<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                  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, 1997
                       Commission File Number: 2-91218-B

                        International Electronics, Inc.
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                 (Name of small business issuer in its charter)

Massachusetts                                        04-2654231
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(State or other jurisdiction of                   (I.R.S. Employer
incorporation or organization)                  Identification No.)

427 Turnpike Street
Canton, Massachusetts                                     02021
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(Address of principal executive office)                 (Zip code)

Issuer's telephone number:  (781) 821-5566

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

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

                          Common Stock, $.01 par value
--------------------------------------------------------------------------------
                                (Title of class)

     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
                                         ---       ---      

     Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B is not contained in this form and no disclosure will 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:  $9,173,580

     As of November 5, 1997, 1,333,145 shares of the registrant's voting stock
was held by non-affiliates of the registrant. In arriving at this number,
registrant has considered officers and directors to be affiliates. Based on a
price of $1.88 per share, (the average of the closing bid and asked price on
November 5, 1997) the aggregate market value of the non-affiliate shares so held
was approximately $2,500,000.

     As of November 5, 1997, 1,493,301 shares of the registrant's common stock
were outstanding.

     Documents incorporated by reference:  None

                                       1
<PAGE>
 
                                     PART I

Item 1.  Business

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

     The Company manufactures and markets a line of access control and digital
keypad products sold under the trade names Door-Gard(TM) and Secured Series(TM).
The Company also manufactures and markets electronic glassbreak detectors sold
under the trade names Tri-Gard(TM), Glass-Gard(TM) and Viper. The Company's
subsidiary, Ecco Industries, Inc. ("Ecco"), manufactures voice verification
systems for the security market.

     The Company's products are sold principally in the United States to many of
the leading distributors and installation companies servicing the security
industry.  The financial information relating to the Company is set forth in
Item 7.

Products

Access Control and Digital Keypad Products and Technology

     The Company manufactures and markets a line of access control and digital
keypad products sold under the trade names Door-Gard(TM) and Secured Series(TM).
These products are sold in a variety of configurations including indoor and
outdoor models, with magnetic card readers, short range proximity readers and
keypads.  They are also sold with several different hardware and software
configurations.  The Company also sells to 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 to any existing switch.  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(TM) software includes features
which apply specifically to electronic door access control.  These features
include request to exit input, door ajar and door position monitoring.

     In September, 1994, the Company introduced its new Secured Series Door-
Gard(TM) access control product line. This line of products includes magnetic
card readers and proximity readers as well as digital keypads. New features in
the Secured Series product line include: 500 users, transaction buffer for up to
500 events, hard copy printing via hand held infrared printer, 8 time zones and
the ability to tie up to 8 doors together.

     Approximate prices paid by installing dealers for the digital keypads are
$50 to $300 and for the Secured Series product line $150 to $400.

Glassbreak Detector Products

     A detector is the component in an alarm system that is activated by an
intrusion or entry into a protected premises.  When activated, it sends a signal
to a central control panel, the portion of the system that triggers the alarm.
The Company's glassbreak products serve only the detection function, but are
compatible with systems made and sold by most major manufacturers 

                                       2
<PAGE>
 
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.

     There are four principal types of glassbreak sensors:  foil, piezoelectric,
audio detectors, and shock sensors.  The Company markets all of these glassbreak
detectors with the exception of foil.  Each has its own advantages and
disadvantages when used in proper installations. See "Tri-Gard"(TM), "Glass-
Gard"(TM) and "Viper Vibration Detector". Although foil is inexpensive, it is
expensive in terms of labor cost to install, and is unsightly.

  Tri-Gard(TM)

     In 1987, the Company began to market an audio glassbreak detector under the
trade name Tri-Gard(TM). Audio detectors work much like the human ear. All
noises are heard by the detector and then compared to a certain set of criteria.
If the sound made meets certain criteria, then the unit determines the sound is
breaking glass and activates an alarm. Because of the wide variety of noise in
the background which can easily confuse an audio detector, stability is a major
factor if the unit is to be successful. The Tri-Gard(TM) can be installed on
either a wall or ceiling. Because the Tri-Gard(TM) detects the sound signals
produced by breaking glass, it can cover a bank of windows or multi-pane
windows. Audio detectors are used in residential, commercial and industrial
applications. The cost of these units to the installing dealers is approximately
$22 to $40 per unit. The Tri-Gard(TM) models: 550, 552, 510 and 511 have
received Underwriters Laboratories listing.

     In November, 1986, the Company signed an agreement with A American
Automatic Alarm Co. ("AAAA") of Westminister, Colorado to act as its exclusive
worldwide sales agent for AAAA's passive audio glassbreak detector.  While the
Company did not sell enough units manufactured by AAAA to meet its minimum
purchase obligations under the agreement, the Company believes that it had the
right under the agreement to manufacture and sell the product.  The Company in
1988 redesigned the Tri-Gard(TM) audio detector in order to reduce both the
physical size of the detector and the manufacturing cost.  The Company does not
have a royalty agreement with AAAA for the circuit design of this product,
however the Company makes royalty payments to AAAA for all sales of the
redesigned unit.  The Company believes its royalty payments to AAAA, which are
based on a percentage of sales, have been reasonable.

     In 1992 the Company began selling an additional audio detector which
utilizes microprocessor technology developed by the Company.  The Company has
received a utility patent on this new detector.  In 1994, the Company introduced
an additional microprocessor-based audio detector.

  Glass-Gard(TM)

     The Glass-Gard(TM) unit, which is based on piezoelectric technology, is
placed on each pane of glass to be protected and is used primarily in industrial
and commercial applications. When glass is broken, it emits particular
distinctive ultrasonic frequencies. The Company's Glass-Gard(TM) detector
responds to the ultrasonic frequency generated when glass breaks.

     The Glass-Gard(TM) unit contains a piezoelectric crystal which is "tuned"
to a particular frequency of breaking glass. When glass to which the unit is
attached is broken, these frequencies cause the crystal to vibrate, and
therefore to generate tiny electric currents. These currents are then passed to
the central control panel of the alarm system, which detects them and sounds the
alarm. The result is a unit which, while somewhat more expensive to purchase
than units of other types, is inexpensive to install, reliable and not prone to
accidental alarms. Glass-Gard(TM) costs the installing dealer approximately $8
to $15 per unit. Some other types of competitive 

                                       3
<PAGE>
 
glassbreak detectors cost the installing dealer between $4 to $10 per unit. Most
of the Glass-Gard(TM) models have received Underwriters Laboratories listing.
The Company has a utility patent on its Glass-Gard units, and a patent on a
tester which is an improvement to the units.

As of February 1, 1998 the Company has agreed to discontinue sales of one of its
Glass-Gard(TM) models in conjunction with a patent settlement agreement. This 
model had net sales of approximately $60,000 in fiscal 1997.

  Viper Vibration Detector

     A vibration sensor is used to detect vibrations of a set magnitude in
certain materials such as glass, wood, plastic, concrete, or metal.  The Viper
has a custom integrated circuit that does internal signal processing so that it
can be adjusted for different materials and shock values.  The cost of these
units to the installing dealers is approximately $15 to $20 per unit.

     Prior to November, 1992 the Company had an agreement with Weyrad
Electronics, Ltd. ("Weyrad") of Weymouth, England to act as a distributor for
their Viper vibration detector in North, South and Central America.  Weyrad
manufactures the Viper, and its primary market has been the United Kingdom and
Europe.  The agreement continues in force unless either the Company or Weyrad
terminate by providing three months written notice.

     The Company also has signed an agreement that gives Weyrad the right to
market the Company's glassbreak products in Europe.

Voice Verification Products and Technology

     In June, 1990, the Company acquired substantially all of the outstanding
common, and all preferred stock of Ecco in exchange for 379,699 unregistered
shares of the Company's common stock.  Ecco is engaged in designing,
manufacturing, and selling voice verification systems.  Ecco, which was founded
in 1983, financed its operations and development efforts through private sales
of securities resulting in net proceeds of approximately $5,500,000.  The
acquisition has been accounted for under the purchase method of accounting.

     During fiscal 1994, Ecco signed a contract for its voice verification
technology with BI, Inc. of Boulder, Colorado for use in conjunction with
substance abuse in the home incarceration market. The agreement provided for a
one-time license fee, ongoing royalty payments and an order for the manufacture
of voice verification boards. In September, 1996 BI informed the Company that
effective January, 1997, BI would no longer make royalty payments to the
Company, but would continue to utilize the Company to manufacture its voice
verification boards.

     Ecco's initial product is called VoiceKey(TM), which is a stand-alone
access control system that grants or denies access to a location based on
verifying a person's voice. VoiceKey(TM) can be configured for stand-alone or
network applications. Typical applications of VoiceKey(TM) include the control
of or access to locations requiring security such as: offices, apartment and
condominium buildings, banks, computer rooms, and hospital pharmacies. Standard
VoiceKey(TM) features include access control management functions such as: time
zone programming, door alarm monitoring, and time-stamped audit trail reporting.
Options include expanded user capacity and weatherproofing. Each VoiceKey(TM)
can monitor and provide control for forty people, or up to two hundred twenty-
five with expansion memory.

     The Company manufactures and markets its VoiceKey(TM) voice verification
access control product.  The VoiceKey(TM) sells to the installing dealer for
approximately $1,000.

Sales and Marketing

     The principal market for the Company is the United States, where it sells
its products through a network of security equipment distributors and
installation companies.  The Company 

                                       4
<PAGE>
 
also sells and markets its products in North and South America, Europe, Asia,
South Africa, Middle East and Australia/New Zealand.

     The Company presently employs thirteen full-time people in sales and
marketing. The Company's Director of Sales coordinates the activities of the
outside sales representatives and inside sales personnel.  The outside sales
personnel contact dealers and distributors to provide ongoing sales and
technical support for the Company's products.  The inside personnel are
responsible for incoming sales calls and telemarketing.

     The Company sells its products primarily to installers and distributors of
alarm security equipment.  The Company's customers include: ADI, Sprint North
Supply, Ameritech, Wells Fargo and Honeywell.  The Company's largest customer
accounted for approximately 36% of net sales for the fiscal year ended August
31, 1997.

     While the Company'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 one such customer
could have a serious adverse effect on the Company's sales.  In fiscal 1995, the
Company lost a major domestic distributor who filed for bankruptcy with accounts
receivable due the Company of approximately $80,000.  See "Item 6 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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

     The Company provides sales support through national advertising, periodic
national mailings, and by participation at national and regional industry trade
shows.  The Company presently attends several national trade shows per year, and
complements these shows by displaying its products at regional alarm association
shows.  Several visits to Europe are made each year including attending foreign
trade shows.  In fiscal 1997, the Company established a wholly-owned subsidiary,
International Electronics Europe Limited, located in the United Kingdom to
market and sell the Company's products.  The Company also participates with some
of its distributors in cooperative advertising programs.

Overseas Components

     The Company sources a significant amount of components and maintains
certain molds for its products in Asia.  The Company 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.

                                       5
<PAGE>
 
Product Sources of Revenue

     The Company's various products have provided revenues during the last three
fiscal years as follows:

<TABLE>
<CAPTION>
                                          
                               Access                      Voice   
                               Control    Glassbreak   Verification 
                             and Keypad    Detectors      & Other       Total
                             -----------  -----------  -------------  ----------
<S>                          <C>          <C>          <C>            <C>
1995                          $3,855,202  $2,480,703     $ 87,025     $6,422,930
1996                           6,296,748   2,038,058      275,566      8,610,372
1997                           7,036,132   1,806,972      330,476      9,173,580

</TABLE> 
 
Domestic and Foreign Sales

     The percentage of domestic and foreign sales for the Company's products for
     the last three fiscal years are as follows:

<TABLE> 
<CAPTION> 

                                        Domestic            Foreign
                                        --------            -------
               <S>                      <C>                 <C> 
               1995                       88%                 12%
               1996                       88                  12
               1997                       84                  16
</TABLE>

Manufacturing and Raw Materials

     The Company performs in-house manufacturing for its Access Control, Keypad,
Glass-Gard(TM), Tri-Gard(TM) and VoiceKey(TM) product lines.

     The Company is dependent upon sole source suppliers for a number of key
components and parts used in the Company's products.  There can be no assurance
that these suppliers will be able to meet the Company's future requirements for
such components or that the components will be available to the Company at
favorable prices.  Any extended interruption in the supply of any such
components could have a material adverse effect on the Company's operating
results in any given period.

Backlog

     The Company's backlog of firm scheduled orders as of August 31, 1997, was
approximately $475,000.  Its backlog as of August 31, 1996, was approximately
$500,000. The Company believes that the majority of the 1997 backlog will be
shipped during fiscal 1998.

Competition

     Other companies in the security and related industries offer products in
competition with those of the Company. Many of the companies with which the
Company competes are substantially larger, have greater resources, and market a
larger line of products. Although the Company has obtained some patent 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 the Company.

     The Company's Glass-Gard(TM) product line is slightly more expensive than
other similar devices marketed by the Company's competitors.  The Company's
other products are competitively priced against the competition.  The Company
believes that installing dealers will use, on a repetitive basis, detectors
which can be installed easily, work when an intrusion occurs, and do not cause
false alarms.

                                       6
<PAGE>
 
     There are numerous manufacturers of audio detectors and shock sensors
selling in the United States market.  Competitors selling audio detectors
include:  Sentrol, Inc., Visonic Ltd., Litton Security Products, Inc.
("Litton"), Detection Systems, Inc., Intellisense, Inc., Ademco Manufacturing,
Inc. ("Ademco"), DSC and Caddx-Caddi Controls, Inc. There are several
competitors selling vibration detectors including: Ultrak, Inc., Sentrol, Inc.,
Ademco, United Security Products, Inc. ("USP") and Litton.

     The Company is aware of two major competitors which market "on glass"
glassbreak detectors in the United States:  USP and Sentrol, Inc.  There are
several European manufacturers of this type of product, but the Company believes
that they to date have not had any significant impact on the United States
market.  The introduction of such products into the United States market could
have a substantial adverse effect on the sale of Glass-Gard(TM).

     There are many manufacturers of access control equipment including
Westinghouse, Casi Rusco Electronics Systems, Inc., Northern Computers, Inc.,
Cardkey, Inc., Software House, Inc., Continental Instruments, Inc., American
Magnetics Corporation, Keri Systems, Kantech, Radionics, and Corby, Inc.

     There are numerous manufacturers of keypads selling in the United States
market including the following competitors:  Corby, Inc., Visonic Ltd., USP,
Inc., Crow Electronics Engineering, Inc., Aleph, Inc., Securitron Magnalock
Corp., Locknetics Security Engineering, Security Door Controls, Alarm Lock,
Inc., Ilco Unican Engineering, Inc., Essex Electronics, Inc., Nel-Tec, Inc.,
STA, Inc. and Sentrol, Inc.

     To the best of the Company's knowledge, the Company's voice verification
product line has competition from: Voice Strategies, Inc., T-Netix, Inc.,
Keyware Technologies, Q Voice, ITT, VeriVoice, Inc., Princeton Voice Radar,
Veritel Corporation of America, Electronic Warfare Assoc., Inc. and Technologia
Systems Limited in the United States, and Zetetic International Limited
("Zetetic") in the United Kingdom and ABS, Inc. in Germany. The Company also
faces competition in the positive identification access control market from
other Biometric systems. These other Biometric systems, and some of the
companies that produce them include: fingerprint (Identix, Inc., American
Biometric Company, Keytronics, Sony, Ultra-Scan, NRI, and Thomson-CFS), hand
geometry (Recognition Systems), palm print, optical systems (Eye Dentify
Systems), and signature (PenOp, Communication Intelligence and AEA).

Working Capital

     During fiscal 1997, the Company depended on its existing cash balances to
provide working capital. In February, 1997 the Company established bank lines of
credit for working capital financing of up to $1,000,000 and $250,000 for
equipment purchases. The Company expects its working capital requirements for
fiscal 1998 to be provided from its cash reserves and its line of credit plus
anticipated cash from operations. As of August 31, 1997, there were no
borrowings outstanding under the working capital line of credit and
approximately $24,000 in borrowings outstanding under the equipment line of
credit. See "Item 6-Management's Discussion and Analysis of Financial Condition
and Results of Operations".

Research and Development

     The Company presently employs seven people in research and development.
The Company also utilizes certain consultants on an as-needed basis with the
Company's employees supervising such work.  Research and development
expenditures were approximately $521,000, $381,000 and $308,000 during fiscal
1997, 1996 and 1995, respectively.

                                       7
<PAGE>
 
Employees

     As of November 1, 1997, the Company had 64 employees, of which 59 were
full-time employees.  Of these 64 employees, 13 were engaged in sales and
marketing, 7 were involved in product development, 30 in manufacturing, 4 in
customer service and 10 employees were providing management and administrative
services.

Seasonality

     The Company 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 many European companies
take substantial vacation time in July and August.

Governmental Controls/Environmental Compliance

     None of the Company's business is subject to renegotiation of profits or
termination of contracts at the election of the Government.  The Company 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 the Company for environmental control facilities.

Item 2.                           Properties

     The Company's administrative and manufacturing operations are located at
427 Turnpike Street, Canton, Massachusetts, and currently consist of
approximately 15,540 square feet of space.  The Company occupies this facility
under a lease expiring April 14, 1998, at a minimum monthly rental of $7,343
plus utilities, maintenance and certain real estate taxes.

Item 3.                       Legal Proceedings

                                    None

Item 4.                Submission of Matters to a Vote
                             of Security Holders
                                        
                                Not Applicable

                                       8
<PAGE>
 
                                    PART II

Item 5.              Market for Registrant's Common Equity
                        and Related Stockholder Matters

     The Company's securities have been traded in the over-the-counter market
since July 5, 1983.  Since October 30, 1987, the Company's common stock has been
quoted by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ").  The Company's common stock trades on the NASDAQ Small-Cap
Market under the symbol IEIB.

     In March, 1992, the National Association of Securities Dealers, Inc.
("NASD") changed its standards for a company's stock to maintain its listing on
NASDAQ.  The changed standards include maintaining a minimum bid price of $1.00
per share for ten consecutive trading days and shareholders' equity with a
minimum balance of $1,000,000. Although the Company has maintained its NASDAQ
listing, the Company has, at times, been unable to maintain the $1.00 minimum
bid price criteria.

     In 1997, the NASD adopted higher standards for a company to maintain its
stock listing on NASDAQ.  The new standards may result in the Company's common
stock losing its listing on NASDAQ, with the consequence that the Company's
stock will be more difficult to trade. The new standards will be effective on
February 23, 1998.

     One of the newly adopted standards include maintaining minimum net tangible
shareholders' equity of $2,000,000.  As of August 31, 1997, the Company had net
tangible shareholders' equity of approximately $1,116,000.  Thus, the Company
does not meet this standard and, unless the Company increases its net tangible
shareholders' equity to $2,000,000, the Company's common stock will no longer be
listed on NASDAQ.

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

<TABLE>
<CAPTION>

                                        Sales Prices
                                    --------------------
                                    High             Low
                                    ----             ---
     <S>                           <C>              <C>
     Fiscal Year 1996:
          First Quarter            $1.83            $1.25
          Second Quarter            3.31             1.13
          Third Quarter             4.38             2.75
          Fourth Quarter            3.63             2.00
                                                        
     Fiscal Year 1997:                                  
          First Quarter             3.88             1.88
          Second Quarter            3.31             2.25
          Third Quarter             3.00             1.63
          Fourth Quarter            1.94             1.31

</TABLE>

     In January, 1996, the Company sold, in a private placement 68,182 shares of
unregistered common stock at $1.32 per share for net proceeds of $89,057 with
issuance costs of $943.  There was no underwriter involved in this transaction.
John Waldstein, President and Treasurer and Robert Voosen, Executive Vice
President each purchased 7,576 shares of restricted common stock in this private
placement.  The other purchasers were accredited investors or sophisticated
private investors familiar with the affairs of the Company.  The Company relied
on Section 4(2) of the Securities Act of 1934 or Regulation D thereof for the
exemption from registration.

                                       9
<PAGE>
 
     As of November 5, 1997 there were approximately 800 shareholders of record
of the Company's common stock.  The Company believes that a substantial number
of shares of the Company's common stock are held by nominees and estimates that
there are approximately 1,700 beneficial owners of the Company's shares.  The
Company has never paid dividends to its shareholders, and does not anticipate
that it will do so in the foreseeable future.

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

Liquidity and Capital Resources

     As of August 31, 1997, the Company had $800,653 in working capital as
compared to $1,044,480 at August 31, 1996.  The ratio of current assets to
current liabilities as of August 31, 1997 was 1.5, as compared to 1.7 in 1996
and 1.6 in 1995.  The debt to equity ratio was 1.2 at August 31, 1997, as
compared to 1.4 in 1996 and 1.6 in 1995.  The decrease in working capital and
current ratio in 1997 from 1996 are the result of the repayment of the loan due
the Federal Deposit Insurance Corporation (FDIC).  The decrease in the debt to
equity ratio in 1997 from 1996 is the result of a reduction in the FDIC debt,
offset in part by increases in accounts payable and accrued expenses.  The
increase in working capital and current ratio and decrease in the debt to equity
ratio in 1996 from 1995 are the result of the Company's operating cash flow for
fiscal 1996 and a private placement of stock in January, 1996 for net proceeds
of approximately $89,000.

     Net capital expenditures were $251,217, $178,541 and $90,429 in fiscal
years ending August 31, 1997, 1996 and 1995, respectively.  The Company has a
current commitment of approximately $60,000 for material capital expenditures,
and anticipates having up to $400,000 in total capital expenditures for the
purchase of equipment, regulatory testing and tooling costs during the next
twelve months.  The increase in anticipated expenditures from the Company's
historical level is primarily due to the need of the Company to upgrade its
production facility, which had been deferred because of the Company's working
capital constraints.

     In February, 1997 the Company repaid approximately $358,000 representing
the balance due the FDIC for the outstanding note originally payable on December
31, 1997.  In February, 1997, the Company also established two bank lines of
credit.  The lines of credit are for working capital financing up to $1,000,000
and $250,000 for equipment purchases.  See Notes 5 and 6 to the Consolidated
Financial Statements.  As of August 31, 1997, the Company had no outstanding
borrowings under the working capital line of credit and had approximately
$24,000 in borrowings outstanding under the equipment line of credit.

     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, the Company 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.

Results of Operations

Fiscal years ended August 31, 1997, 1996 and 1995

     Net sales in 1997 increased 7% from 1996, while 1996 sales increased 34%
from 1995.  The increase in sales for the years 1997 and 1996 is primarily the
result of an increase in access control and keypad product sales of 12% and 63%,
respectively, offset in part by a reduction in glassbreak detector sales.

                                       10
<PAGE>
 
     The ratios of gross profit to sales were 41% in both 1997 and 1996, and 43%
in 1995. The decrease in 1996 from 1995 is primarily the result of product mix
and increases in warranty costs.

     Research and development expenses were $520,629 in 1997, as compared to
$381,245 in 1996 and $308,162 in 1995.  The increase in costs in 1997 from 1996
is due to the hiring of additional personnel and related expenses and an
increase in contract services.  The increase in costs in 1996 from 1995 is
primarily due to the hiring of additional personnel and related expenses.

     As a percentage of net sales, selling, general and administrative expenses
were 34% in both 1997 and 1996, and 42% in 1995.  The decrease in expenses in
1996 from 1995 as a percentage of net sales, is the result of increased
productivity from sales personnel and a reduction in bad debts expense.

     The decreases in other income in 1997 and 1996, from 1995 are primarily a
result of a reduction in commission revenue.  The extraordinary gain of $10,446
in 1997 represents a prepayment discount from the FDIC, net of income tax
expense of $1,000.

     The provision for income taxes for fiscal years 1997 and 1996 represents
foreign, federal alternative minimum taxes and state income tax expense.  The
Company's effective income tax rate is 35% for 1997 and 20% for 1996.
Differences between the effective tax rates and the combined federal and state
statutory rates are the result of permanent differences offset in part by the
utilization of net operating loss carryforwards.

Impact of Inflation and Changing Prices

     The Company does not believe that inflation or changing prices have had a
significant impact on its operations.

New Accounting Pronouncements

     Statement of Financial Accounting Standards ("SFAS") SFAS No. 128,
"Earnings per Share" will be effective commencing with the Company's second
quarter in fiscal 1998.  The Company believes there will be no material impact
upon adoption of SFAS No. 128 on its reported earnings per share.

     SFAS No. 130, "Reporting Comprehensive Income" will be effective for fiscal
years beginning after December 15, 1997.  SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" is effective for periods
beginning after December 15, 1997.  The Company has not determined the effects,
if any, that SFAS No. 130 and SFAS No. 131 will have on its consolidated
financial statements and disclosures.

Factors that May Affect Future Results

     Information provided by the Company 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
Cautionary Statements are being made pursuant to the provisions of the Act and
with the intention of obtaining the benefits of the "safe harbor" provisions of
the Act.  The Company cautions investors that any forward-looking statements
made by the Company involve risks and uncertainties, which could cause actual
results to differ materially from those projected.

                                       11
<PAGE>
 
     The Company 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 the Company to forecast, and these or other factors
can materially adversely affect the Company's business and operating results for
one quarter or a series of quarters.

     Limited Financial Resources and Losses from Operations. The Company has
limited financial resources. It is therefore subject to all the risks generally
associated with a small business having limited financial resources. For the
year ended August 31, 1995, the Company experienced a loss of approximately
($231,000). For the years ended August 31, 1997 and 1996 the Company had net
income of approximately $70,000 and $162,000, respectively. There can be no
assurance that the Company will continue profitable operations. Continued
operations after the expenditure of the Company'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 the Company 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 the Company.  The Company
presently maintains a key man life insurance policy of $1,000,000 on John
Waldstein, President and Treasurer.

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

     Fluctuations in Sales and Operating Results.  The quarterly growth rates
recently experienced by the Company are not necessarily indicative of future
quarterly growth rates.  Operating results may also fluctuate due to factors
such as the timing of new product announcements and introductions by the
Company, its major customers and its competitors, market acceptance of new or
enhanced versions of the Company'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, the Company 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, the Company 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
the Company's operating results.  In addition, competitive pressure on pricing
in a given quarter could adversely effect the Company's operating results, or
such price pressure over an extended period could adversely effect the Company's
long-term profitability.

     The Company 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

                                       12
<PAGE>
 
expectations, there would likely be a material adverse effect on operating
results because only a small portion of the Company's expenses vary with its
sales in the short-term.

     Concentration of Customers.  The Company has a substantial number of
customers but principally sells 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 the
Company's largest customer accounted for approximately 36% of the Company's
total net sales for the fiscal year ended August 31, 1997.  The Company's
agreements with its customers generally do not include minimum purchase
requirements.  There can be no assurance that the Company's major customers will
place additional orders, or that the Company will obtain orders of similar
magnitude from other customers.  The Company'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
the Company or were to delay paying or fail to pay the Company's receivables
from such customer.  In fiscal 1995, the Company lost a major domestic
distributor who filed for bankruptcy with accounts receivable due the Company of
approximately $80,000.

     Competition.  Other companies in the industry offer products in competition
with those of the Company.  Many of the companies with which the Company
competes are substantially larger, have greater resources and market a larger
line of products.  The Company expects competition to increase significantly in
the future from existing competitors and new companies that may enter the
Company's existing or future markets.  Increased competition could adversely
affect the Company's sales and profitability.  There can be no assurance that
the Company will be able to continue to compete successfully with its existing
competitors or with new competitors.

     Lack of Patent Protection.  Although the Company has obtained some patent
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 the Company.

     Production in Asia.  The Company 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 to allow reliable and
consistent delivery of product.

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

     Foreign Sales.  During the year ended August 31, 1997, the Company's
foreign sales represented approximately 16% of net sales. There may be a
reduction in the Company's foreign sales 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 the
Company's common stock and there can be no assurance that even this limited
market will be sustained.  Holders of the Company's common stock may have
difficulty selling their shares or may have difficulty selling them at a
favorable price.

                                       13
<PAGE>
 
     Maintain Listing on NASDAQ. In March 1992, the NASD changed its standards
for a company's stock to maintain its listing on NASDAQ.  The revised standards
include maintaining a minimum bid price of $1.00 per share for ten consecutive
trading days and shareholders' equity with a minimum balance of $1,000,000.
Although the Company has maintained its NASDAQ listing, the Company has, at
times, been unable to maintain the $1.00 minimum bid price criteria.

     In February, 1997, the NASD adopted new higher standards for a company to
maintain its stock listing on NASDAQ.  The new standards may result in the
Company's common stock losing its listing on NASDAQ.  The final standards will
be effective on February 23, 1998.

     One of the newly adopted standards includes maintaining minimum net
tangible shareholders' equity of $2,000,000. As of August 31, 1997, the Company
had net tangible shareholders' equity of approximately $1,116,000.  The Company
does not presently meet the standard and, unless the Company increases its net
tangible shareholders' equity to $2,000,000, the Company's common stock will no
longer be listed on NASDAQ.  If the Company is unable to maintain its listing on
NASDAQ, holders of the Company's common stock may have additional difficulty
selling their shares or may have difficulty selling them at a favorable price.

     Volatility of Stock Price.  The Company'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 the
Company or its competitors and other events or factors could have an immediate
impact on the Company's stock price.  The stock price may also be affected by
broader market trends unrelated to the Company's performance.

Item 7.             Financial Statements and Supplementary Data

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

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

                                   Not Applicable

                                       14
<PAGE>
 
                                   PART III
<TABLE>
<CAPTION>
Item 9.          Directors and Executive Officers of the Registrant

                                    First
                                   Elected
Name                         Age   Director     Position
----                         ---   --------  --------------
<S>                          <C>   <C>       <C>             
John Waldstein               44      1982    President, Chief Executive 
                                             Officer, Treasurer and Chairman 
                                             of the Board
Robert Voosen (1)            49      1982    Director and Executive 
                                             Vice President
Christopher Hentschel        53        -     Vice President of Engineering
Heath Paley                  49      1990    Director
Robert Prager                65      1992    Director
Diane Balcom                 55      1989    Director
</TABLE>

(1)  In September, 1997, Mr. Voosen resigned his position as an officer of the
     Company.

     The term of office of each director expires on the date of the next meeting
of shareholders.  The Company anticipates that an annual meeting of shareholders
will be held in March, 1998.

     John Waldstein has been employed by the Company since 1978, has been
Treasurer since March, 1982, was Vice President between January, 1983 and May,
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."

     Robert Voosen had been the Company's Vice President for Product Development
since 1982, and had been Executive Vice President since May, 1988.  In
September, 1997, Mr. Voosen resigned his position as an officer of the Company.
He received a B.A. in Architecture from the University of Minnesota.  From 1972
through 1983, Mr. Voosen acted as a consultant on the design and installation of
security systems for 3M Alarm Services, Inc..  See "Item 10-Executive
Compensation."

     Christopher Hentschel was appointed the Company's Vice President of
Engineering in March, 1995 and had previously been Chief Engineer since 1989.
Before joining the Company, Mr. Hentschel was a founder and Vice President of
Engineering of Guard Aware, Inc..  Mr. Hentschel is a graduate of Wentworth
Institute.

     Heath Paley is a self-employed computer consultant.  He had been the
Company's Director of Management Information Systems from September, 1994 until
May, 1996 and was the Company'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.

     Robert Prager was appointed to the Board of Directors in December, 1992.
Since 1988, Mr. Prager has been a private investor.  In 1973, Mr. Prager founded
the Major Glass Company and served as President from its inception until 1986
and Chairman of the Board from 1986 to 1988.

     Diane Balcom became a member of the Board of Directors in July, 1989.
Since September, 1997 Ms. Balcom has been the Director of Development for
Children's Hospital of

                                       15
<PAGE>
 
Pittsburgh. From August, 1994 to August, 1997 Ms. Balcom was the Chapter
Director of the Juvenile Diabetes Foundation of Western Pennsylvania. She has
been an adviser to the Company on corporate and financial matters since 1985.
From January, 1989 to August, 1994, Ms. Balcom operated a consulting practice
which provided services related to private and public financing for small and
medium-sized companies. From March, 1987 to January, 1989, she served as Vice
President and Chief Financial Officer for Environmental Diagnostics, Inc., a
publicly-held company. Prior to that, Ms. Balcom held various senior management
positions in Corporate Finance and Research for 13 years with brokerage firms on
the West Coast.

     In September, 1996, Ms. Balcom and Messrs. Prager and Paley, the Company's
three non-employee directors each received fully vested options under the
Company's non-qualified stock option plan to purchase 1,000 shares of common
stock at exercise prices of $2.12 per share.

Item 10.                    Executive Compensation

     The following table sets forth information concerning the compensation for
each of the last three fiscal years ended August 31, 1997, of the Company's
President and Chief Executive Officer, and the only other executive officer of
the Company who received at least $100,000 of compensation during any of these
years (the "Named Executive Officers"):

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                                
                                                                  Long-Term    
                                                                 Compensation   
                                 Annual Compensation(2)          ------------                 
                           ---------------------------------     Options         All Other 
Name                       Year   Salary    Commission/Bonus     (Shares)        Compensation(1)
----                       ----  --------  -----------------     --------        ---------------
<S>                        <C>   <C>       <C>                  <C>              <C>
John Waldstein             1997  $135,000           $ 2,100(4)        10,000(7)        $9,180
President,                 1996   135,519             4,750(5)          -               9,180
Chief Executive Officer    1995   135,519              -              25,000(3)         9,180
 
Robert Voosen (6)          1997   100,000              -               9,000(7)          -
Executive Vice             1996   100,416            12,349             -                -
President                  1995   100,000             5,889           20,000             -
</TABLE>

(1)  Represents the cost of a split dollar whole life insurance policy with a
     face value of $755,000 as of August 31, 1997.  The Company is a beneficiary
     of such policy to the extent of all premiums paid upon the death of John
     Waldstein.  Mr. Waldstein may purchase this policy upon termination of his
     employment for the then current cash surrender value.

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

(3)  Represents warrants granted to purchase 25,000 shares of common stock at an
     exercise price of $.74 per share exercisable for a ten-year period in
     exchange for a personal guarantee of debt held by the FDIC.

(4)  Amount shown represents bonus earned by Mr. Waldstein in fiscal 1997
     payable in fiscal 1998.

(5)  Amount shown represents bonus earned by Mr. Waldstein in fiscal 1996
     payable in fiscal 1997.

(6)  Mr. Voosen resigned as an officer of the Company in September, 1997.

                                       16
<PAGE>
 
(7)  Represents warrants to purchase 10,000 and 9,000 shares of common stock
     granted to Messrs. Waldstein and Voosen, respectively, at an exercise price
     of $2.12 per share exercisable for a ten-year period.

     The Company'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 shall be determined by the
Company's Compensation Committee.

Compensation on Involuntary Termination

     John Waldstein has an employment contract with the Company which provides
for certain compensation to be paid to him if he is discharged by the Company
without cause before the end of the term of his contract.  Mr. Waldstein's
contract expires on December 31, 2000.  John Waldstein's current minimum annual
salary under his contract is $135,000.  The salary of this officer is subject to
performance reviews and annual adjustment by the Board of Directors of the
Company.  Mr. Waldstein's salary shall increase for inflation effective January
1, 1998.

     If the employment of John Waldstein is terminated by the Company without
cause, (including an involuntary relocation due to an acquisition), the Company
is obligated to pay the greater of an amount equal to one times his annual
salary on the date of termination or the salary to the conclusion of the
contract period. As of November 1, 1997, John Waldstein's salary to the
conclusion of his contract period is approximately $427,500 plus cost of living
adjustment.

Warrants Granted During Fiscal 1997

The following table sets forth certain information with respect to the grant of
stock warrants in fiscal 1997 to any of the Named Executive Officers:

<TABLE>
<CAPTION>
 
                                                                             
                                                Individual Grants                          Potential Realizable
                             -----------------------------------------------------------     Value of Assumed 
                             Number of     Percent of                                        Annual Rates of
                              Shares      Total Warrants                                       Stock Price
                             Underlying    Granted To      Exercise                          Appreciation for
                             Warrants       Employees       Price       Expiration           Warrant Term (2)
Name                         Granted        In Year       Per Share        Date              5%($)    10%($)
----                         -------        ----------    ---------        ----              -----    ------
<S>                          <C>            <C>           <C>              <C>               <C>      <C> 
John Waldstein              10,000(1)          16.5         $2.12        Sept. 17, 2006     $13,333   $33,787
Robert Voosen                9,000(1)          14.9         $2.12        Sept. 17, 2006      11,999    30,409
</TABLE>

     (1)  The warrants vest annually over a 4 year period commencing on
          September 17, 1996.

     (2)  Amount represents hypothetical gains that could be achieved for the
          respective warrants if exercised at the end of the warrant term. These
          gains are based on assumed rates of stock price appreciation of 5% and
          10% compounded annually from the date the respective warrants were
          granted to their expiration date. This table does not take into
          account any appreciation in the price of the common stock.

                                       17
<PAGE>
 
Year End Option Table

The following table sets forth the number and value of unexercised options held
as of August 31, 1997 by the Named Executive Officers:

                   Aggregated Option Exercises In Last Fiscal
                     Year and Fiscal Year End Option Values
<TABLE>
<CAPTION>

                                                               Value of Unexercised
                            Number of Unexercised             In-the-Money Options at
                        Options at end of Fiscal 1997          End of Fiscal 1997 (2)
                      --------------------------------    -------------------------------
Name                  Exercisable        Unexercisable     Exercisable      Unexercisable
----                  -----------        -------------     -----------      -------------
<S>                   <C>                <C>               <C>              <C>
John Waldstein (1)        103,167(3)        10,500(4)          $80,997         $533
Robert Voosen (1)          33,167           19,500(4)           24,422        7,983
</TABLE>

(1)  There were no options exercised during fiscal 1997.

(2)  Difference between the fair market value of the underlying common stock on
     November 5, 1997 and the exercise price.

(3)  Includes warrants to purchase 25,000 shares of common stock.  See "Summary
     Compensation Table - Note 3" herein.

(4)  Includes warrants to purchase 10,000 and 9,000 shares of common stock
     granted to Messrs. Waldstein and Voosen, respectively, at an exercise price
     of $2.12 exercisable for a ten-year period.

Other Matters

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

     The Company believes that all filing requirements applicable under Section
16(a) to its executive officers, directors and 10% stockholders were complied
with for fiscal 1997 except that Ms. Balcom and Mr. Voosen are required to file
a Form 5 late.

                                       18
<PAGE>
 
Item 11.                     Security Ownership of Certain
                            Beneficial Owners and Management

     Set forth below is information concerning ownership of the Company's common
stock as of October 25, 1997, (i) by all persons known by the Company to own
beneficially 5% or more of the outstanding common stock, (ii) each director and
Named Executive Officer of the Company and (iii) by all directors and executive
officers as a group.

<TABLE>
<CAPTION>
                                                                Percent of
                                                 Number of     Common Stock
Name                                             Shares(1)         Owned
----                                             ----------        -----
<S>                                              <C>           <C>
Executive Officers and Directors:

     John Waldstein                               182,805/(2)/    11.4%
     c/o International Electronics, Inc.
     427 Turnpike Street
     Canton, Massachusetts

     Robert Voosen                                 79,232/(3)/     5.2%
     c/o International Electronics, Inc.
     427 Turnpike Street
     Canton, Massachusetts

     Heath Paley                                   36,472/(4)/     2.4%
     c/o International Electronics, Inc.
     427 Turnpike Street
     Canton, Massachusetts

     Robert Prager                                 32,337/(5)/     2.2%
     220 Boylston Street
     Boston, Massachusetts

     Diane Balcom                                  14,060/(6)/      .9%
     3705 5th Avenue
     Pittsburgh, Pennsylvania

     All  directors and executive officers
     as a group (6 persons)                       369,539/(7)/    21.7%

5% Shareholders:

     Warren Paley                                 217,267         14.5%
     3 Mill Street
     New Baltimore, New York
</TABLE>


(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 the Company, which may result in a change in control. The number
      of shares shown does include shares which may be acquired through the
      exercise of options and warrants which are exercisable currently or within
      sixty (60) days after October 25, 1997.

(2)   Includes vested options and warrants to purchase an aggregate 106,167
      shares of the Company's common stock granted at prices ranging from $.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.

                                       19
<PAGE>
 
(3)   Includes vested options to purchase an aggregate 35,917 shares of the
      Company's common stock granted at prices ranging from $.75-$2.07 per
      share. In September, 1997 Mr. Voosen resigned his position as an officer
      of the Company.

(4)   Includes vested options to purchase an aggregate 27,787 shares of the
      Company's common stock granted at prices ranging from $.75 - $6.48 per
      share.

(5)   Includes vested options to purchase an aggregate 4,000 shares of the
      Company's common stock granted at prices ranging from $.72-$2.12 per
      share.

(6)   Includes vested options and warrants to purchase an aggregate 12,512
      shares of the Company's common stock granted to Diane Balcom and Balcom &
      Associates at prices ranging from $.72 - $2.12 per share.

(7)   Includes vested options and warrants to purchase an aggregate 209,383
      shares of the Company's common stock granted at prices ranging from $.72 -
      $6.48 per share. 

                                       20
<PAGE>
 
                                    PART IV

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, 1997 and 1996

              Consolidated Statements of Operations for the Years Ended August
              31, 1997, 1996 and 1995

              Consolidated Statements of Shareholders' Equity for the Years
              Ended August 31, 1997, 1996 and 1995

              Consolidated Statements of Cash Flows for the Years Ended August
              31, 1997, 1996 and 1995

              Notes to Consolidated Financial Statements

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

              Valuation and qualifying accounts

       (a)3.  Exhibits:

              (3)     Restated Articles of Organization and By-Laws are
                      incorporated by reference to Exhibit 3 to the Company's
                      Registration Statement on Form S-18 (2-91218-B), filed on
                      May 18, 1984 (hereinafter referred to as the Company's S-
                      18).

              (3)(a)  Amendment to Articles of Organization are incorporated by
                      reference to Exhibit 3.1(a) of the Company's Registration
                      Statement on Form S-1 (Registration No. 33-16333 which
                      became effective on October 8, 1987 (hereinafter referred
                      to as the Company's S-1).

              (4)     Instruments defining the rights of securities holders
                      include the Restated Articles of Organization, By-Laws,
                      Stock Certificate and Stock Purchase Warrant which are
                      incorporated by reference to Exhibits 3, 4b and 4c to the
                      Company's S-18.

              (10)(a) A American Automatic Alarm Company Supplies Contract and
                      Non-Competition Agreement is incorporated by reference to
                      Exhibit (10)(w) of the Company's Annual Report on Form 10-
                      K for the year ended August 31, 1986.

                                       21
<PAGE>
 
              (10)(b) Nonqualified Stock Option Plan is incorporated by
                      reference to Exhibit 10.1(ll) of Post-Effective Amendment
                      No. 2 of the Company's S-1.

              (10)(c) Stock Purchase Agreement dated as of June 19, 1990 by and
                      among the Company and Ecco Industries, Inc. is
                      incorporated by reference to Exhibit (2.1) on Form 8-K
                      dated July 2, 1990.

              (10)(d) Lease, Canton, Massachusetts between Turnpike Realty Trust
                      and the Registrant dated March 6, 1991, is incorporated by
                      reference to Exhibit 6.1 on Form 10-Q for the quarter
                      ended February 28, 1991.

              (10)(e) Distributor Agreement between the Registrant and Weyrad
                      Electronics, Limited dated November 3, 1992 is
                      incorporated by reference to Exhibit 10(V) on Form 10-K
                      for the year ended August 31, 1992.

              (10)(f) Distributor Agreement between the Registrant and Weyrad
                      Electronics, Limited dated April 1, 1993 is incorporated
                      by reference to Exhibit 6.1 on Form 10-Q for the quarter
                      ended February 28, 1993.

              (10)(g) Employment, Non-Disclosure and Non-Compete Agreement for
                      John Waldstein dated June 20, 1994 and amendment dated
                      December 8, 1994 is incorporated by reference to Exhibit
                      10(t) on Form 10-KSB for the year ended August 31, 1994.

              (10)(h) Workout Agreement, Amended and Restated Loan and Security
                      Agreement and Promissory Note between the Registrant and
                      Federal Deposit Insurance Corporation dated December 1,
                      1994 is incorporated by reference to Exhibit 10(u) on Form
                      10-KSB for the year ended August 31, 1994.

              (10)(i) Employment, Non-Disclosure and Non-Compete Agreement for
                      Robert Voosen dated January 15, 1995 is incorporated by
                      reference to Exhibit 6.1 on Form 10-QSB for the quarter
                      ended February 28, 1995.

              (10)(j) Lease, Canton, Massachusetts between 427 Turnpike Street
                      Realty Trust and the Registrant dated March 28, 1995 is
                      incorporated by reference to Exhibit 10(w) on Form 10-KSB
                      for the year ended August 31, 1995. 
    
              (11.1)  Statement regarding computation of per share net income
                      (loss).

              (22)    Subsidiaries of the Registrant.

              (27)    Financial data schedule.

              (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.

                                       22
<PAGE>
 
SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                   INTERNATIONAL ELECTRONICS, INC.

Date: November 25, 1997            By: /s/  John Waldstein
                                      ----------------------------------------
                                      John Waldstein, President and Chief 
                                      Executive Officer

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

<TABLE>
<CAPTION>

Signature                            Title                      Date
---------                            -----                      ----

<S>                             <C>                        <C>    
/s/ John Waldstein              President and Chief        November 25, 1997
---------------------------     Executive Officer,
    John Waldstein              Treasurer and Chief           
                                Financial and Accounting
                                Officer, and Chairman of           
                                the Board 


                                Director                   November 25, 1997
---------------------------
    Robert Voosen


/s/ Heath Paley                 Director                   November 25, 1997
---------------------------
    Heath Paley


                                Director                   November 25, 1997
---------------------------
    Robert Prager


/s/ Diane Balcom                Director                   November 25, 1997
---------------------------
    Diane Balcom

</TABLE>

                                       23
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS
--------------------------------------------------------------------------------


                                                                           Page

INDEPENDENT AUDITORS' REPORT                                                F-2

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
AUGUST 31, 1997, 1996 AND 1995:

   Consolidated Balance Sheets                                              F-3

   Consolidated Statements of Operations                                    F-4

   Consolidated Statements of Shareholders' Equity                          F-5

   Consolidated Statements of Cash Flows                                    F-6

   Notes to Consolidated Financial Statements                             F-7-17

FINANCIAL STATEMENT SCHEDULE FURNISHED PURSUANT TO THE
   REQUIREMENTS OF FORM 10-KSB -

   Schedule II - Valuation and Qualifying Accounts                         F-19


All other 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.


                                       F-1
<PAGE>
 
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, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended August
31, 1997. Our audits also included the financial statement schedule listed in
the Table of Contents. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and the financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 the Company as of August 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended August 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in Notes 1 and 9 to the consolidated financial statements, pursuant
to Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," the Company changed its method of accounting for
nonemployee stock-based compensation for awards made after December 15, 1995 and
adopted the disclosure provisions of SFAS No. 123 during the fiscal year ended
August 31, 1996.


Deloitte & Touche LLP
November 3, 1997
Boston, Massachusetts

                                      F-2
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997 AND 1996
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

ASSETS                                                    1997           1996 
<S>                                                   <C>            <C>     
CURRENT ASSETS:
 Cash and cash equivalents                           $   160,075    $   556,745
 Accounts receivable, net of allowance for
  doubtful accounts and returns of $185,000
  and $131,000 in 1997 and 1996, respectively          1,035,596        932,255
 Inventories                                           1,078,561        828,448
 Other current assets                                    133,274        141,818
                                                     -----------    -----------

       Total current assets                            2,407,506      2,459,266
                                                     -----------    -----------

EQUIPMENT AND FURNITURE, net of
 accumulated depreciation and amortization               357,289        301,300
                                                     -----------    -----------

OTHER ASSETS:
 Goodwill and other intangibles, net of
  accumulated amortization of $1,006,000
  and $916,000 in 1997 and 1996, respectively            235,029        325,313

 Other                                                    26,349         14,299
                                                     -----------    -----------

       Total other assets                                261,378        339,612
                                                     -----------    -----------

                                                     $ 3,026,173    $ 3,100,178
                                                     ===========    ===========

LIABILITIES AND SHAREHOLDERS'                                                  
EQUITY                                                    
                                                                               
CURRENT LIABILITIES:
 Accounts payable                                    $   684,431    $   592,137
 Accrued expenses                                        847,210        703,133
 Income taxes payable                                     39,000         40,000
 Current portion of long-term obligations                 36,212         79,516
                                                     -----------    -----------

       Total current liabilities                       1,606,853      1,414,786
                                                     -----------    -----------

LONG-TERM OBLIGATIONS, less
 current portion                                          68,369        409,451
                                                     -----------    -----------

SHAREHOLDERS' EQUITY:
 Common stock, $.01 par value -- authorized,
  5,984,375 shares; issued, 1,528,301 and
  1,527,051 shares in 1997 and 1996,
  respectively                                            15,283         15,271
 Capital in excess of par value                        4,784,267      4,779,413
 Accumulated deficit                                  (3,409,955)    (3,480,099)
 Less treasury stock, at cost --  35,000 shares          (38,644)       (38,644)
                                                     -----------    -----------

       Total shareholders' equity                      1,350,951      1,275,941
                                                     -----------    -----------

                                                     $ 3,026,173    $ 3,100,178
                                                     ===========    ===========
</TABLE> 

See notes to consolidated financial statements.        

                                      F-3

<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

                                                         1997              1996             1995

<S>                                                 <C>               <C>               <C> 
NET SALES                                           $ 9,173,580       $ 8,610,372       $ 6,422,930

COST OF SALES                                         5,439,461         5,051,387         3,659,140
                                                    -----------       -----------       -----------

GROSS PROFIT                                          3,734,119         3,558,985         2,763,790
                                                    -----------       -----------       -----------

OPERATING EXPENSES:
 Research and development costs                         520,629           381,245           308,162
 Selling, general and administrative expenses         3,106,376         2,950,660         2,678,087
                                                    -----------       -----------       -----------

     Total operating expenses                         3,627,005         3,331,905         2,986,249
                                                    -----------       -----------       -----------

INCOME (LOSS) FROM OPERATIONS                           107,114           227,080          (222,459)

INTEREST EXPENSE                                        (30,826)          (53,467)          (59,313)

OTHER INCOME                                             21,410            28,377            50,732
                                                    -----------       -----------       -----------

INCOME (LOSS) BEFORE INCOME TAXES                       
 AND EXTRAORDINARY GAIN                                  97,698           201,990          (231,040)

EXTRAORDINARY GAIN ON PREPAYMENT OF
 LONG-TERM OBLIGATIONS, NET OF
 INCOME TAX  EXPENSE OF $1,000                           10,446              --                --   
                                                    -----------       -----------       -----------

INCOME (LOSS) BEFORE INCOME TAXES                       108,144           201,990          (231,040)

PROVISION FOR INCOME TAXES                               38,000            40,000              --   
                                                    -----------       -----------       -----------

NET INCOME (LOSS)                                   $    70,144       $   161,990       $  (231,040)
                                                    ===========       ===========       ===========

NET INCOME (LOSS) PER SHARE:
 Income (loss) before extraordinary gain            $      0.03       $      0.10       $     (0.16)
 Extraordinary gain                                        0.01              --                --   
                                                    -----------       -----------       -----------

 Net income (loss) per share                        $      0.04       $      0.10       $     (0.16)
                                                    ===========       ===========       ===========

WEIGHTED AVERAGE COMMON AND
 EQUIVALENT SHARES                                    1,679,066         1,659,355         1,413,981
                                                    ===========       ===========       ===========
</TABLE> 

See notes to consolidated financial statements.

                                      F-4
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

                                                               Capital in
                                       Common Stock            Excess of    Accumulated          Treasury Stock
                                     Shares      Amount        Par Value      Deficit          Shares        Cost          Total
<S>                                <C>         <C>           <C>           <C>            <C>           <C>            <C> 
BALANCES, SEPTEMBER 1, 1994        1,442,669   $    14,427   $ 4,668,050   $(3,411,049)        19,000   $   (19,602)   $ 1,251,826

 Purchase of treasury stock             --          --              --            --           16,000       (19,042)       (19,042)

 Net loss                               --          --              --        (231,040)          --            --         (231,040)
                                 -----------   -----------   -----------   -----------    -----------   -----------    -----------

BALANCES, AUGUST 31, 1995          1,442,669        14,427     4,668,050    (3,642,089)        35,000       (38,644)     1,001,744

 Stock issued upon exercise of 
  stock warrants                      16,200           162        11,988          --             --            --           12,150

 Issuance of stock warrants             --            --          11,000                                                    11,000

 Stock issued in a private 
  placement                           68,182           682        88,375          --             --            --           89,057

 Net income                             --            --            --         161,990           --            --          161,990
                                 -----------   -----------   -----------   -----------    -----------   -----------    -----------

BALANCES, AUGUST 31, 1996          1,527,051        15,271     4,779,413    (3,480,099)        35,000       (38,644)     1,275,941

 Stock issued upon exercise of
  stock options                        1,250            12         1,328          --             --            --            1,340

 Issuance of stock  warrants            --            --           3,526          --             --            --            3,526

 Net income                             --            --            --          70,144           --            --           70,144
                                 -----------   -----------   -----------   -----------    -----------   -----------    -----------

BALANCES, AUGUST 31, 1997          1,528,301   $    15,283   $ 4,784,267   $(3,409,955)        35,000   $   (38,644)   $ 1,350,951
                                 ===========   ===========   ===========   ===========    ===========   ===========    ===========
</TABLE> 

See notes to consolidated financial statements.

                                      F-5
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

                                                                      1997        1996         1995
<S>                                                               <C>          <C>          <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                                $  70,144    $ 161,990    $(231,040)
 Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
   Depreciation and amortization                                    285,512      247,851      264,666
   Stock warrants  issued for professional services                   1,626       11,000         --   
   Changes in operating assets and liabilities:
     Accounts receivable                                           (103,341)     (95,550)    (148,332)
     Inventories                                                   (250,113)    (204,535)    (120,575)
     Other current assets                                             8,544      (37,367)      (6,877)
     Accounts payable and accrued expenses                          236,371      212,705      268,233
     Income taxes payable                                            (1,000)      40,000       (2,000)
                                                                  ---------    ---------    ---------

     Net cash provided by operating activities                      247,743      336,094       24,075
                                                                  ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES AND OTHER:
 Net purchase of equipment and furniture                           (208,891)    (139,033)     (35,429)
 Other assets                                                       (12,050)       2,986        1,850
                                                                  ---------    ---------    ---------

     Net cash used in investing activities and other               (220,941)    (136,047)     (33,579)
                                                                  ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Additions to debt obligations                                       24,353       35,000         --   
 Issuance of common stock and stock warrants                          3,240      101,207         --   
 Purchase of treasury stock                                            --           --        (19,042)
 Payments of debt obligations                                      (451,065)    (107,321)    (142,305)
                                                                  ---------    ---------    ---------

     Net cash provided by (used in) financing activities           (423,472)      28,886     (161,347)
                                                                  ---------    ---------    ---------

CASH AND CASH EQUIVALENTS -- Increase (decrease) during the year   (396,670)     228,933     (170,851)

BALANCES, BEGINNING OF YEAR                                         556,745      327,812      498,663
                                                                  ---------    ---------    ---------

BALANCES, END OF YEAR                                             $ 160,075    $ 556,745    $ 327,812
                                                                  =========    =========    =========

SUPPLEMENTARY DISCLOSURE OF CASH FLOW
 INFORMATION -- Interest paid                                     $  30,826    $  53,467    $  59,313
                                                                  =========    =========    =========

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS --
 Equipment acquired under capitalized leases                      $  42,326    $  39,508    $  55,000
                                                                  =========    =========    =========
</TABLE> 

See notes to consolidated financial statements.
         

                                      F-6
<PAGE>
 
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------


1.    SIGNIFICANT ACCOUNTING POLICIES

      Description of the Business - International Electronics, Inc. and
      subsidiaries (the "Company") 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. and 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 and Cash Equivalents - The Company 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 the Company's
      assets and liabilities which constitute financial instruments approximate
      their recorded value.

      Concentration of Credit Risk - Financial instruments that potentially
      subject the Company to concentrations of credit risk are cash and accounts
      receivable. The majority of the Company's cash is maintained with a
      commercial bank. Concentration of credit risk with respect to accounts
      receivable is limited to certain customers to whom the Company makes
      substantial sales (see Note 11).

      Inventories - Inventories are stated at the lower of cost or market. Cost
      is determined on a first-in, first-out basis. Allowances are made for
      slow-moving, obsolete, unsalable or unusable items.

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

<TABLE> 
<CAPTION> 
                                             Estimated 
                                               Lives   
         <S>                                 <C> 
         Machinery and equipment             3-5 years  
         Office furniture and equipment      3-7 years   
</TABLE> 

                                      F-7
<PAGE>
 
1.    SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      Goodwill and Other Intangibles - Goodwill and other intangibles are
      amortized over five- to ten-year periods.

      During the year ended August 31, 1997, the Company adopted Financial
      Accounting Standards Board ("FASB") Statement of Financial Accounting
      Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
      Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires
      that long-lived assets, certain identifiable intangibles, and goodwill to
      be held and used by an entity be reviewed for impairment whenever
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. The adoption of SFAS No. 121 had no impact on the Company's
      financial position or results of operations.

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

      Revenue Recognition - Revenue from product sales is recognized upon
      shipment. An allowance for estimated future returns is recorded at the
      time revenue is recognized based on the Company's historical experience.
      Estimated product warranty costs are also provided for at the time of
      sale.

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

      Net Income (Loss) Per Share - Net income (loss) per share is computed
      based on the weighted average common and dilutive common equivalent shares
      outstanding during the year. Common equivalent shares consist of stock
      options and warrants. Primary income (loss) per common share is computed
      by dividing net income (loss) by the weighted average number of common and
      common equivalent shares outstanding based on the average market price of
      the Company's common stock (under the treasury stock method). Income
      (loss) per common share, on a fully diluted basis, is computed as
      described above utilizing the higher of the ending or average market price
      of the Company's common stock. Primary and fully diluted income (loss) per
      common share are the same for each year.

      SFAS No. 128, "Earnings Per Share," will be effective commencing with the
      Company's second quarter in fiscal year 1998. SFAS No. 128 replaces the
      presentation of primary earnings per share with basic earnings per share,
      which excludes dilution, and a diluted earnings per share. The Company
      believes there will be no material impact upon adoption of SFAS No. 128 on
      its reported net income per share.

      Employee Stock-Based Compensation - The Company uses the intrinsic
      value-based method of Accounting Principles Board Opinion No. 25, as
      allowed under SFAS No. 123, "Accounting for Stock-Based Compensation," to
      account for all of its employee stock-based compensation plans.

                                      F-8
<PAGE>
 
1.    SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      Nonemployee Stock-Based Compensation - During the year ended August 31,
      1996, the Company adopted the provisions of SFAS No. 123 relating to the
      accounting for awards of stock-based compensation to nonemployees.
      Accordingly, stock-based compensation awarded to nonemployees subsequent
      to December 15, 1995 is accounted for using the "fair value" method.
      Stock-based compensation awarded to nonemployees on or prior to December
      15, 1995 was accounted for using the "intrinsic value" method. The effect
      of adopting SFAS No. 123 was to reduce income before income taxes for the
      year ended August 31, 1996 by $11,000.

      Reclassifications - Certain reclassifications have been made to the prior
      year's financial statements to conform to the 1997 presentation.

      New Accounting Pronouncements - In June 1997, the FASB issued SFAS No.
      130, "Reporting Comprehensive Income," which establishes standards for
      reporting and display of comprehensive income and its components
      (revenues, expenses, gains and losses) in a full set of general-purpose
      financial statements. SFAS No. 130 is effective for fiscal years beginning
      after December 15, 1997. The Company has not determined the effects, if
      any, that SFAS No. 130 will have on its consolidated financial statements.

      In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
      an Enterprise and Related Information," which establishes standards for
      the way that public companies report selected information about operating
      segments. SFAS No. 131 is effective for financial statements for periods
      beginning after December 15, 1997. The Company has not determined the
      effects, if any, that SFAS No. 131 will have on the disclosures in its
      consolidated financial statements.

2.    INVENTORIES

      Inventories at August 31 consist of the following:

<TABLE> 
<CAPTION> 
                                                         1997             1996
<S>                                                  <C>              <C> 
Raw materials and subassemblies                      $  785,088       $  645,275
Work in process                                          83,959           76,821
Finished goods                                          209,514          106,352
                                                     ----------       ----------

                                                     $1,078,561       $  828,448
                                                     ==========       ==========
</TABLE> 

3.    EQUIPMENT AND FURNITURE

      Equipment and furniture at August 31 consist of the following:

<TABLE> 
<CAPTION> 
                                                          1997           1996
<S>                                                  <C>            <C> 
Machinery and equipment                              $   783,880    $   620,619
Office furniture and equipment                           582,116        494,160
                                                     -----------    -----------

                                                       1,365,996      1,114,779

Less accumulated depreciation and amortization        (1,008,707)      (813,479)
                                                     -----------    -----------

                                                     $   357,289    $   301,300
                                                     ===========    ===========
</TABLE> 

                                      F-9
<PAGE>
 
4.    ACCRUED EXPENSES

      Accrued expenses at August 31 consist of the following:

<TABLE> 
<CAPTION> 
                                                          1997            1996
<S>                                                    <C>              <C> 
Payroll and related amounts                            $183,492         $168,172
Warranty                                                528,430          386,199
Professional fees                                       119,965          113,048
Other                                                    15,323           35,714
                                                       --------         --------

                                                       $847,210         $703,133
                                                       ========         ========
</TABLE> 

5.    LONG-TERM OBLIGATIONS

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

<TABLE> 
<CAPTION> 
                                                            1997          1996
<S>                                                      <C>          <C>  
Federal Deposit Insurance Corporation agreement          $    --      $ 385,091
Capitalized lease obligations, 7% -- 18%, due through
 April 2001 (Note 7)                                        60,627       66,793 
Equipment line of credit, 8.5% (Note 6)                     24,352           -
Collateralized 13% equipment loans, final payments
 through August 2000                                         5,602       23,083
Other                                                       14,000       14,000
                                                         ---------    ---------

                                                           104,581      488,967

Less current portion                                       (36,212)     (79,516)
                                                         ---------    ---------

                                                         $  68,369    $ 409,451
                                                         =========    =========
</TABLE> 
                                                                               
      Federal Deposit Insurance Corporation ("FDIC") Agreement - In February
      1997, the Company repaid approximately $358,000, representing the balance
      due the FDIC for the outstanding note originally payable in full on
      December 31, 1997. The Company recognized an extraordinary gain of
      $10,446, net of income tax expense of $1,000, on this transaction,
      representing a prepayment discount from the FDIC.

      The aggregate principal payments on long-term obligations as of August 31,
      1997, excluding capital leases, are $13,719 in 1998, $22,118 in 1999 and
      $8,117 in 2000.

      Capital lease and equipment loans at August 31, 1997 are collateralized by
      the related equipment with a carrying value of approximately $54,000.

                                      F-10
<PAGE>
 
6.    BANK ARRANGEMENTS

      In February 1997, the Company established a bank working capital demand
      line of credit with borrowings up to $1,000,000 and a $250,000 equipment
      line of credit. Available borrowings under the working capital line are
      based on a percentage of eligible accounts receivable and inventory. Both
      lines of credit are at the bank's prime rate of interest and all of the
      Company's assets are collateralized under these arrangements. The credit
      agreements contain certain restrictive covenants including covenants
      limiting the payment of dividends, and a required minimum current ratio
      and debt to tangible net worth ratio. As of August 31, 1997, no borrowings
      have been made under the working capital line of credit and the Company
      has $24,352 in borrowings under the equipment line of credit at an
      interest rate of 8.5% which is payable in monthly installments through
      August 2000.

7.    COMMITMENTS

      Leases -- The Company leases an administrative and production facility
      under an operating lease which expires in April 1998. The Company is
      responsible for certain real estate taxes, utilities and maintenance
      costs. Total rental expense for operating leases for the years ended
      August 31, 1997, 1996 and 1995 amounted to $137,033, $102,198 and $81,235,
      respectively.

      The Company leases certain equipment under capital leases and,
      accordingly, the present value of the net minimum payments has been
      reflected in equipment and furniture and capitalized lease obligations.

      Future minimum lease payments, under noncancelable lease terms in excess
      of one year at August 31, 1997, are as follows:

<TABLE> 
  <S>                                                        <C> 
  1998                                                       $ 28,377
  1999                                                         24,486
  2000                                                         12,761
  2001                                                          6,042
                                                             --------  

  Total minimum lease payments                                 71,666

  Less interest                                               (11,039)
                                                             --------

  Net minimum lease payments                                   60,627

  Less current portion                                        (22,493)
                                                             --------

  Long-term portion                                          $ 38,134
                                                             ========
</TABLE> 

      Employment Agreements -- The Company has an employment agreement with an
      officer of the Company providing minimum annual aggregate compensation of
      $135,000 in 1998, 1999 and 2000, and $45,000 in 2001.

                                     F-11
<PAGE>
 
8.    INCOME TAXES

      The provision for income taxes, including income taxes on extraordinary
      gain in 1997, is comprised of the following:

<TABLE> 
<CAPTION> 
                                          1997            1996           1995
<S>                                     <C>              <C>            <C> 
Current:
  Federal                               $ 3,000          $ 4,000          $ --
  State                                  36,000           36,000            --
                                        -------          -------          ------

                                        $39,000          $40,000          $ --
                                        =======          =======          ======
</TABLE> 

      The Company's effective tax rate differs from the statutory federal income
      tax rate due to the following:

<TABLE> 
<CAPTION> 
                                                     1997     1996    1995
<S>                                                 <C>      <C>     <C>  
Statutory federal income tax rate                     34.0 %   34.0 % (34.0)%
State income taxes, net of federal benefit            21.4     11.8     --   
Effect of graduated federal rates                      --       --     (5.1)
Amortization of goodwill                              27.2     14.6    18.7
Federal alternative minimum tax                        1.8      1.3     --   
Utilization of federal net operating loss 
 carryforwards and tax credits                       (55.5)   (47.0)   17.6
Other                                                  6.2      5.1     2.8
                                                     -----    -----   -----
                                                            
Effective tax rate                                    35.1 %   19.8 %   -- %
                                                     =====    =====   =====
</TABLE> 
                                                           


      As of August 31, 1997, the Company has net operating loss carryforwards
      for financial reporting and income tax purposes of approximately
      $1,644,000, expiring in varying amounts from 1998 to 2008 (primarily 1998
      to 2005). Aggregate investment and research and development credit
      carryforwards of $78,000 at August 31, 1997 expire in varying amounts
      through the year 2004. The Company also has $467,000 of federal net
      operating loss carryforwards which are limited to use against income of
      Ecco.

      Net operating loss carryforwards are limited in the event of certain
      circumstances, including significant changes in ownership interests. Upon
      completion of the Company's 1987 public offering and 1990 acquisition of
      Ecco, the maximum net operating loss carryforward that may be used in any
      year for losses incurred prior to the aforementioned events is
      approximately $212,000. However, use of the Company's net operating loss
      carryforwards, incurred since the completion of the 1987 offering and 1990
      acquisition, approximating $1,010,000, will not be limited in any year.

      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 have been recorded to offset net deferred tax assets due to the
      uncertainty of realizing the benefit of these assets.

                                      F-12
<PAGE>
 
8.    INCOME TAXES (CONTINUED)

      The following is a summary of the significant components of the Company's
      deferred tax assets and liabilities:

<TABLE> 
<CAPTION> 
                                          1997          1996
<S>                                  <C>            <C> 
Deferred tax assets (liabilities):
  Net operating loss carryforwards   $   718,000    $   975,000
  Tax credits                             78,000        124,000
  Accounts receivable reserves            58,000         37,000
  Inventories and related reserves       282,000        205,000
  Other                                  (25,000)       (28,000)
  Depreciation                            20,000          5,000
  Valuation allowance                 (1,131,000)    (1,318,000)
                                     -----------    -----------

                                     $       --     $       --
                                     ===========    ===========
</TABLE> 
                                                                              
9.    CAPITAL TRANSACTIONS

      Common Stock -- In January 1996, the Company sold, in a private placement,
      68,182 shares of restricted common stock for net proceeds of $89,057 with
      issuance costs of $943.

      Stock Options -- In 1983, the Company approved and reserved 9,524 shares
      of common stock for an incentive stock option plan for key employees. No
      option may be granted to any employee who owns in excess of 10% of the
      total outstanding voting stock. No option granted under the plan shall
      have a term in excess of ten years. The purchase price per share for the
      stock options shall not be less than the fair market value of the common
      stock at the time of grant.

      Since 1988, the Company has approved and reserved shares of common stock
      for nonqualified 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. At
      August 31, 1997, 23,955 shares remain available for future grants.


                                      F-13
<PAGE>
 
9.  CAPITAL TRANSACTIONS (CONTINUED)

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

<TABLE> 
<CAPTION> 
                                                                      
                                                                       Weighted Average
                                                                           Exercise
                                                            Shares      Price Per Share
       <S>                                                 <C>         <C> 
       Outstanding, September 1, 1994                       260,673        $ 1.29      
        Granted                                              26,500          1.07      
        Canceled                                            (15,600)         0.95      
                                                           --------                    
                                                                                       
       Outstanding, August 31, 1995                         271,573          1.29      
        Granted (weighted average fair value of $0.89)       84,200          1.44      
        Canceled                                            (41,739)         1.53      
                                                           --------                    
                                                                                       
                                                                                       
       Outstanding, August 31, 1996                         314,034          1.30      
        Granted (weighted average fair value of $0.94)       38,000          2.12      
        Canceled                                            (30,300)         1.65      
                                                           --------                    
                                                                                       
                                                                                       
       Outstanding, August 31, 1997                         321,734          1.37      
                                                           ========     
</TABLE> 


    The following table summarizes information concerning outstanding and
    exercisable options as of August 31, 1997:

<TABLE> 
<CAPTION> 
                                      Options Outstanding                     Options Exercisable
                         ---------------------------------------------   --------------------------------

                                         Weighted
                                          Average
                                         Remaining
                                        Contractual       Weighted                          Weighted
           Range of          Number         Life          Average          Number            Average
      Exercise Price(s)   Outstanding     (Years)      Exercise Price    Exercisable     Exercise Price
<S>                       <C>           <C>            <C>               <C>             <C> 
       $ .72 -- $1.00       96,083          4.58          $   .82           86,771          $   .82
        1.01 --  2.00      151,613          6.68             1.36           92,403             1.34
        2.07 --  2.17       73,667          6.69             2.10           44,167             2.07
            6.48               371          2.79             6.48              371             6.48
                           -------                                         -------                 
                           321,734          6.05          $  1.37          223,712          $  1.29 
                           =======                                         =======        
</TABLE> 

      Stock Warrants -- In December 1994, the Company granted warrants to an
      officer of the Company to purchase 25,000 shares of common stock at an
      exercise price of $.74 per share, exercisable for a ten-year period, in
      exchange for a personal guarantee of certain debt. In September 1995, the
      Company granted warrants to a financial consultant to purchase 1,000
      shares of common stock at an exercise price of $1.36 per share,
      exercisable for a ten-year period.

                                      F-14
<PAGE>
 
9.    CAPITAL TRANSACTIONS (CONTINUED)

      Stock Warrants (Continued) - In January 1996, the Company granted warrants
      to a public relations firm to purchase 10,000 shares of common stock at an
      exercise price of $1.65 per share exercisable for a ten-year period.
      Pursuant to SFAS No. 123, the Company recorded compensation expense of
      $11,000 for the year ended August 31, 1996 in connection with the issuance
      of these warrants.

      In September 1996, the Company granted warrants to two officers to
      purchase an aggregate 19,000 shares of common stock at an exercise price
      of $2.12 per share exercisable for a ten-year period. Each of the warrants
      was assigned a value of $.10 per share which was paid by the officers.

      In August 1997, the Company granted warrants to a financial consultant to
      purchase 3,500 shares of common stock at an exercise price of $1.69,
      exercisable for a ten-year period.

      The Company has granted rights to certain warrant holders with respect to
      the registration of such shares underlying the warrants with the
      Securities and Exchange Commission.

      The following is a summary of transactions relating to the Company's
      outstanding common stock warrants:

<TABLE> 
<CAPTION> 
                                                                                         Private
                                        Consultants       Officers          Debt       Placements         Total
<S>                                     <C>               <C>             <C>          <C>    
Outstanding, September 1, 1994             40,238             --             2,512        22,900          65,650     
 Expired                                     --               --              --          (6,700)         (6,700)    
 Granted                                     --             25,000            --            --            25,000     
                                         --------         --------        --------      --------        --------     
                                                                                                                     
                                                                                                                     
Outstanding, August 31, 1995               40,238           25,000           2,512        16,200          83,950     
 Exercised                                   --               --              --         (16,200)        (16,200)    
 Granted (weighted average
  fair value of $1.12)                     11,000             --              --            --            11,000     
                                         --------         --------        --------      --------        --------     
                                                                                                                     
                                                                                                                     
Outstanding, August 31, 1996                                                                                         
 (weighted average exercise                                                                                          
 price of $1.13)                           51,238           25,000           2,512          --            78,750     
  Expired                                  (3,571)            --              --            --            (3,571)    
  Granted (weighted average                                                                                          
   fair value of $2.05)                     3,500           19,000            --            --            22,500     
                                         --------         --------        --------      --------        --------     
                                                                                                                     
Outstanding, August 31, 1997                                                                                         
 (weighted average exercise                                                                                          
 price of $1.32)                           51,167           44,000           2,512          --            97,679     
                                         ========         ========        ========      ========        ========     
                                                                                                                     
Exercisable                                47,667           25,000           2,512          --            75,179     
                                         ========         ========        ========      ========        ========      
                                                                                                                     
Exercise price(s)                      $.72 - $2.07     $.74 - $2.12      $   0.99      $   --         $.72 - $2.12 
                                       ============     ============      ========      ========       ============ 
</TABLE> 

                                      F-15
<PAGE>
 
9.     CAPITAL TRANSACTIONS (CONTINUED)

       Employee Stock-Based Compensation - With respect to employee and
       directors' stock-based compensation, the Company has adopted the
       disclosure only requirements of SFAS No. 123. Accordingly, no
       compensation cost has been recognized in the accompanying consolidated
       financial statements for employee and directors' stock-based compensation
       awarded under employee stock option plans. If compensation cost had been
       determined for awards granted commencing September 1, 1995 under the
       Company's employee and directors' stock option plans based on the fair
       value of the awards at the date of grant in accordance with the
       provisions of SFAS No. 123, the Company's net income and net income per
       share for the years ended August 31, 1997 and 1996 would have decreased
       to the pro forma amounts indicated below:

<TABLE> 
                                                  1997           1996
<S>                                           <C>            <C> 
Net income - as reported                       $  70,144      $  161,990    
Net income - pro forma                            39,634         141,458    
Net income per share - as reported                  0.04            0.10    
Net income per share - pro forma                    0.02            0.09     
</TABLE> 
                                                                            

      The pro forma disclosures presented are not necessarily representative of
      the effects on reported net income for future years.

       The fair value of each option grant is estimated on the date of the grant
       using the Black-Scholes option-pricing model with an assumed risk-free
       interest rate of 6 percent in 1997 and 7 percent in 1996, an expected
       life of five years, an expected volatility of 42 percent in 1997 and 80
       percent in 1996, and assumes no dividends will be paid.

<TABLE> 
<CAPTION> 
Common Stock Reserved                                           Shares
<S>                                                             <C> 
Stock warrants                                                   97,679 
Stock options                                                   345,689 
                                                                -------
                                                                443,368 
                                                                =======
</TABLE> 

10.   BENEFIT PLAN

      The Company 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 the
      Company are made at the discretion of the Board of Directors. The Company
      has made no contributions to the 401(k) plan to date.

                                     F-16
<PAGE>
 
11.   VENDORS, CUSTOMER AND INTERNATIONAL SALES

      The Company 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 the Company'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 the Company's operating
      results in any given period.

      Sales to one customer accounted for 36%, 33% and 30% of net sales in 1997,
      1996 and 1995, respectively. The accounts receivable from this customer
      amounted to approximately $402,000 and $207,000 at August 31, 1997 and
      1996, respectively.

      The Company sources a significant amount of components and maintains
      certain molds for its products in Asia. The Company 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 could have a
      material adverse effect on the Company's operating results in any given
      period. International sales, primarily to Canada, Europe and Asia, were
      approximately $1,435,000 in 1997, $1,057,000 in 1996 and $763,000 in 1995.

12.   OTHER INCOME

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

<TABLE> 
                                           1997          1996            1995
<S>                                      <C>           <C>             <C>  
Interest                                 $ 7,592       $ 6,641         $ 6,454
Commissions                               13,818        21,736          31,713
Other                                       --            --            12,565
                                         -------       -------         -------
                                                                              
                                         $21,410       $28,377         $50,732
                                         =======       =======         =======
</TABLE> 

                                   * * * * * *


                                     F-17
<PAGE>
 
                          FINANCIAL STATEMENT SCHEDULE
                          FURNISHED PURSUANT TO THE
                          REQUIREMENTS OF FORM 10-KSB



                                     F-18
<PAGE>
 
                                                                     SCHEDULE II

INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                       Additions
                                                Balance at    Charged to    Charged to                Balance at
                                                Beginning     Costs and       Other      Deductions     End of
                 Description                     of Year       Expenses      Accounts       (A)          Year
<S>                                             <C>           <C>           <C>         <C>          <C> 

Allowance for doubtful accounts and returns:

  August 31, 1997                                $131,000      $ 74,000      $   -       $(20,000)     $185,000   
                                                                                                                  
  August 31, 1996                                 113,000        44,000          -        (26,000)      131,000   
                                                                                                                  
  August 31, 1995                                  59,000       132,000          -        (78,000)      113,000    
</TABLE> 


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

                                      F-19