UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 Form 10-KSB /A

              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, including Zip Code)

                                 (619) 596-8600
              (Registrant's Telephone Number, including area code)

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

State issuer's revenues for its most recent fiscal year: $2,409,700

Aggregate market value of the voting stock held by non-affiliates of the
registrant: Approximately $3,107,000 as of October 25, 2002.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 8,780,899 shares of common stock as of October 25, 2002.

Documents incorporated by reference: Certain Exhibits


<PAGE>



Explanatory note on amendment

The Registrant has filled this amendment to reflect changes made to its
financial statements for the fiscal year ended July 31, 2002 with respect to the
writing off of certain start up costs which had been previously capitalized. The
Amendment revises and replaces the following sections:

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

Item 7. Financial Statements and Notes to Financial Statements



<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 $2,011,500 versus net loss of
$2,389,400 for the same period in 2000. During the year, General and
Administrative expenses increased 1% or $11,800 from $1,789,800 in fiscal 2000
to $1,778,000 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.

During the year ended July 31, 2001 the Company expended $230,000 in an effort
to acquire and setup a Korean corporation. The Company originally capitalized
these costs as Deferred Acquisition costs. The Company later determined the
venture was not feasible and decided not to go forward with the project. The
total costs were written-off as Abandoned Projects at July 31, 2002. As
discussed in Note 2 of our financial statements, we now believe the treatment of
these costs was not correct. The accompanying financial statements now show
these costs as expensed when incurred as Start-up Costs. The income statement
effect of this restatement is to increase the net loss at July 31, 2001 by
$230,000 and to decrease the net loss at July 31, 2002 by $230,000. The balance
sheet effect is to show a decrease in Deferred Acquisition Costs in 2001 of
$230,000.

In addition to the ongoing expansion of the water dealer program, distribution
of our other products in the Water Treatment Division continues to grow. A
competitor in the industry, Freshwater Systems, had a significant effect on our
revenues in fiscal year 2000, but our sales have begun to recover. Fillmaster
system sales increased 6% from fiscal year 2000 to 2001, and Fillmaster
replacement filter sales increased 24% from fiscal year 2000 to 2001. 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 products, 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.
<PAGE>
Although retail sales of Nutripure 2000 and Nutripure Sport Bottles comprise
only 11% of Water Treatment Division Sales, we continue to receive and fulfill
reorders and new orders.. . In addition to retail sales, we are conducting a
direct mail program with these products.

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.

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.
<PAGE>
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 $1,338,500 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 $148,700 in deferred acquisition costs during
fiscal 2000. 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:

     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 Vopak (formerly Van, Waters & Rogers)
and members of the Speckoz group of nine regional independent wholesalers. Based
upon these distributors' representations to us and upon their own websites and
promotional materials, we believe them to be the largest distributors of
pesticide products in the United States.

Other than purchase orders, we do not have written agreements with the
distributors. We believe in the coming year RoachX will become an industry
leading technology in cockroach control.

<PAGE>
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 have submitted for and
anticipate receiving EPA approval for AntX. CleanKill is approved by the EPA as
an additional brand name of Axen. We repackage an NSF, USDA and FDA approved
food-grade silicone caulk as our ProChoice product. 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>


Item 7.  Financial Statements






                           INNOVATIVE MEDICAL SERVICES

                        CONSOLIDATED FINANCIAL STATEMENTS
               For the Years Ended July 31, 2001 and July 31, 2000





<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.

     The accompanying financial statements as of July 31, 2001 and 2000 and for
the years then ended have been restated to correct errors as described in Note
2.

         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 except for the third paragraph above and Note 2, which is as of
June 13, 2003.


<PAGE>





<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------
                                                         July 31         July 31
                                                          2001             2000
                                                        Restated         Restated
                                                        (Note 2)         (Note 2)
                                                     -------------   -------------
<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                             903,072       1,056,252
                                                       ----------      ----------
     Total property, plant and equipment                  903,072       1,056,252
                                                       ----------      ----------


Deposits                                                    8,127          14,083
Patents and licenses                                    1,014,282         300,910
Deferred acquisition costs                                     --         202,542
                                                       ----------      ----------

     Total noncurrent assets                            1,022,409         517,535
                                                       ----------      ----------

Total assets                                         $  3,836,881    $  4,368,153
                                                       ==========    ============


LIABILITIES AND STOCKHOLDERS EQUITY
Accounts payable                                     $    543,992    $    308,812
Accrued liabilities                                        96,691          71,400
Notes payable                                                  --         210,592
                                                       ----------      ----------

     Total current liabilities                            640,683         590,804
                                                       ----------      ----------

Minority interest payable                                      --          61,697
                                                       ----------      ----------


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                                    (8,423,467)     (6,411,971)
                                                       ----------      ----------

     Total stockholders' equity                         3,196,198       3,715,652
                                                       ----------      ----------

Total liabilities and stockholders' equity           $  3,836,881    $  4,368,153
                                                       ==========     ===========

</TABLE>


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

<PAGE>


<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------------------------------
                                                                            For Year Ended
                                                                             July 31 2001

                                                                       2001                   2000
                                                                     Restated               Restated
                                                                     (Note 2)               (Note 2)
                                                                  ------------            -------------
<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                                  1,789,783                1,777,903
Research and development                                               292,964                  114,756
Start-up costs                                                         230,000                       --
Impairment of long lived assets                                             --                  505,433
                                                                  ------------             ------------

Total operating costs                                                3,094,557                2,993,234
                                                                  ------------             ------------

Operating income (loss)                                             (2,047,506)              (2,429,191)
                                                                  ------------             ------------
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                                 (2,024,868)              (2,508,618)

Federal and state income taxes                                           1,600                      800
                                                                  ------------             ------------

Income (loss) before minority interest in subsidiary
     operations and change in accounting principle                  (2,026,468)              (2,509,418)

Minority interest in subsidiary operations                              14,972                   40,103
                                                                  ------------             ------------

Net income (loss) before cumulative
     change in accounting principle                                 (2,011,496)              (2,469,315)

Cumulative effect of change
     in accounting principle                                                --                   79,896
                                                                  ------------             ------------

Net income (loss)                                                 $ (2,011,496)            $ (2,389,419)
                                                                  ============             ============


Net income (loss) per common share before change
     in accounting principle (basic)                                $    (0.31)                   (0.49)
Cumulative effect of change
     in accounting principle                                                --                     0.02
                                                                  ------------             ------------

Net income (loss) per common share (basic)                          $    (0.31)              $    (0.47)
                                                                  ============             ============

Net income (loss) per common share before change
     in accounting principal (diluted)                              $    (0.31)                   (0.49)
Cumulative effect of change
     in accounting principle                                                --                     0.02
                                                                  ------------             ------------
Net income (loss) per common share (diluted)                        $    (0.31)              $    (0.47)
                                                                  ============             ============
</TABLE>



<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS
----------------------------------------------------------------
<S>                                                               <C>                      <C>
Balance, beginning of period                                      $ (6,411,971)            $ (3,993,399)

Prior period adjustment (see note 12)                                                           (29,153)

Net income (loss)                                                   (2,011,496)              (2,389,419)
                                                                  ------------            -------------
Balance, end of period                                            $ (8,423,467             $ (6,411,971)
                                                                  ============            =============
</TABLE>





   The accompanying notes are an integral part of these financal statements.

<PAGE>




<TABLE>

<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------

                                                                                 For the Year Ended
                                                                                       July 31

                                                                                2001            2000
                                                                              Restated        Restated
                                                                              (Note 2)        (Note 2)
                                                                            -------------  ---------------
Cash flows from operating activities
<S>                                                                       <C>              <C>
     Net income (loss)                                                    $ (2,011,496)    $ (2,389,419)

     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                             25,292             (822)
                                                                           -----------      -----------
             Net cash provided (used) by operating
                 activities                                                 (1,338,514)      (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                                                      -         (148,691)
                                                                           -----------      -----------

             Net cash (used) in investing activities                          (661,411)        (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:
<TABLE>
<CAPTION>

            Assets:
<S>                                                   <C>
               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
                                                    ===========
</TABLE>


         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.

         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:
<TABLE>
<CAPTION>

                Assets:
<S>                                                                 <C>
                             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
                                                                     =========
</TABLE>

         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>


                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report



         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.

<PAGE>



                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report


         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

         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.

         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:
<TABLE>
<CAPTION>

                                              2001                 2000
                                           ------------        -------------
<S>                                     <C>                   <C>
               Finished Goods           $       246,374       $     108,528
               Work in Progress                 150,815             180,770
               Raw Materials                    313,829             507,410
                                           ------------        -------------
                                        $       711,018       $     796,708
                                           ------------        -------------
</TABLE>

<PAGE>



                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report

         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>



                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report




         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                      $ (2,011,496)     $(2,469,315)

  Cumulative change in accounting principle                          --           79,896
                                                             -----------      -----------
  Net income (loss)                                        $ (2,011,496)     $(2,389,419)
                                                            ===========      ===========

  Basic net earnings (loss) per share
       Net income (loss) per common share
        before change in accounting principle               $     (0.31)     $     (0.49)
       Cumulative effect of change in
        accounting principle                                         --             0.02
                                                            -----------      -----------
        Net income (loss) per common share                  $     (0.31)     $     (0.47)
                                                            ===========      ===========

    Diluted net earnings (loss) per share
       Net income (loss) per common share
        before change in accounting principle               $     (0.31)     $     (0.49)
       Cumulative effect of change in
        accounting principle                                         --             0.02
                                                            -----------      -----------
        Net income (loss) per common share                  $     (0.31)     $     (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>


                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report



         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 $7,146,000, and
         $6,523,000, and $3,073,000, respectively. At July 31, 2000, the Company
         has financial, federal, and California tax net operating loss
         carryforwards of approximately $5,594,000. $5,076,000, and $2,377,000,
         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 $ 1,304,000 and $ 1,181,000 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
         $123,000.

         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:

<TABLE>
<CAPTION>

                                                                      July 31             July 31
                                                                        2001                2000
                                                                        ----                ----
<S>                                                               <C>                 <C>
                Net operating loss carryforward                   $ 1,263,000         $ 1,108,000
                Depreciation and amortization                               0                   0
                Accrued expenses and calculation allowances            36,000              71,000
                Other                                                   5,000                2000
                                                                        -----                ----
                Total deferred tax assets                           1,304,000           1,181,000

                Valuation allowance for deferred tax assets        (1,304,000)         (1,181,000)
                                                                  -----------         -----------
                     Net deferred tax assets                     $          0           $       0
                                                                ===============        ==========
</TABLE>

<PAGE>



                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report



Note 2. Restatement of Financial Statements

         Year Ended July 31, 2001 - Start-up Costs and Warranty Liability
         The accompanying financial statements have been restated to correct an
         error in the recording and reporting of Start-up Costs and the Warranty
         Liability of the Company.

         The Company expended $230,000 during the year ended July 31, 2001 and
         an additional $47,831 during the July 31, 2002 fiscal year in an effort
         to acquire and setup a Korean corporation. The Company capitalized
         these costs as Deferred Acquisition costs as incurred. The Company
         later determined the venture was not feasible and decided not to go
         forward with the project. The total costs of $277,831 were written-off
         as Abandoned Projects at July 31, 2002. We now believe the treatment of
         these costs was not correct. The accompanying financial statements now
         show these costs as expensed when incurred as Start-up Costs. The
         income statement effect of this restatement is to increase the net loss
         at July 31, 2001 by $230,000 and to decrease the net loss at July 31,
         2002 by $230,000. The balance sheet effect is to show a decrease in
         Deferred Acquisition Costs in 2001 of $230,000.

         In previous years the Company had not recorded a liability for its
         future warranty obligation. Because the Company has now computed and
         booked this liability the accompanying financial statements have been
         restated to include this obligation. The warranty liability was $29,153
         at July 31, 1999 and is shown as a prior period adjustment on the
         Consolidated Statements of Accumulated Deficits. A liability of $33,791
         at July 31, 2001 and $34,520 at July 31, 2000 are now included in
         Accrued Liabilities. The income statement effect of theses items was to
         reduce net loss at July 31, 2001 in $729 and to increase net loss at
         July 31, 2000 of $5,367.


         Year Ended July 31, 2000 - 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.
<PAGE>




                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report


         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 should have 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
         $133,20

Note 3. 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 4. 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 5. 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 6. Property, Plant and Equipment

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

                                                             July 31, 2001             July 31, 2000
                                                      ---------------------    ----------------------
<S>                                                   <C>                        <C>
                    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
                                                      ---------------------    ----------------------
</TABLE>

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


<PAGE>



                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report


Note 7. Debt

         The details relating to debt are as follows:
<TABLE>
<CAPTION>

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

<S>                                                                    <C>                 <C>

           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                                       $          -         $          -
                                                                      ------------         ------------
</TABLE>

Note 8. 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:
<TABLE>
<CAPTION>

                           Year Ended July 31           Amount
<S>                               <C>                  <C>
                                  2002                 $139,327
                                  2003                 $144,900
                                  2004                 $150,696
                                  2005                 $156,724
                                  2006                 $162,993
</TABLE>



<PAGE>


                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report



Note 9. 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>
         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 10. Related Party Transactions

         See Note 4 and Note 10.

Note 11. Stock Option Plans

         The Company has the following stock option plans (the Plans) pursuant
         to which options to acquire common stock have been granted.
<PAGE>
         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 ETIH2O 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.
<PAGE>



                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report


         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:
<TABLE>
<CAPTION>

                                                                          Weighted-Average
                                               Number of Shares          Exercise Price ($)
                                             ------------------------- -----------------------
<S>                                                  <C>                         <C>
        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>



<PAGE>



                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report



<TABLE>
<CAPTION>



                                                      Outstanding                           Exercisable
                                                 Weighted      Weighted
        Range of                   Number        Average        Average                              Weighted
        Exercise                   Shares          Life        Exercise            Number             Average
        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 12. 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 13. 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 14. 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 EITF Issue No. 00-2 - Emerging Issues Task
         Force Issue titled: Accounting for Web Site Development Costs dated
         March 16, 2000.


<PAGE>


                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report



Note 15. 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      Sales
                                                        2001           Sales      End 2000
         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.

Note 16.  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.
<PAGE>




                           Innovative Medical Services
                   Notes to Consolidated Financial Statements
                       See Independent Accountants' Report



         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 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.


<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                                August 4, 2003
----------------------------------------            --------------
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                               August 4, 2003
-------------------------------------------                                        --------------
Dennis Brovarone

/s/ GARY BROWNELL                           Chief Financial Officer and Director   August 4, 2003
-------------------------------------------                                        --------------
Gary Brownell

/s/ PATRICK GALUSKA                         Director                               August 4, 2003
-------------------------------------------                                        --------------
Patrick Galuska

/s/ MICHAEL L. KRALL                        President/CEO and Director             August 4, 2003
-------------------------------------------                                        --------------
Michael L. Krall

/s/ EUGENE PEISER                           Director                               August 4, 2003
-------------------------------------------                                        --------------
Eugene Peiser

/s/ GREGORY BARNHILL                        Director                               August 4, 2003
-------------------------------------------                                        --------------
Gregory Barhill
</TABLE>

<PAGE>