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, 2001
                         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
                                 --------------
                                (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: $2,409,700

State the aggregate market value of the voting stock held by non-affiliates of
the registrant: Approximately $15,693,000 as of October 25, 2001.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 6,974,699 shares of common stock as of October 25, 2001.

Documents incorporated by reference: Certain exhibits

<PAGE>

PART I

ITEM 1.  DESCRIPTION OF BUSINESS
Company Overview
----------------
Innovative Medical Services began as a provider of pharmaceutical water
purification products. Although our current revenues are still primarily from
the pharmacy industry, we have expanded from our niche pharmacy market into
other, broader markets with new products, including residential and commercial
water filtration systems, health and wellness-related retail and e-commerce
merchandise, silver ion bioscience technologies and boric acid based pesticide
technologies.

The Fillmaster(R) pharmaceutical water purification, dispensing and measuring
products include the Pharmapure(R) water purification system, the FMD 550
dispenser, the patented Fillmaster 1000e computerized dispenser and the patented
Scanmaster(TM) bar code reader. We also market proprietary National Sanitation
Foundation certified replacement filters for the Fillmaster Systems.

Our Nutripure(R) line of water treatment and filtration systems includes the
Nutripure 3000S-Series whole-house water softening systems, the Nutripure Elite
reverse osmosis point-of-use systems, the Nutripure 2000 countertop water
filtration system and the Nutripure Sport filtered sport bottle. We distribute
our various Nutripure products in several ways, including retail sales,
catalogue placement, business-to-business sales, internet promotion and in-home
sales presentations.

Through our subsidiary Nutripure.com, we operate an e-commerce health website,
Nutripure.com(TM), that distributes Bergen Brunswig products. We provide
consumers a wide variety of vitamins, minerals, nutritional supplements,
homeopathic remedies and natural products. In addition to merchandise, the site
offers comprehensive health and wellness information in an easy-to-access,
intuitive reference format.

We have obtained worldwide manufacturing and marketing rights for advanced
silver ion technologies. Axenohl(TM) is a patented, non-toxic aqueous
disinfectant. The use dilution formulation of Axenohl is called Axen(TM). The
EPA registration for use of Axenohl and Axen as hard surface disinfectants has
been issued, and we plan to pursue additional EPA, USDA and FDA regulatory
approvals for other applications. Additional possible uses for this product
include wound care, topical infection care and personal disinfecting retail
products, which may require FDA approvals, as well as municipal water treatment
and point-of-use/point-of-entry water treatment products, which may require
additional EPA approvals.

We expanded our bioscience division by acquiring a new pesticide technology
during the year. The product line contains particular formulas for specific
pests and targets cockroaches, ants, palmetto bugs, silverfish, waterbugs,
ticks, fleas, lice and garden pests. We are marketing the first product from the
line, the EPA-approved RoachX(TM), to the pest control industry through the two
largest pest control wholesalers in the United States. We have submitted for and
anticipate EPA approval for AntX(TM), the next product in the line. We are ready
to begin selling AntX as soon as approval is received.


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 not only the pharmacy industry, but also
other healthcare markets and to retail consumers.

In the past five years, Innovative Medical Services transitioned from a
one-product company supplying a niche market to a multi-division company
managing new products and programs. In addition to expanding the Fillmaster
product line with the Fillmaster 1000e and the Scanmaster, we launched a line of
residential water treatment and filtration products and several other health
related retail products. We distribute many of the new products through
distribution channels established by sales of Fillmaster Systems to retailers.
We also launched a strong e-commerce initiative and entered the bioscience arena
with our silver ion disinfecting technologies and our boric acid based pesticide
technologies
<PAGE>
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, we
plan to distribute water treatment and silver ion products to Brazil through
AMPROMED. Since the acquisition, the economic conditions in the region have
declined and implementation of the project has been delayed. We no longer have
immediate plans to import medical and dental supplies into Brazil but we
believe, however, that Ampromed is a vital part of our plan to market and sell
Axenohl, RoachX and the Nutripure line of water treatment products.

In December 1999, we formed a wholly owned subsidiary, Nutripure.com, to
capitalize on internet commerce opportunities focusing on health and wellness.
In January 2000, we began the process to spin off Nutripure.com as a separate
public company. During the intervening time, adverse market conditions for
solely internet-based ventures eroded Management's confidence in the viability
of a public market for Nutripure.com common stock. Therefore, in October 2000,
our Board of Directors elected to retain Nutripure.com as an operating division
of Innovative Medical Services in order to minimize the substantial
administrative expense associated with launching and operating a public company.

Principal Products and Markets

WATER TREATMENT DIVISION

Pharmaceutical Water Treatment
Fillmaster(R) The Fillmaster dispensing apparatus, connected to the
Pharmapure(R) reverse osmosis water filtration system, provides measured amounts
of purified water for reconstitution of liquid oral antibiotics and certain
other pharmacy applications. Pharmapure is a 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 and is closed and pressurized to prevent
contamination.

The Fillmaster System saves time and money for pharmacies. According to our
testing, the Fillmaster has a fill rate at least three times that of previous
bottle-and-hose methods, and direct and indirect costs associated specifically
with bottled water are reduced or eliminated. Pharmacy storage space can be
reallocated to more profitable items, labor savings accompany the efficiencies,
and the expense of bottled water purchases of up to $1.25 per gallon is replaced
by one annual filter change. Under optimum usage, a pharmacy reduces the cost of
"purified water" to approximately $.04 per gallon.

In addition to efficiency and cost savings, the Fillmaster System increases
prescription integrity by greatly reducing the possibility of human error while
dispensing prescriptions. The patented Fillmaster 1000e employs multiple
microprocessors to provide accurate and even-flow dispensing. We sell Fillmaster
1000e dispensers as an upgrade to existing installations and as a component of
new installations. The Scanmaster, launched in August 1999, is a pager-sized,
modular upgrade to the Fillmaster 1000e. A user simply scans a prescription's
NDC bar code in front of the dispenser, and the Fillmaster 1000e displays the
product name and required water quantity. The Fillmaster System then dispenses
the prescription with one touch of a button. The advanced technology of the
Fillmaster 1000e computerized dispenser and the Scanmaster bar code reader
ensures accuracy of measurement and assurance of compliance to minimize
liability.

This is a finite, niche market in which our significant customers to date
consist primarily of domestic retail chain pharmacies. 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 20% of a pharmacy's gross profit. We have installed over
20,000 Fillmaster dispensers in pharmacies across the nation, including
Wal-Mart, Walgreens, Albertson's/American Stores, Eckerd, Fred Meyer, Target,
CVS, Kroger, Smith's Food and Drug, Longs Drugs, 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.
<PAGE>
Fillmaster(R) System Filters We also market unique and proprietary NSF certified
filter replacements for the Fillmaster's Pharmapure water purification system,
which require changing at intervals of approximately 12 months or sooner as
indicated by the purity testing module. The filter replacements represent a
significant continuing source of revenues to us.

Customer Service Plan 2000(TM) Innovative Medical Services offers outstanding
service to its pharmacy customers with its exclusive Customer Service Plan 2000
(CSP 2000). The CSP 2000 provides an unlimited warranty on all Innovative
Medical Services pharmacy products, regardless of age or quantity; significant
discounts on maintenance item costs; free software upgrades for the Fillmaster
1000e and Scanmaster; a secure web site that allows pharmacy customers to
monitor history, scheduled maintenance and account status; automatic replacement
filter shipments; and simplified, annual invoicing. Motivated by the cost
savings and the extended warranty coverage, most of our chain customers have
entered into multi-year contracts for the CSP 2000.

Residential Water Treatment Products
Nutripure(R) 3000S Series Innovative Medical Services' Nutripure Water Dealer
Program offers existing independent water treatment dealers a line of
residential water softening and other point-of-use water treatment equipment for
sale to the public under IMS' Nutripure brand. In addition, the program provides
complementary, industry-unique financing that extends credit to consumers for
the purchase of water treatment equipment from participating dealers. We
realize revenues from both the sale of Nutripure equipment and the
financing.

The Nutripure 3000S Series whole-house water softening systems, like most water
softening systems on the market, are typically professionally installed in a
customer's basement or garage and require electricity. The Nutripure water
softening systems, comprised of a resin tank, brine tank and controller, extract
minerals from the water through an ion exchange process. Nutripure 3000 systems
are often installed in conjunction with Nutripure Elite systems.

We have formed alliances with independent dealer groups, finance companies and
leading equipment component manufacturers to create a marketing program to sell
and finance whole-house water treatment systems through existing dealers. We
believe this marketing strategy provides consumers and independent dealers a
name and image they can trust. The programmable systems come equipped with
microprocessors and electronic water meters to monitor daily water usage and
provide automatic, demand-based water conditioning. An electronic memory stores
operating system information, and battery backup keeps it current if power is
lost.

Nutripure(R) Elite The Nutripure Elite line of residential drinking water
systems combines reverse osmosis technology with carbon filtration to improve
the taste, smell, quality and safety of standard tap water. Reverse osmosis is a
water treatment process that removes contaminants from water by using pressure
to force the water molecules through a semi-permeable membrane. Carbon,
sometimes referred to as activated carbon, is a water treatment medium commonly
used for dechlorination and for reducing trace and soluble materials from water.

The Nutripure Elite reverse osmosis filtration system is comprised of a storage
tank, a faucet and a water filtration apparatus which includes a sediment
filter, pre- and post-carbon filters and a reverse osmosis membrane. Nutripure
Elite requires neither professional installation nor electricity to operate. The
Nutripure Elite system filters to .001 micron and reduces heavy metals,
chemicals and microorganisms, such as cryptosporidium and giardia, as well as
reducing bad taste and odor from drinking water. A micron is a measurement unit
equal to one millionth of a meter. Micron measurements are applied to water
filtration systems to indicate the particle size at which suspended solids
larger than that size will be removed.
<PAGE>
We distribute Nutripure Elite systems through independent pharmacists, providing
them an exclusive health product. Our direct sales force of independent water
treatment dealers also distributes the Nutripure Elite system in conjunction
with sales of the Nutripure 3000S Series water softening equipment.

Nutripure(R) Elite Filters We also market unique and proprietary filter
replacements for the Nutripure Elite residential drinking water systems that
require changing every 12 months.

Nutripure(R) 2000 Innovative Medical Services entered the retail venue with its
Nutripure 2000 Countertop Water Filtration System. Nutripure 2000, developed
specifically for mass merchandising, offers water filtration technology at
competitive pricing. Nutripure's professional one-micron, carbon microfilter
reduces dirt, chemicals, lead and parasites to improve the taste, quality and
safety of tap water. The Nutripure 2000 requires no assembly, mounts directly to
a faucet and features a 2,000-gallon capacity filter, an automatic bypass
shutoff valve, an electronic monitor that reminds users when to change the
filter, and an exclusive filter design that prevents leaking and contamination
because water flows only through the completely sealed filter cartridge.

We distribute Nutripure 2000 through retail outlets and catalogues in the United
States and Canada. In many cases, product placement is established through
existing channels of distribution in retail chains that use Fillmaster equipment
in their pharmacies.

Nutripure(R) 2000 Replacement Filters We also market replacement filters for the
Nutripure 2000 water system. The Nutripure 2000 contains a 2,000-gallon filter
that must be changed every year.

Nutripure(R) Sport Filtered Sport Bottle The Nutripure Filtered Sport Bottle,
also offered as a private label or premium item, provides clean, great-tasting
water for on-the-go consumers. The Nutripure Filtered Sport Bottle features a
small carbon filter at the bottom end of the plastic straw so that, as the
consumer drinks through the straw, the water is drawn up through the filter. An
innovative alternative to buying expensive bottled water, Nutripure Sport
filters an average of approximately 30 microns, reducing sediment and chlorine,
and can be refilled 60 times before an inexpensive filter change is required.
The Nutripure Sport program provides recurring revenue through sales of the
replacement filter twin pack.

RETAIL PRODUCTS DIVISION

Medifier(TM) We also market the Medifier, a 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.

E-COMMERCE DIVISION

Nutripure.com(R) We operate Nutripure.com, an e-commerce website providing
consumers a wide variety of vitamins, minerals, nutritional supplements,
homeopathic remedies and natural products. In addition to products, the website
offers comprehensive health and wellness information in an easy-to-access,
intuitive reference format. The website also presents the Nutripure 2000 water
filtration system.

Nutripure.com has formed a strategic alliance with Bergen Brunswig Corporation
to provide a seamless online interface for efficient, direct-to-consumer
distribution of products through Bergen Brunswig's strategically located
state-of-the-art distribution facility in Louisville, Kentucky. The alliance
combines the strengths of Nutripure.com's aggressive sales, marketing and
customer support programs with Bergen Brunswig's leadership, buying power and
order fulfillment and delivery system.

Although sales to date from Nutripure.com are non-material, we have minimized
costs related to the operation and promotion of Nutripure.com, and we have plans
for strategic partnership and future promotion.


BIOSCIENCE DIVISION

Silver Ionization Technologies Innovative Medical Services obtained worldwide
manufacturing and marketing rights to Axenohl(TM) and Axen(TM), advanced silver
ion technologies. Axenohl is a patented, non-toxic aqueous disinfectant. The use
dilution formulation of Axenohl is called Axen. Based upon proprietary
ionization stabilization technology, Axenohl does not include the use of
traditional disinfectants such as quaternary ammonium salts, phenols,
glutaraldehyde, chlorine or bromine compounds. Axenohl enhances the disinfection
properties of halogens (chlorine) at reduced levels and is a cost effective,
stand alone alternative to halogens in many markets where conventional
disinfection methodologies are employed.

The disinfection efficacy of Axenohl has been well documented by independent
testing laboratories. Axenohl eliminates the following test organism strains all
within one minute and with 99.9999% efficacy (complete kill): Pseudomonas
aeruginosa ATCC 15422, Staphylococcus aureus ATCC 6538, Salmonella cholerasuis
ATCC 10708, E. Coli ATCC 0157:H7, Listeria monocytogenes ATCC 11543, Entrococcus
facium ATCC 11543, Rhino virus (common colds), and Rotavirus (infectious
diarrhea).

We obtained our worldwide manufacturing and marketing rights to Axenohl from
NVID International, Inc., in a License Agreement dated November 24, 1999 and a
Manufacturing, Licensing and Distribution Agreement dated March 26, 2000 which
supersedes the November 1999 Agreement.

In November 2000, we closed an acquisition agreement whereby we acquired all of
the outstanding common stock of ETIH20, Inc., in exchange for 51,240 shares of
its common stock and employment agreements with Andrew Arata and George Duren,
the executive officers of ETIH2O, Inc. The primary objective of the ETIH2O
purchase was to acquire the testing data, manufacturing rights and capacity to
Axenohl held by ETIH2O and to maintain and assure product availability and
quality.

In March 2001, the US Patent and Trademark Office issued US Patent Number
6,197,814 for Axenohl. Patent applications have been filed in more than 50
countries and regions, and the World Intellectual Property Organization
published the Axenohl International Patent Application on April 22, 1999 under
publication number WO 99/18790. The inventor of Axenohl is Mr. Andrew B. Arata,
President of ETIH2O Corporation, and the registered patent assignee is NVID
International, Inc. Innovative Medical Services entered into a sales, marketing,
distribution and manufacturing agreement for particular geographic areas and
particular market segments for Axenohl/Axen with NVID International on November
24, 1999. On March 26, 2000, Innovative Medical Services entered into a
superseding contract with NVID and ETI-H2O, Inc. of Florida for exclusive,
worldwide sales, marketing and distribution rights for Axenohl/Axen. The latter
contract is the subject of pending litigation with NVID. The lawsuit seeks a
judicial declaration that the Manufacturing, Licensing and Distribution
Agreement, dated March 26, 2000 between Innovative Medical Services, NVID,
International, Inc. and ETI-H2O does not constitute a binding contract and seeks
unspecified damages. The lawsuit does not challenge the binding effect of the
Standard Manufacturing Agreements dated November 30, 1998 and September 17, 1999
between NVID, International, Inc. and ETI-H2O and the November 24, 1999 License
Agreement between Innovative Medical Services and NVID, International, Inc. The
dispute does not affect any of our rights associated with the EPA registrations.
Under the registrations, ETI-H2O is the only EPA-approved producer of Axenohl
and Axen. Registration under the Federal Insecticide, Fungicide and Rodenticide
Act (FIFRA) is required before a product can be sold in the United States.
Should NVID prevail in its lawsuit, Innovative Medical Services would be limited
by both geography and market segments in its exclusive rights to sell Axenohl.
<PAGE>
The EPA registrations for Axen and Axenohl as hard surface disinfectants were
granted in June of 2001. With EPA approval the potential uses of Axen could make
dramatic improvement in retail hard surface disinfecting products as well as in
disinfecting hard surfaces in hospital ERs, surgeries, laboratories, dental and
medical offices. We have developed equipment to dispense Axen in measured doses
to municipal, commercial and point-of-use water supplies to kill bacteria,
viruses and fungi originating from the water source or the delivery
infrastructure, but additional EPA approvals may be required for such water
treatment applications. To date, no additional EPA applications have been made.
We plan to pursue FDA approval in the future, but no applications have been made
to date. We are currently researching the FDA approval process and plans to hire
an experienced FDA consultant to assist with the process. Potential applications
for this product which may require FDA approvals include wound care, topical
infection care, and personal disinfecting retail products. We have funded
testing with the United Stated Department of Agriculture for use of Axenohl in
poultry processing. The USDA reported that the testing was to be completed in
June, and we are awaiting the final report that will document the testing
results.

Boric Acid Based Pesticide Technologies During the year, we completed the
acquisition of a new pesticide technology. The EPA-approved RoachX(R) was the
first product to launch from the line, and we have submitted for and anticipate
EPA approval for AntX. RoachX is over 96% effective in three to four days with
one application for indoor and outdoor eradication of cockroaches, and can be
used near children and food preparation areas. Boric acid is a well-known and
effective deterrent of cockroaches and will kill them on contact, but
cockroaches do not naturally eat the repellent. Although many pesticide products
contain boric acid as the listed active ingredient, we believe RoachX to be new
because of the combination of boric acid and glycerin in a colloidal suspension
to create three unique results: 1) The formula protects the boric acid from
water and humidity, 2) The cockroaches perceive formulation as food and will
actually eat the glycerin-encapsulated boric acid, and 3) The formula acts as a
time-released pesticide, allowing the cockroach to return to the nest before it
dies and then becomes a "bait station" for other roaches in the colony.  The
product line, containing particular formulas for specific pests, provides
excellent results against cockroaches, ants, palmetto bugs, silverfish,
waterbugs, ticks, fleas, lice and garden pests. RoachX is available through
Vopak (formerly Van, Waters & Rogers) and members of the Speckoz group of nine
regional independent wholesalers.

We believe that with RoachX and AntX we are well positioned to capitalize on
the recent federal restrictions on poisonous pesticides and the subsequent
industry trend of eliminating spray pesticides and increasing the use of
bait-style products like RoachX and AntX. The U.S. Environmental Protection
Agency classifies chemicals according to its published "Toxicity Rating Scale".
The scale lists Categories I, II, III and IV and defines them as Highly Toxic,
Moderately Toxic, Slightly Toxic and Not Toxic. The EPA has placed Boric Acid,
the active ingredient in RoachX, in Toxicity Category III: Slightly Toxic. Boric
Acid is in the "least toxic" EPA category and is 96-100% effective, as tested by
the USDA. Many states, including California, New York and Florida, have
legislated to eliminate pesticide spraying in public schools and move to 100%
IPM (integrated pest management) practices, such as using baits.

Competition
Although we have only one known competitor in our pharmaceutical water
purification market, we face very strong competition in the residential water
treatment markets where many large, long-established competitors currently hold
most of the market share and have the capital resources available to invest in
large national marketing campaigns. The market for Axenohl is highly competitive
because we must work to displace traditional disinfecting technologies sold by
well-known international industry leaders. The market is similar for RoachX.
Although recent changes in EPA regulations may ease our ability to enter the
market, ongoing strong market presence of existing pesticide companies may make
it difficult to compete. On June 8, 2000, the United States EPA reclassified the
Dow Chemical product Dursban (also sold as Lorsban). Over 800 products
containing the organophosphate pesticide chlorpyrifos are reclassified and now
may only be sold in a significantly diluted form. Sales of original, stronger
formulations of such products to retailers ended February 1, 2001, and retailers
must remove the products from shelves by December 31, 2001. The current
formulations are also banned for commercial and agriculture professionals as of
December 31, 2000. Professional pest control companies must use a 100 to 1
diluted version of the current product strength and obtain a waiver of
responsibility from the home or business owner. As of June 6, 2001, the product
underwent a further 10 to 1 dilution, creating a 1000 to 1 diluted treatment.
The online marketing arena is highly competitive, and with our minimal promotion
of Nutripure.com, revenues are not expected to be realized in the foreseeable
future. We recognize that innovative marketing methods are required in such
competitive markets. We work to focus on the high quality and value price of our
products in their markets.
<PAGE>
Patents and Intellectual Property
We own patents on Medifier and the Fillmaster 1000e Electronic Dispenser and
have a patent application pending for Roach X. Except for the Nutripure
whole-house water treatment systems, our other water treatment products are
comprised of combinations of our own proprietary components, custom made
components and patented, off-the-shelf components and are assembled and packaged
by us. The Nutripure whole-house water treatment system sold through the
Nutripure dealer program is purchased from USFilter as a private label product
manufactured specifically for Innovative Medical Services. USFilter uses
patented key components in its product.

The Medifier patent, which expires in March 2010, protects a device for use as a
magnifying implement which has a housing member designed to accommodate
prescription bottles of various popular sizes therein in a fixed position. A
longitudinally moveable magnifying lens slideably mounted in the housing member
is utilized to magnify the print contained on an instruction label located on
the side of the prescription bottle. Alternate embodiments allow different size
medicine bottles to be alternately mounted in concentric fashion, or with the
side of the medicine bottles facing the lens in a fixed position.

The Fillmaster 1000e patent expires in August 2017 and protects a method and
apparatus for dispensing fluids in response to a user request for a specified
amount of the fluid. A microprocessor opens and closes a fluid port for
predetermined amounts of time to control the amount of fluid dispensed. The
microprocessor monitors the elapsed time and the amount of fluid that has been
dispensed since the last time the filter was serviced. In one preferred
embodiment, the amount of fluid that is dispensed is measured by continuously
monitoring the volume of fluid flowing through the apparatus. A pressure
measurement device allows the microprocessor to monitor the fluid pressure. The
microprocessor prevents fluid from being dispensed if the pressure is not within
a predetermined range of tolerances. The fluid port is opened and closed by
activating and deactivating a solenoid. A keypad allows the user to input the
amount of fluid that is to be dispensed. A "Wait" period is imposed between the
time that the user initiates the first stage and the time the user may initiate
the second stage. The microprocessor does not open the fluid port if a "Failure"
condition exists. An LCD is provided to display the amount of fluid that the
user has requested. In an alternative embodiment, a bar code scanner or other
input device allows the user to automatically input the amount of fluid that is
to be dispensed.

A patent application for RoachX and related products was filed in February 1998
to protect a nonaqueous form of insecticide consisting of a desiccant,
preferably boric acid, with additional ingredients for binding, stability and
target insect attraction.

We have licensed patented Axenohl/Axen silver ion technology from NVID
International, Inc. The patent for Axenohl/Axen expires in March 2018 and
protects a non-toxic environmentally friendly aqueous disinfectant for specific
use as prevention against contamination by potentially pathogenic bacteria and
virus. The aqueous disinfectant is formulated by electrolytically generating
silver ions in water in combination with a citric acid. The aqueous disinfectant
may include a suitable alcohol and/or a detergent.
<PAGE>
We obtained our worldwide manufacturing and marketing rights to Axen/Axenohl
from NVID International, Inc., in a License Agreement dated November 24, 1999
and a Manufacturing, Licensing and Distribution Agreement dated March 26, 2000
which supersedes the November 1999 Agreement.

The November 1999 license agreement granted us a three year marketing and
distribution license for the following markets:

         Point of Use Market, defined as water purification and disinfectant
         systems for consumer and commercial use. Worldwide exclusive rights.

         Healthcare Market, defined as all water purification and disinfectant
         systems for hospitals, clinics, surgical centers, doctors' offices or
         other similar medical or health related facilities, including military
         medical and health facilities. Exclusive rights for Australia, North,
         Central and South America and non-exclusive rights for Costa Rica,
         Mexico and other world markets.

         Food Processing Market, defined as water purification and disinfectant
         systems for commercial human or animal food preparation or processing
         operations. Exclusive rights for Australia, North, Central and South
         America and non-exclusive rights for Costa Rica and other world
         markets.

         Dental Market, defined as water purification and disinfectant systems
         for use by dentists and oral surgeons. Worldwide exclusive rights.

In accordance with this agreement and the superseding March 2000 agreement, we
began paying a licensing fee of $70,000 to NVID at the rate of $10,000 per month
one month after we began selling Axenohl in the Point of Use or Healthcare
Markets. We were also obligated to pay up to $20,000 to NVID and $50,000 to the
third party laboratory conducting the EPA certification testing and $29,500 to
the Department of Agriculture for a one year research and testing agreement. We
have made these payments as well as funding all other testing expenses. We are
also obligated to pay a royalty to NVID equal to fifteen percent of the
manufactured cost of Axenohl sold pursuant to the agreement and up to twenty
percent of any licensing fees we receive granting licenses to use Axenohl in the
Food Processing Market. The agreement automatically renews for additional three
year terms provided there have been no breaches of the agreement which have not
been cured within thirty days of notice thereof.

The superseding March 2000 agreement was an agreement by and among Innovative
Medical Services, NVID International, Inc. and ETIH2O, Inc. ETIH20, Inc. is the
manufacturer of Axen/Axenohl. The agreement granted us an exclusive worldwide
license to market and distribute Axen/Axenohl and all related products for all
markets. This agreement also granted us the right to manufacture Axenohl in the
event NVID was unable to deliver Axenohl to us. The agreement included the prior
agreement obligations of ours to begin paying a licensing fee of $70,000 to NVID
at the rate of $10,000 per month one month after we began selling Axenohl in the
Point of Use or Healthcare Markets. We agreed to pay up to $70,000 to the third
party laboratory conducting the EPA certification testing. The agreement also
confirmed that we had paid NVID and ETIH2O approximately $80,000 which included
the $29,500 which was to have been paid to the Department of Agriculture for a
one year research and testing agreement. We originally agreed to pay the
Department of Agriculture fee directly, but, subsequently, at the request of
NVID, we paid NVID the $29,500 specifically designated for the Department of
Agriculture research project. NVID acknowledged receipt of the $29,500 in the
March 2000 contract. The agreement requires a royalty to NVID equal to fifteen
percent of the manufactured cost of Axenohl sold pursuant to the agreement and
up to fifty percent of any licensing fees we receive granting licenses to use
Axenohl in all markets.

In November, 2000, we closed an acquisition agreement whereby we acquired all of
the outstanding common stock of ETIH20, Inc., in exchange for 51,240 shares of
our common stock and employment agreements with Andrew Arata and George Duren,
the executive officers of ETIH2O, Inc. The primary objective of the ETIH2O
purchase was to acquire the testing data, manufacturing rights and capacity to
Axenohl held by ETIH2O and to maintain and assure product availability and
quality.
<PAGE>
Manufacturing
The Fillmaster and Nutripure water systems are assembled primarily from custom
manufactured components. It is our goal to perform minor manufacturing in our
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.

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

The Nutripure Sport bottle is also assembled from proprietary and custom
components 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 $292,964 and $114,756
in the fiscal years ended July 31, 2001 and 2000, respectively.

Employees
As of October 19, 2001, Innovative Medical Services employed thirty-two people,
twenty-nine of whom are full-time individuals whose principal responsibilities
are: product assembly and shipping (nine employees), sales, marketing and
customer service (ten employees), research and development (five employees) and
administration (eight employees). We choose to outsource more expensive,
specialized functions including public relations, graphic design and selected
engineering projects.

ITEM 2.  PROPERTIES
Our business operates in an 11,255 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. The space is leased from an unaffiliated third party under a
sixty-five month agreement commencing on July 1, 1996. The monthly rental is
$0.69 per square foot plus $0.14 per square foot for maintenance of common
areas. There is also a fixed yearly increase of 4%. We have 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 Innovative Medical Services filed in the Circuit Court of
Pinellas County, Florida by Zedburn Corporation, against us for breach
of contract in October 1997. The breach of contract alleged was for payment of
fees for Mr. David Reitz's and Mr. Steven Durland's services of arranging a
public offering of our common stock. We have filed counterclaims based upon the
Racketeer Influenced and Corrupt Organization (RICO) Act against David Reitz,
Zedburn Corporation, Capital Development Group, Steven Durland and other
defendants. It is our position that Mr. Reitz and others perpetrated a scheme to
defraud us of cash fees and securities in connection with purported services of
arranging a public offering of our 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 we have
named Mr. Reitz as a defendant to our counterclaims.
<PAGE>
We believe that the defendants had perpetrated similar schemes against other
parties. We also believe we have substantially completed discovery and complied
compelling evidence to prove our claims.

Several of the Defendants filed Motions to Dismiss our counterclaims. A hearing
on the Motions was held on October 1, 1998. Certain of the Motions were granted
pending our amendment of our Counterclaim. We amended our 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
our 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, we 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 us. We
intend to pursue a trial as soon as possible. In August 2001, the Court of
Appeals reversed the trial court's ruling and reinstated our claim against the
defendants with the exception of Innovative Medical Services' RICO action.

We have neither accrued a liability in our financial statements regarding this
litigation nor disclosed the matter in the footnotes thereof. We have not done
so because we do not believe there is any merit to Mr. Reitz's claims and that
the likelihood that we will realize a loss from these matters is believed
remote. In addition, we believe that in the unlikely event that we settle, the
amount of any such settlement would not be material to our financial statements.

We have filed an action against John Woodard, former Vice President of Sales, in
Superior Court in the State of California in April 2000. We alleged Mr. Woodard
violated his non-competition/non-disclosure agreement and provided proprietary
information, including information regarding our Fillmaster line of products and
Fillmaster customer base, to Fresh Water Systems, Inc. We alleged the
misappropriation of customer lists, equipment service and maintenance schedules,
equipment data, business plans and research and development secrets. We are
seeking monetary damages and injunctive relief.

We have also filed an action against Fresh Water Systems, Inc., Steven Norvell,
Brian Folk and Eric Norvell in Superior Court in the State of California. The
action was filed in August 2000 and amended in October 2000. We allege Fresh
Water Systems and its officers and directors misappropriated trade secrets
obtained from former employees of ours, engaged in unfair competition in
violation of the California Unfair Practices Act, tortious interference with
contractual relations, tortious interference with prospective business
advantage, fraud, trade libel and conspiracy with regard to the Fillmaster line
of products and Fillmaster customer base. We are seeking monetary damages and
injunctive relief.

The previously reported action against Eckerd Corporation has been settled.

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: Innovative Medical Services' common stock is
          traded on the NASDAQ SmallCap Market under the symbol "PURE".
     (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.
<PAGE>
<TABLE>
<CAPTION>
                         Fiscal 2001                               Fiscal 2000
           Quarter Ended        High       Low      Quarter Ended          High       Low
           -------------------------------------    -------------------- --------- -----------
<S>             <C> <C>         <C>       <C>            <C> <C>         <C>       <C>
           July 31, 2001        $2.68     $2.52     July 31, 2000        $1.969    $1.250
           April 30, 2001       $1.81     $1.75     April 30, 2000       $4.188    $1.594
           January 31, 2001     $4.032    $3.75     January 31, 2000     $6.875    $1.375
           October 31, 2000     $2.70     $2.21     October 31, 1999     $4.188    $1.500
</TABLE>


     (3)  Security Holders: As of October 19, 2001, we had approximately 115
          holders of record of our common stock. This does not include
          beneficial owners holding common stock in street name. The closing
          price per share on October 25, 2001 was $2.25.
     (4)  Dividend Plans: We have paid no common stock cash dividends and have
          no current plans to do so. In January 2000, we declared a dividend in
          kind of Nutripure.com common stock. The record date and distribution
          date were to be set following completion of the registration of
          Nutripure.com as a reporting issuer with the Securities and Exchange
          Commission. In October 2000, the Board of Directors of Innovative
          Medical Services determined that in light of adverse market conditions
          for solely internet-based enterprises, a public market for
          Nutripure.com common stock may not be viable. Therefore, the Board
          amended its declaration of a Nutripure.com dividend to a dividend of
          Innovative Medical Services' common stock. On November 20, 2000,
          we distributed one share of Innovative Medical Services' common stock
          for every fifty shares held of record on November 6, 2000 with
          fractional shares rounded up to the nearest whole share.
     (5)  Preferred Stock: There are no shares of preferred stock presently
          outstanding.



<PAGE>



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

Results of Operations Fiscal 2001 vs. Fiscal 2000
During the quarter, we began to realize revenues from multiple product lines in
our different divisions. In order to be more informative regarding distribution
of revenues, discussion of revenues will be in terms of our water treatment,
silver ionization and pesticide divisions.

Revenues of $2,409,700 in the fiscal year ended July 31, 2001 were 45% higher
than the $1,661,500 in revenues reported for the fiscal year ended July 31,
2000. The increase was due to increases in revenues in all of our company
divisions. Water treatment division sales were $2,086,100, silver ionization
division sales were $320,300 and pesticide division sales were $32,200.

Currently, water dealer program sales consist mostly of sales of other
manufacturers' products to independent dealers. Revenue is recognized on sales
to dealers as shipped since we currently do not sell to third party customers of
the dealers. Revenues of silver ion and pesticide products are recognized on
shipment where the sale is made F.O.B. shipping point.

Gross profit for the year ended July 31, 2001 was $1,047,100 versus $564, 000 in
2000. Gross profit percentage of 43% in 2001 was higher versus 34% in 2000. The
increase in gross profit percentage was largely due to higher margins associated
with our pesticide and silver ion technology product lines.

Net loss for the year ended July 31, 2001 was $1,782,200 versus net loss of
$2,384,100 for the same period in 2000. During the year, General and
Administrative expenses increased 1% or $18,000 from $1,772,500 in fiscal 2000
to $1,790,500 in fiscal 2001. Selling expense increased approximately $186,700,
or 31%, from $595,100 in 2000 to $781,800 in 2001 because of increased costs
associated with development of marketing materials, hiring of additional sales
personnel, trade shows and product launches for the Nutripure dealer program,
and the silver ion and pesticide divisions.

In addition to the ongoing expansion of the water dealer program, distribution
of our other products in the Water Treatment Division continues to grow.
Although the market for our pharmacy products is maturing in that there is a
decreasing number of pharmacy chains that do not have water filtration product,
and that we have sold systems to most major chains, Fillmaster sales to
additional chain pharmacies are steady, as are replacement filter sales to
existing customers. The focus for further Fillmaster sales will be on
incremental and upgrade sales to individual pharmacies within current chain
accounts, although we are still actively pursuing Fillmaster sales to remaining
chains. We work to retain Fillmaster customers with our Customer Service Plan
2000, a multi-year service and warranty contract. Fillmaster customers that
subscribe to our Customer Service Plan have contracted to continue purchasing;
otherwise, customers do not have an obligation to continue historic purchasing
patterns.

We continue to receive reorders and new orders for the Nutripure 2000 countertop
water filtration system and the Nutripure Sport Bottle stocked in retail stores
in the US, and those retail products are being test marketed in several other
mass merchandise chains in the US and Canada. In addition to retail sales, we
are conducting a successful direct mail program with Nutripure 2000 and the
Nutripure Sport Bottle.

In October 2000, we launched our Nutripure Dealer Program. Revenues from the
program began in the third quarter and continue to ramp up as we work to sign up
new dealers to the program. We partnered with Automated Payment Services
("APS"), and MBNA to strengthen and streamline the financing program and
administration of the Nutripure dealer program. Under the unique Nutripure
program, independent water treatment dealers may now offer credit to all
prospective customers because the Nutripure program offers competitive,
risk-based interest rates. In addition, through APS, dealers can obtain
real-time processing and approval information online for their customers.
<PAGE>
In January 2001, we announced the acquisition of a new, non-toxic pesticide
technology. The acquisition was completed in April 2001 for approximately
$160,000. RoachX is the first product to launch, and during the second half of
the year, we focused on gaining distribution to more than 40,000 commercial pest
control companies through national wholesalers. The commercial industry provides
larger dollar volume potential and select and controlled distribution. During
the second half of the year, we began receiving purchase orders and shipping
RoachX across the United States. The national kickoff will take place at the
National Pest Management Association meeting in New Orleans in October 2001.

In March 2001, we signed a five-year contract to provide Axenohl to Dodo &
Company, a Korean cosmetics manufacturer and marketer. Under the contract, Dodo
& Company will purchase approximately $1.2 million dollars of product from us
over five years. In addition to the purchase price, we will receive a royalty on
sales of the Axen-containing products. We anticipate that, over the five years,
the revenues from Dodo & Company cosmetics royalties will exceed $5 Million. In
addition to sales to Dodo cosmetics, other recent sales of Axenohl have been to
companies in South Korea for testing purposes. Regulatory clearances have not
yet been issued in South Korea.

Liquidity and Capital Resources Fiscal 2001 vs. 2000
From inception through July 31, 2001, we have financed our operations primarily
through our initial public offering in August of 1996, by a subsequent private
placement in March of 2000, and by other smaller private placement stock sales.
We have operated without long-term debt and have no plans to obtain long-term
financing in the next twelve months. We believe that sales from our new product
lines will not provide sufficient capital resources to sustain operations and
fund product development until fiscal year 2001/2002. In the short term, we
expect to raise capital through equity sales as necessary to fund future growth
until we operate above the break-even point. We continually evaluate
opportunities to sell additional equity or debt securities, or obtain credit
facilities from lenders to strengthen our financial position. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders.

During the fiscal year ended July 31, 2001, our current assets to liabilities
ratio decreased from 5.02 to 3.15. Current assets decreased $883,000 from
$2,794,400 to $1,911,400. Current assets at July 31, 2001 include a decrease of
$914,200 in cash and cash equivalents and a decrease in restricted cash of
$204,900 which was pledged against a line of credit which was paid off during
the year. Accounts receivable increased $159,400 on increased sales volume.
Inventories decreased $85,100 from $796,100 in fiscal 2000 to $711,000 in fiscal
2001 which reflects a changing product mix and more efficient purchasing.
Noncurrent assets increased by $734,900 during the year mainly due to an
increase in Patents and Licenses of $713,400. Current liabilities increased
$50,600 from $556,300 to $606,900. The increase in current liabilities was the
net result of an increase in accounts payable and accrued liabilities of
$261,200 and a payoff of a line of credit of $210,600.

Our liquidity is unaffected by the financing program offered to participating
dealers in the Nutripure water dealer program. We receive funds from our primary
lender and disperse the funds to the dealer, less a commission charged by
us, upon completion of the contract. The primary lender disperses funds to
us. We record a liability when the funds are received and relief of liability
when funds are dispersed, and we do not retain liability on the credit extended.

Cash flows used from operations were $1,108,500 in fiscal year 2001 and
$1,311,900 in 2000. For fiscal year 2001 cash flows used in investing activities
included $40,300 for the purchase of machinery and equipment and $621,100 for
the purchase of patents and licenses. In fiscal 2000 cash flows used in
investing activities included $503,100 for the purchase of machinery and
equipment and for website development and $57,100 for the purchase of patents
and licenses. Also, we incurred $230,000 and $148,700 in deferred acquisition
costs during fiscal 2001 and fiscal 2000 respectively. Cash flows from financing
activities were $1,085,700 in fiscal 2001 and $3,120,100 in fiscal 2000.
Financing activities for the current year included a decrease of $210,600 in
notes payable. Cash flows from financing activities during the year included the
following common stock transactions:
<PAGE>
     1.   A $250,000 private placement in October 2000 in which we issued 94,340
          shares of common stock to six investors at $2.65 per Unit.
     2.   A $250,002 private placement in January 2001 in which we issued 83,334
          shares of common stock to six investors at $3.00 per Unit. Each Unit
          contained one share of common stock and a warrant to acquire an
          additional share of common stock for $4.00 per share up to January 28,
          2003.
     3.   A $225,000 private placement in April 2001 in which we issued 150,000
          shares of common stock to four investors at $1.50 per Unit. As part of
          this registration we also issued $200,000 of convertible debentures at
          10% interest due July 31, 2001. The holders of this debenture are
          entitled to convert all or any amount over $10,000 of principal face
          amount and accrued interest into Units each consisting of one share of
          Common Stock and a Common Stock Purchase Warrant. The conversion price
          for each Unit shall equal 80% of the average closing bid price for the
          five trading days immediately preceding the receipt of Notice of
          Conversion. The debentures were converted to common stock on July 31,
          2001.
     4.   In addition, approximately $245,135 was received from exercise of
          outstanding stock options.

In the prior year, cash flows from financing activities were $3,120,100, which
included $3,355,600 received through private placements of IMS and
Nutripure.com. The total decrease in cash and cash equivalents for 2001 was
$914,200 as compared to an increase of $1,099,300 during the same period in
2000.


Future Outlook

We believe that, during fiscal year 2001, we successfully transitioned from our
niche pharmacy market into other, broader markets with our expanded water
treatment division and our new bioscience division. Although our Fillmaster
products still comprised the majority of our sales in 2001, we believe that will
change in the coming fiscal year.

Looking ahead, we see a year of continued growth in the water treatment division
as the Nutripure Dealer program fully develops and sales of our retail water
filtration products continue to grow.

We also see the bioscience division growing in the coming year. We have focused
the sales efforts of our pesticide technologies on the commercial pesticide
industry to take advantage of key market opportunities. We have earned the
support of and are selling RoachX through the largest distributors in the United
States, and we believe in the coming year RoachX will become an industry leading
technology in cockroach control.

This fall we plan to formally launch three new products from this division:
AntX(TM), our latest development in pesticide technology, CleanKill(TM), the
Axen-based hard surface disinfectant for the pest control industry, and
ProChoice(TM) caulk for pest control operators. We believe adding sales of these
products to the already climbing RoachX revenues will have a very material
positive effect on revenues in the coming fiscal year.

Although we think that the pesticide technologies will have the most immediate
material impact on revenues in the coming year, we believe that the silver ion
technologies will ultimately become the largest revenue generator for Innovative
Medical Services. We intend not only to sell our own Axen-based products, like
CleanKill, but also to sell Axen as an additive to other manufacture's products,
like Dodo Cosmetics' acne-fighting product line. We believe that the innumerable
applications for a non-toxic, tasteless, odorless, highly effective
antimicrobial agent present an outstanding market opportunity for our Axenohl
products.

The investment necessary to pursue regulatory approval for Axenohl will be
significant, but as additional US and international approvals for Axenohl uses
are received, we expect revenues to develop quickly.



<PAGE>

                         Independent Accountants' Report




Board of Directors
Innovative Medical Services


     We have audited the accompanying consolidated balance sheets for Innovative
Medical Services and Consolidated Subsidiaries as of July 31, 2001 and 2000, and
the related consolidated statements of operations, statement of accumulated
deficits and cash flows for the years ended July 31, 2001 and July 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements, referred to above,
present fairly, in all material respects, the financial position of Innovative
Medical Services and Consolidate Subsidiaries as of July 31, 2001 and July 31,
2000, and the results of its operations and its cash flows for the years ended
July 31, 2001 and July 31, 2000, in conformity with generally accepted
accounting principles in the United States of America.

/s/ Miller and McCollom

MILLER AND MCCOLLOM
4350 Wadsworth Boulevard, Suite 300
Wheat Ridge, Colorado
October 19, 2001


<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------
                                                             July 31       July 31
                                                               2001          2000
                                                                           Restated
ASSETS                                                                     (Note 16)
                                                         -----------    ------------
Current Assets
<S>                                                     <C>             <C>
   Cash and cash equivalents                            $    207,092    $  1,121,316
   Restricted cash                                                --         204,887
   Accounts receivable, net of allowance for doubtful
     accounts of $ 115,000 at July 2001
     and $225,000 at July 31, 2000                           570,733         411,323
   Due from officers and employees                           240,001         226,729
   Inventories                                               711,018         796,136
   Prepaid expenses                                          182,556          33,975
                                                           ---------       ---------
      Total current assets                                 1,911,400       2,794,366
                                                           ---------       ---------
Property, Plant and Equipment
   Property, plant and equipment                             903,072       1,056,252
                                                           ---------       ---------
      Total property, plant and equipment                    903,072       1,056,252
                                                           ---------       ---------
Noncurrent Assets
   Deposits                                                    8,127          14,083
   Patents and licenses                                    1,014,282         300,910
   Deferred acquisition costs                                230,000         202,542
                                                           ---------       ---------
      Total noncurrent assets                              1,252,409         517,535
                                                           ---------       ---------
   Total assets                                         $  4,066,881    $  4,368,153
                                                        ============    ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
   Accounts payable                                     $    543,992    $    308,812
   Accrued liabilities                                        62,900          36,880
   Notes payable                                                  --         210,592
                                                        ------------    ------------
      Total current liabilities                              606,892         556,284
                                                        ------------    ------------
Minority interest payable                                         --          61,697
                                                        ------------    ------------
Stockholders' Equity
   Class A common stock, no par value: authorized
      20,000,000 shares, issued and outstanding
       6,954,699 at July 31, 2001 and
       5,942,902 at July 31, 2000                         11,510,915      10,018,873
   Class A warrants: issued and outstanding 3,686,000
      warrants                                               108,750         108,750
   Accumulated deficit                                    (8,159,676)     (6,377,451)
                                                        ------------    ------------
      Total stockholders' equity                           3,459,989       3,750,172
                                                        ------------    ------------
   Total liabilities and stockholders' equity           $  4,066,881    $  4,368,153
                                                        ============    ============

</TABLE>


   The accompanying notes are an integral part of these financial statements





<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------
                                                                     For Year Ended
                                                                      July 31 2001
                                                                 2001               2000
                                                                                  Restated
                                                                                  (Note 16)
                                                             -----------         -----------
<S>                                                          <C>                 <C>
Net sales                                                    $ 2,409,721         $ 1,661,462
Cost of sales                                                  1,362,670           1,097,419
                                                             -----------         -----------
Gross profit                                                   1,047,051             564,043
                                                             -----------         -----------
Selling expenses                                                 781,810             595,142
General and administrative expenses                            1,790,511           1,772,536
Research and development                                         292,964             114,756
Impairment of long lived assets                                       --             505,433
                                                             -----------         -----------
Total operating costs                                          2,865,285           2,987,868
                                                             -----------         -----------
Operating income (loss)                                       (1,818,234)         (2,423,824)
                                                             -----------         -----------
Other income and (expense):
Interest income                                                   33,738              34,763
Interest Expense                                                 (11,100)            (73,990)
Loss on abandoned assets                                              --             (40,200)
                                                             -----------         -----------
Total other income (expense)                                      22,638             (79,427)
                                                             -----------         -----------
Income (loss) before income taxes, minority
     Interest in subsidiary operations and
     change in accounting principle                           (1,795,596)         (2,503,251)

Federal and state income taxes                                     1,600                 800
                                                             -----------         -----------
Income (loss) before minority interest in subsidiary
     operations and change in accounting principle            (1,797,196)         (2,504,051)
                                                             -----------         -----------
Minority interest in subsidiary operations                        14,972              40,103
                                                             -----------         -----------
Net income (loss) before cumulative
     change in accounting principle                           (1,782,224)         (2,463,948)

Cumulative effect of change
     in accounting principle                                          --              79,896
                                                             -----------         -----------
Net income (loss)                                           $ (1,782,224)       $ (2,384,052)
                                                            ============        ============

Net income (loss) per common share before change
     in accounting principle (basic)                          $    (0.28)              (0.49)
Cumulative effect of change
     in accounting principle                                          --                0.02
                                                             -----------         -----------
Net income (loss) per common share (basic)                    $    (0.28)         $    (0.47)
                                                             ===========         ===========
Net income (loss) per common share before change
     in accounting principal (diluted)                        $    (0.28)              (0.49)
Cumulative effect of change
     in accounting principle                                          --                0.02
                                                             -----------         -----------
Net income (loss) per common share (diluted)$                 $    (0.28)         $    (0.47)
                                                             ===========         ===========



CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS
--------------------------------------------------------------------------------------------
Balance, beginning of period                                $ (6,377,451        $ (3,993,399)

Net income (loss)                                             (1,782,224)         (2,384,052)
                                                             -----------         -----------
Balance, end of period                                      $ (8,159,676        $ (6,377,451)
                                                            ============        ============
</TABLE>


   The accompanying notes are an integral part of these financial statements


<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------
                                                                   For the Year Ended
                                                                        July 31
                                                                  2001           2000
                                                                               Restated
                                                                               (Note 16)
                                                             ------------    -----------

Cash flows from operating activities
<S>                                                          <C>             <C>
   Net income (loss)                                         $ (1,782,224)   $(2,384,053)

   Adjustments to reconcile net income to net cash
   provided by operating activities:
     Amortization                                                  96,961        185,735
     Depreciation                                                 193,477        159,624
     Minority interest in subsidiary operations                   (61,697)        61,697
     Impairment of long lived assets                                   --        505,433
     Loss on abandoned assets                                          --         40,200
   Changes in assets and liabilities:
     (Increase) decrease in restricted cash                       204,887            687
     (Increase) decrease in accounts receivable                  (159,409)       378,843
     (Increase) decrease in due from officers and employees       (13,272)       112,795
     (Increase) decrease in prepaid expense                        60,489          3,103
     (Increase) decrease in inventory                              85,118        (76,163)
     (Increase) decrease in deposits                                5,956         (7,508)
     Increase (decrease) in accounts payable                      235,180       (286,136)
     Increase (decrease) in accrued liabilities                    26,020         (6,188)
                                                               ----------     ----------
        Net cash provided (used) by operating
            activities                                         (1,108,514)    (1,311,931)
                                                               ----------     ----------
Cash flows from investing activities
   Purchase of property, plant and equipment                      (40,297)      (503,100)
   Purchase of patents and licenses                              (621,114)       (57,099)
   Deferred acquisition costs                                    (230,000)      (148,691)
                                                               ----------     ----------
        Net cash (used) in investing activities                  (891,411)      (708,890)
                                                               ----------     ----------
Cash flows from financing activities
   Proceeds from debt obligations                                 200,000        275,436
   Payments on debt obligations                                  (210,592)      (510,910)
   Proceeds from sale of common stock                           1,096,293      3,355,555
                                                               ----------     ----------
        Net cash provided by financing activities               1,085,701      3,120,081
                                                               ----------     ----------
        Net increase (decrease) in cash and cash
            equivalents                                          (914,224)     1,099,260

Cash at beginning of period                                     1,121,316         22,056
                                                               ----------     ----------
Cash at end of period                                         $   207,092    $ 1,121,316
                                                              -----------    -----------
Supplemental disclosures of cash flow information
   Cash paid for interest paid                                $    11,100    $    73,990
   Cash paid for taxes paid                                   $     1,600    $       800
   Noncash investing and financing activities:
   Value of shares issued in exchange for Nutripure.com
      minority interest                                       $   550,011    $        --
   Value of shares issued in exchange for ETI H2O             $   140,953    $        --
</TABLE>

   The accompanying notes are an integral part of these financial statements


<PAGE>


                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent 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.

         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 is 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 costs for these two entities all of which was paid in cash.
         The majority of the purchase price was advanced to the previous owners
         in fiscal year 1998 and recorded as deferred acquisition costs until
         the purchase was concluded. The assets acquired and liabilities assumed
         are as follows:

            Assets:
               Accounts Receivable                    $  32,500
               Inventory                                 58,217
               Fixed Assets                              49,083
               Customer List                            360,000
               Licenses                                 354,961
               Goodwill                                 261,322
                                                        -------
                   Total Assets                       1,116,083
            Liabilities
               Accounts Payable                          24,690
                                                         ------
            Equity                                  $ 1,091,393
                                                    ===========


         The above listed goodwill of $261,322 and customer list of $360,000
         were being amortized over a period of forty (40) years. The licenses
         are being amortized over fifteen (15) years. The value of these assets
         and the amortization periods were reassessed at July 31, 2000 and
         adjusted as described in Note 16.

         In December 1999, the Company formed NUTRIPURE.COM as a wholly owned
         subsidiary, incorporated in the state of Nevada. NUTRIPURE.COM is an
         e-commerce web supersite providing consumers a wide variety of
         vitamins, minerals, nutritional supplements, homeopathic remedies and
         natural products. In addition to products, the website offers
         comprehensive health and wellness information in an easy-to-access,
         intuitive reference format. The website will also present the Nutripure
         line of water filtration systems.
<PAGE>
         In November 2000, Innovative Medical Services acquired 100% of the
         stock of ETIH2O, Inc., a Florida corporation, for 56,381 shares of IMS
         stock valued at $140,953 ($2.50 per share). The transaction was
         recorded using the purchase method of accounting. The assets acquired
         and liabilities assumed are as follows:

             Assets:
                    Notes Receivable                         $   33,655
                    Inventories                                  32,077
                    Equipment                                    16,932
                    Licensing & Distribution Rights             118,324
                                                             ----------
             Total Assets                                       200,988
             Liabilities:
                    Notes Payable - IMS                          60,035
                                                             ----------
             Equity                                           $ 140,953
                                                             ==========

         Assets and liabilities were valued at historical cost and no goodwill
         was recorded in the transaction. Results of operations of ETIH2O Inc.
         are included in the current period. The acquired entity was a startup
         company, if results of operations were included in prior periods and
         shown as though the companies had been combined at the beginning of the
         period, it would not have a material affect on the consolidated
         financial statements of Innovative Medical Services.

         The Company merged ETI-H2O with a newly formed Nevada corporation of
         similar name and dissolved the Florida corporation. ETI-H2O, a
         privately held technology corporation, developed Axenohl and is
         responsible for processing, and production of Axenohl and Axen.
         ETI-H2O is also responsible for all supervision of all research,
         studies, data and quality control of the Axenohl/Axen product line.

         In April 2001, the Company completed the purchase of the entire right,
         title and interest in and to specific patent-pending boric acid
         pesticide technologies and all rights, title and interest in and to all
         patents for RoachX from a private individual, for approximately
         $160,000 in cash. The owner/inventor accepted a position with the
         Company to serve as Senior Scientist and to head the Company's new Pest
         Management Division. The employment agreement included bonuses at
         certain revenue thresholds of RoachX sales. The owner/inventor of
         RoachX died unexpectedly in June of 2001. Because the initial payment
         was primarily for the patents and for the EPA licenses, it is included
         in Patents and Licenses and is amortized over a period of 17
         years. RoachX is a pesticide technology containing a familiar active
         ingredient, boric acid, bound to a masking agent and combined with an
         attractant fragrance and proteins in a colloidal suspension. The
         patent-pending time-released formulation protects the boric acid from
         dissolving in water and maintains the integrity of the pesticide to
         obtain maximum killing effect.

         Basis of Presentation and Principles of Consolidation
         The accompanying financial statements include the consolidated accounts
         of Innovative Medical Services and its subsidiaries. All inter-company
         balances and transactions have been eliminated.

         Previously published financial statements have been restated to write
         down certain intangible assets by $505,433. The net loss for the year
         ended July 31, 2000 increased to $2,384,052 from $1,745,430 that was
         previously reported. An explanation of the detail of the adjustment is
         included in Note 16.
<PAGE>
         Revenue Recognition
         Generally, the company recognizes income based upon concluded
         arrangements with customers and all events have occurred by delivery or
         performance. Certain income is recognized upon shipment where the sale
         is made f.o.b. shipping point. Customer acceptance provisions and
         installation procedures accompanying delivery are minor in nature, and
         the Company has not experienced any material expense in satisfying
         customer satisfaction. Revenue is recognized on sales to dealers and to
         pharmacists as shipped, since the Company does not sell to third party
         customers of the dealers and pharmacies. Software upgrades are provided
         free to customers resulting from implants included in products which
         they purchase. In a minor amount of e-commerce business conducted to
         date, sales are recorded on a gross basis resulting from credit card
         sales, the Company does not charge the customer until the product is
         shipped and the Company has been billed.

         The Company began its program of providing financing to independent
         dealers in fiscal year ending July 31, 2001. Currently the financing is
         for equipment of other manufacturers and not the Company's products.
         The Company receives funds from its primary lender and disperses the
         funds to the dealer, less a commission charged by the Company, upon
         completion of the contract. The Company records a liability when the
         funds are received and relief of liability when funds are dispersed.
         The Company is recording only the commissions earned as revenues.

         Software Development Costs
         The Company capitalizes software development costs incurred to develop
         certain assets in accordance with Statement of Position ("SOP") 98-1,
         Accounting for the Costs of Computer Software Developed or Obtained for
         Internal Use. Certain costs of computer software developed or obtained
         for internal use are capitalized and amortized on a straight-line basis
         over the estimated useful life of the software. Costs for general and
         administrative, overhead, maintenance and training, are expensed as
         incurred. To date $207,707 of costs related to the Nutripure.com
         website have been capitalized under SOP 98-1 and are being amortized
         over a period of 3 years.

         Stock-Based Compensation
         The Company follows FASB Statement No. 123, 'Accounting for Stock-Based
         Compensation' ('FAS 123'). The provisions of FAS 123 allow companies to
         either expense the estimated fair value of stock options or to continue
         to follow the intrinsic value method set forth in APB Opinion 25,
         'Accounting for Stock Issued to Employees' ('APB 25') but disclose the
         pro forma effects on net income (loss) had the fair value of the
         options been expensed. The Company has elected to continue to apply APB
         25 in accounting for its stock option plans (Note 10). For awards that
         generate compensation expense as defined under APB 25, the Company
         calculates the amount of expenses and recognizes the expense over the
         vesting period of the award.

         In March 2000, the FASB issued FASB Interpretation No. 44, 'Accounting
         for Certain Transactions involving Stock Compensation' ('FIN 44'),
         which contains rules designed to clarify the application of APB 25. FIN
         44 became effective on July 1, 2000 at which time the Company adopted
         it. The impact of the adoption of FIN 44 was not material to the
         earnings or financial position of the Company.

         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 $292,964 and $114,756 in the fiscal years ended July 31, 2001 and
         2000, 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
             Website                           3.0 years
             Vehicle                           5.0 years to 7.0 years
<PAGE>
         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
         The cost of patents acquired is being amortized on a straight-line
         basis over the remaining lives of 17 years. Licenses which include the
         Ampromed Limitada, the right of Nutripure to distribute and disseminate
         certain information through its website, and costs to acquire EPA
         approval on Axen and Axenohl, are being amortized on a straight line
         basis over periods ranging from 15 to 20 years. Website development
         costs are being amortized on the straight-line basis over 3 years.

         Amortization expense for the years ended July 31, 2001 and July 31,
         2000 was $97,000 and $185,700, respectively.

         Long-Lived Assets
         In accordance with Financial Accounting Standards Board ("FASB")
         Statement of Financial Accounting Standards ("SFAS") No. 121,
         Accounting for Impairment of Long-Lived Assets and for Long-Lived
         Assets to be Disposed of, the carrying value of intangible assets and
         other long-lived assets will be reviewed on a regular basis for the
         existence of facts or circumstances, both internally and externally,
         that may suggest impairment. The Company has recognized impairment of
         the assets purchased with the Ampromed acquisition and has reassessed
         the value of certain assets as described in Note 16. Should there be
         additional impairment in the future, the Company will measure the
         amount of the impairment based on undiscounted expected future cash
         flows from the impaired assets. The cash flow estimates that will be
         used will contain management's best estimates, using appropriate and
         customary assumptions and projections at the time.



<PAGE>

         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 31
         consisted of:

                                            2001                2000
                                         ------------       ------------
             Finished Goods              $   246,374         $   108,528

             Work in Progress                150,815             180,770

             Raw Materials                   313,829             507,410
                                         -----------        ------------
                                         $   711,018         $   796,136
                                         ===========        ============

         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 at the
         first-time advertising and promotion takes place. Such costs were
         $276,492 and $197,908 for the years ended July 31, 2001 and July 31,
         2000, respectively.

         Deferred Acquisition Costs
         During the process of evaluating certain companies for acquisition, the
         Company expended $230,000 and $202,542 in fiscal years ended July 31,
         2001 and July 31, 2000, 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.

         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.



<PAGE>



         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:
<TABLE>
<CAPTION>
                                                      For the Years Ended
                                                  July 31, 2001  July 31, 2000
                                                 --------------   ------------
<S>                                                   <C>            <C>
Shares outstanding                                    6,954,699      5,942,903

Weighted average number of shares actually
   outstanding                                        6,420,926      5,056,141
Stock Options                                         1,815,625      1,214,309
Warrants                                              1,797,500      1,798,125
                                                   ------------    -----------
   Total weighted average shares                     10,034,051      8,068,575
                                                   ------------    -----------
Net income (loss) before cumulative
   Change in accounting principle                  $ (1,782,224)   $(2,463,949)
Cumulative change in accounting principle                    --         79,896
                                                   ------------    -----------
Net income (loss)                                  $ (1,782,224)   $(2,384,053)
                                                   ============    ===========
Basic net earnings (loss) per share
    Net income (loss) per common share
     before change in accounting principle          $     (0.28)   $     (0.49)
    Cumulative effect of change in
     accounting principle                                    --           0.02
                                                   ------------    -----------
    Net income (loss) per common share              $     (0.28)   $     (0.47)
                                                   ============    ===========

Diluted net earnings (loss) per share
    Net income (loss) per common share
     before change in accounting principle          $     (0.28)   $     (0.49)
    Cumulative effect of change in
     accounting principle                                    --           0.02
                                                   ------------    -----------
    Net income (loss) per common share              $     (0.28)   $     (0.47)
                                                   ============    ===========

</TABLE>


         Potential common stock instruments at July 31, 2001, which include
         1,815,625 stock options and 1,797,500 warrants, are included in the
         loss per share calculation for fiscal year ended July 31, 2001.
         Potential common stock instruments at July 31, 2000, which include
         1,214,309 stock options and 1,798,125 warrants, are included in the
         loss per share calculation for fiscal year ended July 31, 2000.

         On August 8, 2001, the warrants expired without exercise.

         Recent Accounting Pronouncements
         In June of 1998, the FASB issued Statement of Accounting Standards No.
         133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
         Activities". SFAS 133 establishes accounting and reporting standards
         for derivative instruments, including certain derivative instruments
         embedded in other contracts, and for hedging activities. It requires
         that an entity recognize all derivatives as either assets or
         liabilities on the balance sheet at their value. This statement, as
         amended by SFAS 137, is effective for financial statements for all
         fiscal quarters to all fiscal years beginning after June 15, 2000. The
         Company does not expect the adoption of this standard to have a
         material impact on its results of operation, financial position, or
         cash flows as the Company currently does not engage in any derivative
         or hedging activities.

         In July 2001, the FASB issued Statement of Financial Accounting
         Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
         of Financial Accounting Standards No. 142, "Goodwill and Other
         Intangible Assets" ("SFAS 142"). SFAS 141 requires all business
         combinations to be accounted for using the purchase method of
         accounting and is effective for all business combinations initiated
         after June 30, 2001. SFAS 142 requires goodwill to be tested for
         impairment under certain circumstances, and written off when impaired,
         rather than being amortized as previous standards required. SFAS 142 is
         effective for fiscal years beginning after December 15, 2001. Early
         application is permitted for entities with fiscal years beginning after
         March 15, 2001 provided that the first interim period financial
         statements have not been previously issued. The adoption of SFAS 141
         did not have a material effect on the Company's operating results or
         financial condition. The Company is currently assessing the impact of
         SFAS 142 on its operating results and financial condition.
<PAGE>
         Income Taxes
         The current provisions for income taxes of $1,600 for fiscal year ended
         July 31, 2001 and $800 for July 31, 2000 is the minimum franchise tax
         paid to the State of California regardless of income or loss.

         At July 31, 2001, the Company has financial, federal, and California
         tax net operating loss carryforwards of approximately $6,917,000, and
         $6,294,000, and $2,958,000, respectively. At July 31, 2000, the Company
         has financial, federal, and California tax net operating loss
         carryforwards of approximately $5,589,000. $5,071,000, and $2,374,000,
         respectively. The difference between the financial reporting and the
         federal tax loss carryforward is primarily due to accrued expenses and
         valuation allowances reported in the financials but not deductible for
         tax purposes. The difference between federal and California tax loss
         carryforwards is primarily due to the fifty percent limitation on
         California loss carryforwards. The federal tax loss carryforwards will
         begin expiring in the fiscal year ended July 31, 2011, unless
         previously utilized and will completely expire in fiscal year ended
         July 31, 2020. The California tax loss carryforwards will begin
         expiring in fiscal year ended July 31, 2001, unless previously utilized
         and will completely expire in fiscal year ended July 31. 2010.

         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 $ 1,263,000 and $ 1,263,000 for the fiscal years ended July
         31, 2001 and 2000, respectively. Realization of these deferred tax
         assets, which relate to operating loss carryforwards and timing
         differences, is dependant on future earnings. The timing and amount of
         future earnings are uncertain and therefore, the valuation allowance
         had been established. The increase in the valuation allowance on the
         deferred tax asset during the fiscal year ended July 31, 2001 was $
         83,000.

         Deferred income taxes reflect the net tax effects of temporary
         differences between the carrying amounts of assets and liabilities for
         financial reporting purposes and the amounts used for income tax
         purposes. Significant components of the Company's deferred tax assets
         are as follows:


                                                         July 31       July 31
                                                          2001           2000
                                                     -----------    -----------
     Net operating loss carryforward                 $ 1,222,000    $ 1,107,000
     Depreciation and amortization                             0              0
     Accrued expenses and calculation allowances          36,000         71,000
     Other                                                 5,000           2000
                                                           -----           ----
     Total deferred tax assets                         1,263,000      1,180,000

     Valuation allowance for deferred tax assets      (1,263,000)   (1,180,000)
                                                     -----------    -----------

         Net deferred tax assets                       $       0     $        0
                                                       =========     ==========
<PAGE>
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, 2001 and July 31, 2000, the Company's cash and cash
         equivalents is represented by $207,092 and $1,121,316, respectively, in
         cash or checking accounts.

Note 3. Restricted Cash
         At July 31, 2001, the Company had no restricted cash. At July 31, 2000,
         the Company's restricted cash consisted of a certificate of deposit of
         $205,574. These certificates of deposit were held by a bank, as
         security for a line of credit with the same bank (Note 6).

Note 4. Due from Officers and Employees
         At July 31, 2001, notes receivable of $66,561 represents amounts due
         from officers and $173,440 represents amounts due from employees. At
         July 31, 2000, notes receivable of $162,793 represents amounts due from
         officers and $63,936 represent amounts due from employees. Due from
         officers at July 31, 2001 consisted of a loan to the president of
         $18,379 and a loan to the chief financial officer of $48,182 due and
         payable at July 31, 2002. These were renewals and changes of prior year
         notes to $117,339 and $45,454, respectively, that were due at July 31,
         2001. 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:

                                             July 31, 2001      July 31, 2000
                                            --------------     --------------
         Computers and equipment            $    1,061,197      $     927,257

         Furniture and fixtures                    103,855            100,630

         Website                                   207,916            207,916

         Vehicle                                    50,985             50,985

         Leasehold improvements                    307,606            304,623
                                            ---------------      -------------
                                                 1,731,559          1,591,411
         Less: accumulated depreciation
                  and amortization                 828,487            535,159
                                            ---------------      -------------
                  Total                     $      903,072       $  1,056,252
                                            ---------------      -------------

          Depreciation expense charged to general and administrative expense for
          the years ended July 31, 2001 and July 31, 2000 was $193,477 and
          $159,624, respectively.

Note 6. Debt
         The details relating to debt are as follows:

                                                July 31, 2001    July 31, 2000
                                                -------------    -------------


      Line of Credit Community 1st Bank
      $200,000 line of credit, interest at
      8.35% Due and payable February 25, 2001
      Secured by certificate of deposit
      of $205,574
                                                 $          -     $    196,009


      Line of Credit Flagship Capital, Inc.
      for financing of accounts payable,
      interest at 9% payable at $15,823
      monthly beginning March 17, 2000.                     -           14,583

                                                 ------------     ------------

      Total notes payable                                   -          210,592

      Current maturities of notes payable
      included in current liabilities                       -          210,592
                                                 ------------     ------------

      Total long term debt                       $          -     $          -
                                                 ------------     ------------

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 11,255
         square foot facility is $0.69 per square foot plus $0.14 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 approximately $307,000.

         The rental expense recorded in general and administrative expenses for
         the years ended July 31, 2001 and July 31, 2000 was $133,968 and
         $98,835, 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

                          2002                 $139,327
                          2003                 $144,900
                          2004                 $150,696
                          2005                 $156,724
                          2006                 $162,993

Note 8. Capital Stock
         The following schedule summarizes the change in capital stock:

<TABLE>
<CAPTION>
                                        Common             Common
                                        Stock              Stock        A Warrants        A Warrants      Z Warrants
                                        Shares               $            Issued               $            Issued
                                      ---------        -----------     -----------       -----------    ------------

<S>                    <C> <C>        <C>               <C>              <C>                <C>              <C>
         Balance, July 31, 1999       4,392,242          6,663,318       3,687,500           108,750         785,000

         Sale of stock                  783,250            759,055              --                --              --

         Private placement              767,411          2,596,500              --                --              --
                                        -------          ---------       ---------          --------        --------
         Balance, July 31, 2000       5,942,903         10,018,873      3,687,500           108,750         785,000

         Sale of stock                  245,467            640,884

         Private placement              421,314            851,158

         Stock Dividends                121,961                 --

         Acquisitions                   223,054                 --
                                        -------

         Balance, July 31, 2001       6,954,699        $11,510,915       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 Z 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.

         On August 8, 2001 the total 3,687,500 Class A warrants and the total
         785,000 Class Z warrants expired without exercise.

Note 9. Related Party Transactions
         See Note 4 and Note 10.

Note 10. Stock Option Plans
         The Company has the following stock option plans (the Plans) pursuant
         to which options to acquire common stock have been granted.

         1996 Incentive Stock Option Plan: Approved by Shareholders in April,
         1996 with 1,000,000 shares authorized under this Plan. The maximum
         number of shares subject to options granted under this Plan to any one
         Key Employee is 100,000 shares. The Options granted 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 350,125 shares under the 1996 Incentive Plan were outstanding
         as of July 31, 2001 with 356,125 shares remaining under this Incentive
         Plan for which options may be granted.

         1996 Directors and Officers Stock Option Plan: Adopted by the Board in
         April, 1996 with 1,000,000 shares authorized under this Plan. The
         maximum number of shares subject to options granted under this Plan to
         any one Director or Officer shall not exceed 200,000 shares in any
         12-month period. Options to acquire 549,625 shares under the 1996 D&O
         Plan were outstanding as of July 31, 2001 and there are no shares
         remaining under this Plan for which options may be granted.

         Amended 1998 Directors and Officers Stock Option Plan: Approved by
         Shareholders in December, 1998 with 2,000,000 shares authorized under
         this Plan. The maximum number of shares subject to options granted
         under this 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 1,281,250 shares under this Plan were outstanding as
         of July 31, 2001 and there are no shares remaining under this Plan for
         which options may be granted.

         2001 Directors and Officers Stock Option Plan: Approved by Shareholders
         in January 2001 with 1,000,000 shares authorized under this Plan. The
         maximum number of shares subject to options granted under this 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
         44,790 shares under this Plan were outstanding as of July 31, 2001 and
         there are 955,210 shares remaining under this Plan for which options
         may be granted.

         2001 ETI-H2O Stock Option Plan: Adopted by the Board in January 2001
         with 1,000,000 shares authorized under this Plan. Options to acquire
         550,000 shares under this Plan were outstanding as of July 31, 2001 and
         there are 450,000 shares remaining under this Plan for which options
         may be granted.

         2001 Consultants and Advisors Stock Option Plan: Adopted by the Board
         in January 2001 with 500,000 shares authorized under this Plan. The
         maximum number of shares subject to options granted under this Plan to
         any one participant shall not exceed 50,000 shares in any 12-month
         period. No options to acquire shares under this Plan were outstanding
         as of July 31, 2001 and there are 500,000 shares remaining under this
         Plan for which options may be granted.

         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 at or above the fair market value for the common
         stock at the date of grant.

         The Company estimates a fair value method of accounting for stock-based
         compensation in accordance with Statement of Financial Accounting
         Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
         123). In accordance with SFAS 123, the Company has chosen to continue
         to account for employee stock-based compensation utilizing the
         intrinsic value method. Accordingly, compensation cost for stock
         options is measured as the excess, if any, of the fair market price of
         the Company's stock at the date of grant over the amount an employee
         must pay to acquire the stock.

         Also, in accordance with SFAS 123, the Company has provided footnote
         disclosure with respect to stock-based employee compensation. The cost
         of stock-based employee compensation is measured at the grant date
         based on the value of the award and is recognized over the service
         period. The value of the stock based award is determined using a
         pricing model whereby compensation cost is the excess of the fair value
         of the stock as determined by the model at grant date or other
         measurement date over the amount an employee must pay to acquire the
         stock.

         The Company accounts for non-employee stock based compensation by
         establishing a fair value for stock options granted. Compensation cost
         is measured as the excess, if any, of the fair value of the Company's
         stock over the amount the non-employee must pay to acquire the stock
         and is recognized over the anticipated service period.

          The effect of applying FAS 123 on the years ended July 31, 2001 and
          2000 pro forma net loss as stated below is not necessarily
          representative of the effects on reported net loss for future years
          due to, among other things, the vesting period of the stock options
          and the fair value of additional stock options in future years. Had
          compensation cost for the Company's stock option plans been determined
          based upon the fair value at the grant date for awards under the plans
          consistent with the methodology prescribed under FAS 123, the
          Company's net loss in the years ended July 31, 2001 and 2000 would
          have been approximately $2,420,628 and $3,292,510 or $(0.38) per share
          and $(0.66) per share, respectively, on a diluted basis. The fair
          value of the options granted during the years ended July 31, 2001 and
          2000 are estimated at $1.22 per share and $1.84 per share,
          respectively, on the date of grant using the Black-Scholes
          option-pricing model. The following assumptions were used for grants
          in 2001 and 2000; no dividend yield, volatility of 98.79% and 124%,
          respectively; a risk-free interest rate of 5.50% and 5.50%,
          respectively and an expected life of 3.51 year from date of vesting. A
          summary of stock option activity is as follows:



                                                               Weighted-Average
                                         Number of Shares       Exercise Price
                                                                      ($)

        Balance at July 31, 1999               1,615,000              1.17

        Granted                                1,246,540              1.81

        Exercised                              (781,750)              1.78

        Forfeited                               (44,250)              1.34
                                               --------
        Balance at July 31, 2000               2,035,540              1.55
        Granted                                  997,000              2.21

        Exercised                              (203,824)              1.78

        Forfeited                               (93,750)              1.50
                                               --------
        Balance at July 31, 2001               2,734,966              1.72
                                               =========

<TABLE>
<CAPTION>
                                                     Outstanding                    Exercisable
                              Number    Weighted Average    Weighted Average                  Weighted
        Range of              Shares          Life              Exercise        Number         Average
        Exercise Prices    Outstanding     (in years)            Price        Exercisable       Price
<S>            <C>            <C>              <C>               <C>             <C>           <C>
               $0.56          285,000          2.0               $ 0.56          235,000       $  0.56
               $1.00          553,750          1.9               $ 1.00          352,500       $  1.00
          $1.31 to $1.50      274,966          3.7               $ 1.45          176,875       $  1.48
          $1.63 to $1.90      315,000          3.6               $ 1.71          165,000       $  1.79
          $2.00 to $2.50      900,000          3.0               $ 3.01          480,000       $  2.01
          $2.93 to $3.20      406,250          3.3               $ 3.01          406,250       $  3.01
                            ---------                                          ---------
                            2,734,966          2.9               $ 1.72        1,815,625       $  1.78
                            =========                                          =========
</TABLE>

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. No employer contributions were made during
         the fiscal years ending July 31, 2000 and July 31, 2001.

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.

Note 13. Cumulative Change in Accounting Principle

         During fiscal years 1999 and 2000, the Company incurred approximately
         $208,000 in development costs related to construction of the
         Nutripure.com website. These costs were originally expensed as
         incurred. In the accompanying financial statements, these costs have
         been retroactively capitalized and included in fixed assets at July
         31, 2000 in compliance with SOP 98-1 (Statement of Position issued by
         the Accounting Standards Executive Committee). Of these costs, $79,900
         were incurred in prior years and are shown as a change in accounting
         principle consistent with issued EITF No. 00-2 - Emerging Issues
         Task Force Issue titled: Accounting for Web Site Development Costs
         dated March 16, 2000.

Note 14. Business Segment and Sales Concentrations
         In accordance with the provisions of SFAS No. 131, certain information
         is disclosed based on the way management organizes financial
         information for making operating decisions and assessing performance.
         In determining operating segments, the Company reviewed the current
         management structure reporting to the chief operating decision-maker
         ('CODM') and analyzed the reporting the CODM receives to allocate
         resources and measure performance.

         The Company's business activities are divided, managed and conducted in
         two basic business segments, the Water Treatment segment and the
         Bioscience segment. These two segments were determined by management
         based upon the inherent differences in the end use of the products, the
         inherent differences in the value added processes made by the Company,
         the differences in the regulatory requirements and the inherent
         differences in the strategies required to successfully market finished
         products. The Water Treatment segment includes Commercial Water
         treatment, Residential Retail products and the Nutripure Water Dealer
         program. Bioscience includes two new products, Axenohl (Silver Ion
         Technology) and RoachX (Pest Management).

         The Company plans to utilize multiple forms of analysis and control to
         evaluate the performance of the segments and to evaluate investment
         decisions. In general, gross margin and Earnings Before Interest
         Depreciation and Amortization (EBITDA) are deemed to be the most
         significant measurements of performance, although collection volumes
         and certain controllable costs also provide useful "early warning
         signs" of future performance. Because the Company has just recently
         changed to multiple segments, historical data on gross profit and
         income from operations is not available. However, the following is a
         summary of segment revenues at July 31, 2001:
<TABLE>
<CAPTION>
                                                                    %                            % Total
                                                 Fiscal Year End   Total   Fiscal Year End 2000   Sales
                                                      2001         Sales
         Water Treatment Division
<S>                                               <C>               <C>       <C>                  <C>
           Commercial Water Treatment             $1,698,900        71%       $1,597,500           96%
           Residential Retail Water Treatment       $190,800         8%          $29,800            2%
           Nutripure Dealer Program                 $167,400         7%          $34,200            2%

         Bioscience Division
           Silver Ion Technology                    $320,300        13%                -            -
           Pest Management Technology                $32,300         1%                -            -
                                                ----------------             --------------
         Total Revenues                           $2,409,700                  $1,661,500


</TABLE>


          Significant customers primarily consisted of domestic retail chain
          pharmacies. Sales concentrations to major chain stores were
          approximately $1,294,600 and export sales were $390,100 for the year
          ended July 31, 2001. No customer accounted for more than 10% of
          consolidated sales.

<PAGE>
Note 15.  Stock Dividend and Share Exchange

          In December 1999, Innovative Medical Services formed a wholly owned
          subsidiary, Nutripure.com, to capitalize on internet commerce
          opportunities focusing on health and wellness. Total authorized
          capitalization of the corporation was 50,000,000 shares of common
          stock at $.001 par value. The Company purchased 8,000,000 shares and
          the newly formed board of directors of the subsidiary purchased
          900,000 shares all at par value. In February of 2000 the corporation
          raised $550,000 in a private placement of 1,100,000 at $0.50 per
          share. At this point the minority interest represented 20% of the
          outstanding common stock of the corporation. Minority interest payable
          and income from operations were first recognized in the consolidated
          financial statements in the quarter ended April 30, 2000. On October
          24, 2000, the Company issued 183,337 shares of common stock valued at
          $550,011 ($3.00 per share) in exchange of 1,100,000 shares of
          Nutripure.com stock representing the 10% minority interest outstanding
          shares of Nutripure.com, which were originally purchased for $.50
          cents per share. Management of Nutripure.com did not exchange shares.
          Shares held by Management were eliminated by a reverse split,
          effective March 16, 2001.

          In January 2000, Innovative Medical Services declared a dividend in
          kind of Nutripure.com common stock as the Company began the process to
          spin off Nutripure.com as a separate public company. The record date
          and distribution date were to be set following completion of the
          registration of Nutripure.com as a reporting issuer with the
          Securities and Exchange Commission. Following the announcement of the
          dividend, however, adverse market conditions for solely internet-based
          ventures eroded Management's confidence in the viability of a public
          market for Nutripure.com common stock. Therefore, the Board amended
          its declaration of a Nutripure.com dividend to a dividend of
          Innovative Medical Services' common stock and the Company purchased
          the minority interest in Nutripure.com through an exchange of shares.
          The Company retains Nutripure.com as an operating division of
          Innovative Medical Services in order to minimize the substantial
          administrative expense associated with launching and operating a
          public company.

          On October 26, 2000, Innovative Medical Services announced that the
          Board of Directors voted to declare a dividend in kind of Innovative
          Medical Services' common stock. This common stock dividend was
          declared and distributed in lieu of the previously announced dividend
          of Nutripure.com shares. The Company distributed one share of
          Innovative Medical Services' common stock for every fifty shares held
          of record on November 6, 2000, with fractional shares rounded up to
          the nearest whole share, for a total of 121,961 shares.

Note 16.  Write Down of Impaired Assets And Change in Asset Lives
         Ampromed was purchased in October 1998 to enable the Company to take
         advantage of the lucrative markets for medical and dental supplies in
         Brazil and other South American countries and to later introduce and
         distribute its water purification products to these markets. Since the
         acquisition the economic conditions in the region have declined and
         implementation of the project has been delayed. The Company no longer
         has immediate plans to import medical and dental supplies into Brazil
         but believes, however, that Ampromed is a vital part of its plan to
         market and sell "Axenohl", RoachX and the Nutripure line of water
         treatment products. The Company believes there is considerable value in
         owning a Brazilian Limitada but has reassessed the value of the
         goodwill and the customer list it purchased. Statement of Financial
         Accounting Standards No. 121 (Accounting for the Impairment of
         Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) requires
         an entity to review long-lived assets and identifiable intangible
         assets when, among other factors, there is a change in the extent or
         manner in which an asset is to be used or when there is a significant
         change in the business climate that could affect the value of an asset.
         Because the Company suspended its plans to market medical and dental
         supplies in Brazil in May of 2000 it believes the Goodwill and Customer
         List assets should be written off, and the value of the Limitada
         license to do business in Brazil should be written down to what it
         would cost to acquire in today's market. This is estimated to be
         approximately $150,000 and is being amortized over its expected useful
         life of 15 years.

         At the date of acquisition of Ampromed the Company established
         amortization periods for the assets purchased at the maximum allowable
         life of 40 years. We now believe these estimated lives were too long
         and the life of the goodwill has been set at 5 years to reflect a more
         reasonable amortization expense under the circumstances and the
         uncertainty involved in commitments from a foreign government. Also,
         an analysis of the customer list based on original estimates indicates
         that a 6 year life is a more appropriate amortization period for this
         intangible asset. In addition, instead of the straight-line method,
         the Company has computed an accelerated method of amortization for the
         customer list based on an analysis of expected future cash flows at
         July 31, 1999 and July 31, 2000. The effect of this restatement is to
         increase General and Administrative Expense by an increase to
         amortization cost of $152,800 in the year ended July 31,1999. The
         effect of the restatement in the year ended July 31, 2000 is a write
         down of impaired asset charge of $505,400 and an increase in General
         and Administrative Expense by an increase to amortization cost of
         $133,200.

Note 17. Subsequent Events
         On August 14, 2001, 20,000 options were exercised bringing the total
         outstanding shares of common stock to 6,974,699 as of October 29, 2001,
         the date of the Form 10KSB filing.


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

<PAGE>
PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers and directors of the Company and their ages are
         as follows:

         Name                      Age      Position
         -----------------         ---      ----------------------------------
         Michael L. Krall           49      President, CEO, Chairman, Director
         Gary Brownell, CPA         53      Treasurer CFO, Director
         Donna Singer               31      Executive Vice President, Director
         Dennis Atchley, Esq.       49      Secretary
         Eugene Peiser, PD          70      Director
         Patrick Galuska            42      Director
         Dennis Brovarone           45      Director

The Directors serve until their successors are elected by the shareholders.
Vacancies on the Board of Directors may be filled by appointment of the majority
of the continuing directors. The executive officers serve at the discretion of
the Board of Directors except as subject to the employment agreement with Mr.
Krall.

Business Experience
DENNIS B. ATCHLEY, ESQ. Mr. Atchley is the Secretary of Innovative Medical
Services and currently practices as a sole practitioner in Carlsbad, California
handling corporate and business related litigation matters. A 1973 graduate of
Loyola Marymount University in Los Angeles and a 1976 graduate of California
Western School of Law in San Diego, California, Mr. Atchley is a member of the
California Bar, the San Diego County Bar Association, and the Association of
Business Trial Lawyers.

DENNIS BROVARONE Mr. Brovarone has been practicing corporate and securities law
since 1986 and as a sole practitioner since 1990. He was elected to the
Company's Board of Directors in April 1996. From December 1997 to April 2001,
Mr. Brovarone has served as the President and Chairman of the Board of Directors
of Ethika Corporation, a publicly held, Mississippi corporation investment
holding company with its office in Littleton, Colorado. From January 1995 to
March 1998 Mr. Brovarone served as President (Chairman) of the Board of
Directors of The Community Involved Charter School, a four year old K-12 public
school located in Lakewood, Colorado, operating under an independent charter and
serving approximately 350 students in an individualized, experiential learning
environment. Prior to 1990, Mr. Brovarone served as in-house counsel to R.B.
Marich, Inc., a Denver, Colorado based brokerage firm. Mr. Brovarone lives and
works in Littleton, Colorado.

GARY W. BROWNELL Mr. Brownell is a Certified Public Accountant in a private
partnership practice. He is the partner in charge of taxes and municipal audits
for his firm. Mr. Brownell graduated from San Diego State University in 1973
with a Bachelor of Science degree in accounting. He received his Certified
Public Accountant designation in 1983. Mr. Brownell has been a partner in
Brownell and Duffy since 1985.

PATRICK GALUSKA Mr. Galuska is a consulting petroleum engineer in Denver,
Colorado. His practice focuses mainly on the acquisition and exploitation of
underdeveloped oil and gas assets in the Rocky Mountain area. He is a Registered
Professional Engineer and is a member of the Society of Petroleum Engineers. Mr.
Galuska earned his BS degree in petroleum engineering from the University of
Wyoming and received his MBA degree in Finance from the University of Denver.
Mr. Galuska resides in Littleton, Colorado with his wife and two children.

MICHAEL L. KRALL Mr. Krall is the President, CEO and Chairman of the Board of
Directors of Innovative Medical Services, a position he has held since 1993. He
is responsible for the strategic planning, product development, and day-to-day
operations of IMS. Previously, Mr. Krall was the President and CEO of
Bettis-Krall Construction, Inc. a successful building-development company of
custom homes and commercial property in San Diego County, California. He has
also held numerous positions in general management in the hospitality industry.
Mr. Krall attended Pepperdine University (economics, statistics mechanical
engineering). He previously served 4 years in the United States Marine Corps and
was elected, by general election, to a 4 year term on the Valle de Oro Planning
Board. Mr. Krall lives in El Cajon, California with his wife, Connie and two
children.
<PAGE>
EUGENE S. PEISER, DOCTOR OF PHARMACY Dr. Peiser has been an independent
consultant to FDA regulated industries since 1974 and a Member of the Board of
Innovative Medical Services since 1994. He graduated from the University of
Tennessee College of Pharmacy with a Bachelor of Science in Pharmacy in 1951 and
has received his Doctorate of Pharmacy. Dr. Peiser's consultancy advises on a
wide variety of subjects, including compliance with the Prescription Drug
Marketing Act and other government compliance matters, employee training and
drug repackaging. Dr. Peiser furnishes expert witness services and has provides
approved Pharmaceutical Continuing Education to several thousand attendees at
his seminars. Dr. Peiser is a Founding Director of the Association of Drug
Repackagers; is appointed as a Registered Arbitrator by the American Registry of
Arbitrators; and is President of the Southwest Chapter of the Association of
Military Surgeons. Dr. Peiser lives and works in Palm Harbor, Florida.

DONNA SINGER Ms. Singer is the Executive Vice President of Innovative Medical
Services. From 1996-1998 Ms. Singer served as Vice President of Operations for
the Company. Ms. Singer is responsible for company operations, corporate
communications, and investor relations. Previously, Ms. Singer served as the
investor relations executive at Western Garnet International, a Toronto Stock
Exchange mining company. Ms. Singer graduated from Gonzaga University with a
Bachelor of Arts degree in English and lives in El Cajon, California.

Committees: Meetings of the Board
We have a Compensation/Administration Committee and an Audit Committee. The
Compensation/Administration Committee and the Audit Committee were formed in
1995. Messrs. Brovarone, Galuska and Peiser comprise the
Compensation/Administration Committee and Messrs. Brownell, Galuska and Peiser,
are the Audit Committee. The Compensation/Administration Committee recommends to
the Board the compensation of executive officers and will serve as the
Administrative Committee for the Company's Stock Option Plans. The Audit
Committee serves as a liaison between the Board and the Company's auditor. The
Compensation/Administration Committee met once during the fiscal year ended July
31, 2001, and the Audit Committee met once during the fiscal year ended July 31,
2001.

Our Board of Directors held five meetings during the fiscal year ended July 31,
2001, at which time all the then Directors were present or consented in writing
to the action taken at such meetings. No incumbent Director attended fewer than
100% of said meetings.

Compliance with Section 16(a) of Securities Exchange Act of 1934
To our knowledge, during the fiscal year ended July 31, 2001, the Company's
Directors and Officers complied with all applicable Section 16(a) filing
requirements except that Eugene Peiser, a director, failed to timely report two
transactions. This statement is based solely on a review of the copies of such
reports furnished to us by our Directors and Officers and their written
representations that such reports accurately reflect all reportable
transactions.

Family Relationships
There is no family relationship between any Director, executive or person
nominated or chosen by Innovative Medical Services to become a Director or
executive officer.

Transactions with Management
Innovtive Medcial Services did not enter into any transactions with Management
during the fiscal year ended July 31, 2001.
<PAGE>
ITEM 10.  EXECUTIVE COMPENSATION

Summary Compensation Table
The following table shows for the fiscal year ending July 31, 2001, the
compensation awarded or paid by the Company to its Chief Executive Officer and
any of the executive officers of the Company whose total salary and bonus
exceeded $100,000 during such year (The "Named Executive Officers"):
<TABLE>
<CAPTION>
 --------------------------------------------------------------------------------------------------------
                           SUMMARY COMPENSATION TABLE
 --------------------------------------------------------------------------------------------------------
                                                                 |    Long Term Compensation            |
 --------------------------------------------------------------------------------------------------------
                                        Annual Compensation      |   Awards     |    Payouts            |
---------------------------------------------------------------------------------------------------------
                                |      |  Salary  | Other Annual | Securities   |                       |
   Name and Principle Position  |  Year|     (S)  | Compensation | Underlying   |All Other Compensation |
                                |      |          |       ($)    | Options (#)  |       ($)             |
---------------------------------------------------------------------------------------------------------
<S>                                <C>    <C>             <C>     <C>                    <C>
  Michael L. Krall President/CEO|  2001|  144,000 |       0      |50,000 Common |        0              |
---------------------------------------------------------------------------------------------------------
  Michael L. Krall President/CEO|  2000|  144,000 |       0      |50,000 Common |        0              |
---------------------------------------------------------------------------------------------------------
  Michael L. Krall President/CEO|  1999|  144,000 |       0      |190,000 Common|        0              |
---------------------------------------------------------------------------------------------------------
</TABLE>

No other executive officer earned more than $100,000 during the current fiscal
year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                        Option Grants in Last Fiscal Year
-----------------------------------------------------------------------------------------------------------------------
                                Individual Grants
-----------------------------------------------------------------------------------------------------------------------
                                     Number of
                                   Common Shares
                                     Underlying
                                  Options Granted     % of Total Options Granted to     Exercise Price  Expiration
  Name                                  (#)               Employees in Fiscal Year          ($/Sh)         Date
-----------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                           <C>                        <C>         <C>   <C>
Michael L. Krall President/CEO       50,000                        5                          2.93        11/16/05
-----------------------------------------------------------------------------------------------------------------------
</TABLE>



<PAGE>



Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option/Values The following table sets forth the number and value of the
unexercised options held by each of the Named Executive Officers at July 31,
2001.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                        Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
------------------------------------------------------------------------------------------------------------------------
                         Shares       Value       Number of Securities Underlying   Value of Unexercised In-the Money
                      Acquired on   Realized at   Unexercised Options at FY-End (#)        Options at FY-End ($)
         Name         Exercise (#)  FY-End ($)        Exercisable/Unexercisable          Exercisable/Unexercisable
------------------------------------------------------------------------------------------------------------------------
<S>                        <C>           <C>      <C>                                     <C>                 <C>
  Michael L. Krall         0             0        531,250 Common Shares/Exercisable       901,500/Exercisable (1)
  President/CEO
------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Option value based on the difference between the exercise price of
     unexercised options and the average closing price of $3.01 for the 30
     trading days ending July 31, 2001.

Employment Agreements and Executive Compensation
In April 1996, the Board of Directors approved a five-year employment agreement
for Michael Krall, its President. Mr. Krall receives a salary of $144,000 per
year, an amount equal to 3% of the Company's net income before taxes, if any,
plus other benefits. The Board of Directors has extended Mr. Krall's employment
agreement on identical terms for an additional year.

Compensation of Directors
Directors are entitled to receive $300 plus reimbursement for all out-of-pocket
expenses incurred for attendance at Board of Directors meetings.

Other Arrangements
1996 Directors And Officers Stock Option Plan: On April 17, 1996, the Company's
Board of Directors approved a Directors and Officers Stock Option Plan. The
purpose of the Plan is to advance the business and development of the Company
and its shareholders by affording to the Directors and Officers of the Company
who are ineligible to participate in the above Incentive Stock Option Plan, the
opportunity to acquire a propriety interest in the Company by the grant of
Options to acquire shares of the Company's common stock. The Plan is
administered by the entire Board of Directors. The Plan became effective on
April 17, 1996 by the Board of Directors, was not subject to Shareholder
approval and shall terminate on April 17, 2006. Subject to anti-dilution
provisions, the Plan may issue Options to acquire up to 1,000,000 shares to
Directors and Officers. The maximum number of shares subject to Options granted
to any one Director or Officer shall not exceed 200,000 shares in any 12-month
period. The exercise price for Options shall be set by the Board of Directors
but shall not be for less than eighty-five (85%) of the fair market value per
share on the date of grant. The period in which Options can be exercised shall
be set by the Board of Directors not to exceed five years from the date of
Grant. The Plan may be terminated, modified or amended by the Board of
Directors.

The Innovative Medical Services 1998 Directors And Officers Stock Option Plan:
On December 19, 1998, the Company's Shareholders approved the Amended Innovative
Medical Services 1998 Officers and Directors Stock Option Plan. The purpose of
the Plan is to advance the business and development of the Company and its
shareholders by affording to the Directors and Officers of the Company the
opportunity to acquire a propriety interest in the Company by the grant of
Options to acquire shares of the Company's common stock.
<PAGE>
The Innovative Medical Services 2001 Directors And Officers Stock Option Plan:
On January 8, 2001, the Company's Shareholders approved the Innovative Medical
Services 2001 Officers and Directors Stock Option Plan. The purpose of the Plan
is to advance the business and development of the Company and its shareholders
by affording to the Directors and Officers of the Company the opportunity to
acquire a propriety interest in the Company by the grant of Options to acquire
shares of the Company's common stock.

The Options granted are not "Incentive Stock Options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended. The issuance of
such non-qualified options pursuant to this Plan is not expected to be a taxable
event for recipient until such time that the recipient elects to exercise the
option whereupon the recipient is expected to recognize income to the extent the
market price of the shares exceeds the exercise price of the option on the date
of exercise.

The Plans are administered by an Administrative Committee whom shall serve a one
year term. The Administrative Committee is composed of the Board's
Compensation/Administration Committee. Subject to anti-dilution provisions, each
Plan may issue Options to acquire up to 2,000,000 shares to Directors and
Officers. The exercise price for Options shall be set by the Administrative
Committee but shall not be for less than the fair market value of the shares on
the date the Option is granted. Fair market value shall mean the average of the
closing price for ten consecutive trading days at which the Stock is listed in
the NASDAQ quotation system ending on the day prior to the date an Option is
granted. The period in which Options can be exercised shall be set by the
Administrative Committee not to exceed five years from the date of Grant.
Options granted to new executive officers or directors shall vest one year from
date of appointment or election. Shares issuable under options granted to
continuing officers or directors are immediately exercisable and vest upon
exercise. The maximum number of shares subject to Options granted to any on
Director of Officer shall not exceed 200,000 shares in any 12-month period.

The Executive Officers and Directors of the Company are eligible to participate
in the Plans. The Administrative Committee first granted the Executive Officers
and Directors an option to purchase 100,000 shares of common stock at $1.00 per
share in 1998. The Administrative Committee shall grant to individuals newly
appointed as Executive Officers or as Directors, an option to purchase 100,000
shares of common stock at fair market value. Upon each subsequent anniversary
thereof, each such Officer and Director will receive an option to purchase
50,000 shares of common stock at fair market value. The Plans also give the
Administrative Committee discretion to award additional options. The aggregate
number and kind of shares within the Plans and the rights under outstanding
Options granted hereunder, both as to the number of shares and Option price,
will be adjusted accordingly in the event of a reverse split in the outstanding
shares of the Common Stock of the Company.

The Board may at any time terminate the Plans. The approval of the majority of
shareholders is required to increase the total number of shares subject to the
Plans, change the manner of determining the option price or to withdraw the
administration of the Plans from the Administrative Committee.

Termination of Employment and Change of Control Arrangement
There is no compensatory plan or arrangement with respect to any individual
named above which results or will result from the resignation, retirement or any
other termination of employment with the Company, or from a change in the
control of the Company.

ITEM 11.  Security Ownership of Certain Beneficial Owners and of Management
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned as of July 31, 2001 by individual directors and
executive officers and by all directors and executive officers of the Company as
a group. Based upon a review of the Company's shareholders list as of July 31,
2001, there are no other registered holders of five percent or more of the
Company's Common Stock. As of July 31, 2001 there were 6,954,699 shares
outstanding.
<TABLE>
<CAPTION>
    Name and Address of                                           Common Stock        Percentage of Shares
     Beneficial Owner                 Title                       Ownership               Outstanding
----------------------------      -------------------------       --------------      --------------------

<S>                                                                   <C>    <C>               <C>
   Dennis Atchley                 Secretary                           93,860 (1)               1.3%
   1725 Gillespie Way
   El Cajon, CA 92020

   Dennis Brovarone               Director                           309,483 (2)               4.4%
   18 Mountain Laurel
   Littleton, CO  80127

   Gary Brownell                  Treasurer, CFO/Director            250,321 (3)               3.6%
   1725 Gillespie Way
   El Cajon, CA 92020

   Patrick Galuska                Director                           210,690 (4)               3.0%
   8137 S. Downing St.
   Littleton, CO 80122

   Michael L. Krall               President, CEO/Chairman          1,153,560 (5)              16.6%
   1725 Gillespie Way
   El Cajon, CA 92020

   Eugene Peiser                  Director                           276,136 (6)               4.0%
   1725 Gillespie Way
   El Cajon, CA 92020

   Donna Singer                   Executive VP, Director             178,356 (7)               2.6%
   1725 Gillespie Way
   El Cajon, CA 92020

   Directors and Officers as a Group
   (7 individuals)                                                 2,472,406 (8)              35.6%
</TABLE>

(1)      Includes presently exercisable options to acquire up to 50,000 shares.
(2)      Includes presently exercisable options to acquire up to 235,000 shares.
(3)      Includes presently exercisable options to acquire up to 200,000 shares.
(4)      Includes presently exercisable options to acquire up to 150,000 shares.
(5)      Includes presently exercisable options to acquire up to 531,250 shares.
(6)      Includes presently exercisable options to acquire up to 200,000 shares
(7)      Includes presently exercisable options to acquire up to 150,000 shares
(8)      Includes presently exercisable options held by all of the above
         officers and directors to acquire up to 1,516,250 shares

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         At July 31, 2001, notes receivable included $66,561 which represents
         amounts due from officers of Innovative Medical Services. In July 1999,
         the Board of Directors authorized a personal loan to Michael L. Krall,
         President and CEO of $110,697. Interest accrues at 6% per annum. On
         July 31, 2000, the accrued interest was added to the loan balance,
         bringing the outstanding balance to $117,339. During Fiscal 2001, this
         loan was paid down to $18,379. In July 1999, the Board of Directors
         authorized a personal loan to Gary Brownell, Chief Financial Officer of
         $42,881. Interest accrues at 6% per annum. On July 31, 2000, the
         accrued interest was added to the loan balance, bring the outstanding
         balance to $45,454. On July 31, 2001, the accrued interest was added to
         the loan balance, bring the outstanding balance to $48,182. Both loans
         are due and payable at July 31, 2002. The loans to Mr. Krall and Mr.
         Brownell were made so that these executive officers could meet personal
         financial obligations. The carrying value of the notes, based on the
         terms at which those same loans would be made currently, approximate
         their fair value.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A.  Exhibits

3.1  (1) -- Articles of Incorporation, Articles of Amendment and Bylaws
4.3  (1) -- Form of Common Stock Certificate
4.5  (2) -- March 2000 Warrant
4.6  (3) -- January 2001 Warrant
4.7  (4) -- Convertible Debenture
4.8  (5) -- Convertible Debenture Purchase Agreement
4.9  (6) -- Convertible Debenture Warrant
10.1 (1) -- Employment Contract/Michael L. Krall
10.2 (7) -- Manufacturing, Licensing and Distribution Agreement dated
            March 26, 2001
10.3 (8) -- Axenohl License Agreement
10.4 (9) -- Weaver - Roach X Assignment
10.5 (9) -- Dodo Agreement [CONFIDENTIAL TREATMENT REQUESTED
                  FOR CERTAIN OMITTED INFORMATION FILED SEPARATELY]
10.6 (8) -- Promissory Note of Michael Krall
10.7 (8) -- Promissory Note of Gary Brownell
10.8 (9) -- Nutripure Dealer Agreement
10.9 (9) -- Sales Finance Agreement
11       -- Statement re: Computation of per share earnings
21       -- Subsidiaries of the registrant

(1)  Incorporated by reference from Form SB-2 registration statement SEC File #
     333-00434 effective August 8, 1996
(2)  Incorporated by reference from S-3 registration statement, SEC File
     #333-36248 effective on May 17, 2000
(3)  Incorporated by reference from S-3 registration statement, SEC File
     #333-55758 effective on February 26, 2001
(4)  Incorporated by reference from S-3 registration statement, SEC File
     #333-61664 filed on May 25, 2001
(5)  Incorporated by reference from pre-effective amendment no. 1 to S-3
     registration statement, SEC File #333-61664 filed on July 10, 2001
(6)  Incorporated by reference from pre-effective amendment no. 2 to S-3
     registration statement, SEC File #333-61664 filed on August 13, 2001
(7)  Incorporated by reference from Current Report on Form 8-K filed on May 24,
     2001 as amended on October 19, 2001
(8)  Incorporated by reference from the Amended Annual Report on Form 10KSB for
     the fiscal year ended July 31, 2000 filed on October 19, 2001
(9)  Incorporated by reference from Amended Form 10QSB for the nine month period
     ended April 30, 2001 filed on October 19, 2001

B. Reports on Form 8-K: A Current Report on Form 8-K was filed on May 24, 2001
and amended on October 19, 2001

<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 25, 2001
----------------------------------------                   ----------------
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.
<TABLE>
<CAPTION>
       NAME                TITLE                                      DATE

<S>                        <C>                                      <C>
/s/ DENNIS BROVARONE       Director                                 October 25, 2001
--------------------------                                          ----------------
Dennis Brovarone

/s/ GARY BROWNELL          Chief Financial Officer and Director     October 25, 2001
--------------------------                                          ----------------
Gary Brownell

/s/ PATRICK GALUSKA        Director                                 October 25, 2001
--------------------------                                          ----------------
Patrick Galuska

/s/ MICHAEL L. KRALL       President/CEO and Director               October 25, 2001
--------------------------                                          ----------------
Michael L. Krall


/s/ EUGENE PEISER          Director                                 October 25, 2001
--------------------------                                          ----------------
Eugene Peiser

/s/ DONNA SINGER           Executive Vice President and Director    October 25, 2001
--------------------------                                          ----------------
Donna Singer
</TABLE>