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


                                         FORM 10-Q


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

For the quarterly period ended September 30, 2000

                                        OR

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

For the transition period from                to

Commission file number:      __________

                                IN STORE MEDIA SYSTEMS, INC.
-------------------------------------------------------------------------------
              (Exact name of Registrant as specified in its charter)

         Nevada                                                84-1249735
-------------------------------------------------------------------------------
(State or other jurisdiction of                   (IRS Employer Identification
 incorporation or organization)                    Number)

                      15423 East Batavia Drive, Aurora, Colorado 80011
-------------------------------------------------------------------------------
               (Address of principal executive offices and Zip Code)

                                  (303) 364-6550
-------------------------------------------------------------------------------
                          (Registrant's telephone number)

                                      N/A
               (Former name, former address and former fiscal year,
                           if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days: Yes X No

                       APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares  outstanding of the issuer's classes of common stock, as of
October 30, 2000 is 57,019,138 shares, $.01 par value.






<PAGE>



                                 IN STORE MEDIA SYSTEMS, INC.


                                             INDEX


                                                                        Page No.

   PART I.  FINANCIAL INFORMATION

   Item 1. Financial Statements

      Balance Sheet - December 31, 1999 and September 30, 2000
      (unaudited)                                                          3

      Statement of Operations - For the Three Months Ended September
      30, 1999 and 2000 (unaudited).                                       5

      Statement of Operations - For the Nine Months Ended September
      30, 1999 and 2000 and for the period from December 30,  1992
      (inception) through September 30, 2000 (unaudited)                   6

      Statement of Stockholders' Deficit - For the Nine Months Ended
      September 30, 2000 (unaudited)                                       7

      Statement of Cash Flows - For the Nine Months Ended September
      30, 1999 and 2000 and for the period from December 30,  1992
      (inception) through September 30, 2000 (unaudited)                   8

      Notes to Unaudited Financial Statements                              9

   Item 2  Management's Discussion and Analysis of Financial Condition
   and Results of Operations                                              12

   Item 3  Quantitative and Qualitative Disclosure About Market Risk      14

   PART II. OTHER INFORMATION                                             15

Item 1.  Legal Proceedings                                                16
Item 2 Changes in Securities and Use of Proceeds                          16
Item 3 Defaults Upon Senior Securities                                    16
Item 4 Submission of Matters to a Vote of Security  Holders               16
Item 5 Other Information Item 6 Exhibits and Reports of Form 8-K          17
Item 6 Exhibits and Reports on Form 8-K                                   17
Signatures                                                                18

                                       1



<PAGE>


                       CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS

This Quarterly Report contains certain forward-looking statements that involve
risks and uncertainties. These forward-looking statements are not historical
facts but rather are based on current expectations, estimates and projections
about our industry, our beliefs and assumptions. We use words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and variations of these words and similar expressions to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and other factors,
some of which are beyond our control, are difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the
forward-looking statements. You should not place undue reliance on these
forward-looking statements included or otherwise incorporated in the Quarterly
Report, which reflect our management's view only on the date of filing of this
report. We undertake no obligation to update these statements to reflect events
or circumstances that occur after the filing date of this Quarterly Report or to
reflect the occurrence of unanticipated events.

                                       2



<PAGE>


                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                                  BALANCE SHEET
                    December 31, 1999 and September 30, 2000
                                  (Unaudited)

                                     ASSETS

                                                        1999        2000
                                                        ----        ----
Current assets:
   Cash and cash equivalents                          $248,325    $ 81,055
   Note receivable - related party                      63,860      68,171
   Inventory                                           117,295     117,295
   Other current assets                                  1,559       8,689
                                                      --------    --------

   Total current assets                                431,039     275,210

Property and equipment, at cost:
   Manufacturing equipment                             341,277     341,562
   Office furniture and equipment                      123,016     127,323
   Leasehold improvements                               55,228      55,228
                                                      --------    --------

                                                       519,521     524,113

   Less accumulated depreciation and amortization     (206,304)   (253,404)
                                                      --------    --------

   Net property and equipment                          313,217     270,709

Other assets:
   Advances and note receivable - related parties       45,085      46,658
   Loan issuance costs                                       -      10,000
   Deposits                                             29,159      29,159
   Patent costs, net of accumulated amortization of
   $18,089 (1999) and $21,206 (2000)                    58,035      85,061
                                                      --------    --------

   Net other assets                                    132,279     170,878
                                                      --------    --------

                                                      $876,535    $716,797
                                                      ========    ========


                            See accompanying notes.
                                       3



<PAGE>


                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                                  BALANCE SHEET
                    December 31, 1999 and September 30, 2000
                                  (Unaudited)

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

                                                        1999        2000
                                                        ----        ----
   Accounts payable                                  $ 587,674   $ 581,012
   Interest payable                                    599,284     789,723
   Accrued wages                                             -      56,827
   Notes payable (Note 2)                            2,140,087   2,065,087
   Notes payable-shareholder and officer                90,000     121,000
   Obligations under capital leases                      3,238           -
                                                    ----------  ----------

   Total current liabilities                         3,420,283   3,613,649

Long-term liability:
   Debenture payable - related party                   247,880     247,880

Stockholders' deficit (Notes 2, 4 and 5):
   Preferred stock, no par value; 50,000,000 shares
   authorized, 3 (2000) shares issued and outstanding        -     750,000
   Common stock, $.01 par value; 150,000,000 shares
   authorized, 63,828,527 (1999) and 66,393,880
   (2000) shares issued                                638,285     663,938
   Additional paid-in capital                       10,242,453  11,000,659
   Treasury stock, at cost; 9,374,742 shares          (563,750)   (563,750)
   Deficit accumulated during the development
    stage                                          (13,108,616)(14,995,579)

   Total stockholders' deficit                      (2,791,628) (3,144,732)
                                                    ----------  ----------

                                                    $  876,535  $  716,797
                                                    ==========  ==========

                            See accompanying notes.
                                       4
<PAGE>



                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                             STATEMENT OF OPERATIONS
             For the Three Months Ended September 30, 1999 and 2000
                                  (Unaudited)
                                                          1999        2000
                                                          ----        ----
Costs and expenses:
   Research and development                             $ 267,324   $  13,500
   General and administrative                             441,967     416,930
   Depreciation and amortization                           24,717      16,739
                                                        ---------   ---------

    Operating loss                                       (734,008)   (447,169)

Other income (expense):
   Interest income                                         22,427       1,118
   Debt conversion costs                                 (107,250)    (17,956)
   Interest expense (Note 2)                               66,755     251,703
                                                        ---------   ---------

    Total other income (expense)                          (18,068)    234,865
                                                        ---------   ---------

Net loss (Note 3)                                        (752,076)   (212,304)

Accrued dividends applicable to preferred stock                 -     (15,658)
                                                        ---------   ---------

Net loss applicable to common stock                     $(752,076)  $(227,962)
                                                        =========   =========

Basic and diluted net loss per common
   share                                                $    (.01)  $      (*)
                                                        =========   =========

Weighted average common shares
   outstanding                                         53,253,000  56,919,000
                                                       ==========  ==========


   * less than $.01 per share


                            See accompanying notes.
                                       5



<PAGE>


                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                             STATEMENT OF OPERATIONS
             For the Nine Months Ended September 30, 1999 and 2000
and for the Period from December 30 1999 (inception) through September 30, 2000
                                  (Unaudited)

                                                                  Cumulative
                                                                  amounts from
                                             1999        2000       inception
                                             ----        ----     ------------
Costs and expenses:
   Research and development               $  267,324   $   19,671  $  3,244,673
   General and administrative                849,640    1,166,042     5,951,705
   Depreciation and amortization              54,423       50,216       274,608
                                          ----------   ----------  ------------

    Operating loss                        (1,171,387)  (1,235,929)   (9,470,986)

Other income (expense):
   Interest income                            23,454        5,549        87,948
   Litigation settlement                           -            -      (156,250)
   Debt conversion costs                    (107,250)     (17,956)     (403,100)
   Interest expense (Note 2)                (195,624)     115,976    (4,298,588)
                                          ----------   ----------    ----------

    Total other income (expense)            (279,420)     103,569    (4,769,990)
                                          ----------   ----------    ----------

Net loss (Note 3)                         (1,450,807)  (1,132,360)  (14,240,976)

Accrued dividends applicable to
   preferred stock                                 -      (15,658)      (15,658)
                                          ----------   ----------   -----------

Net loss applicable to common stock      $(1,450,807) $(1,148,018) $(14,256,634)
                                         ===========  ===========  ============

Basic and diluted net loss per common
   share                                 $      (.03) $      (.02) $       (.30)
                                         ===========  ===========  ============

Weighted average common shares
   outstanding                            51,000,000   56,255,000    48,247,000
                                         ===========  ===========  ============

                            See accompanying notes.
                                       6



<PAGE>
<TABLE>


                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                  STATEMENT  OF CHANGES IN  STOCKHOLDERS'  DEFICIT
                  For the Nine Months Ended September 30, 2000
                                  (Unaudited)
<CAPTION>

                                                                                                           Deficit
                                                                                                         accumulated
                                                                                  Additional             during the
                                           Preferred stock       Common stock      paid-in   Treasury    development
                                          Shares     Amount    Shares    Amount    capital     stock       stage
                                          ------     ------    ------    ------   ---------- --------   -----------
<S>                                       <C>      <C>      <C>        <C>       <C>         <C>        <C>


Balance, December 31, 1999                     -   $      - 63,828,527 $638,285  $10,242,453 $(563,750) $(13,108,616)

   Sale of common stock for cash and in
    exchange for stock offering services
    ($1.00 per share) (Note 4)                 -          -     50,000      500       49,500         -             -

   Exercise of warrants                        -          -    249,642    2,496       14,147         -             -

   Issuance of common stock for employee
    compensation ($.90 per share)              -          -     55,000      550       48,950         -             -

   Warrants exercised on a cashless basis
    in consideration for loan and offering
    expenses                                   -          -  2,009,202   20,092      (20,092)        -             -

   Extension of exercise period of warrants
    issued in connection with debt offerings
   (Note 2)                                    -          -          -        -     (347,369)        -             -

   Sale of preferred stock for cash (Note 4)   3    750,000          -        -      750,000         -      (750,000)

   Preferred stock dividends                   -          -          -        -       (4,603)        -             -

   Intrinsic value of stock options granted    -          -          -        -      144,688         -             -

   Conversion of notes payable into common
    stock (Note 2)                             -          -    201,509    2,015      118,382         -             -

   Net loss for the nine months ended
    September 30, 2000                         -          -          -        -            -         -    (1,132,360)
                                              ---  --------  --------- --------  ----------- ---------  ------------

Balance, September 30, 2000                     3  $750,000 66,393,880 $663,938  $11,000,659 $(563,750  $(14,995,579)
                                              ===  ======== ========== ========  =========== =========  ============
</TABLE>

                            See accompanying notes.
                                       7



<PAGE>



                          (A DEVELOPMENT STAGE COMPANY)
                             STATEMENT OF CASH FLOWS
            For the Nine Months Ended September 30, 1999 and 2000 and
  for the Period from December 30 1999 (inception) through September 30, 2000
                                  (Unaudited)

                                                                  Cumulative
                                                                   amounts
                                                                     from
                                             1999        2000     inception

Cash flows from operating activities:
  Net loss                                $(1,450,807) $(1,132,36) $(14,240,976)
  Adjustments to reconcile net loss to net
   cash used in operating activities:
    Depreciation and amortization              54,423      50,216       274,608
    Common stock and options issued for
     services patents and payables            519,120     194,188     1,527,388
    Amortization of debt issuance costs        14,171    (347,369)    1,371,139
    Reduction in note receivable - related
     party charged to research and
     development                              235,667           -       244,311
    Changes in assets and liabilities:
     Accounts receivable and notes
      receivable                               96,046      (4,311)      (68,171)
     Inventory                                 22,559           -      (117,295)
     Accounts payable                        (422,652)     (6,662)      581,012
     Interest payable                          23,196     190,439       899,613
     Accrued wages                                  -      56,827        56,827
     Other                                          -      (7,130)       (8,689)
                                          -----------  ----------   -----------

    Total adjustments                         542,530     126,198     4,760,743
                                          -----------  ----------   -----------

    Net cash used in operations              (908,277) (1,006,162)   (9,480,233)

Cash flows from investing activities:
  Purchase of property and equipment          (53,893)     (4,592)     (262,146)
  Advances - related party                          -      (1,573)     (290,969)
  Patent costs                                (14,979)    (30,142)     (106,265)
  Lease deposits                                1,811           -       (29,159)
                                          -----------  ----------   -----------

    Net cash used in investing activities     (67,061)    (36,307)     (688,539)

Cash flows from financing activities:
  Proceeds from sale of common stock        2,042,813     187,040     5,497,687
  Proceeds from the sale of preferred stock         -     750,000       750,000
  Purchase of treasury stock                 (520,000)          -      (520,000)
  Proceeds from common stock subscriptions    (75,000)          -             -
  Payment of preferred stock dividends              -      (4,603)       (4,603)
  Loan issuance costs                               -     (10,000)      (10,000)
  Proceeds from (repayments of) stockholder
   loans                                      (23,500)     31,000       121,000
  Proceeds from (repayments of) capital
   leases                                     (10,164)     (3,238)      (14,087)
  Proceeds from notes payable                       -      50,000     4,740,000
  Repayments of notes payable                 (32,000)   (125,000)     (310,170)
                                          -----------  ----------   -----------

    Net cash provided by financing
     activities                             1,382,149     875,199    10,249,827

Net increase (decrease) in cash               406,811    (167,270)       81,055

Cash and cash equivalents at beginning
 of period                                    316,444     248,325             -
                                          -----------  ----------   -----------

Cash and cash equivalents at end
 of period                                $   723,255  $   81,055   $    81,055
                                          ===========  ==========   ===========

                            See accompanying notes.
                                      8

<PAGE>

                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                               September 30, 2000


1. Basis of presentation

   The  accompanying  financial  statements  have been  prepared by the Company,
   without  audit.  In the opinion of  management,  the  accompanying  unaudited
   financial  statements  contain  all  adjustments  (consisting  of only normal
   recurring  accruals)  necessary  for a fair  presentation  of  the  financial
   position as of September  30, 2000,  and the results of  operations  and cash
   flows for the periods ended September 30, 1999 and 2000.

   Basis of presentation and management's plans:

   The Company's  financial  statements  have been  presented on a going concern
   basis which  contemplates  the realization of assets and the  satisfaction of
   liabilities  in  the  normal  course  of  business.  The  Company  is in  the
   development stage and has been primarily involved in research and development
   activities.  This has  resulted  in  significant  losses  ($14,240,976  since
   inception) and a  stockholders'  deficit at September 30, 2000 of $3,144,732.
   The Company's  continued  existence is dependent on its ability to obtain the
   additional  funding necessary to complete  development of the coupon clearing
   system and successfully market the product.  The financial  statements do not
   include any adjustment  relating to the  recoverability and classification of
   recorded  asset amounts or the amount and  classification  of  liabilities or
   other  adjustments  that might be  necessary  should the Company be unable to
   continue as a going concern in its present form.

   During the nine months ended  September  30,  2000,  three shares of Series A
   preferred  stock were sold  resulting  in gross  proceeds of  $750,000  which
   provided additional liquidity for the Company for current operations. Through
   a private  placement,  as a means to secure additional  working capital,  the
   Company  is seeking  to  generate  additional  proceeds  totaling  $2,750,000
   through the sale of eleven additional shares of Series A preferred stock.

   In October 2000, the Company  issued a letter to all note holder's  providing
   them the  option of  extending  their  notes  and  accrued  interest  for one
   additional year or converting  their notes and accrued interest for shares of
   the Company's common stock.

2. Notes payable

   On September  5, 2000,  the Company  borrowed  $30,000 from an officer of the
   Company. Interest on the note accrues monthly at 9.5% per annum. The note and
   accrued  interest is due on October 31,  2000,  or upon receipt of new equity
   funds in excess of  $100,000.  The term of the note has been  extended by the
   holder through January 2, 2001.

   On March 1, 2000, the Company borrowed $50,000 from two individuals evidenced
   by notes payable bearing interest at 10% per annum.  Interest on the notes is
   payable  quarterly  and the notes are due on demand  anytime  after  April 1,
   2000.  During  July 2000,  the notes plus all accrued  interest  were paid in
   full.

                                       9

<PAGE>

                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                               September 30, 2000

2. Notes payable (continued)

   In  connection  with the notes  payable  issued in 1996,  1997 and 1998,  the
   Company  issued  warrants to purchase  the Company  stock  exercisable  for a
   three-year  period.  As these  warrants have neared their initial  expiration
   dates,  the Company has extended  these  warrants first for 120 days and then
   for successive 90 day periods.

   For accounting  purposes,  the Company is treating these  extensions as stock
   appreciation  rights and has  recorded  interest  expense of  $959,895 in the
   fourth quarter of 1999 related to the warrants which have been extended.  For
   the nine months ended September 30, 1999, no expense was recorded  related to
   the warrant extensions. During the quarter ended September 2000, the price of
   the Company's stock declined.  As a result, the value assigned to the warrant
   extensions was reduced by $323,565 and $347,369 for the three months and nine
   months ended September 30, 2000, respectively.

   During the quarter  ended  September  30,  2000,  holders of $75,000 of notes
   payable elected to convert their notes and accrued interest into common stock
   or use the notes payable balance and interest to exercise their warrants. The
   Company  has  recorded  an expense of  $17,956  as debt  conversion  costs in
   recognition of the beneficial conversion terms offered.

3. Income taxes

   No provision for income taxes is required at September  30, 2000 because,  in
   management's  estimation  the Company will not recognize  any taxable  income
   through December 31, 2000.

4. Private placements

   During November 1998, the Company  commenced a private  placement of $100,000
   units,  each  consisting  of 100,000  shares of common  stock and warrants to
   purchase 100,000 shares of common stock exercisable  during the first year at
   $1.25 per share and at $1.50 per share during the second year.

   During the six months  ended June 30, 2000,  .5 units were sold  resulting in
   gross proceeds of $50,000.  As of June 30, 2000,  the Company  concluded this
   offering.

                                       10

<PAGE>



                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                               September 30, 2000

4. Private placements (continued)

   During the nine months ended  September  30,  2000,  three shares of Series A
   preferred stock were sold in a private placement  resulting in gross proceeds
   of $750,000  which provided  additional  liquidity to the Company for current
   operations.  The  three  shares  of  preferred  stock  are  convertible  into
   1,950,000  shares of the Company's  common stock and carry an annual dividend
   rate of 8%. If the Company  completes the sale of all of the remaining shares
   of Series A preferred  stock  available  through the private  placement,  the
   Company would generate additional gross proceeds of $2,750,000.  The Company,
   however,  can provide no assurance  that the Company will be able to complete
   the sale of any additional shares of Series A preferred stock.

   The preferred  stock when issued  contained a favorable  exchange  ratio into
   common stock. This favorable exchange ratio has been valued at the difference
   between the market price of the stock and the  conversion  price and has been
   reflected as an increase of $1,038,312 in  additional  paid-in  capital and a
   corresponding increase in the accumulated deficit.

5. Stock options

   During the  quarter  ended  September  30,  2000,  the Company  entered  into
   employment and consulting  agreements with three  individuals.  In connection
   with these  agreements,  the Company  issued  options to  purchase  1,064,375
   shares of the Company's  common stock at prices  ranging from $0.25 per share
   to $1.00 per share,  exercisable for a two-year period. Of these newly issued
   options,  314,375  were fully vested at  September  30, 2000,  125,000 of the
   options  vest  over  the  next 10  months  and the  remainder  vest  upon the
   achievement of certain  milestones.  In connection with the issuance of these
   options, the Company has recorded compensation expense of $144,688.

6.  Subsequent event

    In October 2000, the Company issued a letter to all note holder's  providing
    them the  option of  extending  their  notes and  accrued  interest  for one
    additional year or converting their notes and accrued interest for shares of
    the Company's common stock.


                                       11
<PAGE>

Item 2.

Management's  Discussion  and  Analysis of  financial condition  and  results of
operation

Overview

The Company is a development  stage company  engaged in the  development  of its
system for distributing and electronically clearing coupons,  certain components
of which are patented.  The Company has generated no revenue from operations and
has incurred losses of $14,240,976  since inception  through September 30, 2000.
The  Company  expects to incur  additional  losses  through  the end of the 2000
fiscal year.

At September 30, 2000,  the Company had a  stockholders'  deficit of $3,144,732,
which  reflects  $11,288,971 of paid in capital (net of amount  attributable  to
treasury  stock)  less  accumulated  deficit of  $15,283,891.  The excess of the
accumulated  deficit amount over paid in capital  primarily is the result of the
amount of interest  expense  incurred in connection with short-term  convertible
notes and debentures by the Company and its predecessor in private  transactions
in 1996,  1997,  1998 and 1999. At September 30, 2000, the Company had a working
capital deficit of $3,338,439.

The Company plans to continue  on-going  development of its coupon  distribution
and clearing system, to the extent permitted by available financing. The Company
will require  additional funds to continue its planned  development  efforts and
implement its plan of operation over the next 12 months. The Company is actively
pursuing  several  equity  financing   opportunities.   Some  of  the  financing
alternatives involve an investment directly into the Company, and others involve
an  investment  into a subsidiary  that is created to develop and operate one of
the Company's  products as a business unit. The Company is unable to provide any
assurance that such fund raising efforts will be achievable.  The Company may be
forced to discontinue or curtail its operations and on-going development efforts
if sufficient  funds do not become  available to the Company in a timely manner.
Management believes that a major capital restructuring will be required in order
to attract investment capital.

The Company continues to pursue alternative sources of financing.  However,  the
Company  has no  commitments  for  additional  financing  at this time,  and the
Company can provide no assurance that it will be able to secure sufficient funds
to continue  operations  as planned.  Through  September  30, 2000,  the Company
remained  burdened  with  debt  obligations  and a  continuing  lack of  working
capital.  If the Company is unable to secure additional working capital,  it may
be forced to curtail or discontinue its operations.

Financial Condition

The Company had $716,797 in total assets and $3,861,529 in total  liabilities at
September 30, 2000, as compared to $876,535 and  $3,668,163 at the end of fiscal
1999,  respectively.  Accounts payable and accrued expenses at the end of fiscal
year 1999 were  $1,186,958 as compared to $1,427,562 at September 30, 2000.  The
Company had a working  capital  deficit of  $3,338,439 at September 30, 2000, as
compared to a working  capital  deficit of $2,989,244 at December 31, 1999.  The
difference  primarily is attributed to reductions of $167,270 in available  cash
and cash equivalents, and an increase in accrued interest of $190,439.

Results of Operations

The  Company's  operational  costs  historically  have  increased  or  decreased
primarily due to the expansion or contraction of the Company's  ongoing research
and  development  efforts.  The  Company  has  incurred  operating  expenses  of
$9,470,986 from inception  through  September 30, 2000.  These expenses  include
$3,244,673 in research and  development  expenses and  $5,951,705 in general and

                                       12
<PAGE>

administrative  expenses.  Subject to the availability of additional  funds, the
Company expects its operational expenses and costs to increase as it expands its
efforts to complete the development of its systems,  products and services,  and
plans to commence  manufacturing and installation of its equipment.  The Company
also  expects  operational  costs to increase as it expands  its  marketing  and
promotional  efforts in  connection  with the  introduction  of its products and
services.

Quarter Ended September 30, 2000, Compared To Quarter Ended September 30, 1999

For the quarter ended  September 30, 2000,  the Company  sustained net operating
losses of $212,304,  as compared to net losses of $752,076 for the quarter ended
September  30, 1999.  The decrease in operating  losses  primarily  was due to a
decrease  in general and  administrative  expenses,  a decrease in research  and
development, a decrease in depreciation and amortization expenses and a decrease
in interest expense.

The  Company's  operating  expenses for the quarter  ended  September  30, 2000,
decreased by approximately 39% to $477,169, as compared to operating expenses of
$734,008 for the same period last year.  The  decrease in operating  expenses in
2000 was due to  decreases  in research and  development  expenses,  general and
administrative  expenses,  depreciation and amortization expenses.  Research and
development  costs  decreased by 95% to $13,500 for the quarter ended  September
30, 2000, as compared to research and development costs of $267,324 for the same
quarter  last year.  This  decrease  was due to the absence of certain  expenses
relating to patent  development.  During  1999,  the Company  expensed as patent
development  expenses a note  receivable of $244,311  from the Company's  former
president,  which was exchanged for certain patents.  General and administrative
expenses  decreased  by  approximately  $25,037 or 6% to  $416,930  for the 2000
fiscal quarter,  as compared to general and administrative  expenses of $441,967
for the same  quarter  last year.  The  decrease in general  and  administrative
expenses  primarily  was due to  reductions  in  corporate  salaries  and wages.
Depreciation and amortization costs decreased by 32% to $16,739,  as compared to
depreciation and  amortization  costs of $24,717 for the quarter ended September
30, 1999. The decrease in depreciation and amortization  costs primarily was due
to an increase in fully-depreciated assets.

The Company's net non-operating income (including  non-operating interest income
and interest  expense)  increased  to income of $234,865  for the quarter  ended
September  30, 2000,  as compared to  non-operating  expenses of $18,068 for the
quarter  ended  September  30, 1999.  The increase was  primarily  due to a 277%
decrease  in  interest  expense,  which  represented  107% of the  non-operating
expenses for the quarter  ended  September  30,  2000.  The decrease in interest
expense was primarily due to the decrease in value  assigned to the extension of
the warrant  exercise  period  related to the  Company's  debt  offerings.  Debt
conversion  costs for the quarter ended September 30, 2000,  decreased by 83% to
$17,956 due to the  decrease in the number of notes  converted  to common  stock
during 2000 as compared to 1999.

Liquidity and Capital Resources

Since inception,  the Company's principal  requirements for capital have been to
finance the cost of research and development of its coupon selection, dispensing
and  clearing  systems  and  related  technologies,  and  to  pay  for  expenses
associated with securing patent  protection,  formulating its business  strategy
and  developing  strategic  relationships  with  third  parties,  such as Unisys
Corporation,  retailers and product manufacturers.  The Company has historically
financed its operations through loans and investments by directors and officers,

                                       13


<PAGE>

and the sale of equity and debt  securities in private  transactions in reliance
upon exemptions  from the  registration  and  qualification  requirements  under
federal and state securities laws.

At September 30, 2000,  the Company had  $3,613,649 in current  liabilities,  of
which  $2,705,778  (including  $640,691 of interest  accrued thereon) was in the
form  of  convertible,  short-term  debentures  issued  by the  Company  and its
predecessor in private transactions during the 1998, 1997 and 1996 fiscal years.
At September 30, 2000, the Company was in default of its  obligations  under the
notes issued to investors by the Company and its  predecessor.  A portion of the
notes was converted  into shares of the Company's  common stock during the 1998,
1999, and 2000 fiscal years. In October 2000, the Company issued a letter to all
note  holder's  providing  them the option of extending  their notes and accrued
interest for one additional year or converting  their notes and accrued interest
for shares of the Company's  common stock.  The Company  anticipates  completing
this process by the end of its fiscal year. At September 30, 2000,  notes in the
aggregate  principal amount of $2,065,087 remained  outstanding,  as compared to
notes in the aggregate  principal  amount of $2,140,087 that were outstanding on
December 31, 1999. The remaining portion of the Company's current liabilities is
primarily comprised of continuing payment obligations of approximately  $490,000
(at September 30, 2000 and December 31, 1999) to Unisys Corporation. The Company
relies  on  the   availability  of  additional   capital  to  satisfy  all  such
obligations.

The Company will require additional capital to continue and complete development
of its  systems,  to market its  products  and  services  and to  implement  its
business  strategies.  The Company has limited  access to additional  sources of
equity and debt financing and it can provide no assurance that additional  funds
will be  available on  commercially  acceptable  terms or in a timely  manner to
enable the Company to continue its operations as expected.

Since the end of fiscal year 1999 through September 30, 2000, the Company's cash
position has declined.  At September 30, 2000, the Company had available cash of
$81,055,  as compared to available cash of $248,325 at December 31, 1999. At the
current  spending rate of  approximately  $60,000 per month, the Company expects
that such funds will be  insufficient  to continue  operations  beyond  November
2000, unless additional funds are raised.

The Company is a party to an agreement to acquire the assets of the  Partnership
for Shared  Marketing,  Inc. for $500,000 in cash and 1,500,000 shares of common
stock,  contingent upon the availability of funding.  Upon  consummation of this
transaction, the Company will acquire a national database containing information
on approximately 73 million households,  which the Company expects to contribute
to its wholly  owned  subsidiary,  Data  Driven  Marketing,  Inc.  Other than in
connection  with the  above-described  transaction,  the  Company  has no future
commitments for capital expenditures.

During the quarter ended  September 30, 2000,  the Company issued 167,250 shares
of its common stock and reduced  accrued  interest by $11,150 in connection with
the exercise of warrants.  The Company also issued  201,509 shares of its common
stock to note holders who converted their notes into common stock.

The  Company  lacks  sufficient  capital or revenue to continue  supporting  the
losses generated by its development.  The Company, as it is currently structured
has made progress in becoming an attractive investment for new equity investors,
but the Company has a long way to go to qualify for conventional bank or venture
capital  financing.  Additional  equity capital is necessary to finance  working
capital for  development.  Management is resolved to continue the search for the
right  financing  formula  as long as it can  quickly  put the  Company,  or its
subsidiaries,  on the path to generate  positive  cash flow.  Due to the current
financial  condition  of the Company and the  relative  lack of liquidity in the
market for the Company's common stock, no assurance can be made that the Company
will be successful in raising any substantial amount of capital through the sale
of equity  securities,  or with  additional  bank debt on favorable terms in the
near future.  Nevertheless,  due to such conditions, the Company may be required

                                       14


<PAGE>


to issue common stock to pay executives,  consultants and other employees, which
may have a dilutive effect on other shareholders of the Company.  Failure of the
Company  to  acquire  additional  capital  in the form of either  debt or equity
capital  will  most  likely  impair  the  ability  of the  Company  to meet  its
obligations in the near or medium term. (See - Note 1 to Financial Statements).

Item 3.

Quantitative and Qualitative Disclosure About Market Risk.

The Company does not own financial instruments that are subject to market risk.


                                       15

<PAGE>



PART II - OTHER INFORMATION

Item 1. Legal Proceedings

        None

Item 2. Changes in Securities and use of proceeds

During the three month period ended  September 30, 2000,  the Company issued one
share of its Series A preferred stock at a purchase price of $250,000. The share
was issued to an unrelated third-party investor.  The Company did not employ the
services of any  underwriter  in  connection  with the sale of this share.  This
share of Series A preferred  stock is  convertible  into  approximately  650,000
shares of the Company's  common stock and entitled to annual  dividends equal to
8% of the purchase price.

The  share  was  sold  in a  private  transaction  pursuant  to  exemption  from
registration  available  under Section 4(2) of the  Securities  Act of 1933 (the
"Securities Act") and Rule 506 of Regulation D under the Securities Act.

Item 3. Defaults Upon Senior Securities

As of  September  30, 2000,  the Company was in default on its notes  payable to
investors in the form of convertible  short-term  debentures totaling $2,705,778
including accured interest of $640,691.

Item 4. Submission of Matters to a Vote of Security Holders

  (a) The Company held its Annual Meeting of Stockholders on September 29, 2000.

  (b) Not applicable

  (c) At  the  time of  the Annual Meeting of Stockholders held on September 29,
      2000, the following matters were proposed and acted upon:

      (i)  The uncontested  election of  the following  nine directors to serve
           until the next Annual Meeting of Stockholders  and  thereafter  until
           their successors are elected and qualified:

               Donald P. Uhl
               Everett E. Schulze, Jr.
               Frank J. Pirri
               Joel Monsky
               Charles A. Schulze
               Michael T. Mozer
               Ronald F. Anderegg
               Raymond Solomon
               George E. Sattler

           For all nominees the results of the vote were as follows:
               For                                             40,852,187
               Against                                             48,500
               Abstained                                            8,000
               Withheld or not present in person or by proxy   15,741,692

      (ii) To amend  and  restate the Company's Articles of Incorporation to (a)
           increase the number of shares of common stock authorized for issuance
           from 100,000,000 shares to 150,000,000; and (b) increase  the  number
           of shares of  preferred  stock authorized for issuance from 5,000,000
           shares to 50,000,000 shares.

           The results of the vote were as follows:
               For                                             34,653,674
               Against                                            350,349
               Abstained                                           12,000
               Withheld or not present in person or by proxy   21,634,356

    (iii)  To amend and restate the Company's Articles of Incorporation  to have
           the  number  of directors of  the Company  to  be provided for in the
           Company's bylaws.

           The results of the vote were as follows:
                For                                            34,938,023
                Against                                            95,000
                Abstained                                           2,000
                Withheld or not present in person or by proxy  21,615,356

    (iv)   To  ratify  the  appointment of  Causey Demgen & Moore Inc.,  as  the
           Company's independent auditors.

           The results of the vote were as follows:
                For                                            40,873,727
                Against                                             9,800
                Abstained                                           2,160
                Withheld or not present in person or by proxy  15,764,692

(d) Not applicable:


Item 5. Other Information

        None

Item 6. Exhibits and Reports on Form 8-K

    (a) Exhibits

        27.1 Financial Data Schedule (1)

    (b) During  the quarter  ended  September  30, 2000,  the  Registrant  filed
        no reports on Form 8-K.


(1)   Filed herewith


<PAGE>



                                          Signatures

   Pursuant to the  requirements  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.

   Date: November 14, 2000                      IN STORE MEDIA SYSTEMS, INC.
                                                (Registrant)


                                                By: /s/ Donald P. Uhl
                                                Donald P. Uhl, President
                                                and Chief Executive Officer