Form 10-KSB

                Annual Report Pursuant to Section 13 or 15 (d) of
                       the Securities Exchange Act of 1934
                     For the fiscal year ended July 31, 1999
                         Commission file number 0-21019

                           INNOVATIVE MEDICAL SERVICES
             (Exact name of registrant as specified in its charter)

                      California                     33-0530289
           (State or other jurisdiction of        (I.R.S. Employer
            incorporation or organization)       Identification No.)

                 1725 Gillespie Way, El Cajon, California 92020
               (Address of principal executive offices) (Zip Code)

                  Registrant's Telephone Number: (619) 596-8600

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

                                      None
                                 --------------
                                (Title of Class)

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

                         Common Stock, Class A Warrants
                         ------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (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 if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference in Part III of this Form 10-KSB or any  amendments to
this Form 10-KSB. [ X ]

State issuer's revenues for its most recent fiscal year: $3,379,984

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant: Approximately $3,934,100 as of October 26, 1999.

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock: 4,562,242 shares of class A common stock as of October 26, 1999.

Documents incorporated by reference:
                    Exhibits to Form SB-2 Registration Statement File # 33-00434
                    Part III of this report is  incorporated  by reference  from
                    the  Registrant's  Proxy  Statement to be filed on or before
                    November 29, 1999.


<PAGE>


PART I

ITEM 1.  DESCRIPTION OF BUSINESS
Company Overview
----------------
Innovative   Medical   Services  (the   Company)  is  the  nation's   leader  in
pharmaceutical  water  purification.  Innovative  Medical  Services  is  engaged
principally in the business of manufacturing and marketing the Fillmaster(R),  a
water  purification,  measuring and  dispensing  apparatus used in pharmacies to
reconstitute oral antibiotic  suspensions.  Innovative Medical Services has also
entered the consumer market with its Nutripure(R)  line of residential  drinking
water systems. The Company markets, for both product lines,  proprietary filters
that  require  changing  at  intervals  of nine to  twelve  months  or  whenever
indicated  by the  systems'  water  quality  monitors.  The filter  replacements
represent a significant continuing source of sales and cash flow to the Company.

History
-------
Innovative  Medical  Services was  incorporated  in the State of  California  on
August 24, 1992, to pursue the immediate business of manufacturing and marketing
the Fillmaster and subsequently a broadly based business of delivering  advanced
technology,  equipment  and  supplies to the pharmacy  industry,  in addition to
pursuing the business of residential  water  filtration.  During its first three
years, the Company established the production and design, entered into contracts
with its parts  suppliers  and  manufacturers,  developed  its initial  assembly
process and implemented its marketing program for the Fillmaster.

In August,  1996 the Company  completed its initial public  offering  whereby it
sold  1,387,000  shares of its common stock at a public  offering price of $4.00
per share and 1,437,500 Class A Warrants at a public offering price of $0.10 per
Class A Warrant.

In the past three years,  Innovative  Medical  Services  has  launched  five new
products,  the Fillmaster(R)  1000e, the Scanmaster(R) and three products in the
Company's  Nutripure(R) line of residential  drinking water systems. The Company
continued  its  marketing  campaigns to expand into new markets  while  pursuing
development of future products.

In October 1998, Innovative Medical Services acquired AMPROMED,  Rio de Janeiro,
Brazil,  and certain  assets of Export  Company of America  Inc.  (EXCOA),  Fort
Lauderdale, FL, and established a new Nevada corporation to hold and operate the
export/import  operation.  AMPROMED's  primary  business is the sale of medical,
dental and  veterinary  disposable  products.  In addition to medical  supplies,
Innovative  Medical Services plans to distribute  water  filtration  products to
Brazil through AMPROMED. The principal terms of the acquisition were forgiveness
of certain debt,  assumption of certain  ongoing  obligations  of AMPROMED,  and
employment contracts for former principals of the Brazilian company.

Principal Products and Markets
------------------------------
FILLMASTER(R)   The   Fillmaster   dispensing   apparatus,   connected   to  the
Pharmapure(R) reverse osmosis water filtration system, provides measured amounts
of "Purified Water" as defined by the United States  Pharmacopoeia,  ("USP") for
reconstitution   of  liquid  oral   antibiotics   and  certain  other   pharmacy
applications.  Pharmapure  is six-stage  water  purification  unit  featuring an
electronic  water purity testing  module and an auxiliary  faucet for dispensing
purified water.  Fillmaster is a calibrated  volumetric measuring and dispensing
apparatus.  The entire system (the  "'Fillmaster  System")  integrates  with the
building's tap water plumbing,  is closed and pressurized and,  according to the
Company's  testing,  has a fill  rate at  least  three  times  that  of  current
bottle-and-hose  methods.  The Company  manufactures,  sells and distributes the
Fillmaster  dispenser and  Pharmapure  water system.  The end-user  installs the
equipment following step-by-step illustrated instructions using common household
tools.



<PAGE>


Historically,  pharmacists  have  either  hand-poured  water for  reconstitution
directly  from a bottle into a measuring  container  and then into the  medicine
bottle,  or they  used a  wall-mounted  measuring  and  gravity-flow  dispensing
cylinder  connected  by a system of rubber  siphon  tubing and pinch clamps to a
water bottle. Traditional methods produce inaccurate measurements either because
two hands are required or because the gravity-fed  system can produce a variable
fill rate due to variation in siphon pressure.

Also,  prior  methods  pose the risk of  accidental  use of  "spring" or bottled
"drinking  water"  due  to  label   similarities,   simple  mistakes  in  supply
purchasing,  or the pharmacy  staff's  unawareness  of the  differences in water
types.  Water that does not qualify as "Purified  Water"  contains  minerals and
other  impurities  that reduce the  stability  and  potency of the  prescription
medicine.  The use of such water  adulterates  the medication by introduction of
foreign materials and violates the Federal Food Drug and Cosmetic Act.

Even when using the intended conforming water, unsealed  bottle-and-hose methods
allow  bacteria,  mold and other airborne  contaminants to enter and grow within
the water  supply.  In addition,  the  dispensing  tips of the other methods can
accumulate  residue  from  the  various  prescriptions  being  mixed  and  cause
cross-contamination  of the  medications,  creating  the  potential  for serious
reactions by the patient.

The Fillmaster  dispenser,  combined with the Pharmapure  water system,  greatly
reduces these  hazards of  contamination  in the  pharmacy's  water source.  The
system  produces and  dispenses  "Purified  Water",  eliminating  the problem of
incorrect  source.  The  closed,  pressurized  system  eliminates  the  airborne
contamination  problem,  and the  rate of  filling  is  increased  dramatically.
Finally,   cross-contamination   of  medications  is  easily  prevented  by  the
Fillmaster dispenser's cleanable and disposable dispensing tips.

Extensive  testing  performed  by the Company  shows that use of the  Fillmaster
System saves a pharmacist  more than 20 seconds of actual  filling time for each
liquid antibiotic  prescription.  When multiplied by over 12,000 antibiotics per
year (on average), the resulting time savings is dramatic. Coupled with the time
savings  generated by  eliminating  water bottle changes (once for each 28 to 30
prescriptions -- approximately 5 minutes for each change), use of the Fillmaster
System enhances  profitability of liquid  antibiotics and multiplies  pharmacist
time for patient counseling and other activities.

Direct and indirect costs associated specifically with bottled water are reduced
or eliminated by use of the  Fillmaster  System.  Pharmacy  storage space can be
reallocated to more profitable items, and the expense of bottled water purchases
of up to $1.25 for each  gallon is  replaced  by one annual  filter  replacement
currently  costing $85. Under optimum usage,  the cost of "Purified Water" using
the Fillmaster System is reduced to approximately $.04 per gallon.

Based on the Company's surveys of Fillmaster users, customer satisfaction levels
are  extremely  high.  Users agree  unanimously  that the  Fillmaster  System is
faster,  easier to use, cleaner, and that the elimination of the aggravation and
difficulties  associated  with all  other  methods  of  reconstitution  make the
Fillmaster well worth the investment in its acquisition.

New sales of Fillmaster Systems continue to rise. More  significantly,  however,
the number of chain pharmacies  testing the product  continues to grow.  Company
records show that more than 85% of  pharmacies  that test the  Fillmaster  place
orders within 8 months.  The Company has established  long-term  agreements with
national chain pharmacies to specify  installation of the Fillmaster as standard
pharmacy equipment in new and remodeled stores.

The original,  manual  Fillmaster System carries a suggested list price of $858,
and the Company offers discounts for volume purchase agreements.



<PAGE>


There are approximately  72,000 pharmacies in the United States and Canada, with
many thousands more worldwide.  Water-mixed antibiotic prescriptions,  for which
the Fillmaster is primarily  used, make up  approximately  12.6% of a pharmacy's
total prescriptions and approximately 25% of a pharmacy's gross profit.

More than 15,000  Fillmaster  systems have been sold to date, and the Fillmaster
is specified  as standard  equipment  for all newly  constructed  and  remodeled
pharmacies at Walgreen's,  Wal-Mart,  Target, Fred Meyer, Ralph's,  Osco, Jewel,
Acme, Lucky, Sav-On, Kroger, Dillon Stores, United Supermarkets, Phar-Mor, Giant
Eagle,  Giant Foods,  Meijer,  City Markets and Eckerd. In addition,  Fillmaster
systems have been  purchased and are now being used by such  pharmacy  chains as
Kroger, Smith's Food and Drug, Longs Drugs, CVS, Rite-Aid, Drug Emporium, Fry's,
Hi-School Pharmacies,  H-E-B,  Fleming,  Giant and Snyders. Also included in the
customer base are many United States Military Clinics,  including Bethesda Naval
Hospital;  the Kaiser  Foundation  for Medical Care; the Mayo Clinic and several
hundred Independent and Hospital Pharmacies.

FILLMASTER(R)  SYSTEM  FILTERS The Company also markets  unique and  proprietary
filter  replacements for the Pharmapure water purification  system which require
changing at intervals of approximately  9-12 months or whenever indicated by the
purity  testing  module.  The  filter   replacements   represent  a  significant
continuing source of sales and cash flow to the Company.

Revenues from the replacement  filter sales, over a five-year  period,  approach
the revenue  generated by the original sale of the  Fillmaster  with much higher
profit levels. Thus, Management views the sale of the Fillmaster as occurring in
two distinct stages:  immediate and deferred. The acquisition of a new customer,
while  generating  profit  during the current year,  produces a deferred  income
stream with at least twice as much gross margin and minimal or no sales expense.
The Company offers a program through which chain and  independent  customers can
automatically be shipped replacement filters annually on the anniversary date of
the system  purchase.  More than 75% of the  Company's  current  customers  have
signed up for this automatic  filter  shipment  program,  and most new customers
subscribe to the program upon purchase of a system.

New Products
------------
FILLMASTER(R) 1000E Designed as an addition to the Fillmaster  dispenser product
line,  the  fully  computerized,  battery-operated  Fillmaster  1000e  dispenser
employs multiple  microprocessors to provide accurate and even-flow  dispensing.
By using the electronic dispenser,  pharmacists increase prescription  integrity
by  greatly   reducing  the  possibility   for  human  error  while   dispensing
prescriptions. The Company sells Fillmaster 1000e dispensers both as upgrades to
existing Fillmaster Systems and as new sales to new customers.  The upgrade list
price of the  Fillmaster  1000e  dispenser  is $399,  and the list price for the
Fillmaster  1000e  electronic  dispenser  with the  Pharmapure  water  system is
$1,158.

SCANMASTER(R)  The Scanmaster is a pager-sized,  plug-in  modular upgrade to the
company's popular Fillmaster 1000e computerized  pharmaceutical water dispenser.
Users simply scan a prescription's  NDC bar code in front of the dispenser,  and
the Fillmaster 1000e displays the product name and required water quantity.  The
prescription  is then  dispensed  with one touch of a button.  The  Scanmaster's
database  contains  proprietary  and  generic  oral drug  types by  manufactures
including  Bristol-Meyers Squibb Co. (NYSE: BMY), Apothecon,  SmithKline Beecham
(NYSE:  SBH),  Eli Lilly & Co. (NYSE:  LLY) and many others.  List price for the
Scanmaster bar code reader is $699.

NUTRIPURE(R)  Elite The  Nutripure  Elite  line of  residential  drinking  water
systems combines  high-quality reverse osmosis technology with carbon filtration
to improve the taste, smell, quality and safety of standard tap water.  Designed
for  residential  use,  Nutripure  Elite systems produce at least 150 gallons of
clean, healthy water per month. The Company's drinking water systems provide the
best reverse osmosis  technology  available  today at a moderate price,  and are
therefore strong value purchases. Incorporating



<PAGE>


the same filtration technology as the Company's Fillmaster  pharmaceutical water
purification  system,  Nutripure Elite systems provide  healthy,  safe and great
tasting drinking water.

The Company distributes Nutripure Elite systems through independent pharmacists,
providing them an exclusive health product dealership with a high profit margin.
Gallup polls reflect the public's  respect for pharmacists as ethical and honest
professionals,  and the  Company  has based the  marketing  of  Nutripure  Elite
systems on both the pharmacist's  reputation and relationship with his customers
as well as his  testimonial to the quality of the product as a Fillmaster  user.
Although the market for water  systems is quite  competitive,  the  pharmacist's
recommendation   of  a  system  they  use  in  their  pharmacy  to  reconstitute
prescriptions  sets Nutripure  apart from all other  residential  drinking water
systems.

Innovative  Medical  Service's  qualitative and quantitative  research reveals a
strong need for independent  pharmacists to find alternative sources to pharmacy
revenues. Shrinking margins on medicines and increased competition from national
chains have left the independent, neighborhood pharmacist scrambling to maintain
market share and  profitability.  The Company's  research shows that independent
pharmacists  welcome a drinking water system as an addition to their home health
care  product  lines and  recognize  the powerful  endorsement  they provide for
Nutripure as Fillmaster users.

The Company supports the independent  pharmacist dealer network with a targeted,
comprehensive  marketing  program that includes  counter top displays,  consumer
brochures  and health  education  materials.  The  dealer  program  provides  an
opportunity  for an  independent  pharmacist  to  realize a  significant  profit
without any investment,  start-up or inventory  costs.  In addition,  the dealer
program further distinguishes the independent from the chain pharmacist.

The  Nutripure   drinking  water  system  is  sold  by  authorized   independent
pharmacists at a retail price of $499 and  drop-shipped by the Company  directly
to the customer.

NUTRIPURE(R)  ELITE  FILTERS The Company  also  markets  unique and  proprietary
filter  replacements  for the Nutripure  residential  drinking water system that
require  changing  every  9-12  months.  The  filter  replacements  represent  a
significant continuing source of sales and cash flow to the Company.  Management
is  confident  that  future  replacement  filter  sales will be an  ongoing  and
significant source of income.

Revenues from the replacement  filter sales, over a five-year  period,  approach
the revenue generated by the original sale of the system with much higher profit
levels.  Thus,  Management  views  the sale of the  system as  occurring  in two
distinct  stages:  immediate and deferred.  The  acquisition  of a new customer,
while  generating  profit  during the current year,  produces a deferred  income
stream with at least twice as much gross margin and minimal or no sales expense.
Nutripure  customers  are  encouraged  to subscribe to the  Company's  automatic
filter shipment  program in which the Company  automatically  ships  replacement
filters annually on the anniversary date of the system purchase.

NUTRIPURE(R) NP2000CT Innovative Medical Services is proud to announce its entry
into the retail venue with its  Nutripure  Countertop  Water  Filtration  System
(model number NP2000CT).  Nutripure  NP2000CT,  developed  specifically for mass
merchandising,  offers  excellent  water  filtration  technology at  competitive
pricing  through  a  unique   marketing   approach.   Nutripure's   professional
one-micron,  carbon microfilter reduces dirt,  chemicals,  lead and parasites to
improve the taste,  quality and safety of water. Most importantly,  Nutripure is
the only  filtration  system in its class that is  pharmacist  recommended.  The
product  has been  tested by Spectrum  Laboratories  to meet or exceed  ANSI/NSF
standard No. 53 Health Effects and ANSI/NSF Standard No. 42 Aesthetic Effects.

Nutripure  NP2000CT  features  enhancements that position the product to compete
well in the competitive residential water filtration market.  Nutripure NP2000CT
contains a high-capacity 2,000-gallon filter that requires replacement only once
a year.  Capacities of other leading filters are much less and therefore require
more frequent  changing.  Also,  the NP2000CT  incorporates  a unique  Automatic
Bypass  Valve that  shuts off after  every use to  prevent  accidental  waste of
filtered water.  Other  countertop  filters may easily be left "on" resulting in
the use of filtered  water for  dishwashing or other  non-consumption  uses. The
NP2000CT requires no assembly,  and its sealed cartridge design prevents leaking
and contamination  because water flows only through the completely sealed filter
cartridge.  Other  filter  systems are designed so that water flows not only in,
but also around the filter  cartridge,  increasing the potential for leaking and
also increasing the risk of contamination as the consumer must handle the filter
during assembly and replacement processes.

Several  national mass  merchandisers as well as department and specialty stores
have completed their  evaluations of the Nutripure 2000.  Trial orders have been
placed, and the Company expects to begin a nation-wide rollout of the product in
the first half of the year.  The NP2000CT is be  competitively  priced to retail
between $59.00 and $79.99.

NUTRIPURE(R)  NP2000CT  REPLACEMENT  FILTERS The Company also  manufactures  and
markets  replacement  filters  for the  Nutripure  NP2000CT  water  system.  The
NP2000CT  contains  a  2,000-gallon  filter  that must be  changed  every  year.
Replacement filters will be sold through retail outlets along with the Nutripure
system.  The  replacement  filters  will  retail  for  approximately  $25.00 and
represent a significant continuing source of sales and cash flow to the Company.

MEDIFIER(TM) The Company also markets the Medifier,  a unique patented universal
prescription   bottle  label   magnifier.   The  Medifier  holds  various  sized
prescription  bottles in position under a magnifier  strip that enlarges  dosage
and use  instructions  to a clearly  readable  size. The Medifier is distributed
through Innovative Medical Services' existing sales channels, as well as through
catalogue sales and promotional products distributors.

Internet Marketing Programs
---------------------------
Innovative  Medical  Services'  internet market presence allows customers direct
and user-friendly access to the Company's home water filtration products. During
the past fiscal year, the Company launched a major internet  marketing  strategy
beginning  with its new  internet  shopping  sites  and its  links to  Lycos(R),
Excite(R),  Netscape(R),  Info Seek(R) and Alta Vista(R). The Company opened its
first online store on Yahoo!(R)  Store at  www.stores.yahoo.com/nutripure,  from
which  all of the  Company's  residential  and  pharmacy  water  systems  may be
purchased. In addition, the Company is currently engaged in contracts with major
web portals and search  engines  including  Yahoo!(R)  AOL(R) and  Lycos(R)  for
banner  and  keyword  advertising  that  generate  significant  traffic  on  its
corporate web site, www.imspure.com.

The Company's  exitsing internet exposure is easily expanded to create an avenue
for untapped revenue at minimal cost to the Company. Innovative Medical Services
will take advantage of hits on its site by presenting an expanded and integrated
product line. The Company is developing a strategic  partnership  with a leading
producer  of  vitamins  and  minerals  to create an  e-commerce  medium for high
quality  products at value  pricing and  expects  the  cross-marketing  of water
filtration  systems and vitamins,  minerals and  supplements  will  dramatically
increase traffic on the web site and maximize purchasing from online consumers.

Manufacturing
-------------
The  Fillmaster  and  Nutripure  systems  are  assembled  primarily  from custom
manufactured components. It is the Company's goal to perform minor manufacturing
in the Company's facility to minimize wages, equipment expense and insurance. No
components   of  the  systems  have   permanent  or   unequivocally   restricted
availability.  Many manufacturers are available to produce the components, and a
change in suppliers would result in virtually no lost production.



<PAGE>


The original  Fillmaster  dispenser and the new Fillmaster  1000e  dispenser are
both assembled  mostly from  proprietary and custom parts  fabricated to Company
specifications from injection-molded plastic and fabricated acrylic.

The Pharmapure  purification modules are the major components of each of the two
Fillmaster systems and are purchased under agreements with several manufacturers
that are exclusive with the Company as to Pharmaceutical  uses. While Management
regards this particular product as the finest of its kind, suitable  alternative
manufacturers exist.

The  Nutripure  line  of  water  filtration  products  is  also  assembled  from
proprietary  and custom  parts  manufactured  under  exclusive  agreements  with
several different manufacturers.  Alternative  manufacturers exist, and a change
in suppliers would result in virtually no lost production. There are no plans to
alter production methods.

Research and Development
------------------------
Research and Development costs that have no alternative  future uses are charged
to operations  when incurred and are included in operating  expenses.  The total
amounts charged to Research and  Development  expense were $157,000 and $177,400
in the fiscal years ended July 31, 1999 and 1998,  respectively.  The  Company's
investment  in Research  and  Development  during the past year  resulted in the
release of five major  additions to the Company's  product line,  the Fillmaster
1000e,  the  Scanmaster  and the  Nutripure  line  of  drinking  water  systems.
Innovative Medical Services anticipates more new products in the coming year.

Employees
---------
As of October 26, 1999, the Company employed  twenty-three  people,  eighteen of
whom are full-time  individuals  whose principal  responsibilities  are: product
assembly and shipping (five  employees),  sales,  marketing and customer service
(four employees),  research and development (three employees) and administration
(six  employees).  The Company chooses to outsource more expensive,  specialized
functions including public relations,  investor  relations,  graphic design, and
selected engineering projects.


ITEM 2.  PROPERTIES
The Company's  business  operates in a 10,000 square foot facility  located in a
light industrial/office park in El Cajon,  California.  This location houses all
administrative, executive, sales, assembly, shipping and manufacturing functions
for the Company.  The Space is leased from an  unaffiliated  third party under a
sixty-five month agreement  commencing July 1, 1996. The monthly rental is $0.61
per square  foot plus $0.08 per square  foot for  maintenance  of common  areas.
There is also a fixed  yearly  increase  of 4%. The  Company  has also signed an
amendment  to the lease to allow for an  option  to lease  the  building  for an
additional five years.


ITEM 3.  LEGAL PROCEEDINGS
The  following  is  an  update  of  developments  in  the  previously  disclosed
litigation  involving the Company filed in the Circuit Court of Pinellas County,
Florida by Zedburn  Corporation,  against  the Company for breach of contract in
October,  1997.  The Company has filed  counterclaims  based upon the  Racketeer
Influenced  and  Corrupt  Organization  (RICO) Act against  Mr.  Reitz,  Zedburn
Corporation,  Capital Development Group, Steven Durland and other defendants. It
is the  Company's  position  that Mr. Reitz and others  perpetrated  a scheme to
defraud the Company of cash fees and  securities  in connection  with  purported
services  of  arranging a public  offering of the  Company's  common  stock.  In
October  1997,  Mr.  Reitz and Zedburn  filed for  protection  under the Federal
bankruptcy laws. In August 1998, Mr. Reitz voluntarily  dismissed his bankruptcy
and as a result  thereof the Company has named Mr.  Reitz as a defendant  to its
counterclaims.

The Company believes that the defendants had perpetrated similar schemes against
other  parties.  The  Company  also  believes  it  has  substantially  completed
discovery and complied compelling evidence to prove its claims.

Several of the Defendants filed Motions to Dismiss the Company's  counterclaims.
A hearing on the  Motions  was held on October 1, 1998.  Certain of the  Motions
were granted pending the Company's  amendment of its  Counterclaim.  The Company
amended  its  Counterclaims  in  accordance  with the judge's  rulings.  Certain
Defendants filed second Motions to Dismiss the amended Counterclaims.  A hearing
on these latest  motions was held in March 1999,  before a different  judge than
the judge who ruled on the first motions. On April 20,1999,  Orders were entered
granting the Defendants' Motions to Dismiss.  However these Orders did not state
the basis for the Orders, nor was the Company's legal counsel provided notice of
the  Orders  or a copy of the new  judge's  correspondence  offering  a  "formal
ruling" upon request.  In May 1999 the Company filed an Appeal of the Orders and
Motions  for  Reconsideration  based upon  inconsistency  of the Orders with the
previous  judge's  rulings  and the lack of notice to the  Company.  The Company
believes  that its Appeal and  Motions  have merit and will be  granted.  In any
event the Company  intends to pursue a trial as soon as possible.  As of October
26, 1999, no ruling has been received on the Company's Appeal.

The  Company  has  neither  accrued  a  liability  in its  financial  statements
regarding this litigation nor disclosed the matter in the footnotes thereof. The
Company  has not done so because it does not  believe  there is any merit to Mr.
Reitz's claims and that the likelihood that the Company will realize a loss from
these matters is believed remote. In addition,  the Company believes that in the
unlikely event that the Company settles, the amount of any such settlement would
not be material to the Company's financial statements.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were  submitted to  shareholders  in the fourth quarter of the fiscal
year.


PART II

ITEM 5.  MARKET  FOR THE  REGISTRANT'S  COMMON  EQUITY AND  RELATED  STOCKHOLDER
         MATTERS

         (1)      Market  Information:  The Company's  common stock is traded on
                  the NASDAQ  SmallCap  Market  under the symbol  "PURE" and its
                  Class A Warrants  are traded  under the  symbol  "PUREW".  The
                  Company's common stock and Class A Warrants are also traded on
                  the Boston Stock Exchange.  The Company's Class Z Warrants are
                  not listed for trading on any recognized market.
         (2)      High and Low Bid Prices:  The following  table sets forth high
                  and low bid prices for each  fiscal  quarter,  as  reported by
                  NASDAQ,  for  the  last  two  fiscal  years.  Such  quotations
                  represent   inter-dealer   prices  without  retail   mark-ups,
                  mark-downs, or commissions and, accordingly, may not represent
                  actual transactions.
<TABLE>
<CAPTION>

                               Fiscal 1999                                    Fiscal 1998
                   Quarter Ended     High      Low      Quarter Ended        High      Low
                   -------------------------------------------------------------------
                  <S>               <C>       <C>                          <C>      <C>
                  July 31, 1999      $2.406   $1.625    July 31, 1998      $1.313   $0.438
                  April 30, 1999     $2.313   $0.656    April 30, 1998     $2.000   $1.000
                  January 31, 1999   $4.750   $0.938    January 31, 1998   $3.125   $1.375
                  October 31, 1998   $1.219   $0.250    October 31, 1997   $2.688   $1.344
</TABLE>

         (3)      Security  Holders:  As of October  26,  1999,  the Company had
                  approximately  1134 holders of record of its common stock, 428
                  holders  of  its  Class  A  Warrants  and  18  holders  of the
                  Company's Class Z Warrants.  This does not include  beneficial
                  owners  holding  common  stock or Class A  Warrants  in street
                  name.  The  closing  price per share on October  26,  1999 was
                  $1.563.

          (4)  Dividend  Plans:  The  Company  has  paid no  common  stock  cash
               dividends and has no current plans to do so.

          (5)  Preferred Stock: There are no shares of preferred stock presently
               outstanding.

Change in Securities
--------------------
In September 1999, the Company issued 160,000 shares of common stock to a single
accredited investor for $200,000 ($1.25 per share) in a private placement of the
shares offered to the one accredited investor.

With  respect to the sales  made,  the  Company  relied on  Section  4(2) of the
Securities Act of 1933, as amended.  No advertising or general  solicitation was
employed in offering the  securities.  The securities were offered solely to the
one accredited  investor who was provided all of the current public  information
available on the Company.


<PAGE>


ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This  section  contains  forward-looking   statements  that  involve  risks  and
uncertainties. These forward-looking statements are not guarantees of our future
performance.  They are  subject to risks and  uncertainties  related to business
operations,  some of which are beyond our control. Our actual results may differ
materially from those anticipated in these forward-looking statements.

The Company's objective is to maximize  shareholder value by focusing on growth,
product innovation and profitability.  The following  discussion  highlights the
Company's  performance and should be read in conjunction  with the  Consolidated
Financial Statements and related notes included therein.

Results of operations Fiscal 1999 vs. Fiscal 1998
-------------------------------------------------
Revenues of  $3,380,000  in the fiscal year ended July 31, 1999 were 102% higher
than the  $1,675,100  in  revenues  reported  for the fiscal year ended July 31,
1998. Fillmaster  Purification System sales in the year ended July 31, 1999 were
$2,320,000  and  replacement  filter  sales were  $889,000.  In the prior  year,
Fillmaster  Purification  System sales were  $1,082,000 and  replacement  filter
sales were $439,100.  Sales of the Fillmaster Purification System rose 114% over
the prior period due largely to the popularity of the new  electronic  dispenser
and bar code  reader.  Sales of filters rose 102% in fiscal 1999 as expected due
to the continually increasing number of Fillmaster Purification Systems in use.

Gross profits for the year ended July 31, 1999 were  $1,936,700  versus $673,100
in 1998.  Gross profit  percentage of 57% in 1999 was higher versus 40% in 1998.
The gross  profit  increase  reflects the  increased  proportion  of  electronic
dispenser and filter sales  associated  with higher margins in the current year.
As the number of Fillmaster system installations  increases,  so will the volume
of replacement filter sales and the related improved gross profit margins.

Net income for the year ended July 31,  1999 was  $260,700  versus a net loss of
$(1,902,800)  for the same  period in 1998.  This  turnaround  was the result of
increased sales and improved gross profit margins resulting from increased sales
of Fillmaster  pharmacy water purification and dispensing systems and disposable
filter  replacements,  and to  growing  sales  of new  products,  including  the
Fillmaster  1000e  dispenser,  the  Scanmaster bar code reader and the Nutripure
line of home water filtration systems.  Also while increasing sales, the Company
cut  Selling  Expenses  by  $291,000  (45%) from  $647,600  in the prior year to
$356,600 in the current  period.  In addition,  the Company  reduced General and
Administrative  Expenses by $611,500  (34%) from  $1,789,700  in the year ending
July 31, 1998 to $1,178,100 in the year ending July 31, 1999. During the current
fiscal  year  the  Company  incurred  expenses  of  $157,000  for  Research  and
Development  costs  associated  with  production and development of new products
compared to $177,400 for the prior year.

Liquidity and Capital Resources Fiscal 1999 vs. 1998
----------------------------------------------------
During the fiscal year ended July 31,  1999,  the  Company's  current  assets to
liabilities  ratio rose from 1.21 to 1.95.  Current assets increased  $1,104,300
from  $1,010,100  to  $2,114,400.  Current  assets at July 31,  1999  include an
increase of $513,500 in accounts receivable associated with higher sales volume.
Inventories  increased  $359,400  from  $360,600  in fiscal  1998 to $720,000 in
fiscal  1999 on  anticipated  sales of the new  electronic  dispenser,  bar code
reader and residential  water systems.  Noncurrent  assets  decreased by $73,100
during the year; however, within this item there was a large reclassification of
acquisition costs during the year due to the purchase of the Company's Brazilian
subsidiary.  In  October  of 1998 the  Company  purchased  the  assets of Export
Company  of  America,   Inc.   (EXCOA),   a  privately  held  Fort   Lauderdale,
Florida-based distributor of disposable medical, dental and veterinary supplies.
The major  asset of this  company  was its 45%  interest  in  Ampromed  Comercio
Importacao E Exportacao Ltda (AMPROMED),  a Rio de Janeiro-based  import company
that sells medical, dental and veterinary supplies and water filtration products
to practitioners,  retail outlets and government agencies.  The Company acquired
the remaining 55% interest in AMPROMED from a private individual.  To facilitate
this transaction the Company has formed EXCOA Nevada, a 100% owned subsidiary of
Innovative  Medical Services  incorporated in Nevada. A 99% interest in AMPROMED
will be held by EXCOA Nevada,  with the remaining 1% of AMPROMED  being owned by

<PAGE>

Innovative  Medical  Services.  These business  combinations  were accounted for
using the purchase method.  The Company  reclassified  $1,091,400 of acquisition
cost for these two entities.  Of this amount,  the Company recorded  $261,300 of
goodwill  and  $360,000  of other  intangible  assets.  These  assets  are being
amortized  over a period of forty (40) years.  The results of  operations of the
acquired  companies  are  included in the  accompanying  consolidated  financial
statements  beginning  November 1, 1998.  The  purchase  did not have a material
impact on the income statement of the company for the fiscal year ended July 31,
1999. Current  liabilities  increased $246,800 from $837,300 to $1,084,100.  The
increase in current  liabilities  was the result of increased  accounts  payable
associated with a corresponding  increase in inventories.  Also, the Company has
established an accounts  receivable  financing facility during the year on which
it has drawn $250,100.

Cash flows used from operations were $556,900 in fiscal year 1999 and $1,994,100
in 1998.  For those  periods,  cash flows  used in  investing  activities  were,
respectively,  $158,000 and $232,300 for the purchase of machinery and equipment
and for  leasehold  improvements.  Cash flows  from  financing  activities  were
$688,700 in fiscal 1999.  Investing  activities for the current year included an
increase of $151,100  in notes  payable.  Also,  the Company  received  $360,750
($1.486 per share) from the  issuance of 242,766  shares of common  stock to two
accredited  investors  during the current year.  With respect to the sales made,
the Company relied on Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
securities  were offered to  accredited  investors  who were provided all of the
current  public  information  available  on the  Company.  Cash flows  financing
activities  in  fiscal  1998 of  $292,000  resulted  from an  increase  in notes
payable.

The total decrease in cash and cash  equivalents for the fiscal years ended July
31, 1999 and July 31, 1998 was $26,200 and $1,934,400

Future Outlook
--------------
STEADY GROWTH  Looking  forward to the year 2000,  the  management of Innovative
Medical  Services  has  committed  to  reducing  operating  costs and  improving
efficiencies  while  employing  an  aggressive  and focused  growth  strategy to
realize   increased  sales  and  earnings.   Innovative   Medical  Services  has
experienced strong, steady annual growth rates over the past 7 years and expects
continued  stable  growth from its  cornerstone  products - the  Fillmaster  and
related components.

Long term profitability of the Fillmaster product line depends on establishing a
substantial number of Fillmaster units in the retail pharmacy market. Since each
unit requires  replacement of its filters at least once a year,  each new system
installed  becomes a source of steady future  income,  eventually  exceeding the
income from the initial sale of the Fillmaster  system. The Fillmaster system is
specified  as  standard  equipment  for  all  newly  constructed  and  remodeled
pharmacies in over a dozen national retail  pharmacy  chains.  Construction  and
remodeling  installations  of Fillmaster  systems generate steady sales at a low
cost of sales and, therefore, a steady increase in replacement filter sales. The
Company expects  additional  retail  pharmacies to add the Fillmaster  system to
their blueprints for new construction and remodeling in the coming year.

The  Company  will  continue to  aggressively  market the  Fillmaster  system to
independent  and chain  pharmacies  and expects  growth to continue  because the
Fillmaster  has  become  an  industry-wide   standard  in  pharmacy   dispensing
equipment.  To date,  Fillmaster  Systems are installed in approximately  15,000
pharmacies,  an  increase of 58% over last year's  total.  The 15,000  locations
represent  approximately 20% of the total pharmacy market,  leaving  significant
growth potential for the Fillmaster system not only in the US, but also abroad.

QUANTUM  GROWTH In the coming  weeks,  Innovative  Medical  Services  expects to
complete  two  major  projects  which,   when  fully  launched,   should  create
significant  quantum  growth for the  Company:  1)  nationwide  roll-out  of the
Nutripure 2000, and 2) expansion of the Company's online retailing initiative.

The Nutripure 2000 countertop  residential water filtration system has been very
well received by mass  merchandisers,  wholesale  club  discounters,  department
stores and  specialty  retailers  that  represent  approximately  40,000  retail
locations  in the US. The  product has  undergone  final  evaluation  in several
national chains,  and the Company expects to begin shipping to retail outlets at
the  beginning of the year.  The Company has made the necessary  adjustments  in
capacity to accommodate  large orders of Nutripure 2000 and can begin fulfilling
bulk orders immediately.  Revenues from nationwide retail sales of the Nutripure
2000 should dramatically accelerate the Company's growth.

The online  retailing  expansion should be completed by the end of the year. The
Company  has  teamed  with  an  industry  leader  in  pharmaceutical   wholesale
distribution  to create an online  "pharmacist  hosted" web supersite to provide
consumers with high-quality,  value priced vitamins, minerals and supplements as
well  as  health   resource   information.   The  web  site  will  also  feature
cross-maketing  programs for the  company's  nutipure  line of water  filtration
systems.  The online  retailing  program is strongly  supported by the Company's
internet marketing presence,  including targeted advertising  campaigns on major
web  portals,  and the  company  expects  the  supersite  to  become  key to the
Company's escalating growth.

In  addition  to  growth  by adding  new  products  and  entering  new  markets,
Innovative  Medical Services,  in cooperation with its investment  banking firm,
continues  to explore  potential  complementary  acquisition  opportunities  for
pharmaceutical,  medical and related  health care  product  distribution  in the
United States and Worldwide.



<PAGE>
ITEM 7.  FINANCIAL STATEMENTS


                               Steven Holand, CPA
                       3914 Murphy Canyon Rd., Ste. A126
                               San Diego CA 92123
                               Phone 619-279-1640
                                Fax 619-279-9221



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT


To the Board of Directors and Stockholders
Innovative Medical Services
El Cajon, California

I have audited the consolidated balance sheets of Innovative Medical Services as
of July 31, 1999 and July 31, 1998, and the related  consolidated  statements of
income,  accumulated  deficit,  and cash flows for the years then  ended.  These
financial  statements are the  responsibility  of the Company's  management.  My
responsibility  is to express an opinion on these financial  statements based on
my audits.

I conducted the audits in accordance with generally accepted auditing standards.
Those standards  require that I 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.
I believe that my audits provide a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly, in all
material  respects,  the consolidated  financial  position of Innovative Medical
Services at July 31, 1999 and July 31, 1998, and the consolidated results of its
operations  and its  consolidated  cash  flows  for the  years  then  ended,  in
conformity with generally accepted accounting principles.




/s/ STEVEN HOLLAND
------------------
Steven Holland
Certified Public Accountant


San Diego, California
October 25, 1999


<PAGE>




<TABLE>

                          CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                       July 31
ASSETS                                                         1999               1998
                                                           -------------------------------
<S>                                                        <C>                 <C>
Current Assets
      Cash and cash equivalents (Note 2)                   $   22,056          $   48,250
      Restricted cash (Note 3)                                205,574             206,230
      Accounts receivable, net of allowance for doubtful
          accounts of $ 50,000 at July 31, 1999               790,166             276,619
          and $ 17,850 at July 31, 1998
      Notes receivable (Note 4)                               339,524             106,918
      Inventories                                             719,972             360,566
      Prepaid expenses                                         37,078              11,556
                                                           -----------         -----------

          Total current assets                              2,114,370           1,010,139
                                                           -----------         -----------

Property, Plant and Equipment
      Property, plant and equipment (Note 5)                  805,523             791,599
                                                           -----------         -----------

          Total property, plant and equipment                 805,523             791,599
                                                           -----------         -----------

Noncurrent Assets
      Deposits                                                  6,575              14,075
      Patents and license                                     425,550              57,806
      Goodwill                                                256,422                   -
      Customer list                                           353,250                   -
      Deferred acquisition costs (Note 1 and 13)               53,851           1,096,852
                                                           -----------         -----------

          Total noncurrent assets                           1,095,648           1,168,733
                                                           -----------         -----------

      Total assets                                         $4,015,541          $2,970,471
                                                           ===========         ===========

LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
      Accounts payable                                     $  594,948          $  495,287
      Accrued liabilities                                      43,068              47,060
      Notes payable (Note 6)                                  446,067             294,986
                                                           -----------         -----------

          Total current liabilities                         1,084,083             837,333
                                                           -----------         -----------

Stockholders' Equity
      Class A common stock, no par value: authorized
          20,000,000 shares, issued and outstanding
           4,392,242 at July 31, 1999 and
           3,916,351 at July 31, 1998 (Note 8)              6,663,318           6,125,718
      Class A warrants: issued and outstanding 3,687,500
          warrants (Note 8)                                   108,750             108,750
      Accumulated deficit                                  (3,840,610)         (4,101,330)
                                                           -----------         -----------

          Total stockholders' equity                        2,931,458           2,133,138
                                                           -----------         -----------

      Total liabilities and stockholders' equity           $4,015,541          $2,970,471
                                                           ===========         ===========
</TABLE>

    The accompanying notes are an integral part of the financial statements.


<PAGE>

                       CONSOLIDATED STATEMENTS OF INCOME

                                                      For the Years Ended
                                                            July 31
                                                      1999            1998
                                                   --------------------------


Net sales                                          $ 3,379,984    $ 1,675,131
Cost of sales                                        1,443,307      1,001,999
                                                   ------------   ------------

Gross profit                                         1,936,677        673,132
                                                   -----------    -----------

Selling expenses                                       356,611        647,637
General and administrative expenses                  1,178,128      1,789,655
Research and development                               157,049        177,384
                                                   -----------    -----------

Total operating costs                                1,691,788      2,614,676
                                                   ------------   ------------
Operating income (loss)                                244,889     (1,941,544)
                                                   ------------   ------------
Other income and (expense):
Interest income                                         16,631         39,602
                                                   ------------   ------------

Total other income (expense)                            16,631         39,602
                                                   ------------   ------------

Income (loss) before income taxes (Note 1)             261,520     (1,901,942)

Federal and state income taxes                             800            800
                                                   ------------   ------------

Net income (loss)                                    $ 260,720    $(1,902,742)
                                                   ------------   ------------

Net income (loss) per common share (basic)         $       0.06   $     (0.50)
                                                   ------------   ------------

Net income (loss) per common share (diluted)       $       0.04    $    (0.27)
                                                   ------------   ------------


                CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS

Balance, beginning of period                      $ (4,101,330)    $ (2,198,588)

Net income (loss)                                      260,720       (1,902,742)
                                                       -------       ----------

Balance, end of period                            $ (3,840,610)    $ (4,101,330)
                                                   ------------    ------------


    The accompanying notes are an integral part of the financial statements


<PAGE>


<TABLE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                   For the Years Ended
                                                                          July 31
                                                                 1999                 1998

                                                            -----------------------------------
<S>                                                         <C>                   <C>
Cash flows from operating activities
      Net income (loss)                                     $   260,720           $ (1,902,742)

      Adjustments to reconcile net income to net cash
      provided by operating activities:
           Depreciation                                         144,075                125,935
      Changes in assets and liabilities:
           (Increase) decrease in restricted cash                   655               (206,230)
           (Increase) decrease in accounts receivable          (513,547)               (57,572)
           (Increase) decrease in notes receivable             (232,606)               (80,988)
           (Increase) decrease in prepaid expense               (25,522)               571,777
           (Increase) decrease in inventory                    (359,406)              (337,034)
           (Increase) decrease in deposits                        7,500                 11,300
           (Increase) decrease in patent and licenses          (367,744)               (13,000)
           (Increase) decrease in deferred acquisition costs  1,043,001               (491,827)
           (Increase) decrease in goodwill                     (256,422)                   -
           (Increase) decrease in intangible assets            (353,250)                   -
           Increase (decrease) in accounts payable               99,661                403,800
           Increase (decrease) in accrued liabilities            (3,992)               (17,490)
                                                            ------------          -------------
                Net cash provided (used) by operating                                      -
                     activities                                (556,877)             (1,994,071)
                                                            ------------          -------------
Cash flows from investing activities
      Purchase of property, plant and equipment                (157,999)              (232,347)
                                                            ------------          -------------

                Net cash (used) in investing activities        (157,999)              (232,347)
                                                            ------------          -------------

Cash flows from financing activities
      Increase (decrease) in notes payable                      151,081                292,008
      Proceeds from sale of common stock                        537,601                    -
                                                            ------------          -------------

                Net cash provided by financing activities       688,682                292,008
                                                            ------------          -------------

                Net increase (decrease) in cash and cash
                     equivalents                                (26,194)            (1,934,410)


Cash at beginning of period                                      48,250              1,982,660
                                                            ------------          -------------

Cash at end of period                                       $    22,056          $     48,250
                                                            ============          =============
Interest paid                                               $    69,591           $      8,243
Taxes paid                                                  $       800           $        800

      Non cash investing and financing transactions:

In fiscal year ended July 31, 1998 stocks were issued for services in the amount
of $ 559,594.  The stock  issued in fiscal year ended July 31,  1998  related to
acquisition costs.


</TABLE>


     The accompanying notes are an integral part of the financial statements.





<PAGE>





                           Innovative Medical Services
                          Notes to Financial Statements
                             See Accountants' Report

NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Organization and Business Activity
         ----------------------------------
         Innovative  Medical Services was incorporated in San Diego,  California
         on August 24,  1992.  The  Company  was  organized  with the purpose of
         manufacturing,  marketing,  and  selling the  Fillmaster,  a unique and
         proprietary  pharmaceutical  water purification and dispensing product.
         The Company is fully  operational,  with more than 15,000  customers in
         all fifty states, Puerto Rico, The United Kingdom,  Australia,  Canada,
         and Europe.  The Company has expanded research and development  efforts
         in order to further develop its product line to include an additional 8
         proprietary pharmacy-related efficiency tools.

         Revenue Recognition
         -------------------
         The company recognizes revenues when products are shipped.

         Research and Development
         ------------------------
         Research and development costs that have no alternative future uses are
         charged to  operations  when  incurred  and are  included in  operating
         expenses.  The total amount charged to Research and Development expense
         was  $157,049  and $177,384 in the fiscal years ended July 31, 1999 and
         1998, respectively.

         Depreciation Method
         -------------------
         The  cost  of  property,  plant  and  equipment  is  depreciated  on  a
         straight-line  basis over the  estimated  useful  lives of the  related
         assets. The useful lives of property, plant, and equipment for purposes
         of computing depreciation are:

                Computers and equipment                   7.0 years
                Furniture and fixtures                   10.0 years
                Property held under capital lease        10.0 years
                Vehicle                                   5.0 years to 7.0 years

         Leasehold  improvements  are  being  depreciated  over the life of the
         lease, which is equal to 120 months.

         Depreciation  is computed on the Modified  Accelerated  Cost  Recovery
         System for tax purposes.

         Amortization
         ------------
         Goodwill and  Customer  List are being  amortized on the  straight-line
         basis over forty (40) years  (Note 13).  Amortization  expense  for the
         years  ended  July  31,  1999 and July  31,  1998 was  $11,650  and $0,
         respectively.

         The cost of patents acquired will be amortized on a straight-line basis
         over the  remaining  lives of 17 years  beginning  in fiscal year ended
         July 31, 2000.

         Inventory Cost Method
         ---------------------
         Inventories are stated at the lower of cost or market determined by the
         Average Cost method and net realizable value.  Inventories at July 31st
         consisted of:


                                            1999          1998

                  Finished Goods    $       212,335    $ 183,777
                  Work in Progress          108,770       37,246
                  Raw Materials             398,867      139,543
                                            -------      -------
                                    $       719,972    $ 360,566
                                            -------      -------
<PAGE>

         Use of Estimates
         ----------------
         The  preparation  of  the  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.

         Fair Value of Financial Instruments
         -----------------------------------
         The fair value of financial  instruments,  consisting  primarily of the
         line of credit, is based on interest rates available to the Company and
         comparison  to  quoted  prices.  The  fair  value  of  these  financial
         instruments approximates carrying value.

         Advertising and Promotional Costs
         ---------------------------------
         Cost of  advertising  and  promotion  are  expensed  as incurred or the
         first-time  advertising  and  promotion  takes  place.  Such costs were
         $101,063  and  $272,191  for the years ended July 31, 1999 and July 31,
         1998, respectively.

         Deferred Public Offering Cost
         -----------------------------
         The company had incurred  $376,695 of costs as of July 31, 1996 related
         to an initial  public  offering.  Those  costs were  deferred,  pending
         completion of the offering.  After the completion of the offering,  the
         total of the public  offering  costs  $1,436,807  was  reclassified  to
         shareholders' equity.

         Deferred Acquisition Costs
         --------------------------
          During the process of evaluating  certain  companies for  acquisition,
          the Company expended $48,391 and $1,096,852 in fiscal years ended July
          31, 1999 and July 31, 1998, respectively. These costs were capitalized
          and will be reclassified if the  acquisitions are successful as a cost
          of the  investment or expensed in the future if the  acquisitions  are
          not  successful.  During fiscal year ended July 31, 1999,  the company
          completed the acquisition of Export Company of America,  Inc.  (EXCOA)
          and  reclassified  $1,051,493 of the July 31, 1998 balance of deferred
          acquisition  costs and  $39,900 of the July 31,  1999  fiscal year end
          expenditures to investment in that purchase (Note 13).

         Net Income (Loss) Per Common Share
         ----------------------------------
         The Company  adopted FASB Statement No. 128,  Earnings Per Share ("SFAS
         128"),  which is effective for periods  ending after December 15, 1997.
         Entities  that have only  common  stock  outstanding  are  required  to
         present  basic  earnings  per share  amounts.  All other  entities  are
         required to present  basic and diluted per share  amounts.  Diluted per
         share  amounts  assume the  conversion,  exercise  or  issuance  of all
         potential  common  stock  instruments  unless the effect is to reduce a
         loss  or  increase  the  income  per  common   share  from   continuing
         operations.

         As required by SFAS 128,  earnings per share is computed based upon the
         weighted average common shares  outstanding for the year.  Earnings per
         share does not exclude  the effect of  outstanding  warrants  and stock
         options even though the effect of their  inclusion in fiscal year ended
         July 31, 1998 is antidilutive, as defined in the Statement.

         Following is a reconciliation  of the weighted average number of shares
         actually outstanding with the number of shares used in the computations
         of loss per common share:
<PAGE>

<TABLE>
<CAPTION>
                                                             For the Years Ended
                                                      July 31, 1999        July 31, 1998
                                                      -------------        -------------
            <S>                                          <C>                  <C>
             Shares outstanding                           4,392,242            3,916,351

             Weighted average number of
               shares actually outstanding                4,148,879            3,779,543

             Stock Options                                1,417,969            1,471,250
             Warrants                                     1,798,125            1,798,125
                                                          ---------            ---------
                Total weighted average shares             7,364,972            7,048,918
                                                          ---------            ---------
             Net income (loss)                            $ 257,195          $(1,902,742)
                                                          =========         ============

             Basic net earnings (loss) per share            $  0.06          $     (0.50)
                                                            -------          ------------

             Diluted net earnings (loss) per share          $  0.03          $     (0.27)
                                                            -------          ------------
</TABLE>


         Potential  common stock  instruments  at July 31, 1999,  which  include
         1,417,969  stock  options and 1,798,125  warrants,  are included in the
         loss per share calculation.  Potential common stock instruments at July
         31, 1998, which include 1,471,250 stock options and 1,798,125 warrants,
         are  included  in the loss per  share  calculation  even  though  their
         inclusion is antidilutive for the fiscal year ended July 31, 1998.

         Income Taxes
         ------------
         At July 31, 1999,  the Company has financial,  federal,  and California
         tax net  operating  loss  carryforwards  of  approximately  $3,844,000,
         $3,771,000, and $1,899,000, respectively. At July 31, 1998, the Company
         has  financial,   federal,   and  California  tax  net  operating  loss
         carryforwards of approximately $4,101,000,  $3,994,000, and $2,122,000,
         respectively.  The difference  between the financial  reporting and the
         federal tax loss carryforward is primarily due to the capitalization of
         research  and  development  expenses  and  start-up  expenses  for  tax
         purposes  with  an  amortization  over  five  (5)  years,  however  for
         financial  reporting  purposes these expenses are charged to operations
         as incurred.  The  difference  between  federal and California tax loss
         carryforwards  is  primarily  due to the fifty  percent  limitation  on
         California loss  carryforwards.  The tax loss  carryforwards will begin
         expiring  in  fiscal  year  ended  July  31,  2008,  unless  previously
         utilized.

         The Company adopted Financial  Accounting Standards Board Statement No.
         109,  Accounting for Income Taxes,  beginning in fiscal year ended July
         31, 1993.  The adoption had no impact on 1993  results.  In  accordance
         with this new  standard,  the Company has recorded  total  deferred tax
         assets of  $899,000  and $962,000  and a related  valuation  reserve of
         $899,000  and  $962,000  for the fiscal  years  ended July 31, 1999 and
         1998,  respectively.  Realization of these  deferred tax assets,  which
         relate to operating loss  carryforwards and timing differences from the
         amortization  of  research  and   development   expenses  and  start-up
         expenses,  is  dependent on future  earnings.  The timing and amount of
         future earnings are uncertain and therefore,  the valuation reserve has
         been established.

NOTE 2. CASH AND CASH EQUIVALENTS

         The carrying  amounts for cash and cash  equivalents  approximate  fair
         value because of the short maturity of these  instruments.  The Company
         maintains cash balances at several financial institutions.  Accounts at
         each   institution  are  insured  by  the  Federal  Deposit   Insurance
         Corporation up to $100,000.

          At July  31,  1999  and  July 31  1998,  the  Company's  cash and cash
          equivalents is represented  by $22,580 and $48,250,  respectively,  in
          cash or checking accounts.

NOTE 3. RESTRICTED CASH

         At  July  31,  1999,  the  Company's  restricted  cash  consisted  of a
         certificate  of deposit of $205,574 and at July 31, 1998 the  Company's
         restricted  cash  consisted  of a  certificate  of deposit of $206,230.
         These  certificates  of deposit were held by a bank,  as security for a
         line of credit with the same bank (Note 6).

NOTE 4. NOTES RECEIVABLE

<PAGE>
         At July 31, 1999, notes receivable of $153,578  represents  amounts due
         from officers and $169,772  represents  amounts due from  employees and
         $16,174 represents amount due from ex-employees and others. At July 31,
         1998, notes receivable of $80,074  represents amounts due from officers
         and $26,844 represent amounts due from employees.  All notes receivable
         are due and payable  within one year.  The carrying value of the notes,
         based on the terms at which those same loans  would be made  currently,
         approximate  their  fair  value.  All notes in excess of $10,000  have
         interest accrued at 6%.

NOTE 5. PROPERTY, PLANT AND EQUIPMENT

          The  following is a summary of  property,  plant,  and  equipment - at
          cost, less accumulated depreciation:
<TABLE>
<CAPTION>

                                                    July 31, 1999       July 31, 1998
                                                    -------------       -------------

               <S>                                 <C>                <C>
                Computers and equipment             $     719,410      $      628,074

                Furniture and fixtures                    107,431              86,487

                Property held under capital lease               0               7,511

                Vehicle                                    52,670              40,670

                Leasehold improvements                    322,805             280,575
                                                          -------             -------
                                                        1,202,316           1,043,317

                Less: accumulated depreciation            396,793             251,718
                                                          -------             -------

                         Total                      $     805,523       $     791,599
                                                    =============       =============
</TABLE>

          Depreciation expense charged to general and administrative expense for
          the years  ended July 31,  1999 and 1998 was  $144,075  and  $125,935,
          respectively.

NOTE 6. DEBT
<TABLE>
<CAPTION>

         The details relating to debt are as follows:
                                                                     July 31, 1999   July 31, 1998

<S>                                                                  <C>             <C>
           Obligation under capital lease                            $           0   $         969

            Line of Credit Valle de Oro Bank
            $200,000 line of credit, interest
            at 7.7% Due and payable February 25, 2000
            Secured by certificate of deposit of @205,574                  196,009         199,484

            Line of Credit Flagship Capital, Inc. for financing
            of accounts payable, interest at 17% payable
            at $27,052 monthly beginning September 17, 1998                      0          94,533

            Business Alliance Capital Corporation for accounts
            receivable financing of up to 80% of
            the aggregate outstanding eligible accounts
            receivables at 3% plus prime beginning
            September 1998 for period of one year
            renewable on an annual basis                                   250,058              0
                                                                   ---------------   -------------

            Total notes payable                                            446,067         294,986

            Current maturities of notes payable included in
            current liabilities                                            446,067         294,986
                                                                   ---------------   --------------

            Total long term debt                                   $             0    $          0
                                                                   ===============    =============
</TABLE>
<PAGE>

NOTE 7. COMMITMENTS

         The company leased office and warehouse  facilities  under an operating
         lease that expired on December 31, 1996.  On May 14, 1996,  the Company
         entered into a new  operating  lease  agreement for  sixty-five  months
         commencing  on July 1, 1996.  The rent payment  portion of the lease is
         for  sixty-three   months,   which  allows  for  an  initial   building
         improvement  period of two  months.  The  monthly  rental for the 9,443
         square  foot  facility  is $0.61 per square  foot plus $0.08 per square
         foot for  maintenance  of common  areas.  There is also a fixed  yearly
         increase of 4%. The company has also signed an  amendment  to the lease
         to allow for an option to lease the  building  for an  additional  five
         years. The company made  improvements to the new building in the amount
         of $280,000.

         The rental expense recorded in general and administrative  expenses for
         the  years  ended  July 31,  1999 and July  31,  1998 was  $78,393  and
         $76,700, respectively. Future minimum rental payments required for each
         of the 5  succeeding  years  assuming  exercise  of the  option  are as
         follows:

               Year Ended July 31,           Amount

                             2000       $    85,026
                             2001            88,428
                             2002            91,965
                             2003            95,644
                             2004            99,470


NOTE 8. CAPITAL STOCK

         The following schedule summarizes the change in capital stock:
<TABLE>
<CAPTION>

                                       Common            Common
                                        Stock             Stock             A                 A          Z Warrants
                                       Shares               $            Warrants         Warrants          Issued
                                                                          Issued              $
                                     ---------         ---------       ---------         --------       -----------
        <S>                          <C>               <C>             <C>                <C>              <C>
         Balance, July 31, 1997       3,532,851        $5,566,124       3,687,500          $108,750         785,000

         Stock issued for services      383,500           559,594               0                 0               0

         Balance, July 31, 1998       3,916,351         6,125,718       3,687,500           108,750         785,000

         Sale of stock                  233,125           189,375               0                 0               0

         Private placement              242,766           348,225               0                 0               0

         Balance, July 31, 1999       4,392,242        $6,663,318       3,687,500          $108,750         785,000

</TABLE>

         Each class A warrant  entitles  the  holder to  acquire  an  additional
         common  share for $5.25 per common share  beginning  August 8, 1997 and
         expiring  August 8, 2001.  The Class A Warrants are  redeemable  by the
         Company for $0.05 per warrant, at the Company's option,  commencing one
         year after the effective date of the offering  provided the closing bid
         price for the Company's  common shares shall have averaged in excess of
         $9.00 per share for thirty consecutive business days ending within five
         days of the date of notice of redemption.

         Each class Z warrant  entitles  the  holder to  acquire  an  additional
         common share for $10.00 per common share  beginning  August 8, 1998 and
         expiring  August 8, 2001.  The Class A Warrants are  redeemable  by the
         Company for $0.10 per warrant, at the Company's option,  commencing one
         year after the effective date of the offering  provided the closing bid
         price for the Company's  common shares shall have averaged in excess of
         $15.00 per share for thirty  consecutive  business  days ending  within
         five days of the date of notice of redemption.
<PAGE>

NOTE 9. RELATED PARTY TRANSACTIONS

         On April 1, 1996, the Company entered into an employment agreement with
         the President and Chief Executive Officer. The term of the agreement is
         for five years with an  automatic  renewal of another  five years.  The
         following are the major provisions of the agreement:

     1.   Compensation
          a.   Salary of $108,000 per year, and
          b.   Additional  compensation  equal  to 3% of the net  income  before
               taxes earned by the corporation during each full fiscal year, and
          c.   A  monthly  amount  of not more  than  $500 per month for an auto
               lease, and
          d.   A  five  year   option  to   purchase   as  many  shares  of  the
               corporation's common stock as equals one hundred thousand dollars
               at 80% of the  initial  public  offering  price of the  Company's
               common  stock,  approximately  31,250  shares at $3.20 per share,
               which are exercisable in April, 1997.

     2.   Compensation for past services
          a.   In  consideration of services which have been rendered during the
               fiscal  years ended July 31, 1994 and July 31, 1995 and the eight
               months period ended March 31, 1996, the  corporation  granted the
               following compensation for past services rendered:
               i.   $30,000 for fiscal year ended July 31, 1994, and
               ii.  $45,000 for fiscal year ended July 31, 1995, and
               iii. $60,000 for the eight months ended March 31, 1996.

         The  President  (Mr.  Krall)  waived  the  payment of  $119,000  of the
         compensation  for past  services  and  contributed  this  amount  as an
         additional  payment for the common stock he presently owns. In order to
         reward the efforts of Director  Krall for his  performance in the weeks
         leading  to  NASDAQ  approval  of  the  initial  public  offering,  the
         Compensation   Committee   recommended   and  the  Board  of  Directors
         authorized a bonus to Mr. Krall in the amount of $257,500. The bonus of
         $257,500 was accrued at July 31, 1996.

         On April 26, 1997,  the board of directors  approved the renewal of the
         employment contract for Michael Krall for the position of President and
         Chief Executive Officer and increased his salary to $12,000 per month.

NOTE 10. STOCK OPTION PLANS

         The Company has three stock option plans (the Plans)  pursuant to which
         options to acquire  common stock have been granted.  These are the 1996
         Incentive  Stock Option Plan (the 1996 Incentive  Plan) approved by the
         Company's  Shareholders in April, 1996, the 1996 Directors and Officers
         Stock  Option  Plan (the 1996 D&O Plan)  adopted by the Board in April,
         1996 and the Amended  Innovative  Medical  Services 1998  Directors and
         Officers  Stock  Option  Plan  (the  1998  D&O  Plan)  approved  by the
         Company's Shareholders in December, 1998. The Plans are administered by
         a Committee of the Board of Directors or the entire Board. The exercise
         price of options granted under any of the Plans must be the fair market
         value for the common stock at the date of grant.

         1996 Incentive  Plan: The maximum number of shares which may be offered
         pursuant to stock  options under the 1996  Incentive  Plan is 1,000,000
         Shares.  The maximum number of shares subject to Options granted to any
         one Key Employee shall not exceed 100,000  shares.  The Options granted

<PAGE>
         are "Incentive  Stock Options" within the meaning of Section 422 of the
         Internal  Revenue Code of 1986, as amended,  for certain key employees.
         All Key Employees of the Company and its  subsidiaries  are eligible to
         participate  in the 1996  Incentive  Plan. A Key Employee is defined in
         the  Plan  as  a  Company   employee   who  in  the   judgment  of  the
         Administrative  Committee  has the  ability  to  positively  affect the
         profitability  and  economic  well-being  of  the  Company.  Part  time
         employees, independent contractors, consultants and advisors performing
         bona fide  services to the Company  shall be  considered  employees for
         purposes of participation in the Plan. No Executive Officer or Director
         of the Company has received options  pursuant to this Plan.  Options to
         acquire  143,125 shares under the 1996 Incentive Plan were  outstanding
         as of July 31,  1999  with  673,750  shares  remaining  under  the 1996
         Incentive Plan for which options may be granted.

         1996 D&O  Plan:  The  maximum  number of  shares  which may be  offered
         pursuant to stock options under the 1996 D&O Plan was 1,000,000 Shares.
         The maximum number of shares subject to options  granted under the 1996
         D&O Plan to any one Director or Officer shall not exceed 200,000 shares
         in any 12-month  period.  Options to acquire  400,000  shares under the
         1996 D&O Plan  were  outstanding  as of July 31,  1999 and there are no
         shares  remaining  under  the 1996 D&O Plan for  which  options  may be
         granted.

         1998 D&O  Plan:  The  maximum  number of  shares  which may be  offered
         pursuant to stock options under the 1998 D&O Plan is 2,000,000  shares.
         The maximum number of shares subject to options  granted under the 1998
         D&O Plan to any one Director or Officer shall not exceed 200,000 shares
         in any 12-month period.  Upon the election of a continuing  director or
         the  further  appointment  of  a  continuing   executive  officer,  the
         continuing  director or officer will receive an  additional  option for
         50,000 shares.  A newly elected  director or newly appointed  executive
         officer is entitled to receive an option for 100,000 shares. Options to
         acquire  991,250 shares under the 1998 D&O Plan were  outstanding as of
         July 31, 1999 and there are 958,750 shares remaining under the 1998 D&O
         Plan for which options may be granted.

          During  fiscal  year  ended  July  31,  1999  employees  and  officers
          exercised options on 233,125 shares of stock.

NOTE 11. PENSION PLAN

         The  Company  participates  in a Small  SEP  program  under  which  the
         employer  makes  contributions  to  a  SEP,  which  includes  a  salary
         reduction arrangement (SARSEP). Employees who participate in the SARSEP
         may elect to have the employer:  (a) make  contributions  to the SEP on
         their behalf, or (b) pay them cash. A salary reduction  arrangement may
         be used only in years in which the SEP meets  requirements that the IRS
         may  impose to ensure  distribution  of  excess  contributions.  Annual
         contributions  of  an  employer  under  a SEP  are  excluded  from  the
         participant's gross income.

NOTE 12. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS

         The Company  markets its  products  to  numerous  customers  in various
         geographic  regions,  thereby  spreading  its  credit  risk  related to
         receivables.  See Note 2 Cash and Cash Equivalents as to the discussion
         of credit risks concerning cash equivalents.

         The carrying amounts for cash and cash  equivalents,  receivables,  and
         payables   approximate  fair  value  because  of  the  short  maturity,
         generally less than three months,  of these  instruments.  The carrying
         value of the Company's long-term debt approximates fair value since the
         current borrowing rates available for financing are similar in terms.


<PAGE>
NOTE 13. ACQUISITIONS

         In October of 1998 the Company  purchased the assets of Export  Company
         of  America,   Inc.   (EXCOA),   a  privately  held  Fort   Lauderdale,
         Florida-based  distributor of disposable medical, dental and veterinary
         supplies.  The major  asset of this  company  was its 45%  interest  in
         Ampromed  Comercio  Importacao E Exportacao Ltda  (AMPROMED),  a Rio de
         Janeiro-based import company that sells medical,  dental and veterinary
         supplies and water filtration products to practitioners, retail outlets
         and  government  agencies.  The  Company  acquired  the  remaining  55%
         interest in AMPROMED  from a private  individual.  To  facilitate  this
         transaction  the  Company  has  formed  EXCOA  Nevada,   a  100%  owned
         subsidiary   of   Innovative   Medical   Services.   This  company  was
         incorporated  in Nevada.  A 99%  interest in  AMPROMED  will be held by
         EXCOA  Nevada,  with  the  remaining  1% of  AMPROMED  being  owned  by
         Innovative Medical Services. These business combinations were accounted
         for using the  purchase  method.  The Company  incurred  $1,091,393  of
         acquisition  cost for these two  entities.  Of this  amount the Company
         recorded $261,322 of goodwill and $360,000 of other intangible  assets.
         These assets are being amortized over a period of forty (40) years.

         The  results of  operations  of the acquired  companies are included in
         the accompanying  consolidated financial statements beginning November
         1st of  1998.  The  Company  has  made  a  substantial  investment  to
         establish a  facility and obtain access to Brazilian markets.  However,
         due to recent  economic conditions in the region,  activities in Brazil
         were temporarily scaled back.

          The  assets  acquired,  including  the cost in  excess  of net  assets
          acquired in the acquisition of AMPROMED are as follows:

             Tangible assets acquired at fair value                    $122,801
             Intangible assets acquired (Licenses and customer list)    707,271
             Costs in excess of net assets acquired                     261,322
             Total purchase price                                    $1,091,394

         Selected  unaudited pro forma  combined  results of operations  for the
         years  ended  July 31,  1999 and 1998,  assuming  AMPROMED  acquisition
         occurred on August 1, 1998 and 1997, are presented as follows:

     Total Revenues                         $  3,379,984     $        1,763,515
     Net income (loss)                      $    257,502     $       (1,996,119)

     Basic net earnings (loss) per share    $       0.06     $            (0.53)

NOTE 14. YEAR 2000

         The Company  recognizes the need to ensure its  operations  will not be
         adversely  impacted by Year 2000 software  failures.  Software failures
         due to processing errors  potentially  arising from calculations  using
         Year 2000 date are a known risk. The Company is addressing this risk to
         the availability and integrity of financial systems and the reliability
         of operational systems even though the newly acquired in-house software
         system is Year 2000 compliant.  The Company has  established  processes
         for  evaluating and managing the risks and costs  associated  with this
         problem.  The Company is also  communicating  with suppliers,  dealers,
         financial institutions and others with which it does business to ensure
         their systems will be Year 2000 compliant.  The cost of compliance will
         be incurred through December 31, 1999.


<PAGE>

                              Steven Holland, CPA
                       3914 Murphy Canyon Rd., Ste. A126
                              San Diego, CA 92123
                               Phone 619-279-1640
                                Fax 619-279-9221

Auditor's Report
on Supplementary Information


         My audits of the basic financial statements were made primarily to form
an opinion on such  financial  statements  taken as a whole.  The  supplementary
information  contained in the  following  pages is presented  for the purpose of
additional  analysis  and,  although  not required  for a fair  presentation  of
consolidated  financial  position,  results of operations,  and cash flows,  was
subjected  to the audit  procedures  applied  in the  examinations  of the basic
financial  statements.  In my opinion,  the supplementary  information is fairly
presented in all material respects in relation to the basic financial statements
taken as a whole.



/s/ STEVEN HOLLAND
------------------
Steven Holland
Certified Public Accountant



San Diego, California
October 25, 1999


<PAGE>

                   COST OF SALES AND SELLING EXPENSES SCHEDULE


                                                 For the Years Ended
                                                       July 31
                                           1999                  1998
                                         --------------------------------
Schedule of Cost of Sales

     Material purchases                    $ 1,152,821       $   809,528
     Production labor                          143,017           100,562
     Freight                                   138,653            82,752
     Supplies and miscellaneous                  8,816             9,157
                                           -----------       -----------

                 Total cost of sales       $ 1,443,307       $ 1,001,999
                                           ===========      ============

Schedule of Selling Expenses

     Advertising and marketing             $   101,063       $   276,390
     Sales wages                               216,895           335,098
     Travel and entertainment                   31,758             9,037
     Trade shows                                 6,895            27,112
                                           -----------       -----------

                 Total selling expenses    $   356,611       $   647,637
                                           ===========       ===========


<PAGE>
                 SCHEDULE OF GENERAL AND ADMINSTRATIVE EXPENSES



                                                       For the Years Ended
                                                             July 31
                                                     1999            1998
                                                 -----------------------------
Schedule of General and Administrative Expenses

   Accounting fees                              $   42,330      $   17,180
   Amortization                                     11,650               -
   Auto expenses                                       747           1,621
   Bad debts                                        32,400               -
   Bank charges and processing fees                  3,122           2,640
   Board meetings and fees                           7,038          33,864
   Cleaning                                          1,314              60
   Computer expense                                  2,320           5,712
   Contributions                                       205               -
   Consulting fees                                  40,500         654,565
   Depreciation                                    144,075         125,935
   Dues & subscriptions                             10,583          15,072
   Employee benefits                                12,386           6,521
   Equipment rent                                   16,649          10,579
   Insurance                                        56,617          54,083
   Interest expense                                 69,591           8,243
   Investor relations                               31,182          14,410
   Legal and professional                           66,875          71,433
   Licenses and fees                                     -             130
   Miscellaneous                                     2,466           2,474
   Office supplies and expense                       8,737          14,893
   Office wages and payroll taxes                  287,241         271,133
   Officers wages                                  144,000         146,215
   Overhead application to WIP                     (74,559)              -
   Payroll processing service                        3,074           3,040
   Postage/shipping                                 16,554          36,373
   Printing                                          3,019           4,377
   Public relations                                 24,009          56,946
   Recruiting - employment                           3,496             936
   Rent expense                                     78,393          76,700
   Repairs and maintenance                             792           5,765
   SEC compliance costs                             37,560          62,201
   Security                                            240             428
   Services charges                                 33,000               -
   Small tools                                         361           1,667
   Taxes: business                                   6,241           6,313
   Telephone                                        38,844          61,751
   Travel                                              778               -
   Utilities                                        14,298          16,395
                                                -----------     -----------

     Total general and administrative expenses  $1,178,128      $1,789,655
                                                ===========     ===========

<PAGE>






ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE: None

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required by this Item is  incorporated  by reference  from the
Registrant's Proxy Statement to be filed on or before November 29, 1999.


ITEM 10. EXECUTIVE COMPENSATION

The  information  required by this Item is  incorporated  by reference  from the
Registrant's Proxy Statement to be filed on or before November 29, 1999.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this Item is  incorporated  by reference  from the
Registrant's Proxy Statement to be filed on or before November 29, 1999.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required by this Item is  incorporated  by reference  from the
Registrant's Proxy Statement to be filed on or before November 29, 1999.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

A.       Exhibits
         (3) (i)  Articles of Incorporation  (Incorporated by reference from
                  Form SB-2  Registration SEC File # 333-00434  effective August
                  8, 1996)

         (3) (ii) By-Laws of  Corporation  (Incorporated  by reference from
                  Form SB-2  Registration SEC File # 333-00434  effective August
                  8, 1996)

         (11)     Statement Re: Computation of Per Share Earnings

         (13)     Subsidiaries of the Registrant

         (27)     Financial Data Schedule

B.       Reports on Form 8-K: None


<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.




INNOVATIVE MEDICAL SERVICES                                           DATE



/s/ MICHAEL L. KRALL                                            October 28, 1999
--------------------
Michael L. Krall, Chairman/President/CEO



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

    NAME                TITLE                                  DATE

/s/ DENNIS BROVARONE    Director                                October 28, 1999
--------------------
Dennis Brovarone

/s/ GARY BROWNELL       Chief Financial Officer and Director    October 28, 1999
-----------------

/s/ PATRICK GALUSKA     Director                                October 28, 1999
-------------------
Patrick Galuska

/s/ EUGENE PEISER       Director                                October 28, 1999
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Eugene Peiser

/s/ DONNA SINGER        Executive Vice President and Director   October 28, 1999
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Donna Singer


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