<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

                   (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended JULY 31, 1997

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

                         For the transition period from

                             Commission file number
                                     0-13176

                      NON-INVASIVE MONITORING SYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)

                   Florida                                59-2007840
        (State or other jurisdiction                   (I.R.S. Employer
      of incorporation or organization)               Identification No.)

                  1840 West Avenue, Miami Beach, Florida, 33139
               (Address of principal executive offices) (Zip Code)

                                 (305) 534-3694
                        (Registrant's telephone number:)

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


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

                                      NONE
                                (Title of Class)

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

                     Common Stock, par value $.01 per share
                                (Title of Class)


<PAGE>   2

         Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.

Yes  X     No
    ----      ----

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

         State issuer's revenues for the most recent fiscal year: $1,351,982

         State the aggregate market value of the voting stock held by
non-affiliates of the registrant on October 16, 1997, computed by reference to
the price at which the stock was sold on that date: $1,238,164.34.

                      APPLICABLE ONLY TO CORPORATE ISSUERS
                      ------------------------------------

         The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share (the "Common Stock"), as of October 16, 1997, was
12,439,730.

         Transitional Small Business Disclosure Format:
                                                            Yes        No  X
                                                                ----      ----


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                                     PART I
                                     ------

                           Forward-Looking Statements

         This Report contains, in addition to historical information,
forward-looking statements regarding Non-Invasive Monitoring Systems, Inc. (the
"Company"), that involve risks and uncertainties. The Company's actual results
could differ materially. For this purpose, any statements contained in this
Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "estimate," or "continue" or the negative or other variations thereof
or comparable terminology are intended to identify forward-looking statements.
Factors that could cause or contribute to such difference include, but not
limited to, history of operating losses and accumulated deficit; possible need
for additional financing; dependence on SensorMedics Corporation ("SMC");
competition; dependence on management; risk related to proprietary rights; and
government regulation; and other factors discussed herein and in the Company's
other filings with the Securities and Exchange Commission.

ITEM 1.  BUSINESS.

         A.  GENERAL DEVELOPMENT OF BUSINESS.

         The Company is engaged in development of computer assisted,
non-invasive monitoring devices and related software designed to detect abnormal
respiratory, cardiac, and other medical conditions from sensors placed
externally on the body's surface. These devices provide diagnostic information
regarding cardiorespiratory and sleep disorders in infants, children and adults;
in addition, alarms are sounded for adverse cardiac and respiratory events in
critically ill patients. The Company also has in development non-invasive,
therapeutic, cardiorespiratory devices. In December 1996 a Joint Manufacturing
and Marketing Agreement between Nims and SensorMedics Corporation (SMC) was
entered into. This amended agreement between Nims and SMC granted SMC exclusive
rights to manufacture Nims' disposable Respiband transducers along with
non-exclusive rights to manufacture certain other products. Nims' principal
products are the following:

- Respitrace PT - a breathing recorder originally developed to monitor infants
prone to Sudden Infant Death Syndrome. The Respitrace PT is marketed by SMC
under the arrangement described below under the name SomnoStar PT.

- Respitrace Plus - a small portable respiratory and cardiac monitor;

- RespiEvents - a software package used in conjunction with the Respitrace PT to
detect apnea (cessation of breathing), slowing of heartbeat, diminution of blood
oxygen, and other adverse indices;

- RespiCardio Central - a device which allows the simultaneous monitoring of the
respiratory and cardiac function from a central station monitor to which up to
eight individual Respitrace Plus units can be connected;

- RespiTrends - a personal computer-based software program used in conjunction
with Respitrace Plus for patient trend data display, analysis, storage and hard
copy report; and

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- Respibands Plus - disposable patented non-invasive respiratory transducers
worn around the torso.

          In December 1996, the Company and SMC who had been the principal
distributor of Nims' products, amended the terms of their existing arrangement
and entered into a Joint Development, Manufacturing and Marketing Agreement (the
"SMC Agreement") pursuant to which the Company granted SMC the exclusive rights
to manufacture the Company's Respibands and non-exclusive rights to manufacture
the Company's Respitrace Plus and Respitrace PT. In exchange for such rights,
Nims received or will receive certain fixed payments from SMC, as well as
ongoing royalties. The Company has also developed a new sleep diagnostic device
to be manufactured and marketed exclusively by SMC. SMC also produces
instruments for pulmonary function testing, metabolic measurements, sleep
diagnostics and like support and has over 30 years experience in the medical
device industry. SMC distributes through 35 direct representatives in the United
States, the United Kingdom, the Benelux countries, France, and Germany and uses
50 dealers in other countries.

         In recent years, the increasing financial cost of domestic and foreign
regulatory compliance in the manufacture and marketing of medical devices has
adversely affected Nims' ability, particularly in light of its limited capital
resources, to manufacture and market new products targeted to adult and infant
critical care. As SMC is responsible under the Agreement for regulatory
compliance, the Company believes that by granting manufacturing rights to SMC,
it allows Nims to focus its efforts on product development which, in the opinion
of management, has always been the Company's strength. Nims is pursuing such
development efforts to improve its existing products and develop new products
for licensing to third parties for manufacture and marketing to the medical
community.

         The Company has operated under significant capital constraints in
recent years and has downsized its operations. Management believes that revenues
from the SMC Agreement will generate sufficient cash flow to fund and continue
operations, through the fiscal year ending July 31, 1998 ("fiscal 1998"). If
revenues generated from the SMC Agreement do not reach levels sufficient to fund
working capital requirements during fiscal 1998, the Company will require
further financing to continue operations during fiscal 1998 and in any event may
require additional capital to fund research and development efforts beyond
presently contemplated levels. Failure to secure necessary financing might
result in the further reduction and curtailment of operations.

         The term the "Company" refers to both the Company and its subsidiaries,
unless the context requires otherwise. The Company's executive offices are
located at 1840 West Avenue, Miami Beach, Florida 33139 and its telephone number
is (305) 534-3694.

         B.  FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

         Not applicable.



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         C.  NARRATIVE DESCRIPTION OF BUSINESS.

         PRODUCTS AND SERVICES

         The Company is engaged in the development of computer assisted,
non-invasive monitoring devices designed to detect abnormal respiratory and
related pulmonary events from sensors placed on the body's surface. These
devices provide diagnostic information regarding cardiorespiratory and sleep
disorders in infants, children and adults; in addition alarms are sounded for
adverse cardiac and respiratory events in critically ill patients.

- Respitrace PT - commercially introduced in April 1996. SMC manufactures and
markets the Respitrace PT under the name SomnoStar PT. A diagnostic sleep
recorder for detecting sleep disorders in adults, children and babies.

- Respitrace Plus - commercially introduced in April 1991, is a small, portable,
non-invasive, stand-alone patient monitoring unit designed to continuously
monitor heart and breathing abnormalities in a variety of environments inside
and outside a hospital at an economically viable selling price. It can also be
used as a portable battery-powered device during transportation of patients in
ambulances and within a hospital from patient rooms to diagnostic areas. The
system furnishes digital and analog displays of the electrocardiograph and
breath waveforms and interfaces with computer and video display equipment.

- RespiEvents - commercially introduced in April 1996, also known as the Event
Display program ("EDP"), is a software program for a personal computer ("PC")
designed to be used in conjunction with Respitrace Plus. It enables the PC to
receive digital information from the Respitrace Plus Digital Interface (RS232
output) and display real-time Respitrace Plus waveforms on the computer screen.
RespiEvents allows storage of Respitrace Plus information on the hard drive of
the PC for subsequent display of full fidelity waveforms and derived numerical
values and indices. EDP includes tools to manipulate the vertical and horizontal
gain displays of waveform information stored on the PC. EDP also includes a
capability to convert the numerical values of the data files into ASCII format
enabling them to be imported into other programs such as spread sheets (e.g.,
Lotus 123, Quattro Pro, Paradox), databases (e.g., FoxPro, Paradox), and
statistical packages (e.g., SigmaPlot, Statistica) so that sophisticated
numerical and statistical analysis and plots can be carried out. breathing and
electrocardiographic waveforms, which is particularly useful in documentation of
such occurrences in critically ill pulmonary, cardiac, and neurologic patients.

         RespiEvents transforms the PC into a polygraph recorder for Respitrace
Plus information and can be used in any situation where such a recorder might be
employed. One application is polysomnography in which apneic/hypopneic events
may be classified and sleep stages characterized according to breath waveform
patterns. Another is to monitor breath by breath changes in ventilation and
breathing pattern during exercise. EDP permits documentation of unusual patterns
of breathing and electrocardiographic waveforms, which is particularly useful in
documentation of such occurrences in critically ill pulmonary, cardiac, and
neurologic patients.


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         The Company, based on current market information, believes that the
features presented by RespiEvents are of particular importance to clinicians
treating not only adult patients with cardiorespiratory and sleep disorders but
also in the monitoring of infants both in hospital and at home. The Company has
retained exclusive rights to RespiEvents and such software is sold to SMC by
NIMS according to the pricing set forth in the Distribution Agreement.

- Respicardio Central - commercially introduced in April 1991, is a system for
monitoring the respiratory and cardiac ("ECG") functions of up to eight patients
simultaneously from a central station monitor, to which individual Respitrace
Plus bedside units are connected. The monitor receives a continuous stream of
data from bedside Respitrace Plus monitoring units linked to the central monitor
by interconnecting cables or telemetry. RespiCardio Central permits detection
and classification of cardiorespiratory rhythm disturbances and abnormal cardiac
beats. The system operates with a laser printer, and/or an optional integral
thermal-paper ECG/Respiration Strip-chart recorder to produce hard copy
documentation for later analysis and patient diagnosis. RespiCardio Central
displays real-time ECG, heart rate, arrhythmia diagnoses, breath waveforms,
breath rate labored breathing index, labored breathing index, percent tidal
volume, and percent oxygen saturation in clear, precise graphics. RespiCardio
Cental's monitor provides alarms for high or low heart rate; cardiac
arrhythmia's; high, low, labored or zero breathing; and system function. These
audio and visual alarms can be programmed to meet the requirements of individual
patients.

- Respitrends - commercially introduced in July 1992, is a medical data storage
software program which permits real-time reception and storage of Respitrace
Plus cardiac and respiratory information for display on the screen of the
device. It also generates a variety of reports and trend-plots of patient
status. The software program also allows the user to down load RespiTrends from
Respitrace Plus to a personal computer for further analysis and report
generation. All Respitrace Plus data, including heart, breath, and system
values, conditions, and alarms during a 24-hour period or less may be loaded
into a personal computer using the RespiTrends software. Time periods from 15
minutes to the full 24 hours for each value, condition and alarm may then be
viewed, analyzed, and/or printed. RespiTrends software is user friendly with an
intuitive graphical interface. Learning time is minimal and no special knowledge
of medical procedures is required to load or print RespiTrends data. Statistical
reports and comparison of patient status with normative standards can be viewed
and/or printed. RespiTrends is offered in conjunction with the Respitrace Plus
system.

- Respi-ECG Simulator - commercially introduced in January 1994, is an all
electronic simulator capable of simulating breathing for the rib cage and
abdomen channels as inputs to all Respitrace monitors. Additionally, it also has
a channel for simulating ECG and heart rate for monitors. The breathing part of
the simulator is theoretically correct to produce an exact calibration of
breathing waveforms and can produce an apnea at the touch of a button. The ECG
section of the simulator is capable of producing two heart rates, allowing a
functional check of Bradycardia alarms on monitor heart channels.

- Respitrace Basic System - was introduced in 1979 as the Company's initial
product. By placing one Respiband over the thorax and the other over the
abdomen, changes in the capacity of 


                                       6
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the thoracic and abdominal cavities during pulmonary functions are measured and
graphically displayed on a recording device. The Company does not currently
manufacture or market the Respitrace Basic System directly, but rather has
licensed the rights for its manufacture and marketing in the United States,
Canada and Japan to one party and has licensed the rights for its manufacturing
and marketing in the entire world except the United States, Canada and Japan to
a second concern. Such licenses, which are exclusive, run in perpetuity and for
20 years, respectively, and provide for royalty payments of 25% and 20% of net
sales (as defined), respectively. Such entities are also licensed to sell
certain other Nims products on a non-exclusive basis in such territories.
Pursuant to these license agreements, the Company earned royalties of
approximately $25,000 and $10,000 during each of the fiscal years ended July 31,
1997 and 1996.

- Disposable and Accessories - Nims has also developed disposable and accessory
items utilized with its products including the Respiband Plus.

         PRODUCTS UNDER DEVELOPMENT

         The Company has undertaken development of several new products. SMC has
the right of first refusal to new products and technology should Nims elect to
enter to license its products to others. The products under development are:

- Respitrace PT 16 - is a modification of the Nims Respitrace PT that allows
recording of 16 additional analog channels and display in RespiEvents. Versions
of this device are currently under clinical testing.

- Heart Rate Variability - is a component of RespiEvents that measures heart
rate and respiratory variability in the time domain. Nims, which has not
received 510(k) clearance for marketing this product, will attempt to license
this software to other companies for marketing once 510(k) clearance is
obtained.

- Inspiratory Acceleration - is software package that is under development as a
new measure of central respiratory drive and a patent has been applied for on
this measure.

- EEG Period-Amplitude Analysis - is a software package currently under
development that analyzes sleep and wake electroencephalogram in the time domain
by period-amplitude analysis. It aids the clinician in distinguishing among wake
sleep stages.

- Arterial Oxygen Saturation Artifact Detector - is a software algorithm that
distinguish motion artifacts on the pulse oximeter that cause erroneous values
of arterial oxygen saturation from this device. A patent has been allowed and
the software is a component of RespiEvents that has received 510(k) clearance
for marketing by the FDA.

- RespiCVP - is a non-invasive method for estimation of central venous pressure.
Its accuracy has been validated against invasive central venous catheter
measurements. A scientific paper providing details of this measurement has been
published in Chest 100:371, 1991. The Company 



                                       7
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is currently planning refinements to take this technique from the research to
the clinical stage in conjunction with the Respicardiograph more fully described
below.

- Respicardiograph - is a system which is designed to monitor and record cardiac
signals by placing Respibands around different locations on the chest. This
technology depicts left and right ventricular volume curves of the heart and
serves as a continuous non-invasive monitor of the mechanical function of the
heart. By providing a recording of changes in blood pumped from the heart, it
measures changes in cardiac output. In addition, analysis of various points on
the ventricular volume curve, provide assessment of systolic (contraction) and
diastolic (relaxation) properties of the heart. The Respicardiograph also
provides data on regional cardiac motion, which is a key factor in early
detection of acute heart attacks. Four scientific papers have been published on
this technology (Chest 99:613, 1991; Chest 99:896, 1991; Chest 106:1668, 1994;
Am.J.Respir.Crit.Care Med.155:26, 1997). The Company believes that the
Respicardiograph will serve as a low cost, less labor-intensive substitute for
certain aspects of Doppler-Echo technology, a low cost, less labor-intensive,
more easily interpretable technologic, alternative to the echocardiogram for
detection of regional myocardial dysfunction due to coronary artery disease, and
as a safe low-cost alternative to invasive Swan-Ganz catheter technology for
monitoring the status of the pulmonary circulation and heart in critically ill
patients.

         The Company has developed prototype models of the Respicardiograph
system and has continued with refinements to hardware and software which are
undergoing testing. Such hardware will allow collection from up to five
Respiband Plus transducers simultaneously and eliminate electrical
interference's when several Respiband Plus transducers are placed upon the body.

         The Company devised and began testing new devices that provide
non-invasive motion ventilation, i.e., a powered, moving platform under computer
control produces passive movements of the body that give rise to ventilation.
This method, for which a patent has been applied, does not require connection to
the airway for imposed positive pressures as is the case for conventional
mechanical ventilators. Initial experiments indicate that this method provides
adequate ventilation as measured by arterial blood gases when the respiratory
muscles are paralyzed.

         During the fiscal year ended July 31, 1997, ("fiscal 1997") the
Company's product development activities were mainly focused on those required
pursuant to the SMC Agreement of the new diagnostic sleep recorder as well as
the new, non-invasive, therapeutic motion ventilation system.

         MARKETING AND SALES

         The Company's products are designed for hospitals and other health care
facilities such as outpatient surgical units, sleep disorder centers, home
health care monitoring services, research facilities and governmental agencies
well as to health care professionals such as pulmonary and critical care
physicians, neonatologists, anesthesiologists, respiratory therapists, hospital
administrators and directors of home health care agencies.


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<PAGE>   9

         The Company's products are primarily distributed by SMC pursuant to the
SMC Agreement. SMC produces instruments for pulmonary function testing,
metabolic measurements, sleep diagnostics and like support and has over 30 years
experience in the medical device industry. SMC distributes through 35 direct
representatives in the United States, the United Kingdom, the Benelux countries,
France, and Germany and uses 50 dealers in other countries.

         As described in "General Development of Business" above, in December
1996, Nims granted SMC the exclusive rights to manufacture Respibands and
non-exclusive rights to manufacture certain other products. In exchange for such
rights, Nims has received and will receive certain fixed payments from SMC, as
well as ongoing royalties. The Company believes that by granting manufacturing
rights to SMC, it allows Nims to focus its efforts on product development which,
in the opinion of management, has always been the Company's strength. Nims is
pursuing such development efforts to improve its existing products and develop
new products for licensing to third parties for manufacture and marketing to the
medical community.

GOVERNMENT REGULATION

         Manufacturers of medical devices are subject to extensive regulation by
various federal and state government entities relating to nearly every aspect of
the development, manufacture and commercialization of such products. The U.S.
Food and Drug Administration is the principal regulatory authority over medical
devices in the United States. In addition, in order to manufacture and market
medical devices overseas, which the Company believes is a significant potential
market for its products, the Company must comply with regulatory requirements
and procedures in various foreign countries.

         In recent years, the increasing financial cost of domestic and foreign
regulatory compliance in the manufacture and marketing of medical devices has
adversely affected Nims' ability, particularly in light of its limited capital
resources, to manufacture and market new products targeted to adult and infant
critical care. Accordingly, in connection with the grant by Nims to SMC in
December 1996 of the exclusive rights to manufacture Respibands and
non-exclusive rights to manufacture Nims' other products, SMC assumed
responsibility for regulatory compliance for the manufacture and marketing of
Nims' products.

         PATENTS AND TRADEMARKS

         The Company currently holds 17 United States and 6 foreign patents with
respect to both overall design and specific features of its present and proposed
products and has submitted applications with respect to an additional 4 United
States and three foreign patents. No assurance can be given as to the scope of
protection afforded by any patent issued, whether patents will be issued with
respect to any pending or future patent application, that patents issued will
not be designed around, infringed or successfully challenged by others, that the
Company will have sufficient resources to enforce any proprietary protection
afforded by its patents or that the Company's technology will not infringe on
patents held by others. The Company believes that in the event its patent
protection is materially impaired, a material adverse effect on its present and
proposed business could result. The expiration dates of the patents are as
follows:


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                      NUMBER OF PATENTS                            EXPIRATION
              DOMESTIC                  FOREIGN                       DATE
              --------                  -------                    ----------
                 3                                                    1999
                 1                                                    2000
                 1                                                    2001
                 2                         2                          2004
                 2                                                    2005
                 1                         1                          2006
                 1                         2                          2007
                 2                                                    2008
                 2                         1                          2011
                 2                                                    2015
               -----                     -----
                17                         6

         With respect to its present and proposed product line the Company has
13 trademarks and trade names which are registered in the United States and 13,
which are registered in several foreign countries, including the Company's
principal trademark.

         COMPETITION

         The Company competes with several concerns which develop non-invasive
respiratory monitoring devices, including Healthdyne Corporation, Hewlett
Packard and Spacelabs, all of which are larger, have longer operating histories
and have financial and personnel resources far greater than those of the
Company. Management believes, however, that it effectively competes with such
concerns.

         EMPLOYEES

         The Company currently employs seven employees on a full-time basis. Two
are engaged in general and administrative duties, four in research and
development, and one in product assembly. The reduction in full-time employees
is due to the license to SMC of rights to manufacture the Company's products.

         D. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
            AND EXPORT SALES.

         Not  applicable.

ITEM 2.  PROPERTIES.

         The Company occupies approximately 6,000 square feet at 1840 West
Avenue, Miami Beach, Florida, which house its executive offices and product
development facilities. Such space is leased on a month-to-month basis from a
non-affiliated party at an annual rental of 



                                       10
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approximately $31,000. The Company believes that its facilities are adequate for
the Company's needs in the near future.

ITEM 3.  LEGAL PROCEEDINGS.

         There are no material legal proceedings which are currently pending or,
to the Company's knowledge, contemplated against the Company to which it is a
party.

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

         None.





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<PAGE>   12


                                     PART II

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

         A.  MARKET INFORMATION.

         The Company's Common Stock is currently traded in the over-the-counter
market and is listed on the OTC Bulletin Board. The high and low bid prices for
the Common Stock, as reported by the National Quotation Bureau Incorporated for
each quarter during the last two fiscal years were as follows:

          QUARTER ENDED                HIGH              LOW
          -------------                ----              ---
         October 31, 1995             $0.938           $0.250
         January 31, 1996             $0.203           $0.125
         April 30, 1996               $0.719           $0.125
         July 31, 1996                $0.656           $0.250
         October 31, 1997             $0.25            $0.25
         January 31, 1997             $N/A             $0.188
         April 30, 1997               $0.188           $0.156
         July 31, 1997                $0.188           $0.141

         The quotations set forth above reflect inter-dealer prices, without
retail markup, markdown, or commission, and may not necessarily represent actual
transactions.

         B.  HOLDERS

         At October 16, 1997 there were approximately 2,100 holders of record of
the Common Stock.

         C.  DIVIDENDS.

         The Company has not paid any dividends on its capital stock since its
inception and the Board of Directors does not contemplate doing so in the near
future. Any decision as to future payment of dividends depends on the factors as
the Board of Directors deems relevant.




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


         RESULTS OF OPERATIONS.

         FISCAL 1997 COMPARED TO FISCAL 1996

         The Company's net income for fiscal 1997 was approximately $163,000 as
compared to net loss of approximately $394,000 for the year ending July 31, 1996
("fiscal 1996"). For fiscal 1997, total revenue was approximately $1,352,000 as
compared to approximately $1,723,000 in fiscal 1996. The improvement in
performance for fiscal 1997 was primarily due to the SMC Agreement. During
fiscal 1997 the Company received $750,000 as payment for the license grant and
product sold pursuant to the SMC Agreement. Under the terms of the SMC
agreement, the Company granted SMC manufacturing and distribution rights (as
defined) for Nims products.

         Cost of goods sold expressed as a percentage of product sales was
approximately 51% for fiscal 1997 compared to 57% in fiscal 1996. These
decreases are due to lower sales and fixed production costs. As described above,
during Fiscal 1997, the Company granted SMC certain manufacturing rights for the
Company's products, which largely eliminates cost of goods sold and has resulted
in expense reductions.

         During fiscal 1997, the Company wrote-down approximately $164,000 of
inventory based on a valuation of net realizable value. In fiscal 1996, the
Company wrote-down inventory with a cost of approximately $272,000. Net
operating loss carry forward for federal income tax purposes, for the Company as
of July 31, 1997 was approximately $ 8,901,000.

         Costs and expenses were approximately $1,200,000 for fiscal 1997
compared to $2,153,000 in fiscal 1996. Selling and distribution expenses were
approximately $27,000 lower during fiscal 1997, as compared to the same periods
in fiscal 1996. Due to the SMC Agreement, the Company is not incurring and does
not expect to incur any significant selling expenses. General and administrative
expenses were approximately $49,000 lower in fiscal 1997 as compared to fiscal
1996 as a result of decreased expenses associated with securing FDA approvals.
Research and development expenses were approximately $37,000 higher in fiscal
1997 as compared to fiscal 1996 due to increased research and development of new
products pursuant to the SMC Agreement.

         LIQUIDITY AND CAPITAL RESOURCES

         For the year ended July 31, 1997, Nims primary source of working
capital was generated from royalties and licensing fees under the SMC Agreement.

         Working capital at July 31, 1997 was $640,000 as compared to $490,000
at July 31, 1996. The increase in working capital is due to net income generated
during fiscal 1997. The 



                                       13
<PAGE>   14

significant improvement in working capital for the year ended July 31, 1997 as
compared to July 31, 1996 was primarily due to the factors described above.

         Cash provided by operating activities during fiscal 1997 was
approximately $489,000 compared to $36,000 during fiscal 1996. The increase in
cash provided by operating activities of approximately $453,000 in fiscal 1997
as compared to fiscal 1996 is primarily attributable to an decrease in operating
assets (net of liabilities) of $96,000 in fiscal 1997 as compared to an increase
of $19,000 in fiscal 1996, and an increase in the Company's net income (net of
non-cash charges) of $338,000 during fiscal 1997.

         Cash used in investing activities in fiscal 1997 and fiscal 1996 was
approximately $31,000 and $36,000, respectively. Investing activities consist
primarily of costs for patents and software production.

         There was no cash provided by financing activities in fiscal 1997 and
in fiscal 1996.

         The report of independent auditors on financial statements at and for
the two years ended July 31, 1997, contains an explanatory paragraph raising
substantial doubt of the Company's ability to continue as a going concern. Note
2 to the consolidated financial statements describes the conditions which raise
this doubt and management's plans. Management believes that revenues from the
SMC Agreement will generate sufficient cash flow to fund working capital needs
and continue operations through fiscal 1998. If revenues generated from the SMC
Agreement, do not reach levels sufficient to fund working capital requirements
during fiscal 1998, the Company may require further financing to continue
operations during fiscal 1998 and in any event may require additional capital to
fund research and development efforts beyond presently contemplated levels.
Failure to secure necessary financing might result in the further reduction and
curtailment of operations.

ITEM 7.  FINANCIAL STATEMENTS

         The response to this item is submitted in a separate section of this
report, beginning at page F-1.

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

         There have been no changes in accountants during the 24 months prior to
July 31, 1997.


<PAGE>   15


                                    PART III
                                    --------

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

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

                  NAME                   AGE      POSITION

         Marvin A. Sackner, M.D.         65       Chairman of the Board, Chief 
                                                  Executive Officer and Director

         Ruth Sackner                    61       Secretary and Director

         Gerard Kaiser, M.D.             65       Director

         Morton J. Robinson, M.D.        65       Director

         Stanley C. Sackner, D.O.        61       Director

         Edward Shapiro                  83       Director


         MARVIN A. SACKNER, M.D. was elected to his positions with the Company
in November 1989, upon the Company's acquisition by merger (the "Merger") of all
of the capital stock of Non-Invasive Monitoring Systems, Inc., a privately held
Florida corporation ("Nims/Fla"). Dr. Sackner co-founded Nims/FLA in 1977 and
was the Chairman of the Board from 1981 until October 1989 and Chief Executive
Officer from 1985 until the Merger. From 1974 until October 1991, Dr. Sackner
was the Director of Medical Services at Mount Sinai in Miami Beach, Florida.
From 1973 to 1986, Dr. Sackner was consultant to Key Pharmaceutical, Inc. and
has been a consultant to the Sherwood Medical Division of American Home Products
and Schering-Plough Corporation since 1986. Dr. Sackner was the President of the
American Thoracic Society from 1979 to 1980 and was the Chairman of the
Pulmonary Disease Subspecialty Examining Board of the American Board of Internal
Medicine from 1977 to 1980.

         RUTH SACKNER was elected a Director of the Company in November 1989
upon completion of the Merger. Mrs. Sackner was a Director of Nims/FLA from 1986
until the Merger. Mrs. Sackner is an Overseer of the Library Committee at the
University of Pennsylvania.

         GERARD KAISER, M.D. was elected a Director of the Company in November
1989 upon completion of the Merger. From 1988 until the Merger, Dr. Kaiser was a
Director of Nims/FLA. Since 1971, he has been at the University of Miami School
of Medicine and presently serves as Deputy Dean for Clinical Affairs and
Daughtry Professor of Cardiothoracic Surgery. He also serves as Senior Vice
President for Medical Affairs at Jackson Memorial Hospital.


                                       15
<PAGE>   16

         MORTON J. ROBINSON, M.D. was elected a Director of the Company in
November 1989 upon completion of the Merger. Dr. Robinson was a Director of
Nims/FLA from 1986 until the Merger. For at least the past 6 years, Dr. Robinson
has been a Director of the Department of Pathology and Laboratory Medicine at
Mount Sinai.

         STANLEY C. SACKNER, D.O. was elected a Director of the Company in
November 1989 upon completion of the Merger. Dr. Sackner was a Director of
Nims/FLA from 1986 until the Merger. Dr. Sackner is on honorary staff of
Department Anesthesiology at Memorial Hospital in Union, New Jersey.

         EDWARD SHAPIRO was elected a Director of the Company in November 1989
upon completion of the Merger. Mr. Shapiro was a Director of Nims/FLA from 1987
until the Merger. From 1969 to the present, Mr. Shapiro has been a private real
estate investor. From 1950 until 1981, he was a Director and President of
several divisions of Maryland Cup Corporation. From 1979 until 1982, Mr. Shapiro
was the Chairman of the Board of Directors of Mount Sinai.

         Ruth Sackner and Dr. Stanley C. Sackner are Marvin A. Sackner's spouse
and brother, respectively.

         Directors of the Company hold their offices until the next annual
meeting of the Company's shareholders until their successors have been duly
elected and qualified or until their earlier resignation, removal of office or
death. Other than an Audit and Legal Committee consisting of Edward Shapiro,
Gerard Kaiser and Ruth Sackner and a Compensation and Stock Option Review
Committee consisting of Marvin A. Sackner and Morton J. Robinson, there are no
committees of the Board of Directors.

         Officers of the Company serve at the pleasure of the Board of Directors
and until the first meeting of the Board of Directors following the next annual
meeting of the Company's shareholders and until their successors have been
chosen and qualified.

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's Directors, executives officers and holders of more than
ten percent of the Company's Common Stock, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and NASDAQ.
Such persons are required to furnish the Company with copies of all Section
16(a) forms they file.

         Based solely on its review of the copies of such forms received by it,
or oral or written representations from certain reporting persons that no Forms
5 were required for those persons, the Company believes that, during fiscal
1997, all filing requirements applicable to its directors, executive officers
and greater than 10% beneficial owners were complied with, except that a Form 4
for each of Dr. Marvin A. Sackner and Ruth Sackner reporting certain
dispositions of Common Stock during July 1997 was filed approximately ten days
late due to an administrative oversight.




                                       16
<PAGE>   17


ITEM 10. EXECUTIVE COMPENSATION

         A.  SUMMARY COMPENSATION TABLE

         The following compensation table sets forth, for the fiscal years
ending July 31, 1997 and 1996, the cash and certain other compensation paid by
the Company to the Company's Chief Executive Officer ("CEO"). No other current
executive officer had an annual salary and bonus in excess of $100,000 during
either of such fiscal years:

                                                            Other Annual
                                                Salary      Compensation
NAME AND PRINCIPAL POSITION         YEAR          ($)            ($)
---------------------------         ----        ------      ------------

Marvin A. Sackner
Chairman of the Board, and
Chief Executive Officer             1997        $75,000          --
                                    1996        $48,077          --


         B.       EMPLOYMENT AGREEMENTS

                  None.

         C.       OTHER COMPENSATION

                  None.

         D.       COMPENSATION OF DIRECTORS

                  None.

         E.       TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT.

                  None.



                                       17
<PAGE>   18



ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT.

                             PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding NIMS' Common Stock,
Series C Convertible Preferred Stock and NIMS' voting securities beneficially
owned on October 11, 1997 and giving effect to the Exchange Offer, by (i) each
person who is known by NIMS to own beneficially or exercise voting or
dispositive control over 5% or more of NIMS' Common Stock, (ii) each of NIMS'
Directors and (iii) all executive officers and Directors as a group:


<TABLE>
<CAPTION>
                                                          No. of Shares of 
                                                              Series C                         No. of Shares
                     No. of Shares of                       Convertible                          of Voting          
                       Common Stock       Percentage of    Preferred Stock        Percentage     Securities        Percentage of
 Name and Address     Beneficially         Beneficial       Beneficially          Percentage    Beneficially        Beneficial
 Identity of Group      Owned (1)          Ownership           Owned              of Class        Owned (1)         Ownership
 ---------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>                 <C>              <C>                    <C>           <C>                 <C>    
 Marvin A.             3,198,779 (2)          25.0%           36,855.92 (2)         59.4%        3,235,634.9(2)        26.0%
 Sackner, M.D.
 1840 West Avenue
 Miami Beach, FL
 33139

 ----------------------------------------------------------------------------------------------------------------------------------
 Ruth Sackner          3,198,779 (2)          25.0%           36,855.92 (2)         59.4%         3,235,634.9(2)           26.0%
 1840 West Avenue
 Miami Beach, FL
 33139

 ----------------------------------------------------------------------------------------------------------------------------------
 Stanley C.              249,909 (4)           2.0%            1,198.19  (4)        0.9%           251,107.19(4)          2.0%
 Sackner, D.O.           
 1840 West Avenue
 Miami Beach, FL
 33139

 ----------------------------------------------------------------------------------------------------------------------------------
 Morton J.                76,159                *              1,073.19             1.7%            77,232.19(3)            *
 Robinson, M.D.
 1840 West Avenue
 Miami Beach, FL
 33139

 ----------------------------------------------------------------------------------------------------------------------------------
 Edward Shapiro           26,250(5)             *               525.00(5)           *               26,775.00(5)            *
 1840 West Avenue          
 33139

 ----------------------------------------------------------------------------------------------------------------------------------
 Gerard Kaiser,            4,875(6)            *                 75.00(6)           *               4,950.00(6)             *
 M.D.
 1840 West Avenue
 Miami Beach, FL
 33139

 ----------------------------------------------------------------------------------------------------------------------------------
 All executive         3,555,972(2)-(6)       27.0%          39,727.30 (2)-(8)     62.0%        3,595,699.28            28.0%
 officers and                                                                                         (2)-(6)
 Directors as a
 group (6 persons)


</TABLE>

---------------------------
* Less than 1%

                                       18
<PAGE>   19


(1) Does not include shares of Common Stock issuable upon conversion of Series C
Convertible Preferred Stock. Each share of Series C Convertible Preferred Stock
is convertible, at the option of the holder thereof, at any time, in whole or in
part, into 25 shares of Common Stock upon payment of a conversion premium of
$4.20 per share of Common Stock. Holders of Series C Convertible Preferred Stock
are entitled to vote together with the holders of shares of Common Stock and
Series B Convertible Preferred Stock, on a share-for-share basis as a single
class, on all matters except as otherwise required by law.

(2) Represents securities held by Dr. Marvin A. Sackner and Ruth Sackner, his
spouse.

(3) Includes securities held jointly by Dr. Robinson and his spouse and by a
pension plan established in connection with Dr. Robinson's medical practice.
Does not include securities held by trust established for the benefit of Dr.
Robinson's children, in which securities he disclaims beneficial ownership.

(4) Includes shares of Common Stock held by a pension plan established in
connection with Dr. Stanley Sackner's medical practice and securities held
jointly by Dr. Sackner and his spouse.

(5) Includes securities held jointly by Mr. Shapiro and his spouse.

(6) Includes shares of Common Stock held by Dr. Kaiser's spouse.


                                       19

<PAGE>   20


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         None.








                                       20
<PAGE>   21



                                     PART IV


ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a).  EXHIBITS

        EXHIBIT NO.               DESCRIPTION OF EXHIBITS
        -----------               -----------------------

           3(a)           -  Articles of Incorporation, as amended(1)

            (b)           -  By-Laws, as amended(2)

           4(a)           -  Form of Certificate evidencing shares of Common
                             Stock(3)

          10(c)           -  Revised SMC Agreement(4)

          21              -  Subsidiaries of the Company (2)

          27              -  Financial Data Schedule (SEC use only)



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

(1) Included as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-14451), including all pre and post effective Amendments thereto,
and incorporated herein by reference, except for Articles of Amendment and a
Certificate of Designation, Rights, Preferences and Limitations of Series C
Convertible Preferred Stock, which are included as Exhibits to the Company's
Annual Report on Form 10-K for the year ended July 31, 1989 and are incorporated
herein by reference.

(2) Included as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-14451) including all pre and post effective Amendments thereto, and
incorporated herein by reference.

(3) Included as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended July 31, 1990 and incorporated herein by reference.

(4) Included as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended July 31, 1996 and incorporated here by reference.

(b).  REPORTS ON FORM 8-K

      None.



                                       21
<PAGE>   22

             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

                               Form 10-KSB-Item 13
                          Index to Financial Statements




                                    CONTENTS

The following consolidated financial statements of Non-Invasive Monitoring
Systems, Inc. and subsidiaries are included in Item 7:

         Consolidated Balance Sheet--July 31, 1997

         Consolidated Statements of Operations and Accumulated Deficit--Years
         ended July 31, 1997 and 1996

         Consolidated Statements of Cash Flows--Years ended July 31, 1997 and
         1996

         Notes to Consolidated Financial Statements--July 31, 1997





                                      F-1
<PAGE>   23


               Report of Independent Certified Public Accountants

The Board of Directors and Shareholders
Non-Invasive Monitoring Systems, Inc.

We have audited the consolidated financial statements of Non-Invasive Monitoring
Systems, Inc. and subsidiaries listed in the accompanying index to financial
statements (Item 13). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements listed in the accompanying index to
financial statements (Item 13) present fairly, in all material respects, the
consolidated financial position of Non-Invasive Monitoring Systems, Inc. and
subsidiaries at July 31, 1997, and the consolidated results of their operations
and their cash flows for each of the two years in the period ended July 31,
1997, in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that Non-Invasive Monitoring Systems, Inc. and subsidiaries will continue as a
going concern. As more fully described in Note 2, the Company continues to incur
operating losses and negative cash flows. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans as to these matters are also described in Note 2. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.




                                                          /s/ ERNST & YOUNG LLP

Miami, Florida
September 30, 1997                                         



                                      F-2
<PAGE>   24



             Non-Invasive Monitoring Systems, Inc. and Subsidiaries


                           Consolidated Balance Sheet

                                  July 31, 1997

<TABLE>
<S>                                                                    <C>        
ASSETS
Current assets:
   Cash and cash equivalents                                           $   646,261
   Accounts and royalties receivable                                        93,905
   Prepaid expenses and other current assets                                10,313
                                                                       -----------
Total current assets                                                       750,479
Property and equipment:
   Furniture and equipment                                                 695,428
   Leasehold improvements                                                   15,731
                                                                       -----------
                                                                           711,159
   Less accumulated depreciation and amortization                         (616,339)
                                                                       -----------
                                                                            94,820
Other assets:
   Patent costs, net of accumulated amortization of $144,284               253,326
   Other assets                                                              3,770
                                                                       -----------
Total other assets                                                         257,096
                                                                       -----------
Total assets                                                           $ 1,102,395
                                                                       ===========

</TABLE>



                                      F-3

<PAGE>   25



             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

                           Consolidated Balance Sheet

                                  July 31, 1997

<TABLE>
<S>                                                                         <C>         
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                         $     25,775
   Accrued expenses                                                               84,638
                                                                            ------------
Total current liabilities                                                        110,413

Shareholders' equity:
   Convertible Preferred Stock, $1.00 par value, 
     1,000,000 shares authorized:
     Series B--100 shares issued and outstanding
     (liquidation preference of $100 per share,
     aggregating $10,000)                                                            100
     Series C--62,048 shares issued and outstanding                               62,048
   Common Stock, $.01 par value, 100,000,000 shares
     authorized, 12,439,729 issued and outstanding                               124,398
Additional paid-in capital                                                    10,693,127
Accumulated deficit                                                           (9,887,691)
                                                                            ------------
Total shareholders' equity                                                       991,982
                                                                            ------------
Total liabilities and shareholders' equity                                  $  1,102,395
                                                                            ============

</TABLE>


SEE ACCOMPANYING NOTES.



                                      F-4
<PAGE>   26
 

             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

          Consolidated Statements of Operations and Accumulated Deficit

<TABLE>
<CAPTION>
                                                                 YEARS ENDED JULY 31
                                                                1997              1996
                                                           ------------       ------------
<S>                                                        <C>                <C>         
Revenues
   Product sales                                           $    513,473       $  1,712,248
   License revenue and product sales under Joint
     Development, Manufacturing and Marketing
     Agreement                                                  750,000                 --
   Royalty income                                                88,509             10,384

                                                           ------------       ------------
Total Revenue                                                 1,351,982          1,722,632

Costs and expenses:
   Cost of goods sold                                           261,950            978,695
   Write-down of inventory                                      164,072            272,033
   Amortization of software production costs                         --             90,000
   Selling, general and administrative                          413,810            489,842
   Research and development                                     360,081            322,780
                                                           ------------       ------------
Total costs and expenses                                      1,199,913          2,153,350

Income (loss) from operations                                   152,069           (430,718)

Other income                                                     10,834             36,578
                                                           ------------       ------------
Net income (loss)                                               162,903           (394,140)
Accumulated deficit at beginning of period                  (10,050,594)        (9,656,454)
                                                           ------------       ------------
Accumulated deficit at end of period                       $ (9,887,691)      $(10,050,594)
                                                           ============       ============

Average common shares outstanding                            12,439,729         12,439,729
                                                           ============       ============

Income (loss) per common share                             $       0.01       $      (0.03)
                                                           ============       ============


</TABLE>

SEE ACCOMPANYING NOTES.




                                      F-5
<PAGE>   27


             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                               YEARS ENDED JULY 31
                                                               1997           1996
                                                            ---------       ---------
<S>                                                         <C>             <C>       
OPERATING ACTIVITIES
Net income (loss)                                           $ 162,903       $(394,140)
Adjustments to reconcile net (loss) income to net
   cash used in operating activities:
     Depreciation and amortization                             65,324         168,130
     Write down of patent costs                                    --           8,370
     Write down of inventory                                  164,072         272,033
     Changes in operating assets and liabilities:
       Decrease (increase) in accounts and
         royalties receivable                                 538,637        (523,790)
       Decrease in inventories                                 92,970          14,262
       Decrease in prepaid expenses and other
         current assets                                         6,365          25,861
       Decrease in deferred costs                              37,606              --
       (Increase) in other assets                              (3,770)             --
       Increase (decrease) in accounts payable
         and accrued expenses                                (491,584)        394,017
       (Decrease) increase in customer deposits               (84,000)         71,017
                                                            ---------       ---------
Net cash provided by operating activities                     488,523          35,760

INVESTING ACTIVITIES
Purchases of plant and equipment                                   --          (7,121)
Patent costs                                                  (31,354)        (29,316)
                                                            ---------       ---------
Net cash (used in) investing activities                       (31,354)        (36,437)

Net decrease in cash and cash equivalents                     457,169            (677)
Cash and cash equivalents at beginning of period              189,092         189,769
                                                            ---------       ---------
Cash and cash equivalents at end of period                  $ 646,261       $ 189,092
                                                            =========       =========

</TABLE>

SEE ACCOMPANYING NOTES.



                                      F-6

<PAGE>   28


             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                  July 31, 1997


1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND CONSOLIDATION

The consolidated financial statements include the accounts of Non-Invasive
Monitoring Systems, Inc. (the Company) and its wholly-owned subsidiary,
Non-Invasive Monitoring Systems of Florida, Inc. (NIMS, FL), and Respitrace
Corporation, the wholly-owned subsidiary of NIMS, FL. All significant
intercompany balances have been eliminated in consolidation. Respitrace
Corporation did not have any operations during the 1997 or 1996 fiscal years.

Prior to December 1996, the Company was engaged in the manufacture, sale and
service of computer-aided continuous monitoring devices to detect abnormal
respiratory and cardiac events using sensors placed upon the body's surface. In
December 1996, the Company sold non-exclusive and, in one case, exclusive
production and distribution rights to its products. The Company intends to focus
primarily in development of existing products and the development of new
products. The Company holds patents on various devices. See Note 2.

PLANT AND EQUIPMENT

Plant and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
three to five years for furniture and equipment, and three years or the lease
term, if shorter, for leasehold improvements.

PATENTS

Costs incurred in applying for and defending patents are capitalized and
amortized on the straight-line method over the estimated useful lives of the
patents.

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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.



                                      F-7
<PAGE>   29


             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SOFTWARE PRODUCTION COSTS

The Company deferred certain software production costs in accordance with
Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED (FAS 86). The
Company has capitalized no software production costs in 1997 or 1996. These
deferred costs were fully amortized in the year ended July 31, 1996.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value because of their short
duration.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less from the date purchased to be cash equivalents.

STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123 encourages, but does not require, companies to record
compensation plans at fair value. The Company has chosen, in accordance with
provisions of SFAS 123, to apply Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations
treatment for its stock plan. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

INCOME TAXES

The Company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. Under SFAS 109, deferred
income tax assets and liabilities are determined based upon differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.




                                      F-8
<PAGE>   30
             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

Deferred tax assets:
   Net operating loss carryforwards                          $3,349,619

Deferred tax liability:
   Depreciation and amortization                                 58,433
                                                             ----------
   Net deferred tax asset                                     3,291,186
   Valuation allowance for net deferred tax asset             3,291,186
                                                             ----------
Net deferred tax asset                                       $       --
                                                             ==========

SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $3,291,000 valuation allowance at July 31, 1997 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$62,000. At July 31, 1997, the Company has available net operating loss carry
forwards of $8,901,000, which will expire as follows: $804,000 in 2001, $429,000
in 2002, $755,000 in 2004, $190,000 in 2005, $2,072,000 in 2006, $1,736,000 in
2007, $1,651,000 in 2008, $861,000 in 2009, $5,000 in 2010 and $398,000 in 2012.

WARRANTIES

The Company's warranty policy provides for a one year coverage against defects.
In the opinion of management, warranty costs will not be material. Accordingly,
no provision for warranty costs has been recorded.

REVENUE RECOGNITION

The Company recognizes revenue when products are shipped. If installation is
required as a condition of sale, revenue is recognized when the installation has
been completed.


                                       F-9
<PAGE>   31
             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

License fees revenue under joint development, manufacturing and marketing
agreement is recognized when these rights are granted, the Company has no
further obligation, and the collectibility of the fees is assured.

INCOME (LOSS) PER COMMON SHARE

Income (loss) per common share has been calculated based upon the weighted
average number of shares outstanding each year. Although they are deemed common
share equivalents, outstanding options are not considered because they would be
anti-dilutive or have no effect. Conversion of convertible preferred stock has
not been considered in the calculation of loss per common share because the
conversions would be anti-dilutive or would have no effect.

In February 1997, the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, EARNINGS PER SHARE, which will change
the current method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per share"
amounts, as defined. SFAS No. 128 will be effective for the Company's quarter
ending January 31, 1998, and upon adoption, all prior-period earnings per share
data presented shall be restated to conform with the provisions of the new
pronouncement. Application earlier than the Company's quarter January 31, 1998
is not permitted. The restated basic and diluted earnings or loss per share to
be reported upon adoption of SFAS No. 128 will not differ from amounts reported
under existing accounting rules for all periods reported by the Company through
July 31, 1997.

ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

In fiscal 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS. SFAS No. 121 requires impairment losses to be recorded on long-lived
assets when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. The adoption of SFAS No. 121 had no impact on the Company's financial
statements.

RECLASSIFICATIONS

Certain reclassifications of 1996 amounts have been made to conform to the 1997
financial statement presentation.


                                      F-10

<PAGE>   32
             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




2. PRODUCT DISTRIBUTION AND PRODUCTION RIGHTS

During fiscal 1994, the Company established a strategic alliance with
SensorMedics Corp. (SensorMedics) to undertake marketing of the Company's
products. Effective October 1, 1995, the Company entered into an agreement
extending this alliance for an additional two years, through August 31, 1997.
Under the terms of this agreement, the Company granted exclusive worldwide
distribution rights (as defined) for certain products. SensorMedics was required
to purchase minimum quantities of the Company's products to maintain these
exclusive distribution rights.

During December 1996, the Company agreed to amend the terms of the agreement
with SensorMedics. The amended agreement, among other things, granted to
SensorMedics, for $500,000 and ten years, the nonexclusive right to manufacture
and distribute the Company's principal monitoring devices, as well as, an
exclusive right to manufacture and distribute the Company's disposable products.
The Company recognized the $500,000 as revenue in 1997. The Company also agreed
to develop a diagnostic device for SensorMedics for $250,000. This device was
delivered in June 1997 and the Company has recorded this revenue in 1997. The
Company will also receive a minimum royalty payment of $100,000 for each
calendar year ended December 31, 1997 and 1998 from SensorMedics and ongoing
royalties based on a percentage of net sales of the products sold by
SensorMedics. SensorMedics also purchased, at cost, all usable raw material
inventory used in the manufacturing of the Company's principal monitoring
devices for approximately $200,000.

Management believes that this agreement, as well as other ventures with other
third parties that the Company is pursuing, will allow the Company to focus its
efforts on research and development activities.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern and do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets, or the amounts or classifications of liabilities that might result from
the possible inability of the Company to continue as a going concern.



                                      F-11

<PAGE>   33
             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


3. INVENTORIES

During the fourth fiscal quarter of the year ended July 31, 1997, the Company
wrote off its inventory balance with a cost of approximately $164,000. This
inventory was not purchased by SMC due to their manufacturing plans of the
Company's products. During the fourth quarter of the year ended July 31, 1996,
the Company wrote off certain inventory with a cost of $272,033.

4. RELATED PARTY TRANSACTIONS

The Company is entitled to receive royalties from products sold by certain
former shareholder/ officers that were developed by the Company in prior years
and are now manufactured by independent third parties. In connection with these
agreements, the Company earned royalties of approximately $ 24,000 and $10,400
during the years ended July 31, 1997 and 1996, respectively.

The Company's Chairman of the Board and Chief Executive Officer holds an
honorary executive medical staff position at a local health care institution
(Mount Sinai Medical Center of Greater Miami) that purchases devices and other
equipment from the Company. Sales to this institution totaled approximately $
71,000 and $32,000 during the years ended July 31, 1997 and 1996, respectively.
Sales to this health care institution were at a discount of 15% to 50% from the
Company's published list prices.

5. COMMON STOCK

At July 31, 1997, a total of 1,803,700 shares of the Company's Common Stock have
been reserved under various grants of options and for conversion of the Series B
and Series C Convertible Preferred Stock. Of the total shares reserved, 2,500
and 1,551,200 shares have been reserved for the conversion of Series B and
Series C Convertible Preferred Stock, respectively. The remaining shares were
reserved for issuance under various grants of options.

6. CONVERTIBLE PREFERRED STOCK

The Series B Convertible Preferred Stock has a liquidation preference of $100
per share and provides for a noncumulative dividend of $10 per share, if
declared.

The Series C Convertible Preferred Stock has a liquidation preference of $1.00
per share, is convertible into 25 shares of Common Stock at a conversion premium
of $4.20 per share of 




                                      F-12
<PAGE>   34
             Non-Invasive Monitoring Systems, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


Common Stock, is redeemable at the option of the Company commencing in 1994 at
$.40 per share and provides for a noncumulative dividend of $.40 per share, if
declared.

Holders of the Company's Series B and Series C Convertible Preferred Stock are
entitled to one vote for each share held.

7. STOCK OPTIONS

The Company has a Stock Option Plan (the Plan) for key officers and employees of
the Company. The Company has reserved 250,000 shares of Common Stock under the
Plan. No options have been granted since the Plan's inception.

8. OTHER INFORMATION

During the year ended July 31, 1997 and 1996, one customer (SensorMedics)
accounted for 100% and 89% of product sales, respectively. During the year ended
July 31, 1997, this same customer accounted for 97% of license revenue and
product sales under joint development, manufacturing and marketing agreement and
royalty income

Accrued expenses at July 31, 1997 consisted of the following:

         Accrued wages                                $48,638
         Accrued professional fees                     36,000
                                                      =======
                                                      $84,638
                                                      =======

9. COMMITMENTS AND CONTINGENCIES

In recognition of the ongoing contributions of a health care institution (Note
5) to the Company's research and marketing activities, the Company agreed to pay
minimum royalties of $50,000 per calendar year from 1987 through December 1995.
Royalties of $20,833 are included in selling expenses in the consolidated
statements of operations and accumulated deficit for the years ended July 31,
1996.


                                      F-13
<PAGE>   35



                                   SIGNATURES

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


                                         NON-INVASIVE MONITORING SYSTEMS, INC.

Dated: October 27, 1997                  By: /s/ MARVIN A. SACKNER
                                             ---------------------
                                             Marvin A. Sackner,
                                             Chairman of the Board


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

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


<TABLE>
<CAPTION>

       SIGNATURES                                    TITLE                          DATE
       ----------                                    -----                          ----

<S>                                       <C>                                   <C>

 /s/ MARVIN A. SACKNER                    Chairman of the Board, Chief          October 27, 1997
-------------------------------           Executive Officer and Director
 MARVIN A. SACKNER                        


/s/ MORTON J. ROBINSON                    Director                              October 27, 1997
-------------------------------
 MORTON J. ROBINSON


 /s/ RUTH SACKNER                         Director and Secretary                October 27, 1997
-------------------------------
 RUTH SACKNER


 /s/ STANLEY C. SACKNER                   Director                              October 27, 1997
-------------------------------
 STANLEY C. SACKNER

 /s/ EDWARD SHAPIRO                       Director                              October 27, 1997
-------------------------------
 EDWARD SHAPIRO

 /s/ GERARD KAISER                        Director                              October 27, 1997
-------------------------------
 GERARD KAISER

</TABLE>



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