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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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

the Securities Exchange Act of 1934



For fiscal year ended August 31, 2003



Commission File Number: 0-16305



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International Electronics, Inc.

(Name of small business issuer in its charter)



|Massachusetts                                                 |  | 04-2654231                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction 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)



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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: $10,291,370



As of October 31, 2003, 1,175,267 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 $4,125,000. As of October 31, 2003, 1,629,031 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                                                                            |  | 8   
|     |  |                                                                                      
|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  
|     |  |                                                                                      
|     |  | PART III                                                                              |  |     
|     |  |                                                                                      
|9.   |  | Directors and Executive Officers of the Registrant                                    |  | 21  
|     |  |                                                                                      
|10.  |  | Executive Compensation                                                                |  | 23  
|     |  |                                                                                      
|11.  |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 26  
|     |  |                                                                                      
|12.  |  | Certain Relationships and Related Transactions                                        |  | 28  
|     |  |                                                                                      
|13.  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 28  
|     |  |                                                                                      
|     |  | Signatures                                                                            |  | 31  
|     |  |                                                                                      
|     |  | Financial Statements                                                                  |  | F   



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PART I



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



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



IEI manufactures and markets a line of access control and digital keypad products sold under the trade names Door-Gard and Secured Series. IEI also manufactures and markets a line of industrial access control products 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 names Tri-Gard and Viper.



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, which apply specifically to electronic door access control. These features include request to exit input, door ajar and
door position monitoring. IEI also sells a version of its Door-Gard under the trade name prox.pad. The prox.pad
incorporates the use of both keypad and proximity technology. The prox.pad has been jointly developed by IEI and HID Corporation, a subsidiary of Assa Abloy of Sweden. 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.



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IEI also markets and sells its Secured Series access control product line. This line of products includes magnetic card readers and
proximity readers as well as digital keypads. Systems features in the Secured Series product line include: 1,000 users, transaction buffer for 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 BioRead Secured Series Fingerprint access control system, which is currently available. IEI has a non-exclusive worldwide distribution agreement with Precise
Biometrics of Lund, Sweden, a global supplier of biometric fingerprint technology. In addition 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.



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



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



Glassbreak Detector Products



A detector is the component in an alarm system that is activated by an
intrusion or entry into protected premises. When activated, it sends a signal to a central control panel, the portion of the system that triggers the alarm. IEIs glassbreak products serve only the detection function, but are compatible with
systems made and sold by most major manufacturers of central control panels, and can be incorporated into both hard wired and certain wireless systems. These products are used in a system in conjunction with other forms of detectors such as those
which detect the opening of a door or window. IEI markets an audio glassbreak detector under the trade name Tri-Gard and a vibration sensor under the trade name Viper. 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, South Africa, the Middle East and Australia/New Zealand.



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



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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 38% of IEIs total net sales for the fiscal year ended
August 31, 2003.



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 17% 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 Controland Digital Keypad |            | GlassbreakDetector |   | Total  
|---- |  | -------------------------------- | ---------- | ------------------ | - | -------
|2003 |  | $                                | 9,889,444  |                    | $ | 401,926
|2002 |  |                                  | 11,218,877 |                    |   | 576,378
|2001 |  |                                  | 9,992,730  |                    |   | 591,351



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 |  
|---- |  | -------- | - |  | ------- | -
|2003 |  | 90       | % |  | 10      | %
|2002 |  | 92       |   |  | 8       |  
|2001 |  | 90       |   |  | 10      |  



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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 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.



Backlog



IEIs backlog of firm scheduled orders as of August 31, 2003, was approximately $220,000. Its backlog as of August 31, 2002 was approximately $430,000. The decrease in 2003 backlog from the prior year is
primarily due to a decrease in OEM orders. IEI believes that the majority of its 2003 backlog will be shipped during fiscal 2004.



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



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



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has brought several large multinational companies into the industry and with whom the company now competes. These companies have all the principal advantages
that large companies have over smaller companies including: lower manufacturing costs, worldwide distribution channels, significant research and development efforts and broad customer support capabilities.



Intellectual Property



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



Working Capital



During
fiscal 2003, IEI depended on its existing cash balances to provide working capital. As of August 31, 2003, 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 $399,000 for equipment purchases. IEI expects its working capital requirements for fiscal 2004 to be provided from its existing cash reserves, its available line of credit and anticipated cash flow generated
from operations. As of August 31, 2003, there were no borrowings outstanding under the demand line of credit and approximately $492,000 in borrowings outstanding as equipment debt. See Item 6-Managements Discussion and Analysis of
Financial Condition and Results of Operations.



Research and
Development



IEI presently employs nine people in research
and development. IEI also utilizes certain consultants and subcontractors on an as-needed basis with IEIs employees supervising such work. Research and development expenditures were approximately $1,091,000, $1,060,000 and $1,045,000 for
fiscal 2003, 2002 and 2001, respectively. IEIs net sales include research and development revenues from customers of approximately $114,000, $167,000 and $73,000 during fiscal 2003, 2002 and 2001, respectively.



Employees



As of November 1, 2003, IEI had 60 employees, of which 58 were full-time employees. Of these 60 employees, 13 were in sales
and marketing, 9 in research and development, 25 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.



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Governmental Controls/Environmental Compliance



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



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



IEIs administrative and manufacturing operations are located at 427 Turnpike Street, Canton, Massachusetts, and currently consist of approximately
20,740 square feet of space. IEI occupies this facility under a lease expiring April 30, 2006, at an annual rent of $145,000 through April 2004 increasing to $160,000 thereafter, plus utilities, maintenance and certain real estate taxes. The
property used by IEI is in good condition.



|Item 3. |  | Legal Proceedings
|------- |  | -----------------



None



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



No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2003.



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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
2003, IEI met the minimum bid price criteria and $2,500,000 of stockholders equity.



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        
|Fiscal Year 2003: |  |             
|First Quarter     |  | $           
|Second Quarter    |  |             
|Third Quarter     |  |             
|Fourth Quarter    |  |             
|                  |  |             
|Fiscal Year 2002: |  |             
|First Quarter     |  |             
|Second Quarter    |  |             
|Third Quarter     |  |             
|Fourth Quarter    |  |             



As of October 31,
2003, there were approximately 425 shareholders of record of IEIs common stock. IEI believes that a substantial number of shares of IEIs common stock are held by nominees and estimates that there are approximately 1,100 beneficial owners
of IEIs shares. IEI has never paid dividends to its shareholders. IEIs credit agreements contain certain restrictive covenants including restricting the payment of dividends.



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Equity Compensation Plan Information



The following table sets forth a description of our equity compensation plans as of August 31, 2003:



|                                                    |  | Number of securities to be issued upon exercise of outstandingoptions and warrants |  | Weighted-averageexercise price of outstanding optionsand warrants |      | Number ofsecurities remainingavailable forfuture issuance
|--------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- | ---- | ---------------------------------------------------------
|Stock option plan approved by shareholders          |  | 138,800                                                                            |  | $                                                                 | 2.09 |                                                          
|Stock option plans not approved by shareholders (1) |  | 167,373                                                                            |  |                                                                   | 1.39 |                                                          
|Warrants not approved by shareholders (2)           |  | 48,168                                                                             |  |                                                                   | 1.24 |                                                          
|                                                    |  |                                                                                    |  |                                                                   |      |                                                          
|                                                    |  | 354,341                                                                            |  | $                                                                 | 1.64 |                                                          
|                                                    |  |                                                                                    |  |                                                                   |      |                                                          



|(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, 2003 describes the significant accounting policies used in the preparation
of our consolidated financial statements. Management bases its estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances. Estimates are used for, but not limited to,
the accounting for allowance for doubtful accounts and sales returns, inventory reserves, warranty reserves and contingencies. Actual results could 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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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, 2003, 2002 and 2001



Net Sales. Net sales in 2003 decreased 13%
from 2002, while 2002 net sales increased 11% from 2001. 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. The increase in net
sales for 2002 compared to the prior year is primarily due to increases in digital keypad and OEM product sales.



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 44% in 2003, 47% in 2002 and 44% in 2001. 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, change in product mix and an increase in occupancy costs. The increase in the gross profit ratio for 2002 from the prior year is primarily the result of improved
manufacturing efficiencies due to increased sales volume, a customer settlement of $160,000 for cancellation of the customers purchase commitment, and a reduction in material costs, partially offset by start-up costs incurred in the
implementation of newly purchased and installed production equipment. 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 $1,090,604 in 2003, $1,059,598 in 2002 and $1,045,389 in 2001. The increase in costs in 2003 from the prior year is primarily due to additional prototype
costs and consulting expenses. The increase in costs in 2002 from the prior year is primarily due to increases in personnel and related expenses, partially offset by a reduction in prototype costs, consulting and depreciation expense. We believe
that research and development is critical to our strategic product development objectives and we intend to continue to enhance our products. Accordingly, we expect future research and development expenses to remain consistent in absolute dollars at
its current level.



Selling, General and Administrative
Expenses. Selling, general and administrative expenses consist primarily of salaries and related personnel expenses, commissions, travel and entertainment expenses, trade shows, advertising, telephone, bad debts and professional fees. As a
percentage of net sales, selling, general and administrative expenses were 33% in 2003, 31% in 2002 and 33% for 2001. 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. The



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decrease in expenses as a percentage of net sales in 2002 from the prior year is due to sales efficiencies and primarily due to decreases in bad debt, trade
show and telephone expenses, and to a lesser extent, reductions in investor relations and travel expenses, partially offset by increased professional fees and salary related expenses. We expect 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 $23,578 in 2003, $36,053 in 2002 and $77,116 in 2001. The decrease in 2003 from the prior year is the result of a reduction in interest rates and invested balances. The decrease in 2002 from the prior year is the result of a
reduction in interest rates, partially offset by an increase in invested balances.



Interest Expense. Interest expense consists of interest incurred on equipment financing. Interest expense was $27,462 in 2003, $28,558 for 2002 and $32,329 in 2001. The decrease in 2002 from the prior
year is the result of lower interest rates on equipment borrowings, partially offset by an increase in outstanding debt.



Income Taxes. IEIs effective income tax rate was 28% for 2003, 10% for 2002 and 21% for 2001. The difference between the effective tax
rate and the federal statutory rate is primarily the result of utilization of net operating loss carryforwards. As of August 31, 2003, we have utilized the majority of our available net operating loss carryforwards and therefore expect that our
future effective income tax rate will approximate the state and federal statutory rates.



Liquidity and Capital Resources



As of August 31, 2003, IEI had $3,313,607 in working capital as compared to $3,258,965 at August 31, 2002. The ratio of current assets to current liabilities as of August 31, 2003 and 2002 was 2.8, as compared to 2.7 in 2001. The debt to
equity ratio was 0.5 at August 31, 2003 as compared to 0.6 at both August 31, 2002 and 2001. The increase in working capital in 2003 from 2002 is primarily due to an increase in accounts receivable. The decrease in the debt to equity ratio is
primarily due to a reduction in equipment debt and IEIs net income.



Net cash flows used in operating activities in 2003 was $323,409, compared with cash flows provided by operating activities of $1,768,903 in 2002 and $159,328 in 2001. 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. The increase in 2002 from the prior year is primarily the result of increases in IEIs net income, reduction in accounts receivable and increase in
accrued expenses.



Net capital expenditures were $229,311,
$677,496 and $299,382 for 2003, 2002 and 2001, respectively. The decrease in expenditures in 2003 from the prior year is primarily due to a reduction in manufacturing equipment purchases. The increase in expenditures in 2002 from the prior year is
primarily due to the purchase of additional automated manufacturing equipment and related facility improvements. IEI anticipates having up to $325,000 in total capital expenditures in fiscal 2004 primarily for the purchase of facility improvements
and production and engineering equipment. We expect that a portion of our fiscal 2004 capital expenditures will be



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financed from our available equipment line of credit and the remainder from cash flow from operations.



As of August 31, 2003, IEI has available through February 28, 2004 a $399,000
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. As of August 31, 2003, IEI had no outstanding borrowings under the demand line of credit and had approximately
$492,000 in borrowings outstanding under equipment lines of credit.



Net cash flows used in financing activities was $97,562 in 2003, while cash flows provided by financing activities were $275,100 in 2002 and $73,660 in 2001. 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 increase in net cash flows provided by financing activities in 2002 compared to the prior year is primarily the result of additional long-term debt obligations for equipment
financing and proceeds from the exercise of stock options and warrants.



The following table summarizes our future contractual cash obligations as of August 31, 2003:



|                            |  | 2004 |         | 2005 |   | 2006    |  | Total
|--------------------------- |  | ---- | ------- | ---- | - | ------- |  | -----
|Long-term obligations       |  | $    | 291,167 |      | $ | 156,229 |  | $    
|Employment agreement        |  |      | 174,908 |      |   | 174,908 |  |      
|Operating lease obligations |  |      | 150,365 |      |   | 160,735 |  |      
|                            |  |      |         |      |   |         |  |      
|                            |  | $    | 616,440 |      | $ | 491,872 |  | $    
|                            |  |      |         |      |   |         |  |      



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



Recent Accounting Pronouncements



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



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of



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Others (FIN No. 45). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The FIN No. 45 disclosure requirements are included in Note 4 to our consolidated financial statements. The adoption of FIN No. 45 did not have any impact on IEIs
financial position or results of operations.



In December 2002,
the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based
method of accounting for employee stock-based compensation. These alternative methods will only impact us if we voluntarily change to the fair value-based method of accounting for employee stock-based compensation which we currently do not plan to
implement. SFAS No. 148 also requires companies who account for employee stock-based compensation under the intrinsic value-based method to disclose additional footnote information in annual financial statements effective for fiscal years ending
after December 15, 2002 and in financial statements for interim periods beginning after December 15, 2002. The requisite disclosure appears in Note 1, Stock-Based Compensation, to our consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity, which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on IEIs financial
position or results of operations.



Risk Factors



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



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



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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 38% of IEIs total net sales for the fiscal year ended August 31, 2003. 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.



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 effected.



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



Limited Financial Resources. IEI has limited financial resources. It is therefore subject to all the risks generally associated with a small
business having limited financial resources. For the years ended August 31, 2003, 2002 and 2001 IEI had net income of approximately $23,000, $701,000 and $136,000, respectively. There can be no assurance that IEI will continue profitable operations.
Continued operations after the expenditure of IEIs existing cash reserves may require additional working capital to be generated by profitable operations or use of the bank lines of credit and/or additional financing. There can be no assurance
that profits will continue or that additional external funding will be obtainable, if such a need should arise.



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



Lack of New Product Development. IEI is engaged in an industry, which, as a result of extensive research and development, introduces new products on a regular basis. Current competitors or new market entrants may develop new
products with features that could adversely



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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 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.



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



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



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



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



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



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



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



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



| |  | 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



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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,
2003, IEIs foreign sales represented approximately 10% of net sales. There may be a reduction in IEIs foreign sales from the 2003 level in the event of significant changes in foreign exchange rates or political and economic instability
in foreign countries.



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



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



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



|Item 7. |  | Financial Statements and Supplementary Data
|------- |  | -------------------------------------------



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



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



Not Applicable



|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-
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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PART III



|Item 9. |  | Directors and Executive Officers of the Registrant
|------- |  | --------------------------------------------------



The following table sets forth our executive officers and directors, their respective ages and positions as of October 31, 2003:



|Name                  |  | Age |  | FirstElected Director |  | Year currentterm will expire |  | Position                                                                                                    
|--------------------- |  | --- |  | --------------------- |  | ---------------------------- |  | ------------------------------------------------------------------------------------------------------------
|John Waldstein        |  | 50  |  | 1982                  |  | 2006                         |  | President, Chief Executive Officer, Treasurer, Chief Financial Officer, Chairman of the Board and a Director
|Diane Balcom          |  | 61  |  | 1989                  |  | 2005                         |  | Director                                                                                                    
|Heath Paley           |  | 55  |  | 1990                  |  | 2004                         |  | Director                                                                                                    
|Steven Tannenbaum     |  | 43  |  | 2002                  |  | 2006                         |  | Director                                                                                                    
|Peter Demakis         |  | 58  |  |                      |  |                             |  | Chief Operating Officer                                                                                     
|Christopher Hentschel |  | 59  |  |                      |  |                             |  | Vice President of Engineering                                                                               
|Robert Stewart        |  | 60  |  |                      |  |                             |  | Vice President of Manufacturing                                                                             



IEI anticipates that
the next annual meeting of shareholders will be held in March 2004. 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 June 2002, Ms. Balcom has served as Director of Development of Achieva, a non-profit agency providing services for people with disabilities and their family members. From
February 2001 to June 2002, Ms. Balcom served as an independent consultant to a variety of non-profit organizations in southwestern Pennsylvania. From October 1998 to February 2001, Ms. Balcom served as the Executive Director of the Pittsburgh Mercy
Foundation. From September 1997 to September 1998, she held the position of Director of Development for Childrens Hospital of Pittsburgh. From August 1994 to August 1997, Ms. Balcom was the Chapter Director of the Juvenile Diabetes Foundation
of Western Pennsylvania. She had been an adviser to IEI on corporate and financial matters from 1985 until December 2002. 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.



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Heath Paley became a member of the Board of Directors in 1990. Since March 1997, Mr. Paley has served as
President of Comorant, Inc., a manufacturer and retailer of glass wind chimes marketed under the name Goose Rock Designs. From May 1996 to December 2002, Mr. 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. From 1983 to June 1990, Mr. Paley was President and a founder of Ecco
Industries, Inc. From 1980 to 1983, he was President of the Maine Woods Shoe Division of Bennett Industries. Heath Paley is the son of Warren Paley. See Item 11-Security Ownership of Certain Beneficial Owners and Management.



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



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.



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 of 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.



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.



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IEI believes that all filing requirements applicable under Section 16(a) to its executive officers,
directors and 10% stockholders were complied with for fiscal 2003, with the exception of Diane Balcom who inadvertently failed to file a Form 4 in connection with the sale of 1,548 shares of IEI common stock.



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 officer. 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.



|Item 10. |  | Executive Compensation
|-------- |  | ----------------------



The following table sets forth information concerning the compensation for each of the last three fiscal years ended August 31, 2003, of IEIs
President and Chief Executive Officer, and the other executive officers of IEI who received at least $100,000 of compensation during any of these years (the Named Executive Officers):



Summary Compensation Table



|Name                                                         |  |                |  | Annual Compensation      |  | Long-TermCompensation(2)
|------------------------------------------------------------ |  | -------------- |  | ------------------------ |  | ------------------------
|                                                             |  | Year           |  | Salary                   |  | Commission/ Bonus(3)    
|                                                             |  |                |  |                          | 
|John Waldstein(1) President and Chief Executive Officer      |  | 2003 2002 2001 |  | $172,190 164,592 155,536 |  | $    50,000 9,091      
|                                                             |  |                |  |                          | 
|Christopher Hentschel Vice President of Engineering          |  | 2003 2002 2001 |  | 126,000 124,384 116,550  |  |  12,600               
|                                                             |  |                |  |                          | 
|James Brierley, Jr.(4) Vice President of Sales and Marketing |  | 2003 2002 2001 |  | 19,231 125,000 124,885   |  |  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 on October 31, 2002.
|--- | -------------------------------------------------------



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



Compensation on Involuntary Termination



John Waldstein has an employment contract with IEI which provides for
certain compensation to be paid to him if he is discharged by IEI without cause, as defined before the end of the term of his contract. Mr. Waldstein has a continuous three-year employment contract with a current minimum annual salary of
approximately $175,000, 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 to a minimum annual salary of $175,000, based on future adjustments for inflation. As of November 1, 2003, John Waldsteins base salary to the conclusion of his contract period is approximately $525,000, 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 November 1, 2003, the salaries of such management
personnel represent an aggregate of approximately $437,000.



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Year End Option Table



The following table sets forth the number and value of unexercised options held as of August 31, 2003 by the Named Executive Officers:



Fiscal Year End Option Values



|                      |  | Number of UnexercisedOptions at End of Fiscal 2003 |  | Value of UnexercisedIn-the-Money Options atEnd of Fiscal 2003 (1)
|--------------------- |  | -------------------------------------------------- |  | -----------------------------------------------------------------
|Name                  |  | Exercisable                                        |  | Unexercisable                                                    
|John Waldstein (2)    |  | 132,375                                            |  | 6,625                                                            
|Christopher Hentschel |  | 16,083                                             |  | 1,250                                                            



|(1) | Difference between the fair market value of the underlying common stock on October 31, 2003 and the exercise price.
|--- | -------------------------------------------------------------------------------------------------------------------



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



There were no options exercised by or granted to any of the Named Executive
Officers during the year ended August 31, 2003.



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, 2003, directors fees were paid in the amounts of $6,000 each to Ms. Balcom,
Mr. Paley and Mr. Tannenbaum.



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|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management
|-------- |  | --------------------------------------------------------------



Set forth below is information concerning ownership of IEIs common stock as of October 31, 2003, (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 ofCommonStock Owned |  
|----------------------------------------------------------- |  | ------------------ | --- |  | --------------------------- | -
|Executive Officers and Directors:                           |  |                    |     |  |                             |  
|                                                            |  |                   
|John Waldstein                                              |  | 292,130            | (2) |  | 16.6                        | %
|c/o International Electronics, Inc.                         |  |                    |     |  |                             |  
|427 Turnpike Street                                         |  |                    |     |  |                             |  
|Canton, Massachusetts                                       |  |                    |     |  |                             |  
|                                                            |  |                   
|Steven Tannenbaum                                           |  | 239,927            | (3) |  | 14.7                        |  
|c/o Greenwood Investments, Inc.                             |  |                    |     |  |                             |  
|68 Harvard Street, 3rdFloor                                 |  |                    |     |  |                             |  
|Brookline, Massachusetts                                    |  |                    |     |  |                             |  
|                                                            |  |                   
|Heath Paley                                                 |  | 42,852             | (4) |  | 2.6                         |  
|c/o International Electronics, Inc.                         |  |                    |     |  |                             |  
|427 Turnpike Street                                         |  |                    |     |  |                             |  
|Canton, Massachusetts                                       |  |                    |     |  |                             |  
|                                                            |  |                   
|Christopher Hentschel                                       |  | 34,301             | (5) |  | 2.1                         |  
|c/o International Electronics, Inc.                         |  |                    |     |  |                             |  
|427 Turnpike Street                                         |  |                    |     |  |                             |  
|Canton, Massachusetts                                       |  |                    |     |  |                             |  
|                                                            |  |                   
|Diane Balcom                                                |  | 19,012             | (6) |  | 1.2                         |  
|1403 Sharps Hill Road                                       |  |                    |     |  |                             |  
|Pittsburgh, Pennsylvania                                    |  |                    |     |  |                             |  
|                                                            |  |                   
|All directors and executive officers as a group (6 persons) |  | 636,472            | (7) |  | 35.1                        |  
|                                                            |  |                   
|5% Shareholder:                                             |  |                    |     |  |                             |  
|                                                            |  |                   
|Warren Paley                                                |  | 217,268            |     |  | 13.3                        |  
|3 Mill Street                                               |  |                    |     |  |                             |  
|New Baltimore, New York                                     |  |                    |     |  |                             |  

---

|(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
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(Footnotes continued on following page)



26



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##### Table of Contents

| | be acquired through the exercise of options and warrants which are exercisable currently or within sixty (60) days after October 31, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes vested options and warrants to purchase an aggregate 134,125 shares of IEIs common stock granted at prices ranging from $0.74-$2.12 per share. Includes 6,234 shares
of common stock held by Mr. Waldsteins wife. Mr. Waldstein disclaims beneficial ownership of these shares.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes 181,977 shares of common stock held by Greenwood Capital Limited Partnership (GCLP). Mr. Tannenbaum serves as the president, sole stockholder and sole director
of Greenwood Investments, Inc., which is the sole general partner of GCLP and has sole voting and investment power with respect to such shares. With respect to the remaining 57,950 shares of common stock, Mr. Tannenbaum holds such shares jointly
with his wife and has shared voting and investment power.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Includes vested options to purchase an aggregate 12,500 shares of IEIs common stock granted at prices ranging from $0.88-$2.81 per share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------



|(5) | 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 1,634 shares of common stock held by
Mr. Hentchels wife. Mr. Hentschel disclaims beneficial ownership of these shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(7) | Includes vested options and warrants to purchase an aggregate 182,708 shares of IEIs common stock granted at prices ranging from $0.72-$2.81 per share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------



27



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##### Table of Contents

|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:
| | ----- | -----------------------------------------------------------------------



Independent Auditors Report



Consolidated Balance Sheets as of August 31, 2003 and 2002



Consolidated Statements of Income for the Years Ended August 31, 2003, 2002 and 2001



Consolidated Statements of Shareholders Equity for the Years Ended August 31, 2003, 2002 and 2001



Consolidated Statements of Cash Flows for the Years Ended August 31, 2003,
2002 and 2001



Notes to Consolidated Financial Statements



| | (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    | 
|     | 
|3(a) | 
|     | 
|4    | 



28



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##### Table of Contents

|      | 
|----- | 
|10(a) | 
|      | 
|10(b) | 
|      | 
|10(c) | 
|      | 
|10(d) | 
|      | 
|10(e) | 
|      | 
|10(f) | 
|      | 
|10(g) | 
|      | 
|10(h) | 
|      | 
|10(i) | 
|      | 
|10(j) | 
|      | 
|10(k) | 



29



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##### Table of Contents

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



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



30



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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 24, 2003 |  |  |  | By:                            
|                        |  |  |  |                                
|                        |  |  |  |                                



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 24, 2003
|                                          |  |                                                                                                                            
|/s/    DIANE
BALCOMDiane
Balcom           |  | Director                                                                                                                    |  | November 24, 2003
|                                          |  |                                                                                                                            
|/s/    HEATH
PALEYHeath Paley             |  | Director                                                                                                                    |  | November 24, 2003
|                                          |  |                                                                                                                            
|/s/    STEVEN
TANNENBAUMSteven
Tannenbaum |  | Director                                                                                                                    |  | November 24, 2003



31



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##### Table of Contents

INTERNATIONAL ELECTRONICS, INC.

AND SUBSIDIARIES



TABLE OF CONTENTS



|                                                                                      |  | Page    
|------------------------------------------------------------------------------------- |  | --------
|                                                                                      | 
|INDEPENDENT AUDITORS REPORT                                                          |  | F-1     
|                                                                                      | 
|CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001: |  |         
|                                                                                      | 
|Consolidated Balance Sheets                                                           |  | F-2     
|                                                                                      | 
|Consolidated Statements of Income                                                     |  | F-3     
|                                                                                      | 
|Consolidated Statements of Shareholders Equity                                       |  | F-4     
|                                                                                      | 
|Consolidated Statements of Cash Flows                                                 |  | F-5     
|                                                                                      | 
|Notes to Consolidated Financial Statements                                            |  | F-6F-15





F



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



To the Shareholders and Board of Directors of

International Electronics, Inc.

Canton, Massachusetts



We have audited the accompanying consolidated balance sheets of International Electronics, Inc. and subsidiaries (the Company) as of August 31, 2003 and 2002
and the related consolidated statements of income, shareholders equity and cash flows for each of the three years in the period ended August 31, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of International
Electronics, Inc. and subsidiaries as of August 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2003 in conformity with accounting principles generally accepted
in the United States of America.





Deloitte & Touche LLP

Boston, Massachusetts

November 7, 2003



F-1



---

##### Table of Contents

INTERNATIONAL ELECTRONICS, INC.

AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

AUGUST 31, 2003 AND 2002



|ASSETS                                          |  | 2003 |            |   | 2002 |  
|----------------------------------------------- |  | ---- | ---------- | - | ---- | -
|                                                |  |     
|CURRENT ASSETS:                                 |  |      |            |   |      |  
|Cash and cash equivalents                       |  | $    | 2,266,078  |   |      | $
|Accounts receivable, net of allowances for      |  |      |            |   |      |  
|doubtful accounts and returns of $253,000       |  |      |            |   |      |  
|and $209,000 in 2003 and 2002, respectively     |  |      | 1,452,143  |   |      |  
|Inventories                                     |  |      | 764,674    |   |      |  
|Deferred income taxes                           |  |      | 379,000    |   |      |  
|Other current assets                            |  |      | 259,521    |   |      |  
|                                                |  |      |            |   |      |  
|Total current assets                            |  |      | 5,121,416  |   |      |  
|                                                |  |      |            |   |      |  
|PROPERTY AND EQUIPMENTnet of                   |  |      |            |   |      |  
|accumulated depreciation and amortization       |  |      | 698,837    |   |      |  
|                                                |  |      |            |   |      |  
|OTHER ASSETS:                                   |  |      |            |   |      |  
|Deferred income taxes                           |  |      | 66,000     |   |      |  
|Other                                           |  |      | 8,062      |   |      |  
|                                                |  |      |            |   |      |  
|Total other assets                              |  |      | 74,062     |   |      |  
|                                                |  |      |            |   |      |  
|TOTAL                                           |  | $    | 5,894,315  |   |      | $
|                                                |  |      |            |   |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY            |  |      |            |   |      |  
|                                                |  |     
|CURRENT LIABILITIES:                            |  |      |            |   |      |  
|Accounts payable                                |  | $    | 381,248    |   |      | $
|Accrued expenses                                |  |      | 1,135,394  |   |      |  
|Current portion of long-term obligations        |  |      | 291,167    |   |      |  
|                                                |  |      |            |   |      |  
|Total current liabilities                       |  |      | 1,807,809  |   |      |  
|                                                |  |      |            |   |      |  
|LONG-TERM OBLIGATIONSless current portion      |  |      | 201,086    |   |      |  
|                                                |  |      |            |   |      |  
|COMMITMENTS                                     |  |      |            |   |      |  
|                                                |  |     
|SHAREHOLDERS EQUITY:                           |  |      |            |   |      |  
|Common stock, $0.01 par valueauthorized,       |  |      |            |   |      |  
|5,984,375 shares; issued, 1,653,731 and         |  |      |            |   |      |  
|1,643,731 shares in 2003 and 2002, respectively |  |      | 16,537     |   |      |  
|Capital in excess of par value                  |  |      | 5,016,786  |   |      |  
|Accumulated deficit                             |  |      | (1,109,259 | ) |      |  
|Treasury stockat cost, 35,000 shares           |  |      | (38,644    | ) |      |  
|                                                |  |      |            |   |      |  
|Total shareholders equity                      |  |      | 3,885,420  |   |      |  
|                                                |  |      |            |   |      |  
|TOTAL                                           |  | $    | 5,894,315  |   |      | $
|                                                |  |      |            |   |      |  



See notes to consolidated financial
statements.



F-2



---

##### Table of Contents

INTERNATIONAL ELECTRONICS, INC.

AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED AUGUST 31, 2003, 2002 AND 2001





|                                               |  | 2003 |            |   | 2002 |   |            | 2001 | 
|---------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- | 
|NET SALES                                      |  | $    | 10,291,370 |   |      | $ | 11,795,255 |      | 
|COST OF SALES                                  |  |      | 5,729,331  |   |      |   | 6,293,738  |      | 
|                                               |  |      |            |   |      |   |            |      | 
|GROSS PROFIT                                   |  |      | 4,562,039  |   |      |   | 5,501,517  |      | 
|                                               |  |      |            |   |      |   |            |      | 
|OPERATING EXPENSES:                            |  |      |            |   |      |   |            |      | 
|Research and development costs                 |  |      | 1,090,604  |   |      |   | 1,059,598  |      | 
|Selling, general and administrative expenses   |  |      | 3,435,620  |   |      |   | 3,674,413  |      | 
|                                               |  |      |            |   |      |   |            |      | 
|Total operating expenses                       |  |      | 4,526,224  |   |      |   | 4,734,011  |      | 
|                                               |  |      |            |   |      |   |            |      | 
|INCOME FROM OPERATIONS                         |  |      | 35,815     |   |      |   | 767,506    |      | 
|INTEREST EXPENSE                               |  |      | (27,462    | ) |      |   | (28,558    | )    | 
|OTHER INCOME                                   |  |      | 23,578     |   |      |   | 36,053     |      | 
|                                               |  |      |            |   |      |   |            |      | 
|INCOME BEFORE INCOME TAXES                     |  |      | 31,931     |   |      |   | 775,001    |      | 
|PROVISION FOR INCOME TAXES                     |  |      | 8,800      |   |      |   | 74,000     |      | 
|                                               |  |      |            |   |      |   |            |      | 
|NET INCOME                                     |  | $    | 23,131     |   |      | $ | 701,001    |      | 
|                                               |  |      |            |   |      |   |            |      | 
|NET INCOME PER SHARE:                          |  |      |            |   |      |   |            |      | 
|Basic                                          |  | $    | 0.01       |   |      | $ | 0.45       |      | 
|                                               |  |      |            |   |      |   |            |      | 
|Diluted                                        |  | $    | 0.01       |   |      | $ | 0.40       |      | 
|                                               |  |      |            |   |      |   |            |      | 
|SHARES USED IN COMPUTING NET INCOME PER SHARE: |  |      |            |   |      |   |            |      | 
|Basic                                          |  |      | 1,610,046  |   |      |   | 1,575,262  |      | 
|                                               |  |      |            |   |      |   |            |      | 
|Diluted                                        |  |      | 1,717,147  |   |      |   | 1,742,728  |      | 
|                                               |  |      |            |   |      |   |            |      | 



See notes to consolidated financial
statements.



F-3



---

##### Table of Contents

INTERNATIONAL ELECTRONICS, INC.

AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

YEARS ENDED AUGUST 31, 2003, 2002 AND 2001





|                                                         |  | Common Stock |  | Capital inExcess of Par Value |        | AccumulatedDeficit |   |           | Treasury Stock |      |            |  
|-------------------------------------------------------- |  | ------------ |  | ----------------------------- | ------ | ------------------ | - | --------- | -------------- | ---- | ---------- | -
|                                                         |  | Shares       |  | Amount                        |        |                    |   | Shares    |                | Cost |            |  
|BALANCEAugust 31, 2000                                  |  | 1,570,813    |  | $                             | 15,708 |                    | $ | 4,853,991 |                | $    | (1,969,591 | )
|Stock issued upon exercise of stock options              |  | 18,500       |  |                               | 185    |                    |   | 14,800    |                |      |           |  
|Net income                                               |  |             |  |                               |       |                    |   |          |                |      | 136,200    |  
|                                                         |  |              |  |                               |        |                    |   |           |                |      |            |  
|BALANCEAugust 31, 2001                                  |  | 1,589,313    |  |                               | 15,893 |                    |   | 4,868,791 |                |      | (1,833,391 | )
|Stock issued upon exercise of stock options and warrants |  | 54,418       |  |                               | 544    |                    |   | 88,995    |                |      |           |  
|Tax benefits for stock options and warrants              |  |             |  |                               |       |                    |   | 40,000    |                |      |           |  
|Net income                                               |  |             |  |                               |       |                    |   |          |                |      | 701,001    |  
|                                                         |  |              |  |                               |        |                    |   |           |                |      |            |  
|BALANCEAugust 31, 2002                                  |  | 1,643,731    |  |                               | 16,437 |                    |   | 4,997,786 |                |      | (1,132,390 | )
|Stock issued upon exercise of stock options              |  | 10,000       |  |                               | 100    |                    |   | 15,200    |                |      |           |  
|Tax benefits for stock options                           |  |             |  |                               |       |                    |   | 3,800     |                |      |           |  
|Net income                                               |  |             |  |                               |       |                    |   |          |                |      | 23,131     |  
|                                                         |  |              |  |                               |        |                    |   |           |                |      |            |  
|BALANCEAugust 31, 2003                                  |  | 1,653,731    |  | $                             | 16,537 |                    | $ | 5,016,786 |                | $    | (1,109,259 | )
|                                                         |  |              |  |                               |        |                    |   |           |                |      |            |  



See notes to consolidated financial
statements.



F-4



---

##### Table of Contents

INTERNATIONAL ELECTRONICS, INC.

AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED AUGUST 31, 2003, 2002 AND 2001





|                                                                                  |  | 2003 |           |   | 2002 |   |           | 2001 | 
|--------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |      |           |   |      |   |           |      | 
|Net income                                                                        |  | $    | 23,131    |   |      | $ | 701,001   |      | 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |           |   |      |   |           |      | 
|Depreciation and amortization                                                     |  |      | 354,638   |   |      |   | 358,441   |      | 
|Deferred income taxes                                                             |  |      | 2,000     |   |      |   | (29,000   | )    | 
|Changes in operating assets and liabilities:                                      |  |      |           |   |      |   |           |      | 
|Accounts receivable                                                               |  |      | (735,939  | ) |      |   | 495,680   |      | 
|Inventories                                                                       |  |      | 13,724    |   |      |   | 70,344    |      | 
|Other current assets                                                              |  |      | 10,391    |   |      |   | (30,426   | )    | 
|Accounts payable and accrued expenses                                             |  |      | 4,846     |   |      |   | 193,863   |      | 
|Income taxes payable                                                              |  |      | 3,800     |   |      |   | 9,000     |      | 
|                                                                                  |  |      |           |   |      |   |           |      | 
|Net cash (used in) provided by operating activities                               |  |      | (323,409  | ) |      |   | 1,768,903 |      | 
|                                                                                  |  |      |           |   |      |   |           |      | 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |      |           |   |      |   |           |      | 
|Net purchase of property and equipment                                            |  |      | (229,311  | ) |      |   | (677,496  | )    | 
|Other assets                                                                      |  |      | (101      | ) |      |   |          |      | 
|                                                                                  |  |      |           |   |      |   |           |      | 
|Net cash used in investing activities                                             |  |      | (229,412  | ) |      |   | (677,496  | )    | 
|                                                                                  |  |      |           |   |      |   |           |      | 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |      |           |   |      |   |           |      | 
|Additions to debt obligations                                                     |  |      | 215,243   |   |      |   | 478,728   |      | 
|Payments of debt obligations                                                      |  |      | (328,105  | ) |      |   | (293,167  | )    | 
|Proceeds from exercise of stock options and warrants                              |  |      | 15,300    |   |      |   | 89,539    |      | 
|                                                                                  |  |      |           |   |      |   |           |      | 
|Net cash (used in) provided by financing activities                               |  |      | (97,562   | ) |      |   | 275,100   |      | 
|                                                                                  |  |      |           |   |      |   |           |      | 
|CASH AND CASH EQUIVALENTS(Decrease) increase during the year                     |  |      | (650,383  | ) |      |   | 1,366,507 |      | 
|CASH AND CASH EQUIVALENTSBeginning of year                                       |  |      | 2,916,461 |   |      |   | 1,549,954 |      | 
|                                                                                  |  |      |           |   |      |   |           |      | 
|CASH AND CASH EQUIVALENTSEnd of year                                             |  | $    | 2,266,078 |   |      | $ | 2,916,461 |      | 
|                                                                                  |  |      |           |   |      |   |           |      | 
|SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:                                |  |      |           |   |      |   |           |      | 
|Interest paid                                                                     |  | $    | 27,462    |   |      | $ | 28,558    |      | 
|                                                                                  |  |      |           |   |      |   |           |      | 
|Income taxes paid                                                                 |  | $    | 44,634    |   |      | $ | 72,100    |      | 
|                                                                                  |  |      |           |   |      |   |           |      | 



See notes to consolidated financial
statements.



F-5



---

##### Table of Contents

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED AUGUST 31, 2003, 2002 AND 2001





|1. | SIGNIFICANT ACCOUNTING POLICIES
|-- | -------------------------------



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



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



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



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



Concentration of Credit RiskFinancial instruments that potentially subject IEI to concentrations of
credit risk are cash, cash equivalents and accounts receivable. IEI has no significant off-balance-sheet concentrations such as foreign exchange contracts, option contracts or other hedging arrangements. The majority of IEIs cash is maintained
with a commercial bank, and cash equivalents are U.S. government securities. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom IEI makes substantial sales (see Note 11). 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, non-sellable 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.



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##### Table of Contents

Significant Estimates and AssumptionsThe preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



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



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



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



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



|                                                                   |  | 2003      |  | 2002      |  | 2001     
|------------------------------------------------------------------ |  | --------- |  | --------- |  | ---------
|Weighted-average shares outstanding for basic net income per share |  | 1,610,046 |  | 1,575,262 |  | 1,539,145
|Effect of dilutive option and warrant shares                       |  | 107,101   |  | 167,466   |  | 108,137  
|                                                                   |  |           |  |           |  |          
|Total shares for diluted net income per share                      |  | 1,717,147 |  | 1,742,728 |  | 1,647,282
|                                                                   |  |           |  |           |  |          



The calculations for
diluted net income per share do not include aggregate anti-dilutive stock options and warrants of 37,300, 1,000 and 186,667 for the years ended August 31, 2003, 2002 and 2001, 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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##### Table of Contents

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 2003, 3.5% in 2002 and 5.0% in 2001; volatility of 120% for both 2003 and 2002 and 80% in 2001; an expected life of five years, and the
assumption that no dividends will be paid. Under APB No. 25, IEI has recognized no stock-based compensation expense for the years ended August 31, 2003, 2002 and 2001. Had employee stock-based compensation expense for IEIs stock option plans
been determined consistent with SFAS No. 123, the pro forma net income (loss) and pro forma net income (loss) per share would have been as follows for the years ended August 31:



|                                                               |  | 2003 |         |   | 2002 |   |         | 2001 | 
|-------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|Net income (loss):                                             |  |      |         |   |      |   |         |      | 
|As reported                                                    |  | $    | 23,131  |   |      | $ | 701,001 |      | 
|Less employee stock-based compensation under fair value method |  |      | (44,290 | ) |      |   | (50,525 | )    | 
|                                                               |  |      |         |   |      |   |         |      | 
|Pro forma                                                      |  | $    | (21,159 | ) |      | $ | 650,476 |      | 
|                                                               |  |      |         |   |      |   |         |      | 
|Net income (loss) per share:                                   |  |      |         |   |      |   |         |      | 
|Basic as reported                                              |  | $    | 0.01    |   |      | $ | 0.45    |      | 
|Basic pro forma                                                |  |      | (0.01   | ) |      |   | 0.41    |      | 
|Diluted as reported                                            |  |      | 0.01    |   |      |   | 0.40    |      | 
|Diluted pro forma                                              |  |      | (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Comprehensive income for each of the three years in the period ended August 31, 2003 does not differ from the
reported net income.



Disclosure About Segments of an
EnterpriseIEI has adopted SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, which requires companies to report selected information about operating segments, products and services, geographic
areas and major customers. Operating segments are determined based on the way the chief operating decision-maker organizes the business for making operating decisions and assessing performance. IEI has determined that it conducts its operations in
one business segment.



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



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##### Table of Contents

In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The FIN No. 45 disclosure requirements are included in Note 4 to the consolidated financial statements. The adoption of FIN No. 45 did not have any impact on IEIs
financial position or results of operations.



In December
2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair
value-based method of accounting for employee stock-based compensation. These alternative methods will only impact IEI if it voluntarily changes to the fair value-based method of accounting for employee stock-based compensation which IEI currently
does not plan to implement. SFAS No. 148 also requires companies that account for employee stock-based compensation under the intrinsic value-based method to disclose additional footnote information in annual financial statements effective for
fiscal years ending after December 15, 2002, and in financial statements for interim periods beginning after December 15, 2002. The requisite disclosures are provided above.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on IEIs financial position or results of operations.



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



Inventories at August 31 consist of the following:



|                                |  | 2003 |         | 2002
|------------------------------- |  | ---- | ------- | ----
|Raw materials and subassemblies |  | $    | 478,241 |     
|Work in process                 |  |      | 107,903 |     
|Finished goods                  |  |      | 178,530 |     
|                                |  |      |         |     
|                                |  | $    | 764,674 |     
|                                |  |      |         |     



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##### Table of Contents

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



Property and equipment at August 31 consist of the following:



2003


2002Machinery and equipment

$
1,780,854


$
1,667,094Office furniture and equipment


1,162,256



1,117,214Leasehold improvements


313,719



295,2873,256,829



3,079,595Less accumulated depreciation and amortization


(2,557,992
)


(2,269,181
)$
698,837


$
810,414




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



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



2003

2002Payroll and related amounts

$
337,202

$
475,458Warranty


385,833


395,833Professional fees


213,032


250,727Other


199,327


185,103$
1,135,394

$
1,307,121


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



Year Ended August 31:

Balance at Beginning of Year

Charged to Costs and Expenses

Deductions


Balance at End of Year2003

$
395,833

$
214,148

$
(224,148
)

$
385,8332002


347,833


223,563


(175,563
)


395,8332001


395,124


197,121


(244,412
)


347,833




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



Year Ended August 31:

Balance at Beginning of Year

Charged to Costs and Expenses

Deductions (A)


Balance at End of Year2003

$
209,000

$
51,000

$
(7,000
)

$
253,0002002


215,000


3,000


(9,000
)


209,0002001


171,000


90,000


(46,000
)


215,000




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





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##### Table of Contents

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



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



2003


2002Equipment line of creditinterest rates from 4%5.75% (Note 6)

$
492,253


$
605,115Less current portion


(291,167
)


(301,214
)$
201,086


$
303,901




The future
principal payments on long-term obligations as of August 31, 2003 are $291,167 in 2004, $156,229 in 2005 and $44,857 in 2006.



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



As of August 31, 2003, IEI has available through February 28, 2004 an equipment line of credit that provides for remaining borrowings of up to $399,000
and a demand bank line of credit that provides for borrowings of up to $1,000,000. Both lines of credit are at the banks prime rate of interest (4.0% at August 31, 2003), and all of IEIs assets are collateralized under these
arrangements. The credit agreements contain certain restrictive covenants including covenants limiting the payment of dividends, a minimum debt-to-tangible-net-worth ratio, and bi-annual net income. As of August 31, 2003, no borrowings have been
made under the demand line of credit and IEI has an aggregate of $492,253 outstanding as equipment debt which is payable in monthly installments through August 2006 (Note 5).



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



LeasesIEI leases an administrative and production facility under an operating lease expiring in April 2006 at an annual rate of
$145,000 through April 2004 and $160,000 thereafter. IEI is also responsible for certain real estate taxes, utilities and maintenance costs related to the leased property. Such contingent rental obligations are recognized as incurred. Total rental
expense for operating leases for the years ended August 31, 2003, 2002 and 2001 amounted to approximately $252,000, $234,000 and $197,000, respectively.



Employment ArrangementsIEI has a continuous, three-year employment agreement with its president and chief executive officer providing
minimum annual aggregate compensation of approximately $175,000. 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 $375,000 in salaries as of August 31, 2003) in the event of termination of such employment as a result of an acquisition, merger or sale of assets of IEI (an
Acquisition).



SettlementIn
June 2002, IEI reached a settlement with a customer whereby IEI received payment of $160,000 in exchange for the cancellation of the customers purchase commitment. The settlement is included in net sales for the year ended August 31, 2002 in
the accompanying consolidated statements of income.



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##### Table of Contents

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



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



2003

2002

2001Current:Federal (net of tax benefits for operating loss carryforwards of $6,000, $220,000 and $108,000 in 2003, 2002 and 2001,
respectively, and tax credits of $10,000 in 2002)

$
3,800

$
3,000

$
State


3,000


60,000


31,000Total current provision


6,800


63,000


31,000Deferred:Federal





10,000


5,000State


2,000


1,000


1,000Total deferred provision


2,000


11,000


6,000Total provision

$
8,800

$
74,000

$
37,000




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



2003


2002


2001Statutory federal income tax rate

34.0
%

34.0
%

34.0
%State income taxes, net of federal benefit

5.3


6.2


11.8Other permanent items

17.6


0.6


0.9Recognition of previously reserved tax assets




(32.2
)

(62.9
)Other

(29.3
)

0.9


37.6Effective tax rate

27.6
%

9.5
%

21.4
%




As of August
31, 2003, IEI has remaining net operating loss carryforwards of approximately $50,000, expiring in varying amounts through 2005. IEI also has available research and development credit carryforwards of approximately $29,000 expiring through 2023. Net
operating 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 net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Valuation allowances were previously recorded to offset net deferred tax assets due to the uncertainty of realizing the benefit of some assets. During the years ended August 31, 2002 and 2001, IEI
reduced its valuation allowance by $270,000 and $88,000, respectively, because of utilization of IEIs net operating loss carryforwards and tax credits, and managements assessment of the likelihood of recovery of such assets.



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##### Table of Contents

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



2003

2002Deferred tax assets:Net operating loss carryforwards

$
17,000

$
33,000Tax credits


29,000


Accounts receivable reserves


101,000


84,000Inventories and related reserves


235,000


254,000Other


26,000


36,000Depreciation


37,000


40,000$
445,000

$
447,000




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



Stock OptionsSince 1988, IEI has approved and reserved shares of common stock for nonqualified and incentive stock option plans for
the benefit of certain employees, nonemployee directors, and key advisors. The option plans are administered by a committee appointed by the Board of Directors (the Committee), which determines the terms of options including the exercise
price, expiration date (no longer than 10 years), number of shares and vesting provisions. All options vest at the rate of 25% per year with the exception of options issued to certain officers, nonemployee directors, and key advisors with vesting
provisions established by the Committee. All of the options vest 100% and are fully exercisable in the event of an Acquisition of IEI, as defined by the plan. At August 31, 2003, 79,358 shares remain available for future grants.



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



Shares


Exercise Price Per ShareOutstandingAugust 31, 2000

376,309


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

48,000



2.02Exercised

(18,500
)


0.81Canceled/expired

(4,149
)


1.19OutstandingAugust 31, 2001

401,660



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

7,500



2.71Exercised

(49,752
)


1.63Canceled/expired

(9,035
)


1.50OutstandingAugust 31, 2002

350,373



1.65Granted (weighted-average fair value of $2.33)

12,300



2.80Exercised

(10,000
)


1.53Canceled/expired

(46,500
)


1.62OutstandingAugust 31, 2003

306,173


$
1.71






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##### Table of Contents

The following table summarizes information concerning outstanding and exercisable options as of August
31, 2003:



|                         |  | Options Outstanding |  | Options Exercisable                       
|------------------------ |  | ------------------- |  | ------------------------------------------
|Range of Exercise Prices |  | Number Outstanding  |  | Average Remaining Contractual Life (Years)
|$0.72$1.00              |  | 24,800              |  | 0.52                                      
|1.012.00                |  | 193,573             |  | 4.20                                      
|2.012.81                |  | 86,800              |  | 6.75                                      
|5.51                     |  | 1,000               |  | 8.89                                      
|                         |  |                     |  |                                           
|                         |  | 306,173             |  | 4.64                                      
|                         |  |                     |  |                                           



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



Consultant


Officer

TotalOutstandingAugust 31, 2000


27,834



35,000


62,834Expired


(10,000
)





(10,000
)OutstandingAugust 31, 2001


17,834



35,000


52,834Exercised


(4,666
)





(4,666
)OutstandingAugust 31, 2002 and 2003 (weighted-average exercise price of $1.24)


13,168



35,000


48,168Exercisable


13,168



35,000


48,168Exercise prices

$
0.72$1.69


$
0.74$2.12

$
0.72$2.12




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



Common Stock ReservedCommon stock reserved for future issuance at August 31, 2003 consists of the
following:



|Stock warrants |  | 48,168 
|-------------- |  | -------
|Stock options  |  | 385,531
|               |  |        
|               |  | 433,699
|               |  |        



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##### Table of Contents

|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 2003, and two in both 2002 and 2001 each contributed more than 10% of net sales, representing an aggregate of 38% of net sales in 2003, 37% in 2002 and 46% in 2001. The accounts receivable from these customers amounted to
approximately $646,000 and $156,000 at August 31, 2003 and 2002, 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 10% of net sales in 2003, 8% in 2002 and 10% in
2001. The majority of IEIs long-lived assets are located in the United States of America.



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



2003

2002

2001Access control and keypad

$
9,889,444

$
11,218,877

$
9,992,730Glassbreak detectors


401,926


576,378


591,351$
10,291,370

$
11,795,255

$
10,584,081




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



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



2003


2002

2001Interest

$
26,274


$
36,053

$
77,360Other expense


(2,696
)





(244
)$
23,578


$
36,053

$
77,116




******



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##### Table of Contents

International Electronics, Inc.

Exhibits to 10-KSB



|     | 
|---- | 
|21.1 | 
|     | 
|23.1 | 
|     | 
|31.1 | 
|     | 
|32.1 |