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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-KSB





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


the Securities Exchange Act of 1934





For fiscal year ended August 31, 2002





Commission File Number: 0-16305





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INTERNATIONAL ELECTRONICS, INC.


(Name of small business issuer in its charter)





Massachusetts

04-2654231(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification
No.)427 Turnpike Street Canton,
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. (    )





State issuers
revenues for its most recent fiscal year: $11,795,255





As of November 4, 2002, 1,158,967 shares of the
Registrants voting stock was held by non-affiliates of the Registrant. In arriving at this number, Registrant has considered executive officers and directors to be affiliates. Based on a price of $3.28 per share, (the average of the closing
bid and asked price on November 4, 2002) the aggregate market value of the non-affiliate shares so held was approximately $3,800,000. As of November 4, 2002, 1,608,731 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



PagePART I1.

Business

32.

Properties

83.

Legal Proceedings

84.

Submission of Matters to a Vote of Security Holders

8PART II5.

Market for Registrants Common Stock and Related Stockholder Matters

96.

Managements Discussion and Analysis of Financial Condition and Results of Operations

117.

Financial Statements and Supplementary Data

198.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

19PART III9.

Directors and Executive Officers of the Registrant

2010.

Executive Compensation

2211.

Security Ownership of Certain Beneficial Owners and Management

2512.

Certain Relationships and Related Transactions

2713.

Controls and Procedures

2714.

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

27Signatures and Certification

30Financial Statements

F




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PART I





|Item 1. | Business
|------- | --------




International Electronics, Inc. (IEI) was formed
in 1977 as a Massachusetts corporation. IEI designs, manufactures, markets and sells electronic products for the security industry and other commercial applications.





IEI manufactures and markets a line of access control and digital keypad products sold under the trade names Door-Gard  and Secured Series  . IEI also manufactures and markets a line of industrial access control products under the trade name PowerKey  used to control access to industrial machinery and vehicles. IEI also manufactures and markets electronic glassbreak detectors sold under the trade names Tri-Gard  and Viper. IEIs subsidiary, Ecco Industries, Inc. (Ecco), owns voice verification technology.





IEIs products are sold principally in the United States to many of the leading distribution and
installation companies servicing the security industry. IEI has had no material changes in its business during the last 3 years.





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 Secured Series  and Door-Gard  . 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, which 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.





In 2002, IEI introduced the Door-Gard  LS-1 lockset. The LS-1 combines IEI keypad technology with a UL listed grade 1 lockset to enable a battery operated stand-alone system. The list price for the LS-1 is approximately $555.





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: 1,000 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
32 doors together. Approximate prices paid by installing dealers for the Door-Gard  products range
from $50 to $300 and for the Secured Series  product line from $150 to $400.





IEI also markets a line of industrial access control products sold under the trade name PowerKey  . These products can control access to mobile assets such as forklifts or the AC version of the product, which
controls access to industrial machinery.





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 which detect the opening of a door or window. IEI markets an audio glassbreak detector under the trade name Tri-Gard  and a vibration sensor under the trade name Viper.





Tri-Gard 





Since 1987, IEI has marketed an audio glassbreak detector under the trade name Tri-Gard  . Audio detectors work much like the human ear. All noises are heard by the detector and then compared to a certain set of criteria. If the
sound made meets certain criteria, then the unit determines the sound is breaking glass and activates an alarm. Because of the wide variety of noise in the background, which can easily confuse an audio detector, stability is a major factor if the
unit is to be successful. Audio detectors are used in residential, commercial and industrial applications. The cost of these units to the installing dealers is approximately $22 to $40 per unit. The Tri-Gard  models: 550, 552 and 510 have received Underwriters Laboratories listing.





Viper Vibration Detector





A
vibration sensor is used to detect vibrations of a set magnitude in certain materials such as glass, wood, plastic, concrete or metal. The Viper has a custom integrated circuit that does internal signal processing so that it can be adjusted for
different materials and shock values. The cost of these units to the installing dealers is approximately $25 to $35 per unit.





In 1992 IEI signed an agreement with Weyrad Electronics, Ltd. of Weymouth, England to act as a distributor for their Viper vibration detector in North, South and Central America. In 1999 the Viper product line was sold to Chloride
Safety Systems Limited (Chloride). In May




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2000 IEI signed a distribution agreement whereby IEI would resell certain Chloride products in the United States.





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, South Africa, the Middle East and
Australia/New Zealand.





IEI presently employs thirteen 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 37% of IEIs total net sales for the
fiscal year ended August 31, 2002.





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 substantial 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 10% of its finished goods are manufactured in Asia. 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.




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Product Sources of Revenue





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








Access Control and Keypad

Glassbreak Detectors

Total2002

$11,218,877

$576,378

$11,795,2552001

9,992,730

591,351

10,584,0812000

10,716,817

735,461

11,452,278





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

Foreign2002

92%

8%2001

90

102000

92

8








Manufacturing and Raw Materials





IEI performs in-house manufacturing for its access control, digital keypad 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 HID Corporation and Future Electronics, Inc. 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. Any extended interruption in the supply of any such components 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.





Backlog





IEIs backlog of firm scheduled orders as of August 31, 2002, was
approximately $430,000. Its backlog as of August 31, 2001 was approximately $885,000. The decrease in 2002 backlog from the prior year is primarily due to a decrease in OEM orders partially offset by increases in access control and digital keypad
orders. IEI believes that the majority of its 2002 backlog will be shipped during fiscal 2003.





Competition





The market for products within the security industry is intensely competitive, subject to technological change and affected by
new product introductions and other market activities of industry participants. We expect competition to persist and increase in the future. Many of our competitors have sufficiently greater financial resources than we do and are able to devote
greater resources to the development, promotion, sale and support of their products. In addition, many of our competitors have more extensive customer bases and broader customer relationships




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than we do, including relationships with our existing and potential customers. Although IEI has obtained some patent and copyright protection for certain 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
digital keypad products include 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. In addition, there are a number of smaller companies that we compete against including: Corby, Crow Electronics, I.D. Systems, Keri Systems, Napco, Visonic, and United Security Products.





We also face competition in the positive identification access control market from biometric systems including:
voice verification, fingerprint, hand geometry, palm print, optical systems, signature and facial recognition.





IEI has a well recognized brand in the United States security marketplace having marketed, serviced and sold its products in the industry for the last 25 years. Our products are designed to be cost effective, easy to install with
high reliability. Our Door-Gard  keypad product line, due to its wide array of product offerings, is
considered one of the industry leaders. Our customer support services are an important element of our solution to our customers. Over the past several years there has been significant consolidation within the security industry that has brought
several large multinational companies into the industry and with whom the company now competes. 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.





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.





Working Capital





During fiscal 2002, IEI depended on its existing cash balances to provide working capital. As of August 31, 2002, IEI had a
demand bank line of credit available for borrowings of up to $1,000,000 which could be used for working capital purposes and an additional line of credit available for approximately $150,000 for equipment purchases. IEI expects its working capital
requirements for fiscal 2003 to be provided from its existing cash reserves, its available line of credit and anticipated cash flow generated from operations. As of August 31, 2002, there were no borrowings outstanding under the demand line of
credit and approximately $605,000 in borrowings outstanding as equipment debt. See Item 6-Managements Discussion and Analysis of Financial Condition and Results of Operations.




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Research and Development





IEI presently employs eight 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 $1,060,000, $1,045,000 and $1,202,000 for fiscal 2002, 2001 and 2000, respectively. IEIs net sales include research and development revenues from
customers of approximately $167,000, $73,000 and $100,000 during fiscal 2002, 2001 and 2000, respectively.





Employees





As of November 1, 2002, IEI had 64 employees, of which 60 were full-time employees. Of these 64 employees, 13
were in sales and marketing, 8 in research and development, 28 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. In addition, overseas sales, specifically to Europe, slow down in the summer because some European companies take substantial vacation time in July and August.





Governmental Controls/Environmental Compliance





None of IEIs business is subject to renegotiation of profits or termination of contracts at the election of the government. IEI has not been materially affected by compliance with any
governmental regulation relating to protection of the environment, and no material capital expenditures are expected by IEI for environmental control facilities.





|Item 2. | Properties
|------- | ----------




IEIs administrative and manufacturing operations are
located at 427 Turnpike Street, Canton, Massachusetts, and currently consist of approximately 20,740 square feet of space. IEI occupies this facility under a lease expiring April 30, 2004, at an annual rent of $145,000 plus utilities, maintenance
and certain real estate taxes. IEI also has an option to renew the lease for an additional two years at an annual rate of $157,000. 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 2002.




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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.
Since October 30, 1987, IEIs common stock has been quoted by the National Association of Securities Dealers Automated Quotation System (NASDAQ). IEIs common stock currently trades under the symbol IEIB on the
NASDAQ SmallCap Market.





The NASDAQ standards for a companys stock to maintain its SmallCap listing include
maintaining a minimum bid price of $1.00 per share and stockholders equity of $2,500,000 or alternatively net income of $500,000 for the last fiscal year or in two of the three most recently completed fiscal years. In fiscal 2002, IEI met both
the (i) minimum bid price criteria and $2,500,000 of stockholders equity and (ii) the $500,000 net income standards.





There can be no assurance that IEI will continue to meet the NASDAQ standards to maintain its SmallCap listing. If IEI is unable to maintain its SmallCap listing on NASDAQ, holders of IEIs common stock may have additional
difficulty selling their shares at a favorable price, or at all, and it may be more difficult for IEI to obtain additional financing.





The prices set forth below are based on information provided to IEI by NASDAQ. These sales prices reflect interdealer prices, without retail mark-ups, markdowns or commissions.











Sales PricesHigh

LowFiscal Year 2002:First Quarter

$  2.66

$  1.46Second Quarter

2.26

1.89Third Quarter

6.89

2.00Fourth Quarter

6.34

2.22Fiscal Year 2001:First Quarter

2.50

2.00Second Quarter

2.53

1.75Third Quarter

2.44

1.40Fourth Quarter

1.75

1.30





As of November 4, 2002, there were approximately 430 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. IEIs credit agreements contain certain restrictive covenants including restricting the payment of dividends.




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Equity Compensation Plan Information





The following table sets forth a description of our equity compensation plans as of August 31, 2002:





Number of securities to be
issued upon exercise of outstanding options and
warrants

Weighted-average exercise
price of outstanding options and
warrants

Number of securities remaining available for future issuanceStock option plan approved by shareholders

132,500

$
2.02

40,500Stock option plans not approved by shareholders (1)

217,873


1.43

19,226Warrants not approved by shareholders (2)

48,168


1.24

398,541

$
1.60

59,726





|(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 executive officers, nonemployee directors and
key advisors. The term of the Stock Plans is 10 years and the plans are administered by a committee of the Board of Directors. All the options 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 at 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, 2002 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 and contingencies. Actual results could 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.





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 could be adversely affected.





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 could be adversely affected.





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
could be adversely affected.





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




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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 adjusted.





Results of Operations





Fiscal years ended August 31, 2002, 2001 and 2000





Net Sales.  Net sales in 2002 increased 11% from 2001, while 2001 sales decreased 8% from 2000. The increase in sales for 2002 compared to the prior year is primarily due to
increases in digital keypad and OEM product sales. The reduction in sales for 2001 compared to the prior year was due to decreases in access control, glassbreak, and OEM product lines, partially offset by increases in the digital keypad and vertical
market product lines.





Cost of Sales/Gross Profit.  Our cost of sales consist primarily 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 47% in 2002, 44% in 2001, and 45% in 2000. The increase in the
gross profit ratio for 2002 from the prior year is primarily the result of improved manufacturing efficiencies due to increased sales volume, a customer settlement of $160,000 for cancellation of the customers purchase commitment, and a
reduction in material costs, partially offset by start-up costs incurred in the implementation of the recently purchased production equipment. The decrease in the gross profit ratios for 2001 from the prior year was due to product mix and additional
manufacturing costs. We expect future gross profit as a percentage of net sales to decline slightly from the current level due to the non-recurring customer settlement benefit in 2002. Our gross profit as a percentage of net sales in a particular
quarter is highly variable due to many factors such as revenue volume. Gross profit may also be adversely affected by increases in manufacturing costs, excess and obsolete inventory, warranty costs, increased price competition, geographic mix,
changes in sales channels or product mix.





Research and Development Expenses.  Research
and development expenses consist primarily of salaries and related personnel expenses, consulting fees, and prototype costs. Research and development expenses were $1,059,598 in 2002, as compared to $1,045,389 in 2001 and $1,201,859 in 2000. The
increase in costs in 2002 from the prior year is primarily due to increases in personnel and related expenses, partially offset by a reduction in prototype costs, consultants and depreciation expenses. The reduction in costs in 2001 from the prior
year is primarily due to decreases in personnel and related expenses and consulting fees. We believe that research and development is critical to our strategic product development objectives and we intend to continue to enhance our products.
Accordingly, we expect future research and development expenses to remain consistent in absolute dollars at its current level.





Selling, General and Administrative Expenses.  Selling, general and administrative expenses consist primarily 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 31% in 2002 and 33% for both 2001 and 2000. The decreases in expenses as a percentage of net sales in
2002 from the prior year is due to sales efficiencies and primarily due to decreases in bad debt, trade show, and telephone expenses, and to a lesser extent, reductions in investor relations and travel expenses, partially offset by increased
professional fees and salary related expenses. We expect




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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 $36,053 in 2002, $77,116 in 2001, and $81,755 in 2000. The decrease in 2002 from the prior year is the result of a
reduction in interest rates earned on our excess cash balances.





Interest
Expense.    Interest expense consists of interest incurred on equipment financing. Interest expense was $28,558 for 2002, $32,329 in 2001, and $29,706 in 2000. The decrease in 2002 from the prior year is the result of
lower interest rates on equipment borrowings, partially offset by an increase in outstanding debt.





Income
Taxes.    IEIs effective income tax rate, which includes current and deferred taxes, was 10% for 2002, 21% for 2001 and (29%) for 2000. The difference between the effective tax rate and the federal statutory rate
for 2002 and 2001 is primarily the result of utilization of net operating loss carryforwards. IEIs effective tax rate in 2000 differs from the federal statutory rate because of the deferred tax asset recorded during the year and utilization of
federal net operating loss carryforwards. We expect that our future effective income tax rate will approximate the state and federal statutory rates because as of August 31, 2002 we have utilized the majority of our available net operating loss
carryforwards.





Liquidity and Capital Resources





As of August 31, 2002, IEI had $3,258,965 in working capital as compared to $2,613,067 at August 31, 2001. The ratio of current assets to current liabilities as of August
31, 2002 was 2.8, as compared to 2.7 in 2001 and 2.4 in 2000. The debt to equity ratio was 0.6 at both August 31, 2002 and 2001 and 0.7 at August 31, 2000. The increases in working capital and current ratio are primarily due to increases in
IEIs operating income.





Net cash flows provided by operating activities was $1,768,903 in 2002, $159,328 in
2001, and $430,458 in 2000. The increase in 2002 from the prior year is primarily the result of increases in IEIs net income, reduction in accounts receivable, and increase in accrued expenses. The decrease in 2001 from the prior year is
primarily the result of a reduction in net income and a reduction in accounts payable and accrued expenses.





Net
capital expenditures were $677,496, $299,382 and $291,221 for 2002, 2001 and 2000, respectively. The increase in expenditures in 2002 from the prior year is primarily due to the purchase of additional automated manufacturing equipment and related
facility improvements. IEI anticipates having up to $220,000 in total capital expenditures primarily for the purchase of facility improvements and production and engineering equipment during fiscal 2003. We expect that a portion of our 2003 capital
expenditures will be financed from our available equipment line of credit and the remainder from cash flow from operations.





As of August 31, 2002, IEI has $150,000 available under its equipment line of credit expiring February 28, 2003 and a bank demand line of credit available of up to $1,000,000. See Notes 5 and 6 to the Consolidated Financial
Statements. As of August 31, 2002, IEI had no




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outstanding borrowings under the demand line of credit and had approximately $605,000 in borrowings outstanding under equipment lines of credit.





Net cash flows provided by financing activities was $275,100 in 2002, $73,660 in 2001, and $176,090 in 2000. The
increase in 2002 compared to the prior year is primarily the result of additional long-term debt 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, 2002:





2003

2004

2005

TotalLong-term obligations

$
301,214

$
219,420

$
84,481

$
605,115Employment agreement


167,056


167,056


167,056


501,168Operating lease obligations


145,180


96,787





241,967$
613,450

$
483,263

$
251,537

$
1,348,250





Management believes that its current cash position, together with
internally generated funds at present sales levels and its available bank financing, will provide adequate cash reserves to satisfy its cash requirements for the next twelve months. Depending upon whether or not sufficient revenue and working
capital is generated from profitable operations, IEI may require additional external funding. There is no assurance that profits will be generated, or that additional external funding will be obtainable, if such a need should arise.





Recent Accounting Pronouncements





In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting and prohibits the use of the pooling-of-interests
method. SFAS No. 142 eliminates the amortization of goodwill and certain other intangibles and instead subjects these assets to periodic impairment assessments. SFAS No. 142 is effective immediately for all goodwill and certain other intangible
assets acquired after June 30, 2001. The implementation of SFAS Nos. 141 and 142 did not have any impact on IEIs consolidated financial statements.





In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principles Bulletin Opinion No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 specifies accounting for long-lived assets to be disposed of by sale and broadens the presentation
of discontinued operations to include more disposal transactions than were included under the previous standards. IEI is required to implement SFAS No. 144 on September 1, 2002, and does not expect the implementation of this statement will have a
material impact on its consolidated financial position or results of operations.







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In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for
in accordance with Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of
SFAS No. 146 includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees who are involuntarily terminated. SFAS No. 146
is effective for exit or disposal activities initiated after December 31, 2002. IEI does not expect the implementation of this statement will have a material impact on its consolidated financial position or results of operations.





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 impact on its operating results which 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 37% of IEIs total net sales for the fiscal year ended August 31, 2002. IEIs industry has recently 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
effected 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.





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




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devote adequate resources to the sale of our products, our operating results could be materially and adversely effected.





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 years ended August 31, 2002, 2001 and 2000 IEI had net income of approximately $701,000, $136,000 and $355,000, respectively. There can be no
assurance that IEI will continue profitable operations. Continued operations after the expenditure of IEIs existing cash reserves may require additional working capital to be generated by profitable operations or use of the bank lines of
credit and/or additional financing. There can be no assurance that profits will continue 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 effect 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 affect on IEI.





Fluctuations in Sales and Operating Results.    The annual growth rates experienced by IEI are not necessarily indicative of future annual
growth rates. 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 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




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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.
| | - |  | ----------------------------------------------------------------------------------------------------------




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;
| | - |  | -----------------------------------------------------------



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| |  |  | 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 certain 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, 2002, IEIs foreign sales represented
approximately 8% of net sales. There may be a reduction in IEIs foreign sales from the 2002 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.





Maintain SmallCap Listing on NASDAQ.    There can be no assurance that IEI will continue to meet the
SmallCap standards to maintain its listing on NASDAQ. If IEI is unable to maintain its SmallCap listing on NASDAQ, holders of IEIs common stock may have difficulty selling their shares at a favorable price, or at all, and it may be more
difficult for IEI to obtain additional financing. See Item 5-Market for Registrants Common Stock and Related Stockholder Matters.





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




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impact on IEIs stock price. The stock price may also be affected by broader market trends unrelated to IEIs performance.





Insiders have Substantial Control.    Our executive officers, directors and entities affiliated with them beneficially own, in the
aggregate, a significant portion of our outstanding common stock. Although there are no current agreements among the parties, these shareholders, if acting together, would be able to influence significantly all matters requiring approval by our
shareholders, including the election of directors and the approval of mergers or other business combination transactions.





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.





Item
8.                                        
                            
Changes in and Disagreements with


Accountants on Accounting and Financial Disclosure





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 November 4, 2002:





Name

Age

First Elected Director

Term expires at annual meeting expected to occur

PositionJohn Waldstein

49

1982

April 2003

President, Chief Executive Officer, Treasurer, Chief Financial Officer, Chairman of the Board and a DirectorDiane Balcom

60

1989

April 2005

DirectorHeath Paley

54

1990

April 2004

DirectorSteven Tannenbaum

42

2002

April 2003

DirectorChristopher Hentschel

58





Vice President of Engineering





IEI anticipates that the next annual meeting of shareholders will
be held in April 2003. All directors serve 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 June 2002, Ms. Balcom has 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. From September 1997 to September 1998, she held the position of Director of Development for Childrens Hospital of
Pittsburgh. From August 1994 to August 1997, Ms. Balcom was the Chapter Director of the Juvenile Diabetes Foundation of Western Pennsylvania. She has been an adviser to IEI on corporate and financial matters since 1985. 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 Comorant, Inc., a
manufacturer and retailer of glass wind chimes marketed under the name Goose Rock Designs. Since May 1996, Mr. Paley has also been a self-employed computer consultant. He had been IEIs Director of Management Information Systems




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from September 1994 until May 1996 and was IEIs Chief Operating Officer and Executive Vice President from June 1990 to August 1994. From 1983 to June 1990, Mr. Paley was President and a
founder of Ecco Industries, Inc. From 1980 to 1983, he was President of the Maine Woods Shoe Division of Bennett Industries. Heath Paley is the son of Warren Paley. See Item 11-Security Ownership of Certain Beneficial Owners and
Management.





Steven Tannenbaum became a member of the Board of Directors in March 2002. Since 1993, Mr.
Tannenbaum has been the President of Greenwood Investments, Inc., which serves as the general partner of Greenwood Capital Limited Partnership and other partnerships engaged in investment and real estate development.





Christopher Hentschel was appointed IEIs Vice President of Engineering in 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.





Kenneth Moyes resigned from IEIs Board of Directors in August 2002.





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 2002 except
Ms. Balcom inadvertently filed one Form 4 late in conjunction with one transaction, Messrs. Heath Paley, Waldstein and Hentschel each inadvertently filed one Form 4 late in conjunction with two transactions and Mr. Moyes, while a director,
inadvertently filed two Form 4s late in conjunction with eight transactions.




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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, 2002, of IEIs President and Chief Executive Officer, and two 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

Annual Compensation (2)

Long-Term Compensation

All Other Compensation (1)Year

Salary

Commission/ Bonus (3)

Options (Shares)John Waldstein President and Chief Executive Officer

2002 2001 2000

$
164,592 155,536 145,217

$50,000 9,091 50,000

 7,000 12,500

$16,632 15,656 16,234James Brierley, Jr.(4) Vice President of Sales and Marketing

2002 2001 2000


125,000 124,885 120,065

6,500  9,500

  5,000

  Christopher Hentschel Vice President of Engineering

2002 2001 2000


124,384 116,550 105,196

12,600  6,000

  5,000

  


---




|(1) |  | 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 commissions and/or bonus earned during the applicable year.
|--- |  | -----------------------------------------------------------------------------




|(4) |  | Mr. Brierley resigned his position on October 31, 2002.
|--- |  | -------------------------------------------------------




IEIs Board of Directors, commencing in fiscal 1993, established an annual bonus plan for officers and certain key employees. The available funds for the plan shall be
up to five percent of income before taxes. The final amount and subsequent distribution to employees and officers shall be determined by IEIs Compensation Committee.





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 $167,000, subject to adjustment for




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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 to a minimum annual salary of $175,000, based on future adjustments for inflation. As of November 1, 2002, John Waldsteins base salary to the conclusion of his contract period is approximately
$501,000, 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 Mr. Hentschel) that require salary
and benefit continuation for a one year period in the event of a termination of such employment as a result of an Acquisition. As of August 31, 2002, the annual salaries of such management personnel represent an aggregate of approximately $440,000.





Year End Option Table





The following table sets forth the number and value of unexercised options held as of August 31, 2002 by the Named Executive Officers:





Aggregated Option Exercises In Last Fiscal


Year and Fiscal Year End Option Values





Name

Shares Acquired on Exercise

Value Realized (3)

Number of Unexercised Options at End of Fiscal 2002

Value of Unexercised In-the-Money Options at End of Fiscal 2002 (1)Exercisable

Unexercisable

Exercisable

UnexercisableJohn Waldstein (2)

11,667

$
27,709

122,125

18,875

$
246,451

$
32,419James Brierley, Jr.(4)






32,500

2,500


58,450


1,850Christopher Hentschel

13,334


23,768

16,000

3,333


28,240


3,217





|(1) |  | Difference between the fair market value of the underlying common stock on November 4, 2002 and the exercise price.
|--- |  | -------------------------------------------------------------------------------------------------------------------




|(2) |  | Includes warrants to purchase an aggregate of 35,000 shares of common stock. See Note 9 to the Consolidated Financial Statements.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------






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|(3) |  | Difference between fair market value of the underlying common stock on the date of exercise and the exercise price, multiplied by the number of shares issued
upon exercise.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(4) |  | Mr. Brierley resigned his position on October 31, 2002.
|--- |  | -------------------------------------------------------




There were no options granted to any of the Named Executive Officers during the year ended August 31, 2002.





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, 2002, directors fees were paid in the amounts of
$5,000 to Ms. Balcom, $5,500 to Mr. Moyes, $4,500 to Mr. Paley and $2,500 to Mr. Tannenbaum.




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Item
11.                                        
                            
Security Ownership of Certain


Beneficial Owners and Management





Set forth below is information concerning ownership of IEIs common stock as of November 4, 2002, (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 of Shares(1)


Percent of Common Stock OwnedExecutive Officers and Directors:John Waldstein

282,380
(2)

16.3
%c/o International Electronics, Inc.427 Turnpike StreetCanton, MassachusettsSteven Tannenbaum

239,927
(3)

14.9c/o Greenwood Investments, Inc.68 Harvard Street, 3rdFloorBrookline, MassachusettsHeath Paley

44,852
(4)

2.8c/o International Electronics, Inc.427 Turnpike StreetCanton, MassachusettsChristopher Hentschel

32,218
(5)

2.0c/o International Electronics, Inc.427 Turnpike StreetCanton, MassachusettsDiane Balcom

19,012
(6)

1.21403 Sharps Hill RoadPittsburgh, PennsylvaniaAll directors and executive officersas a group (5 persons)

618,389
(7)

34.85% Shareholder:Warren Paley

217,268


13.53 Mill StreetNew Baltimore, New York


---

|(See |  | footnotes on following page)
|---- |  | ----------------------------



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|(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 November 4, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(2) |  | Includes vested options and warrants to purchase an aggregate 126,375 shares of IEIs common stock granted at prices ranging from $0.74-$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 181,977 shares of common stock held by Greenwood Capital Limited Partnership (GCLP). Mr. Tannenbaum serves as the president, sole
stockholder and sole director of Greenwood Investments, Inc., which is the sole general partner of GCLP and has sole voting and investment power with respect to such shares. With respect to the remaining 57,950 shares of common stock, Mr. Tannenbaum
holds such shares jointly with his wife and has shared voting and investment power.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(4) |  | Includes vested options to purchase an aggregate 14,500 shares of IEIs common stock granted at prices ranging from $0.81-$2.81 per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------




|(5) |  | Includes vested options to purchase an aggregate 17,250 shares of IEIs common stock at prices ranging from $0.81-$2.54 per share. Includes 1,634 shares of
common stock held by Mr. Hentchels wife. Mr. Hentschel disclaims beneficial ownership of these shares.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(6) |  | Includes vested options to purchase an aggregate 10,500 shares of IEIs common stock granted at prices ranging from $0.72-$2.81 per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------




|(7) |  | Includes vested options and warrants to purchase an aggregate 168,625 shares of IEIs common stock granted at prices ranging from $0.72-$2.81 per share.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 12.

Certain Relationships and Related Transactions





None





Item 13.

Controls and Procedures





| | (a) |  | Evaluation of disclosure controls and procedures. IEIs chief executive and chief financial officer has reviewed and evaluated the
effectiveness of IEIs disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the Exchange Act)), as of a date within ninety days before the filing of this quarterly
report. Based on that evaluation, the chief executive and chief financial officer has concluded that IEIs current disclosure controls and procedures are effective to ensure that information required to be disclosed by IEI in reports that it
files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | Changes in internal controls. There have not been any significant changes in IEIs internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weakness in the internal controls, and therefore no corrective actions were taken.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 14.

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





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





Independent Auditors Report





Consolidated Balance Sheets as of August 31, 2002 and 2001





Consolidated Statements of Income for the Years Ended August 31, 2002, 2001 and 2000





Consolidated Statements of Shareholders Equity for the Years Ended August 31, 2002, 2001 and 2000





Consolidated Statements of Cash Flows for the Years Ended August 31, 2002, 2001 and 2000





Notes to Consolidated Financial Statements





(a)2.    The following schedule is included in Item 7:





Valuation
and qualifying accounts





(a)3.    Exhibits:







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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)

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(f)

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(g)

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(h)

Fourth amendment to original lease of March 28, 1995, Canton, Massachusetts between 427 Turnpike Street Realty Trust and the




28




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##### Table of Contents

Registrant dated October 31, 2001 is incorporated by reference to 10(h) on Form 10-KSB for the year ended August 31, 2001.10(i)

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, 2001.21.1

Subsidiaries of the Registrant.23.1

Consent of Deloitte & Touche LLP.99.1

Certification of International Electronics, Inc. Chief Executive and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.





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




No reports on Form 8-K were filed during the last quarter of the period covered by this report.




29




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##### 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 25, 2002



By: /s/  John WaldsteinJohn 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
Waldstein John Waldstein

President, Chief Executive Officer, Treasurer, Chief Financial and Accounting Officer, Chairman of the Board and a
Director

November 25, 2002/s/    Diane
Balcom Diane Balcom

Director

November 25, 2002/s/    Heath
Paley Heath Paley

Director

November 25, 2002/s/    Steven
Tannenbaum Steven
Tannenbaum

Director

November 25, 2002




30




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##### Table of Contents




CERTIFICATION





I, John Waldstein, President, Chief Executive Officer, Chief Financial Officer and Treasurer of International Electronics, Inc. (the Registrant), certify that:





| | 1. |  | I have reviewed this annual report on Form 10-KSB of International Electronics, Inc. (Annual Report);
| | -- |  | -------------------------------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
I have:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (i) |  | designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (ii) |  | evaluated the effectiveness of the Registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual
Report (the Evaluation Date); and
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (iii) |  | presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | I have disclosed, based on our most recent evaluation, to the Registrants auditors and the audit committee of Registrants board of directors:
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------




| | (i) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrants ability to record, process,
summarize and report financial data and have identified for the Registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (ii) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal controls; and
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



31




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##### Table of Contents




| | 6. |  | I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




/s/  John Waldstein


John Waldstein


President, Chief Executive
Officer, Chief Financial Officer and Treasurer


Dated:  November 25, 2002




32




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##### Table of Contents




INTERNATIONAL ELECTRONICS, INC.


AND SUBSIDIARIES





TABLE OF CONTENTS


---




PageINDEPENDENT AUDITORS REPORT

F-1CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000:Consolidated Balance Sheets

F-2Consolidated Statements of Income

F-3Consolidated Statements of Shareholders Equity

F-4Consolidated Statements of Cash Flows

F-5Notes to Consolidated Financial Statements

F-6  F-15FINANCIAL STATEMENT SCHEDULE FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-KSB:

F-16Schedule II  Valuation and Qualifying Accounts

F-17





All other schedules are omitted because they are inapplicable or not required under the
instructions.







F




---

##### Table of Contents

[LETTERHEAD DELOITTE & TOUCHE]





INDEPENDENT AUDITORS REPORT





To the Shareholders and Board of


Directors of International Electronics, Inc.


Canton, Massachusetts





We have audited the accompanying consolidated balance sheets of
International Electronics, Inc. and subsidiaries (the Company) as of August 31, 2002 and 2001, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the period ended
August 31, 2002. Our audits also included the financial statement schedule listed in the Table of Contents. These financial statements and the financial statement schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on the financial statements and the financial statement schedule based on our audits.





We conducted our audits
in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 financial position of International Electronics, Inc. and subsidiaries as of August 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended August 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.





/s/ Deloitte & Touche LLP


Boston,
Massachusetts


October 18, 2002




F-1




---

##### Table of Contents




INTERNATIONAL ELECTRONICS, INC.


AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


AUGUST 31, 2002 AND 2001


2002


2001ASSETSCURRENT ASSETS:Cash and cash equivalents

$
2,916,461


$
1,549,954Accounts receivable, net of allowances for doubtful accounts and returns of $209,000 and $215,000 in 2002 and 2001,
respectively


716,204



1,211,884Inventories


778,398



848,742Deferred income taxes


391,000



330,000Other current assets


269,912



239,486Total current assets


5,071,975



4,180,066PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization


810,414



476,359OTHER ASSETS:Deferred income taxes


56,000



88,000Other


21,711



36,711Total other assets


77,711



124,711TOTAL

$
5,960,100


$
4,781,136LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable

$
204,675


$
330,627Accrued expenses


1,307,121



987,306Income taxes payable






31,000Current portion of long-term obligations


301,214



218,066Total current liabilities


1,813,010



1,566,999LONG-TERM OBLIGATIONS, less current portion


303,901



201,488COMMITMENTSSHAREHOLDERS EQUITY:Common stock, $0.01 par value  authorized,5,984,375 shares; issued, 1,643,731 and1,589,313 shares in 2002 and 2001, respectively


16,437



15,893Capital in excess of par value


4,997,786



4,868,791Accumulated deficit


(1,132,390
)


(1,833,391
)Treasury stock, at cost  35,000 shares


(38,644
)


(38,644
)Total shareholders equity


3,843,189



3,012,649TOTAL

$
5,960,100


$
4,781,136





See notes to consolidated financial statements.




F-2




---

##### Table of Contents




INTERNATIONAL ELECTRONICS, INC.


AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF INCOME


YEARS ENDED AUGUST 31, 2002, 2001 AND 2000


2002


2001


2000NET SALES

$
11,795,255


$
10,584,081


$
11,452,278COST OF SALES


6,293,738



5,884,800



6,295,556GROSS PROFIT


5,501,517



4,699,281



5,156,722OPERATING EXPENSES:Research and development costs


1,059,598



1,045,389



1,201,859Selling, general, and administrative expenses


3,674,413



3,525,479



3,732,147Total operating expenses


4,734,011



4,570,868



4,934,006INCOME FROM OPERATIONS


767,506



128,413



222,716INTEREST EXPENSE


(28,558
)


(32,329
)


(29,706
)OTHER INCOME


36,053



77,116



81,755INCOME BEFORE INCOME TAXES


775,001



173,200



274,765PROVISION (BENEFIT) FOR INCOME TAXES


74,000



37,000



(80,000
)NET INCOME

$
701,001


$
136,200


$
354,765NET INCOME PER SHARE:Basic

$
0.45


$
0.09


$
0.23Diluted

$
0.40


$
0.08


$
0.21SHARES USED IN COMPUTING NET INCOME PER SHARE:Basic


1,575,262



1,539,145



1,524,964Diluted


1,742,728



1,647,282



1,688,549





See notes to consolidated financial statements.




F-3




---

##### Table of Contents




INTERNATIONAL ELECTRONICS, INC.


AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


YEARS ENDED AUGUST 31, 2002, 2001 AND 2000


Common Stock

Capital in Excess
of

Accumulated


Treasury StockShares

Amount

Par Value

Deficit


Shares

Cost


TotalBALANCE, AUGUST 31, 1999

1,533,301

$
15,333

$
4,806,955

$
(2,324,356
)

35,000

$
(38,644
)

$
2,459,288Issuance of stock options







7,074












7,074Stock issued upon exercise of stock options and warrants

37,512


375


39,962












40,337Net income










354,765









354,765BALANCE, AUGUST 31, 2000

1,570,813


15,708


4,853,991


(1,969,591
)

35,000


(38,644
)


2,861,464Stock issued upon exercise of stock options

18,500


185


14,800












14,985Net income










136,200









136,200BALANCE, AUGUST 31, 2001

1,589,313


15,893


4,868,791


(1,833,391
)

35,000


(38,644
)


3,012,649Stock issued upon exercise of stock options and warrants

54,418


544


88,995












89,539Tax benefits for stock options and warrants







40,000












40,000Net income










701,001









701,001BALANCE, AUGUST 31, 2002

1,643,731

$
16,437

$
4,997,786

$
(1,132,390
)

35,000

$
(38,644
)

$
3,843,189





See notes to consolidated financial statements.




F-4




---

##### Table of Contents




INTERNATIONAL ELECTRONICS, INC.


AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


YEARS ENDED AUGUST 31, 2002, 2001 AND 2000


---




2002


2001


2000CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
701,001


$
136,200


$
354,765Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


358,441



329,374



343,691Stock options and warrants issued for professional services










7,074Tax benefit for stock options and warrants


40,000







Deferred income taxes


(29,000
)


6,000



(95,000
)Changes in operating assets and liabilities:Accounts receivable


495,680



(76,756
)


(410,796
)Inventories


70,344



(16,749
)


201,104Other current assets


(30,426
)


10,611



(67,926
)Accounts payable and accrued expenses


193,863



(245,352
)


144,546Income taxes payable


(31,000
)


16,000



(47,000
)Net cash provided by operating activities


1,768,903



159,328



430,458CASH FLOWS FROM INVESTING ACTIVITIES:Net purchase of property and equipment


(677,496
)


(299,382
)


(291,221
)Other assets






(26,011
)


Net cash used in investing activities


(677,496
)


(325,393
)


(291,221
)CASH FLOWS FROM FINANCING ACTIVITIES:Additions to debt obligations


478,728



256,748



280,727Payments of debt obligations


(293,167
)


(198,073
)


(144,974
)Proceeds from exercise of stock options and warrants


89,539



14,985



40,337Net cash provided by financing activities


275,100



73,660



176,090CASH AND CASH EQUIVALENTS  increase (decrease) during the year


1,366,507



(92,405
)


315,327CASH AND CASH EQUIVALENTS, beginning of year


1,549,954



1,642,359



1,327,032CASH AND CASH EQUIVALENTS, end of year

$
2,916,461


$
1,549,954


$
1,642,359SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:Interest paid

$
28,558


$
31,538


$
29,984Income taxes paid

$
72,100


$
425


$
2,500





See notes to consolidated financial statements.







F-5




---

##### Table of Contents




INTERNATIONAL ELECTRONICS, INC.


AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


YEARS ENDED AUGUST 31, 2002, 2001 AND 2000








|1. |  | 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 instruments purchased with a remaining 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 (see Note 11).





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, unsalable, 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.





Estimated LivesMachinery and equipment

3-7 yearsOffice furniture and equipment

2-7 yearsLeasehold improvements

Life of lease





Other AssetsOther assets
include a license for certain technology embedded in IEIs products. The license is amortized over its estimated three-year useful life.




F-6




---

##### Table of Contents




|1. |  | SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|-- |  | -------------------------------------------




Significant Estimates and Assumptions The preparation of consolidated 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.





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.





Net Income Per Share  Basic net income per share is computed by dividing net income by weighted-average common shares outstanding during the year. Diluted net income per share is
computed by dividing net 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 income
per share:





2002

2001

2000Weighted-average shares outstanding for basic net income per share

1,575,262

1,539,145

1,524,964Effect of dilutive option and warrant shares

167,466

108,137

163,585Total shares for diluted net income per share

1,742,728

1,647,282

1,688,549





The calculations for diluted net income per share do not include
aggregate stock options and warrants of 1,000, 186,667, and 36,000 as of August 31, 2002, 2001 and 2000, respectively.





Employee Stock-Based Compensation  IEI uses the intrinsic-value-based method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as permitted
under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to account for all of its employee and director stock-based compensation plans.





Nonemployee Stock-Based Compensation  IEI complies with the provisions of SFAS No. 123 relating to the accounting for
awards of stock-based compensation to nonemployees. Accordingly, stock-based compensation awarded to nonemployees is accounted for using the fair-value method.




F-7




---

##### Table of Contents




|1. |  | SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|-- |  | -------------------------------------------




Comprehensive Income IEI reports comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive Income. Comprehensive income for each of the three years
in the period ended August 31, 2002 does not differ from the reported net income.





Disclosure About Segments
of an EnterpriseIEI has adopted SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, which requires companies to report selected information about operating segments, products and
services, geographic areas, and major customers. 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 business segment.





Recent Accounting Pronouncements In June
2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of accounting and prohibits the use of the pooling-of-interests method. SFAS No. 142 eliminates the amortization of goodwill and certain other intangibles and, instead,
subjects these assets to periodic impairment assessments. SFAS No. 142 was effective immediately for all goodwill and certain other intangible assets acquired after June 30, 2001. The implementation of SFAS Nos. 141 and 142 did not have any impact
on IEIs consolidated financial statements.





In August 2001, the FASB issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations  Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 specifies
accounting for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. IEI is required to implement SFAS No. 144 on
September 1, 2002 and does not expect the implementation of this statement will have a material impact on its consolidated financial position or results of operations.





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses the recognition,
measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for in accordance with Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). The scope of SFAS No. 146 includes costs related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees, and certain termination benefits provided to employees who are involuntarily terminated. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. IEI does not expect
the implementation of this statement will have a material impact on its consolidated financial position or results of operations.




F-8




---

##### Table of Contents




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




Inventories at August 31 consist of the following:





2002

2001Raw materials and subassemblies

$
458,737

$
578,839Work in process


127,301


123,479Finished goods


192,360


146,424$
778,398

$
848,742





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




Property and equipment at August 31 consist of the following:





2002


2001Machinery and equipment

$
1,667,094


$
1,228,567Office furniture and equipment


1,117,214



1,008,419Leasehold improvements


295,287



165,1133,079,595



2,402,099Less accumulated depreciation and amortization


(2,269,181
)


(1,925,740
)$
810,414


$
476,359





|4. |  | ACCRUED EXPENSES
|-- |  | ----------------




Accrued expenses at August 31 consist of the following:





2002

2001Payroll and related amounts

$
475,458

$
323,050Warranty


395,833


347,833Professional fees


250,727


150,952Other


185,103


165,471$
1,307,121

$
987,306







F-9




---

##### Table of Contents




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




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





2002


2001Equipment line of credit, 4.75%  9.50% (Note 6)

$
605,115


$
417,948Collateralized 8% equipment loans






1,606605,115



419,554Less current portion


(301,214
)


(218,066
)$
303,901


$
201,488





The future principal payments on long-term obligations as of August
31, 2002 are $301,214 in 2003, $219,420 in 2004, and $84,481 in 2005.





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




As of August 31, 2002, IEI has available an equipment line of credit that provides for remaining borrowings of up to $150,000, expiring February 28, 2003, and a demand line of credit that provides for borrowings of up to
$1,000,000. Both lines of credit are at the banks prime rate of interest (4.75% at August 31, 2002), and all of IEIs assets are collateralized under these arrangements. The credit agreements contain certain restrictive covenants
including covenants limiting the payment of dividends, a minimum debt-to-tangible-net-worth ratio, and annual net income. As of August 31, 2002, no borrowings have been made under the demand line of credit and IEI has an aggregate of $605,115
outstanding as equipment debt which is payable in monthly installments through May 2005 (Note 5).





|7. |  | COMMITMENTS
|-- |  | -----------




Leases  IEI leases an administrative and production facility at an annual rate of $145,000 under an operating lease which expires in April 2004. IEI has the option to renew the lease for an additional two years at
an annual rate of $157,000. 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 years ended August 31, 2002, 2001 and 2000 amounted to approximately $234,000, $197,000 and $198,000, respectively.





Employment Arrangements IEI has a continuous, three-year employment agreement with its president and chief executive officer providing minimum annual aggregate compensation of approximately $167,000.
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
$440,000 in salaries as of August 31, 2002) in the event of termination of such employment as a result of an acquisition, merger, or sale of assets of IEI (an Acquisition).





Settlement In June 2002, IEI reached a settlement with a customer whereby IEI received payment of $160,000 in exchange for the cancellation of the
customers purchase commitment. The settlement is included in net sales in the accompanying consolidated statements of income.




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##### Table of Contents




8.    INCOME TAXES





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





2002

2001

2000Current:Federal (net of tax benefits for operating loss carryforwards of $220,000, $108,000 and $100,000 in 2002, 2001 and 2000,
respectively, and tax credits of $10,000 in 2002)

$
3,000

$


$
State


60,000


31,000


15,000Total current provision


63,000


31,000


15,000Deferred:Federal


10,000


5,000


(103,000
)State


1,000


1,000


8,000Total deferred provision (benefit)


11,000


6,000


(95,000
)Total provision (benefit)

$
74,000

$
37,000

$
(80,000
)





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





2002


2001


2000Statutory federal income tax rate

34.0
%

34.0
%

34.0
%State income taxes, net of federal benefit

6.2


11.8


3.8Amortization of goodwill







7.8Other permanent items

0.6


0.9


4.1Recognition of previously reserved tax assets

(32.2
)

(62.9
)

(109.6
)Other

0.9


37.6


30.8Effective tax rate

9.5
%

21.4
%

(29.1
)%





As of August 31, 2002, IEI has remaining net operating loss
carryforwards of approximately $100,000, expiring in varying amounts through 2005. Net operating loss carryforwards may be limited in the event of certain circumstances, including significant changes in ownership interests.





Deferred income taxes reflect the net 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 were previously recorded to offset net deferred tax assets due to the uncertainty of realizing the benefit of some assets. During the years ended August 31,
2002 and 2001, IEI reduced its valuation allowance by $270,000 and $88,000, respectively, because of utilization of IEIs net operating loss carryforwards and tax credits, and managements assessment of the likelihood of recovery of such
assets.







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##### Table of Contents




8.    INCOME TAXES (CONTINUED)





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





2002

2001Deferred tax assets:Net operating loss carryforwards

$
33,000

$
260,000Tax credits





10,000Accounts receivable reserves


84,000


86,000Inventories and related reserves


254,000


220,000Other


36,000


23,000Depreciation


40,000


89,000Valuation allowance





(270,000
)$
447,000

$
418,000





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 plan. At August 31, 2002, 59,726 shares remain
available for future grants.





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





Weighted-AverageExerciseShares


Price Per ShareOutstanding, August 31, 1999

356,430


$
1.38Granted (weighted-average fair value of $1.66)

48,500



2.48Exercised

(20,000
)


1.42Canceled/expired

(8,621
)


1.28Outstanding, August 31, 2000

376,309



1.53Granted (weighted-average fair value of $1.36)

48,000



2.02Exercised

(18,500
)


0.81Canceled/expired

(4,149
)


1.19Outstanding, August 31, 2001

401,660



1.63Granted (weighted-average fair value of $2.26)

7,500



2.71Exercised

(49,752
)


1.63Canceled/expired

(9,035
)


1.50Outstanding, August 31, 2002

350,373


$
1.65




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##### Table of Contents




9.    CAPITAL TRANSACTIONS (CONTINUED)





The following table summarizes information concerning outstanding and exercisable options as of August 31, 2002:





Options Outstanding

Options ExercisableRange of Exercise Prices

Number Outstanding

Average Remaining Contractual Life (Years)

Weighted- Average Exercise Price

Number Exercisable

Weighted- Exercise
Price$0.72 - $1.00

24,800

1.52

$
0.83

24,800

$
0.831.01 -   2.00

240,073

5.08


1.45

204,240


1.422.01 -   2.81

84,500

7.08


2.44

46,625


2.435.51

1,000

9.89


5.51




350,373

5.33

$
1.65

275,665

$
1.54





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





Consultants


Officers

Debt


TotalOutstanding, August 31, 1999


46,167



35,000


2,512



83,679Exercised


(15,000
)





(2,512
)


(17,512
)Expired


(3,333
)









(3,333
)Outstanding, August 31, 2000


27,834



35,000






62,834Expired


(10,000
)









(10,000
)Outstanding, August 31, 2001


17,834



35,000






52,834Exercised


(4,666
)









(4,666
)Outstanding, August 31, 2002 (weighted-average exercise price of $1.24)


13,168



35,000






48,168Exercisable


13,168



35,000






48,168Exercise prices

$
0.72 -$1.69


$
0.74 - $2.12

$



$
0.72 - $2.12





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




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##### Table of Contents

9.    CAPITAL TRANSACTIONS (CONTINUED)





Employee Stock-Based Compensation With respect to employee and director stock-based compensation, IEI has adopted the
disclosure-only requirements of SFAS No. 123. Accordingly, no compensation cost has been recognized in the accompanying consolidated financial statements for employee and director stock-based compensation awarded under employee stock option plans as
the option exercise price equals the market price of the underlying stock on the date of grant. If compensation cost had been determined for awards under IEIs employee and director stock option plans based on the fair value of the awards at
the date of grant, in accordance with the provisions of SFAS No. 123, IEIs net income and net income per share for the years ended August 31, 2002, 2001 and 2000 would have decreased to the pro forma amounts indicated below:





2002

2001

2000Net income  as reported

$
701,001

$
136,200

$
354,765Net income  pro forma


650,476


83,991


322,366Net income per share  diluted  as reported


0.40


0.08


0.21Net income per share  diluted  pro forma


0.37


0.05


0.19





The pro-forma disclosures presented are not necessarily
representative of the effects on reported net income for future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with an assumed risk-free interest rate of 3.5% in 2002, 5.0%
in 2001, and 5.5% in 2000, an expected life of five years, and an expected volatility of 120% in 2002 and 80% in both 2001 and 2000 and assumes no dividends will be paid for 2002, 2001 and 2000.





Common Stock Reserved Common stock reserved for future issuance at August 31, 2002 consists of the following:





Stock warrants

48,168Stock options

410,099458,267





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 2002, two in 2001 and one in 2000 each
contributed more than 10% of net sales, representing an aggregate of 37% of net sales in 2002, 46% in 2001, and 36% in 2000. The accounts receivable from these customers amounted to approximately $156,000 and $542,000 at August 31, 2002 and 2001,
respectively.




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##### Table of Contents




|11. |  | VENDOR, CUSTOMER, AND SALES INFORMATION (CONTINUED)
|--- |  | ---------------------------------------------------




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 8% of
net sales in 2002, 10% in 2001, and 8% in 2000. The majority of IEIs long-lived assets are located in the United States of America.





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





2002

2001

2000Access control and keypad

$
11,218,877

$
9,992,730

$
10,716,817Glassbreak detectors


576,378


591,351


735,461$
11,795,255

$
10,584,081

$
11,452,278





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




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





2002

2001


2000Interest

$
36,053

$
77,360


$
77,530Other (expenses) income





(244
)


4,225$
36,053

$
77,116


$
81,755





* * * * * *




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##### Table of Contents




FINANCIAL STATEMENT SCHEDULE


FURNISHED PURSUANT TO THE


REQUIREMENTS OF FORM 10-KSB




F-16




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##### Table of Contents




INTERNATIONAL ELECTRONICS, INC.


AND SUBSIDIARIES





SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS


YEARS ENDED AUGUST 31, 2002, 2001 AND 2000


---




AdditionsBalance at

Charged to

Charged to




Balance atBeginning

Costs and

Other

Deductions


End ofDescription

of Year

Expenses

Accounts

(A)


YearAllowance for doubtful accounts and returns:August 31, 2002

$
215,000

$
3,000

$


$
(9,000
)

$
209,000August 31, 2001


171,000


90,000





(46,000
)


215,000August 31, 2000


201,000


2,000





(32,000
)


171,000





|(A) |  | Net write-offs of bad debts (net of recoveries) and returns.
|--- |  | ------------------------------------------------------------



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International Electronics, Inc.


Exhibits to 10-KSB





21.1

Subsidiaries of the Registrant.23.1

Consent of Deloitte & Touche LLP.99.1

Certification of International Electronics, Inc. Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.