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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10KSB/A



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



FOR THE FISCAL YEAR ENDED MARCH 31, 2003



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



Commission File No. 001-16185



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INNOVATIVE COMPANIES, INC.

(Exact name of small business issuer in its charter)



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|                                                                  |  |                                  
|----------------------------------------------------------------- |  | ---------------------------------
|State of Florida                                                  |  | 59-2600232                       
|(State of or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                                  | 
|6950 Bryan Dairy Road, Largo, Florida                             |  | 33777                            
|(Address of Principal Executive Officers)                         |  | (Zip Code)                       



Issuers
telephone number: (727) 544-8866



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



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



Common Capital Stock

(Title of Class)



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Indicate by check mark whether the issuer (1) filed all
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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.    Yex    No ̈



Indicate by check mark if
there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.    x



Issuers revenues for its most recent fiscal year were $14,731,514.



The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 26, 2003 was $10,682,358.
Number of shares outstanding of the Issuers common stock at $.01 par value as of June 24, 2003 was 7,727,634 (exclusive of Treasury Shares).



Documents Incorporated by Reference:



Reference is made in Part III of this Report to the Companys Registration Statement, filing Number 333-92849, filed with the SEC on December 14, 1999, which is
hereby incorporated by reference, and amendments No. 1-5 thereto as filed dated May 11, 2000, June 28, 2000, July 25, 2000, September 18, 2000, and October 19, 2000, respectively.



Transitional Small Business Disclosure Format:    Yes ̈No  x



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CAUTIONARY STATEMENTS



Certain oral statements made by management from time to time and certain statements contained in press releases and periodic
reports issued by Innovative Companies, Inc. (the Company), as well as those contained herein, that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act
of 1934 and, because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements, including those in Managements
Discussion and Analysis, are statements regarding the intent, belief or current expectations, estimates or projections of the Company, its Directors or its Officers about the Company and the industry in which it operates, and are based on
assumptions made by management. Forward-looking statements include without limitation statements regarding: (a) the Companys growth and business expansion, including future acquisitions; (b) the Companys financing plans; (c) trends
affecting the Companys financial condition or results of operations; (d) the Companys ability to continue to control costs and to meet its liquidity and other financing needs; (e) the declaration and payment of dividends; (f) the
Companys use of proceeds from their initial public offering, and (g) the Companys ability to respond to changes in customer demand and regulations. Although the Company believes that its expectations are based on reasonable assumptions,
it can give no assurance that the anticipated results will occur. When issued in this report, the words expects, anticipates, intends, plans, believes, seeks,
estimates, and similar expressions are generally intended to identify forward-looking statements.



Important factors that could cause the actual results to differ materially from those in the forward-looking statements include, among other items, (i)
changes in the regulatory and general economic environment related to the health care and nutraceutical industry; (ii) conditions in the capital markets, including the interest rate environment and the availability of capital; (iii) changes in the
competitive marketplace that could affect the Companys revenue and/or cost and expenses, such as increased competition, lack of qualified marketing, management or other personnel, and increased labor and inventory costs; (iv) changes in
technology or customer requirements, which could render the Companys technologies noncompetitive or obsolete; (v) new product introductions, product sales mix and the geographic mix of sales and (vi) its customers willingness to accept
its Internet platform in the future. Further information relating to factors that could cause actual results to differ from those anticipated is included but not limited to information under the headings Business, and
Managements Discussion and Analysis of Financial Conditions and Results of Operations in this Form 10-KSB as of and for the year ended March 31, 2003. The Company disclaims any intention or obligation to update or revise
forward-looking statements, whether as a result of new information, future events or otherwise.



PART I



ITEM
1.    DESCRIPTION OF BUSINESS



History



We were incorporated as Energy Factors, Inc., a Florida
corporation, in 1985. In August 1998 we changed our name to Innovative Health Products, Inc., in February 2000 we changed our name to Go2Pharmacy.com, Inc., and in September 2000 we changed our name to Go2Pharmacy, Inc., in anticipation of our
merger with the Delaware corporation Go2Pharmacy.com, Inc. Our merger with Go2Pharmacy.com, Inc. was effected simultaneously with the successful completion of our initial public offering during November 2000. Effective September 6, 2002, we changed
our name to Innovative Companies, Inc. We continue to conduct nutritional and herbal supplement product line manufacturing business under the name Innovative Health Products, Inc.



Business Overview



At Innovative Companies, Inc., we manufacture, package and ship high-quality private label dietary supplements, over-the-counter drugs, and health and
beauty care products for companies worldwide under two of our Florida-incorporated companies, Innovative Health Products, Inc. and Belcher Pharmaceuticals, Inc. Belcher Pharmaceuticals is our FDA-registered, over-the-counter (OTC),
manufacturing company. As a private-label contract manufacturer, we develop and manufacture for ourselves, and our customers, dietary supplements and health and beauty care products for distribution through various outlets. During fiscal 2003,
Belcher has also begun the initial steps in becoming a generic drug manufacture and distribution facility. Through Breakthrough Engineered Nutrition, Inc., we distribute two of our own product lines; Lean Protein, a three SKU (Store Keeping
Unit), high protein zero and low carbohydrate foods line, and Thermo ZXE, a five SKU energy drink line. Go2PBM Services, Inc, a Florida corporation, is our pharmacy benefit management company that manages multiple health care plan members and
their related pharmacy claims.



Our manufacturing customers
include mass marketing companies, network marketing, distributors and direct sales companies. We manufacture, package and ship these products from our two facilities located in Largo, Florida. In addition to our private label business, we develop,
manufacture and distribute our own branded dietary supplements and health and beauty care products. Some of our branded products include Nutrisure meal replacement powder, Physicians Pharmaceuticals dietary



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supplement product line, and Arth-Aid roll-on and cream for arthritis. We distribute these products to retail
consumers, marketing companies, wholesalers and retailers, including independent pharmacies, regional and national chain drug stores, direct mail companies, mass merchandisers, deep discounters and brokers. We are currently forming strategic
alliances with health maintenance organizations, insurance companies, retail chains, and other health related associations to attract new customers.



In April 2000, we formed a wholly-owned distribution subsidiary named Breakthrough Engineered Nutrition, Inc., a Florida corporation, for the purpose of
marketing and distributing our own branded product line, Lean Protein. Products introduced under this product line include, Lean Protein Chips, a zero carbohydrate, high protein snack chip, Lean Protein Bites
which we believe is a one-of-a-kind high protein, low carbohydrate, sweet and crunchy snack food that is offered in three flavors. Further targeted to the sports and fitness markets, is our energy beverage line, Thermo ZXE, designed to
provide energy that we believe assists in improving performance during workouts. We have an established and growing network of over 40 distributors strategically located across the United States and Canada. Our product lines are sold in national as
well as local grocery chains, convenience stores, health food stores and gyms.



In March 2001, we incorporated our pharmacy benefit management company, Go2PBM Services, Inc., a Florida corporation. Go2PBM Services administers drug benefits for health maintenance organizations, insurance company
plans, preferred provider organizations, self-insured corporate health plans and Taft-Hartley self-insured labor unions. As a pharmacy benefit manager, the company oversees all member benefits in low risk plans, while taking an exclusively
administrative role in higher risk plans. Our administrative services include claim processing, network management and customer service.



In September 2002, we incorporated two wholly-owned distribution companies, IHP Marketing, Inc. and Breakthrough Marketing, Inc., for the purpose of
marketing and distributing additional proprietary brands to the public in the future.



Business Strategy



We
are continuing to build a multi-faceted company able to maximize our efficiencies and capitalize on our synergies through vertical operations. To manage our operations, we have assembled and maintained a management team with experience in
manufacturing, marketing, sales and technology to assist in leading us to our sales, profit and overall business goals. Our vertical operations consist of manufacturing and distribution, sales and marketing, in-house formulation laboratory and other
chemical analysis services, customer service and public relations. We will be able to support our own needs as well as those of our customers, from order processing, manufacturing through end-user distribution. We have streamlined our two
manufacturing facilities in order to continue growing our manufacturing segment.



During the fiscal year ended March 31, 2003, we have begun the initial, yet critical, steps in becoming a generic drug manufacturer and distributor. In reference to the manufacture and the distribution of generic
drugs numerous licensures have been applied for, which include a drug enforcement agency (DEA) license, a State of Florida prescription drug manufacturing permit, State of Florida and other specific states wholesale distribution
licenses. Our regulatory and laboratory departments have been improved and financial resources have been strategically planned as we intend to achieve these goals in various stages during the fiscal years ending 2004 through 2006. Currently, we are
working on the development of generic and other over-the-counter drugs in tablet form for the treatment of thyroid conditions found in animals and humans in addition to generic and over-the-counter drugs to treat animal arthritis and similar joint
ailments. This development work includes product formulation stability studies under accelerated and real time conditions, methods and process validation, and analytical work required to support the Companys goal to file abbreviated new animal
drug applications (ANADA) and to file human abbreviated drug applications (ANDA) with the FDA. All costs, including research and development costs are expensed as incurred. We have upgraded the laboratory to handle all of our
development work. Additional analytical and other lab equipment have been added to conduct the required analysis of the active pharmaceutical ingredients. We are currently generating data for ANDA work on certain drug products. Formulation work and
stability studies are currently underway on three other drug products. Our Regulatory Affairs department is preparing the necessary documentation for the FDA and the other regulatory agencies. The research, development, stability testing, clinical
testing and FDA review process leading to approval takes approximately 12  24 months for each product. Some of the products require no review or very little laboratory testing and hence may take less than one year. The current strategy is to
work on drug products that can be brought to market at an even pace, as we believe this approach allows for immediate revenue generation and provides for a possible future, continuous revenue generation stream.



We are continuing to develop our sales and marketing strategies to build our
recognition among national grocery and drug chains, long-term care facilities and other health product consumer organizations, while building brand awareness of our branded and other proprietary products as well as our private label capabilities. We
have developed several proprietary products that are currently being sold nationally to our target markets. We believe that we have created a solid platform to continue to achieve these goals.



For Lean Protein and Thermo ZXE, our current branded product lines that we
distribute, we plan on further developing and expanding these lines into other flavors and forms of our unique high protein low carbohydrate foods and energy products. In addition, our third product line is estimated to be introduced summer 2003. We
market our product lines using our own telemarketing efforts as well as utilizing brokers to increase the awareness and availability of our offerings and capabilities.



By merging with the Delaware corporation Go2Pharmacy.com, Inc. in November 2000, we have entered into an agreement to
provide our pharmacy benefit management services to a New York State health maintenance organization. We have entered into a contract with CarePlus, to provide pharmacy benefit management services to its members through two of their health plans,



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through our wholly-owned subsidiary, Go2PBM Services, Inc. In addition, the agreement allows us to be the
organizations exclusive private label over-the-counter supplier of healthcare and healthcare related products.



We intend to provide over-the-counter drugs, and health and beauty care products directly to nursing homes, assisted living facilities, and personal care
residences across the country. We plan to develop these outlets to become a premier provider of nutritional, over-the-counter and other related products for institutional and long-term care facilities seeking high quality competitively-priced
products.



Through the development of our private label,
branded, generic drug and over-the-counter manufacturing, distribution and pharmacy benefit management efforts, we intend to provide wholesale and institutional customers with an efficient source for their nutritional, over-the-counter and other
pharmacy-related product needs. By vertically integrating our core business operations, we believe we have, and will continue, to achieve increased brand recognition and exposure, ancillary product and service revenues, and will be able to provide
competitively priced products, quick turn around on our manufactured and distributed products in addition to maintaining overall superior customer service.



Private Label Products-Manufacturing



Sales of our manufactured private label products accounted for approximately 71.6% of our total consolidated revenues for the year ended March 31, 2002
and 67.9% for the year ended March 31, 2003. We currently manufacture products for over 400 private label customers in 47 states in the United States and ship to several countries internationally. Our private label business has a widely distributed
revenue base. For the year ended March 31, 2002, we had sales of 5% or more of total consolidated revenues to three of our private label customers, each of which accounted for 22.8% which was Metabolife International, 16.6% which was Healthworks
International and 7.4% of total consolidated revenues none of which were sales to affiliated customers. For the year ended March 31, 2003, we had sales of 5% or more of total consolidated revenues to Metabolife International, one of our private
label customers, of which accounted for 29.1% of total consolidated revenues none of which were sales to affiliated customers. For the year ended March 31, 2002 and 2003, we did not have sales of 5% or more of total consolidated revenues to any
company that is a party to an exclusive manufacturing agreement with us.



Branded Products-Manufacturing



To date, sales of our branded products have not accounted for a significant portion of our revenues. We intend to employ additional marketing efforts on the sale of our branded products, which we believe will yield
higher profit margins than our private label products. In addition to the branded products listed below, we also have approximately 12 other branded products, and intend to develop additional branded products. Some of our branded products include:



| |  | Nutrisurea meal replacement powder mix with nutritious proteins, medium chain triglycerides and antioxidants that conforms with diabetic diet requirements;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Physicians Pharmaceuticalsa proprietary line of dietary supplements which includes vitamins, minerals and herbal supplements; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| |  | Arth-Aidan arthritis cream in an easy-to-use roll-on form designed to relieve arthritic pain, and is formulated with capsaicin and functional botanicals.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



For the fiscal years ended March 31, 2002 and 2003, no manufacturing revenues were derived from the sale of these branded products to
external customers.



Manufacturing



Our primary manufacturing facility is located in
33,222 square feet of leased space in Largo, Florida. We use this location for our executive offices and for the manufacturing, packaging and warehousing of products, laboratory services, research and development, marketing and final distribution.
Our manufacturing facilities at this site utilize high-speed encapsulating, tableting, packaging and other production line equipment. The facility is large enough to handle bulk orders, but versatile enough to provide quick response to customer
needs. This site also houses our graphic arts department, which assists us and our customers print layout and graphic needs.



Our second manufacturing facility is located in 10,000 square feet of leased space in Largo, Florida. This facility is registered with the United States
Food and Drug Administration and is used for the manufacture, packaging and distribution of over-the-counter products for our customers.



Currently, we can manufacture approximately 270 million tablets and capsules and four million bottles annually. For the fiscal year ended March 31, 2003,
we operated at approximately 60% of our total capacity. Our manufacturing facilities normally operate two shifts per day, five days per week. Certain packaging lines or capsule and tablet production lines run longer as demand warrants. We operate
flexible manufacturing lines that can shift output efficiently among various pieces of equipment depending upon factors such as batch size, tablets or capsule count, and labeling requirements. We strive to fulfill and ship all orders within 30-60
days. While we believe we can double our sales volume without expanding our current facilities, we will expand our manufacturing capacities upon receiving Food and Drug Administration registration for production of generic and other over-the-counter
drugs. An increase in production would require additional space and personnel for warehousing and shipping operations, but would not necessarily require substantial capital investment.



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Branded Products-Distribution



Sales of our distributed product line, Lean Protein, accounted for approximately 7.1% of our total consolidated revenues for
the year ended March 31, 2002 and accounted for approximately 9.3% of consolidated revenues for the year ended March 31, 2003. We currently distribute our products under our product line, Lean Protein to over 40 distributors in 20 states
in the United States and Canada. Our distribution product line has a widely distributed revenue base whereas for the year ended March 31, 2002 and 2003, no one customer accounted for more than 5% of total consolidated revenues. For the fiscal year
ended March 31, 2002, 100% of our distribution revenues were derived from our Lean Protein Bites product line as compared to the fiscal year ended March 31, 2003, where 76.4% of the total distribution revenues were derived from our Lean Protein
Bites product line with 23.6% of the total being derived from our Thermo ZXE, energy product line. For the fiscal year ended March 31, 2003, 25,890 cases of Lean Protein Bites were sold as compared to fiscal year ended March 31, 2002 where 20,197
cases were sold. For our Thermo ZXE line, 17,106 cases were sold for the year ended March 31, 2003 noting that the products market entrance was September 2002.



Pharmacy Benefit Management



Sales generated from our pharmacy benefit management subsidiary accounted for approximately 21.3% of our total consolidated revenues for the year ended
March 31, 2002 and accounted for 22.8% of consolidated revenues for the year ended March 31, 2003. 100% of the Companys pharmacy benefit management revenues are derived from CarePlus Health an affiliate of the Company.



Research and Development



Our research and development department develops new concepts and
formulations for our customers private label products as well as our own branded products. Dr. Sekharam, our President, provides guidance and direction for our research and development team in product development. Our lab chemists perform
product development, product improvement, process development through to the last-minute fine-tuning of products and processes while our technical staff prepares cost estimates and samples based on those formulations. Prior to the final manufacture
of our products, this team also prepares documentation of operational procedures performed and documentation of pilot testing programs. Finally, our research and development regulatory staff personnel prepare product information documenting label
requirements. Historically, our expenditures for research and development have not been material, relative to our overall operating expenses.



Our research and development laboratory is equipped with modern laboratory test equipment, including high pressure liquid chromatography, atomic
absorption spectroscopy, as well as instruments to test different parameters like pH, viscosity, moisture, gradient sizing, ash, melting point, refractive index, tablet hardness, dissolution and disintegration. We also have a full-fledged micro lab
to test samples for microbiological loads including yeast, bacteria and fungi. The laboratory has stability chambers to test both the long-term and the accelerated shelf life of products. Our laboratory is well equipped to handle all aspects of
generic drug development. We believe that our laboratory facilities are in compliance with all applicable environmental regulations.



Our product development team works closely with customers to identify their own strengths as well as understand their needs to create products with value
adding features. As our development response time is critical to capitalizing on consumer trends and preferences, we focus on meeting end-user needs as quickly as possible. For example, our touch-free arthritis relief roll-on was specially designed
for customers reporting finger irritation due to the products active ingredients. We believe that this type of flexibility and attention to customer needs results in more valuable and marketable products.



Marketing and Sales



Our marketing and promotion strategy is targeted toward stimulating demand for our products and service capabilities and by
increasing our brand awareness. We currently employ a traditional in-house sales force that markets our branded and private label products directly to wholesale and institutional customers. We also utilize product promotions and print media to reach
new customers in targeted markets. We intend to increase these efforts significantly in the areas of direct sales, telesales, and traditional and online advertising.



We plan to hire additional marketing representatives to contact prospective customers needing our private-label
manufacturing services, self-insured employers, health maintenance organizations, and other health benefit provider associations to market our manufacturing capabilities and pharmacy benefit management services in addition to pursuing contractual
arrangements with pharmacies related to our future generic drug manufacturing and distribution. We also intend to expand our sales force to initiate direct and regular contact with our customers key personnel, to inform them of new product
developments and industry trends, aid them in the design of store displays and create merchandising programs that promote our manufacturing capabilities and our branded products.



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We intend to increase telesales by hiring an in-house telesales group to prospect for customers for our
branded products that we distribute. We have increased our advertising efforts by implementing online sales and marketing techniques to increase brand awareness and direct traffic to our web sites, www.leanprotein.com and onlineihp.com. This
includes purchasing banner advertising on search engine web sites and Internet directories, as well as direct links from health related web sites. We feel that these efforts are and will continue to compliment our existing and future strategic
agreements and traditional advertising efforts.



We also
increase the flexibility of our product offerings by extending various credit terms to our customers, subject to our credit approval process. In most cases, where credit terms are granted, we require a prepayment of 50% of the amount of the sales
order, with the balance due within 30 days of shipment. Some of our customers whose sales are to regional and/or national chain stores receive payments from their customers on extended payment terms. In such cases, we grant extended payment terms,
when requested, by a long-standing significant customer.



Our
manufacturing revenues are generated by fulfilling sales orders received from our customers within an average turn-around time ranging from 30-60 days. Consequently, we experience a backlog for future revenues at all times. As of March 31, 2002 and
2003, we had approximately $1,179,000 and $1,300,000, respectively, in backlog manufacturing sales orders.



Additional Business Goals



In addition to continuing the efforts described above, we intend to increase sales by building a pharmacy benefit management business that services at least 200,000 members through the addition of new plans. We currently have 29,923 members
in our current Plan and have added an additional Plan called Family Health Plan. We plan to increase sales by concentrating our marketing efforts of certain of our branded products to specific market segments. We also intend to increase sales by
expanding our branded and private label offerings of over-the-counter products. We plan to target trade associations that service long-term health care facilities, as well as private and public assisted living facilities and nursing home chains, to
form alliances and partnerships to build our business to business customer base. We also plan to offer discount and rebate programs to these organizations based on the volume of sales. We have an agreement with The Greater New York Health Care
Facilities Association to provide our products to its members. This Association is a provider association servicing over 100 long-term care facilities throughout the New York metropolitan area. Through these facilities, the Association represents
approximately 30,000 nursing home beds, which comprises approximately 35% of the nursing home beds in the state of New York.



We intend to target health maintenance organizations, insurance companies and corporate health unions to provide pharmacy benefit management services to
their members. Simultaneous with the merger in November 2000, we entered into a five year agreement to provide pharmacy benefit management services to Care Plus Health Plan, a Medicaid health maintenance organization located in New York. Pursuant to
the agreement, we are administering pharmacy benefit management services to approximately 60% of CarePlus membership. We intend to develop a nationwide network of local and regional pharmacy chains that will service our pharmacy benefit
management members non-maintenance prescription needs. We intend to expand our market pharmacy benefit management services to self-insured employers, health maintenance organizations, and other large service organizations.



We currently manufacture several of our own branded products, some of which
are currently being sold to nursing homes. We plan to market these products through major business to business Internet sites and by advertising in trade journals and through traditional media. The sale of these products is expected to offer
significant brand awareness within the long-term care facility industry. We intend to increase marketing of our branded products to institutional markets, health food stores, mass market retailers, and directly to consumers. We plan to increase our
sales force to achieve market penetration into targeted geographical areas. Some of the sales personnel we expect to hire will devote a substantial portion of their time enhancing relationships with our customers key personnel, informing them
of new product developments and industry trends, and aiding them in designing store displays and merchandising programs for our branded products. We also intend to employ additional financial resources to implement media kits and increase our
newsprint advertising, our national print media, and our direct mail marketing efforts. As a manufacturer, we have the facilities, equipment, manufacturing capacity, skilled work force and industry experience to control product processing and
minimize product cost from order inception to distribution of finished products to our customers.



By utilizing our manufacturing capabilities, we intend to build institutional relationships through high quality and low cost custom product lines. We are
continuously seeking ways to expand our manufacturing customer base. We intend to increase our market penetration of private label manufacturing customers increasing our outside sales and telesales efforts, by reducing manufacturing time with
additional fully-automated high-speed manufacturing equipment, by delivering high quality products and by providing research and development support to improve our product offerings. We will also continue to develop strategic alliances with new
manufacturing customers. We intend to increase our ongoing development and marketing of new products in order to capitalize on and create market opportunities in new market segments. We feel that we can differentiate ourselves from our competitors
by providing customers with more value-added products. Consequently, we intend to produce and market additional, as well as enhance currently existing products and dietary supplements that integrate a variety of compounds to achieve greater
bio-availability, effectiveness and product convenience. We differentiate ourselves from other dietary supplement



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manufacturers by providing faster and more appropriate responses to our customers. Our development response time for
proprietary and private label products is critical to capitalize on consumer trends and preferences. We intend to utilize these trends and preferences to expand our customer base and provide consumers with the most timely and well adapted products
for their needs.



We believe that the health care,
pharmaceutical and dietary supplement industries are fragmented and currently offer attractive acquisition opportunities. We intend to pursue acquisition opportunities that will broaden our product lines, provide efficiencies in manufacturing
through economies of scale, broaden our customer base, complement our existing businesses and further our overall strategic business goals. However, we have no current plans, arrangements or agreements for any acquisitions.



Employees



As of March 31, 2003, we had 68 employees. Of these employees, four were engaged in marketing and sales, 54 were devoted to
production, laboratory and distribution and ten were responsible for management and administration. None of our employees are covered by a collective bargaining agreement. We believe we have good relations with our employees. Employees are permitted
to participate in employee benefit plans of the Company that may be in effect from time to time, to the extent eligible, and employees may be entitled to receive an annual bonus as determined at the sole discretion of the Companys Board of
Directors based on the Boards evaluation of the employees performance and the financial performance of the Company.



Principal Suppliers



We obtain all of the raw materials for the manufacture of our products from third party suppliers primarily located within the United States. We do not
have contracts with any of our suppliers to provide adequate materials required for our product manufacturing.



Competition



The
manufacturing, wholesale, retail and distribution industries in which we operate are highly competitive. Numerous companies, many of which have greater size, financial, personnel, distribution and other resources than us, compete with us in our
development, manufacture, distribution, wholesaling and retailing businesses. The Nutrition Business Journal estimates that there are 935 manufacturers and branded marketers of dietary supplements in the United States, as subcategorized into three
revenue categories, (1) companies with annual revenues of less than $20 million, (2) companies with annual revenues of $20 million to $99 million and (3) companies with annual revenues of over $100 million. The Nutrition Business Journals 2001
database includes within subcategory (3), 18 companies with over $100 million in revenues, which represent 58% of the dietary supplement market as compared to the range in which our Company operates in, subcategory (1), whereas we are among 863
which compromises only 16% of the market. Our branded products face substantial competition from broad line manufacturers, large private label manufacturers, and more recently from large pharmaceutical companies. Increased competition from companies
with greater financial, manufacturing, distribution and marketing capabilities than our own could have a materially adverse affect on our operations. We compete on the basis of product quality, cost and customer service. Our branded products
success depends primarily on our increasing brand recognition across multiple distribution channels, our ability to quickly develop, advertise, market and promote new and existing products with high quality and value, and our efficient distribution
of these products. Our competitors include:



| |  | chain drug stores, such as CVS and Walgreens;
| | - | ----------------------------------------------



| |  | prescription benefit managers, such as Express Scripts;
| | - | -------------------------------------------------------



| |  | warehouse clubs, such as BJs and Costco;
| | - | -----------------------------------------



| |  | mail order pharmacies;
| | - | ----------------------



| |  | major department stores, such as Macys and Nordstrom; and
| | - | ----------------------------------------------------------



| |  | health, beauty salons, spas and
| | - | -------------------------------



| |  | Internet portals with shopping services, such as Yahoo!, Excite, and America Online.
| | - | ------------------------------------------------------------------------------------



Many of these competitors currently offer online ordering of their products. In addition, many of these online and
traditional competitors have longer operating histories, greater brand recognition, and substantially greater economic, marketing and other resources than we do. These resources may provide some of these competitors with greater opportunities to
form joint ventures and favorable vendor agreements as this market develops. In addition, traditional pharmacies can provide customers with the ability to see and feel products, and may be able to address immediate customer product needs in ways
that we cannot.



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Trademarks and Intellectual Property



We utilize the federally registered trademarks Lean Protein, Nutrisure, Physician Pharmaceutical12-and
Arth-Aid. The Company, as assisted by our president, Dr. Kotha Sekharam, also filed for
three additional patents for products already in the market with patent pending status. We also utilize the registered domain names leanprotein.com, ihp-inc.com, and onlineihp.com. We believe that protecting our trademarks and registered
domain names is crucial to our business strategy of building strong brand name recognition and that such trademarks have significant value in the marketing of our products. Our policy is to pursue registrations of all the trademarks associated with
our key products. We rely on common law trademark rights to protect our unregistered trademarks. Common law trademark rights generally are limited to the geographic area in which the trademark is actually used, while a United States federal
registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third party anywhere in the United States. Furthermore, the protection available, if any, in foreign jurisdictions may not be as extensive as the
protection available to us in the United States. Although we seek to ensure that we do not infringe upon the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual property infringement
claims against us. Any infringement claims by third parties against us may have a materially adverse affect on our business, financial condition, results of operations and cash flows.



Government Regulation



The manufacture, packaging, labeling, advertising, promotion, distribution and sale of our manufactured products is subject to regulation by numerous
governmental agencies, particularly the United States Food and Drug Administration, which regulates our products under the Federal Food, Drug and Cosmetic Act, and the United States Federal Trade Commission, which regulates the advertising of our
products under the Federal Trade Commission Act. Our products are also subject to regulation by, among other regulatory agencies, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Department of
Environmental Regulation and the Occupational Safety and Health Administration. The manufacture, labeling and advertising of our products is also regulated by the Occupational Safety and Health Administration through various state and local agencies
as well as foreign countries to which we distribute our products.



Dietary supplements, health and beauty care products, generic drugs, over-the-counter drugs, and consumer products business is subject to significant government regulation. These products are regulated by the Food and Drug Administration,
Federal Trade Commission, Consumer Product Safety Commission, as well as other state and federal regulatory entities. While we use our best efforts to adhere to the regulatory and licensing requirements, as well as any other requirements affecting
our products, compliance with these often requires subjective legislative interpretation. Consequently, we cannot assure that our compliance efforts will be deemed sufficient by regulatory agencies and commissions enforcing these requirements.
Violation of these regulations may result in civil and criminal penalties, which could materially and adversely affect our operations. Recent events have suggested that the regulatory requirements governing our industry may expand in the near
future.



Our manufacture of dietary supplements is subject to
significant labeling regulation. Labeling claims are governed by the Food and Drug Administration, the Federal Food, Drug and Cosmetic Act, and the recent Dietary Supplement Health and Education Act of 1994. Our manufacture of over-the-counter drugs
must comply with all Food and Drug Administration guidelines and Food and Drug Administration enforced Good Manufacturing Practices regulations for those products as set forth in official monographs of the United States Pharmacoepia and other
applicable laws enforced by the Food and Drug Administration. These include manufacturing and product information, such as claims in a products labeling, package inserts, and accompanying literature. The Dietary Supplement Health and Education
Act of 1994 guidelines permit certain dietary supplement labeling claims without prior authorization by the Food and Drug Administration, provided that the manufacturer has substantiation for the claims and complies with certain notification and
disclaimer requirements. The legislation gives dietary supplement manufacturers more freedom to market their products, while providing consumers adequate information for informed decisions on the use of supplements.



Under the Dietary Supplement Health and Education Act of 1994 and previous
food labeling laws, supplement manufacturers may use three types of labeling claims, with the approval of the Food and Drug Administration. These claims include nutrient-content claims, disease claims, and nutrition-support claims, which include
structure-function claims. Nutrient-content claims describe the level of a nutrient in a food or dietary supplement. For example, a supplement containing at least 200 mg of calcium per serving could carry the claim high in
calcium. Disease claims show a link between a substance and a disease or health-related condition. The Food and Drug Administration authorizes disease claims based on a direct review of scientific evidence or documentation of established
diet-to-health links from highly regarded scientific bodies, such as the National Academy of Sciences. For example, it is permissible to advertise a link between calcium and a lower risk of osteoporosis, if the supplement contains sufficient amounts
of calcium. Nutrition-support claims describe a link between a nutrient and deficiency diseases that may result from diets lacking the nutrient. For example, the label of a Vitamin C supplement could state that Vitamin C prevents scurvy. When these
types of claims are used, the label must mention the prevalence of the nutrient-deficiency disease in the United States. Finally, structure-function claims refer to the supplements effect on the bodys structure or function, including its
overall effect on a persons well-being. For example, a structure-function claim could state antioxidants maintain cell integrity. Structure-function claims must be accompanied by the disclaimer This statement has not been
evaluated by the



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Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease.
Manufacturers who plan to use a structure-function claim on a particular product must inform the Food and Drug Administration of the use of the claim no later than 30 days after the product is first marketed. The Food and Drug Administration may
then advise the manufacturer to change or delete the claim. Claims made for our dietary supplement products may include statements of nutritional support and health and nutrient content. The Food and Drug Administrations interpretation of what
constitutes an acceptable statement of nutritional support may change in the future thereby requiring that we revise our labels. The Food and Drug Administration recently issued a proposed rule on what constitutes permitted structure/function claims
as distinguished from prohibited disease claims. Although we believe our product claims comply with the law, depending on the content of the final regulation, we may need to revise our labels.



The Food and Drug Administration issued final dietary supplement labeling
regulations in 1997 that required a new format for dietary supplement product labels by March 23, 1999. All companies in the dietary supplement industry were required to comply with these labeling regulations. The Food and Drug Administration has
also announced that it is considering promulgating new Good Manufacturing Practices regulations, specific to dietary supplements. Such regulations, if promulgated, may be significantly more rigorous than currently applicable regulations and contain
quality assurance requirements similar to Good Manufacturing Practices regulations for drug products. Therefore, we may be required to expend additional capital resources on upgrading manufacturing processes and/or equipment in the future in order
to comply with the law. Our failure to comply with applicable Food and Drug Administration regulatory requirements could result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions.



Our advertising of dietary supplement products is also subject
to regulation by the Federal Trade Commission under the Federal Trade Commission Act, in addition to state and local regulation. The Federal Trade Commission Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or
affecting commerce. The Federal Trade Commission Act also provides that the dissemination or the causing to be disseminated of any false advertisement pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive
act or practice. Under the Federal Trade Commissions Substantiation Doctrine, an advertiser is required to have a reasonable basis for all objective product claims before the claims are made. Failure to adequately substantiate
claims may be considered either deceptive or unfair practices. Pursuant to this Federal Trade Commission requirement we are required to have adequate substantiation for all material advertising claims made for our products.



In recent years the Federal Trade Commission has initiated numerous
investigations of dietary supplement and weight loss products and companies. The Federal Trade Commission is reexamining its regulation of advertising for dietary supplements and has announced that it will issue a guidance document to assist
supplement marketers in understanding and complying with the substantiation requirement. Upon release of this guidance document we will be required to evaluate our compliance with the guideline and may be required to change our advertising and
promotional practices. We may be the subject of investigation in the future. The Federal Trade Commission may impose limitations on our advertising of products. Any such limitations could materially adversely affect our ability to successfully
market our products. The Federal Trade Commission has a variety of processes and remedies available to it for enforcement, both administratively and judicially, including compulsory processes, cease and desist orders, and injunctions. Federal Trade
Commission enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts and such other relief as may be deemed necessary. A violation
of such orders could have a material adverse affect on our business, financial condition and results of operations.



Governmental regulations in foreign countries where our plans to commence or expand sales may prevent or delay entry into the market or prevent or delay
the introduction, or require the reformulation, of certain of our products. Compliance with such foreign governmental regulations is generally the responsibility of our distributors for those countries. These distributors are independent contractors
over whom we have limited control.



We manufacture certain
products pursuant to contracts with customers who distribute the products under their own or other trademarks. Such private label customers are subject to government regulations in connection with their purchase, marketing, distribution and sale of
such products. We are subject to government regulations in connection with our manufacturing, packaging and labeling of such products. Our private label customers are independent companies and their labeling, marketing and distribution of their
products is beyond our control. The failure of these customers to comply with applicable laws or regulations could have a materially adverse effect on our business, financial condition, results of operations and cash flows.



We may be subject to additional laws or regulations by the Food and Drug
Administration or other federal, state or foreign regulatory authorities, the repeal of laws or regulations which we consider favorable, such as the Dietary Supplement Health and Education Act of 1994, or more stringent interpretations of current
laws or regulations, from time to time in the future. We are unable to predict the nature of such future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders,
when and if promulgated, would have on our business in the future. The Food and Drug Administration or other governmental regulatory bodies could, however, require the reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not able to be reformulated, imposition of



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additional record keeping requirements, expanded documentation of the properties of certain products, expanded or
different labeling and scientific substantiation. Any or all of such requirements could have a materially adverse affect on our business, financial condition, results of operations and cash flows.



Risk Factors



Our Securities May be Delisted from the Nasdaq Stock Market: On February 3, 2003, we received notification from the
NASDAQ Listing Qualifications Department that our common stock has closed below the minimum $1 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4) (the Rule). Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), we have been provided 180 calendar days, or until August 4, 2003 to regain compliance. If, at any time prior to August 4, 2003, the bid price of the Companys common stock closes at $1.00 per share or more for a minimum of 10
consecutive trading days, the Company will be provided written notification that compliance has been met. On May 27, 2003, NASDAQ provided written notification that the Company regained compliance with the Rule and that this matter is now closed.



New or Amended Government Regulation Could Adversely Impact
Our Business and Operations: We may be subject to additional laws or regulations by the Food and Drug Administration or other federal, state or foreign regulatory authorities, the repeal of laws or regulations which we consider favorable, such
as the Dietary Supplement Health and Education Act of 1994, or more stringent interpretations of current laws or regulations, from time to time in the future. We are unable to predict the nature of such future laws, regulations, interpretations or
applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. We also can not predict what effect these regulations, and the related
publicity from promulgation of such regulations, could have on consumer perceptions related to the nutraceutical market in which we operate. The Company, and its customers, depend on positive publicity as it relates to the efficacy and overall
health benefits derived from certain products we manufacture for others. This could have a materially adverse affect on our business, financial condition, results of operations and cash flows.



The Food and Drug Administration or other governmental regulatory bodies
could require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific substantiation. Any or all of such requirements could have a materially adverse affect on our business, financial condition, results of operations and cash flows.



Our Insurance Coverage May not be Sufficient to Cover All Risk
Exposure: The Company has maintained its insurance coverages for its directors and officers, general liability insurance, and product liability insurance at levels deemed adequate by the Companys Board of Directors. The Company can not
guarantee that these same levels of insurance, at premiums acceptable to the Company, will be available in the future. As related to product liability insurance, a reduction in coverage or an exclusion for one or more key raw materials, may
adversely affect our ability to continue our business as currently conducted. In addition, a loss of one or more of any of these insurance policies, or a claim-related loss in excess of insured limits will adversely affect our ability to continue
our business as currently conducted.



We Can Not Predict the
Effects of Terrorism on the Economy or on our Company: The terrorist attacks on September 11, 2001, exacerbated an already fragile economic situation and have added to a growing level of uncertainty and caution in the marketplace. The adverse
impacts to our business may include, but are not limited to, a delay in placing or a decrease in the size of orders, a lengthening of sales cycles and increased credit risks. We can give no estimate of how long these effects may last. The occurrence
of any future terrorist activity will further exacerbate these effects.



The Unavailability of Additional Funds When Needed Could Adversely Impact Our Business and Operations: Management believes that cash expected to be generated from operations, current cash reserves, and existing financial arrangements
will be sufficient for the Company to meet its capital expenditures and working capital needs for its operations as presently conducted. In addition, the Company would require more significant capital to expand operation or complete cash based
acquisitions. If cash flows from operations, current cash reserves and available credit facilities are not sufficient, it will be necessary for the Company to seek additional financing. There can be no assurance that such financing would be
available in amounts and on terms acceptable to the Company.



ITEM
2.    DESCRIPTION OF PROPERTY



Our
primary manufacturing facility is located in 33,222 square feet of leased space in Largo, Florida. We use this location as our corporate offices, for Innovative Health Products manufacturing, research, development, packaging and warehousing of
our products and for Breakthrough Engineered Nutritions administrative and sales office. We lease this facility from an affiliate, Dynamic Health Products, Inc, pursuant to a ten year triple-net lease that expires on September 30, 2009,
currently at a monthly rental of approximately $17,000, subject to annual inflationary adjustments.



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Our second manufacturing facility is located in 10,000 square feet of leased space in Largo, Florida.
Belcher Pharmaceuticals uses this facility for the manufacture and packaging of over-the-counter products. This facility is registered with the United States Food and Drug Administration. We lease this facility from an unrelated third party pursuant
to a five year lease currently at a monthly rental of approximately $5,500 subject to annual inflationary adjustments.



ITEM 3.    LEGAL PROCEEDINGS



On April 11, 2003 the company filed a lawsuit against Joseph Zappala, a member of the companys Board of Directors in the Sixth Judicial Circuit in
and for Pinellas County, Florida. The lawsuit seeks to rescind a purported agreement between the company and Mr. Zappala, breach of a consulting agreement between the company and Mr. Zappala and related claims involving those agreements. Mr. Zappala
has denied the material allegations against him and has filed a counterclaim against the Company for breach of the consulting agreement.



From time to time we are subject to litigation incidental to our business including possible product liability claims. Such claims, if successful, could
exceed applicable insurance coverage.



ITEM
4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



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PART II



ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Market For Securities



The Companys $.01 par value common stock, is listed on the Nasdaq SmallCap Market under the symbol GORX and on the Boston Stock Exchange
under the symbol GORX. The Company began its initial trading November 14, 2000; its high and low sales prices since that time, by quarter-ended date, are as follows:



|                   |  |      |       |     |   |      
|------------------ |  | ---- | ----- | --- | - | -----
|                   |  | High |       | Low
|December 31, 2000  |  | $    | 7.875 |     | $ | 1.813
|March 31, 2001     |  | $    | 4.375 |     | $ | 0.875
|June 30, 2001      |  | $    | 3.10  |     | $ | 0.92 
|September 30, 2001 |  | $    | 2.22  |     | $ | 0.66 
|December 31, 2001  |  | $    | 2.90  |     | $ | 0.77 
|March 31, 2002     |  | $    | 1.11  |     | $ | 0.45 
|June 30, 2002      |  | $    | 1.02  |     | $ | 0.55 
|September 30, 2002 |  | $    | 1.60  |     | $ | 0.74 
|December 31, 2002  |  | $    | 1.40  |     | $ | 0.67 
|March 31, 2003     |  | $    | 1.05  |     | $ | 0.65 



As of June 13, 2003,
there were approximately 700 stockholders of record according to ADP and our stock transfer agent, Registrar and Transfer Company, Inc. located in Cranford, New Jersey.



Dividend Policy



As of March 31, 2002 and 2003, we have paid $150,000 and $120,031, respectively, in preferred dividends as related to the 10%, $1.5 million face value
preferred stock representing 150,000 shares of our series A preferred stock. The Company will pay a quarterly dividend payment calculated at 10% based on the number of preferred shares outstanding for the period to the preferred stockholders until
the stock is redeemed.



The board of directors declared a 10%
stock dividend to all the Companys common stockholders of record on March 1, 2003 with the distribution date of March 17, 2003.



We have not paid any cash dividends on our common stock and we currently intend to retain any future earnings to fund the development and growth of our
business. Any future determination to pay dividends on our common stock will depend upon our results of operations, financial condition and capital requirements, applicable restrictions under any credit facilities or other contractual arrangements
and such other factors deemed relevant by the Companys board of directors.



ITEM 6.    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



The statements contained in this Report that are not historical are forward-looking statements, including statements regarding the Companys
expectations, intentions, beliefs or strategies regarding the future. Forward- looking statements include the Companys statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking
statements included in this Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. It is important to note that the Companys actual
results could differ materially from those in such forward-looking statements. Additionally, the following discussion and analysis should be read in conjunction with the Financial Statements and notes thereto appearing elsewhere in this Report. The
discussion is based upon such financial statements which have been prepared in accordance with U.S. Generally Accepted Accounting Principles.



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SELECTED QUARTERLY DATA



|                                                                             |  |                             |           |   |               |   |           |               |  |   |               |   |  |   |          
|---------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ------------- | - | --------- | ------------- |  | - | ------------- | - |  | - | ---------
|                                                                             |  | Quarter ended:June 30, 2001 |           |   | Sept. 30,2001 |   |           | Dec. 31, 2001 |  |   | Mar. 31, 2002
|Net sales                                                                    |  | $                           | 1,788,962 |   |               | $ | 1,700,097 |               |  | $ | 1,748,764     |   |  | $ | 3,745,621
|Gross profit                                                                 |  | $                           | 360,033   |   |               | $ | 369,997   |               |  | $ | 409,748       |   |  | $ | 844,728  
|SGA                                                                          |  | $                           | 725,092   |   |               | $ | 758,698   |               |  | $ | 815,628       |   |  | $ | 877,661  
|Net income/(loss) available to common shareholders                           |  | $                           | (403,394  | ) |               | $ | (445,509  | )             |  | $ | (475,461      | ) |  | $ | 49,881   
|Basic and fully diluted earnings (loss) per share                            |  | $                           | (0.06     | ) |               | $ | (0.06     | )             |  | $ | (0.07         | ) |  | $ | 0.01     
|Basic and fully diluted weighted average number of common shares outstanding |  |                             | 7,025,000 |   |               |   | 7,025,000 |               |  |   | 7,025,000     |   |  |   | 7,025,000



SELECTED QUARTERLY DATA



|                                                                             |  |                             |           |                |   |               |  |               |           |  |   |          
|---------------------------------------------------------------------------- |  | --------------------------- | --------- | -------------- | - | ------------- |  | ------------- | --------- |  | - | ---------
|                                                                             |  | Quarter ended:June 30, 2002 |           | Sept. 30, 2002 |   | Dec. 31, 2002 |  | Mar. 31, 2003
|Net sales                                                                    |  | $                           | 4,411,133 |                | $ | 3,253,360     |  | $             | 3,280,372 |  | $ | 3,786,649
|Gross profit                                                                 |  | $                           | 1,263,275 |                | $ | 984,179       |  | $             | 803,739   |  | $ | 967,616  
|SGA                                                                          |  | $                           | 838,587   |                | $ | 874,041       |  | $             | 885,832   |  | $ | 1,066,172
|Other income/ (expense), net                                                 |  | $                           | 8,644     |                | $ | 211,580       |  | $             | 240,485   |  | $ | 248,702  
|Net income/(loss) available to common shareholders                           |  | $                           | 375,805   |                | $ | 274,840       |  | $             | 257,206   |  | $ | 122,927  
|Basic and fully diluted earnings (loss) per share                            |  | $                           | 0.05      |                | $ | 0.04          |  | $             | 0.04      |  | $ | 0.02     
|Basic and fully diluted weighted average number of common shares outstanding |  |                             | 7,025,000 |                |   | 7,025,000     |  |               | 7,025,000 |  |   | 7,073,266



Managements Discussion and
Analysis of Financial Condition and Results of Operations



We derive our revenues from developing, manufacturing and wholesaling a wide variety of non-prescription dietary supplements, and health and beauty care products. We also derive revenues from the distribution of our branded product lines,
Lean Protein and Thermo ZXE. In addition, we derive revenues from the services provided in connection with pharmacy benefit management. Revenues are billed and recognized as product is produced and shipped, net of discounts, allowances, returns and
credits. Service revenues are billed and recognized once the service has been provided. The PBMs revenues are comprised of amounts billed and recognized based on the number of eligible plan members enrolled in the HMO insurance programs, plan
member claims caused by the fulfillment of an eligible HMO members drug prescription and related administration costs for pharmacys fulfilling drug prescriptions for the number of members and the number of claims for the period.



Cost of goods sold is comprised of direct
manufacturing and manufacturing and distribution material product costs, contracted service fees, direct personnel compensation and other statutory benefits and indirect costs relating to labor to support product manufacture, distribution and the
warehousing of production and other manufacturing overhead. The PBM cost of sales amounts recognized represent the direct and indirect costs of the prescription drug claims arising from the pharmacys fulfillment of a drug prescription that
were filled, completed and received by eligible HMO Insurance plan members for the period.



Research and development expenses that benefit our customers are charged against cost of goods sold as incurred. Selling, general and administrative costs
include management and general office salaries, advertising and promotional expenses, depreciation, insurance expenses, legal and accounting costs, sales and marketing and other indirect operating costs.



Interest expense, net consists primarily of interest expense associated with
borrowings to finance capital equipment expenditures and other working capital needs as partially offset by interest income earned on our funds held at banks.



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Other income (expense) net, consists primarily of amounts received from an insured loss that occurred on
August 27, 2002, where a commercial building where one of our manufacturing facilities is located, was involved in a fire. Although this fire was not in our leased space, nor was the fire caused by the Company or any of its related parties, our
facility was exposed to and incurred smoke and water damage. The company that had the fire is not a related party. Innovative has adequate insurance coverage that covers replacement cost of the facilities contents which includes inventory and
leasehold improvements, in addition to business interruption insurance which covers lost profits based on certain coverage formulas and policy limits. As of March 31, 2003, the final financial assessment has not been made by our insurance company.



We have an income tax benefit recorded in the form of a
deferred tax asset due to calculations surrounding net operating losses, tax accounting timing differences as defined and projections related to future income. Generally, net operating losses may be carried forward for up to 20 years. Due to our
merger with the Delaware corporation Go2Pharmacy.com, Inc. and the change in our ownership structure on November 7, 2000, the utilization of net operating losses may be limited by Internal Revenue Code Section 382.



Upon consummation of the merger of the Florida corporation, Go2Pharmacy, Inc.
and the Delaware corporation, Go2Pharmacy.com, Inc. on November 7, 2000, the Company charged $23,625,000 to marketing expense representing the issuance of 3,000,000 shares of the Companys stock at the initial public offering price of $7.875.
This was reflected in the Companys financial statements as a noncash, nonrecurring marketing expense and was included in the operations of the Company for the year ended March 31, 2001 and is carried forward in subsequent years as a charge
within shareholders equity.



Results of Operations



The following table sets forth selected consolidated statements of
operations data as a percentage of revenues for the periods indicated.



|                                                          |  |                      |    |  |       |  
|--------------------------------------------------------- |  | -------------------- | -- |  | ----- | -
|                                                          |  | Year Ended March 31, |   
|                                                          |  | 2002                 |    |  | 2003  |  
|Revenues                                                  |  | 100.0                | %  |  | 100.0 | %
|Cost of goods sold                                        |  | 77.9                 |    |  | 72.7  | %
|                                                          |  |                      |    |  |       |  
|Gross profit                                              |  | 22.1                 | %  |  | 27.3  | %
|                                                          |  |                      |    |  |       |  
|Selling, general and administrative expenses              |  | 35.4                 | %  |  | 24.9  | %
|                                                          |  |                      |    |  |       |  
|Other income (expense), net                               |  | 1.4                  | %  |  | 4.8   | %
|                                                          |  |                      |    |  |       |  
|Income (loss) before income taxes and preferred dividends |  | (12.5                | )% |  | 6.8   | %
|                                                          |  |                      |    |  |       |  
|Income tax (expense) / benefit                            |  |                     |    |  | 1.0   | %
|                                                          |  |                      |    |  |       |  
|Net income (loss)                                         |  | (14.2                | )% |  | 7.0   | %
|                                                          |  |                      |    |  |       |  



Fiscal Year Ended March 31, 2003,
Compared to Fiscal Year Ended March 31, 2002



Revenues. Total revenues increased $5,748,070, or 64%, to $14,731,514 for the fiscal year ended March 31, 2003, as compared to $8,983,444 for the fiscal year ended March 31, 2002.



Distribution revenues increased $734,362 or 115.3% to $1,371,327 for the
fiscal year ended March 31, 2003, as compared to $636,965 for the fiscal year ended March 31, 2002. This increase primarily results from the increase in units sold of our branded product line Lean Protein Bites, the introduction of our new branded
energy beverage line, Thermo ZXE, during September 2002, in addition to the absence of Lean Protein Bites distribution inventory for two months during the fiscal year ended 2002 due to the relocation of manufacturing sites. The Lean Protein Bites
product line is comprised of three SKUs, milk chocolate, white chocolate and peanut butter. For the fiscal year ended 2003, 25,890 total cases were sold as compared to the fiscal year ended 2002, where 20,197 total cases were sold. Sales prices vary
dependent upon a customers individual as well as cumulative purchase volumes. The Thermo ZXE product line is comprised of five SKUs, cranapple, grape, lemonade, fruit punch and tangerine. For the fiscal year ended 2003, 17,106 cases were sold
as compared to the fiscal year ended 2002, where no units were sold as the product line was not introduced until September 2002. Sales prices vary dependent upon a customers individual as well as aggregate purchase volumes.



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Manufacturing revenues increased $3,563,710, or 55.4%, to $9,995,597 for the fiscal year ended March 31,
2003, as compared to $6,431,887 for the corresponding period. The increase was primarily due to net increases in sales volumes due to the expansion of our private-label customer base and related sales order volumes as partially offset by the
temporary decline in one of two plants manufacturing output due to a fire. The Companys manufacturing revenues are normally derived from two, full-time operating manufacturing plants. However, during August 2002, the smaller of our two
plants was exposed to chemical smoke and water damage directly related to a fire in a nearby tenants facility. Therefore, our one facility was not operational from August 27, 2002 through January 15, 2003. The fire was an insured event.
Overall, manufacturing capacities have increased and are greater than this years production and are greater as compared to the prior year based on continued manufacturing plant improvements that include additions to manufacturing machinery and
analytic laboratory equipment. The number of manufacturing personnel was consistent from the 2002 fiscal year to the 2003 fiscal year.



Pharmacy benefit management revenues increased 75.7% or $1,449,998 to $3,364,590 for the fiscal year ended March 31, 2003, as compared to $1,914,592 for
the fiscal year ended March 31, 2002. The increase results from the increase in overall membership in the existing health plan in addition to the introduction of a new health plan which has brought increases in membership. Revenue per member
remained constant from the 2002 fiscal year to the 2003 fiscal year.



Gross Profit. Total gross profit increased $2,034,303 or 102.5%, to $4,018,809 for the fiscal year ended March 31, 2003, as compared to $1,984,506 for the fiscal year ended March 31, 2002. Total gross margins increased
to 27.3% for the fiscal year ended March 31, 2003 from 22.1% for the fiscal year ended March 31, 2002.



Although distribution gross profits increased 79.1% or $212,349 to $480,803 for the fiscal year ended March 31, 2003, as compared to $268,454 for the
fiscal year ended March 31, 2002, distribution gross margins decreased from 42.2% for the fiscal year ended March 31, 2002 to 35.1% for the fiscal year ended March 31, 2002. The increase in gross profits is directly related to increases in sales
volumes. The gross margin has declined overall based on the influence of initial product start-up costs for Thermo ZXE which temporarily increased cost of revenue thus decreasing the related gross margin in addition to the increase of free samples
distributed for all products in both product lines which raises costs without the associated increase in revenues.



Manufacturing gross profit increased $1,774,397, or 126.8.6%, to approximately $3,174,308 for the fiscal year ended March 31, 2003, as compared to
approximately $1,399,911 in the corresponding period in 2002. For the fiscal year ended March 31, 2003 manufacturing gross margin increased to 31.8%, from 21.8% in the corresponding period in 2002. The increase is primarily attributable to a change
in our sales portfolio that not only had higher sales unit volumes but improved gross margins as well. For the fiscal year ended March 31, 2003, product costs and related labor dollars have increased in total however, as a percentage of revenue have
decreased due to improved management and planning related to labor and productions in addition to improved purchasing practices that have yielded lower costs. Although direct revenue generating cost dollars and overhead dollars in total have
increased, through increased units of production based on increased sales, overhead dollars per unit have decreased.



Pharmacy Benefit Management gross profit increased $47,557 to $363,698 for the fiscal year ended March 31, 2003, as compared to $316,141 for the fiscal
year ended March 31, 2002. Pharmacy benefit management gross margin was 16.5% for the fiscal year ended March 31, 2002 as compared to 10.8% for the fiscal year ended March 31, 2003. Although gross profits increase due to increases in sales, the
decline in the gross margin was primarily due to the introduction of a new health plan product which yields a lower gross margin.



Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of advertising and promotional
expenses; personnel costs related to general management functions, finance, accounting and information systems, payroll expenses and sales commissions; professional fees related to legal, audit and tax matters; and depreciation expense. Selling,
general and administrative expenses increased $482,012, or 15.2%, to $3,664,632 for the fiscal year ended March 31, 2003, as compared to $3,182,620 in the corresponding period. The increase is primarily attributable to additional advertising and
promotional expenses associated with our distribution segment, depreciation, general and product liability insurance, rents and bad debt expense as related to our manufacturing segment, as well as payroll expenses and insurance costs associated with
fringe benefits to support our distribution, manufacturing and pharmacy benefit management growth. As a percentage of sales, selling, general and administrative expenses decreased to 24.9% for the fiscal year ended March 31, 2003 from 35.4% in the
corresponding period in 2002.



Other Income (Expense),
Net. For the fiscal year ended March 31, 2003, the balance in other income/(expense), net, was $709,411 as compared to $124,045 for the corresponding period. Of the $709,411 for fiscal 2003, approximately $664,038 was recorded due to a fire
loss that occurred on August 27, 2002, where a commercial building where one of our manufacturing facilities is located, was exposed to and incurred smoke and water damage. The total amount of the insurance claim to date was approximately $1 million
based on two insurance policies with face amounts of $500,000 each for current replacement value of property, which includes inventory, equipment and leasehold improvements and business interruption. Of the $664,000 of other
income, $500,000 was attributable to business interruption income that was recognized as recorded within other income; the revenue recognition was limited to $500,000 based on policy limitations. The remaining $164,000 income within
other income



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##### Table of Contents

was attributable to replacement value amounts received from the insurance company for leasehold improvements and
inventory in excess of their carrying value. The $169,795 of inventory and $96,600 of net book value of leasehold improvements were charged (debited) to other income/expense line item. As of March 31, 2003, the final financial assessment
has not been made by our Company or by our insurance company.



Interest Income (Expense), Net. Interest expense, net of interest income, increased $10,265 to $60,679 for the fiscal year ended March 31, 2003, from $50,414 for the fiscal year ended March 31, 2002. The increase in net
interest expense is primarily attributable to increases in net borrowings to fund rising general, product liability and directors and officers insurance costs as partially offset by lower interest income earned due to declining interest rates.



Income Taxes. At March 31, 2003, the Company had
$147,900 recorded as a deferred tax asset and related tax benefit as of and for the fiscal year ended March 31,2003, as based on the tax calculations, assumptions about the future operations of the Company as well as the utilization of available
operating loss carryforwards.



Management believes that there
was no material effect on operations or the financial condition of the Company as a result of inflation as of and for the year ended March 31, 2003. Management also believes that its business is not seasonal, however significant promotional
activities can have a direct impact on sales volume in any given quarter.



Financial Condition, Liquidity and Capital Resources



The Company has financed its operations through available borrowings under its credit line facilities, loans from within the Company, cash provided from operations and cash provided from the proceeds received from the
initial public offering effective November 7, 2000. The Company had working capital of approximately $2,727,503 at March 31, 2003, inclusive of current portion of long-term obligations and credit facilities, as compared to a working capital of
approximately $2,529,146 at March 31, 2002. The increase in working capital is based upon the increase in cash in addition to the decline in outstanding trade accounts payable.



Net cash provided by operating activities was $1,198,711 for the fiscal year ended March 31, 2003, as compared to net cash
used in operating activities of ($1,689,316) for the fiscal year ended March 31, 2002 . Cash provided was primarily attributable to net income before preferred dividends of $1,150,809 based on net increases in consolidated gross profits of
approximately $2 million, increases in other income of approximately $580,000 and a tax benefit of $147,000 as partially offset by increases in operational expenses of approximately $480,000 and preferred dividends of approximately $120,000, a
decrease in trade accounts receivable of $850,807 based on customers remittances on sales revenue for the manufacturing and distribution segments of approximately $11.4 million, and increase for both the segments in aggregate of approximately $4.8
million. PBM segment credit sales are excluded from trade accounts receivable as they are reported within due from affiliates based on transactions with related parties, depreciation of $381,352 from corporate and manufacturing assets, an increase
in accrued expenses of $79,603 and $21,052 due to a write-off of a note receivable all of which was partially offset by a decrease in accounts payable of $513,207 representing quicker payments on trade vendor accounts outstanding although
consolidated selling, general and administrative operational expenses increased approximately $480,000, an increase in due from affiliates, net, of $130,689, primarily due to increases in related party PBM segment sales activity of approximately
$1.4 million, an increase in accounts receivable-other, of $354,293 representing the final amounts due for the August 2002 fire-insurance claim, an increase in prepaid and other current assets of $120,302, an increase in inventory of $19,303 and an
increase of $147,900 in the deferred tax asset.



Net cash used
in investing activities was $271,774 for the fiscal year ended March 31, 2003 as compared to the net cash used of $860,914 for the fiscal year ended March 31, 2002. Investing activities primarily represented purchases and upgrades of plant and
laboratory equipment for both our manufacturing plants as partially offset by $121,000 of insurance proceeds related to leasehold improvements.



Net cash used in financing activities was $845,542 for the fiscal year ended March 31, 2003 as compared to cash used in financing activities of $337,717
for the fiscal year ended March 31, 2002. Cash used was primarily attributable to redemption of preferred stock of $775,000, payments on long-term obligations of $364,597, payments of preferred stock dividends of $120,031 and $107,700 paid for
143,600 shares of the Companys common stock now recorded as treasury shares as partially offset by proceeds from long-term obligations of $323,559, and proceeds from lines of credit of $198,227.



In March 2001, the Company established an annually renewable line of credit
and a five-year term loan with a bank. This line of credit replaced the credit facility entered into during February 1999. The credit available to the Company under this line was approximately $650,000 and was collateralized by a $650,000 restricted
certificate of deposit. The facility imposes certain financial and reporting covenants. The agreement requires certain cash balances be maintained. The agreement also prevents the Company from disposing of assets or incurring additional debt unless
the transactions are within the normal course of business. During the year ended March 31, 2003, the line of credit facility was increased to $900,000 with a reduction of the amount required for the certificate of deposit collateralzing the
outstanding balance from $650,000 to approximately $300,000. As of March 31, 2002 and 2003, borrowings on the credit facility accrue interest at 4.25% and 5.15%, respectively. As of March 31, 2003, the balance owed under this facility was
approximately $846,000.



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On March 29, 2002, Breakthrough Engineered Nutrition, Inc. established a $100,000 annually renewable line
of credit with a bank. Borrowings on the credit facility accrue at 4.25%. This line of credit is cross-collateralized with the Companys restricted certificate of deposit and with Breakthroughs inventory and accounts receivable. As of
March 31, 2003, $100,000 remained available under this line.



The credit lines payable are included with current liabilities instead of long-term liabilities, as management believes that this presentation better reflects the utility of the current assets as the source of repayment for the credit lines
payable.



During March 2003, the Company borrowed $107,000
represented by a note payable for twelve months at 4.4% interest related to the purchase of 146,000 shares of the Companys common stock outstanding which is cross-collateralized by a $107,000 certificate of deposit. The common shares purchased
are currently recorded as treasury stock which is a contra account within Shareholders equity. The entire $107,000 note payable is recorded within current liabilities.



Management believes that cash expected to be generated from operations, current cash reserves, and existing financial
arrangements will be sufficient for the Company to meet its capital expenditures and working capital needs for its operations as presently conducted. The Companys future liquidity and cash requirements will depend on a wide range of factors,
including the level of business in existing operations, expansion of facilities, expected results from recent procedural changes surrounding the acceptance of manufacturing sales orders, and possible acquisitions. In particular, we have added
additional manufacturing lines and have purchased additional fully automated manufacturing equipment to meet our present and future growth. Our plans may require the leasing of additional facilities and/or the leasing or purchase of additional
equipment in the future to accommodate further expansion of our manufacturing, warehousing and related storage needs. If cash flows from operations, current cash reserves and available credit facilities are not sufficient, it will be necessary for
the Company to seek additional financing. There can be no assurance that such financing would be available in amounts and on terms acceptable to the Company.



ITEM 7.    FINANCIAL STATEMENTS



All financial information required by this Item is attached hereto beginning on Page F-1.



ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE



None.



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##### Table of Contents

PART III



ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT



Our executive officers, directors and key
employees and their ages and their respective positions as of March 31, 2003 were as follows:



|                        |  |     |  |                                                
|----------------------- |  | --- |  | -----------------------------------------------
|Name                    |  | Age |  | Position                                       
|Jugal K. Taneja         |  | 59  |  | Chairman of the Board and Director             
|Mihir K. Taneja         |  | 28  |  | Chief Executive Officer, Secretary and Director
|Kotha S. Sekharam, Ph.D |  | 52  |  | President and Director                         
|Carol Dore-Falcone      |  | 38  |  | Vice President and Chief Financial Officer     
|Bartholomew J. Lawson   |  | 54  |  | Director                                       
|Joseph Zappala          |  | 69  |  | Director                                       
|George L. Stuart, Jr.   |  | 57  |  | Director                                       



MIHIR K. TANEJA has
served as our Chief Executive Officer, Secretary and a Director since November 1999. Prior to this he served as our Vice President of Marketing since June 1998. He also served as Dynamics Vice President of Marketing from July 1996 to November
1999. Prior to joining Dynamic, Mr. Taneja served as a market and financial analyst for Bancapital Corporation from 1994 to 1996. Mr. Taneja holds Bachelor of Arts degrees in finance and marketing from the University of Miami. Mr. Taneja is the son
of Jugal K. Taneja, the Companys Chairman of the Board.



DR. KOTHA S. SEKHARAM currently serves as our President and a Director. Prior to this, Dr. Sekharam was a founder and director of Nu-Wave Health Products, Inc., a developer and manufacturer of over-the-counter analgesic roll-ons and creams,
dietary supplements and health and beauty care products. Dynamic acquired 80% of Nu-Wave in September 1995 and the additional 20% of Nu-Wave in July 1997. Dr. Sekharam served as President of Nu-Wave from June 1996 through March 1998 and Vice
President of Nu-Wave from September 1995 until June 1996. From 1992 until September 1995, he served as Director of Research and Development of Energy Factors, Inc., our predecessor. He has served as President of Dynamic since June 1996 and served as
our President since June 1998. Presently, he continues to serve as our President and as President of Dynamic. Dr. Sekharam holds a Ph.D. in food sciences from Central Food Technological Research Institute, Mysore, India, a United Nations university
center and has been employed in the food and health industry since 1982.



CAROL DORE-FALCONE has served as our Vice President and Chief Financial Officer since August 1999. She has also served as Vice President and Chief Financial Officer of Dynamic since August 1999 until November 7, 2000.
Prior to joining us, Ms. Dore-Falcone was employed as an audit manager with Deloitte & Touche, Certified Public Accountants, where she had served in various capacities since January 1990. Ms. Dore-Falcone is a certified public accountant and
holds an M.B.A. from the University of Tampa.



JUGAL K. TANEJA
has served as our Chairman of the Board since June 1998. Until June 1998, he also served as Chief Executive Officer for Dynamic. From November 1991 until December 1998, he also served as the Chairman of the Board and Chief Executive Officer of NuMed
Home Health Care, Inc., a provider of home health care services and contract staffing of health care employees. From June 1993 until March 1998, he was also the Chief Executive Officer of National Diagnostics, Inc., a provider of medical diagnostic
services. NuMed Home Health Care, Inc and National Diagnostics, Inc., are publicly traded companies. Since April 1996, Mr. Taneja is also a Director of DrugMax, Inc., a public company operating as an online business to business wholesaler and
retailer of pharmaceuticals, over-the-counter drugs, health and beauty care products and private label dietary supplements. Although he devotes substantial time to our operations and business, Mr. Taneja does not devote his full time to our
business. Mr. Taneja is the father of Mihir K. Taneja, our chief executive officer.



JOSEPH ZAPPALA has served as a Director since December 1, 2000. Since January 1995, Mr. Zappala has served as Chairman and a member of the board of managers of CarePlus, LLC, a growing Medicaid and Child Health Plus
health maintenance organization. Mr. Zappala was appointed by United States President George Bush and served as the United States Ambassador to Spain from 1989 to 1992. Mr. Zappala has been a Florida-based business executive for over 35 years with
experience in various industries, including healthcare, banking, real estate and manufacturing.



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BARTHOLOMEW J. LAWSON has served as a Director since December 1, 2000. Since June 1997, Mr. Lawson has
served as President and Executive Director of the Greater New York Health Care Facilities Association, a not-for-profit trade association, representing over 150 skilled nursing and long-term care facilities, as well as ancillary health care
providers, and managed care organizations. Since June 1997, Mr. Lawson has also served as Chairman of the Board of the Local 144-Greater New York Nursing Home Industry Welfare, Pension, Skill and Productivity Funds, which represents over $500
million of employee benefit revenues, which has an annual operating budget of $55 million. Since January 1995, Mr. Lawson served as a member of the board of managers of CarePlus, LLC, a growing Medicaid and Child Health Plus health maintenance
organization. Mr. Lawson is considered one of the foremost experts on long-term care in the United States. His knowledge of health care economics has led to consulting engagements with city, county, state, and federal legislators, health care
delivery systems and executives. During 1994 and 1995, Mr. Lawson chaired the health transition teams for both New York State Governor Pataki and New York City Mayor Giuliani. In August 1998, Mr. Lawson was appointed by the Minority Leader of the
New York State Assembly to the New York State Managed Care Advisory Committee.



GEORGE L. STUART, JR. has served as a Director since March 2000. Mr. Stuart is the President of George Stuart & Associates, a management consulting firm. In addition, Mr. Stuart was the Chief Executive Officer of
DoctorSurf.com, Inc. from December 1, 1999 to July 2000. From July 1997 to December 1999, Mr. Stuart was Vice President and a Director of Leapfrog Smart Products, Inc., a high-technology smart card development company in Orlando, Florida. From
January 1995 to July 1997, Mr. Stuart was a partner in Stuart/Cloud Enterprises, Ltd. A government relations business development and organizational consulting firm in Tallahassee, Florida. Mr. Stuart was a Florida State Senator from 1978 through
1990. From January 1991 to January 1995, Mr. Stuart served as the Secretary and Chief Executive Officer of the State of Floridas Department of Business and Professional Regulation. Mr. Stuart holds a B.A. degree in Economics from the
University of Florida and an M.B.A. from Harvard Universitys Graduate School of Business.



Compensation of Directors



We reimburse each of our directors for reasonable expenses incurred in attending meetings of our Board of Directors. Each non-employee director receives compensation in the form a fee of $500 for each meeting attended by such director, but
not less than $2,000 per year if they attend at least three meetings during the year. For board meetings held telephonically, each month that such telephonic meetings are held and attended, each participating non-employee director will be
compensated $1,000 per quarter. This $1,000 compensation fee will be waived should the Company have a net loss available to common shareholders for that quarter. Non-employee directors who serve on board committees will be paid a fee of $100 for
each committee meeting attended by such director. Additionally, all directors are eligible to receive stock options under the Companys 1999 Stock Option Plan, and directors who are also employees of the Company, or a subsidiary of the Company,
are eligible to receive Incentive Stock Options when and as approved by the Board of Directors. During April 2001, the Company established a policy providing that all directors will receive 25,000 stock options per fiscal year if they attend at
least two meetings in such fiscal year. Additionally, each member of a committee of the Board of Directors shall receive 5,000 additional stock options per fiscal year, each chairperson of a committee shall receive an additional 2,500 stock options
per fiscal year and the Chairman of the Board shall receive 10,000 stock options per fiscal year. The options granted under this policy to directors are exercisable in accordance with a three-year vesting schedule from date of grant, provided that
should any director resign prior to the end of the relevant term of office, the options granted for during such fiscal term shall be immediately canceled. During the fiscal year ended March 31, 2002 and 2003, 310,000 and 165,000 options,
respectively, were granted to the directors.



Committees of the Board of
Directors



The Board of Directors have formed the
following committees with each of its respective members listed: audit committee consists of Bartholomew Lawson and George Stuart, Jr., the executive committee consists of Jugal K. Taneja and Joseph Zappala and the compensation committee consists of
George Stuart, Jr. and Joseph Zappala.



Section 16(a) Beneficial Ownership
Reporting Compliance



Based solely upon a review of Forms
3, 4 and 5, and amendments thereto, furnished to the Company during fiscal year 2002 and 2003, the Company is not aware of any director, officer or beneficial owner of more than ten percent of the Companys Common Stock that failed to file
reports required by Section 16(a) of the Securities Exchange Act of 1934 on a timely basis during fiscal year 2003.



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ITEM 10.    EXECUTIVE COMPENSATION



The following table sets forth certain summary information with respect to
the compensation paid to the Companys Chief Executive Officer, President and Chief Financial Officer for services rendered in all capacities to the Company for the fiscal periods ended March 31, 2001, 2002 and 2003. Other than as listed below,
the Company had no executive officers whose total annual salary and bonus exceeded $100,000 for that fiscal year:



SUMMARY COMPENSATION TABLE



|                                         |  |                     |  |                       |  |          |  |                             |  |                      |  |                                          |  |                |  |                         
|---------------------------------------- |  | ------------------- |  | --------------------- |  | -------- |  | --------------------------- |  | -------------------- |  | ---------------------------------------- |  | -------------- |  | ------------------------
|                                         |  | Annual Compensation |  |                       |  |          |  | Long-Term Compensation     
|                                         |  |                     |  |                       |  |          |  |                             |  |                      |  | Awards                                   |  |                |  | Payouts                 
|Name and Principal Position              |  | Year                |  | Salary($)             |  | Bonus($) |  | Other AnnualCompensation($) |  | RestrictedStockAward |  | SecuritiesUnderlyingOptions /SARs (#)(1) |  | LTIPPayouts($) |  | All OtherCompensation($)
|Mihir K. Taneja, Chief Executive Officer |  | 200320022001        |  | 158,917151,196110,757 |  |        |  |                          |  |                   |  | 100,00050,000                           |  |             |  |                      
|                                         |  |                     |  |                       |  |          |  |                            
|Kotha S. Sekharam, Ph.D., President      |  | 200320022001        |  | 91,95191,80590,984    |  |       |  |                          |  |                   |  | 50,00050,000                            |  |             |  |                      
|                                         |  |                     |  |                       |  |          |  |                            
|Carol Dore-Falcone,                      |  | 2003                |  | 118,149               |  |         |  |                            |  |                     |  | 50,000                                   |  |               |  |                        
|                                         |  |                     |  |                       |  |          |  |                            
|Vice President and                       |  | 2002                |  | 112,228               |  |         |  |                            |  |                     |  |                                         |  |               |  |                        
|                                         |  |                     |  |                       |  |          |  |                            
|Chief Financial Officer                  |  | 2001                |  | 108,591               |  |         |  |                            |  |                     |  | 50,000                                   |  |               |  |                        

---

|(1) | On December 1, 2000 and June 20, 2002 , each of the officers were granted common stock options by action of the Board of Directors. The options vest prorata over a three year period
beginning December 1, 2001 and June 20, 2003, respectively. The exercise price of the options for the December 1, 2000 grant was $2.00 with the exercise price of the options for the June 20, 2002 grant was $0.85 as based on the closing price of the
Companys stock on the NASDAQ SmallCap Market the business date prior to the date of the grant.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employment Arrangements



The Company has entered into three-year employment agreements commencing June 2000 with Mihir K. Taneja, Chief Executive Officer, Kotha S. Sekharam,
President, and Carol Dore-Falcone, Vice President and Chief Financial Officer, at annual salaries of $160,000, $97,000 and $118,000, plus benefits, respectively. Effective February 1, 2001, the Company entered into an annually renewable consulting
agreement with the Chairman of the Board, Jugal K. Taneja, pursuant to which he is paid an annual fee of $100,000.



Officers and employees are permitted to participate in our benefits and employee benefit plans that may be in effect from time to time, to the extent
eligible, and each employee is entitled to receive an annual bonus as determined in the sole discretion of our Board of Directors based on the Boards evaluation of the officers or employees performance as well as the Companys
financial performance.



Employee and Non-Employee Stock Option Plans



1999 Employee Stock Option Plan



On September 30, 1999, our Board of Directors and our sole stockholder at
that time adopted our 1999 Stock Option Plan. The 1999 plan will enable us to attract and retain top-quality employees, officers, directors and consultants and to provide such employees, officers, directors and consultants with an incentive to
enhance stockholder return. The 1999 plan will allow the grant of options to purchase a maximum aggregate of 1,000,000 shares of common stock to our officers, directors, or other key employees and consultants.



The Board of Directors or a committee of the Board may administer the 1999
plan, and has complete discretion to select the optionees and terms and conditions of each option, subject to the provisions of the 1999 plan. Options granted under the 1999 plan may be incentive stock options as defined in Section 411
of the Internal Revenue Code of 1986 or so-called nonqualified options.



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The exercise price of incentive stock options may not be less than 100% of the fair market value of the
common stock as of the date of grant (110% of the fair market value if the grant is to an employee who owns more than 10% of the total combined voting power of all classes of capital stock of the company). The Internal Revenue Code currently limits
to $100,000 the aggregate value of common stock that may be acquired in any one year pursuant to incentive stock options under the 1999 plan or any other option plan adopted by a company.



Nonqualified options may be granted under the 1999 plan at an exercise price of not less than 100% of the fair market value
of the common stock on the date of grant. Nonqualified options also may be granted without regard to any restriction on the amount of common stock that may be acquired pursuant to such options in any one year.



Subject to the limitations contained in the 1999 plan, options become
exercisable at such times and in such installments (but not less than 20% per year) as the Committee shall provide in the terms of each individual stock option agreement. The Committee must also provide in the terms of each stock option agreement
when the option expires and becomes unexercisable, and may also provide the option expires immediately upon termination of employment for any reason. No option held by directors, executive officers or other persons subject to Section 16 of the
Securities Exchange Act of 1934 may be exercised during the first six months after such option is granted.



Unless otherwise provided in the applicable stock option agreement, upon termination of employment of an optionee, all options that were then exercisable
would terminate three months (twelve months in the case of termination by reason of death or disability) following termination of employment. Any options which were not fully vested and exercisable on the date of such termination would immediately
be cancelled concurrently with the termination of employment.



Options granted under the 1999 plan may not be exercised more than ten years after the grant (five years after the grant if the grant is an incentive stock option to an employee who owns more than 10% of the total combined voting power of
all classes of capital stock of the company). Options granted under the 1999 plan are not transferable and may be exercised only by the respective grantees during their lifetime or by their heirs, executors or administrators in the event of death.
Under the 1999 plan, shares subject to cancelled or terminated options are reserved for subsequently granted options. The number of options outstanding and the exercise price thereof are subject to adjustment in the case of certain transactions such
as mergers, recapitalizations, stock splits or stock dividends. The 1999 plan is effective for ten years, unless sooner terminated or suspended.



On December 1, 2000 and June 20, 2002, the board of directors approved the granting of 250,000 options to be allocated amongst the Companys
employees of record as of that date. The exercise price of the options is $2.00 and as based on the closing price of the Companys stock on the NASDAQ SmallCap Market on November 30, 2000 and $0.85 on June 19, 2002. Each of the employees of
record were to receive the options based on their years of service and their salary.



The following represents the employees common stock options outstanding as of March 31, 2002:



|                                           |  |         |  
|------------------------------------------ |  | ------- | -
|Option balance outstanding, March 31, 2001 |  | 243,000 |  
|Granted                                    |  | 0       |  
|Exercised                                  |  | 0       |  
|Forfeited                                  |  | (15,500 | )
|                                           |  |         |  
|Option balance outstanding, March 31, 2002 |  | 227,500 |  
|                                           |  |         |  



The following
represents the employees common stock options outstanding as of March 31, 2003:



|                                           |  |         |  
|------------------------------------------ |  | ------- | -
|Option balance outstanding, March 31, 2002 |  | 227,500 |  
|Granted                                    |  | 250,000 |  
|Exercised                                  |  | 0       |  
|Forfeited                                  |  | (12,500 | )
|                                           |  |         |  
|Option balance outstanding, March 31, 2003 |  | 465,000 |  
|                                           |  |         |  



As of March 31, 2003, of the 465,000
options outstanding, 143,333 options were vested with 321,667 options being nonvested.



Forfeited options represent options granted to one or more employees of record whose employment is terminated, voluntarily or involuntarily, and based on their termination date, such options were considered nonvested.



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On December 1, 2000, the board of directors approved the granting a total of 200,000 options, or 50,000
options each, to be allocated to each of the Companys officers of record as of that date. The exercise price of the options granted on December 1, 2000 was $2.00 per share based on the closing price on the NASDAQ on November 30, 2000. Each of
the officers of record were to receive the options based on their years of service and their salary. The following represents the officers common stock options outstanding as of March 31 ,2002:



|                                           |  |        
|------------------------------------------ |  | -------
|Option balance outstanding, March 31, 2001 |  | 150,000
|Granted                                    |  | 0      
|Exercised                                  |  | 0      
|Forfeited                                  |  | 0      
|                                           |  |        
|Option balance outstanding, March 31, 2002 |  | 150,000
|                                           |  |        



On June 20, 2002, the
board of directors approved the granting a total of 250,000 options, to be allocated to each of the Companys officers of record as of that date. The exercise price of the options granted on June 20, 2002 was $0.85 per share based on the
closing price on the NASDAQ on June 19, 2002. Each of the officers of record were to receive the options based on their years of service and their salary. The following represents the officers common stock options outstanding as of March
31, 2003:



|                                           |  |        
|------------------------------------------ |  | -------
|Option balance outstanding, March 31, 2002 |  | 150,000
|Granted                                    |  | 250,000
|Exercised                                  |  | 0      
|Forfeited                                  |  | 0      
|                                           |  |        
|Option balance outstanding, March 31, 2003 |  | 400,000
|                                           |  |        



As of March 31, 2003, of the 400,000
options outstanding, 100,000 of those options were vested with 300,000 options being nonvested.



Forfeited options represent options granted to one or more officers of record whose employment is terminated, voluntarily or involuntarily, and based on their termination date, such options were considered nonvested.



1999 Non-Employee Stock Option Plan



On September 30, 1999, our Board of Directors and sole stockholder
adopted our 1999 non-employee stock option plan. The 1999 non-employee plan enables us to attract and retain top-quality directors and consultants and to provide such directors and consultants with an incentive to enhance stockholder return. The
1999 non-employee plan allows the grant of options to purchase a maximum aggregate of 500,000 shares of common stock to non-employee directors.



The Board of Directors or a committee of the Board may administer the 1999 non-employee plan, and has complete discretion to select the optionees and
terms and conditions of each option, subject to the provisions of the 1999 non-employee plan. Options granted under the 1999 non-employee plan will not be incentive stock options as defined in Section 411 of the Internal Revenue Code of
1986, they will be so-called nonqualified options.



Nonqualified options may be granted under the 1999 non-employee plan at an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. Nonqualified options also may be granted without regard to
any restriction on the amount of common stock that may be acquired pursuant to such options in any one year.



Subject to the limitations contained in the 1999 non-employee plan, options become exercisable at such times and in such installments as the Committee
shall provide in the terms of each individual stock option agreement. The Committee must also provide in the terms of each stock option agreement when the option expires and becomes unexercisable, and may also provide the option expires immediately
upon termination of services for us or for any other reason. No option held by persons subject to Section 16 of the Securities Exchange Act of 1934 may be exercised during the first six months after such option is granted.



Unless otherwise provided in the applicable stock option agreement, upon
termination of engagement of an optionee, all options that were then exercisable would terminate three months (twelve months in the case of termination by reason of death or disability) following termination of services. Any options which were not
fully vested and exercisable on the date of such termination would immediately be cancelled concurrently with the termination.



Options granted under the 1999 non-employee plan may not be exercised more than ten years after the grant. Options granted under the 1999 non-employee
plan are not transferable and may be exercised only by the respective grantees during their lifetime or by their heirs, executors or administrators in the event of death. Under the 1999 non-employee plan, shares subject to cancelled or terminated
options are reserved for subsequently granted options. The number of options outstanding and the exercise price thereof are subject to adjustment in the case of certain transactions such as mergers, recapitalizations, stock splits or stock
dividends. The 1999 non-employee plan is effective for ten years, unless sooner terminated or suspended. We will not grant any options under the 1999 non-employee plan until the plan is appropriately registered pursuant to Florida Statutes or an
exemption therefrom is available.



22



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On December 1, 2000, the Chairman of the Board approved the granting of a total of 16,000, or 4,000
options to each non-employee director, options to be allocated to each of the Companys nonemployee directors of record as of that date. The exercise price of the options is $2.00 as based on the closing price of the Companys stock on the
NASDAQ SmallCap Market on November 30, 2000. This plan was amended during September 2001. Options issued during the year ended March 31, 2002 were issued under the amendment to the plan and exercisable at $1.00 for those directors who beneficially
own less than 10% of the Company and at $1.10 for those directors who beneficially own more than 10% of the Company based on the closing-price of the companys stock on the date granted. The following represents the nonemployee common stock
options outstanding as of March 31, 2002:



|                                           |  |        
|------------------------------------------ |  | -------
|Option balance outstanding, March 31, 2001 |  | 16,000 
|Granted                                    |  | 310,000
|Exercised                                  |  | 0      
|Forfeited                                  |  | 0      
|                                           |  |        
|Option balance outstanding, March 31, 2002 |  | 326,000
|                                           |  |        



The following
represents the nonemployee common stock options outstanding as of March 31, 2003:



|                                           |  |         |  
|------------------------------------------ |  | ------- | -
|Option balance outstanding, March 31, 2002 |  | 326,000 |  
|Granted                                    |  | 165,000 |  
|Exercised                                  |  | 0       |  
|Forfeited                                  |  | (34,000 | )
|                                           |  |         |  
|Option balance outstanding, March 31, 2003 |  | 457,000 |  
|                                           |  |         |  



As of March 31, 2003,
of the 457,000 options outstanding, 101,333 of those options were vested with 355,667 options being nonvested.



ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth, as of March 31, 2003, certain information concerning beneficial ownership of shares of Common Stock with respect to (i)
each person known to the Company to own 5% or more of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) the executive officers of the Company, and (iv) all directors and officers of the Company as a group:



|               |  |                                          |  |                                            |  |                                |  
|-------------- |  | ---------------------------------------- |  | ------------------------------------------ |  | ------------------------------ | -
|Title Of Class |  | Name And Address Of Beneficial Owner (1) |  | Amount AndNature OfBeneficialOwnership (2) |  | ApproximatePercent ofClass (%) |  
|Common         |  | Jugal K. Taneja                          |  | 1,642,633                                  |  | 21.7                           | %
|Common         |  | Mihir K. Taneja                          |  | 338,162                                    |  | 4.5                            |  
|Common         |  | Kotha S. Sekharam, PhD                   |  | 144,411                                    |  | 1.9                            |  
|Common         |  | Carol Dore-Falcone                       |  | 16,500                                     |  |                               |  
|Common         |  | Joseph Zappala                           |  | 1,949,750                                  |  | 25.7                           |  
|Common         |  | Bartholomew Lawson                       |  | 275,000                                    |  | 3.6                            |  
|Common         |  | George Stuart, Jr.                       |  |                                           |  |                               |  
|Common         |  | Carnegie Capital                         |  | 582,537                                    |  | 7.7                            |  
|Common         |  | All officers and directors as a group    |  | 4,366,456                                  |  | 57.6                           |  

---

|(1) | Except as noted above, the address for the above identified officers and directors of the Company is c/o Innovative Companies, Inc., 6950 Bryan Dairy Road, Largo, Florida 33777.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to the shares shown. Except where
indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of voting securities shown as beneficially owned by them. Percentages are
based upon the assumption that each shareholder has exercised all of the currently exercisable options he or she owns which are currently exercisable or exercisable within 60 days and that no other shareholder has exercised any options he or she
owns.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

|(3) | The following factors have been taken into consideration in calculating the amount and nature of beneficial ownership in Innovative:
|--- | ------------------------------------------------------------------------------------------------------------------------------------



| |  | Dr. Kotha Sekharams beneficially owned shares include approximately 26,733 shares beneficially owned by Madhavi Sekharam, Dr. Sekharams wife, as to which Dr. Sekharam
exercises no investment or voting power and disclaims beneficial ownership.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Jugal K. Tanejas beneficially owned shares include approximately 359,206 shares beneficially owned by his wife Manju Taneja. Mr. Taneja exercises no investment or voting power
over any of the shares owned by his wife, and disclaims beneficial ownership of those shares.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Jugal K. Tanejas beneficially owned shares also include 582,537 shares beneficially owned by Carnegie Capital, Ltd, 347,938 shares beneficially owned by Bryan Capital Limited
Partnership and approximately 60,855 shares beneficially owned by First Delhi Trust. Mr. Taneja is the general partner of both Carnegie Capital, Ltd. and First Delhi Trust, and holds sole voting and investment power over these shares. Bryan Capital
Limited Partnership is indirectly owned by Dynamic Health Products, Inc., an affiliate, and who Jugal K. Taneja is the Chairman and CEO.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Joseph Zappalas beneficially owned shares include 478,500 shares beneficially owned by Mr. Zappalas wife and minor child.
| | - | ---------------------------------------------------------------------------------------------------------------------------



ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The Company has entered into transactions and business
relationships with certain of our officers, directors and principal stockholders or their affiliates. We believe that all of the transactions were on terms no less favorable than we could have obtained from independent third parties.



Revenues: For the fiscal years ended March 31, 2002 and 2003, manufacturing
revenues of approximately $291,579 and $170,092, respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products, an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board
of the Company, is a principal shareholder. For the fiscal years ended March 31, 2002 and 2003, revenues of $5,122, and $3,176, respectively, were recorded from sales by the Company to DrugMax, Inc., an affiliate of the Company, and of which Jugal
K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the fiscal years ended March 31, 2002 and 2003, revenues of $47,956 and $169,261 respectively, were recorded from sales by the Company to Vertical Health Inc., an
affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder.



For the fiscal years ended March 31, 2002 and 2003, distribution revenues of approximately $0 and $5,077, respectively, were recorded from sales by the
Company to Vertical Health, Inc., an affiliate of the Company



For the fiscal years ended March 31, 2002 and 2003, pharmacy benefit managment revenues of approximately $1,914,593 and $3,364,590, respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the
Companys board members Mssrs. Lawson and Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract.



Trade Accounts Receivable/ Trade Accounts PayableAmounts due to affiliates and amounts due from affiliates represent balances owed by or amounts
owed to the Company for sales occurring in the normal course of business. Amounts due to and amounts due from these affiliates are in the nature of trade payables or receivables and fluctuate based on sales volume and payments received.



As of March 31, 2002 and 2003, for the manufacturing segment, $73,895 and
$18,297 was due from subsidiaries of Dynamic Health Products. $57,700 and $57,700, respectively, was due to DrugMax., $28,982 and $75,650 was due from Vertical Health, Inc., and $59,380 and $59,380 was due from Careplus Health.



As of March 31, 2002 and 2003, for the distribution segment, $21,534 and
$10,470 was due to DrugMax.



As of March 31, 2002 and 2003, for
the pharmacy benefit management segment, $265,292 and $391,743 was due from CarePlus Health.



Lease / Debt ObligationsFor each of the years ended March 31, 2002 and 2003, rent expense of $192,000 and $207,597 was paid to Dynamic Health Products, Inc. The Company and Dynamic are parties to a ten-year,
triple net operating lease that expires in the year 2009. Monthly rents are approximately $17,000 per month.



In September 1999, the Company issued 150,000 shares of redeemable series A preferred stock to Dynamic Health Care Products, Inc. in satisfaction of
$1,500,000 of outstanding liabilities. The shares of preferred stock were subsequently transferred to JB Capital Corp., a company affiliated with our Chairman, Jugal K. Taneja. Holders of redeemable series A preferred stock



24



---

##### Table of Contents

vote together with the holders of common stock with respect to all matters as to which such shareholders vote, with each
share of redeemable series A preferred stock entitled to one vote. In the event of liquidation, dissolution or winding-up of our operations, holders of redeemable series A preferred stock will be paid an amount equal to $10.00 per share of
redeemable series A preferred stock before any payment is made with respect to our common stock. The redeemable series A preferred stock pays dividends at the rate of 10% per annum, which is cumulative from the date of issuance and payable quarterly
commencing March 31, 2001. For the years ended March 31, 2002 and 2003, $150,000 and $120,031 of accrued preferred dividends were paid to JB Capital Corp. For the year ended March 31, 2003, the holders had redeemed 77,500 shares; in addition, as of
March 31, 2003, the holders of the preferred stock had the right to redeem another approximate 27,500 shares based upon the redemption formula utilizing positive net income as defined as a basis. Positive net income is defined as net income/(loss)
as adjusted for depreciation, amortization and other non-cash charges. The Company has agreed with the holders of the preferred stock to a sliding scale redemption plan based on this monthly positive net income formula. The monthly redemption
schedule is as follows:



|                                          |  |             |        
|----------------------------------------- |  | ----------- | -------
|Monthly positive net income as (defined): |  | Payment due
|$0$24,999                                |  | $           | 0      
|$25,000$124,999                          |  | $           | 25,000 
|$125,000$224,999                         |  | $           | 50,000 
|$225,000$324,999                         |  | $           | 75,000 
|$325,000$424,999                         |  | $           | 100,000



An additional $25,000
will be paid to the holders of the preferred stock for each additional $100,000 of cash basis net income, as defined, above $424,999 until such time that all preferred stock is redeemed.



ITEM 13.    EXHIBITS, LIST AND REPORTS ON FORM 8-K



The Company has not filed any reports on Form 8-K during the last quarter of the period covered by this report.



Exhibits



The following Exhibits are filed as part of this Report:



|              |  |                                                                                                                                                                                                                                                                            
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                
|              | 
|2.1           |  | Agreement and Plan of Reorganization dated June 12, 1998, effective June 15, 1998, by and among Nu-Wave Health Products, Inc., Nu-Wave Acquisition, Inc., Energy Factors, Inc., U.S.
Diversified Technologies, Inc., Paul Santostasi, Chris Starkey, and Marvin Deutsch. **
|              | 
|3.1           |  | Articles of Incorporation of Energy Factors, Inc., filed September 3, 1985.**                                                                                                                                                                                              
|              | 
|3.2           |  | By-Laws of Energy Factors, Inc.**                                                                                                                                                                                                                                          
|              | 
|3.3           |  | Articles of Incorporation of Nu-Wave Acquisition, Inc., dated June 11, 1998 and filed June 12, 1998. **                                                                                                                                                                    
|              | 
|3.4           |  | Articles of Amendment to Articles Innovative changing name.**                                                                                                                                                                                                              
|              | 
|3.5           |  | Agreement with holder of Series A preferred stock dated as of March 25, 2002.**                                                                                                                                                                                            
|              | 
|4.1           |  | Specimen Stock Certificate of the Company **                                                                                                                                                                                                                               
|              | 
|4.2           |  | Form of Underwriters Warrant **                                                                                                                                                                                                                                           
|              | 
|4.3           |  | Form of Consulting Agreement with Underwriter **                                                                                                                                                                                                                           
|              | 
|10.1          |  | Promissory note in favor of Nu-Wave Health Products, Inc. from Energy Factors, Inc., dated May 13, 1998.**                                                                                                                                                                 
|              | 
|10.2          |  | Form of 1999 Stock Option Plan **                                                                                                                                                                                                                                          
|              | 
|10.3          |  | Innovative Health Products, Inc. 1999 Stock Option Plan.**                                                                                                                                                                                                                 
|              | 
|10.4          |  | Form of Employment Agreement with Kotha S. Sekharam, Ph.D. **                                                                                                                                                                                                              
|              | 
|10.5          |  | Form of Employment Agreement with Mihir K. Taneja **                                                                                                                                                                                                                       
|              | 
|10.6          |  | Form of Employment Agreement with Carol Dore-Falcone **                                                                                                                                                                                                                    
|              | 
|10.7          |  | Lease of Companys facility at 6950 Bryan Dairy Road, Largo, Florida 33777 **                                                                                                                                                                                              
|              | 
|10.8          |  | Acquisition Agreement between Go2Pharmacy.com, Inc. (Florida) and Go2Pharmacy.com, Inc. (Delaware) **                                                                                                                                                                      



25



---

##### Table of Contents

|              |  |                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                  
|              | 
|10.9          |  | Agreement between Go2Pharmacy.com, Inc. (Delaware) and CarePlus dated as of March 23, 2000.**                                                                                
|              | 
|10.10         |  | Agreement between Go2Pharmacy.com, Inc. (Delaware) and the Greater New York Health Care Association dated June 27, 2000. **                                                  
|              | 
|10.11         |  | Consulting Agreement between Go2Pharmacy.com, Inc. and Joseph Zappala**                                                                                                      
|              | 
|10.12         |  | Promissory Note between Go2Pharmacy, Inc. and First Community Bank of America dated March 8, 2001 in the amount of $551,512 **                                               
|              | 
|10.13         |  | Revolving Line of Credit Promissory Note between Go2Pharmacy, Inc. and First Community Bank of America dated March 8, 2001 in the amount of $650,000**                       
|              | 
|10.14         |  | Consulting Agreement with Jugal K. Taneja dated February 2001.**                                                                                                             
|              | 
|10.15         |  | Sublease and Consent**                                                                                                                                                       
|              | 
|10.16         |  | Revolving line of Credit Promissory Note between Breakthrough Engineered Nutrition, Inc. and First Community Bank of America dated March 29, 2002 in the amount of $100,000**
|              | 
|10.17         |  | Revolving line of Credit Promissory Note between Innovative and First Community Bank of America dated March 2003 in the amount of $900,000.                                  
|              | 
|21.1          |  | Innovative Companies, Inc.List of Subsidiaries.                                                                                                                             
|              | 
|99.1          |  | Certifications Pursuant to Section 906 of the Sarbanes Oxley Act of 2002                                                                                                     
|              | 
|99.2          |  | Code of Ethics and Business Conduct of Officers and Directors                                                                                                                

---

|** | Previously filed
|-- | ----------------



ITEM 14.    CONTROLS AND PROCEDURES



As of March 31, 2003, an evaluation was performed under the supervision and with the participation of the Companys management, including the Chief
Executive Officer and the Chief Accounting Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based on that evaluation, the Companys management, including the Chief Executive
Officer and Chief Accounting Officer, concluded that the Companys disclosure controls and procedures were effective as of March 31, 2003. There have been no significant changes in the Companys internal controls or other factors that
could significantly affect internal controls subsequent to March 31, 2003.



26



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##### Table of Contents

SIGNATURES



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



|                     |  |                                                   
|-------------------- |  | --------------------------------------------------
|Dated: June 30, 2003 |  | INNOVATIVE COMPANIES, INC.                        
|                     | 
|                     |  | /s/  Mihir K. Taneja                              
|                     |  | Mihir K. Taneja,                                  
|                     |  | Chief Executive Officer,                          
|                     |  | Secretary and Director                            
|                     | 
|                     |  | /s/  Kotha S. Sekharam, Ph.D.                     
|                     |  | Kotha S. Sekharam                                 
|                     |  | President and Director                            
|                     | 
|                     |  | /s/  Carol Dore-Falcone                           
|                     |  | Carol Dore-Falcone                                
|                     |  | Vice President and                                
|                     |  | Chief Financial Officer (Chief Accounting Officer)



Pursuant to the
requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities as on June 30, 2003.



| |  |                                   
| |  | ----------------------------------
| |  | /s/  Jugal K. Taneja              
| |  | Jugal K. Taneja                   
| |  | Chairman of the Board of Directors
| |  |                                   
| |  | Bartholomew Lawson                
| |  | Director                          
| |  |                                   
| |  | Joseph Zappala                    
| |  | Director                          
| |  | /s/  George L. Stuart, Jr.        
| |  | George L. Stuart, Jr.             
| |  | Director                          



27



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##### Table of Contents

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002



I, Carol
Dore-Falcone, certify that:



1. I have reviewed this annual
report on Form 10-KSB of Innovative Companies, Inc.;



2. Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;



3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this quarterly report;



4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b) evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;



5. The registrants
other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the registrants internal controls; and



6. The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                      |  |     |  |                                                              
|--------------------- |  | --- |  | -------------------------------------------------------------
|Dated:  June 30, 2003 |  | By: |  | /s/    CAROL DORE-FALCONE                                    
|                      |  |     |  | Carol Dore-Falcone Vice President and Chief
Financial Officer



28



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##### Table of Contents

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002



I, Mihir K. Taneja,
certify that:



1. I have reviewed this annual report on Form
10-KSB of Innovative Companies, Inc.;



2. Based on my
knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;



3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;



4. The
registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;



b) evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;



5. The registrants
other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the registrants internal controls; and



6. The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                      |  |     |  |                                        
|--------------------- |  | --- |  | ---------------------------------------
|Dated:  June 30, 2003 |  | By: |  | /s/    MIHIR K. TANEJA                 
|                      |  |     |  | Mihir K. Taneja Chief Executive
Officer



29



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##### Table of Contents

INNOVATIVE COMPANIES, INC.

AND SUBSIDIARIES

FINANCIAL STATEMENTS

MARCH 31, 2002 AND 2003

CONTENTS



|                                                |  |    
|----------------------------------------------- |  | ---
|INDEPENDENT AUDITORS REPORT                    |  | F-2
|                                                | 
|FINANCIAL STATEMENTS                            |  |    
|                                                | 
|CONSOLIDATED BALANCE SHEETS                     |  | F-3
|                                                | 
|CONSOLIDATED STATEMENTS OF OPERATIONS           |  | F-5
|                                                | 
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY |  | F-6
|                                                | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS           |  | F-7
|                                                | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      |  | F-8



F-1



---

##### Table of Contents

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors

Innovative Companies, Inc. and Subsidiaries



We have audited the accompanying consolidated balance sheets of Innovative Companies, Inc. and subsidiaries as of March 31,
2002 and 2003 and the related consolidated statements of operations, stockholders equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.



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



In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innovative Companies, Inc. and subsidiaries as of March 31, 2002 and 2003 and the consolidated results of operations
and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.



LOGOBRIMMER, BUREK & KEELAN LLPCertified Public Accountants




Tampa, Florida

June 9, 2003 except as to

footnote 16 June 16, 2003



F-2



---

##### Table of Contents

INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



ASSETS



|                                          |  |               |           |               |   |          
|----------------------------------------- |  | ------------- | --------- | ------------- | - | ---------
|                                          |  | March 31,2002 |           | March 31,2003
|Current assets:                           |  |               |           |               |   |          
|Cash and cash equivalents                 |  | $             | 392,638   |               | $ | 474,033  
|Certificate of deposit, restricted        |  |               | 679,205   |               |   | 409,059  
|Certificate of deposit, unrestricted      |  |               |          |               |   | 294,883  
|Accounts receivable, net                  |  |               | 1,730,261 |               |   | 879,454  
|Accounts receivable, other                |  |               |          |               |   | 354,293  
|Inventories, net                          |  |               | 2,121,406 |               |   | 2,140,709
|Prepaid expenses and other current assets |  |               | 176,812   |               |   | 297,114  
|Due from affiliates                       |  |               | 427,588   |               |   | 546,426  
|Deferred tax asset                        |  |               |          |               |   | 147,900  
|                                          |  |               |           |               |   |          
|Total current assets                      |  | $             | 5,527,910 |               | $ | 5,543,871
|                                          |  |              
|Property, leaseholds and equipment, net   |  |               | 1,612,156 |               |   | 1,477,726
|                                          |  |              
|Intangible assets, net                    |  |               | 957,932   |               |   | 960,047  
|                                          |  |              
|Other assets, net                         |  |               | 127,905   |               |   | 104,072  
|                                          |  |               |           |               |   |          
|Total assets                              |  | $             | 8,225,903 |               | $ | 8,085,716
|                                          |  |               |           |               |   |          



F-3



---

##### Table of Contents

LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                             |  |                |             |   |                |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | -------------- | - | ----------- | -
|                                                                                                                                             |  | March 31, 2002 |             |   | March 31, 2003 |  
|Current liabilities:                                                                                                                         |  |                |             |   |                |   |             |  
|Accounts payable                                                                                                                             |  | $              | 1,432,917   |   |                | $ | 919,710     |  
|Current portion of long-term obligations                                                                                                     |  |                | 254,234     |   |                |   | 369,066     |  
|Credit lines payable                                                                                                                         |  |                | 647,789     |   |                |   | 846,016     |  
|Accrued expenses                                                                                                                             |  |                | 258,349     |   |                |   | 337,952     |  
|Obligations to related parties                                                                                                               |  |                | 1,151       |   |                |   | 153         |  
|Obligations to affiliates                                                                                                                    |  |                | 404,324     |   |                |   | 343,471     |  
|                                                                                                                                             |  |                |             |   |                |   |             |  
|Total current liabilities                                                                                                                    |  | $              | 2,998,764   |   |                | $ | 2,816,368   |  
|                                                                                                                                             |  |               
|Long-term obligations, less current portion                                                                                                  |  |                | 381,152     |   |                |   | 225,282     |  
|                                                                                                                                             |  |                |             |   |                |   |             |  
|Total liabilities                                                                                                                            |  | $              | 3,379,916   |   |                | $ | 3,041,650   |  
|                                                                                                                                             |  |               
|Redeemable preferred stock, no par value, 150,000 shares authorized, 117,5000 and 45,000 respectively, issued and outstanding, at face
value |  |                | 1,175,000   |   |                |   | 450,000     |  
|                                                                                                                                             |  |               
|Commitments and contingencies                                                                                                                |  |                |            |   |                |   |            |  
|                                                                                                                                             |  |               
|Shareholders equity:                                                                                                                        |  |                |             |   |                |   |             |  
|Preferred stock, no par value, 5,850,000 shares authorized, no shares issued and outstanding                                                 |  | $              |            |   |                | $ |            |  
|Common stock, $.01 par value; 24,000,000 shares authorized; 7,025,000 and 7,727,634 shares issued and outstanding                            |  |                | 70,250      |   |                |   | 77,276      |  
|Treasury stock (143,600 common shares, $.01 par value)                                                                                       |  |                |            |   |                |   | (1,436      | )
|Additional paid-in capital                                                                                                                   |  |                | 29,953,495  |   |                |   | 29,840,205  |  
|Retained earnings (deficit)                                                                                                                  |  |                | (26,352,758 | ) |                |   | (25,321,979 | )
|                                                                                                                                             |  |                |             |   |                |   |             |  
|Total shareholders equity                                                                                                                   |  | $              | 3,670,987   |   |                | $ | 4,594,066   |  
|                                                                                                                                             |  |                |             |   |                |   |             |  
|Total liabilities and shareholders equity                                                                                                   |  | $              | 8,225,903   |   |                | $ | 8,085,716   |  
|                                                                                                                                             |  |                |             |   |                |   |             |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                       |  |                      |            |   |      |   |            |  
|---------------------------------------------------------------------- |  | -------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                       |  | Year Ended March 31, |           
|                                                                       |  | 2002                 |            |   | 2003 |  
|Revenue                                                                |  |                      |            |   |      |   |            |  
|PBM (a related party activity)                                         |  | $                    | 1,914,592  |   |      | $ | 3,364,590  |  
|Distribution                                                           |  |                      | 636,965    |   |      |   | 1,371,327  |  
|Manufacturing                                                          |  |                      | 6,431,887  |   |      |   | 9,995,597  |  
|                                                                       |  |                      |            |   |      |   |            |  
|Total revenue                                                          |  | $                    | 8,983,444  |   |      | $ | 14,731,514 |  
|Cost of goods sold                                                     |  |                      |            |   |      |   |            |  
|PBM                                                                    |  |                      | 1,598,451  |   |      |   | 3,000,892  |  
|Distribution                                                           |  |                      | 368,511    |   |      |   | 890,524    |  
|Manufacturing (exclusive of depreciation and amortization shown below) |  |                      | 5,031,976  |   |      |   | 6,821,289  |  
|                                                                       |  |                      |            |   |      |   |            |  
|Total cost of goods sold                                               |  | $                    | 6,998,938  |   |      | $ | 10,712,705 |  
|Gross profit                                                           |  |                      |            |   |      |   |            |  
|PBM                                                                    |  |                      | 316,141    |   |      |   | 363,698    |  
|Distribution                                                           |  |                      | 268,454    |   |      |   | 480,803    |  
|Manufacturing                                                          |  |                      | 1,399,911  |   |      |   | 3,174,308  |  
|                                                                       |  |                      |            |   |      |   |            |  
|Total gross profit                                                     |  | $                    | 1,984,506  |   |      | $ | 4,018,809  |  
|                                                                       |  |                     
|Selling, general and administrative expenses:                          |  |                      |            |   |      |   |            |  
|Selling, general and administrative expenses                           |  |                      | 2,737,059  |   |      |   | 3,283,280  |  
|Depreciation and amortization                                          |  |                      | 445,561    |   |      |   | 381,352    |  
|                                                                       |  |                      |            |   |      |   |            |  
|Operating income (loss) before other income (expense)                  |  | $                    | (1,198,114 | ) |      | $ | 354,177    |  
|Other income (expense):                                                |  |                      |            |   |      |   |            |  
|Interest income (expense), net                                         |  |                      | (50,414    | ) |      |   | (60,679    | )
|Other income (expense), net                                            |  |                      | 124,045    |   |      |   | 709,411    |  
|                                                                       |  |                      |            |   |      |   |            |  
|Total other income (expense)                                           |  | $                    | 73,631     |   |      | $ | 648,732    |  
|                                                                       |  |                      |            |   |      |   |            |  
|Income (loss) before income taxes                                      |  |                      | (1,124,483 | ) |      |   | 1,002,909  |  
|Income tax benefit                                                     |  |                      |           |   |      |   | 147,900    |  
|                                                                       |  |                      |            |   |      |   |            |  
|Net income (loss)                                                      |  | $                    | (1,124,483 | ) |      | $ | 1,150,809  |  
|Preferred stock dividends                                              |  |                      | 150,000    |   |      |   | 120,031    |  
|                                                                       |  |                      |            |   |      |   |            |  
|Net income (loss) available to common shareholders                     |  | $                    | (1,274,483 | ) |      | $ | 1,030,778  |  
|                                                                       |  |                      |            |   |      |   |            |  
|Basic and diluted income (loss) per share                              |  | $                    | (0.18      | ) |      | $ | 0.15       |  
|                                                                       |  |                      |            |   |      |   |            |  
|Basic and diluted weighted average number of common shares outstanding |  |                      | 7,025,000  |   |      |   | 7,073,266  |  
|                                                                       |  |                      |            |   |      |   |            |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)



MARCH 31, 2003



|                           |  |                |  |              |   |                |           |         |   |        |  |          |         |  |                                   |                           |   |  |                           |            |   |  |   |             |   |  |   |            |  
|-------------------------- |  | -------------- |  | ------------ | - | -------------- | --------- | ------- | - | ------ |  | -------- | ------- |  | --------------------------------- | ------------------------- | - |  | ------------------------- | ---------- | - |  | - | ----------- | - |  | - | ---------- | -
|                           |  | PreferredStock |  | Common Stock |   | Treasury Stock |           |         |   |        |  |          |         |  | TotalShareholdersequity(deficit) |                          
|                           |  | Shares         |  | Dollars      |   | Shares         |           | Dollars |   | Shares |  |          | Dollars |  |                                   | Additionalpaid in capital |   |  | Retainedearnings(deficit) |            |  
|Balances at March 31, 2001 |  |               |  | $            |  |                | 7,025,000 |         | $ | 70,250 |  |          |         |  |                                   |                           |   |  | $                         | 29,944,240 |   |  | $ | (25,078,275 | ) |  | $ | 4,936,215  |  
|Payment of IPO expenses    |  |               |  |              |  |                |          |         |   |       |  |          |         |  |                                   |                           |   |  |                           | 9,255      |   |  |   |            |   |  |   | 9,255      |  
|Preferred stock dividends  |  |               |  |              |  |                |          |         |   |       |  |          |         |  |                                   |                           |   |  |                           |           |   |  |   | (150,000    | ) |  |   | (150,000   | )
|Net loss                   |  |               |  |              |  |                |          |         |   |       |  |          |         |  |                                   |                           |   |  |                           |           |   |  |   | (1,124,483  | ) |  |   | (1,124,483 | )
|                           |  |                |  |              |   |                |           |         |   |        |  |          |         |  |                                   |                           |   |  |                           |            |   |  |   |             |   |  |   |            |  
|Balances at March 31, 2002 |  |               |  | $            |  |                | 7,025,000 |         | $ | 70,250 |  |          |         |  |                                   |                           |   |  | $                         | 29,953,495 |   |  | $ | (26,352,758 | ) |  | $ | 3,670,987  |  
|                           |  |                |  |              |   |                |           |         |  
|10% stock dividend         |  |               |  |              |  |                | 702,634   |         |   | 7,026  |  |          |         |  |                                   |                           |   |  |                           | (7,026     | ) |  |   |            |   |  |   |           |  
|Purchase treasury shares   |  |               |  |              |  |                |           |         |   |        |  | (143,600 | )       |  | $                                 | (1,436                    | ) |  |                           | (106,264   | ) |  |   |            |   |  |   | (107,700   | )
|Preferred stock dividends  |  |               |  |              |  |                |          |         |   |       |  |         |         |  |                                   |                          |   |  |                           |           |   |  |   | (120,031    | ) |  |   | (120,031   | )
|Net income                 |  |               |  |              |  |                |          |         |   |       |  |         |         |  |                                   |                          |   |  |                           |           |   |  |   | 1,150,809   |   |  |   | 1,150,809  |  
|                           |  |                |  |              |   |                |           |         |   |        |  |          |         |  |                                   |                           |   |  |                           |            |   |  |   |             |   |  |   |            |  
|Balances at March 31, 2003 |  |               |  | $            |  |                | 7,727,634 |         | $ | 77,276 |  | (143,600 | )       |  | $                                 | (1,436                    | ) |  | $                         | 29,840,205 |   |  | $ | (25,321,979 | ) |  | $ | 4,594,066  |  
|                           |  |                |  |              |   |                |           |         |   |        |  |          |         |  |                                   |                           |   |  |                           |            |   |  |   |             |   |  |   |            |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                |  |               |            |   |               |   |           |  
|----------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ------------- | - | --------- | -
|                                                                                                |  | March 31,2002 |            |   | March 31,2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                           |  |               |            |   |               |   |           |  
|Net income (loss)                                                                               |  | $             | (1,124,483 | ) |               | $ | 1,150,809 |  
|Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |  |               |            |   |               |   |           |  
|(Gain) loss on disposal of equipment                                                            |  |               | 41,673     |   |               |   | (2,000    | )
|Depreciation, leasehold and intangible amortization                                             |  |               | 445,561    |   |               |   | 381,352   |  
|Accrued interest income                                                                         |  |               | (33,923    | ) |               |   |          |  
|Loss on note receivable                                                                         |  |               |           |   |               |   | 21,052    |  
|Deferred tax asset                                                                              |  |               |           |   |               |   | (147,900  | )
|Changes in operating assets and liabilities:                                                    |  |               |            |   |               |   |           |  
|Accounts receivable                                                                             |  |               | (1,038,924 | ) |               |   | 850,807   |  
|Accounts receivable, other                                                                      |  |               |           |   |               |   | (354,293  | )
|Inventory                                                                                       |  |               | (375,276   | ) |               |   | (19,303   | )
|Prepaid expenses and other current assets                                                       |  |               | 233,316    |   |               |   | (120,302  | )
|Other assets                                                                                    |  |               | 10,075     |   |               |   | 2,782     |  
|Accounts payable                                                                                |  |               | 571,361    |   |               |   | (513,207  | )
|Accrued expenses                                                                                |  |               | (81,404    | ) |               |   | 79,603    |  
|Due from affiliates, net                                                                        |  |               | (337,292   | ) |               |   | (130,689  | )
|                                                                                                |  |               |            |   |               |   |           |  
|Net cash provided by (used by) operating activities                                             |  |               | (1,689,316 | ) |               |   | 1,198,711 |  
|                                                                                                |  |              
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |  |               |            |   |               |   |           |  
|Purchases of property, leaseholds and equipment                                                 |  | $             | (895,646   | ) |               | $ | (370,037  | )
|Proceeds from insured loss-leaseholds                                                           |  |               |           |   |               |   | 121,000   |  
|Collections on notes receivable                                                                 |  |               | 7,732      |   |               |   |          |  
|Certificates of deposit                                                                         |  |               |           |   |               |   | (24,737   | )
|Proceeds from disposal of equipment                                                             |  |               | 27,000     |   |               |   | 2,000     |  
|                                                                                                |  |               |            |   |               |   |           |  
|Net cash used by investing activities                                                           |  |               | (860,914   | ) |               |   | (271,774  | )
|                                                                                                |  |              
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |  |               |            |   |               |   |           |  
|Purchase of treasury stock                                                                      |  | $             |           |   |               | $ | (107,700  | )
|Redemption of preferred stock to related party                                                  |  |               |           |   |               |   | (775,000  | )
|Net change in credit lines payable                                                              |  |               |           |   |               |   | 198,227   |  
|Proceeds from issuance of long-term obligations                                                 |  |               | 182,175    |   |               |   | 323,559   |  
|Payments of long-term obligations                                                               |  |               | (341,818   | ) |               |   | (364,597  | )
|Payment of related party obligations                                                            |  |               | (28,074    | ) |               |   |          |  
|Payment of preferred stock dividends                                                            |  |               | (150,000   | ) |               |   | (120,031  | )
|                                                                                                |  |               |            |   |               |   |           |  
|Net cash used by financing activities                                                           |  |               | (337,717   | ) |               |   | (845,542  | )
|                                                                                                |  |               |            |   |               |   |           |  
|Net increase (decrease) in cash                                                                 |  | $             | (2,887,947 | ) |               | $ | 81,395    |  
|Cash at beginning of period                                                                     |  |               | 3,280,585  |   |               |   | 392,638   |  
|                                                                                                |  |               |            |   |               |   |           |  
|Cash at end of period                                                                           |  | $             | 392,638    |   |               | $ | 474,033   |  
|                                                                                                |  |               |            |   |               |   |           |  
|SUPPLEMENTAL INFORMATION:                                                                       |  |               |            |   |               |   |           |  
|Cash paid for interest                                                                          |  | $             | 161,730    |   |               | $ | 87,602    |  
|                                                                                                |  |               |            |   |               |   |           |  
|Cash paid for taxes                                                                             |  | $             |           |   |               | $ |          |  
|                                                                                                |  |               |            |   |               |   |           |  
|NON-CASH INVESTING AND FINANCING ACTIVITIES:                                                    |  |               |            |   |               |   |           |  
|Stock dividend                                                                                  |  | $             |           |   |               | $ | 7,026     |  
|                                                                                                |  |               |            |   |               |   |           |  
|Accrued preferred stock redemption                                                              |  | $             |            |   |               | $ | 275,000   |  
|                                                                                                |  |               |            |   |               |   |           |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



MARCH 31, 2002 and 2003



NOTE 1BACKGROUND INFORMATION



We were incorporated in 1985 as Energy Factors, Inc., a
Florida corporation. In August 1998 we changed our name to Innovative Health Products, Inc., and in February 2000 we changed our name to Go2Pharmacy, Inc., in anticipation of our merger with the Delaware corporation Go2Pharmacy.com, Inc. September
2002, we changed our name to Innovative Companies, Inc. (Innovative). Currently, Innovative continues to do manufacturing business under the name Innovative Health Products, Inc. as it represents our manufacturing arm of the Company.
Prior to November 7, 2000 Go2Pharmacy, Inc., the Florida corporation was a wholly-owned subsidiary of Dynamic Health Products, Inc. (Dynamic).



On November 7, 2000, the Securities and Exchange Commission declared the Companys registration of 1,000,000 shares of the common stock to be
effective. The registration was affected through the filing of Registration Statement No. 333-92849 on Form SB-2 with the Securities and Exchange Commission. The Companys initial public offering, pursuant to this registration, was successfully
completed on November 14, 2000. In conjunction with this offering, 1,000,000 shares of common stock, $.01 par value, were sold to the public for net proceeds of $6,655,705. Simultaneously with and conditioned upon the offering, Go2 merged with
Go2Pharmacy.com, Inc., a Delaware corporation, in exchange for 3,000,000 shares of its common stock. Other than the $250,000 gross cash capital contribution, Go2Delaware had no assets with any assignable value thus creating no goodwill.



In April 2000, Breakthrough Engineered Nutrition, Inc.
(Breakthrough), a Florida corporation, was formed as a wholly-owned subsidiary of Go2Pharmacy, Inc. to market and distribute its own zero and low carbohydrate product line, Lean Protein, to wholesalers and retail stores using a network
of distributors throughout the United States and Canada.



In
February 2001, we formed a wholly-owned subsidiary, Belcher Pharmaceuticals, Inc. (Belcher), in order to manufacture and distribute private label over the counter products.



In March 2001, we formed a wholly-owned subsidiary, Go2PBM Services, Inc., (PBM) for the purpose of providing
pharmacy benefit management services. PBM administers drug benefits for health maintenance organizations, insurance company plans, preferred provider organizations, self-insured corporate health plans and Taft-Hartley self-insured labor unions. As a
pharmacy benefit manager, we manage all member benefits in low risk plans, while taking an exclusively administrative role in higher risk plans. Our administrative services include claim processing, network management and customer service. We have
entered into an agreement to provide our pharmacy benefit management services to a New York State Health Maintenance Organization. Through the development of our manufacturing and pharmacy benefit management efforts, we intend to provide health
plans and institutional customers with an efficient source for their pharmacy product needs.



In September 2002, we incorporated two wholly-owned distribution companies, IHP Marketing, Inc. and Breakthrough Marketing, Inc., for the purpose of marketing and distributing additional proprietary brands to the
public in the future.



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES



a.    Principles of Consolidation



The consolidated financial statements as of and for the
year ended March 31, 2002 and 2003 include the corporate and manufacturing accounts of Innovative Companies, Inc. (the Company), (Innovative), which is continuing to do manufacturing business as Innovative Health Products,
Inc. (Innovative), and its wholly-owned Florida subsidiaries IHP Marketing, Breakthrough, Breakthrough Marketing, Belcher and PBM. Significant intercompany balances and transactions have been eliminated in consolidation.



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##### Table of Contents

INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



b.    Industry Segment



In accordance with the provisions of Statement of Financial Accounting
Standards No. 131, (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, a company is required to disclose selected financial and other related information about its operating segments. Operating segments are components of
an enterprise about which separate financial information is available and is utilized by the chief operating decision maker (CODM) related to the allocation of resources and in the resulting assessment of the segments overall
performance. The measure used by the Companys CODM is a business segments gross profit. As of and for the year ended March 31, 2002 and 2003, the Company had three industry segments: manufacturing, distribution and pharmacy benefit
management. Each of the business segments total revenues for the fiscal years ended March 31, 2002 and 2003 are presented on the face of the statements of operations. The $8,225,903 of total assets as of March 31, 2002 were comprised of $844,469
attributable to corporate, $6,453,863 attributable to manufacturing, $631,902 attributable to distribution and $295,669 attributable to pharmacy benefit management. The $8,085,716 of total assets as of March 31, 2003 were comprised of $965,740
attributable to corporate, $5,883,651 attributable to manufacturing, $587,411 attributable to distribution and $648,914 attributable to pharmacy benefit management.



c.    Cash and Cash Equivalents



For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.



d.    Restricted Cash



Restricted cash is comprised of a one-year certificate of deposit that is collateralizing lines of credit with a Bank.



e.    Inventories



Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out method.



f.    Property, Leasehold Improvements and Equipment



Depreciation is provided for using the straight-line method, in amounts
sufficient to relate the cost of depreciable assets to operations over their estimated service lives (asset categories range from three to seven years). Leasehold improvements are amortized using the straight-line method over the lives of the
respective leases or the service lives of the improvements, whichever is shorter. Leased equipment under capital leases is amortized using the straight-line method over the lives of the respective leases or over the service lives of the assets,
whichever is shorter, for those leases that substantially transfer ownership. Accelerated depreciation methods are used for tax purposes.



g.    Intangible Assets



Intangible assets consist primarily of goodwill and intellectual property. Effective April 1, 2002 with the adoption of SFAS 142, Goodwill and Other
Intangibles, intangible assets with an indefinite life, namely goodwill and the intellectual property, are not amortized. Intangible assets with a definite life are amortized on a straight-line basis with estimate useful lives ranging from 1
to 3 years. Indefinite lived intangible assets will be tested for impairment yearly and will be tested for impairment between the annual tests should an event occur or should circumstances change that would indicate that the carrying amount may be
impaired. The Company has selected January 1, as the annual date to test these assets for impairment. The unamortized balance of goodwill as of the date of the test and as of March 31, 2003 was $728,896 with the unamortized balance of the
intellectual property for the same periods was $228,305. Based on the required analyses performed as of that annual test date, no impairment loss was required to be recorded for the fiscal year ended March 31, 2003.



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##### Table of Contents

INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



h.    Impairment of Assets



In accordance with the provisions of Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Companys policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and
goodwill when certain events have taken place that indicate the remaining unamortized balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of
related undiscounted cash flows. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. There have been no impairment losses recorded for the fiscal years 2002 and 2003.



i.    Income Taxes



The Company utilizes the guidance provided by Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of
assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.



j.    Earning (Loss) Per Common Share



Earnings (loss) per share are computed using the basic and diluted
calculations on the face of the statement of operations. Basic earnings (loss) per share are calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the
period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the
treasury stock method. There were no potentially dilutive instruments outstanding for all periods presented.



k.    Use of Estimates



The preparation of 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
disclosures of contingent assets and liabilities at March 31, 2002 and 2003, as well as the reported amounts of revenues and expenses for the fiscal years ended March 31, 2002 and 2003. The actual outcome of the estimates could differ from the
estimates made in the preparation of the financial statements.



l.    Concentration of Credit Risk



Concentrations of credit risk with respect to trade accounts receivable are limited due to the distribution of sales over a large customer base as of March 31, 2002 and 2003. For the year ended March 31, 2002, four customers accounted for
22.8%, 21.3%, 16.6% and 7.4% of revenues, respectively, while for year ended March 31, 2003, two customers accounted for 29.1% and 22.8% the in relation to total consolidated revenues. The Company has no concentration of customers within specific
geographic areas outside the United States that would give rise to significant geographic credit risk.



As of March 31, 2002 and 2003 the Company maintained cash balances in excess of federally insured limits of approximately $1,127,000 and $678,000 ,
respectively.



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



m.    Revenue Recognition



In accordance with SAB 101, Revenue Recognition, revenues are recognized by
the Company when the merchandise is shipped which is when title and risk of loss has passed to the customer.



n.    Advertising Costs



The Company charges advertising costs to expense as incurred. Advertising expense was $116,702, and $106,365 for the years ended March 31, 2002 and 2003, respectively.



o.    Fair Value of Financial Instruments



The Company, in estimating its fair value disclosures for financial
instruments, uses the following methods and assumptions:



Cash,
Accounts Receivable, Accounts Payable and Accrued Expenses: The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their relatively short maturity.



Long-term Obligations: The fair value of the Companys
fixed-rate long-term obligations is estimated using discounted cash flow analyses, based on the Companys current incremental borrowing rates for similar types of borrowing arrangements. At March 31, 2002 and 2003, the fair value of the
Companys long-term obligations approximated its carrying value.



Credit Lines Payable: The carrying amount of the Companys credit lines payable approximates fair market value since the interest rate on these instruments corresponds to market interest rates.



p.    Reclassifications



Certain reclassifications have been made to the financial statements as of
and for the fiscal year ended March 31, 2002 to conform to the presentation as of and for the year ended March 31, 2003.



NOTE 3ACCOUNTS RECEIVABLE, NET



Accounts receivable, net, consist of the following:



|                                          |  |           |           |   |      |   |           |  
|----------------------------------------- |  | --------- | --------- | - | ---- | - | --------- | -
|                                          |  | March 31, |          
|                                          |  | 2002      |           |   | 2003 |  
|Trade accounts receivable                 |  | $         | 1,879,175 |   |      | $ | 1,088,968 |  
|Less allowance for uncollectible accounts |  |           | (148,914  | ) |      |   | (209,514  | )
|                                          |  |           |           |   |      |   |           |  
|                                          |  | $         | 1,730,261 |   |      | $ | 879,454   |  
|                                          |  |           |           |   |      |   |           |  



As of March 31, 2002,
the total accounts receivable balance of $1,879,175 includes $1,673,657 related to the Companys manufacturing segment and $205,518 related to the Companys distribution segment. As of March 31, 2003, the total accounts receivable balance
of $1,088,968 includes $934,484 related to the Companys manufacturing segment and $154,484 related to the Companys distribution segment.



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



NOTE 4ACCOUNTS RECEIVABLE, OTHER



On August 27, 2002, a commercial building where one of our manufacturing
facilities is located, was involved in a fire. Although this fire was not in our leased space, nor was the fire caused by the Company or any of its related parties, our facility was exposed to and incurred smoke and water damage. The company that
had the fire is not a related party. Innovative has adequate insurance coverage that covers replacement cost of the facilities contents which includes inventory and leasehold improvements, in addition to business interruption insurance which
covers lost profits based on certain coverage formulas and policy limits. As of March 31, 2003, the final financial assessment has not been made by our insurance company. The Company has a $5,000 deductible for each policy, or $10,000 in total for
both policies, that the Company believes it will also be able to recoup these deductibles since the claim has been assessed by our insurance company as subrogatable against the other non-related company who is at fault.



As of March 31, 2003, included within accounts receivable-other, the Company
has recorded amounts due from the Companys insurance company that are quantifiable and measurable at this time, in the amount of $354,293 comprised of amounts due and approved for inventory replacement and for amounts due for business
interruption income. For the period of August 27, 2002 through March 31, 2003, the Company has collected approximately $598,515 from the insurance company representing amounts reimbursed for the replacement of damaged leasehold improvements and
business interruption income. For the fiscal year ended March 31, 2003, amounts recorded in other income/(expense), net, included approximately $664,038.



NOTE 5INVENTORIES, NET



Inventories, net, consist of the following:



|                                      |  |           |           |   |      |   |           |  
|------------------------------------- |  | --------- | --------- | - | ---- | - | --------- | -
|                                      |  | March 31, |          
|                                      |  | 2002      |           |   | 2003 |  
|Processed raw materials and packaging |  | $         | 871,410   |   |      | $ | 624,603   |  
|Work in process                       |  |           | 1,164,439 |   |      |   | 1,294,831 |  
|Finished goods                        |  |           | 171,211   |   |      |   | 239,130   |  
|                                      |  |           |           |   |      |   |           |  
|                                      |  |           | 2,207,060 |   |      |   | 2,158,564 |  
|Less reserve for obsolescence         |  |           | (85,654   | ) |      |   | (17,855   | )
|                                      |  |           |           |   |      |   |           |  
|                                      |  | $         | 2,121,406 |   |      | $ | 2,140,709 |  
|                                      |  |           |           |   |      |   |           |  



As of March 31, 2002,
the total inventory balance of $2,207,060 includes $2,073,849 related to the Companys manufacturing segment and $133,211 related to the Companys distribution segment. As of March 31, 2003, the total inventory balance of $2,158,564
includes $1,983,785 related to the Companys manufacturing segment and $174,779 related to the Companys distribution segment. In addition, for the manufacturing segment, approximately $513,000 and $670,000 of factory overhead has been
capitalized in inventory as of March 31, 2002 and 2003, respectively.



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



NOTE 6PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET



Property, leasehold improvements and equipment, net, consists of the
following:



|                                               |  |           |           |   |      |   |            |  
|---------------------------------------------- |  | --------- | --------- | - | ---- | - | ---------- | -
|                                               |  | March 31, |          
|                                               |  | 2002      |           |   | 2003 |  
|Machinery and equipment                        |  | $         | 1,645,741 |   |      | $ | 1,737,933  |  
|Furniture, fixtures and equipment              |  |           | 299,321   |   |      |   | 334,719    |  
|Leasehold improvements                         |  |           | 433,839   |   |      |   | 503,938    |  
|                                               |  |           |           |   |      |   |            |  
|                                               |  |           | 2,378,901 |   |      |   | 2,576,590  |  
|Less accumulated depreciation and amortization |  |           | (766,745  | ) |      |   | (1,098,864 | )
|                                               |  |           |           |   |      |   |            |  
|                                               |  | $         | 1,612,156 |   |      | $ | 1,477,726  |  
|                                               |  |           |           |   |      |   |            |  



Depreciation and
leasehold amortization expense totaled $336,142 and $379,964 for the years ended March 31, 2002 and 2003, respectively primarily attributable to manufacturing and corporate depreciable assets.



The Company leases one of our two manufacturing facilities from Dynamic, a
related party, (See note 11), for approximately $17,000 per month, subject to annual inflationary adjustments, for a period of ten years. For each of the years ended March 31, 2002 and 2003, rents paid to Dynamic were $192,000 and $207,000,
respectively.



NOTE 7INTANGIBLE ASSETS, NET



Intangible assets, net, consist of the following:



|                              |  |           |           |   |      |   |           |  
|----------------------------- |  | --------- | --------- | - | ---- | - | --------- | -
|                              |  | March 31, |          
|                              |  | 2002      |           |   | 2003 |  
|Loan and lease costs          |  | $         | 1,675     |   |      | $ | 5,179     |  
|Intellectual property         |  |           | 295,696   |   |      |   | 295,696   |  
|Goodwill                      |  |           | 901,727   |   |      |   | 901,727   |  
|                              |  |           |           |   |      |   |           |  
|                              |  |           | 1,199,098 |   |      |   | 1,202,602 |  
|Less accumulated amortization |  |           | (241,166  | ) |      |   | (242,555  | )
|                              |  |           |           |   |      |   |           |  
|                              |  | $         | 957,932   |   |      | $ | 960,047   |  
|                              |  |           |           |   |      |   |           |  



As of March 31, 2002
and 2003, goodwill and the loan and lease costs represented an intangible asset attributable to the manufacturing segment with the intellectual property balance attributable to the distribution segment.



During February 2001, the Company purchased intellectual property surrounding
a patentable manufacturing process and ingredient listing related to our product line, Lean Protein. The total purchase price was $435,000; the Company paid $217,500 in cash with the balance financed by the seller over three years from the date of
sale.



During the March 2002 fiscal year, the Company learned
the seller violated various provisions of the purchase agreement. Article six of the purchase agreement requires the seller to indemnify the Company for any



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



losses incurred because of such violations. Pursuant to the provisions of the contract the
Company has chosen to offset its losses against the installment note. The note and related accrued interest totaling approximately $212,000 was offset against inventory losses of approximately $72,000 and the balance was recorded as a reduction in
the purchase price of the intellectual property.



Amortization
expense totaled $109,419 and $1,389 for the years ended March 31, 2002 and 2003, respectively



NOTE 8OTHER ASSETS, NET



Other assets, net, consist of the following:



|                                          |  |           |         |   |      |   |         |  
|----------------------------------------- |  | --------- | ------- | - | ---- | - | ------- | -
|                                          |  | March 31, |        
|                                          |  | 2002      |         |   | 2003 |  
|Deposits                                  |  | $         | 71,799  |   |      | $ | 69,018  |  
|Notes and other noncurrent receivables    |  |           | 77,024  |   |      |   | 60,054  |  
|                                          |  |           |         |   |      |   |         |  
|                                          |  |           | 148,823 |   |      |   | 129,072 |  
|Less allowance for uncollectible accounts |  |           | (20,918 | ) |      |   | (25,000 | )
|                                          |  |           |         |   |      |   |         |  
|                                          |  | $         | 127,905 |   |      | $ | 104,072 |  
|                                          |  |           |         |   |      |   |         |  



As March 31, 2002 and
2003, other assets, net are attributable to the manufacturing segment.



Notes receivable consist of two trade receivables that have been converted to notes, from nonaffiliated third parties.



The first note is for a term of five years, commencing in October 1997, in the principal amount of approximately $71,300, with interest at 9% per annum,
payable in monthly installments of principal and interest in the amount of $1,480. There is no prepayment penalty under this note. At March 31, 2002 and 2003, the principal and unpaid accrued interest balance on this note was approximately $21,891
and $0, respectively. During the year ended March 31, 2003, the Company was notified that the corporate note holder filed bankruptcy with the corporation being dissolved as a direct result of the filing; therefore, the note was written off as
uncollectible.



The second note is for a term of two years,
commencing in May 1999, in the principal amount of approximately $49,400, with interest at 12% per annum, payable in monthly installments of principal and interest in the amount of $2,500. There is no prepayment penalty under this note. As of March
31, 2002 and 2003, the principal balance and unpaid accrued interest was approximately $55,133 and $60,054, respectively. This note is in default with judgment in favor of the Company with interest continuing to accrue. In accordance with the
judgment, payment terms are in the process of being renegotiated.



As noted above, an allowance for uncollectible notes of $20,918 and $25,000, respectively has been established to offset possible losses on these notes.



NOTE 9CREDIT LINES PAYABLE



In March 2001, the Company established an annually renewable line of credit and a five-year term loan with a bank. (See Note 10 as related to the term
loan.) This line of credit replaced the credit facility entered into during February 1999. The credit available to the Company under this line was approximately $650,000 and is



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



collateralized by a $650,000 restricted certificate of deposit. The facility imposes certain
financial and reporting covenants. The agreement requires certain cash balances be maintained. The agreement also prevents the Company from disposing of assets or incurring additional debt unless the transactions are within the normal course of
business. During the year ended March 31, 2003, the line of credit facility was increased to $900,000 with a reduction of the amount required for the certificate of deposit collateralizing the outstanding balance to $300,000. As of March 31, 2002
and 2003, borrowings on the credit facility accrue interest at 4.25%. As of March 31, 2003, the balance owed under this facility was approximately $846,000.



On March 29, 2002, Breakthrough Engineered Nutrition, Inc. established a $100,000 annually renewable line of credit with a bank. Borrowings on the credit
facility accrue at 4.25%. This line of credit is cross-collateralized with the Companys restricted certificate of deposit and with Breakthroughs inventory and accounts receivable. As of March 31, 2003, $100,000 remained available under
this line.



During March 2003, the Company borrowed $107,000
for twelve months at 4.4% interest related to the purchase of 146,000 shares of the Companys common stock outstanding. This note is cross-collateralized with the Companys restricted certificate of deposit. These shares are currently
recorded as treasury stock which is a contra account within Shareholders equity. The entire $107,000 note payable is recorded within current liabilities.



The credit lines payable are included with current liabilities instead of long-term liabilities, as management believes that this presentation better
reflects the utility of the current assets as the source of repayment for the credit lines payable.



NOTE 10LONG-TERM OBLIGATIONS



Long-term obligations consist of the following:



|                                                                                                                                                                                     |  |           |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                     |  | March 31, |         
|                                                                                                                                                                                     |  | 2002      |          |   | 2003 |  
|Capital lease obligation for equipment, due in monthly principal and interest payments of approximately $7,499 through 2004                                                          |  | $         | 97,098   |   |      | $ | 51,377   |  
|Note payable collateralized by certain equipment, due in monthly principal payments of $9,191 plus interest through 2006, interest at 5.25% at
March 31, 2002 and 2003 respectively. |  |           | 500,142  |   |      |   | 329,775  |  
|Note payable due in monthly principal payments of $8,844 plus interest through 2004, interest at 4.4% at March 31, 2003                                                              |  |           |         |   |      |   | 107,700  |  
|Other                                                                                                                                                                                |  |           | 38,146   |   |      |   | 105,496  |  
|                                                                                                                                                                                     |  |           |          |   |      |   |          |  
|                                                                                                                                                                                     |  |           | 635,386  |   |      |   | 594,348  |  
|Less current maturities                                                                                                                                                              |  |           | (254,234 | ) |      |   | (369,066 | )
|                                                                                                                                                                                     |  |           |          |   |      |   |          |  
|                                                                                                                                                                                     |  | $         | 381,152  |   |      | $ | 225,282  |  
|                                                                                                                                                                                     |  |           |          |   |      |   |          |  



Of the $635,386 of
total debt outstanding as of March 31, 2002, $38,146 relates to corporate, and the balance of $597,240 is attributable to the manufacturing segment. Of the $594,348 of total debt outstanding as of March 31, 2003, $151,026 relates to corporate, and
the balance of $443,322 is attributable to the manufacturing segment.



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



At March 31, 2003, aggregate maturities of long-term obligations are as
follows:



|                      |  |   |        
|--------------------- |  | - | -------
|Year ending March 31, |  |  
|2004                  |  | $ | 369,066
|2005                  |  |   | 116,092
|2006                  |  |   | 109,190
|2007                  |  |   |       
|2008                  |  |   |       
|Thereafter            |  |   |       
|                      |  |   |        
|                      |  | $ | 594,348
|                      |  |   |        



NOTE 11RELATED PARTY
TRANSACTIONS



Revenues: For the fiscal years ended March
31, 2002 and 2003, manufacturing revenues of approximately $291,579 and $170,092, respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products, an affiliate of the Company, and of which Jugal K.
Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the fiscal years ended March 31, 2002 and 2003, revenues of $5,122, and $3,176, respectively, were recorded from sales by the Company to DrugMax, Inc., an affiliate of
the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the fiscal years ended March 31, 2002 and 2003, revenues of $47,956 and $169,261 respectively, were recorded from sales by the
Company to Vertical HealthInc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder.



For the fiscal years ended March 31, 2002 and 2003, distribution revenues of approximately $0 and $5,077, respectively, were recorded from sales by the
Company to Vertical Health, Inc., an affiliate of the Company



For the fiscal years ended March 31, 2002 and 2003, pharmacy benefit managment revenues of approximately $1,914,593 and $3,364,590, respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the
Companys board members Mssrs. Lawson and Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract.



Trade Accounts Receivable/ Trade Accounts PayableAmounts due to affiliates and amounts due from affiliates represent balances owed by or amounts
owed to the Company for sales occurring in the normal course of business. Amounts due to and amounts due from these affiliates are in the nature of trade payables or receivables and fluctuate based on sales volume and payments received.



As of March 31, 2002 and 2003, for the manufacturing segment, $73,895 and
$18,297 was due from subsidiaries of Dynamic Health Products. $57,700 and $57,700, respectively, was due to DrugMax., $28,982 and $75,650 was due from VerticalHealth,Inc., and $59,380 and $59,380 was due from Careplus Health.



As of March 31, 2002 and 2003, for the distribution segment, $21,534 and
$10,470 was due to DrugMax.



As of March 31, 2002 and 2003, for
the pharmacy benefit management segment, $265,292 and $391,743 was due from CarePlus Health.



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



Lease / Debt ObligationsFor each of the years ended March 31, 2002 and
2003, rent expense of $192,000 and $207,597 was paid to Dynamic Health Products, Inc. The Company and Dynamic are parties to a ten-year, triplenet operating lease that expires in the year 2009. Monthly rents are approximately $17,000 per month.



For the years ended March 31, 2002 and 2003, $150,000 and
$120,031 of accrued preferred dividends were paid to JB Capital Corp., the holders of the preferred stock, an affiliate of the Chairman. During the year ended March 31, 2003, 77,500 shares, or $775,000, of preferred stock were redeemed by their
holders with another 27,500 shares, or $275,000, accrued for redemption within due to affiliates.



NOTE 12INCOME TAXES



The Companys taxable income was included in a consolidated income tax return with Dynamic, our previous parent company, until the effective date of our initial public offering on November 7, 2000. The following is presented as if the
Company was reported on a stand-alone basis.



Income taxes for
the years ended March 31, 2002 and 2003 differ from the amounts computed by applying the effective income tax rates to income before income taxes as a result of the following:



|                                                     |  |           |          |   |      |   |          |  
|---------------------------------------------------- |  | --------- | -------- | - | ---- | - | -------- | -
|                                                     |  | March 31, |         
|                                                     |  | 2002      |          |   | 2003 |  
|Computed tax expense (benefit) at the statutory rate |  | $         | (191,172 | ) |      | $ | 425,800  |  
|Increase (decrease) in taxes resulting from:         |  |           |          |   |      |   |          |  
|Effect of permanent differences:                     |  |           |          |   |      |   |          |  
|Goodwill and other permanent differences             |  |           | 34,871   |   |      |   | 6,226    |  
|Effect of temporary differences:                     |  |           |          |   |      |   |          |  
|Accruals and allowances                              |  |           | 29,555   |   |      |   | (17,702  | )
|Depreciation                                         |  |           | (19,957  | ) |      |   | (65,918  | )
|Net operating loss                                   |  |           | (95,047  | ) |      |   | (496,306 | )
|Change in valuation allowance                        |  |           | 241,750  |   |      |   |         |  
|                                                     |  |           |          |   |      |   |          |  
|Income tax (benefit) expense                         |  | $         |         |   |      | $ | (147,900 | )
|                                                     |  |           |          |   |      |   |          |  



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



Temporary differences that give rise to deferred tax assets and liabilities
are as follows:



|                                 |  |           |          |   |      |   |          |  
|-------------------------------- |  | --------- | -------- | - | ---- | - | -------- | -
|                                 |  | March 31, |         
|                                 |  | 2002      |          |   | 2003 |  
|Deferred tax assets:             |  |           |          |   |      |   |          |  
|Bad debts                        |  | $         | 33,414   |   |      | $ | 85,000   |  
|Inventories                      |  |           | 16,852   |   |      |   | 6,700    |  
|Accrued vacation                 |  |           | 8,127    |   |      |   | 19,200   |  
|Deposits                         |  |           | 21,538   |   |      |   | 30,000   |  
|Amortization                     |  |           | 8,943    |   |      |   |         |  
|Net operating loss carryforwards |  |           | 302,632  |   |      |   | 264,300  |  
|Less: valuation allowance        |  |           | (330,900 | ) |      |   |         |  
|                                 |  |           |          |   |      |   |          |  
|                                 |  | $         | 60,597   |   |      | $ | 405,200  |  
|                                 |  |           |          |   |      |   |          |  
|Deferred tax liabilities:        |  |           |          |   |      |   |          |  
|Fixed asset basis differences    |  | $         | (60,597  | ) |      | $ | (209,300 | )
|Amortization                     |  |           |         |   |      |   | (48,000  | )
|                                 |  |           |          |   |      |   |          |  
|                                 |  |           | (60,597  | ) |      | $ | (257,300 | )
|                                 |  |           |          |   |      |   |          |  
|Net deferred tax asset recorded  |  | $         |         |   |      | $ | 147,900  |  
|                                 |  |           |          |   |      |   |          |  



At March 31, 2002 and
2003, the Company has a tax net operating loss carryforwards of approximately $1,676,728 and 668,943 to offset future taxable income. The tax net operating loss carryforwards begin to expire in 2021.



NOTE 13REDEEMABLE PREFERRED STOCK



The Company is authorized, to issue up to 6,000,000 shares of preferred
stock in one or more series, and to establish the number of shares, the designations, powers, preferences, rights, qualifications, limitations or restrictions of any such series without any further vote or action by the stockholders. The Board of
Directors may authorize and issue preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock.



In September 1999, the Company issued 150,000 shares of redeemable series A preferred stock to Dynamic in satisfaction of
$1,500,000 of outstanding liabilities. Dynamic transferred these shares to JB Capital, Inc an affiliate of Dynamic and of Jugal K. Taneja, the Companys Chairman. Holders of redeemable series A preferred stock will vote together with the
holders of common stock with respect to all matters as to which such shareholders vote, with each share of redeemable series A preferred stock entitled to one vote. In the event of liquidation, dissolution or winding-up of our operations, holders of
redeemable series A preferred stock will be paid an amount equal to $10.00 per share of redeemable series A preferred stock before any payment is made with respect to our common stock. The redeemable series A preferred stock pays dividends at the
rate of 10% per annum, which is cumulative from the date of issuance and payable quarterly commencing March 31, 2001. For the years ended March 31, 2002 and 2003, the Company paid dividends of $150,000 and $120,031, respectively, as described in
Note 11. During the fiscal year ended March 31, 2002, the Company negotiated with the holders of the preferred stock a sliding scale redemption plan based on monthly positive net income, as defined, with payments to be made on a quarterly basis.



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



Positive net income is defined as net income/(loss) as adjusted for
depreciation, amortization and other non-cash charges. The Company has agreed with the holders of the preferred stock to a sliding scale redemption plan based on monthly positive net income. The monthly redemption schedule is as follows:



|                                          |  |            |        
|----------------------------------------- |  | ---------- | -------
|Monthly positive net income (as defined): |  | Paymentdue
|$0 - $24,999                              |  | $          | 0      
|$25,000 - $124,999                        |  | $          | 25,000 
|$125,000 - $224,999                       |  | $          | 50,000 
|$225,000 - $324,999                       |  | $          | 75,000 
|$325,000 - $424,999                       |  | $          | 100,000



An additional $25,000
will be paid to the holders of the preferred stock for each additional $100,000 of cash basis net income, as defined, above $424,999 until such time that all preferred stock is redeemed. As of March 31, 2003, the holders of the preferred stock have
redeemed 77,500 shares of the 150,000 shares outstanding with another 27,500 shares pending redemption leaving 45,000 shares or $450,000 as recorded and as presented immediately above the shareholders equity section. As of March 31, 2002 and
2003, the redeemable preferred stock outstanding was $1,175,000, or 117,500 shares, and $450,000, or 45,000 shares, respectively.



NOTE 14SHAREHOLDERS EQUITY



Common Stock



As of March 31, 2002 and 2003, the number of shares of $.01 par value Common Stock outstanding was 7,025,000 and 7,727,634 before treasury shares. The
increase in common shares outstanding is a direct result of the 10% stock dividend declared by the Companys board of directors for all common shareholders of record as of March 1, 2003. The stock dividend was distributed on March 17,
2003. During March 2003, the Company purchased 143,600 shares and recorded such shares as treasury stock thus adjusting the total shares outstanding, net of treasury stock, to 7,584,034 as of March 31, 2003.



Subject to preferences that might be applicable to any Preferred Stock, the
holders of the Common Stock are entitled to receive dividends when, as, and if declared from time to time by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution, or winding up of the Company,
holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities subject to prior distribution rights of any Preferred Stock then outstanding. The Common Stock has no preemptive or conversion rights and
is not subject to call or assessment by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock.



Stock Option Plan



On September 30, 1999, the Company adopted a Stock Option Plan, which provides for the grant to employees of incentive or non-qualified options to
purchase up to 1,000,000 shares of Common Stock. The exercise price represents the estimated fair value of the Companys Common Stock at the time of the grant or the proposed public offering price, as approved by the Board of Directors. All
outstanding options vest upon the change in control of the Company. Options granted under the Plan expire not later than ten years after the date granted or sooner in the event of death, disability, retirement, or termination of employment. Options
were granted on December 1, 2000 (the grant date) and have an exercise price of $2.00 as determined by the November 30, 2000 closing price on NASDAQ. The options vest over a three-year vesting schedule with the first



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##### Table of Contents

INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



years vesting period ending on December 1, 2001. No options were granted during the
year ended March 31, 2002 and 15,500 options were forfeited. As of March 31, 2002, 377,500 options were outstanding with 125,833 options vested and 251,667 options nonvested. On June 20, 2002, 450,000 options were granted and have an exercise price
of $0.85 as determined by the June 19, 2002 closing price. As of March 31, 2003, 865,000 options were outstanding with 243,333 options vested and 621,667 options nonvested.



The Non-Employee Plan



The Non-Employee Plan provides for the grant of nonqualified stock options to purchase up to 500,000 shares of Common Stock to members of the Board of
Directors who are not employees of the Company. Upon adoption of the Plan, each non-employee director was granted options to purchase 4,000 shares of Common Stock. Thereafter, on the date on which a new non-employee director is first elected or
appointed, he will automatically be granted options to purchase 25,000 shares of Common Stock for each year of his initial term. Each non-employee director will be granted options to purchase 4,000 shares of Common Stock for each year of any
subsequent term to which he is elected. All options become exercisable ratably over the directors term and have an exercise price equal to the fair market value of the Common Stock on the date of grant. Options were granted on December 1, 2000
(the grant date) and have an exercise price of $2.00 as determined by the November 30, 2000 closing price on NASDAQ. The options vest over a three-year vesting schedule with the first years vesting period ending on December 1,
2001.



During September 2001, the plan was amended to increase
the number of options covered by the plan to 500,000. During the year ended March 31, 2002, 310,000 shares were granted at the closing price on the date of grant of $1.00. As of March 31, 2002 326,000 options were outstanding, of which 5,333 options
were vested. During the year ended March 31, 2003, 165,000 options were granted and 34,000 options were forfeited. As of March 31, 2003, 457,000 options were outstanding, of which 101,333 options were vested with 355,667 options being nonvested.



The following table summarizes information about the aggregate
stock option activity for the years ended March 31, 2002 and 2003:



|                               |  |                 |   |  |                              |       |   |                 |         |   |                              |   |       |  
|------------------------------ |  | --------------- | - |  | ---------------------------- | ----- | - | --------------- | ------- | - | ---------------------------- | - | ----- | -
|                               |  | 2002            |   |  | 2003                         |      
|Employee Stock Options         |  | Numberof Shares |   |  | WeightedAverageExercisePrice |       |   | Numberof Shares |         |   | WeightedAverageExercisePrice |  
|Outstanding, beginning of year |  | 243,000         |   |  | $                            | 2.00  |   |                 | 227,500 |   |                              | $ | 2.00  |  
|Granted                        |  | 0               |   |  |                              |       |   |                 | 250,000 |   |                              | $ | 0.85  |  
|Exercised                      |  | 0               |   |  |                              |       |   |                 | 0       |   |                              |   | 0     |  
|Expired and forfeited          |  | (15,500         | ) |  | $                            | (2.00 | ) |                 | (12,500 | ) |                              | $ | (2.00 | )
|                               |  |                 |   |  |                              |       |   |                 |         |   |                              |   |       |  
|Outstanding, end of year       |  | 227,500         |   |  | $                            | 2.00  |   |                 | 465,000 |   |                              | $ | 1.38  |  
|                               |  |                 |   |  |                              |       |   |                 |         |   |                              |   |       |  
|Options vested, end of year    |  | 75,833          |   |  | $                            | 2.00  |   |                 | 143,333 |   |                              | $ | 2.00  |  
|                               |  |                 |   |  |                              |       |   |                 |         |   |                              |   |       |  



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



|                               |  |                 |  |                              |      |                 |         |                              |   |     
|------------------------------ |  | --------------- |  | ---------------------------- | ---- | --------------- | ------- | ---------------------------- | - | ----
|                               |  | 2002            |  | 2003                        
|Officer Stock Options          |  | Numberof Shares |  | WeightedAverageExercisePrice |      | Numberof Shares |         | WeightedAverageExercisePrice
|Outstanding, beginning of year |  | 150,000         |  | $                            | 2.00 |                 | 150,000 |                              | $ | 2.00
|Granted                        |  | 0               |  |                              |      |                 | 250,000 |                              | $ | 0.85
|Exercised                      |  | 0               |  |                              |      |                 | 0       |                              |   | 0   
|Expired and forfeited          |  | 0               |  |                              |      |                 | 0       |                              |   | 0   
|                               |  |                 |  |                              |      |                 |         |                              |   |     
|Outstanding, end of year       |  | 150,000         |  | $                            | 2.00 |                 | 400,000 |                              | $ | 1.28
|                               |  |                 |  |                              |      |                 |         |                              |   |     
|Options vested, end of year    |  | 50,000          |  | $                            | 2.00 |                 | 100,000 |                              | $ | 2.00
|                               |  |                 |  |                              |      |                 |         |                              |   |     



Employee Stock Options



The weighted-average fair value of options granted for
the years ending March 31, 2003 was $.85, (no employee options were granted during fiscal year ended March 31, 2002) . The estimated fair value for the above options was determined using the Black-Scholes method with the following weighted-average
assumptions used for grants in 2002 and 2003:



|                        |  |          |   |  |          |  
|----------------------- |  | -------- | - |  | -------- | -
|                        |  | 2002     |   |  | 2003     |  
|Dividend Yield          |  | 0.00     | % |  | 0.00     | %
|Option Term             |  | 10 years |   |  | 10 years |  
|Expected volatility     |  | 222.276  | % |  | 216      | %
|Risk-free interest rate |  | 5.52     | % |  | 4.85     | %



Officers Stock Options



The weighted-average fair value of options granted for
the years ending March 31, 2003 was $.85, (no officer options were granted during fiscal year ended March 31, 2002). The estimated fair value for the above options was determined using the Black-Scholes method with the following weighted-average
assumptions used for grants in 2002 and 2003:



|                        |  |          |   |  |          |  
|----------------------- |  | -------- | - |  | -------- | -
|                        |  | 2002     |   |  | 2003     |  
|Dividend Yield          |  | 0.00     | % |  | 0.00     | %
|Option Term             |  | 10 years |   |  | 10 years |  
|Expected volatility     |  | 222.276  | % |  | 216      | %
|Risk-free interest rate |  | 5.52     | % |  | 4.85     | %



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##### Table of Contents

The Company has adopted only the disclosure provision of SFAS No. 123, as it related to employee awards.
APB No. 25 is applied in accounting for the plan. Accordingly, no compensation expense is recognized related to the stock based compensation plans. The pro forma net earnings (loss) per common share, if the Company had elected to account for its
plan consistent with the methodology prescribed by SFAS No. 123, are shown in the following:



|                                      |  |      |            |   |      |   |          
|------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------
|                                      |  | 2002 |            |   | 2003
|Net earnings (loss):                  |  |      |            |   |      |   |          
|As reported                           |  | $    | (1,274,483 | ) |      | $ | 1,030,778
|                                      |  |      |            |   |      |   |          
|Pro forma                             |  | $    | (1,526,149 | ) |      | $ | 930,778  
|                                      |  |      |            |   |      |   |          
|Net earnings (loss) per common share: |  |      |            |   |      |   |          
|Basic income (loss) per share:        |  |      |            |   |      |   |          
|As reported                           |  | $    | (.18       | ) |      | $ | .15      
|                                      |  |      |            |   |      |   |          
|Pro forma                             |  | $    | (.22       | ) |      | $ | .12      
|                                      |  |      |            |   |      |   |          
|Diluted income (loss) per share:      |  |      |            |   |      |   |          
|As reported                           |  | $    | (.18       | ) |      | $ | $.15     
|                                      |  |      |            |   |      |   |          
|Pro forma                             |  | $    | (.22       | ) |      | $ | .12      
|                                      |  |      |            |   |      |   |          



|                         |  |                            |  |                                                 |  |                                      |  |                                |     
|------------------------ |  | -------------------------- |  | ----------------------------------------------- |  | ------------------------------------ |  | ------------------------------ | ----
|                         |  | Options                    |  | Outstanding                                     |  |                                      |  |                               
|Range of Exercise Prices |  | NumberOutstanding 03/31/03 |  | WeightedAverageRemainingContractualLife (years) |  | Number ofOptionsExercisable 03/31/03 |  | WeightedAverage Price 03/31/03
|$0.85                    |  | 665,000                    |  | 10.00                                           |  |                                     |  |                                |     
|$1.00                    |  | 276,000                    |  | 9.00                                            |  | 85,333                               |  |                                |     
|$2.00                    |  | 381,000                    |  | 7.19                                            |  | 259,333                              |  |                                |     
|                         |  |                            |  |                                                 |  |                                      |  |                                |     
|$0.85-$2.00              |  | 1,322,000                  |  | 8.98                                            |  | 344,666                              |  | $                              | 1.75



NOTE 15COMMITMENTS AND
CONTINGENCIES



Operating Leases



The Company has operating leases for facilities and certain machinery and
equipment that expire at various dates through 2009. Certain leases provide an option to extend the lease term. Certain leases provide for payment by the Company of any increases in property taxes, insurance, and common area maintenance over a base
amount and others provide for payment of all property taxes and insurance by the Company.



Future minimum lease payments, by year and in aggregate under non-cancelable operating leases, consist of the following at March 31, 2003:



|                      |  |   |          
|--------------------- |  | - | ---------
|Year ending March 31, |  |  
|2004                  |  | $ | 289,456  
|2005                  |  |   | 291,531  
|2006                  |  |   | 274,916  
|2007                  |  |   | 220,301  
|2008                  |  |   | 220,301  
|Thereafter            |  |   | 288,000  
|                      |  |   |          
|                      |  | $ | 1,584,504
|                      |  |   |          



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The Company leases one of their facilities from Dynamic (See Note 11, related party transaction) for a
ten-year term at approximately $207,000 annually. The lease provides for an annual cost-of-living increase. Management considers these lease terms to be comparable to those of unrelated third parties. The future minimum lease payments as of March
31, 2003 include this commitment.



Total rent expense for the
years ended March 31, 2002 and 2003, was $280,538 and $354,338 respectively.



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##### Table of Contents

INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



MARCH 31, 2002 and 2003



Litigation



The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary
course of business. The Company believes that none of the claims that were outstanding as of March 31, 2003 should have a material adverse impact on its financial condition or results of operations. See further consideration at Note 16-Subsequent
Events.



Employment Agreements



Simultaneously with the public offering, the Company entered into three year
employment agreements with the Chief Executive Officer, President and Chief Financial Officer at annual salaries of $160,000, $97,000 and $118,000 plus benefits, respectively.



Directors Compensation



The Company pays directors fees of $1,000 each per quarter and not less than $2,000 per year. In addition, each non-employee director receives options to
purchase shares of common stock for each year completed of the directors term. See further consideration within Note 14 above.



Common Stock



In December 2001, a special subcommittee of the board, comprised of Messrs. Dalton, Lawson and Stuart, was formed for the purpose of determining whether
all objectives and business plans negotiated at the time of the merger had been met. The merger was affected simultaneously with the successful completion of the Companys IPO in November 2000. On February 15, 2002, the special subcommittee
submitted their report to the board of directors; the Committee Report was adopted by the board for managements implementation. Their report, among other things, recommended that the board more closely review the business operations of the
Company for the period from, March 2002 through June 2002, inclusive, such that at the end of June 2002, the board would evaluate the success of the plans implementation. Should it be decided by the board that segments of the Companys
operations are not viable, the board will recommend possible remedies. See further consideration at Note 16-Subsequent Events.



NOTE 16SUBSEQUENT EVENTS



Stock Price



On February 3, 2003, we received notification from the NASDAQ Listing Qualifications Department that our common stock has closed below the minimum $1 per
share requirement for continued inclusion under Marketplace Rule 4310(c)(4) (the Rule). Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), we have been provided 180 calendar days, or until August 4, 2003 to regain compliance.
If, at any time prior to August 4, 2003, the bid price of the Companys common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, the Company will be provided written notification that compliance has been met.
On May 27, 2003, NASDAQ provided written notification that the Company regained compliance with the Rule and that this matter is now closed.



Common Stock



On April 11, 2003 the Company filed a lawsuit against Joseph Zappala, a member of the Companys Board of Directors in the Sixth Judicial Circuit in
and for Pinellas County, Florida. The lawsuit seeks to rescind a purported agreement between the Company and Mr. Zappala, breach of a consulting agreement between the Company and Mr. Zappala and related claims involving those agreements. Mr. Zappala
has denied the material allegations against him and has filed a counterclaim against the Company for breach of the consulting agreement.



F-24