UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2006

Commission File Number 0-16305

INTERNATIONAL ELECTRONICS, INC.

(Exact name of small business issuer as specified in its charter)

MASSACHUSETTS	04-2654231
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)

427 Turnpike Street, Canton, Massachusetts 02021

(Address of principal executive offices, including zip code)

(781) 821-5566

(Issuer’s telephone number, including area code)

Check 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

As of March 31, 2006, there were 1,738,931 shares of $0.01 par value per share, common stock, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

Form 10-QSB

Quarter Ended February 28, 2006

Table of Contents

		Page No.
Part I.	Financial Information:
	Item 1: Financial Statements (unaudited)
	Consolidated Balance Sheets, February 28, 2006 and August 31, 2005	3
	Consolidated Statements of Operations, three and six months ended February 28, 2006 and 2005	4
	Consolidated Statements of Cash Flows, six months ended February 28, 2006 and 2005	5
	Notes to Consolidated Financial Statements	6-12
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-21
	Item 3: Controls and Procedures	22
Part II.	Other Information:
	Item 6: Exhibits	23
	Signature	23

2

Part I. Financial Information

Item 1: Financial Statements

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

	February 28, 2006			August 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	772,643		$	1,165,847
Accounts receivable, net		1,673,280			1,800,250
Inventories, net		1,109,249			846,156
Other current assets		322,828			245,100
Total current assets		3,878,000			4,057,353
Property and equipment, net		625,741			605,874
Other assets		16,055			6,055
	$	4,519,796		$	4,669,282
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	983,664		$	904,765
Accrued expenses		1,602,900			1,349,958
Current portion of long-term obligations		148,918			238,385
Total current liabilities		2,735,482			2,493,108
Commitments and contingencies		—			—
Shareholders’ equity:
Common stock, $0.01 par value:
Authorized 5,984,375 shares Issued and outstanding 1,738,931 and 1,731,531 at February 28, 2006 and August 31, 2005, respectively		17,389			17,315
Capital in excess of par value		5,124,145			5,113,627
Accumulated deficit		(3,357,220	)		(2,954,768	)
Total shareholders’ equity		1,784,314			2,176,174
	$	4,519,796		$	4,669,282

See notes to unaudited consolidated financial statements.

3

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended						Six months ended
	Feb. 28, 2006			Feb. 28, 2005			Feb. 28, 2006			Feb. 28, 2005
Net sales	$	3,509,998		$	3,041,968		$	6,878,958		$	5,778,021
Cost of sales		1,864,502			1,635,881			3,800,844			3,218,598
Gross profit		1,645,496			1,406,087			3,078,114			2,559,423
Operating expenses:
Research and development		280,185			282,152			628,787			565,425
Selling, general and administrative		1,511,773			1,300,994			2,854,920			2,619,570
Total operating expenses		1,791,958			1,583,146			3,483,707			3,184,995
Loss from operations		(146,462	)		(177,059	)		(405,593	)		(625,572	)
Interest expense		(3,589	)		(5,578	)		(8,037	)		(10,956	)
Other income		3,999			6,019			11,178			12,302
Net loss	$	(146,052	)	$	(176,618	)	$	(402,452	)	$	(624,226	)
Basic and diluted net loss per share	$	(0.08	)	$	(0.10	)	$	(0.23	)	$	(0.36	)
Shares used in computing net loss per share:		1,738,931			1,729,531			1,738,314			1,729,531

See notes to unaudited consolidated financial statements.

4

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six months ended
	Feb. 28, 2006			Feb. 28, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(402,452	)	$	(624,226	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		118,992			133,199
Changes in operating assets and liabilities:
Accounts receivable		126,970			(40,548	)
Inventories		(263,093	)		(207,741	)
Other current assets		(77,728	)		(2,409	)
Accounts payable and accrued expenses		331,841			(36,803	)
Net cash used in operating activities		(165,470	)		(778,528	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of property and equipment		(138,859	)		(57,610	)
Net cash used in investing activities		(138,859	)		(57,610	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants		10,592			—
Additions to debt obligations		—			50,652
Financing costs		(10,000	)		—
Payment of debt obligations		(89,467	)		(164,125	)
Net cash used in financing activities		(88,875	)		(113,473	)
CASH AND CASH EQUIVALENTS:
Net decrease during period		(393,204	)		(949,611	)
Balances, beginning of period		1,165,847			2,142,526
Balances, end of period	$	772,643		$	1,192,915
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	8,062		$	10,956
Income taxes paid	$	—		$	6,225

See notes to unaudited consolidated financial statements.

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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. (a) Financial Statements

In the opinion of International Electronics, Inc’s. (IEI) management, the unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of February 28, 2006 and 2005, the results of operations for the three and six months then ended and cash flows for the six months then ended. The results of operations for the six months ended February 28, 2006 may not be indicative of the results for the full fiscal year.

Certain disclosures normally included have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although IEI believes the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in IEI’s Annual Report on Form 10-KSB for the year ended August 31, 2005.

(b) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of IEI and its inactive majority-owned subsidiaries, Ecco Industries, Inc. and International Electronics Europe Limited. All material intercompany transactions, balances and profits have been eliminated.

(c) Limited Financial Resources

IEI has limited financial resources. It is therefore subject to all the risks generally associated with a small business having limited financial resources. For the six months ended February 28, 2006 and years ended August 31, 2005 and 2004, IEI had net losses of approximately ($402,000), ($720,000) and ($1,125,000), respectively. Continued operations after the expenditure of IEI’s existing cash reserves may require additional working capital to be generated by profitable operations and/or additional financing. There can be no assurance that we will achieve profitable operations or that additional external funding will be obtainable, if such a need should arise.

(d) Significant Accounting Policies

Concentration of Credit Risk – Financial instruments that potentially subject IEI to concentrations of credit risk are cash, cash equivalents and accounts receivable. IEI has no significant off-balance sheet concentrations such as foreign exchange contracts, option contracts or other hedging arrangements. The majority of IEI’s cash is maintained with a commercial bank, and cash equivalents are U.S. government securities. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom IEI makes substantial sales (Note 10). IEI generally does not obtain collateral in support of its trade accounts receivable.

6

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

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

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

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

(e) Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123 provides that companies may account for stock-based compensation under either the fair value-based method of accounting under SFAS No. 123 or use the intrinsic value-based method provided by Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees.” IEI uses the intrinsic value-based method of APB No. 25 to account for all of its employee stock-based compensation plans and uses the fair value method of SFAS No. 123 to account for all nonemployee stock-based compensation. SFAS No. 123, as amended by SFAS No. 148, requires companies using the intrinsic-value method under APB No. 25 to make pro-forma disclosure in the notes to the financial statements using the measurement provisions of SFAS No. 123. See Note 1(f).

IEI has computed the pro forma disclosures required under SFAS No. 123 for stock options granted to employees using the Black-Scholes option pricing model with an assumed risk-free interest rate of 3%, volatility of 100% and an expected life of 5 years, with the assumption that no dividends will be paid for all periods presented. Under APB No. 25, IEI has recognized no stock-based compensation expense for the three and six months ended February 28, 2006 and 2005. Had compensation expense for IEI’s stock option plans been determined consistent with SFAS No. 123, the pro forma net loss and pro forma net loss per share would have been as follows:

7

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

	Three months ended						Six months ended
	Feb. 28, 2006			Feb. 28, 2005			Feb. 28, 2006			Feb. 28, 2005
Net loss:
As reported	$	(146,052	)	$	(176,618	)	$	(402,452	)	$	(624,226	)
Less: employee stock-based compensation under fair value method		(9,159	)		(12,305	)		(17,592	)		(23,549	)
Pro forma	$	(155,211	)	$	(188,923	)	$	(420,044	)	$	(647,775	)
Loss per share:
Basic and diluted as reported	$	(0.08	)	$	(0.10	)	$	(0.23	)	$	(0.36	)
Basic and diluted pro forma	$	(0.09	)	$	(0.11	)	$	(0.24	)	$	(0.37	)

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

(f) Recent Accounting Pronouncement

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

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

8

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

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

In May 2005, the FASB issued SFAS Statement No. 154, Accounting Changes and Error Corrections (“SFAS 154”), which replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements – An Amendment of APB Opinion No. 28. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of SFAS 154 cannot be predicted at this time.

2. Income Taxes

IEI provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Valuation allowances are recorded to offset net deferred tax assets due to the uncertainty of realizing the benefit of assets. Based on management’s assessment of the likelihood of recovery of such assets, IEI recorded a valuation allowance on all of the net deferred tax assets as of August 31, 2005. IEI evaluated the valuation allowance as of February 28, 2006 and determined that there remains an uncertainty of realizing the benefit therefore a full valuation allowance equal to 100% of net deferred tax assets was required.

3. Significant Estimates and Assumptions

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

9

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

4. Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted-average common shares outstanding during the periods. Diluted net loss per share is computed when required by dividing net earnings by the weighted-average number of common and dilutive option and warrant shares outstanding based on the average market price of IEI’s common stock (under the treasury stock method). The impact on earnings per share of the aggregate stock options and warrants of 285,300 as of February 28, 2006 and 324,152 as of February 28, 2005 are not included in these financial statements, as their effects would have been anti-dilutive.

5. Inventories, net

Inventories consist of the following:

	Feb. 28, 2006		Aug. 31, 2005
Raw materials	$	659,041	$	460,800
Work in progress		223,906		159,014
Finished goods		226,302		226,342
	$	1,109,249	$	846,156

The inventory amounts include the effect of $275,474 and $178,031 at February 28, 2006 and August 31, 2005, respectively, of reserves for excess and obsolete inventories.

6. Other Balance Sheet Data

Allowance for Doubtful Accounts and Returns

The following table sets forth activity in IEI’s allowance for doubtful accounts and returns for the six months ended February 28, 2006 and 2005:

	Balance at beginning of period		Charges to costs and expenses		Deductions(a)		Balance end of period
Feb. 28, 2006	$	227,841	$	23,677	—		$	251,518
Feb. 28, 2005		238,495		4,126	(4,126	)		238,495

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

10

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

Warranty

The following table sets forth activity in IEI’s warranty accrual, included in accrued expenses, for the six months ended February 28, 2006 and 2005:

	Balance at beginning of period		Charges to costs and expenses		Deductions			Balance end of period
Feb. 28, 2006	$	287,569	$	184,256	$	(192,799	)	$	279,026
Feb. 28, 2005		354,845		141,128		(173,738	)		322,235

7. Commitments and Contingencies

Leases – IEI leases an administrative and production facility under an operating lease expiring in April 2006 at an annual rate of $160,000. An amendment to the lease was signed on February 15, 2006 at an annual rate of $162,000. The amendment term commences on May 1, 2006 and expires on April 30, 2008. IEI is also responsible for certain real estate taxes, utilities and maintenance costs related to the leased property. Such contingent rental obligations are recognized as incurred.

Employment Arrangements – IEI has a continuous, three-year employment agreement with its president and chief executive officer providing minimum annual aggregate compensation of approximately $193,000. This employment agreement contains certain termination provisions. In addition, IEI has employment arrangements with certain other key management that require salary and benefit continuation for up to one year (representing an aggregate of approximately $458,000 in salaries as of February 28, 2006) in the event of termination of such employment as a result of an acquisition, merger or sale of assets of IEI.

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

8. Long-term Obligations

Long-term obligations are summarized as follows:

	Feb. 28, 2006			Aug. 31, 2005
Equipment line of credit, 6%-8.5%	$	148,918		$	238,385
Less current portion		(148,918	)		(238,385	)
	$	—		$	—

11

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

In February 2005 an equipment line of credit from Eastern Bank expired. The debt under the line of credit was reclassified as a current liability on the balance sheet. The payment of this equipment line is described in footnote 9 below.

9. Bank Arrangements

On April 12, 2006, the Company entered into a Loan and Security Agreement (Agreement) with Silicon Valley Bank (Bank) for a Revolving Line up to $1,500,000 and a Term Loan in an aggregate amount equal to $300,000. These loans become due on April 11, 2007. Part of the Term Loan will be used to pay off the Eastern Bank equipment line of credit balance (see footnote 8). Subject to certain limitations, advances under the Revolving Line are available up to 80% of eligible receivables and the Revolving Line accrues interest at Bank’s prime rate plus 2%. The Term loan accrues interest at the Bank’s prime rate plus 2.5%. All assets of the Company secure these loans from Bank.

10. Vendor, Customer and Sales Information

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

One customer in both fiscal 2006 and fiscal 2005 contributed 30% and 32% of net sales for the three and six month periods ended February 28, 2006, respectively, compared to 31% and 33% for the three and six month periods ended February 28, 2005, respectively. The accounts receivable from this customer amounted to approximately $217,000 and $258,000 as of February 28, 2006 and August 31, 2005, respectively.

IEI sources a significant amount of components, manufactures products and maintains certain molds for its products in Asia. IEI believes that such sourcing reduces its cost of sales through lower parts, labor and tooling costs. There can be no guarantee that the Asian political or economic environment will remain sufficiently stable to allow reliable and consistent delivery of product. Any extended interruption in the supply or significant increase in the price of any such components and products could have a material adverse effect on IEI’s operating results in any given period. International sales, primarily to Canada, Europe and Mexico were 10% and 9% of net sales for the three and six month periods ended February 28, 2006, and were 7% and 11% for the comparable periods of fiscal 2005.

12

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Critical Accounting Policies

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

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

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

Inventory Obsolescence Reserve - Inventory purchases and commitments are based upon future demand forecasts for our products and our current level of

13

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

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

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

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

Results of Operations

Three and six months ended February 28, 2006 and 2005

Net Sales. Net sales for the second quarter of fiscal 2006 ending February 28, 2006 increased 15% compared to the second quarter of fiscal 2005. Net sales for the first six months of fiscal 2006 increased 19% compared to the first six months of fiscal 2005. The increases in net sales are primarily the result of an increase in demand for our access control and keypad product lines. For the six months ended February 28, 2006 and 2005, one customer contributed 32% and 33% of net sales, respectively.

Cost of Sales/Gross Profit. Our cost of sales primarily consists of purchased materials, manufacturing salaries, and related personnel expenses, facility overhead and amounts paid to third-party manufacturers. The ratio of gross profit to net sales was 47% for the three months ended February 28, 2006, compared to 46% for the three months ended February 28, 2005. The ratio of gross profit to net sales was 45% for the six months ended February 28, 2006, compared to 44% for the six months ended February

14

28, 2005. The increases in the gross profit ratio are primarily due to changes in the product mix. Our gross profit as a percentage of net sales in a particular quarter is highly variable due to many factors such as sales volume. Gross profit may also be adversely affected by increases in manufacturing costs, excess and obsolete inventory, warranty costs, increased price competition, geographic mix, and changes in sales channels or product mix.

Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel expenses, consulting fees and prototype costs. Research and development expenses, as a percentage of net sales, were 8% and 9% for the second quarter and six months ended February 28, 2006, respectively, compared to 9% and 10% for the comparable periods of fiscal 2005. The decrease in costs is primarily due to timing of development projects. We believe that research and development is critical to our strategic product development objectives and we intend to continue to enhance our products. Accordingly, we expect future research and development expenses to remain consistent in absolute dollars at its current level.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries and related personnel expenses, commissions, travel and entertainment expenses, trade shows, advertising, telephone, bad debts and professional fees. As a percentage of net sales, selling, general and administrative expenses were 43% and 42%, for the three and six month periods ended February 28, 2006, respectively, compared to 43% and 45% for both the second quarter and six months ended February 28, 2005. We expect future selling, general and administrative expenses to increase in absolute dollars from its current level as we introduce new products to the market and continue to expand our sales organization.

Interest Expense. Interest expense consists of interest incurred on equipment financing. Interest expense was $3,589 and $8,037 for the three and six months ended February 28, 2006, respectively, compared to $5,578 and $10,956 for the comparable periods of fiscal 2005. The decrease relates to a reduction in the outstanding debt.

Interest Income. Interest income, included in other income, was $3,999 and $10,378 for the three and six months ended February 28, 2006, respectively, compared to $6,019 and $12,302 for the comparable periods of fiscal 2005.

Income Taxes. For the six months ended February 28, 2006 and 2005, IEI has recorded no provision for income taxes due to our net loss.

Off-Balance Sheet Arrangements

The company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Outstanding contractual arrangements are shown in the table with the liquidity and capital resources section.

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Liquidity and Capital Resources

As of February 28, 2006, IEI had $1,142,518 in working capital as compared to $1,564,245 at August 31, 2005. The ratio of current assets to current liabilities as of February 28, 2006 was 1.4, as compared to 1.6 at August 31, 2005. The debt to equity ratio, which is a measure of a company’s financial leverage and is computed by dividing total liabilities over shareholders’ equity, was 1.5 at February 28, 2006 and 1.1 at August 31, 2005. The decrease in working capital and current ratio and increase in debt to equity ratio is primarily due to our net loss for the six months ended February 28, 2006.

Net cash flows used in operating activities was $165,470 for the six months ended February 28, 2006, as compared to net cash flows used in operating activities of $778,528 for the comparable period of the prior year. The decreases in cash, pertaining to both periods, are primarily the result of the net losses and increases in inventory balances. The increases in inventories are primarily due to new product introductions and the timing of purchases.

Net capital expenditures were $138,859 and $57,610 for the six months ended February 28, 2006 and February 28, 2005, respectively. IEI anticipates having up to $300,000 in total capital expenditures in the next 12 months primarily for license fees for enterprise software and production and engineering equipment.

Net cash flows used in financing activities was $88,875 for the six months ended February 28, 2006, as compared to net cash flows used in financing activities of $113,743 for the comparable period of the prior year. The decrease in net cash flows used is primarily a result of a decrease in payments made on borrowings due to the decrease in outstanding debt. On April 12, 2006, the Company entered into a Loan and Security Agreement with Silicon Valley Bank for a Revolving Line up to $1,500,000 and a Term Loan in an aggregate amount equal to $300,000. (See footnote 9, Notes to Consolidated Financial Statements.)

The following table summarizes our future contractual cash obligations as of February 28, 2006:

	Less than 1 year		1 to 3 years		Total
Notes payable – Eastern Bank	$	148,918	$	—	$	148,918
Employment agreement		192,765		385,530		578,295
Purchase obligations		2,062,522		—		2,062,522
Operating lease obligations		161,599		188,734		350,333
	$	2,565,804	$	574,264	$	3,140,068

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

Based on our past performance and current expectations, we believe that our current cash position, together with internally generated funds at present sales levels, will provide adequate cash reserves to satisfy our cash requirements for the next twelve months. Although it is difficult to predict future liquidity requirements with certainty, the rate at which we will consume cash will be dependent on the cash needs of future

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operations, including changes in working capital, which will, in turn, be directly affected by the levels of demand for our products, the timing and rate of expansion of our business and the resources we devote to developing our products. We anticipate devoting substantial capital resources to continue our research and development efforts, to increase our sales and marketing, and for other general corporate activities. We may periodically review strategic and operational alternatives to improve our operating results and financial position. In this regard, we may consider, among other things, changes in our capital structure, adjustments to our capital expenditures and overall spending and the restructuring of our operations. We cannot assure you that we will be successful in implementing any new strategic or operational initiatives or, if implemented, that they will have the effect of improving our operating results and financial position. We may seek to sell additional equity or debt securities that could result in additional dilution to our shareholders, and we cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and sales and marketing efforts, which could harm our business, financial condition and operating results.

Recent Accounting Pronouncement

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

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

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

In May 2005, the FASB issued SFAS Statement No. 154, Accounting Changes and Error Corrections (“SFAS 154”), which replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements – An Amendment of APB Opinion No. 28. SFAS 154 provides guidance on

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the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of SFAS 154 cannot be predicted at this time.

Risk Factors

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

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

Concentration of Customers. IEI has a substantial number of customers but sells a large majority of its products to a small number of large customers. This concentration of customers may cause net sales and operating results to fluctuate from quarter to quarter based on major customers’ requirements and the timing of their orders and shipments. Sales to IEI’s largest customer accounted for approximately 32% of IEI’s total net sales for the six months ended February 28, 2006 and fiscal year ended August 31, 2005. IEI’s industry has experienced significant consolidation, which may further increase IEI’s concentration among its major customers. There can be no assurance that IEI’s major customers will place additional orders, or that IEI will obtain orders of similar magnitude from other customers. IEI’s operating results could be materially and adversely affected if any present or future major customer were to choose to reduce its level of orders, were to experience financial, operational or other difficulties that resulted in such a reduction in orders to IEI or were to delay paying or fail to pay IEI’s receivables from such customer.

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

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

Limited Financial Resources. IEI has limited financial resources. It is therefore subject to all the risks generally associated with a small business having limited financial resources. For the six months ended February 28, 2006 and year ended August 31, 2005 and 2004, IEI had net losses of approximately ($402,000), ($720,000) and ($1,125,000), respectively. Continued operations after the expenditure of IEI’s existing cash reserves may require additional working capital to be generated by profitable operations and/or additional financing. There can be no assurance that we will achieve profitable operations or that additional external funding will be obtainable, if such a need should arise.

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

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

Fluctuations in Sales and Operating Results. Operating results may fluctuate due to factors such as the timing of new product announcements and introductions by IEI, its major customers and its competitors, market acceptance of new or enhanced versions of IEI’s products, changes in the product mix of sales, changes in the relative proportions of sales among distribution channels or among customers within each distribution channel, changes in manufacturing costs, competitive pricing pressures, the gain or loss of significant customers, increased research and development expenses associated with new product introductions and general economic conditions. A limited number of customers have accounted for a significant portion of sales in any particular quarter. In addition, IEI typically operates with a relatively small backlog. As a result, quarterly sales and operating results generally depend on the volume, timing of, and ability to fulfill orders received within the quarter which are difficult to forecast. In this regard, IEI may recognize a substantial portion of its sales in a given quarter from sales booked and shipped in the last weeks of that quarter. A delay in customer orders, resulting in a shift of product shipment from one quarter to another, could have a significant effect on IEI’s operating results in a quarter. In addition, competitive pressure on pricing in a given quarter could adversely affect IEI’s operating results, or such price pressure over an extended period could adversely affect IEI’s long-term profitability.

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

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

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

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

• issue stock that would dilute our current shareholders’ percentage ownership; incur debt or assume liabilities;

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

• incur significant amortization expenses related to purchased intangible assets; or

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

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

• problems and unanticipated costs associated with combining the purchased products, technologies, or businesses;

• diversion of management’s attention from our core business;

• adverse effects on existing business relationships with suppliers and customers;

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

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• potential loss of key employees, particularly those of the acquired organizations.

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

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

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

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

Foreign Sales. For the six months ended February 28, 2006 and the year ended August 31, 2005, IEI’s aggregate foreign sales represented approximately 10% and 9% of net sales, respectively. There may be a reduction in IEI’s foreign sales from the current level in the event of significant changes in foreign exchange rates or political and economic instability in foreign countries.

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

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Item 3: Controls and Procedures

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

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

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(c) Part II. Other Information

Item 6: Exhibits

(a) Exhibits

31.1	Certification of International Electronics, Inc. Chief Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of International Electronics, Inc. Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of International Electronics, Inc. Chief Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of International Electronics, Inc. Chief Operating Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, who is duly authorized to sign and is the Chief Financial and Accounting Officer.

	International Electronics, Inc.
Date: 04/13/06	/s/ John Waldstein
	John Waldstein, President and Chief Executive Officer, Treasurer, Chief Financial and Accounting Officer and Chairman of the Board

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International Electronics, Inc. and Subsidiaries

Exhibits to Form 10-QSB

Quarter Ended February 28, 2006

31.1	Certification of International Electronics, Inc. Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of International Electronics, Inc. Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of International Electronics, Inc. Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of International Electronics, Inc. Chief Operating Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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