  |        |  |                     |        
|Robert Stewart          |  | 2005   |  |                     | 115,000 |                          |                       | 3,750  | (3)             |  |   |       |  |      
|Vice President of       |  | 2004   |  |                     | 115,000 |                          |                       |       | (5)             |  |   |       |  |      
|Manufacturing           |  | 2003   |  |                     | 104,769 |                          |                       |       |                 |  |   |       |  | 5,000 

---

|(1) | All other compensation represents the cost of a split dollar whole life insurance policy with a face value of $1,005,000, a term insurance policy with a face value of $1,000,000,
and a long-term disability policy. IEI is a beneficiary of the whole life insurance policy to the extent of all premiums paid upon the death of John Waldstein. Mr. Waldstein may purchase the life insurance policies upon termination of his
employment for the cash surrender value as of August 31, 2001.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Does not include perquisites, which do not exceed 10% of annual salary.
|--- | -----------------------------------------------------------------------



|(3) | Amount represents bonuses paid during the fiscal year ending August 31, 2005, though were accrued in the prior year and previously reported in that year. In addition, the
officer may, together with other non-officer employees, share in a bonus pool of $114,000 which at the present time has not been individually awarded to anyone.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Mr. Demakis commenced his employment in September 2003.
|--- | -------------------------------------------------------



|(5) | See footnote 3.
|--- | ---------------



21



---

##### Table of Contents

Compensation on Involuntary Termination



John Waldstein has an employment contract with IEI which provides for certain compensation to be paid to him if he is
discharged by IEI without cause, as defined before the end of the term of his contract. Mr. Waldstein has a continuous three-year employment contract with a current minimum annual salary of approximately $185,000, subject to adjustment for
inflation, plus an annual minimum bonus of $50,000 payable upon the achievement of specified goals and objectives. The salary and bonus of Mr. Waldstein is subject to performance reviews and annual adjustment as determined by IEIs
Compensation Committee.



If the employment of
Mr. Waldstein is terminated by IEI without cause, including the election of a slate of board of director members not approved by Mr. Waldstein or a change in status as a result of an acquisition, merger or sale of assets (an
Acquisition), IEI is obligated to pay at such termination an amount equal to his total salary and benefits to the conclusion of the contract period. In the event of an Acquisition of IEI, Mr. Waldsteins base salary shall
increase based on future adjustments for inflation. As of August 31, 2005, John Waldsteins base salary to the conclusion of his contract period is approximately $554,000, plus future cost of living adjustments.



After an Acquisition of IEI, provided Mr. Waldstein continues his
employment for at least a six-month period, and he subsequently voluntarily resigns, he shall be paid severance of one years compensation and benefits. For each additional six months that he works thereafter, in the event Mr. Waldstein
subsequently voluntarily resigns, he shall be paid severance of an additional six months compensation and benefits provided any such severance payments shall not exceed three years of compensation.



In addition to the foregoing, IEI also has employment letters with certain
key management (including Messrs. Demakis, Hentschel and Stewart) that require salary and benefits continuation in the event of a termination of such employment as a result of an Acquisition. As of August 31, 2005, the salaries of such
management personnel represent an aggregate of approximately $458,000.



Stock Option Grants



There were no option
grants to any of the Executive Officers during the year ended August 31, 2005. Therefore, there are no hypothetical gains or option spreads to be calculated.



22



---

##### Table of Contents

Year End Option Table



The following table sets forth information concerning the exercise of stock options and warrants by each of the Named Executive Officers and the number and value of
unexercised options and warrants held by them as of August 31, 2005:



Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values



|                      |  |                           |  |                   |   |                                                    |               |                                                                    |             |        |               |   |        |  |   |  
|--------------------- |  | ------------------------- |  | ----------------- | - | -------------------------------------------------- | ------------- | ------------------------------------------------------------------ | ----------- | ------ | ------------- | - | ------ |  | - | -
|                      |  | SharesAcquiredon Exercise |  | ValueRealized (3) |   | Number of UnexercisedOptions at End of Fiscal 2005 |               | Value of Unexercised in-the-Money Options atEnd of Fiscal 2005 (1)
|Name                  |  |                           |  | Exercisable       |   |                                                    | Unexercisable |                                                                    | Exercisable |        | Unexercisable
|John Waldstein        |  |                          |  | $                 |  |                                                    | 74,000        | (2)                                                                |             |       |               | $ | 45,310 |  | $ | 
|Peter Demakis         |  |                          |  |                   |  |                                                    | 14,375        |                                                                    |             | 15,625 |               |   |       |  |   | 
|Christopher Hentschel |  |                          |  |                   |  |                                                    | 17,333        |                                                                    |             |       |               |   | 8,880  |  |   | 
|Robert Stewart        |  |                          |  |                   |  |                                                    | 14,750        |                                                                    |             | 3,250  |               |   |       |  |   | 

---

|(1) | Difference between the fair market value of the underlying common stock on November 4, 2005 and the exercise price.
|--- | -------------------------------------------------------------------------------------------------------------------



|(2) | Includes warrants to purchase 10,000 shares of common stock. See Note 9 to the Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------



|(3) | The value realized represents the difference between the aggregate closing price of the shares on the date of exercise less the aggregate exercise price paid.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



23



---

##### Table of Contents

Compensation of Directors



Directors who are not executive officers receive $500 for each Board of Directors meeting and $500 for each Committee
meeting that they attend in person or by telephone conference call. For the fiscal year ended August 31, 2005, directors fees were paid in the amounts of $8,000 each to Ms. Balcom and Mr. Paley, $4,000 to Mr. Charm, and
$3,000 to Mr. Janjigian.



24



---

##### Table of Contents

Item 11. Security Ownership of Certain Beneficial Owners and Management



Set forth below is information concerning ownership of IEIs common stock as of October 31, 2005, (i) by all persons known by IEI to own
beneficially 5% or more of the outstanding common stock, (ii) each current director and Named Executive Officer of IEI and (iii) all directors and executive officers as a group.



|                                                            |  |                    |      |  |                             |  
|----------------------------------------------------------- |  | ------------------ | ---- |  | --------------------------- | -
|Name                                                        |  | Number ofShares(1) |      |  | Percent ofCommon StockOwned |  
|Executive Officers and Directors:                           |  |                    |      |  |                             |  
|                                                            |  |                   
|John Waldstein                                              |  | 277,405            | (2)  |  | 13.6                        | %
|c/o International Electronics, Inc.                         |  |                    |      |  |                             |  
|427 Turnpike Street                                         |  |                    |      |  |                             |  
|Canton, Massachusetts                                       |  |                    |      |  |                             |  
|                                                            |  |                   
|Christopher Hentschel                                       |  | 30,301             | (3)  |  | 1.5                         |  
|c/o International Electronics, Inc.                         |  |                    |      |  |                             |  
|427 Turnpike Street                                         |  |                    |      |  |                             |  
|Canton, Massachusetts                                       |  |                    |      |  |                             |  
|                                                            |  |                   
|Peter Demakis                                               |  | 16,875             | (4)  |  | 0.8                         |  
|c/o International Electronics, Inc.                         |  |                    |      |  |                             |  
|427 Turnpike Street                                         |  |                    |      |  |                             |  
|Canton, Massachusetts                                       |  |                    |      |  |                             |  
|                                                            |  |                   
|Robert Stewart                                              |  | 14,750             | (5)  |  | 0.7                         |  
|c/o International Electronics, Inc.                         |  |                    |      |  |                             |  
|427 Turnpike Street                                         |  |                    |      |  |                             |  
|Canton, Massachusetts                                       |  |                    |      |  |                             |  
|                                                            |  |                   
|Heath Paley                                                 |  | 12,500             | (6)  |  | 0.6                         |  
|c/o International Electronics, Inc.                         |  |                    |      |  |                             |  
|427 Turnpike Street                                         |  |                    |      |  |                             |  
|Canton, Massachusetts                                       |  |                    |      |  |                             |  
|                                                            |  |                   
|Albert Janjigian                                            |  | 12,500             | (7)  |  | 0.6                         |  
|116 Barnard Avenue                                          |  |                    |      |  |                             |  
|Watertown, Massachusetts                                    |  |                    |      |  |                             |  
|                                                            |  |                   
|Diane Balcom                                                |  | 11,500             | (8)  |  | 0.5                         |  
|1403 Sharps Hill Road                                       |  |                    |      |  |                             |  
|Pittsburgh, Pennsylvania                                    |  |                    |      |  |                             |  
|                                                            |  |                   
|Leslie Charm                                                |  | 2,500              | (9)  |  | 0.1                         |  
|39 Holden Avenue                                            |  |                    |      |  |                             |  
|Concord, Massachusetts                                      |  |                    |      |  |                             |  
|                                                            |  |                   
|All directors and executive officers as a group (8 persons) |  | 378,331            | (10) |  | 18.7                        |  
|                                                            |  |                   
|5% Shareholders:                                            |  |                    |      |  |                             |  
|                                                            |  |                   
|David Weiner                                                |  | 153,940            | (11) |  | 8.9                         | %
|c/o W-Net, Inc.                                             |  |                    |      |  |                             |  
|3490 Laurel Canyon Blvd., Suite 327                         |  |                    |      |  |                             |  
|Studio City, California                                     |  |                    |      |  |                             |  

---

(Footnotes continued on following page)



|(1) | Except as otherwise indicated below, the named owner has sole voting and investment power with respect to the shares set forth. No arrangements are known to IEI, which may result in
a change in control. The number of shares shown does include shares which may be acquired through the exercise of options and warrants which are exercisable currently or within sixty (60) days after October 31, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



---

##### Table of Contents

|(2) | Includes vested options and warrants to purchase an aggregate 74,000 shares of IEIs common stock granted at prices ranging from $1.17-$2.12 per share. Includes 6,234 shares of
common stock held by Mr. Waldsteins wife. Mr. Waldstein disclaims beneficial ownership of these shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes vested options to purchase an aggregate 15,333 shares of IEIs common stock at prices ranging from $1.35-$2.54 per share. Includes 14,968 shares of common stock held
jointly by Mr. Hentschel and his wife.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Includes vested options to purchase 16,875 shares of IEIs common stock granted at a price of $2.75 per share.
|--- | --------------------------------------------------------------------------------------------------------------



|(5) | Includes vested options to purchase an aggregate 14,750 shares of IEIs common stock granted at prices ranging from $2.30-$2.80 per share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Includes vested options to purchase an aggregate 8,500 shares of IEIs common stock granted at prices ranging from $1.36-$2.81 per share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



|(7) | Includes vested options to purchase 2,500 shares of IEIs common stock granted at a price of $3.07 per share.
|--- | -------------------------------------------------------------------------------------------------------------



|(8) | Includes vested options to purchase an aggregate 8,500 shares of IEIs common stock granted at prices ranging from $1.36-$2.81 per share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



|(9) | Includes vested options to purchase 2,500 shares of IEIs common stock granted at a price of $3.07 per share.
|--- | -------------------------------------------------------------------------------------------------------------



|(10) | Includes vested options and warrants to purchase an aggregate 137,958 shares of IEIs common stock granted at prices ranging from $1.17-$3.07 per share.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------



|(11) | Includes 85,000 shares owned by W-Net, Inc. (W-Net) and 68,940 shares owned by Woodman Management Corporation (WMC). Based on a Schedule 13D filed with the
SEC, Mr. Weiner may be deemed to beneficially own the W-Net and WMC shares.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 12. Certain Relationships and Related Transactions



None



Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K



(a)1. The following Consolidated Financial Statements are included in Item 7:



Reports of Independent Registered Public Accounting Firm



Consolidated Balance Sheets as of August 31, 2005 and 2004



Consolidated Statements of Operations for the Years Ended August 31,
2005, 2004 and 2003



Consolidated Statements of
Shareholders Equity for the Years Ended August 31, 2005, 2004 and 2003



Consolidated Statements of Cash Flows for the Years Ended August 31, 2005, 2004 and 2003



Notes to Consolidated Financial Statements



26



---

##### Table of Contents

(a)2. Financial Statement Schedules:



None. All schedules are omitted because they are inapplicable, not required under the instructions or because the
information is reflected in the consolidated financial statements or notes thereto.



(a)3. Exhibits:



|      |  |                                                                                                                                                                                                                                                            
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3     |  | Restated Articles of Organization and By-Laws are incorporated by reference to Exhibit 3 to Registrants Registration Statement on Form S-18 (2-91218-B), filed on May 18, 1984
(hereinafter referred to as Registrants S-18).                            
|      | 
|3(a)  |  | Amendment to Articles of Organization are incorporated by reference to Exhibit 3.1(a) of Registrants Registration Statement on Form S-1 (Registration No. 33-16333 which became effective
on October 8, 1987 hereinafter referred to as Registrants S-1).
|      | 
|4     |  | Instruments defining the rights of securities holders include the Restated Articles of Organization, By-Laws, Stock Certificate and Stock Purchase Warrant which are incorporated by reference
to Exhibits 3, 4b and 4c to Registrants S-18.              
|      | 
|10(a) |  | Nonqualified Stock Option Plan is incorporated by reference to Exhibit 10.1(ll) of Post-Effective Amendment No. 2 of Registrants S-1.                                                                                                                     
|      | 
|10(b) |  | 1999 Stock Option Plan is incorporated by reference to the definitive proxy material for the 1999 special meeting in lieu of the annual meeting of shareholders.                                                                                           
|      | 
|10(c) |  | Stock Purchase Agreement dated as of June 19, 1990 by and among Registrant and Ecco Industries, Inc. is incorporated by reference to Exhibit (2.1) on Form 8-K dated July 2,
1990.                                                                         
|      | 
|10(d) |  | Lease for Canton, Massachusetts facility between 427 Turnpike Street Realty Trust and the Registrant dated March 28, 1995 is incorporated by reference to Exhibit 10(w) on Form 10-KSB for the
year ended August 31, 1995.                                 
|      | 
|10(e) |  | Demand Loan and Security Agreement Accounts Receivable and Inventory dated as of February 28, 1997 between Eastern Bank and the Registrant is incorporated by reference to exhibit 10(a) on
Form 10-QSB for the period ended February 28, 2002.            
|      | 
|10(f) |  | Demand Loan and Security Letter Agreement dated as of December 27, 2000 between Eastern Bank and the Registrant is incorporated by reference to exhibit 10(b) on Form 10-QSB for the period
ended February 28, 2002.                                       



27



---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                        
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10(g) |  | First amendment to original lease of March 28, 1995, Canton, Massachusetts between 427 Turnpike Street Realty Trust and the Registrant dated April 1, 1998 is incorporated by
reference to Exhibit 10(k) on Form 10-KSB for the year ended August 31, 1998.            
|      | 
|10(h) |  | Demand Loan and Security Letter Agreement dated May 20, 1999 between Eastern Bank and the Registrant is incorporated by reference to exhibit 10(c) on Form 10-QSB for the period ended February
28, 2002.                                                              
|      | 
|10(i) |  | Second amendment to original lease of March 28, 1995, Canton, Massachusetts between 427 Turnpike Street Realty Trust and the Registrant dated January 28, 1999 is incorporated by reference to
10(m) on Form 10-KSB for the year ended August 31, 1999.                
|      | 
|10(j) |  | Third amendment to original lease of March 28, 1995, Canton, Massachusetts between 427 Turnpike Street Realty Trust and the Registrant dated September 27, 1999 is incorporated by reference to
10(n) on Form 10-KSB for the year ended August 31, 1999.               
|      | 
|10(k) |  | Fourth amendment to original lease of March 28, 1995, Canton, Massachusetts between 427 Turnpike Street Realty Trust and the Registrant dated October 31, 2001 is incorporated by reference to
10(h) on Form 10-KSB for the year ended August 31, 2001.                
|      | 
|10(l) |  | 2001 restatement of the Employment, Non-Disclosure, and Non-Compete Agreement for John Waldstein dated September 13, 2001 is incorporated by reference to 10(i) on Form 10-KSB for the year
ended August 31, 2001.                                                     
|      | 
|10(m) |  | Line of Credit Agreement for the Acquisition of Equipment dated as of December 11, 2001 between Eastern Bank and the Registrant is incorporated by reference to exhibit 10(d) on Form 10-QSB
for the period ended February 28, 2002.                                   
|      | 
|10(n) |  | Line of Credit Agreement for the Acquisition of Equipment dated January 14, 2003 between Eastern Bank and the Registrant is incorporated by reference to 10(a) on Form 10-QSB for the three
months ended February 28, 2003.                                            
|      | 
|10(o) |  | Amendment to February 28, 1997 Demand Loan and Security Agreement, Accounts Receivable and Inventory dated April 11, 2003 between Eastern Bank and the Registrant is incorporated by reference
to 10(a) on Form 10-QSB for the three months ended May 31, 2003.        
|      | 
|10(p) |  | November 26, 2003 Amendment to Demand Loan and Security Agreement, Accounts Receivable and Inventory dated February 28, 1997 between Eastern Bank and the Registrant is incorporated by
reference to 10(a) on Form 10-QSB for the three months ended November 30, 2003.



28



---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                        
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10(q) |  | February 24, 2004 Amendment to Demand Loan and Security Agreement, Accounts Receivable and Inventory dated February 28, 1997 between Eastern Bank and the Registrant is incorporated
by reference to 10(a) on Form 10-QSB for the three months ended February 29, 2004.
|      | 
|10(r) |  | February 26, 2004 Amendment to Demand Loan and Security Agreement, Accounts Receivable and Inventory dated February 28, 1997 between Eastern Bank and the Registrant is incorporated by
reference to 10(b) on Form 10-QSB for the three months ended February 29, 2004.
|      | 
|10(s) |  | April 19, 2005 Eastern Bank letter confirming demand and equipment lines were not renewed.                                                                                                                                                                             
|      | 
|16.1  |  | Letter dated March 7, 2005 from Deloitte & Touche LLP as required by regulation SB item 304(2)(3).                                                                                                                                                                     
|      | 
|21.1  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                        
|      | 
|23.1  |  | Consent of BDO Seidman, LLP.                                                                                                                                                                                                                                           
|      | 
|23.2  |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                      
|      | 
|31.1  |  | Certification of International Electronics, Inc. Chief Executive and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                
|      | 
|31.2  |  | Certification of International Electronics, Inc. Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                    
|      | 
|32.1  |  | Certification of International Electronics, Inc. Chief Executive and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                
|      | 
|32.2  |  | Certification of International Electronics, Inc. Chief Operating Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                    



| | (b) | Reports on Form 8-K
| | --- | -------------------



On July 18, 2005 we furnished a Current Report on Form 8-K to the SEC under Item 3 stating that although IEI had not received any notice from
NASDAQ with respect to being delisted from NASDAQ, IEI discovered on July 14, 2005 that it was not able to trade on NASDAQ and discovered that it was being traded in the pink sheets. As a result, IEI believed that it had been delisted from
NASDAQ and that it would no longer be traded on NASDAQ because IEI was not in compliance with NASDAQ marketplace rule 4310(c)(2)(B) which requires IEI to have a minimum of $2,500,000 in stockholders equity or $35,000,000 market value of listed
securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.



29



---

##### Table of Contents

Item 14. Principal Accountant Fees and Services



The following is a summary of the fees incurred by IEI from BDO Seidman, LLP, IEIs principal accountant since March 10, 2005, and Deloitte & Touche LLP, IEIs principal accountant until
February 25, 2005, for professional services rendered for the fiscal years ending August 31, 2005 and 2004:



|                   |  |                     |         |                 |   |        
|------------------ |  | ------------------- | ------- | --------------- | - | -------
|Fee Category       |  | Fiscal2005 Fees (1) |         | Fiscal2004 Fees
|Audit fees         |  | $                   | 123,340 |                 | $ | 101,000
|Audit-related fees |  |                     |        |                 |   |       
|Tax fees           |  |                     |        |                 |   | 4,950  
|All other fees     |  |                     |        |                 |   |       
|                   |  |                     |         |                 |   |        
|Total fees         |  | $                   | 123,340 |                 | $ | 105,950
|                   |  |                     |         |                 |   |        

---

|(1) | Includes fees billed and estimated to be billed by BDO Seidman, LLP in 2005 for the 2005 audit and related consulting.
|--- | ----------------------------------------------------------------------------------------------------------------------



Audit Fees. Consists of fees incurred for professional services
rendered for the audit of IEIs consolidated financial statements and for reviews of the interim consolidated financial statements included in our quarterly reports on Form 10-QSB and consents for filings with the SEC.



Audit-related Fees. Consists of fees billed for professional
services that are reasonably related to the performance of the audit or review of IEIs consolidated financial statements, but are not reported under Audit Fees.



Tax Fees. Consists of fees billed for professional services relating to tax compliance, tax reporting, tax
advice and tax planning.



All Other Fees.
Consists of fees billed for all other services.



Audit Committee
Pre-Approval



The Audit Committees policy is to
pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year
and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management periodically report to the Audit Committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by case basis. During fiscal 2005, no services were
provided to IEI by Deloitte & Touche LLP, BDO Seidman, LLP, or any other accounting firm other than in accordance with the pre-approval policies and procedures described above.



30



---

##### Table of Contents



SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) 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 ELECTRONICS, INC.
|                        |  |  | 
|Date: November 28, 2005 |  |  |  | By:                             |  | /s/ John Waldstein
|                        |  |  |  |                                 |  |                    |  | John Waldstein, President and Chief Executive Officer



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                     |  |                                                                                                                             |  |                  
|------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------- |  | -----------------
|Signature                            |  | Title                                                                                                                       |  | Date             
|                                     |  |                                                                                                                            
|/s/ John WaldsteinJohn Waldstein     |  | President, Chief Executive Officer, Treasurer, Chief Financial and Accounting Officer, Chairman of the Board and a Director |  | November 28, 2005
|                                     |  |                                                                                                                            
|/s/ Diane BalcomDiane Balcom         |  | Director                                                                                                                    |  | November 28, 2005
|                                     |  |                                                                                                                            
|/s/ Heath PaleyHeath Paley           |  | Director                                                                                                                    |  | November 28, 2005
|                                     |  |                                                                                                                            
|/s/ Leslie CharmLeslie Charm         |  | Director                                                                                                                    |  | November 28, 2005
|                                     |  |                                                                                                                            
|/s/ Albert JanjigianAlbert Janjigian |  | Director                                                                                                                    |  | November 28, 2005



31



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##### Table of Contents



International Electronics,
Inc.

Exhibits to 10-KSB



|     |  |                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|21.1 |  | Subsidiaries of the Registrant.                                                                                                                                
|     | 
|23.1 |  | Consent of BDO Seidman, LLP.                                                                                                                                   
|     | 
|23.2 |  | Consent of Deloitte & Touche LLP.                                                                                                                              
|     | 
|31.1 |  | Certification of International Electronics, Inc. Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | Certification of International Electronics, Inc. Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                            
|     | 
|32.1 |  | Certification of International Electronics, Inc. Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of International Electronics, Inc. Chief Operating Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            



32



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



TABLE OF CONTENTS



|                                                                                                |  |           
|----------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                |  | Page      
|REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS                                       |  | F-2  F-3 
|                                                                                                | 
|CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003: |  |           
|                                                                                                | 
|Consolidated Balance Sheets                                                                     |  | F-4       
|                                                                                                | 
|Consolidated Statements of Operations                                                           |  | F-5       
|                                                                                                | 
|Consolidated Statements of Shareholders Equity                                                 |  | F-6       
|                                                                                                | 
|Consolidated Statements of Cash Flows                                                           |  | F-7       
|                                                                                                | 
|Notes to Consolidated Financial Statements                                                      |  | F-8  F-17



F-1



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders and Board of Directors of International Electronics, Inc.

Canton, Massachusetts



We have audited the accompanying consolidated balance sheet of International Electronics,
Inc. and subsidiaries (the Company) as of August 31, 2005 and the related consolidated statements of operations, shareholders equity and cash flows for the year ended August 31, 2005. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our
audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of International Electronics, Inc. and subsidiaries as of August 31, 2005, and the results of their operations and their cash flows for the year ended August 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.





/s/ BDO Seidman, LLP

Boston, Massachusetts

November 4, 2005



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders and Board of Directors of International Electronics, Inc.

Canton, Massachusetts



We have audited the accompanying consolidated balance sheet of International Electronics, Inc. and subsidiaries (the Company) as of August 31, 2004, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the two years in the period ended August 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion
on the financial statements based on our audits.



We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of International Electronics, Inc. and subsidiaries as of August 31, 2004, and
the consolidated results of their operations and their cash flows for each of the two years in the period ended August 31, 2004 in conformity with accounting principles generally accepted in the United States of America.





/s/ Deloitte & Touche LLP

Boston, Massachusetts

November 12, 2004



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

AUGUST 31, 2005 AND 2004



|                                                                                                                                  |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                  |  | 2005 |            |   | 2004 |  
|ASSETS                                                                                                                            |  |      |            |   |      |   |            |  
|CURRENT ASSETS:                                                                                                                   |  |      |            |   |      |   |            |  
|Cash and cash equivalents                                                                                                         |  | $    | 1,165,847  |   |      | $ | 2,142,526  |  
|Accounts receivable, net of allowances for doubtful accounts and returns of $228,000 and $238,000 in 2005 and 2004,
respectively  |  |      | 1,800,250  |   |      |   | 1,262,327  |  
|Inventories                                                                                                                       |  |      | 846,156    |   |      |   | 762,365    |  
|Other current assets                                                                                                              |  |      | 245,100    |   |      |   | 276,260    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total current assets                                                                                                              |  |      | 4,057,353  |   |      |   | 4,443,478  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|PROPERTY AND EQUIPMENTNet of accumulated depreciation and amortization                                                           |  |      | 605,874    |   |      |   | 771,155    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|OTHER ASSETS                                                                                                                      |  |      | 6,055      |   |      |   | 6,055      |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|TOTAL ASSETS                                                                                                                      |  | $    | 4,669,282  |   |      | $ | 5,220,688  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                              |  |      |            |   |      |   |            |  
|CURRENT LIABILITIES:                                                                                                              |  |      |            |   |      |   |            |  
|Accounts payable                                                                                                                  |  | $    | 904,765    |   |      | $ | 501,267    |  
|Accrued expenses                                                                                                                  |  |      | 1,349,958  |   |      |   | 1,367,588  |  
|Current portion of long-term obligations                                                                                          |  |      | 238,385    |   |      |   | 262,177    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total current liabilities                                                                                                         |  |      | 2,493,108  |   |      |   | 2,131,032  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|LONG-TERM OBLIGATIONSLess current portion                                                                                        |  |      |           |   |      |   | 196,175    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total liabilities                                                                                                                 |  |      | 2,493,108  |   |      |   | 2,327,207  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|COMMITMENTS AND CONTINGENCIES                                                                                                     |  |      |            |   |      |   |            |  
|SHAREHOLDERS EQUITY:                                                                                                             |  |      |            |   |      |   |            |  
|Common stock, $0.01 par valueauthorized, 5,984,375 shares; issued, 1,731,531 and 1,764,531 shares in 2005 and 2004,
respectively |  |      | 17,315     |   |      |   | 17,645     |  
|Additional paid in capital                                                                                                        |  |      | 5,113,627  |   |      |   | 5,149,221  |  
|Accumulated deficit                                                                                                               |  |      | (2,954,768 | ) |      |   | (2,234,741 | )
|Treasury stockat cost, 0 and 35,000 shares in 2005 and 2004, respectively                                                        |  |      |           |   |      |   | (38,644    | )
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total shareholders equity                                                                                                        |  |      | 2,176,174  |   |      |   | 2,893,481  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                        |  | $    | 4,669,282  |   |      | $ | 5,220,688  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  



See
notes to consolidated financial statements.



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED AUGUST 31, 2005, 2004 AND 2003



|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                      |  | 2005 |            |   | 2004 |   |            | 2003 | 
|NET SALES                                             |  | $    | 12,646,997 |   |      | $ | 11,393,708 |      |  | $ | 10,291,370 |  
|                                                      |  |      |           
|COST OF SALES                                         |  |      | 6,978,820  |   |      |   | 6,626,589  |      |  |   | 5,729,331  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|GROSS PROFIT                                          |  |      | 5,668,177  |   |      |   | 4,767,119  |      |  |   | 4,562,039  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|OPERATING EXPENSES:                                   |  |      |            |   |      |   |            |      |  |   |            |  
|Research and development costs                        |  |      | 1,228,920  |   |      |   | 1,177,463  |      |  |   | 1,090,604  |  
|Selling, general and administrative expenses          |  |      | 5,162,954  |   |      |   | 4,257,437  |      |  |   | 3,435,620  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|Total operating expenses                              |  |      | 6,391,874  |   |      |   | 5,434,900  |      |  |   | 4,526,224  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|INCOME (LOSS) FROM OPERATIONS                         |  |      | (723,697   | ) |      |   | (667,781   | )    |  |   | 35,815     |  
|                                                      |  |      |           
|INTEREST EXPENSE                                      |  |      | (20,097    | ) |      |   | (24,929    | )    |  |   | (27,462    | )
|                                                      |  |      |           
|OTHER INCOME                                          |  |      | 25,867     |   |      |   | 18,228     |      |  |   | 23,578     |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|INCOME (LOSS) BEFORE INCOME TAXES                     |  |      | (717,927   | ) |      |   | (674,482   | )    |  |   | 31,931     |  
|                                                      |  |      |           
|PROVISION FOR INCOME TAXES                            |  |      | 2,100      |   |      |   | 451,000    |      |  |   | 8,800      |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|NET INCOME (LOSS)                                     |  | $    | (720,027   | ) |      | $ | (1,125,482 | )    |  | $ | 23,131     |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|NET INCOME (LOSS) PER SHARE:                          |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                                 |  | $    | (0.42      | ) |      | $ | (0.68      | )    |  | $ | 0.01       |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted                                               |  | $    | (0.42      | ) |      | $ | (0.68      | )    |  | $ | 0.01       |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|SHARES USED IN COMPUTING NET (LOSS) INCOME PER SHARE: |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                                 |  |      | 1,729,536  |   |      |   | 1,654,326  |      |  |   | 1,610,046  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted                                               |  |      | 1,729,536  |   |      |   | 1,654,326  |      |  |   | 1,717,147  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  



See
notes to consolidated financial statements.



F-5



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

YEARS ENDED AUGUST 31, 2005, 2004 AND 2003



|                                                         |  |              |   |  |                          |        |   |                    |   |           |                |  |      |            |   |  |         |   |  |   |         |   |  |   |            |  
|-------------------------------------------------------- |  | ------------ | - |  | ------------------------ | ------ | - | ------------------ | - | --------- | -------------- |  | ---- | ---------- | - |  | ------- | - |  | - | ------- | - |  | - | ---------- | -
|                                                         |  | Common Stock |   |  | Additionalpaid incapital |        |   | AccumulatedDeficit |   |           | Treasury Stock |  |      | Total      |  
|                                                         |  | Shares       |   |  | Amount                   |        |   |                    |   | Shares    |                |  | Cost |            |  
|BALANCEAugust 31, 2002                                  |  | 1,643,731    |   |  | $                        | 16,437 |   |                    | $ | 4,997,786 |                |  | $    | (1,132,390 | ) |  | 35,000  |   |  | $ | (38,644 | ) |  | $ | 3,843,189  |  
|Stock issued upon exercise of stock options and warrants |  | 10,000       |   |  |                          | 100    |   |                    |   | 15,200    |                |  |      |           |   |  |        |   |  |   |        |   |  |   | 15,300     |  
|Tax benefits for stock options and warrants              |  |             |   |  |                          |       |   |                    |   | 3,800     |                |  |      |           |   |  |        |   |  |   |        |   |  |   | 3,800      |  
|Net income                                               |  |             |   |  |                          |       |   |                    |   |          |                |  |      | 23,131     |   |  |        |   |  |   |        |   |  |   | 23,131     |  
|                                                         |  |              |   |  |                          |        |   |                    |   |           |                |  |      |            |   |  |         |   |  |   |         |   |  |   |            |  
|BALANCEAugust 31, 2003                                  |  | 1,653,731    |   |  |                          | 16,537 |   |                    |   | 5,016,786 |                |  |      | (1,109,259 | ) |  | 35,000  |   |  |   | (38,644 | ) |  |   | 3,885,420  |  
|Stock issued upon exercise of stock options and warrants |  | 110,800      |   |  |                          | 1,108  |   |                    |   | 132,435   |                |  |      |           |   |  |        |   |  |   |        |   |  |   | 133,543    |  
|Net loss                                                 |  |             |   |  |                          |       |   |                    |   |          |                |  |      | (1,125,482 | ) |  |        |   |  |   |        |   |  |   | (1,125,482 | )
|                                                         |  |              |   |  |                          |        |   |                    |   |           |                |  |      |            |   |  |         |   |  |   |         |   |  |   |            |  
|BALANCEAugust 31, 2004                                  |  | 1,764,531    |   |  |                          | 17,645 |   |                    |   | 5,149,221 |                |  |      | (2,234,741 | ) |  | 35,000  |   |  |   | (38,644 | ) |  |   | 2,893,481  |  
|Stock issued upon exercise of stock options and warrants |  | 2,000        |   |  |                          | 20     |   |                    |   | 2,700     |                |  |      |           |   |  |        |   |  |   |        |   |  |   | 2,720      |  
|Reclassification of treasury shares                      |  | (35,000      | ) |  |                          | (350   | ) |                    |   | (38,294   | )              |  |      |           |   |  | (35,000 | ) |  |   | 38,644  |   |  |   |           |  
|Net loss                                                 |  |             |   |  |                          |       |   |                    |   |          |                |  |      | (720,027   | ) |  |        |   |  |   |        |   |  |   | (720,027   | )
|                                                         |  |              |   |  |                          |        |   |                    |   |           |                |  |      |            |   |  |         |   |  |   |         |   |  |   |            |  
|BALANCEAugust 31, 2005                                  |  | 1,731,531    |   |  | $                        | 17,315 |   |                    | $ | 5,113,627 |                |  | $    | (2,954,768 | ) |  |        |   |  | $ |        |   |  | $ | 2,176,174  |  
|                                                         |  |              |   |  |                          |        |   |                    |   |           |                |  |      |            |   |  |         |   |  |   |         |   |  |   |            |  



See
notes to consolidated financial statements.



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED AUGUST 31, 2005, 2004 AND 2003



|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|-------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | ---------- | ---- |  | - | --------- | -
|                                                                                                   |  | 2005 |           |   | 2004 |   |            | 2003 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |      |           |   |      |   |            |      |  |   |           |  
|Net (loss) income                                                                                  |  | $    | (720,027  | ) |      | $ | (1,125,482 | )    |  | $ | 23,131    |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |      |           |   |      |   |            |      |  |   |           |  
|Depreciation and amortization                                                                      |  |      | 272,506   |   |      |   | 332,303    |      |  |   | 354,638   |  
|Deferred income taxes                                                                              |  |      |          |   |      |   | 445,000    |      |  |   | 2,000     |  
|Changes in operating assets and liabilities:                                                       |  |      |           |   |      |   |            |      |  |   |           |  
|Accounts receivable                                                                                |  |      | (537,923  | ) |      |   | 189,816    |      |  |   | (735,939  | )
|Inventories                                                                                        |  |      | (83,791   | ) |      |   | 2,309      |      |  |   | 13,724    |  
|Other current assets                                                                               |  |      | 31,160    |   |      |   | (16,739    | )    |  |   | 10,391    |  
|Accounts payable and accrued expenses                                                              |  |      | 385,868   |   |      |   | 352,213    |      |  |   | 4,846     |  
|Income taxes payable                                                                               |  |      |          |   |      |   |           |      |  |   | 3,800     |  
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|Net cash (used in) provided by operating activities                                                |  |      | (652,207  | ) |      |   | 179,420    |      |  |   | (323,409  | )
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |      |           |   |      |   |            |      |  |   |           |  
|Purchases of property and equipment                                                                |  |      | (107,225  | ) |      |   | (404,621   | )    |  |   | (229,311  | )
|Other assets                                                                                       |  |      |          |   |      |   | 2,007      |      |  |   | (101      | )
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|Net cash used in investing activities                                                              |  |      | (107,225  | ) |      |   | (402,614   | )    |  |   | (229,412  | )
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |      |           |   |      |   |            |      |  |   |           |  
|Additions to debt obligations                                                                      |  |      | 50,652    |   |      |   | 317,879    |      |  |   | 215,243   |  
|Payments of debt obligations                                                                       |  |      | (270,619  | ) |      |   | (351,780   | )    |  |   | (328,105  | )
|Proceeds from exercise of stock options and warrants                                               |  |      | 2,720     |   |      |   | 133,543    |      |  |   | 15,300    |  
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|Net cash (used in) provided by financing activities                                                |  |      | (217,247  | ) |      |   | 99,642     |      |  |   | (97,562   | )
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|CASH AND CASH EQUIVALENTS(Decrease) during the year                                               |  |      | (976,679  | ) |      |   | (123,552   | )    |  |   | (650,383  | )
|CASH AND CASH EQUIVALENTSBeginning of year                                                        |  |      | 2,142,526 |   |      |   | 2,266,078  |      |  |   | 2,916,461 |  
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|CASH AND CASH EQUIVALENTSEnd of year                                                              |  | $    | 1,165,847 |   |      | $ | 2,142,526  |      |  | $ | 2,266,078 |  
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:                                                 |  |      |           |   |      |   |            |      |  |   |           |  
|Interest paid                                                                                      |  | $    | 20,097    |   |      | $ | 24,929     |      |  | $ | 27,462    |  
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  
|Income taxes paid                                                                                  |  | $    | 6,225     |   |      | $ | 1,225      |      |  | $ | 44,634    |  
|                                                                                                   |  |      |           |   |      |   |            |      |  |   |           |  



See
notes to consolidated financial statements.



F-7



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



|1. | BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
|-- | --------------------------------------------



Description of the BusinessInternational Electronics, Inc. and subsidiaries (IEI) designs, manufactures, markets and sells
electronic products for the security industry and other commercial applications.



Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of International Electronics, Inc., its majority-owned subsidiary, Ecco Industries, Inc.
(Ecco), and its wholly owned subsidiary, International Electronics Europe Limited. All material intercompany transactions, balances and profits have been eliminated.



Cash EquivalentsIEI considers all highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.



Fair Value of Financial
InstrumentsThe fair value of IEIs assets and liabilities which constitute financial instruments approximates their recorded value.



Concentration of Credit RiskFinancial instruments that potentially subject IEI to concentrations of credit risk are cash, cash
equivalents and accounts receivable. IEI has no significant off-balance-sheet concentrations such as foreign exchange contracts, option contracts or other hedging arrangements. The majority of IEIs cash is maintained with a commercial bank,
and cash equivalents are U.S. government securities. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom IEI makes substantial sales (Note 11). IEI generally does not obtain collateral in support
of its trade accounts receivable.



Allowance for
Doubtful Accounts and Sales ReturnsThe allowance for doubtful accounts and sales returns is based on our assessment of the collectibility of specific customer accounts, the aging of our accounts receivable and trends in product
returns. While we believe that our allowance for doubtful accounts and sales returns is adequate and that the judgment applied is appropriate, if there is a deterioration of a major customers credit worthiness, actual defaults are higher than
our previous experience, or actual future returns do not reflect historical trends, our estimates of the recoverability of the amounts due us and our sales would be adversely affected.



InventoriesInventories are stated at the lower of cost or market. Cost is determined on a first-in,
first-out basis. Reserves are recorded for slow-moving, obsolete, nonsellable or unusable items based upon a product-level review.



Property and EquipmentProperty and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expense as
incurred, whereas major betterments are capitalized as additions to property and equipment. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the applicable assets.



|                               |  |                                      
|------------------------------ |  | -------------------------------------
|                               |  | EstimatedLives                       
|Machinery and equipment        |  | 3-7 years                            
|Office furniture and equipment |  | 2-7 years                            
|Leasehold improvements         |  | Shorter oflife of leaseor useful life



Impairment of
Long-Lived AssetsIEI periodically reviews the carrying value of its long-lived assets to determine if facts and circumstances suggest that they may be impaired or that the amortization or depreciation period may need to be changed. The
carrying value of a long-lived asset is considered impaired when the anticipated identifiable undiscounted cash flows from such assets are less than its carrying value. An impairment loss is calculated to be the difference between the carrying
amount and fair value. No such losses have been recognized.



Warranty ReserveIEI accrues for warranty costs based on the historical rate of claims and costs to provide warranty services as the sale is recognized. While IEI believes the accrual for warranty costs is adequate to
address known warranty issues, if IEI experiences an increase in warranty claims that are higher than its historical experience or its costs to provide warranty services increase, IEI may be required to increase its warranty accrual and as a result,
its gross profit margin would be adversely affected.



F-8



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



Significant Estimates and JudgmentsThe preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates relied upon in preparing these financial statements include allowances for doubtful accounts and
sales returns, inventory reserves, warranty accrual, income taxes and contingencies. Changes in estimates are recorded in the period in which they become known. IEI bases its estimates on historical experience and various other assumptions that it
believes to be reasonable under the circumstances. Actual results may differ from IEIs estimates if past experience or other assumptions do not turn out to be substantially accurate.



Revenue RecognitionRevenue from product sales is
recognized upon shipment provided there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collection of the related receivable is probable. If
uncertainties exist, IEI recognizes revenue when these uncertainties are resolved. An allowance for estimated future returns is recorded at the time revenue is recognized based on IEIs historical experience. Estimated product warranty costs
are recorded at the time of product revenue recognition.



Research and Development CostsAll research and development costs are charged to operations as incurred. Research and development expenditures were approximately $1,229,000, $1,177,000 and $1,091,000 for fiscal 2005, 2004
and 2003, respectively. IEIs net sales include research and development revenues from customers of approximately $421,000, $123,000 and $114,000 during fiscal 2005, 2004 and 2003, respectively.



Advertising CostsAdvertising costs are charged to
operations as incurred. Advertising expense was $46,453, $59,370 and $51,505 during fiscal 2005, 2004 and 2003, respectively.



Net (Loss) Income Per ShareBasic net (loss) income per share is computed by dividing net (loss) income by weighted-average common
shares outstanding during the year. Diluted net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common and dilutive option and warrant shares outstanding based on the average market price of
IEIs common stock (under the treasury stock method).



The following table sets forth the computation of the weighted-average number of shares used in calculating basic and diluted net (loss) income per share:



|                                                                          |  |           |  |           |  |          
|------------------------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                                          |  | 2005      |  | 2004      |  | 2003     
|Weighted-average shares outstanding for basic net (loss) income per share |  | 1,729,536 |  | 1,654,326 |  | 1,610,046
|Effect of dilutive option and warrant shares                              |  |          |  |          |  | 107,101  
|                                                                          |  |           |  |           |  |          
|Total shares for diluted net (loss) income per share                      |  | 1,729,536 |  | 1,654,326 |  | 1,717,147
|                                                                          |  |           |  |           |  |          



The calculations for
diluted net (loss) income per share do not include aggregate anti-dilutive stock options and warrants of 302,540, 266,812 and 37,300 for the years ended August 31, 2005, 2004 and 2003, respectively.



Stock-Based CompensationIn October 1995, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 provides that companies may account for
stock-based compensation under either the fair value-based method of accounting under SFAS No. 123 or use the intrinsic value-based method provided by Accounting Principles Board (APB) No. 25, Accounting for Stock Issued
to Employees. IEI uses the intrinsic value-based method of APB No. 25 to account for all of its employee stock-based compensation plans and uses the fair value method of SFAS No. 123 to account for all nonemployee stock-based
compensation. SFAS No. 123, as amended by SFAS No. 148, requires companies using the intrinsic-value method under APB No. 25 to make pro-forma disclosure in the notes to the financial statements using the measurement provisions of
SFAS No. 123.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



IEI has computed the pro forma disclosures required under SFAS No. 123 for stock options granted
to employees using the Black-Scholes option-pricing model with an assumed risk-free interest rate of 3.0% in 2005, 2004 and 2003; volatility of 100% in 2005 and 2004 and 120% for 2003; an expected life of five years, and the assumption that no
dividends will be paid for all periods presented. Under APB No. 25, IEI has recognized no stock-based compensation expense for the years ended August 31, 2005, 2004 and 2003. Had employee stock-based compensation expense for IEIs
stock option plans been determined consistent with SFAS No. 123, the pro forma net (loss) income and pro forma net (loss) income per share would have been as follows for the years ended August 31:



|                                                               |  |      |          |   |      |   |            |      |  |   |         |  
|-------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ---------- | ---- |  | - | ------- | -
|                                                               |  | 2005 |          |   | 2004 |   |            | 2003 | 
|Net (loss) income:                                             |  |      |          |   |      |   |            |      |  |   |         |  
|As reported                                                    |  | $    | (720,027 | ) |      | $ | (1,125,482 | )    |  | $ | 23,131  |  
|Less employee stock-based compensation under fair value method |  |      | (55,083  | ) |      |   | (52,997    | )    |  |   | (44,290 | )
|                                                               |  |      |          |   |      |   |            |      |  |   |         |  
|Pro forma net (loss) income                                    |  | $    | (775,110 | ) |      | $ | (1,178,479 | )    |  | $ | (21,159 | )
|                                                               |  |      |          |   |      |   |            |      |  |   |         |  
|Net (loss) income per share:                                   |  |      |          |   |      |   |            |      |  |   |         |  
|Basic as reported                                              |  | $    | (0.42    | ) |      | $ | (0.68      | )    |  | $ | 0.01    |  
|Basic pro forma                                                |  | $    | (0.45    | ) |      | $ | (0.71      | )    |  | $ | (0.01   | )
|Diluted as reported                                            |  | $    | (0.42    | ) |      | $ | (0.68      | )    |  | $ | 0.01    |  
|Diluted pro forma                                              |  | $    | (0.45    | ) |      | $ | (0.71      | )    |  | $ | (0.01   | )



The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including
the expected stock price volatility. Because IEIs employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value
estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of IEIs options.



Comprehensive Income (Loss)Comprehensive income (loss) represents income (loss) from the normal course of operations though excludes
contributions of capital by owners or distributions of profits or capital of owners. For each of the three years in the period ended August 31, 2005 comprehensive income (loss) does not differ from the reported net income (loss).



Disclosure About Segments of an EnterpriseOperating
segments are determined based on the way the chief operating decision-maker organizes the business for making operating decisions and assessing performance. IEI has determined that it conducts its operations in one operating and reporting segment.



Recent Accounting Pronouncement In
November 2004, the Financial Accounting Standards Board (FASB) issued SFAS Statement No. 151, Inventory Costs, an Amendment of Accounting Principles Board Opinion No. 43, Chapter 4, or SFAS 151. SFAS 151 requires that
items such as idle facility expense, freight, handling costs and wasted materials be recognized as current-period charges rather than being included in the inventory regardless of whether the costs meet the criterion of abnormal as defined in
Accounting Principles Board Opinion No. 43. SFAS 151 is applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. We will adopt this pronouncement on September 1, 2005 and we do not expect the adoption
will have a material impact on our financial condition or results of operation.



In December 2004, the FASB issued Statement No. 123R, Share-Based Payment (FAS 123R). FAS 123R is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation
(FAS 123). IEI is required to adopt the provisions of FAS 123R as of the beginning of its first fiscal quarter of 2007, beginning September 1, 2006. This statement establishes standards for and requires the recognition of the cost
of employment-related services settled in share-based payment.



In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SECs interpretation of FAS 123R and the valuation of share-based payments for public companies. IEI will be evaluating the
requirements of FAS 123R and SAB 107. The impact of FAS 123R and SAB 107 cannot be predicted at this time because it will depend on the fair-market value of the awards issued and the amount of the share based awards granted in the future.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



|2. | INVENTORIES
|-- | -----------



Inventories at August 31 consist of the following:



|                                |  |      |         |      |   |        
|------------------------------- |  | ---- | ------- | ---- | - | -------
|                                |  | 2005 |         | 2004
|Raw materials and subassemblies |  | $    | 460,800 |      | $ | 442,638
|Work in process                 |  |      | 159,014 |      |   | 159,020
|Finished goods                  |  |      | 226,342 |      |   | 160,707
|                                |  |      |         |      |   |        
|                                |  | $    | 846,156 |      | $ | 762,365
|                                |  |      |         |      |   |        



|3. | PROPERTY AND EQUIPMENT
|-- | ----------------------



Property and equipment at August 31 consist of the following:



|                                               |  |      |            |   |      |   |            |  
|---------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                               |  | 2005 |            |   | 2004 |  
|Machinery and equipment                        |  | $    | 2,046,859  |   |      | $ | 2,022,494  |  
|Office furniture and equipment                 |  |      | 1,289,753  |   |      |   | 1,255,059  |  
|Leasehold improvements                         |  |      | 343,350    |   |      |   | 331,105    |  
|Capital in progress                            |  |      | 17,700     |   |      |   |           |  
|                                               |  |      |            |   |      |   |            |  
|                                               |  |      | 3,697,662  |   |      |   | 3,608,658  |  
|Less accumulated depreciation and amortization |  |      | (3,091,788 | ) |      |   | (2,837,503 | )
|                                               |  |      |            |   |      |   |            |  
|                                               |  | $    | 605,874    |   |      | $ | 771,155    |  
|                                               |  |      |            |   |      |   |            |  



Depreciation expense
was $272,506, $332,303 and $354,638 for 2005, 2004 and 2003, respectively.



|4. | OTHER BALANCE SHEET DATA
|-- | ------------------------



Accrued ExpensesAccrued expenses at August 31 consist of the following:



|                            |  |      |           |      |   |          
|--------------------------- |  | ---- | --------- | ---- | - | ---------
|                            |  | 2005 |           | 2004
|Payroll and related amounts |  | $    | 595,969   |      | $ | 510,110  
|Warranty                    |  |      | 287,569   |      |   | 354,845  
|Professional fees           |  |      | 173,228   |      |   | 239,830  
|Other                       |  |      | 293,192   |      |   | 262,803  
|                            |  |      |           |      |   |          
|                            |  | $    | 1,349,958 |      | $ | 1,367,588
|                            |  |      |           |      |   |          



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



WarrantyThe following table sets forth the activity in IEIs warranty
accrual, included in accrued expenses:



|                      |  |                            |         |                             |   |          |  |   |                      |   |  |   |        
|--------------------- |  | -------------------------- | ------- | --------------------------- | - | -------- |  | - | -------------------- | - |  | - | -------
|Year Ended August 31: |  | Balance atBeginningof Year |         | Charged toCosts andExpenses |   | Payments |  |   | Balance atEnd ofYear
|2005                  |  | $                          | 354,845 |                             | $ | 239,965  |  | $ | (307,241             | ) |  | $ | 287,569
|2004                  |  |                            | 385,833 |                             |   | 229,930  |  |   | (260,918             | ) |  |   | 354,845
|2003                  |  |                            | 395,833 |                             |   | 214,148  |  |   | (224,148             | ) |  |   | 385,833



Allowance for
Doubtful Accounts and ReturnsThe following table sets forth the activity in IEIs allowance for doubtful accounts and returns:



|                                                                   |  |                            |         |                             |   |               |  |   |                      |   |  |   |        
|------------------------------------------------------------------ |  | -------------------------- | ------- | --------------------------- | - | ------------- |  | - | -------------------- | - |  | - | -------
|Year Ended August 31:                                              |  | Balance atBeginningof Year |         | Charged toCosts andExpenses |   | Deductions(A) |  |   | Balance atEnd ofYear
|2005                                                               |  | $                          | 238,000 |                             | $ |              |  | $ | (10,000              | ) |  | $ | 228,000
|2004                                                               |  |                            | 253,000 |                             |   |              |  |   | (15,000              | ) |  |   | 238,000
|2003                                                               |  |                            | 209,000 |                             |   | 51,000        |  |   | (7,000               | ) |  |   | 253,000
|                                                                   |  |                            |         |                             |   |               |  |   |                      |   |  |   |        
|(A)   Net write-offs of bad debts (net of recoveries) and returns.



|5. | LONG-TERM OBLIGATIONS
|-- | ---------------------



Long-term obligations at August 31 consist of the following:



|                                                                  |  |      |          |   |      |   |          |  
|----------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                  |  | 2005 |          |   | 2004 |  
|Equipment line of creditinterest rates from 4.0% - 7.5% (Note 6) |  | $    | 238,385  |   |      | $ | 458,352  |  
|Less current portion                                              |  |      | (238,385 | ) |      |   | (262,177 | )
|                                                                  |  |      |          |   |      |   |          |  
|                                                                  |  | $    |         |   |      | $ | 196,175  |  
|                                                                  |  |      |          |   |      |   |          |  



In February 2005 the
equipment line of credit expired and was not renewed, and therefore the debt was classified as a current liability on the balance sheet. Eastern Bank agreed to the original repayment schedule as dictated by the equipment line of credit. The
outstanding balance of $238,385 is scheduled to be paid as follows: $167,691 in fiscal 2006, $62,252 in fiscal 2007 and $8,442 in fiscal 2008.



|6. | BANK ARRANGEMENTS
|-- | -----------------



IEI had available through February 28, 2005 an equipment line of credit, as amended November 12, 2004, that provided for borrowings of up to
$500,000 and a demand bank line of credit that provided for borrowings of up to $1,000,000. The equipment and demand lines of credit expired February 28, 2005 and were not renewed. As of August 31, 2005, there were no borrowings
outstanding under the demand line of credit and approximately $238,000 in borrowings outstanding as equipment debt. The outstanding debt is accruing interest at a rate of 5%, or 1/2% less than the banks rate at IEIs option. The banks rate at August 31, 2005 was 6.5%. IEI pledged all assets as collateral under this agreement. As this
agreement has expired and not been renewed, IEI has shown the debt as current, though IEI is paying the outstanding debt on a monthly basis as stated in the original agreement, with payments due through May 2008 (Note 5).



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



|7. | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------



LeasesIEI leases an administrative and production facility under an operating lease expiring in April 2006 at an annual rate of
$161,000. IEI is also responsible for certain real estate taxes, utilities and maintenance costs related to the leased property. Such contingent rental obligations are recognized as incurred. Total rental expense for operating leases for the year
ended August 31, 2005 was approximately $352,000, while the rental expense for both the years ended August 31, 2004 and 2003 was approximately $252,000 each.



Employment ArrangementsIEI has a continuous, three-year employment agreement with its president and
chief executive officer providing minimum annual aggregate compensation of approximately $185,000. This employment agreement contains certain termination provisions. In addition, IEI has employment arrangements with certain other key management that
require salary and benefit continuation for one year (representing an aggregate of approximately $458,000 in salaries as of August 31, 2005) in the event of termination of such employment as a result of an acquisition, merger or sale of assets
of IEI (an Acquisition).



LitigationFrom time to time, IEI is subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of its business activities. Each of these matters is
subject to various uncertainties. On the basis of information presently available, IEI is not currently aware of any legal proceedings or claims that it believes are likely to have a material effect on its financial position or results of
operations.



|8. | INCOME TAXES
|-- | ------------



The provision for income taxes is composed of the following for the years ended August 31:



|                                                                                 |  |      |       |      |   |         |  |   |      
|-------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------- |  | - | -----
|                                                                                 |  | 2005 |       | 2004 |   | 2003   
|Current:                                                                         |  |      |       |      |   |         |  |   |      
|Federal (net of tax benefits for operating loss carryforwards of $6,000 in 2003) |  | $    |      |      | $ |        |  | $ | 3,800
|State                                                                            |  |      | 2,100 |      |   | 6,000   |  |   | 3,000
|                                                                                 |  |      |       |      |   |         |  |   |      
|Total current provision                                                          |  |      | 2,100 |      |   | 6,000   |  |   | 6,800
|                                                                                 |  |      |       |      |   |         |  |   |      
|Deferred:                                                                        |  |      |       |      |   |         |  |   |      
|Federal                                                                          |  |      |      |      |   | 385,000 |  |   |     
|State                                                                            |  |      |      |      |   | 60,000  |  |   | 2,000
|                                                                                 |  |      |       |      |   |         |  |   |      
|Total deferred provision                                                         |  |      |      |      |   | 445,000 |  |   | 2,000
|                                                                                 |  |      |       |      |   |         |  |   |      
|Total provision                                                                  |  | $    | 2,100 |      | $ | 451,000 |  | $ | 8,800
|                                                                                 |  |      |       |      |   |         |  |   |      



IEIs effective
tax rate differs from the statutory federal income tax rate due to the following for the years ended August 31:



|                                               |  |       |    |  |       |    |  |       |  
|---------------------------------------------- |  | ----- | -- |  | ----- | -- |  | ----- | -
|                                               |  | 2005  |    |  | 2004  |    |  | 2003  |  
|Statutory federal income tax (benefit) expense |  | (34.0 | )% |  | (34.0 | )% |  | 34.0  | %
|State income taxesnet of federal benefit      |  | .2    |    |  | .6    |    |  | 5.3   |  
|Other permanent items                          |  | 1.4   |    |  | (0.8  | )  |  | 17.6  |  
|Other                                          |  | (2.5  | )  |  | (1.8  | )  |  | (29.3 | )
|Valuation allowance                            |  | 35.2  |    |  | 102.9 |    |  |      |  
|                                               |  |       |    |  |       |    |  |       |  
|Effective tax rate                             |  | .3    | %  |  | 66.9  | %  |  | 27.6  | %
|                                               |  |       |    |  |       |    |  |       |  



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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



As of August 31, 2005, IEI has remaining tax loss carryforwards of approximately $1,831,000,
expiring in varying amounts through 2025. IEI also has available research and development credit carryforwards of approximately $73,000 expiring through 2025. Net loss and tax credit carryforwards may be limited in the event of certain
circumstances, including significant changes in ownership interests.



Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Valuation allowances are recorded to
offset net deferred tax assets due to the uncertainty of realizing the benefit of assets. Based on managements assessment of the likelihood of recovery of such assets, IEI increased its valuation allowance by $317,000 and $760,000 in 2005 and
2004, respectively.



IEI provides for income taxes at the end
of each interim period based on the estimated effective annual tax rate/benefit for the full fiscal year. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is
determined. In the fourth quarter of fiscal 2005, upon completion of IEIs 2006 operating plan and fiscal 2005 financial results, management decided to keep a full valuation allowance against the calculated deferred tax asset due to the
uncertainty of realizing the benefit of these assets.



The
following is a summary of the significant components of IEIs deferred tax assets (liabilities) at August 31:



|                                   |  |      |            |   |      |   |          |  
|---------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | -
|                                   |  | 2005 |            |   | 2004 |  
|Deferred tax assets (liabilities): |  |      |            |   |      |   |          |  
|Net operating loss carryforwards   |  | $    | 733,000    |   |      | $ | 390,000  |  
|Tax credits                        |  |      | 73,000     |   |      |   | 48,000   |  
|Accounts receivable reserves       |  |      | 91,000     |   |      |   | 95,000   |  
|Inventories and related reserves   |  |      | 186,000    |   |      |   | 220,000  |  
|Other                              |  |      | 68,000     |   |      |   | 76,000   |  
|Depreciation                       |  |      | (74,000    | ) |      |   | (69,000  | )
|Valuation allowance                |  |      | (1,077,000 | ) |      |   | (760,000 | )
|                                   |  |      |            |   |      |   |          |  
|                                   |  | $    |           |   |      | $ |         |  
|                                   |  |      |            |   |      |   |          |  



In accordance with
SFAS No. 109, Accounting for Income Taxes, and SFAS No. 5, Accounting for Contingencies, IEI established reserves for tax contingencies that reflect its best estimate of the transactions and deductions that IEI may be unable
to sustain or that IEI could be willing to concede as part of a broader tax settlement. Tax authorities periodically challenge certain transactions and deductions IEI reported on its income tax returns. IEI does not expect the outcome of these
examinations, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations, or cash flows.



|9. | CAPITAL TRANSACTIONS
|-- | --------------------



Stock OptionsSince 1988, IEI has approved and reserved shares of common stock for nonqualified and incentive stock option plans for
the benefit of certain employees, nonemployee directors and key advisors. The option plans are administered by a committee appointed by the Board of Directors (the Committee), which determines the terms of options including the exercise
price, expiration date (no longer than 10 years), number of shares and vesting provisions. All options vest at the rate of 25% per year with the exception of options issued to certain officers, nonemployee directors and key advisors with
vesting provisions established by the Committee. All of the options vest 100% and are fully exercisable in the event of an acquisition of IEI, as defined by the plans. At August 31, 2005, 18,110 options remain available for future grants under
the plans.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



A summary of activity of the stock option plans is as follows:



|                                               |  |         |   |  |                       
|---------------------------------------------- |  | ------- | - |  | ----------------------
|                                               |  | Shares  |   |  | ExercisePricePer Share
|OutstandingAugust 31, 2002                    |  | 350,373 |   |  | 1.65                  
|                                               |  |        
|Granted (weighted-average fair value of $2.33) |  | 12,300  |   |  | 2.80                  
|Exercised                                      |  | (10,000 | ) |  | 1.53                  
|Canceled/expired                               |  | (46,500 | ) |  | 1.62                  
|                                               |  |         |   |  |                       
|OutstandingAugust 31, 2003                    |  | 306,173 |   |  | 1.71                  
|                                               |  |        
|Granted (weighted-average fair value of $2.23) |  | 40,000  |   |  | 2.96                  
|Exercised                                      |  | (83,800 | ) |  | 1.35                  
|Canceled/expired                               |  | (7,000  | ) |  | 1.00                  
|                                               |  |         |   |  |                       
|OutstandingAugust 31, 2004                    |  | 255,373 |   |  | 2.04                  
|                                               |  |         |   |  |                       
|Granted (weighted-average fair value of $3.07) |  | 33,500  |   |  | 3.07                  
|Exercised                                      |  | (1,000  | ) |  | 1.36                  
|Canceled/expired                               |  | (5,500  | ) |  | 1.28                  
|                                               |  |         |   |  |                       
|OutstandingAugust 31, 2005                    |  | 282,373 |   |  | 2.17                  
|                                               |  |         |   |  |                       



The following table
summarizes information concerning outstanding and exercisable options as of August 31, 2005:



|                        |  |                     |  |                                        |  |                               |  |                   |  |                              
|----------------------- |  | ------------------- |  | -------------------------------------- |  | ----------------------------- |  | ----------------- |  | -----------------------------
|                        |  | Options Outstanding |  | Options Exercisable                   
|Range ofExercise Prices |  | NumberOutstanding   |  | AverageRemainingContractualLife(Years) |  | Weighted-AverageExercisePrice |  | NumberExercisable |  | Weighted-AverageExercisePrice
|1.171.90               |  | 132,073             |  | 3.27                                   |  | 1.50                          |  | 126,948           |  | 1.49                         
|2.123.57               |  | 149,300             |  | 6.77                                   |  | 2.75                          |  | 78,325            |  | 2.65                         
|5.51                    |  | 1,000               |  | 6.89                                   |  | 5.51                          |  | 500               |  | 5.51                         
|                        |  |                     |  |                                        |  |                               |  |                   |  |                              
|                        |  | 282,373             |  | 5.13                                   |  | 2.17                          |  | 205,773           |  | 1.94                         
|                        |  |                     |  |                                        |  |                               |  |                   |  |                              



Stock
WarrantsIEI has issued stock warrants in connection with certain services. A summary of activity of stock warrants is as follows:



|                                                                       |  |             |   |  |         |         |   |       |             |  
|---------------------------------------------------------------------- |  | ----------- | - |  | ------- | ------- | - | ----- | ----------- | -
|                                                                       |  | Consultant  |   |  | Officer |         |   | Total |            
|OutstandingAugust 31, 2002 and 2003                                   |  | 13,167      |   |  |         | 35,000  |   |       | 48,167      |  
|Exercised                                                              |  | (2,000      | ) |  |         | (25,000 | ) |       | (27,000     | )
|                                                                       |  |             |   |  |         |         |   |       |             |  
|OutstandingAugust 31, 2004 (weighted-average exercise price of $1.87) |  | 11,167      |   |  |         | 10,000  |   |       | 21,167      |  
|Exercised                                                              |  | (1,000      | ) |  |         |        |   |       | (1,000      | )
|                                                                       |  |             |   |  |         |         |   |       |             |  
|OutstandingAugust 31, 2005 (weighted-average exercise price of $1.90) |  | 10,167      |   |  |         | 10,000  |   |       | 20,167      |  
|                                                                       |  |             |   |  |         |         |   |       |             |  
|Exercisable                                                            |  | 10,167      |   |  |         | 10,000  |   |       | 20,167      |  
|                                                                       |  |             |   |  |         |         |   |       |             |  
|Exercise prices                                                        |  | $1.67$1.69 |   |  | $       | 2.12    |   |       | $1.67$2.12 |  
|                                                                       |  |             |   |  |         |         |   |       |             |  



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



IEI has granted certain piggy-back rights to certain warrant holders with respect to the
registration of such shares underlying the warrants with the SEC.



Common Stock ReservedCommon stock reserved for future issuance at August 31, 2005 consists of the following:



|               |  |        
|-------------- |  | -------
|Stock warrants |  | 20,167 
|Stock options  |  | 300,483
|               |  |        
|               |  | 320,650
|               |  |        



|10. | BENEFIT PLAN
|--- | ------------



IEI sponsors a savings plan for its employees which has been qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are
permitted to contribute to the 401(k) plan through payroll deductions within statutory and plan limits. Contributions from IEI are made at the discretion of the Board of Directors. IEI has made no contributions to the 401(k) plan to date.



|11. | VENDOR, CUSTOMER AND SALES INFORMATION
|--- | --------------------------------------



IEI is dependent upon sole-source suppliers for a number of key components of its products. There can be no assurance that these suppliers will be able to
meet IEIs future requirements for such components or that the components will be available at favorable terms. Any extended interruption in the supply of any such components or any significant price increase could have a material adverse
effect on IEIs operating results in any given period.



One customer in the years 2005, 2004 and 2003 contributed more than 10% of net sales, representing an aggregate of 32% of net sales in 2005, 35% in 2004 and 38% in 2003. The accounts receivable from this customer amounted to approximately
$258,000 $239,000 and $646,000 at August 31, 2005, 2004 and 2003, respectively.



IEI sources a significant amount of components, manufactures products and maintains certain molds for its products in Asia. IEI believes that such sourcing reduces its cost of sales through lower parts, labor and
tooling costs. There can be no guarantee that the Asian political or economic environment will remain sufficiently stable to allow reliable and consistent delivery of product. Any extended interruption in the supply or significant increase in the
price of any such components and products could have a material adverse effect on IEIs operating results in any given period. International sales, primarily to Canada, Europe and Mexico, were 11% of net sales in 2005 and 2004 and 10% in 2003.



IEI sales by product category consist of the following for
the years ended August 31:



|                                      |  |      |            |      |   |            |  |   |           
|------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                      |  | 2005 |            | 2004 |   | 2003      
|Access control and stand alone keypad |  | $    | 11,665,399 |      | $ | 10,584,427 |  | $ | 9,545,320 
|PowerKey                             |  |      | 648,729    |      |   | 358,848    |  |   | 344,124   
|Glassbreak detectors                  |  |      | 332,869    |      |   | 450,433    |  |   | 401,926   
|                                      |  |      |            |      |   |            |  |   |           
|                                      |  | $    | 12,646,997 |      | $ | 11,393,708 |  | $ | 10,291,370
|                                      |  |      |            |      |   |            |  |   |           



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005



|12. | OTHER INCOME
|--- | ------------



Other income consists of the following for the years ended August 31:



|                            |  |      |        |      |   |        |  |   |        |  
|--------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|                            |  | 2005 |        | 2004 |   | 2003   | 
|Interest                    |  | $    | 25,500 |      | $ | 16,634 |  | $ | 26,274 |  
|Other income (expense), net |  |      | 367    |      |   | 1,594  |  |   | (2,696 | )
|                            |  |      |        |      |   |        |  |   |        |  
|                            |  | $    | 25,867 |      | $ | 18,228 |  | $ | 23,578 |  
|                            |  |      |        |      |   |        |  |   |        |  



* * * * * *



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