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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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

the Securities Exchange Act of 1934



For fiscal year ended August 31, 2004

Commission File Number: 0-16305



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International Electronics, Inc.

(Name of small business issuer in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Massachusetts                                                 |  | 04-2654231                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



|                                                           |  |                            
|---------------------------------------------------------- |  | ---------------------------
|427 Turnpike StreetCanton, Massachusetts 02021             |  | (781) 821-5566             
|(Address of principal executive office including zip code) |  | (Issuers telephone number)



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



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



Common Stock, $0.01 par value

(Title of class)



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Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



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



State issuers revenues for its most recent fiscal year: $11,393,708



As of October 21, 2004, 1,506,158 shares of the Registrants voting stock was held by non-affiliates of the Registrant. As of that date, the aggregate market value of the non-affiliate shares so held was
approximately $4,650,000. As of October 31, 2004, 1,729,531 shares of the Registrants common stock were outstanding.



Documents incorporated by reference: None



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INTERNATIONAL ELECTRONICS, INC.

ANNUAL REPORT ON FORM 10-KSB



TABLE OF CONTENTS



|     |  |                                                                                       |  |     
|---- |  | ------------------------------------------------------------------------------------- |  | ----
|Item |  |                                                                                       |  | Page
|     |  | PART I                                                                                |  |     
|     |  |                                                                                      
|1.   |  | Business                                                                              |  | 3   
|2.   |  | Properties                                                                            |  | 7   
|3.   |  | Legal Proceedings                                                                     |  | 8   
|4.   |  | Submission of Matters to a Vote of Security Holders                                   |  | 8   
|     |  |                                                                                      
|     |  | PART II                                                                               |  |     
|     |  |                                                                                      
|5.   |  | Market for Registrants Common Stock and Related Stockholder Matters                  |  | 9   
|6.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|7.   |  | Financial Statements and Supplementary Data                                           |  | 19  
|8.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 19  
|8A.  |  | Controls and Procedures                                                               |  | 19  
|8B.  |  | Other Information                                                                     |  | 20  
|     |  |                                                                                      
|     |  | PART III                                                                              |  |     
|     |  |                                                                                      
|9.   |  | Directors and Executive Officers of the Registrant                                    |  | 21  
|10.  |  | Executive Compensation                                                                |  | 23  
|11.  |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 27  
|12.  |  | Certain Relationships and Related Transactions                                        |  | 28  
|13.  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 28  
|14.  |  | Principle Accounting Fees and Services                                                |  | 31  
|     |  | Signatures                                                                            |  | 33  
|     |  | Financial Statements                                                                  |  | F-1 



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PART I



Item 1. Business



International
Electronics, Inc. (IEI) was formed in 1977 as a Massachusetts corporation. IEI 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 sold under the trade name of PowerKey used to control access to industrial machinery and vehicles. IEI also manufactures and markets electronic glassbreak detectors sold under the trade name Tri-Gard.



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



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



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



In 2002, IEI introduced the Door-Gard LS lockset. The LS combines IEI keypad and/or HID proximity technology with a UL
listed grade 1 lockset to enable a battery operated stand-alone system. The approximate list prices for the LS products range from $550 to $1,000.



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



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event recording, hard copy printing of events, holiday schedules and time zone limitations (which allow users access
depending upon time of day or day of week) as well as the ability to tie up to 32 doors together. The approximate list prices for the Secured Series products range from $500 to $1,200.



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



IEI also markets a line of industrial access control and asset management systems sold under the trade name PowerKey. These products control access to mobile assets such
as forklifts and greatly reduce operating costs, improve operator safety and maximize vehicle performance. Under the AC version of the product, only access to industrial machinery is controlled.



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



Glassbreak Detector Products



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



Sales and
Marketing



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



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



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



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



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



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



Overseas Components and Production



IEI estimates that approximately 13% 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.



Product Sources of
Revenue



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



|     |  |                                   |            |                     |   |         |  |   |           
|---- |  | --------------------------------- | ---------- | ------------------- | - | ------- |  | - | ----------
|     |  | Access Control and Digital Keypad |            | Glassbreak Detector |   | Total  
|2004 |  | $                                 | 10,943,275 |                     | $ | 450,433 |  | $ | 11,393,708
|2003 |  |                                   | 9,889,444  |                     |   | 401,926 |  |   | 10,291,370
|2002 |  |                                   | 11,218,877 |                     |   | 576,378 |  |   | 11,795,255



Domestic and Foreign Sales



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



|     |  |          |   |  |         |  
|---- |  | -------- | - |  | ------- | -
|     |  | Domestic |   |  | Foreign |  
|2004 |  | 89       | % |  | 11      | %
|2003 |  | 90       |   |  | 10      |  
|2002 |  | 92       |   |  | 8       |  



Manufacturing and Raw Materials



IEI performs in-house manufacturing for some of 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



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



Competition



The market for products within the security industry is 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 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,
sell and/or manufacture competing products. In addition, there are a number of smaller companies that we compete against including: Corby, Crow Electronics, I.D. Systems, IronRhino, Keri Systems, Keytroller, Napco, Shockwatch, Visonic and United
Security Products.



IEI has a well recognized brand in the
United States security marketplace having marketed, serviced and sold its products in the industry for more than 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 we now compete. 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.



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Working Capital



During fiscal 2004, IEI depended on its existing cash balances to provide for its working capital needs. As of August 31, 2004, 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 $410,000 for equipment purchases. IEI expects its working capital requirements for fiscal 2005 to
be provided from its existing cash reserves, its available line of credit and anticipated cash flow generated from operations. As of August 31, 2004, there were no borrowings outstanding under the demand line of credit and approximately $458,000 in
borrowings outstanding as equipment debt. See Item 6-Managements Discussion and Analysis of Financial Condition and Results of Operations.



Research and Development



IEI presently employs 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 $1,177,000, $1,091,000 and $1,060,000 for fiscal 2004, 2003 and 2002, respectively. IEIs net sales include research and development revenues
from customers of approximately $123,000, $114,000 and $167,000 during fiscal 2004, 2003 and 2002, respectively.



Employees



As of November 1, 2004, IEI had 64 employees, of which 63 were full-time employees. Of these 64 employees, 16 were in sales and marketing, 8 in research
and development, 27 in manufacturing and purchasing, 6 in customer service and 7 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 consist of approximately 20,740 square feet of space. IEI occupies this facility under a lease expiring April 30, 2006, at an annual rent of
$160,000 plus utilities, maintenance and certain real estate taxes. The property used by IEI is in good condition.



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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 2004.



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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
2004, IEI met the minimum bid price criteria and $2,500,000 of stockholders equity.



In August 2004, one of IEIs independent directors resigned from its Board of Directors. Therefore, IEI is currently not in compliance with NASDAQ rule 4350(m) requiring three independent audit committee members.
NASDAQ has provided to IEI a cure period with respect to this non-compliance until the earlier of our next annual shareholders meeting or August 11, 2005.



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, and may not represent actual transactions.



|                  |  |              |       |     |   |     
|----------------- |  | ------------ | ----- | --- | - | ----
|                  |  | Sales Prices
|                  |  | High         |       | Low
|Fiscal Year 2004: |  |              |       |     |   |     
|First Quarter     |  | $            | 4.10  |     | $ | 2.57
|Second Quarter    |  |              | 4.10  |     |   | 3.10
|Third Quarter     |  |              | 15.40 |     |   | 2.75
|Fourth Quarter    |  |              | 4.93  |     |   | 2.16
|                  |  |             
|Fiscal Year 2003: |  |              |       |     |   |     
|First Quarter     |  |              | 4.24  |     |   | 2.40
|Second Quarter    |  |              | 4.18  |     |   | 2.76
|Third Quarter     |  |              | 3.45  |     |   | 2.15
|Fourth Quarter    |  |              | 3.15  |     |   | 2.25



As of October 21,
2004, there were approximately 400 shareholders of record of IEIs common stock. IEI believes that a substantial number of shares of IEIs common stock are held by nominees and estimates that there are approximately 1,100 beneficial owners
of IEIs shares. IEI has never paid dividends to its shareholders. IEIs credit agreements contain certain restrictive covenants including restricting the payment of certain 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, 2004:



|                                                    |  |                                                                                  |  |                                                                   |      |                                                           |       
|--------------------------------------------------- |  | -------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- | ---- | --------------------------------------------------------- | ------
|                                                    |  | Number of securities to beissued upon exerciseof outstandingoptions and warrants |  | Weighted-averageexercise price of outstandingoptions and warrants |      | Number ofsecuritiesremainingavailable for future issuance
|                                                    |  | (A)                                                                              |  | (B)                                                               |      | (Excludes A)                                             
|Stock option plan approved by shareholders          |  | 158,300                                                                          |  | $                                                                 | 2.18 |                                                           | 7,700 
|                                                    |  |                                                                                  | 
|Stock option plans not approved by shareholders (1) |  | 97,073                                                                           |  |                                                                   | 1.81 |                                                           | 29,408
|                                                    |  |                                                                                  | 
|Warrants not approved by shareholders (2)           |  | 21,168                                                                           |  |                                                                   | 1.87 |                                                           |      
|                                                    |  |                                                                                  |  |                                                                   |      |                                                           |       
|                                                    |  | 276,541                                                                          |  | $                                                                 | 2.03 |                                                           | 37,108
|                                                    |  |                                                                                  |  |                                                                   |      |                                                           |       

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|(1) | The August 1988, January and September 1989, June and August 1990, July 1992, October 1993, May 1994, and September 1995 nonqualified stock option plans (the Stock
Plans) were approved by our Board of Directors but not our shareholders. The Stock Plans provide for the grant of options to purchase shares of our common stock for employees (including officers and employee directors), non-employee directors,
consultants and key personnel. See Note 9 to our Consolidated Financial Statements for additional information. The term of the Stock Plans is 10 years and the plans are administered by a committee of the Board of Directors. To date, all options
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, 2004 describes the significant accounting policies used in the preparation of our consolidated
financial statements. Management bases its estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances. Estimates are used for, but not limited to, the accounting for
allowance for doubtful accounts and sales returns, inventory reserves, warranty reserves, income taxes and contingencies. Actual results could materially differ from these estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.



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



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



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



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



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



Results of Operations



Fiscal years ended August 31, 2004, 2003 and 2002



Net Sales. Net sales in 2004 increased 11% from 2003, while 2003 net sales decreased 13% from 2002. The increase in net sales for 2004 compared to the prior year is primarily due to increases in demand
for our access control product line. The decrease in net sales for 2003 compared to the prior year is primarily the result of a reduction in demand for our access control and digital keypad and OEM products. In 2004, 2003 and 2002, one customer
contributed more than 10% of our net sales, representing 35%, 38% and 37%, respectively.



Cost of Sales/Gross Profit. Our cost of sales consists 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 42% in 2004, 44% in 2003, and 47% in 2002. The decrease in the gross profit ratio for 2004 from the prior year is primarily due to product mix and an increase in manufacturing overhead
costs. The decrease in the gross profit ratio for 2003 from the prior year is primarily due to a higher proportion of fixed costs resulting from the decline in net sales, changes in product mix and an increase in occupancy costs. Our gross profit as
a percentage of net sales in a particular quarter is highly variable due to many factors such as sales volume. Gross profit may also be adversely affected by increases in manufacturing costs, excess and obsolete inventory, warranty costs, increased
price competition, geographic mix, and changes in sales channels or product mix.



Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel expenses, consulting fees and prototype costs. Research and development expenses
were $1,177,463 in 2004, $1,090,604 in 2003 and $1,059,598 in 2002. The increase in costs in 2004 from the prior year is primarily due to additional salaries and related expenses, and consulting fees due to the increased development efforts for the
industrial access control product line. The increase in costs in 2003 from the prior year is primarily due to additional prototype costs and consulting expenses. We believe that research and development is critical to our strategic product
development objectives and we intend to continue to enhance our products. We expect future research and development expenses to decrease slightly in absolute dollars from its current level.



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Selling, General and Administrative Expenses. Selling, general and administrative expenses
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 37% in 2004, 33% in 2003 and 31% in 2002. The increase in expenses as a percentage of net sales in 2004 from the prior year is primarily due to an increase in the hiring of additional management personnel, increases in advertising,
trade shows and consulting fees and a reduction in bad debt expense. The increase in expenses as a percentage of net sales in 2003 from the prior year is primarily due to a decrease in sales volume and additional consulting expenses. We expect
future selling, general and administrative expenses to increase in absolute dollars from its current level as we introduce new products to the market and expand our sales organization.



Other Income. Other income primarily consists of interest earned on our cash balances, and to a lesser extent,
sundry other non-operating items. Other income was $18,228 in 2004, $23,578 in 2003 and $36,053 in 2002. These decreases are the result of a reduction in interest rates and invested balances.



Interest Expense. Interest expense consists of interest
incurred on equipment financing. Interest expense was $24,929 in 2004, $27,462 in 2003 and $28,558 for 2002. The decrease in 2004 from the prior year is the result of a reduction in outstanding debt.



Income Taxes. IEIs effective income tax rate was a
negative 67% in 2004, 28% for 2003 and 10% for 2002. In the fourth quarter of 2004, upon completion of IEIs 2005 operating plan and 2004 financial results, we reduced our previously recorded net deferred tax assets by $445,000 due to the
increased uncertainty of realizing the benefit of these assets. See Note 8 to the Consolidated Financial Statements. The difference between the effective tax rate and the federal statutory rate is primarily the valuation allowance in 2004 and is the
utilization of net operating loss carryforwards in 2003 and 2002.



Off-Balance Sheet Arrangements.



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



Liquidity and Capital Resources



As of August 31, 2004, IEI had $2,312,446 in working capital as compared to
$3,313,607 at August 31, 2003. The ratio of current assets to current liabilities as of August 31, 2004 was 2.1 as compared to 2.8 for both 2003 and 2002. The debt to equity ratio was 0.8 at August 31, 2004 as compared to 0.5 at August 31, 2003 and
0.6 at August 31, 2002. The decrease in working capital and current ratio in 2004 from 2003 is primarily due to a reduction in accounts receivable and deferred income taxes, and an increase in accounts payable and accrued expenses. The increase in
the debt to equity ratio in 2004 from 2003 is primarily due to an increase in accounts payable and accrued expenses and IEIs net loss.



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Net cash flows provided by operating activities was $179,420 in 2004, compared with net cash flows used
in operating activities of $323,409 in 2003, and cash flows provided by operating activities of $1,768,903 in 2002. The increase in 2004 from the prior year is primarily the result of an increase in accounts payable and accrued expenses, the
valuation allowance for deferred tax assets and a reduction in accounts receivable, partially offset by the 2004 net loss. The decrease in 2003 from the prior year is primarily the result of a decrease in IEIs net income and increase in
accounts receivable.



Net capital expenditures were $404,621,
$229,311 and $677,496 for 2004, 2003 and 2002, respectively. The increase in expenditures in 2004 from the prior year is primarily due to the purchase of additional manufacturing equipment. The decrease in expenditures in 2003 from the prior year is
primarily due to a reduction in manufacturing equipment purchases. IEI anticipates having up to $400,000 in total capital expenditures in fiscal 2005 primarily for the purchase of license fees and production and engineering equipment. We expect that
a portion of our fiscal 2005 capital expenditures will be financed from our available equipment line of credit and the remainder from cash flow from operations.



As of August 31, 2004, IEI has available through February 28, 2005 a $410,000 equipment line of credit and a bank demand line of credit of up to
$1,000,000. See Notes 5 and 6 to the Consolidated Financial Statements. The credit agreements contain certain restrictive covenants including: limiting the payment of certain dividends, a minimum debt-to-tangible-net-worth ratio and minimum annual
net income of $10,000. IEI has obtained a waiver from the bank for the annual net income covenant for the year ended August 31, 2004. As of August 31, 2004, IEI had no outstanding borrowings under the demand line of credit and had approximately
$458,000 in borrowings outstanding under equipment lines of credit.



Net cash flows provided by financing activities was $99,642 in 2004, while net cash flows used in financing activities was $97,562 in 2003, and net cash flows provided by financing activities were $275,100 in 2002. The increase in net cash
flows provided by financing activities in 2004 compared to the prior year is primarily the result of additional long-term debt obligations for equipment financing and proceeds from the exercise of stock options and warrants. The increase in net cash
used in financing activities in 2003 compared to the prior year is primarily due to a reduction in long-term obligations.



The following table summarizes our future contractual cash obligations as of August 31, 2004:



|                            |  |      |           |      |   |         |  |       |         |  |   |          
|--------------------------- |  | ---- | --------- | ---- | - | ------- |  | ----- | ------- |  | - | ---------
|                            |  | 2005 |           | 2006 |   | 2007    |  | Total
|Long-term obligations       |  | $    | 262,177   |      | $ | 150,807 |  | $     | 45,368  |  | $ | 458,352  
|Employment agreement        |  |      | 181,555   |      |   | 181,555 |  |       | 181,555 |  |   | 544,665  
|Purchase commitments        |  |      | 1,265,910 |      |   | 237,553 |  |       | 27,000  |  |   | 1,530,463
|Operating lease obligations |  |      | 160,735   |      |   | 107,157 |  |       |        |  |   | 267,892  
|                            |  |      |           |      |   |         |  |       |         |  |   |          
|                            |  | $    | 1,870,377 |      | $ | 677,072 |  | $     | 253,923 |  | $ | 2,801,372
|                            |  |      |           |      |   |         |  |       |         |  |   |          



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.



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Recent Accounting Pronouncement



In December 2003, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 104 (SAB 104), Revenue Recognition, which supersedes SAB No. 101, Revenue Recognition in Financial Statements. SAB No. 104s primary purpose is to rescind the accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangement that was superseded as a result of the issuance of Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. Additionally, SAB No. 104 rescinds the SECs related Revenue Recognition in Financial Statements Frequently Asked Questions and Answers issued with SAB No. 101 that had been codified in SEC Topic 13,
Revenue Recognition. While the wording of SAB No. 104 has changed to reflect the issuance of EITF Issue No. 00-21, the revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104, which was
effective upon issuance. IEIs adoption of SAB No. 104 did not have a material effect on its 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, that may impact on its operating results that are detailed below. All of these factors are difficult for IEI to forecast, and these or other factors can materially adversely affect IEIs business and operating results
for one quarter or a series of quarters.



Concentration
of Customers. IEI has a substantial number of customers but sells a large majority of its products to a small number of large customers. This concentration of customers may cause net sales and operating results to fluctuate from quarter to
quarter based on major customers requirements and the timing of their orders and shipments. Sales to IEIs largest customer accounted for approximately 35% of IEIs total net sales for the fiscal year ended August 31, 2004.
IEIs industry has experienced significant consolidation, which may further increase IEIs concentration among its major customers. There can be no assurance that IEIs major customers will place additional orders, or that IEI will
obtain orders of similar magnitude from other customers. IEIs operating results could be materially and adversely 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.



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



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



Limited Financial Resources. IEI has limited financial resources. It is therefore subject to all the risks generally associated with a small business having limited financial resources. For the year ended August 31, 2004, IEI
had a net loss of approximately ($1,125,000) and for the years ended August 31, 2003 and 2002 IEI had net income of approximately $23,000 and $701,000, respectively. There can be no assurance that IEI will return to profitable operations. Continued
operations after the expenditure of IEIs existing cash reserves may require additional working capital to be generated by profitable operations or use of the bank lines of credit and/or additional financing. There can be no assurance that
profits will return or that additional external funding will be obtainable, if such a need should arise.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Lack of Patent Protection. Although IEI has
obtained some patent, trademark, trade secret and copyright protection for certain of its products and software, management believes that competitors may be able to market 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, 2004, IEIs foreign sales represented approximately 11% of net sales. There may be a
reduction in IEIs foreign sales from the 2004 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. In August 2004, one of IEIs independent directors resigned from its Board of Directors. Therefore, IEI is currently not in compliance with NASDAQ rule
4350(m) requiring three independent audit



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committee members. NASDAQ has provided to IEI a cure period with respect to this non-compliance until the earlier of our
next annual shareholders meeting or August 11, 2005. IEI intends to cure this non-compliance within the time period specified. The NASDAQ standards for a companys stock to maintain its SmallCap listing also include maintaining a minimum
stockholders equity of $2,500,000. As of August 31, 2004, IEI had stockholders equity of approximately $2,894,000. 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 Part II, 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 impact on
IEIs stock price. The stock price may also be affected by broader market trends unrelated to IEIs performance.



Item 7. Financial Statements and Supplementary Data



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



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



Not Applicable



Item 8A. Controls and Procedures



| | (a) | Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive and chief financial officer has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)), as of the end of the period covered by this annual report. Based
on that evaluation, the chief executive and chief financial officer has concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were (1) designed to ensure that material information relating
to us, including our consolidated subsidiaries, is made known to our chief executive and chief financial officer by others within those entities, particularly during the period in which this report was being prepared, and (2) effective, in that they
provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SECs rules and forms.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | (c) | Limitations on Effectiveness of Controls. Our management has concluded that our disclosure controls and procedures and internal controls provide reasonable assurance
that the objectives of our control system are met. However, our management (including our chief executive and chief financial officer) does not expect that
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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the disclosure controls and procedures or internal controls will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of
fraud, if any, within the company have been or will be detected.



Item 8B. Other Information



Not
Applicable



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##### Table of Contents

PART III



Item 9. Directors and Executive Officers of the Registrant



The following table sets forth our executive officers and directors, their respective ages and positions as of October 31, 2004:



|                      |  |     |  |                       |  |                             |  |                                     
|--------------------- |  | --- |  | --------------------- |  | --------------------------- |  | ------------------------------------
|Name                  |  | Age |  | First ElectedDirector |  | Yearcurrent termwill expire |  | Position                            
|John Waldstein        |  | 51  |  | 1982                  |  | 2006                        |  | President, Chief Executive Officer, 
|                      |  |     |  |                       |  |                             |  | Treasurer, Chief Financial Officer, 
|                      |  |     |  |                       |  |                             |  | Chairman of the Board and a Director
|Diane Balcom          |  | 62  |  | 1989                  |  | 2005                        |  | Director                            
|Heath Paley           |  | 56  |  | 1990                  |  | 2004                        |  | Director                            
|Peter Demakis         |  | 59  |  |                      |  |                            |  | Chief Operating Officer             
|Christopher Hentschel |  | 60  |  |                      |  |                            |  | Vice President of Engineering       
|Robert Stewart        |  | 61  |  |                      |  |                            |  | Vice President of Manufacturing     



IEI anticipates that
the next annual meeting of shareholders will be held in March 2005. Directors serve staggered three-year terms and hold office until their successors are chosen and qualified.



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



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



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



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



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



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



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



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 2004. However, IEI believes a 10% stockholder, Warren Paley, failed to file a Form 4 in connection with a purchase of 10,000 shares of IEI common stock in a prior year, but corrected that failure during fiscal 2004.



Code of Ethics



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



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Item 10. Executive Compensation



The following table sets forth information concerning the compensation for each of the last three fiscal years ended August 31, 2004, of IEIs President and Chief Executive Officer, and the other executive officers of IEI who received
at least $100,000 of compensation during any of these years (the Named Executive Officers):



Summary Compensation Table



|                        |  |      |  |                     |         |                           |   |                       |  |                  |        |  |       
|----------------------- |  | ---- |  | ------------------- | ------- | ------------------------- | - | --------------------- |  | ---------------- | ------ |  | ------
|                        |  |      |  | Annual Compensation |         | Long-Term Compensation(2)
|Name                    |  | Year |  | Salary              |         | Commission/Bonus(3)       |   | All OtherCompensation |  | Options (Shares)
|John Waldstein (1)      |  | 2004 |  | $                   | 179,087 |                           | $ | 12,500                |  | $                | 21,247 |  |      
|President and           |  | 2003 |  |                     | 172,190 |                           |   |                      |  |                  | 25,524 |  |      
|Chief Executive Officer |  | 2002 |  |                     | 164,592 |                           |   | 50,000                |  |                  | 16,632 |  |      
|                        |  |      |  |                     |        
|Peter Demakis (5)       |  | 2004 |  |                     | 118,750 |                           |   | 12,500                |  |                  |       |  | 30,000
|Chief Operating         |  | 2003 |  |                     |        |                           |   |                      |  |                  |       |  |      
|Officer                 |  | 2002 |  |                     |        |                           |   |                      |  |                  |       |  |      
|                        |  |      |  |                     |        
|Christopher Hentschel   |  | 2004 |  |                     | 127,923 |                           |   | 3,750                 |  |                  |       |  |      
|Vice President of       |  | 2003 |  |                     | 126,000 |                           |   |                      |  |                  |       |  |      
|Engineering             |  | 2002 |  |                     | 124,384 |                           |   | 12,600                |  |                  |       |  |      
|                        |  |      |  |                     |        
|Robert Stewart          |  | 2004 |  |                     | 115,000 |                           |   | 3,750                 |  |                  |       |  |      
|Vice President of       |  | 2003 |  |                     | 104,769 |                           |   |                      |  |                  |       |  | 5,000 
|Manufacturing           |  | 2002 |  |                     | 97,153  |                           |   |                      |  |                  |       |  | 3,000 
|                        |  |      |  |                     |        
|James Brierley, Jr. (4) |  | 2004 |  |                     |        |                           |   |                      |  |                  |       |  |      
|Vice President of       |  | 2003 |  |                     | 19,231  |                           |   |                      |  |                  | 1,189  |  |      
|Sales and Marketing     |  | 2002 |  |                     | 125,000 |                           |   | 6,500                 |  |                  |       |  |      

---

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



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



|(3) | Amount represents commissions and/or bonus earned during the applicable year.
|--- | -----------------------------------------------------------------------------



|(4) | Mr. Brierley resigned his position in October 2002.
|--- | ---------------------------------------------------



|(5) | Mr. Demakis commenced his employment in September 2003.
|--- | -------------------------------------------------------



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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 $182,000, subject to adjustment for
inflation, plus an annual minimum bonus of $50,000 payable upon the achievement of specified goals and objectives. The salary and bonus of Mr. Waldstein is subject to performance reviews and annual adjustment as determined by IEIs Compensation
Committee.



If the employment of Mr. Waldstein is terminated by
IEI without cause, including the election of a slate of board of director members not approved by Mr. Waldstein or a change in status as a result of an acquisition, merger or sale of assets (an Acquisition), IEI is obligated to pay at
such termination an amount equal to his total salary and benefits to the conclusion of the contract period. In the event of an Acquisition of IEI, Mr. Waldsteins base salary shall increase based on future adjustments for inflation. As of
August 31, 2004, John Waldsteins base salary to the conclusion of his contract period is approximately $545,000, plus future cost of living adjustments.



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



In addition to the foregoing, IEI also has employment letters with certain key management (including Messrs. Demakis, Hentschel and Stewart) that require
salary and benefits continuation in the event of a termination of such employment as a result of an Acquisition. As of August 31, 2004, the salaries of such management personnel represent an aggregate of approximately $392,000.



Stock Option Grants



The option grant table below sets forth information about option grants to the Named Executive Officers during the year
ended August 31, 2004, including hypothetical gains or option spreads for the options at the end of their respective ten-year terms, as calculated in accordance with the rules of the SEC. Each gain is based on an arbitrarily assumed
annualized rate of compound appreciation of the market price at the date of the grant of 5% and 10% from the date the option was granted to the end of the option term. Actual gains, if any, on option exercises are dependent on the future performance
of our common stock, overall market conditions and continued employment.



24



---

##### Table of Contents

Option Grants in Last Fiscal Year



|                      |  |                                               |  |                                                              |    |  |                             |      |                 |         |                                                                                                |   |        |  |   |       
|--------------------- |  | --------------------------------------------- |  | ------------------------------------------------------------ | -- |  | --------------------------- | ---- | --------------- | ------- | ---------------------------------------------------------------------------------------------- | - | ------ |  | - | ------
|Name                  |  | No. ofSecuritiesUnderlyingOptions Granted (1) |  | Percent ofTotalOptionsGranted toEmployees in Fiscal Year (2) |    |  | ExercisePrice Per Share (3) |      | Expiration Date |         | Potential RealizableValue at
AssumedAnnual Rates of StockPrice Appreciation forOption Term (4)
|                      |  |                                               |  |                                                              | 5% |  | 10%                        
|John Waldstein        |  | 0                                             |  |                                                             | %  |  | $                           |     |                 |        |                                                                                                | $ |       |  | $ |      
|Peter Demakis         |  | 30,000                                        |  | 75                                                           |    |  |                             | 2.75 |                 | 9/12/10 |                                                                                                |   | 33,586 |  |   | 78,269
|Christopher Hentschel |  | 0                                             |  |                                                             |    |  |                             |     |                 |        |                                                                                                |   |       |  |   |      
|Robert Stewart        |  | 0                                             |  |                                                             |    |  |                             |     |                 |        |                                                                                                |   |       |  |   |      

---

|(1) | Options vest 25% one year from the date of grant and thereafter an additional 2.0833% for each month of employment.
|--- | -------------------------------------------------------------------------------------------------------------------



|(2) | Based on options to purchase an aggregate of 40,000 shares of common stock granted by us to employees, including those granted to the Named Executive Officers, during the fiscal
year ended August 31, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Options were granted with an exercise price equal to the fair market value of our common stock on the date of grant.
|--- | --------------------------------------------------------------------------------------------------------------------



|(4) | The potential realizable value is calculated based on (a) the seven-year term of the option at its time of grant; (b) the assumption that the closing price for the common stock on
the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option; and (c) the assumption that the option is exercised and sold on the last day of its term for the appreciated stock price.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Year End Option Table



The following table sets forth information concerning the exercise of stock options and
warrants by each of the Named Executive Officers and the number and value of unexercised options and warrants held by them as of August 31, 2004:



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



|                      |  |                            |             |  |                    |               |                                                    |             |                                                                     |               |        |  |   |         |  |   |       
|--------------------- |  | -------------------------- | ----------- |  | ------------------ | ------------- | -------------------------------------------------- | ----------- | ------------------------------------------------------------------- | ------------- | ------ |  | - | ------- |  | - | ------
|Name                  |  | SharesAcquired on Exercise |             |  | Value Realized (3) |               | Number of
UnexercisedOptions at End of Fiscal 2004 |             | Value of Unexercised in-the-Money
Options at End of Fiscal 2004 (1)
|                      |  |                            | Exercisable |  |                    | Unexercisable |                                                    | Exercisable |                                                                     | Unexercisable
|John Waldstein        |  | 67,000                     | (4)         |  | $                  | 150,140       |                                                    | 72,250      | (2)                                                                 |               | 1,750  |  | $ | 112,738 |  | $ | 2,433 
|Peter Demakis         |  |                           |             |  |                    |              |                                                    |            |                                                                     |               | 30,000 |  |   |        |  |   | 10,200
|Christopher Hentschel |  | 2,000                      |             |  |                    | 4,740         |                                                    | 17,333      |                                                                     |               |       |  |   | 23,223  |  |   |      
|Robert Stewart        |  |                           |             |  |                    |              |                                                    | 10,250      |                                                                     |               | 7,750  |  |   | 6,948   |  |   | 4,073 

---

|(1) | Difference between the fair market value of the underlying common stock on October 21, 2004 and the exercise price.
|--- | -------------------------------------------------------------------------------------------------------------------



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



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



25



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##### Table of Contents

|(4) | Includes the exercise of warrants to purchase 25,000 shares of common stock.
|--- | ----------------------------------------------------------------------------



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, 2004, directors fees were paid in the amounts of $8,500 each to Ms. Balcom, Mr. Paley and Mr. Tannenbaum. Mr. Steven Tannenbaum resigned from the Board of Directors in
August 2004.



26



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##### Table of Contents

Item 11. Security Ownership of Certain Beneficial Owners and Management



Set forth below is information concerning ownership of IEIs common stock as of October 31, 2004, (i) by all persons known by IEI to own beneficially
5% or more of the outstanding common stock, (ii) each current director and Named Executive Officer of IEI and (iii) all directors and executive officers as a group.



|                                                            |  |                    |     |  |                             |  
|----------------------------------------------------------- |  | ------------------ | --- |  | --------------------------- | -
|Name                                                        |  | Number ofShares(1) |     |  | Percent ofCommon StockOwned |  
|Executive Officers and Directors:                           |  |                    |     |  |                             |  
|                                                            |  |                   
|John Waldstein                                              |  | 275,655            | (2) |  | 15.3                        | %
|c/o International Electronics, Inc.                         |  |                    |     |  |                             |  
|427 Turnpike Street                                         |  |                    |     |  |                             |  
|Canton, Massachusetts                                       |  |                    |     |  |                             |  
|                                                            |  |                   
|Christopher Hentschel                                       |  | 30,301             | (3) |  | 1.7                         |  
|c/o International Electronics, Inc.                         |  |                    |     |  |                             |  
|427 Turnpike Street                                         |  |                    |     |  |                             |  
|Canton, Massachusetts                                       |  |                    |     |  |                             |  
|                                                            |  |                   
|Robert Stewart                                              |  | 12,750             | (4) |  | 0.7                         |  
|c/o International Electronics, Inc.                         |  |                    |     |  |                             |  
|427 Turnpike Street                                         |  |                    |     |  |                             |  
|Canton, Massachusetts                                       |  |                    |     |  |                             |  
|                                                            |  |                   
|Heath Paley                                                 |  | 12,500             | (5) |  | 0.7                         |  
|c/o International Electronics, Inc.                         |  |                    |     |  |                             |  
|427 Turnpike Street                                         |  |                    |     |  |                             |  
|Canton, Massachusetts                                       |  |                    |     |  |                             |  
|                                                            |  |                   
|Diane Balcom                                                |  | 11,500             | (6) |  | 0.7                         |  
|1403 Sharps Hill Road                                       |  |                    |     |  |                             |  
|Pittsburgh, Pennsylvania                                    |  |                    |     |  |                             |  
|                                                            |  |                   
|Peter Demakis                                               |  | 9,375              | (7) |  | 0.5                         |  
|c/o International Electronics, Inc.                         |  |                    |     |  |                             |  
|427 Turnpike Street                                         |  |                    |     |  |                             |  
|Canton, Massachusetts                                       |  |                    |     |  |                             |  
|                                                            |  |                   
|All directors and executive officers as a group (6 persons) |  | 352,081            | (8) |  | 18.9                        |  

---

(Footnotes continued on following page)



|(1) | Except as otherwise indicated below, the named owner has sole voting and investment power with respect to the shares set forth. No arrangements are known to IEI, which may result in
a change in control. The number of shares shown does include shares which may be acquired through the exercise of options and warrants which are exercisable currently or within sixty (60) days after October 31, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



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##### Table of Contents

|(2) | Includes vested options and warrants to purchase an aggregate 72,250 shares of IEIs common stock granted at prices ranging from $1.17-$2.12 per share. Includes 6,234 shares of
common stock held by Mr. Waldsteins wife. Mr. Waldstein disclaims beneficial ownership of these shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes vested options to purchase an aggregate 17,333 shares of IEIs common stock at prices ranging from $1.36-$2.54 per share. Includes 12,968 shares of common stock held
jointly by Mr. Hentschel and his wife.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Includes vested options to purchase an aggregate 12,750 shares of IEIs common stock granted at prices ranging from $2.30-$2.80 per share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Includes vested options to purchase an aggregate 8,500 shares of IEIs common stock granted at prices ranging from $1.36-$2.81 per share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



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



|(7) | Includes vested options to purchase 9,375 shares of IEIs common stock granted at a price of $2.75 per share.
|--- | -------------------------------------------------------------------------------------------------------------



|(8) | Includes vested options and warrants to purchase an aggregate 128,708 shares of IEIs common stock granted at prices ranging from $1.17-$2.81 per share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------



Item 12. Certain Relationships and Related Transactions



None



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



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



Report of Independent Registered Public Accounting Firm



Consolidated Balance Sheets as of August 31, 2004 and 2003



Consolidated Statements of Operations for the Years Ended August 31, 2004, 2003 and 2002



Consolidated Statements of Shareholders Equity for the Years Ended August 31, 2004, 2003 and 2002



Consolidated Statements of Cash Flows for the Years Ended August 31, 2004,
2003 and 2002



Notes to Consolidated Financial Statements



28



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##### Table of Contents

| | (a)2. | Financial Statement Schedules:
| | ----- | ------------------------------



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



| | (a)3. | Exhibits:
| | ----- | ---------



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



29



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##### Table of Contents

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



30



---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                        
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10(q) |  | February 24, 2004 Amendment to Demand Loan and Security Agreement, Accounts Receivable and Inventory dated February 28, 1997 between Eastern Bank and the Registrant is incorporated by
reference to 10(a) on Form 10-QSB for the three months ended February 29, 2004.
|      | 
|10(r) |  | February 26, 2004 Amendment to Demand Loan and Security Agreement, Accounts Receivable and Inventory dated February 28, 1997 between Eastern Bank and the Registrant is incorporated by
reference to 10(b) on Form 10-QSB for the three months ended February 29, 2004.
|      | 
|21.1  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                        
|      | 
|23.1  |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                      
|      | 
|31.1  |  | Certification of International Electronics, Inc. Chief Executive and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                
|      | 
|32.1  |  | 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
| | --- | -------------------



On August 13, 2004, we furnished a Current Report on Form 8-K to the SEC under Item 5 reporting that a director, Steven Tannenbaum, had resigned from the
Board of Directors effective August 11, 2004.



Item 14. Principle Accountant Fees and Services



The following is a summary of the fees incurred by IEI from Deloitte & Touche LLP for professional services rendered for the fiscal years ending August 31, 2004 and 2003:



|                   |  |                      |         |                  |   |        
|------------------ |  | -------------------- | ------- | ---------------- | - | -------
|Fee Category       |  | Fiscal 2004 Fees (1) |         | Fiscal 2003 Fees
|Audit fees         |  | $                    | 101,000 |                  | $ | 93,000 
|Audit-related fees |  |                      |        |                  |   |       
|Tax fees           |  |                      | 19,000  |                  |   | 19,237 
|All other fees     |  |                      |        |                  |   |       
|                   |  |                      |         |                  |   |        
|Total fees         |  | $                    | 120,000 |                  | $ | 112,237
|                   |  |                      |         |                  |   |        

---

|(1) | Includes fees billed and estimated to be billed by Deloitte & Touche LLP in 2004 for the 2004 audit and tax return.
|--- | -------------------------------------------------------------------------------------------------------------------



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



31



---

##### Table of Contents

Audit-related Fees. Consists of fees billed for professional services that are reasonably
related to the performance of the audit or review of IEIs consolidated financial statements, but are not reported under Audit Fees. No such fees were incurred during the past two years.



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



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



Audit Committee Pre-Approval



The Audit
Committees policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management periodically report to the Audit
Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by case
basis. During fiscal 2004, no services were provided to IEI from Deloitte & Touche LLP or any other accounting firm other than in accordance with the pre-approval policies and procedures described above.



32



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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 22, 2004 |  | By:                             |  | /s/ John Waldstein                                   
|                        |  |                                 |  | John Waldstein, President and Chief Executive Officer



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



|                                 |  |                                                                                                                             |  |                  
|-------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | -----------------
|Signature                        |  | Title                                                                                                                       |  | Date             
|                                 |  |                                                                                                                            
|/s/ John WaldsteinJohn Waldstein |  | President, Chief Executive Officer, Treasurer, Chief Financial and Accounting Officer, Chairman of the Board and a Director |  | November 22, 2004
|                                 |  |                                                                                                                            
|/s/ Diane BalcomDiane Balcom     |  | Director                                                                                                                    |  | November 22, 2004
|                                 |  |                                                                                                                            
|/s/ Heath PaleyHeath Paley       |  | Director                                                                                                                    |  | November 22, 2004



33



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##### Table of Contents

International Electronics, Inc.

Exhibits to 10-KSB



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



34



---

##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



TABLE OF CONTENTS



|                                                                                      |  |         
|------------------------------------------------------------------------------------- |  | --------
|                                                                                      |  | Page    
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                               |  | F-2     
|                                                                                      | 
|CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002: |  |         
|                                                                                      | 
|Consolidated Balance Sheets                                                           |  | F-3     
|                                                                                      | 
|Consolidated Statements of Operations                                                 |  | F-4     
|                                                                                      | 
|Consolidated Statements of Shareholders Equity                                       |  | F-5     
|                                                                                      | 
|Consolidated Statements of Cash Flows                                                 |  | F-6     
|                                                                                      | 
|Notes to Consolidated Financial Statements                                            |  | F-7-F-16



F-1



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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

Canton, Massachusetts



We have audited the accompanying consolidated balance sheets of International Electronics,
Inc. and subsidiaries (the Company) as of August 31, 2004 and 2003, and the related consolidated statements of operations, shareholders equity and cash flows for each of the three years in the period ended August 31, 2004. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 consolidated financial position of International Electronics, Inc. and subsidiaries as of August 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 2004 in conformity with accounting principles generally accepted in the United States of America.



|                         
|-------------------------
|                         
|/s/ Deloitte & Touche LLP
|Boston, Massachusetts    
|November 12, 2004        



F-2



---

##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

AUGUST 31, 2004 AND 2003



|                                                                                                                                  |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                  |  | 2004 |            |   | 2003 |  
|ASSETS                                                                                                                            |  |      |            |   |      |   |            |  
|CURRENT ASSETS:                                                                                                                   |  |      |            |   |      |   |            |  
|Cash and cash equivalents                                                                                                         |  | $    | 2,142,526  |   |      | $ | 2,266,078  |  
|Accounts receivable, net of allowances for doubtful accounts and returns of $238,000 and $253,000 in 2004 and 2003,
respectively  |  |      | 1,262,327  |   |      |   | 1,452,143  |  
|Inventories                                                                                                                       |  |      | 762,365    |   |      |   | 764,674    |  
|Deferred income taxes                                                                                                             |  |      |           |   |      |   | 379,000    |  
|Other current assets                                                                                                              |  |      | 276,260    |   |      |   | 259,521    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total current assets                                                                                                              |  |      | 4,443,478  |   |      |   | 5,121,416  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|PROPERTY AND EQUIPMENTNet of accumulated depreciation and amortization                                                           |  |      | 771,155    |   |      |   | 698,837    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|OTHER ASSETS:                                                                                                                     |  |      |            |   |      |   |            |  
|Deferred income taxes                                                                                                             |  |      |           |   |      |   | 66,000     |  
|Other                                                                                                                             |  |      | 6,055      |   |      |   | 8,062      |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total other assets                                                                                                                |  |      | 6,055      |   |      |   | 74,062     |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|TOTAL                                                                                                                             |  | $    | 5,220,688  |   |      | $ | 5,894,315  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                              |  |      |            |   |      |   |            |  
|CURRENT LIABILITIES:                                                                                                              |  |      |            |   |      |   |            |  
|Accounts payable                                                                                                                  |  | $    | 501,267    |   |      | $ | 381,248    |  
|Accrued expenses                                                                                                                  |  |      | 1,367,588  |   |      |   | 1,135,394  |  
|Current portion of long-term obligations                                                                                          |  |      | 262,177    |   |      |   | 291,167    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total current liabilities                                                                                                         |  |      | 2,131,032  |   |      |   | 1,807,809  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|LONG-TERM OBLIGATIONSLess current portion                                                                                        |  |      | 196,175    |   |      |   | 201,086    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|COMMITMENTS                                                                                                                       |  |      |            |   |      |   |            |  
|                                                                                                                                  |  |     
|SHAREHOLDERS EQUITY:                                                                                                             |  |      |            |   |      |   |            |  
|Common stock, $0.01 par valueauthorized, 5,984,375 shares; issued, 1,764,531 and 1,653,731 shares in 2004 and 2003,
respectively |  |      | 17,645     |   |      |   | 16,537     |  
|Capital in excess of par value                                                                                                    |  |      | 5,149,221  |   |      |   | 5,016,786  |  
|Accumulated deficit                                                                                                               |  |      | (2,234,741 | ) |      |   | (1,109,259 | )
|Treasury stockat cost, 35,000 shares                                                                                             |  |      | (38,644    | ) |      |   | (38,644    | )
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total shareholders equity                                                                                                        |  |      | 2,893,481  |   |      |   | 3,885,420  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|TOTAL                                                                                                                             |  | $    | 5,220,688  |   |      | $ | 5,894,315  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  



See notes to consolidated financial
statements.



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED AUGUST 31, 2004, 2003 AND 2002



|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                      |  | 2004 |            |   | 2003 |   |            | 2002 | 
|NET SALES                                             |  | $    | 11,393,708 |   |      | $ | 10,291,370 |      |  | $ | 11,795,255 |  
|                                                      |  |      |           
|COST OF SALES                                         |  |      | 6,626,589  |   |      |   | 5,729,331  |      |  |   | 6,293,738  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|GROSS PROFIT                                          |  |      | 4,767,119  |   |      |   | 4,562,039  |      |  |   | 5,501,517  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|OPERATING EXPENSES:                                   |  |      |            |   |      |   |            |      |  |   |            |  
|Research and development costs                        |  |      | 1,177,463  |   |      |   | 1,090,604  |      |  |   | 1,059,598  |  
|Selling, general and administrative expenses          |  |      | 4,257,437  |   |      |   | 3,435,620  |      |  |   | 3,674,413  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|Total operating expenses                              |  |      | 5,434,900  |   |      |   | 4,526,224  |      |  |   | 4,734,011  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|(LOSS) INCOME FROM OPERATIONS                         |  |      | (667,781   | ) |      |   | 35,815     |      |  |   | 767,506    |  
|                                                      |  |      |           
|INTEREST EXPENSE                                      |  |      | (24,929    | ) |      |   | (27,462    | )    |  |   | (28,558    | )
|                                                      |  |      |           
|OTHER INCOME                                          |  |      | 18,228     |   |      |   | 23,578     |      |  |   | 36,053     |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|(LOSS) INCOME BEFORE INCOME TAXES                     |  |      | (674,482   | ) |      |   | 31,931     |      |  |   | 775,001    |  
|                                                      |  |      |           
|PROVISION FOR INCOME TAXES                            |  |      | 451,000    |   |      |   | 8,800      |      |  |   | 74,000     |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|NET (LOSS) INCOME                                     |  | $    | (1,125,482 | ) |      | $ | 23,131     |      |  | $ | 701,001    |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|NET (LOSS) INCOME PER SHARE:                          |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                                 |  | $    | (0.68      | ) |      | $ | 0.01       |      |  | $ | 0.45       |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted                                               |  | $    | (0.68      | ) |      | $ | 0.01       |      |  | $ | 0.40       |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|SHARES USED IN COMPUTING NET (LOSS) INCOME PER SHARE: |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                                 |  |      | 1,654,326  |   |      |   | 1,610,046  |      |  |   | 1,575,262  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted                                               |  |      | 1,654,326  |   |      |   | 1,717,147  |      |  |   | 1,742,728  |  
|                                                      |  |      |            |   |      |   |            |      |  |   |            |  



See notes to consolidated financial
statements.



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

YEARS ENDED AUGUST 31, 2004, 2003 AND 2002



|                                                         |  |              |  |        |                     |                                |   |                |  |      |            |   |       |        |  |   |         |   |  |   |            |  
|-------------------------------------------------------- |  | ------------ |  | ------ | ------------------- | ------------------------------ | - | -------------- |  | ---- | ---------- | - | ----- | ------ |  | - | ------- | - |  | - | ---------- | -
|                                                         |  |              |  |        |                     | Capital in Excess of Par Value |   |                |  |      |            |   |       |        |  |   |        
|                                                         |  | Common Stock |  |        | Accumulated Deficit |                                |   | Treasury Stock |  |      |            |  
|                                                         |  | Shares       |  | Amount |                     |                                |   | Shares         |  | Cost |            |   | Total |       
|BALANCEAugust 31, 2001                                  |  | 1,589,313    |  | $      | 15,893              |                                | $ | 4,868,791      |  | $    | (1,833,391 | ) |       | 35,000 |  | $ | (38,644 | ) |  | $ | 3,012,649  |  
|Stock issued upon exercise of stock options and warrants |  | 54,418       |  |        | 544                 |                                |   | 88,995         |  |      |           |   |       |       |  |   |        |   |  |   | 89,539     |  
|Tax benefits for stock options and warrants              |  |             |  |        |                    |                                |   | 40,000         |  |      |           |   |       |       |  |   |        |   |  |   | 40,000     |  
|Net income                                               |  |             |  |        |                    |                                |   |               |  |      | 701,001    |   |       |       |  |   |        |   |  |   | 701,001    |  
|                                                         |  |              |  |        |                     |                                |   |                |  |      |            |   |       |        |  |   |         |   |  |   |            |  
|BALANCEAugust 31, 2002                                  |  | 1,643,731    |  |        | 16,437              |                                |   | 4,997,786      |  |      | (1,132,390 | ) |       | 35,000 |  |   | (38,644 | ) |  |   | 3,843,189  |  
|Stock issued upon exercise of stock options and warrants |  | 10,000       |  |        | 100                 |                                |   | 15,200         |  |      |           |   |       |       |  |   |        |   |  |   | 15,300     |  
|Tax benefits for stock options and warrants              |  |             |  |        |                    |                                |   | 3,800          |  |      |           |   |       |       |  |   |        |   |  |   | 3,800      |  
|Net income                                               |  |             |  |        |                    |                                |   |               |  |      | 23,131     |   |       |       |  |   |        |   |  |   | 23,131     |  
|                                                         |  |              |  |        |                     |                                |   |                |  |      |            |   |       |        |  |   |         |   |  |   |            |  
|BALANCEAugust 31, 2003                                  |  | 1,653,731    |  |        | 16,537              |                                |   | 5,016,786      |  |      | (1,109,259 | ) |       | 35,000 |  |   | (38,644 | ) |  |   | 3,885,420  |  
|Stock issued upon exercise of stock options and warrants |  | 110,800      |  |        | 1,108               |                                |   | 132,435        |  |      |           |   |       |       |  |   |        |   |  |   | 133,543    |  
|Net loss                                                 |  |             |  |        |                    |                                |   |               |  |      | (1,125,482 | ) |       |       |  |   |        |   |  |   | (1,125,482 | )
|                                                         |  |              |  |        |                     |                                |   |                |  |      |            |   |       |        |  |   |         |   |  |   |            |  
|BALANCEAugust 31, 2004                                  |  | 1,764,531    |  | $      | 17,645              |                                | $ | 5,149,221      |  | $    | (2,234,741 | ) |       | 35,000 |  | $ | (38,644 | ) |  | $ | 2,893,481  |  
|                                                         |  |              |  |        |                     |                                |   |                |  |      |            |   |       |        |  |   |         |   |  |   |            |  



See notes to consolidated financial
statements.



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED AUGUST 31, 2004, 2003 AND 2002



|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                   |  | 2004 |            |   | 2003 |   |           | 2002 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |      |            |   |      |   |           |      |  |   |           |  
|Net (loss) income                                                                                  |  | $    | (1,125,482 | ) |      | $ | 23,131    |      |  | $ | 701,001   |  
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |  |      |            |   |      |   |           |      |  |   |           |  
|Depreciation and amortization                                                                      |  |      | 332,303    |   |      |   | 354,638   |      |  |   | 358,441   |  
|Deferred income taxes                                                                              |  |      | 445,000    |   |      |   | 2,000     |      |  |   | (29,000   | )
|Changes in operating assets and liabilities:                                                       |  |      |            |   |      |   |           |      |  |   |           |  
|Accounts receivable                                                                                |  |      | 189,816    |   |      |   | (735,939  | )    |  |   | 495,680   |  
|Inventories                                                                                        |  |      | 2,309      |   |      |   | 13,724    |      |  |   | 70,344    |  
|Other current assets                                                                               |  |      | (16,739    | ) |      |   | 10,391    |      |  |   | (30,426   | )
|Accounts payable and accrued expenses                                                              |  |      | 352,213    |   |      |   | 4,846     |      |  |   | 193,863   |  
|Income taxes payable                                                                               |  |      |           |   |      |   | 3,800     |      |  |   | 9,000     |  
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|Net cash provided by (used in) operating activities                                                |  |      | 179,420    |   |      |   | (323,409  | )    |  |   | 1,768,903 |  
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |      |            |   |      |   |           |      |  |   |           |  
|Purchases of property and equipment                                                                |  |      | (404,621   | ) |      |   | (229,311  | )    |  |   | (677,496  | )
|Other assets                                                                                       |  |      | 2,007      |   |      |   | (101      | )    |  |   |          |  
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|Net cash used in investing activities                                                              |  |      | (402,614   | ) |      |   | (229,412  | )    |  |   | (677,496  | )
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |      |            |   |      |   |           |      |  |   |           |  
|Additions to debt obligations                                                                      |  |      | 317,879    |   |      |   | 215,243   |      |  |   | 478,728   |  
|Payments of debt obligations                                                                       |  |      | (351,780   | ) |      |   | (328,105  | )    |  |   | (293,167  | )
|Proceeds from exercise of stock options and warrants                                               |  |      | 133,543    |   |      |   | 15,300    |      |  |   | 89,539    |  
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|Net cash provided by (used in) financing activities                                                |  |      | 99,642     |   |      |   | (97,562   | )    |  |   | 275,100   |  
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|CASH AND CASH EQUIVALENTS(Decrease) increase during the year                                      |  |      | (123,552   | ) |      |   | (650,383  | )    |  |   | 1,366,507 |  
|CASH AND CASH EQUIVALENTSBeginning of year                                                        |  |      | 2,266,078  |   |      |   | 2,916,461 |      |  |   | 1,549,954 |  
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|CASH AND CASH EQUIVALENTSEnd of year                                                              |  | $    | 2,142,526  |   |      | $ | 2,266,078 |      |  | $ | 2,916,461 |  
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:                                                 |  |      |            |   |      |   |           |      |  |   |           |  
|Interest paid                                                                                      |  | $    | 24,929     |   |      | $ | 27,462    |      |  | $ | 28,558    |  
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  
|Income taxes paid                                                                                  |  | $    | 1,225      |   |      | $ | 44,634    |      |  | $ | 72,100    |  
|                                                                                                   |  |      |            |   |      |   |           |      |  |   |           |  



See notes to consolidated financial
statements.



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED AUGUST 31, 2004, 2003 AND 2002



|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 investments 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 (Note 11). IEI generally does not
obtain collateral in support of its trade accounts receivable.



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



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



|                               |  |               
|------------------------------ |  | --------------
|                               |  | EstimatedLives
|Machinery and equipment        |  | 3-7 years     
|Office furniture and equipment |  | 2-7 years     
|Leasehold improvements         |  | Life of lease 



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



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



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



Research and Development CostsAll research and development costs are charged to operations as incurred.



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



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



|                                                                          |  |           |  |           |  |          
|------------------------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                                          |  | 2004      |  | 2003      |  | 2002     
|Weighted-average shares outstanding for basic net (loss) income per share |  | 1,654,326 |  | 1,610,046 |  | 1,575,262
|Effect of dilutive option and warrant shares                              |  |          |  | 107,101   |  | 167,466  
|                                                                          |  |           |  |           |  |          
|Total shares for diluted net (loss) income per share                      |  | 1,654,326 |  | 1,717,147 |  | 1,742,728
|                                                                          |  |           |  |           |  |          



The calculations for
diluted net (loss) income per share do not include aggregate anti-dilutive stock options and warrants of 266,812, 37,300 and 1,000 for the years ended August 31, 2004, 2003 and 2002, respectively.



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



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IEI has computed the pro forma disclosures required under SFAS No. 123 for stock options granted to
employees using the Black-Scholes option-pricing model with an assumed risk-free interest rate of 3.0% in both 2004 and 2003 and 3.5% in 2002; volatility of 100% in 2004 and 120% for both 2003 and 2002; an expected life of five years, and the
assumption that no dividends will be paid for all periods presented. Under APB No. 25, IEI has recognized no stock-based compensation expense for the years ended August 31, 2004, 2003 and 2002. Had employee stock-based compensation expense for
IEIs stock option plans been determined consistent with SFAS No. 123, the pro forma net (loss) income and pro forma net (loss) income per share would have been as follows for the years ended August 31:



|                                                               |  |      |            |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                               |  | 2004 |            |   | 2003 |   |         | 2002 | 
|Net (loss) income:                                             |  |      |            |   |      |   |         |      |  |   |         |  
|As reported                                                    |  | $    | (1,125,482 | ) |      | $ | 23,131  |      |  | $ | 701,001 |  
|Less employee stock-based compensation under fair value method |  |      | (52,997    | ) |      |   | (44,290 | )    |  |   | (50,525 | )
|                                                               |  |      |            |   |      |   |         |      |  |   |         |  
|Pro forma net (loss) income                                    |  | $    | (1,178,479 | ) |      | $ | (21,159 | )    |  | $ | 650,476 |  
|                                                               |  |      |            |   |      |   |         |      |  |   |         |  
|Net (loss) income per share:                                   |  |      |            |   |      |   |         |      |  |   |         |  
|Basic as reported                                              |  | $    | (0.68      | ) |      | $ | 0.01    |      |  | $ | 0.45    |  
|Basic pro forma                                                |  |      | (0.71      | ) |      |   | (0.01   | )    |  |   | 0.41    |  
|Diluted as reported                                            |  |      | (0.68      | ) |      |   | 0.01    |      |  |   | 0.40    |  
|Diluted pro forma                                              |  |      | (0.71      | ) |      |   | (0.01   | )    |  |   | 0.37    |  



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



Comprehensive Income (Loss)Comprehensive income (loss) for each of the three years in the period ended August 31, 2004 does not differ
from the reported net income (loss).



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



Recent Accounting PronouncementIn December 2003, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition,
which supersedes SAB No. 101, Revenue Recognition in Financial Statements. SAB No. 104s primary purpose is to rescind the accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements that was
superseded as a result of the issuance of Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. Additionally, SAB No. 104 rescinds the SECs related Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers issued with SAB No. 101 that had been codified in SEC Topic 13, Revenue Recognition. While the wording of SAB No. 104 has changed to reflect the issuance of EITF
Issue No. 00-21, the revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104, which was effective upon issuance. IEIs adoption of SAB No. 104 did not have a material effect on its financial
position or results of operations.



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



Inventories at August 31 consist of the following:



|                                |  |      |         |      |   |        
|------------------------------- |  | ---- | ------- | ---- | - | -------
|                                |  | 2004 |         | 2003
|Raw materials and subassemblies |  | $    | 442,638 |      | $ | 478,241
|Work in process                 |  |      | 159,020 |      |   | 107,903
|Finished goods                  |  |      | 160,707 |      |   | 178,530
|                                |  |      |         |      |   |        
|                                |  | $    | 762,365 |      | $ | 764,674
|                                |  |      |         |      |   |        



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



Property and equipment at August 31 consist of the following:



|                                               |  |      |            |   |      |   |            |  
|---------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                               |  | 2004 |            |   | 2003 |  
|Machinery and equipment                        |  | $    | 2,022,494  |   |      | $ | 1,780,854  |  
|Office furniture and equipment                 |  |      | 1,255,059  |   |      |   | 1,162,256  |  
|Leasehold improvements                         |  |      | 331,105    |   |      |   | 313,719    |  
|                                               |  |      |            |   |      |   |            |  
|                                               |  |      | 3,608,658  |   |      |   | 3,256,829  |  
|Less accumulated depreciation and amortization |  |      | (2,837,503 | ) |      |   | (2,557,992 | )
|                                               |  |      |            |   |      |   |            |  
|                                               |  | $    | 771,155    |   |      | $ | 698,837    |  
|                                               |  |      |            |   |      |   |            |  



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



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



|                            |  |      |           |      |   |          
|--------------------------- |  | ---- | --------- | ---- | - | ---------
|                            |  | 2004 |           | 2003
|Payroll and related amounts |  | $    | 510,110   |      | $ | 337,202  
|Warranty                    |  |      | 354,845   |      |   | 385,833  
|Professional fees           |  |      | 239,830   |      |   | 213,032  
|Other                       |  |      | 262,803   |      |   | 199,327  
|                            |  |      |           |      |   |          
|                            |  | $    | 1,367,588 |      | $ | 1,135,394
|                            |  |      |           |      |   |          



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



|                      |  |                            |         |                             |   |          |  |   |                      |   |  |   |        
|--------------------- |  | -------------------------- | ------- | --------------------------- | - | -------- |  | - | -------------------- | - |  | - | -------
|Year Ended August 31: |  | Balance atBeginningof Year |         | Charged toCosts andExpenses |   | Payments |  |   | Balance atEnd ofYear
|2004                  |  | $                          | 385,833 |                             | $ | 229,930  |  | $ | (260,918             | ) |  | $ | 354,845
|2003                  |  |                            | 395,833 |                             |   | 214,148  |  |   | (224,148             | ) |  |   | 385,833
|2002                  |  |                            | 347,833 |                             |   | 223,563  |  |   | (175,563             | ) |  |   | 395,833



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



|                                                                   |  |                            |         |                             |   |               |  |   |                      |   |  |   |        
|------------------------------------------------------------------ |  | -------------------------- | ------- | --------------------------- | - | ------------- |  | - | -------------------- | - |  | - | -------
|Year Ended August 31:                                              |  | Balance atBeginningof Year |         | Charged toCosts andExpenses |   | Deductions(A) |  |   | Balance atEnd ofYear
|2004                                                               |  | $                          | 253,000 |                             | $ |              |  | $ | (15,000              | ) |  | $ | 238,000
|2003                                                               |  |                            | 209,000 |                             |   | 51,000        |  |   | (7,000               | ) |  |   | 253,000
|2002                                                               |  |                            | 215,000 |                             |   | 3,000         |  |   | (9,000               | ) |  |   | 209,000
|                                                                   |  |                            |         |                             |   |               |  |   |                      |   |  |   |        
|(A)   Net write-offs of bad debts (net of recoveries) and returns.



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



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



|                                                                  |  |      |          |   |      |   |          |  
|----------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                  |  | 2004 |          |   | 2003 |  
|Equipment line of creditinterest rates from 4.5% - 5.5% (Note 6) |  | $    | 458,352  |   |      | $ | 492,253  |  
|Less current portion                                              |  |      | (262,177 | ) |      |   | (291,167 | )
|                                                                  |  |      |          |   |      |   |          |  
|                                                                  |  | $    | 196,175  |   |      | $ | 201,086  |  
|                                                                  |  |      |          |   |      |   |          |  



The future principal
payments on long-term obligations as of August 31, 2004 are $262,177 in 2005, $150,807 in 2006 and $45,368 in 2007.



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



As of August 31, 2004, IEI has available through February 28, 2005 an equipment line of credit that provides for remaining borrowings of up to $410,000
and a demand bank line of credit that provides for borrowings of up to $1,000,000. The demand line of credit is at the banks base rate of interest (4.5% at August 31, 2004) and the equipment line is at 5%, or 1⁄2% less than the banks
base rate at IEIs option. All of IEIs assets are collateralized under these arrangements. The credit agreements contain certain restrictive covenants including covenants limiting the payment of certain dividends, a minimum
debt-to-tangible-net-worth ratio and minimum annual net income of $10,000. IEI has obtained a waiver from the bank for the annual net income covenant for the year ended August 31, 2004. As of August 31, 2004, no borrowings have been made under the
demand line of credit and IEI has an aggregate of $458,352 outstanding as equipment debt which is payable in monthly installments through May 2007 (Note 5).



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



LeasesIEI leases an administrative and production facility under an operating lease expiring in April 2006 at an annual rate of
$160,000. 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 both the
years ended August 31, 2004 and 2003 amounted to approximately $252,000 and for the year ended August 31, 2002 was approximately $234,000.



Employment ArrangementsIEI has a continuous, three-year employment agreement with its president and chief executive officer providing
minimum annual aggregate compensation of approximately $182,000. 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 $392,000 in salaries as of August 31, 2004) 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 cancelation of the customers purchase commitment. The settlement is included in net sales for the year ended August 31, 2002 in
the accompanying consolidated statements of operations.



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



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



|                                                                                                                                                         |  |      |         |      |   |       |  |   |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ----- |  | - | ------
|                                                                                                                                                         |  | 2004 |         | 2003 |   | 2002 
|Current:                                                                                                                                                 |  |      |         |      |   |       |  |   |       
|Federal (net of tax benefits for operating loss carryforwards of $6,000 and $220,000 in 2003 and 2002, respectively, and tax credits of
$10,000 in 2002) |  | $    |        |      | $ | 3,800 |  | $ | 3,000 
|State                                                                                                                                                    |  |      | 6,000   |      |   | 3,000 |  |   | 60,000
|                                                                                                                                                         |  |      |         |      |   |       |  |   |       
|Total current provision                                                                                                                                  |  |      | 6,000   |      |   | 6,800 |  |   | 63,000
|                                                                                                                                                         |  |      |         |      |   |       |  |   |       
|Deferred:                                                                                                                                                |  |      |         |      |   |       |  |   |       
|Federal                                                                                                                                                  |  |      | 385,000 |      |   |      |  |   | 10,000
|State                                                                                                                                                    |  |      | 60,000  |      |   | 2,000 |  |   | 1,000 
|                                                                                                                                                         |  |      |         |      |   |       |  |   |       
|Total deferred provision                                                                                                                                 |  |      | 445,000 |      |   | 2,000 |  |   | 11,000
|                                                                                                                                                         |  |      |         |      |   |       |  |   |       
|Total provision                                                                                                                                          |  | $    | 451,000 |      | $ | 8,800 |  | $ | 74,000
|                                                                                                                                                         |  |      |         |      |   |       |  |   |       



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



|                                               |  |       |    |  |       |   |  |       |  
|---------------------------------------------- |  | ----- | -- |  | ----- | - |  | ----- | -
|                                               |  | 2004  |    |  | 2003  |   |  | 2002  |  
|Statutory federal income tax (benefit) expense |  | (34.0 | )% |  | 34.0  | % |  | 34.0  | %
|State income taxesnet of federal benefit      |  | 0.6   |    |  | 5.3   |   |  | 6.2   |  
|Other permanent items                          |  | (0.8  | )  |  | 17.6  |   |  | 0.6   |  
|Recognition of previously reserved tax assets  |  |      |    |  |      |   |  | (32.2 | )
|Other                                          |  | (1.8  | )  |  | (29.3 | ) |  | 0.9   |  
|Valuation allowance                            |  | 102.9 |    |  |      |   |  |      |  
|                                               |  |       |    |  |       |   |  |       |  
|Effective tax rate                             |  | 66.9  | %  |  | 27.6  | % |  | 9.5   | %
|                                               |  |       |    |  |       |   |  |       |  



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As of August 31, 2004, IEI has remaining tax loss carryforwards of approximately $980,000, expiring in
varying amounts through 2024. IEI also has available research and development credit carryforwards of approximately $48,000 expiring through 2024. Net loss and tax credit carryforwards may be limited in the event of certain circumstances, including
significant changes in ownership interests.



Deferred income
taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Valuation allowances are recorded to offset net deferred tax
assets due to the uncertainty of realizing the benefit of assets. Based on managements assessment of the likelihood of recovery of such assets, IEI increased its valuation allowance by $760,000 in 2004 and reduced the allowance by $270,000 in
2002.



IEI provides for income taxes at the end of each
interim period based on the estimated effective annual tax rate/benefit for the full fiscal year. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined.
In the fourth quarter of fiscal 2004, upon completion of IEIs 2005 operating plan and fiscal 2004 financial results, management reduced its previously recorded net deferred tax assets by $445,000 due to the increased uncertainty of realizing
the benefit of these assets.



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



|                                   |  |      |          |   |      |   |        
|---------------------------------- |  | ---- | -------- | - | ---- | - | -------
|                                   |  | 2004 |          |   | 2003
|Deferred tax assets (liabilities): |  |      |          |   |      |   |        
|Net operating loss carryforwards   |  | $    | 390,000  |   |      | $ | 17,000 
|Tax credits                        |  |      | 48,000   |   |      |   | 29,000 
|Accounts receivable reserves       |  |      | 95,000   |   |      |   | 101,000
|Inventories and related reserves   |  |      | 220,000  |   |      |   | 235,000
|Other                              |  |      | 76,000   |   |      |   | 26,000 
|Depreciation                       |  |      | (69,000  | ) |      |   | 37,000 
|Valuation allowance                |  |      | (760,000 | ) |      |   |       
|                                   |  |      |          |   |      |   |        
|                                   |  | $    |         |   |      | $ | 445,000
|                                   |  |      |          |   |      |   |        



|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 plans. At August 31, 2004, 37,108 options remain available for future grants under the plans.



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



|                                               |  |         |   |  |                       
|---------------------------------------------- |  | ------- | - |  | ----------------------
|                                               |  | Shares  |   |  | ExercisePricePer Share
|OutstandingAugust 31, 2001                    |  | 401,660 |   |  | $1.63                 
|                                               |  |        
|Granted (weighted-average fair value of $2.26) |  | 7,500   |   |  | 2.71                  
|Exercised                                      |  | (49,752 | ) |  | 1.63                  
|Canceled/expired                               |  | (9,035  | ) |  | 1.50                  
|                                               |  |         |   |  |                       
|OutstandingAugust 31, 2002                    |  | 350,373 |   |  | 1.65                  
|                                               |  |        
|Granted (weighted-average fair value of $2.33) |  | 12,300  |   |  | 2.80                  
|Exercised                                      |  | (10,000 | ) |  | 1.53                  
|Canceled/expired                               |  | (46,500 | ) |  | 1.62                  
|                                               |  |         |   |  |                       
|OutstandingAugust 31, 2003                    |  | 306,173 |   |  | 1.71                  
|                                               |  |        
|Granted (weighted-average fair value of $2.23) |  | 40,000  |   |  | 2.96                  
|Exercised                                      |  | (83,800 | ) |  | 1.35                  
|Canceled/expired                               |  | (7,000  | ) |  | 1.00                  
|                                               |  |         |   |  |                       
|OutstandingAugust 31, 2004                    |  | 255,373 |   |  | 2.04                  
|                                               |  |         |   |  |                       



The following table
summarizes information concerning outstanding and exercisable options as of August 31, 2004:



|                         |  |                     |  |                                         |  |                               |      |                   |         |                               |      
|------------------------ |  | ------------------- |  | --------------------------------------- |  | ----------------------------- | ---- | ----------------- | ------- | ----------------------------- | -----
|                         |  | Options Outstanding |  | Options Exercisable                    
|Range of Exercise Prices |  | NumberOutstanding   |  | AverageRemainingContractualLife (Years) |  | Weighted-AverageExercisePrice |      | NumberExercisable |         | Weighted-AverageExercisePrice
|$0.90                    |  | 1,500               |  | 0.15                                    |  | $                             | 0.90 |                   | 1,500   |                               | $0.15
|1.171.90                |  | 135,073             |  | 4.26                                    |  |                               | 1.50 |                   | 129,573 |                               | 1.49 
|2.123.57                |  | 117,800             |  | 6.96                                    |  |                               | 2.65 |                   | 59,200  |                               | 2.46 
|5.51                     |  | 1,000               |  | 7.89                                    |  |                               | 5.51 |                   | 500     |                               | 5.51 
|                         |  |                     |  |                                         |  |                               |      |                   |         |                               |      
|                         |  | 255,373             |  | 5.50                                    |  |                               | 2.04 |                   | 190,773 |                               | 1.80 
|                         |  |                     |  |                                         |  |                               |      |                   |         |                               |      



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



|                                                                       |  |            |            |   |         |   |         |       |  |   |            |  
|---------------------------------------------------------------------- |  | ---------- | ---------- | - | ------- | - | ------- | ----- |  | - | ---------- | -
|                                                                       |  | Consultant |            |   | Officer |   |         | Total | 
|OutstandingAugust 31, 2002 and 2003                                   |  |            | 13,168     |   |         |   | 35,000  |       |  |   | 48,168     |  
|Exercised                                                              |  |            | (2,000     | ) |         |   | (25,000 | )     |  |   | (27,000    | )
|                                                                       |  |            |            |   |         |   |         |       |  |   |            |  
|OutstandingAugust 31, 2004 (weighted-average exercise price of $1.87) |  |            | 11,168     |   |         |   | 10,000  |       |  |   | 21,168     |  
|                                                                       |  |            |            |   |         |   |         |       |  |   |            |  
|Exercisable                                                            |  |            | 11,168     |   |         |   | 10,000  |       |  |   | 21,168     |  
|                                                                       |  |            |            |   |         |   |         |       |  |   |            |  
|Exercise prices                                                        |  | $          | 1.36$1.69 |   |         | $ | 2.12    |       |  | $ | 1.36$2.12 |  
|                                                                       |  |            |            |   |         |   |         |       |  |   |            |  



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##### Table of Contents

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



Common Stock ReservedCommon stock reserved for future issuance at August 31, 2004 consists of the following:



|               |  |        
|-------------- |  | -------
|Stock warrants |  | 21,168 
|Stock options  |  | 292,481
|               |  |        
|               |  | 313,649
|               |  |        



|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 both 2004 and 2003, and two customers in 2002 each contributed more than 10% of net sales, representing an aggregate of 35% of net sales in 2004, 38% in 2003 and 37% in 2002. The accounts receivable from these customers
amounted to approximately $239,000 and $646,000 at August 31, 2004 and 2003, respectively.



IEI sources a significant amount of components, manufactures products and maintains certain molds for its products in Asia. IEI believes that such sourcing reduces its cost of sales through lower parts, labor and
tooling costs. There can be no guarantee that the Asian political or economic environment will remain sufficiently stable to allow reliable and consistent delivery of product. Any extended interruption in the supply or significant increase in the
price of any such components and products could have a material adverse effect on IEIs operating results in any given period. International sales, primarily to Canada, Europe and Mexico, were 11% of net sales in 2004, 10% in 2003 and 8% in
2002.



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



|                          |  |      |            |      |   |            |  |   |           
|------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                          |  | 2004 |            | 2003 |   | 2002      
|Access control and keypad |  | $    | 10,943,275 |      | $ | 9,889,444  |  | $ | 11,218,877
|Glassbreak detectors      |  |      | 450,433    |      |   | 401,926    |  |   | 576,378   
|                          |  |      |            |      |   |            |  |   |           
|                          |  | $    | 11,393,708 |      | $ | 10,291,370 |  | $ | 11,795,255
|                          |  |      |            |      |   |            |  |   |           



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##### Table of Contents

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



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



|                       |  |      |        |      |   |        |      |  |   |       
|---------------------- |  | ---- | ------ | ---- | - | ------ | ---- |  | - | ------
|                       |  | 2004 |        | 2003 |   |        | 2002
|Interest               |  | $    | 16,634 |      | $ | 26,274 |      |  | $ | 36,053
|Other income (expense) |  |      | 1,594  |      |   | (2,696 | )    |  |   |      
|                       |  |      |        |      |   |        |      |  |   |       
|                       |  | $    | 18,228 |      | $ | 23,578 |      |  | $ | 36,053
|                       |  |      |        |      |   |        |      |  |   |       



* * * * * *



F-16