<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, 2001

                                       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:      000-28515
                             ---------

                          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
November 9, 2001 is 70,757,580 shares, $.001 par value.

<PAGE>

<TABLE>
                              IN STORE MEDIA SYSTEMS, INC.
<CAPTION>

                                          INDEX
                                          -----


                                                                                Page No.
                                                                                --------
<S>                                                                             <C>
PART I.      FINANCIAL INFORMATION
-------      ---------------------

Balance Sheet - December 31, 2000 and September 30, 2001 (unaudited)            3 and 4

Statement of Operations - For the Three Months Ended September 30, 2000
and 2001 (unaudited)                                                                  5

Statement of Operations - For the Nine Months Ended September 30, 2000
and 2001 and for the period from December 30, 1992 (inception) through
September 30, 2001 (unaudited)                                                        6

Statement of Stockholders' Deficit - For the Nine Months Ended
September 30, 2001 (unaudited)                                                        7

Statement of Cash Flows - For the Nine Months Ended September 30, 2000
and 2001 and for the period from December 30, 1992 (inception) through
September 30, 2001 (unaudited)                                                        8

Notes to Unaudited Financial Statements                                               9

Management's Discussion and Analysis of Financial Condition and
Results of Operations                                                                13

PART II.     OTHER INFORMATION                                                       17
--------     -----------------
</TABLE>

                                            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>

<TABLE>
                            IN STORE MEDIA SYSTEMS, INC.
                            (A DEVELOPMENT STAGE COMPANY)
                                    BALANCE SHEET
                      DECEMBER 31, 2000 AND SEPTEMBER 30, 2001
                                     (UNAUDITED)
<CAPTION>

                                        ASSETS
                                        ------

                                                               2000          2001
                                                          ------------   ------------
<S>                                                       <C>            <C>
Current assets:
   Cash and cash equivalents                              $   191,039    $   322,031
   Inventory                                                    5,925          5,525
   Other current assets                                        44,270         22,451
                                                          ------------   ------------

     Total current assets                                     241,234        350,007

Property and equipment, at cost:
   Manufacturing equipment                                     79,076              -
   Office furniture and equipment                             128,614        243,024
   Leasehold improvements                                      55,228         55,228
                                                          ------------   ------------

                                                              262,918        298,252

   Less accumulated depreciation and amortization            (150,853)      (124,898)
                                                          ------------   ------------

     Net property and equipment                               112,065        173,354

Other assets:
   Advances and note receivable - related parties              46,658              -
   Debt issuance costs, net of accumulated amortization             -        379,167
   Loan issuance costs                                         10,000         10,000
   Patent costs, net of accumulated amortization of
    $23,926 (2000) and $29,418 (2001)                          86,754         90,984
                                                          ------------   ------------

     Net other assets                                         143,412        480,151
                                                          ------------   ------------

                                                          $   496,711    $ 1,003,512
                                                          ============   ============

                               See accompanying notes.

                                          3
</TABLE>
<PAGE>

<TABLE>
                            IN STORE MEDIA SYSTEMS, INC.
                            (A DEVELOPMENT STAGE COMPANY)
                                    BALANCE SHEET
                      DECEMBER 31, 2000 AND SEPTEMBER 30, 2001
                                     (UNAUDITED)
<CAPTION>

                        LIABILITIES AND STOCKHOLDERS' DEFICIT
                        -------------------------------------

                                                            2000            2001
                                                       -------------   -------------
<S>                                                    <C>             <C>
Current liabilities:
   Accounts payable                                    $    597,330    $    826,000
   Interest payable                                         610,780         227,907
   Accrued expenses                                          48,665          52,968
   Notes payable (Note 2)                                 1,679,976         487,500
   Notes payable-shareholder and officer                    251,000               -
   Short-term notes payable                                 354,874               -
                                                       -------------   -------------

    Total current liabilities                             3,542,625       1,594,375

Stockholders' deficit (Notes 2, 4 and 5):
   Preferred stock, no par value; 50,000,000 shares
    authorized, 3 shares (2000) and 2 shares (2001)
    issued and outstanding, liquidation preference
    $ 50,000                                                750,000         500,000
   Common stock, $.001 par value; 150,000,000 shares
    authorized, 67,631,621 (2000) and 80,132,322
    (2001) shares issued                                     67,631          80,132
   Additional paid-in capital                            13,076,110      19,576,784
   Stock subscriptions received                                   -           3,766
   Treasury stock, at cost; 9,374,742 shares               (563,750)       (563,750)
   Deficit accumulated during the development stage     (16,375,905)    (20,187,795)
                                                       -------------   -------------

    Total stockholders' deficit                          (3,045,914)       (590,863)
                                                       -------------   -------------

                                                       $    496,711    $  1,003,512
                                                       =============   =============

                               See accompanying notes.

                                         4
</TABLE>
<PAGE>

                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                             STATEMENT OF OPERATIONS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
                                   (UNAUDITED)


                                                      2000              2001
                                                 -------------     -------------
Revenues:
    Coupon handling fees and other               $          -      $      5,732

Costs and expenses:
    Research and development                           13,500           (14,389)
    General and administrative                        416,930           950,518
    Depreciation and amortization                      16,739            10,988
                                                 -------------     -------------

      Total costs and expenses                       (447,169)         (947,117)
                                                 -------------     -------------

      Operating loss                                 (447,169)         (941,385)

Other income (expense):
    Interest income                                     1,118            10,896
    Debt conversion costs                             (17,956)          (32,068)
    Interest expense (Note 2)                         251,703           455,083
                                                 -------------     -------------

      Total other income (expense)                    234,865           433,911
                                                 -------------     -------------

Net loss (Note 3)                                    (212,304)         (507,474)

Dividends applicable to preferred stock                15,658            29,999
                                                 -------------     -------------

Net loss applicable to common stock              $   (227,962)     $   (537,473)
                                                 =============     =============

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

Weighted average common shares
    outstanding                                    56,919,000        69,435,000
                                                 =============     =============

    * less than $.01 per share

                               See accompanying notes.

                                       5
<PAGE>

<TABLE>
                             IN STORE MEDIA SYSTEMS, INC.
                            (A DEVELOPMENT STAGE COMPANY)
                               STATEMENT OF OPERATIONS
                FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
   AND FOR THE PERIOD FROM DECEMBER 30, 1992 (INCEPTION) THROUGH SEPTEMBER 30, 2001
                                     (UNAUDITED)
<CAPTION>

                                                                          Cumulative
                                                                         amounts from
                                             2000            2001         inception
                                        -------------   -------------   -------------
<S>                                     <C>             <C>             <C>
Revenues:
    Coupon handling fees and other      $          -    $     11,727    $     11,727

Costs and expenses:
    Research and development                  19,671          41,455       3,316,807
    General and administrative             1,166,042       2,329,344       8,819,728
    Depreciation and amortization             50,216          32,492         325,824
                                        -------------   -------------   -------------

      Total costs and expenses            (1,235,929)     (2,403,291)    (12,462,359)
                                        -------------   -------------   -------------

      Operating loss                      (1,235,929)     (2,391,564)    (12,450,632)

Other income (expense):
    Interest income                            5,549          15,024         104,984
    Litigation settlement                          -               -        (156,250)
    Restructuring costs                            -         (26,121)       (222,632)
    Debt conversion costs                    (17,956)       (631,512)     (1,308,342)
    Interest expense (Note 2)                115,976        (721,662)     (5,344,265)
                                        -------------   -------------   -------------

      Total other income (expense)           103,569      (1,364,271)     (6,926,505)
                                        -------------   -------------   -------------

Net loss (Note 3)                         (1,132,360)     (3,755,835)    (19,377,137)

Dividends applicable to
    preferred stock                           15,658          56,055          60,658
                                        -------------   -------------   -------------

Net loss applicable to common stock     $ (1,148,018)   $ (3,811,890)   $(19,437,795)
                                        =============   =============   =============

Basic and diluted net loss per common
    share                               $       (.02)   $       (.06)   $       (.40)
                                        =============   =============   =============

Weighted average common shares
    outstanding                           56,255,000      65,049,000      49,154,000
                                        =============   =============   =============

                               See accompanying notes.

                                          6
</TABLE>
<PAGE>

<TABLE>
                                                    IN STORE MEDIA SYSTEMS, INC.
                                                    (A DEVELOPMENT STAGE COMPANY)
                                            STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
                                            FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
                                                             (Unaudited)
<CAPTION>

                                                              Preferred stock                 Common stock               Additional
                                                       -----------------------------   ----------------------------       paid-in
                                                           Shares          Amount         Shares          Amount          capital
                                                       -------------   -------------   -------------   -------------   -------------
<S>                                                               <C>  <C>               <C>           <C>             <C>
Balance, December 31, 2000                                        3    $    750,000      67,631,621    $     67,631    $ 13,076,110

   Sale of common stock for cash ($.27 to $.36 per
     share) (Note 4)                                              -               -       6,600,000           6,600       2,045,400

   Preferred stock dividends                                      -               -               -               -               -

   Intrinsic value of stock options granted to an
     officer of the Company (Note 4)                              -               -               -               -         304,739

   Conversion of notes payable into common
     stock (Note 2)                                               -               -       2,715,000           2,715       1,866,040

   Conversion of short-term note payable into common
     stock (Note 2)                                               -               -         310,155             310         251,241

   Extension of exercise period of warrants issued
     in connection with debt offering (Note 2)                    -               -               -               -         439,874

   Sales of common stock for cash ($.75 per share)
     (Note 4)                                                     -               -       2,292,000           2,292       1,716,708

   Net retirement of stock and cash paid upon merger
     with E. Schulze Corp. (Note 4)                               -               -      (2,292,000)         (2,292)     (1,716,708)

   Stock issued to consultants for services                       -               -         542,500             543         573,882

   Funds received relating to exercise of warrants
     (Note 2)                                                     -               -               -               -               -

   Sales of common stock for cash ($.75 per  share)               -               -         403,999             404         302,596

   Exercise Warrants                                              -               -         267,121             267          78,564

   Conversion of preferred stock into common stock               (1)       (250,000)        661,926             662         249,338

   Issuance of common stock for debt issuance
     costs ($.39 per share)                                       -               -       1,000,000           1,000         389,000

   Net loss for the nine months ended
     September 30, 2001                                           -               -               -               -               -
                                                       -------------   -------------   -------------   -------------   -------------

Balance, September 30, 2001                                       2    $    500,000      80,132,322    $     80,132    $ 19,576,784
                                                       =============   =============   =============   =============   =============
</TABLE>
(CONTINUED BELOW)
<PAGE>

<TABLE>
                                             IN STORE MEDIA SYSTEMS, INC.
                                             (A DEVELOPMENT STAGE COMPANY)
                                     STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
                                     FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
                                                      (UNAUDITED)
                                                      (CONTINUED)
<CAPTION>

                                                                                           Deficit
                                                                                         accumulated
                                                                                          during the
                                                              Stock         Treasury     development
                                                          subscriptions      stock           stage           Total
                                                          -------------  -------------   -------------   -------------
<S>                                                       <C>            <C>             <C>             <C>
Balance, December 31, 2000                                $          -   $   (563,750)   $(16,375,905)   $ (3,045,914)

   Sale of common stock for cash ($.27 to $.36 per
     share) (Note 4)                                                 -              -               -       2,052,000

   Preferred stock dividends                                         -              -         (56,055)        (56,055)

   Intrinsic value of stock options granted to an
     officer of the Company (Note 4)                                 -              -               -         304,739

   Conversion of notes payable into common
     stock (Note 2)                                                  -              -               -       1,868,755

   Conversion of short-term note payable into common
     stock (Note 2)                                                  -              -               -         251,551

   Extension of exercise period of warrants issued
     in connection with debt offering (Note 2)                       -              -               -         439,874

   Sales of common stock for cash ($.75 per share)
     (Note 4)                                                        -              -               -       1,719,000

   Net retirement of stock and cash paid upon merger
     with E. Schulze Corp. (Note 4)                                  -              -               -      (1,719,000)

   Stock issued to consultants for services                          -              -               -         574,425

   Funds received relating to exercise of warrants
     (Note 2)                                                    3,766              -               -           3,766

   Sales of common stock for cash ($.75 per  share)                  -              -               -         303,000

   Exercise Warrants                                                 -              -               -          78,831

   Conversion of preferred stock into common stock                   -              -               -               -

   Issuance of common stock for debt issuance
     costs ($.39 per share)                                          -              -               -         390,000

   Net loss for the nine months ended
     September 30, 2001                                              -              -      (3,755,835)     (3,755,835)
                                                          -------------  -------------   -------------   -------------

Balance, September 30, 2001                               $      3,766   $   (563,750)   $(20,187,795)   $   (590,863)
                                                          =============  =============   =============   =============

                                                See accompanying notes.

                                                          7
</TABLE>
<PAGE>

<TABLE>
                                   IN STORE MEDIA SYSTEMS, INC.
                                   (A DEVELOPMENT STAGE COMPANY)
                                      STATEMENT OF CASH FLOWS
                       FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
         AND FOR THE PERIOD FROM DECEMBER 30, 1992 (INCEPTION) THROUGH SEPTEMBER 30, 2001
                                            (UNAUDITED)
<CAPTION>

                                                                                      Cumulative
                                                                                        amounts
                                                                                         from
                                                          2000            2001         inception
                                                     -------------   -------------   -------------
<S>                                                  <C>             <C>             <C>
Cash flows from operating activities:
   Net loss                                          $ (1,132,360)   $ (3,755,835)   $(19,377,137)
   Adjustments to reconcile net loss to net
    cash used in operating activities:
      Depreciation and amortization                        50,216          32,492         325,824
      Restructuring charges
      Common stock and options issued for services
       patents and payables                               194,188       2,340,550       4,726,080
      Amortization of debt issuance costs                (347,369)              -       1,550,512
      Reduction in note receivable - related party
       charged to research and development                      -               -         244,311
      Changes in assets and liabilities:
       Other current assets                                (4,311)         21,819         (42,041)
       Inventory                                                -             400        (109,905)
       Other assets                                        (7,130)              -         (44,270)
       Accounts payable                                    (6,662)        228,670         826,000
       Interest payable                                   190,439         203,394       1,129,385
       Accrued expenses                                    56,827           4,303          52,968
                                                     -------------   -------------   -------------

      Total adjustments                                   126,198       2,831,628       8,658,864
                                                     -------------   -------------   -------------

      Net cash used in operations                      (1,006,162)       (924,207)    (10,718,273)

Cash flows from investing activities:
   Purchase of property and equipment                      (4,592)        (32,124)       (299,152)
   Proceeds from sale of property and equipment                 -               -         125,000
   Advances - related party                                (1,573)              -        (290,969)
   Patent costs                                           (30,142)         (9,722)       (120,401)
   Lease deposits                                               -               -         (27,880)
                                                     -------------   -------------   -------------

      Net cash used in investing activities               (36,307)        (41,846)       (613,402)

Cash flows from financing activities:
   Proceeds from sale of common stock                     187,040       1,924,611       7,285,258
   Proceeds from the sale of preferred stock              750,000               -         750,000
   Purchase of treasury stock                                   -               -        (520,000)
   Proceeds from common stock subscriptions                     -           3,766           3,766
   Payment of preferred stock dividends                    (4,603)        (56,055)        (60,658)
   Loan issuance costs                                    (10,000)              -               -
   Proceeds from (repayments of) stockholder loans         31,000        (251,000)              -
   Proceeds from (repayments of) capital leases            (3,238)              -         (14,087)
   Proceeds from notes payable                             50,000         125,493       5,170,367
   Repayments of notes payable                           (125,000)       (649,770)       (960,940)
                                                     -------------   -------------   -------------

      Net cash provided by financing activities           875,199       1,097,045      11,653,706
                                                     -------------   -------------   -------------

Net increase (decrease) in cash                          (167,270)        130,992         322,031

Cash and cash equivalents at beginning of period          248,325         191,039               -
                                                     -------------   -------------   -------------

Cash and cash equivalents at end of period           $     81,055    $    322,031    $    322,031
                                                     =============   =============   =============

                                      See accompanying notes.

                                                8
</TABLE>
<PAGE>

                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2001


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, 2001, and the results of operations and cash
     flows for the periods ended September 30, 2000 and 2001.

     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
     ($19,377,137 since inception) and a stockholders' deficit at September 30,
     2001 of $590,863. 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. In
     January 2001, the Company completed a private equity funding agreement that
     provided the Company with $2,052,000 of equity, enabling the Company to
     begin the commercial introduction of its proprietary electronic coupon
     clearing system. In connection with this funding agreement, the Company
     received proceeds of $1,500,000 in equity before the third quarter and an
     additional $552,000 of equity was received on August 31, 2001.

     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.

     In March 2001, the Company launched the initial pilot program of its
     proprietary electronic coupon clearing system. In connection with this
     pilot program, the Company has commenced the generation of operating
     revenue. For the quarter ended September 30, 2001, the Company generated
     operating revenue of $5,732. For the nine months ended September 30, 2001,
     the Company had operating revenue of $11,727.

2.   Notes payable
     -------------

     On September 5, 2000, the Company borrowed $30,000 from an officer of the
     Company. Interest on the note accrued monthly at 9.5% per annum. The note
     and accrued interest was due on October 31, 2000, or upon receipt of new
     equity funds in excess of $100,000. During February 2001, the note plus all
     accrued interest was paid in full.

     On November 8, 2000, the Company borrowed $180,000 from a partnership in
     which the Company's president is the general partner bearing interest at
     9.50% per annum. During February 2001, the note plus all accrued interest
     was paid in full.

                                       9
<PAGE>

                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2001


2.   Notes payable (continued)
     -------------------------

     On November 20, 2000, the Company borrowed $160,000 from an unrelated
     company bearing interest at 9.50% per annum. During February 2001, the note
     plus all accrued interest was paid in full.

     On December 20, 2000, the Company borrowed $160,000 from an unrelated
     individual bearing interest at 9.50% per annum. During February 2001, the
     note plus all accrued interest was paid in full.

     From October 1997 through February 1998, the Company borrowed a total of
     $188,500 from a shareholder related to the Company's former president
     bearing interest at the default rate of 18%. During February 2001, these
     notes plus all accrued interest were paid in full.

     On May 15, 2001, the Company borrowed $125,493 from a shareholder/director
     bearing interest at 8% per annum, convertible into 310,155 shares of the
     Company's common stock. On June 7, 2001, the shareholder/director elected
     to convert the note payable and any accrued interest into 310,155 shares of
     the Company's common stock.

     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. In March 2001, the Company issued a letter
     to all warrant holders, whose notes were previously converted to the
     Company's common stock, informing them that the Company would no longer be
     extending the warrants beyond their current extension dates. All warrant
     holders wishing to exercise these warrants were required to do so by April
     3, 2001, otherwise, these warrants would expire. The warrants were
     subsequently extended to August 15, 2001. As of September 30, 2001, $78,831
     has been received for the exercise of warrants to purchase 267,121 common
     shares.

     For accounting purposes, the Company is treating these extensions as stock
     appreciation rights and has recorded a decrease in interest expense of
     $510,088 in the quarter ended September 30, 2000 related to the warrants
     which have been extended. During the quarter ended September 30, 2001, the
     price of the Company's stock declined and therefore, the value assigned to
     the warrant extensions declined by $510,088. This combined with the first
     two-quarter expense of $949,962 results in an increase in interest expense
     for the nine months ended September 30, 2001 of $439,874.

     During the quarter ended September 30, 2001, 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 $32,068 as debt conversion
     costs in recognition of the beneficial conversion terms offered. For the
     nine months ended September 30, 2001, holders of $892,476 of notes payable
     converted to common stock or exercised their warrants and the Company
     recorded a total of $631,512 of debt conversion costs associated with the
     conversions. Additionally, as of September 30, 2001, holders of $212,500 of
     notes payable outstanding elected to extend their notes until October 31,
     2001.

                                       10
<PAGE>

                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2001


3.   Income taxes
     ------------

     No provision for income taxes is required at September 30, 2001 because, in
     management's estimation the Company will not recognize any taxable income
     through December 31, 2001.

4.   Stockholders' equity
     --------------------

     Private placement:

     In January 2001, the Company completed a private equity funding agreement
     that provided the Company with $2,052,000 of equity, enabling the Company
     to begin the commercial introduction of its proprietary electronic coupon
     clearing system. In connection with this funding agreement, the Company
     received initial equity proceeds of $1,000,000 in January 2001, $500,000 in
     April 2001, and the final $552,000 in August 2001 all in exchange for an
     aggregate of 6,600,000 shares of common stock. In connection with the
     release of the final $552,000 from escrow, the Company issued 7,600,000
     options to purchase shares of the Company's restricted common stock at
     prices ranging from $.75 per share to $1.50 per share. Also in connection
     with the release of the final $552,000 from escrow, the Company issued
     660,000 options to purchase shares of the Company's restricted common stock
     to In Store Capital, LLC at prices ranging from $.75 per share to $1.50 per
     share.

     Additionally, in August 2001, in accordance with the agreement to provide
     financing contracted upon by the Company and the investor group, the
     Company released from escrow 1,000,000 shares of the Company's restricted
     common stock in satisfaction of the agreement to provide the Company with
     accounts receivable financing. In connection with the financing and
     corresponding release of the shares, the Company recorded debt issuance
     costs of $390,000 that are being amortized over the three-year term of the
     financing agreement.

     Stock options:

     In January 2001, the Company issued to its president, options to purchase
     700,000 shares of the Company's common stock exercisable at $.30 per share,
     for a five-year period and are fully vested. In connection with the
     issuance of these options, the Company has recorded compensation expense of
     $304,739.

     In January 2001, the Company's Board of Directors approved the sale of
     25,000 shares of the Company's restricted common stock to each outside
     director for each year of service provided to the Company at a price of
     $.25 per share. The cost of the shares will be paid by a note from each
     director and be collateralized by the stock. This resolution was approved
     by the Company's shareholders at the 2001 Annual Shareholders' Meeting.

                                       11
<PAGE>

                          IN STORE MEDIA SYSTEMS, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2001


4.   Stockholders' equity (continued)
     --------------------------------

     Acquisition of Schulze Corp.:

     In May 2001, the Company acquired the entire outstanding capital stock of
     The E. Schulze Corporation, a Colorado corporation (the "Schulze Corp."),
     in exchange for an aggregate of $1,719,000 in cash (the "Cash Amount") and
     17,852,196 shares of the Company's common stock (the "Company Common
     Stock"). Under the terms of an Agreement and Plan of Merger dated March 30,
     2001, between the Company, the Schulze Corp. and the stockholders of the
     Schulze Corp., a newly-formed subsidiary of the Company was merged with and
     into the Schulze Corp. in a tax-free reorganization under the Internal
     Revenue Code. As a result, at the effective time of the merger, the Schulze
     Corp. became a wholly-owned subsidiary of the Company.

     The Company generated the cash necessary to pay the Cash Amount through the
     sale to certain investors of 2,292,000 new shares (the "New Shares") at a
     price per share of $.75. The purchasers of the New Shares included a
     director of the Company and certain principals and affiliates of the
     director and a company related to a director of the Company.

     Prior to the acquisition, the Schulze Corp. was the largest holder of the
     Company's Common Stock. The assets of the Schulze Corp. consist of
     20,144,196 shares of common stock and rights to a certain patented
     technology commonly known as the "Canpactor".

                                       12
<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. As a result of the below-described commencement of the
Company's pilot program in March 2001, the Company generated initial revenues
from operations of $11,727 during the nine months ended September 30, 2001.
Additionally, the Company has incurred losses of $19,377,137 since inception
through September 30, 2001.

At September 30, 2001, the Company had a stockholders' deficit of 590,863, which
reflects 19,596,932 of paid in capital (net of amount attributable to treasury
stock) less accumulated deficit of 20,187,795. The accumulated deficit amount is
primarily 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, 1999, and 2000,
research and development, general and administrative expenses and the valuation
of stock options and warrants incurred since inception. At September 30, 2001,
the Company had a working capital deficit of $1,244,368.

In March 2001, the Company launched the initial pilot program of its proprietary
electronic coupon clearing system in four retail supermarkets in South Carolina.
In connection with this pilot program, the Company generated operating revenue
for the first time since its inception. In order to initiate and fund the
commercial introduction of these systems, the Company entered into a private
equity funding agreement in January 2001. Under the terms of the agreement, the
Company received initial proceeds of $1,000,000 in equity with an additional
$1,052,000 of equity being held in escrow pending the Company's completion of
certain milestones, including the commencement of the pilot program and the
initial signing of long-term contracts with retailers. In April 2001, the
Company received $500,000 of these escrowed funds as a result of the successful
launch of its pilot program in March 2001. In August 2001, the Company received
the remaining $552,000 from escrow in exchange for the issuance of 7,600,000
options to purchase shares of the Company's restricted common stock at prices
ranging from $.75/share to $1.50/share. These options were issued to the
investor group since the Company did not complete the milestones required for
the release of the escrowed funds as designated by the agreement. In addition to
the equity proceeds, the Company will require supplementary financing to fund
the equipment and accounts receivable financing required for the rollout of its
systems after the completion of the pilot program. The Company and In Store
Capital LLC, are parties to an agreement under which In Store Capital LLC,
agreed to secure a credit facility to finance the cost of manufacturing the
Company's systems for distributing and clearing coupons, subject to the
satisfaction of certain terms and conditions by the Company. Messrs. Mozer and
Bushman, two of the Company's directors, and certain of their affiliates, are
principals and executive officers of In Store Capital LLC. If the Company
obtains such financing, the Company believes it will have the funds necessary to
implement its plan of operation over the next 12 months. The Company is unable
to provide any assurance that it will be able to raise the additional funds
necessary to finance anticipated manufacturing costs and otherwise to implement
its business plan and strategy, as presently contemplated.

At the beginning of the third quarter of fiscal 2001, the Company's total debt
obligations, including accrued interest, were $868,192. During the three months
ended September 30, 2001, the Company repaid the principal and related accrued
interest under certain promissory notes in the aggregate amount of $55,071.
Additionally, the Company has continued its efforts to eliminate all remaining
debt obligations through the conversion of notes that remain outstanding and the
exercise of related warrants, and through the exchange of these notes for the
Company's restricted common stock. During the three months ended September 30,

                                       13
<PAGE>

2001, principal and accrued interest totaling $110,995 under certain notes were
converted. The converted amounts were used to exercise related warrants, which
resulted in the issuance of 225,000 shares of the Company's restricted common
stock. Notes evidencing debt obligations in the aggregate principal amount of
$212,500 were extended to October 31, 2001.

Through September 30, 2001, the Company remained burdened with debt obligations
and a continuing lack of working capital. The completion of the private equity
funding agreement in January 2001 along with the conversion of notes and accrued
interest relieved some of the financial burden relating to the debt obligations
and made available the funds necessary to commence the pilot program of the
Company's proprietary electronic coupon clearing system. If the Company is
unsuccessful in eliminating all remaining debt obligations either through the
above-described means (of conversion or exchange), the Company may be required
to secure additional working capital to continue its pilot program and
operations as planned, and may be forced to curtail or discontinue its
operations.

FINANCIAL CONDITION
-------------------

The Company had $1,003,512 in total assets and $1,594,375 in total liabilities
at September 30, 2001, as compared to $496,711 and $3,542,625 at the end of
fiscal 2000, respectively. Accounts payable and accrued expenses at the end of
fiscal year 2000 were $1,256,775 as compared to $1,106,875 at September 30,
2001. The Company had a working capital deficit of $1,244,368 at September 30,
2001, as compared to a working capital deficit of $3,301,391 at December 31,
2000. This difference primarily is attributed to reductions in notes payable and
accrued interest of $2,181,223.

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
$12,462,359 from inception through September 30, 2001. These expenses include
$3,316,807 in research and development expenses and $8,819,728 in general and
administrative expenses. Subject to the availability of additional funds, the
Company expects its operational expenses and costs to increase as it expands its
pilot program of its proprietary electronic coupon clearing system, expands its
efforts to complete the development of its systems, products and services, and
commences 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. No assurance can be made that the Company will be able to raise the
funds necessary to implement its business plan and strategy as presently
contemplated, and if such additional funds do not become available, the Company
may be forced to curtail or discontinue its operations.

QUARTER ENDED SEPTEMBER 30, 2001, COMPARED TO QUARTER ENDED SEPTEMBER 30, 2000
------------------------------------------------------------------------------

For the three months ended September 30, 2001, the Company sustained net
operating losses of $507,474 as compared to net operating losses of $212,304 for
the three months ended September 30, 2000. The increase in operating losses
primarily was due to an increase in general and administrative expenses arising
from the increases in stock based compensation to consultants and management
consulting fees and a decrease in interest expense, which resulted from the
valuation of stock warrants and options at September 30, 2001 as compared to the
valuation at June 30, 2001. For the quarter ended September 30, 2001, the
Company recognized a decrease in the valuation of these options and warrants
totaling $510,088. Warrants to purchase common stock issued in connection with
notes payable periodically have been extended since their initial expiration
dates. For accounting purposes, the Company is treating these extensions as
stock appreciation rights and the amount charged to interest expense increases
or decreases as the Company's stock price fluctuates.

                                       14
<PAGE>

The Company's operating expenses for the quarter ended September 30, 2001
increased by approximately 112% to $947,117, as compared to operating expenses
of $447,169 for the same period last year. The increase in operating expenses in
2001 was due to increases in general and administrative expenses. General and
administrative expenses increased by $533,588 or 128% to $950,518 for the 2001
fiscal quarter as compared to general and administrative expenses of $416,930
for the same period last year. The increase in general and administrative
expenses primarily was due to increases of $424,000 in stock based compensation
to consultants and $162,562 of management consulting fees related to the
Company's project management requirements. Compensation and employee benefits
expense decreased by $148,710 for the fiscal quarter ended September 30, 2001 as
compared to the same period last year.

The Company's net non-operating income (including non-operating interest income
and interest expense) increased to $433,911 for the quarter ended September 30,
2001 as compared to non-operating income of $234,865 for the quarter ended
September 30, 2000. The increase was primarily due to decreases in interest
expense relating to the valuation of stock options and warrants offset by
increases in debt conversion costs. Debt conversion costs for the quarter ended
September 30, 2001 increased by 79% to $32,068 as compared to the same period
last year. This was due to increases in the number of notes and accrued interest
converted to common stock. Interest expense for the quarter ended September 30,
2001 decreased by $203,380 which represented 105% of the non-operating income
for the quarter. This was due primarily to a decrease in the valuation of the
warrants issued in connection with the Company's debt offerings.

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

At September 30, 2001, the Company had $1,594,375 in current liabilities, of
which $715,407 (including $227,907 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, 2001, the Company was in default of its obligations under the
notes issued to investors by the Company and its predecessor in the amount of
$332,370 (including accrued interest of $107,370). A portion of the notes was
converted into shares of the Company's common stock during the 1998, 1999, 2000,
and 2001 fiscal years. In October 2000, the Company issued a letter to all note
holders 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. Approximately $212,500 of notes have been
extended to October 31, 2001. At September 30, 2001, notes in the aggregate
principal amount of $487,500 remained outstanding, as compared to notes in the
aggregate principal amount of $1,679,976 that were outstanding on December 31,
2000. The remaining portion of the Company's current liabilities is primarily
comprised of continuing payment obligations of $490,688 (at September 30, 2001
and December 31, 2000) to Unisys Corporation. The Company relies on the
availability of additional capital to satisfy all such obligations.

                                       15
<PAGE>

The Company will require additional capital to continue in its existing form,
and 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 2000 through September 30, 2001, the Company's cash
position has increased. At September 30, 2001, the Company had available cash of
$322,031, as compared to available cash of $191,039 at December 31, 2000.

With the completion of the private equity funding agreement in January 2001 and
the release of all funds from escrow, the Company anticipates it has sufficient
funds to continue its operations through December 31, 2001. At that time, the
Company would have to either generate sufficient cash flow from its anticipated
rollout of its proprietary electronic coupon clearing systems or raise
additional funds to continue its operation as planned.

In January 2001, the Company completed a funding arrangement with a private
equity group resulting in the Company receiving equity proceeds of $2,052,000.
The Company received initial proceeds of $1,000,000 in equity with an additional
$1,052,000 of equity being held in escrow pending the Company attaining certain
milestones by September 30, 2001. In April 2001, the Company received $500,000
of these escrowed funds as a result of its attainment of the first of two
milestones completed in March 2001. In August 2001, the Company received the
remaining $552,000 from escrow in exchange for the issuance of 7,600,000 options
to purchase shares of the Company's restricted common stock at prices ranging
from $.75/share to $1.50/share. These options were issued to the investor group
since the Company did not complete the milestones required for the release of
the escrowed funds as designated by the agreement. With these funds, the Company
is able to continue the commercial introduction of its proprietary electronic
coupon clearing systems in its pilot programs. It is anticipated that the
Company's current cash position would allow the Company the ability to continue
the rollout of its systems, generate revenues and fund its operation through
December 31, 2001. Additionally, if successful, the Company believes it would be
in a stronger position to secure additional capital if the need should arise.
Failure to attain these objectives would require the Company to acquire
additional capital in the form of either debt or equity. If the Company were
unable to secure this additional capital, if needed, it would most likely impair
the ability of the Company to meet its obligations in the near or medium term.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
------------------------------------------------------------------

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

                                       16
<PAGE>

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings
         -----------------

         None


Item 2.  Changes in Securities and use of proceeds
         -----------------------------------------

In January 2001, the Company completed a private equity funding agreement that
provided the Company with $2,052,000 of equity, enabling the Company to begin
the commercial introduction of its proprietary electronic coupon clearing
system. In connection with this funding agreement, the Company received proceeds
of $2,052,000 in equity in exchange for 6,600,000 shares of common stock. The
shares were sold to Mr. Derrick Bushman and 33 other purchasers who qualified as
"accredited" investors under Rule 501 of Regulation D under the Securities Act
of 1933, as amended ("Securities Act"). In connection with the release of the
final $552,000 from escrow, the Company issued 7,600,000 options to purchase
shares of the Company's restricted common stock at prices ranging from $.75 per
share to $1.50 per share. Also in connection with the release of the final
$552,000 from escrow, the Company issued 660,000 options to purchase shares of
the Company's restricted common stock to In Store Capital, LLC at prices ranging
from $.75 per share to $1.50 per share. The shares were sold in reliance on the
exemptions from registration available under Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder. No fee was paid in
connection with the sale of these shares.

In January 2001, the Company granted to Mr. Donald Uhl, the Company's Chairman
and CEO, options to purchase 700,000 shares of the Company's common stock. The
options are exercisable immediately at $0.30 per share. The options were granted
as consideration for Mr. Uhl's past contibutions and his continued employment
with the Company. The options were granted in reliance on the exemptions
available under Rule 701 of Regulation C promulgated by the Securities and
Exchange Commission under the Securities Act.

At various times during the three months ended September 30, 2001, the Company
issued to 2 holders of certain notes an aggregate of 225,000 shares of common
stock upon the exercise of certain warrants that were previously issued in
connection with the issuance of notes payable in 1996, 1997, and 1998. All such
holders were unrelated parties and qualified as "accredited" investors under
Rule 501 of Regulation D under the Securities Act. As consideration for the
issuance of the 225,000 shares, the Company received aggregate consideration of
$110,995 in the form of debt cancellation. The holders of the notes applied all
principal and accrued interest payable under the notes in the amount of $110,995
to exercise the related warrants. The shares were issued in private transactions
in reliance on the exemptions from registration available under Section 4(2) of
the Securities Act and Rule 506 of Regulation D under the Securities Act. No fee
was paid in connection with these transactions.

In May 2001, the Company issued to eleven individual investors 17,852,196 shares
of the Company's common stock in connection with the acquisition of The E.
Schulze Corporation, as more fully described under Item 6(b) below. The bulk of
the shares were issued to Melissa Schulze, the wife of the Company's deceased
Chairman and CEO, Everette E. Schulze, and Mr. Schulze's six children. Each of
Messrs. Donald Uhl and Michael Mozer received 1,000,000 shares of the Company's
common stock in the transaction. As consideration for the shares issued and cash
paid in the transaction, the Company received the entire capital stock of The E.
Schulze Corporation. The shares issued by the Company were issued in a private
transaction in reliance on the exemption from registration available under
Section 4(2) of the Securities Act. The Company paid no underwriting fee in
connection with these transactions.

                                       17
<PAGE>

In May 2001, the Company sold 714,154 shares of common stock to Mr. Derrick
Bushman and 3 other purchasers who qualified as "accredited" investors under
Rule 501 of Regulation D under the Securities Act of 1933, as amended
("Securities Act") for total proceeds of $428,493. These proceeds were than used
by the Company to reduce notes payable and accrued interest payable to selected
noteholders of the Company. The shares were issued in private transactions in
reliance on the exemptions from registration available under Section 4(2) of the
Securities Act and Rule 506 of Regulation D under the Securities Act. No fee was
paid in connection with these transactions.

In August 2001, in accordance with the agreement to provide financing contracted
upon by the Company and the investor group, the Company released from escrow
1,000,000 shares of the Company's restricted common stock in satisfaction of the
agreement to provide the Company with accounts receivable financing. In
connection with the financing and corresponding release of the shares, the
Company recorded debt issuance costs of $390,000 that are being amortized over
the three-year term of the financing agreement. The shares were issued in
private transactions in reliance on the exemptions from registration available
under Section 4(2) of the Securities Act and Rule 506 of Regulation D under the
Securities Act. No fee was paid in connection with these transactions.

At various times during the three months ended September 30, 2001, the Company
issued to various consultants an aggregate of 392,500 shares of common stock for
professional services performed on behalf of the Company. The shares were issued
in private transactions in reliance on the exemptions from registration
available under Section 4(2) of the Securities Act and Rule 506 of Regulation D
under the Securities Act. No fee was paid in connection with these transactions.


Item 3.  Defaults Upon Senior Securities
         -------------------------------

At November 14, 2001, the Company was in default on its notes payable to
investors in the form of convertible short-term debentures totaling $332,370
including accrued interest of $107,370.


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

         (a)      The Company held its Annual Meeting of Stockholders on October
                  24, 2001.

         (b)      Not applicable

         (c)      At the time of the Annual Meeting of Stockholders held on
                  October 24, 2001, 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
                                Thomas F. Carroll
                                Frank J. Pirri
                                John Watkins
                                Derrick Bushman
                                Michael T. Mozer
                                Ronald F. Anderegg
                                Raymond Solomon
                                George E. Sattler

                                       18
<PAGE>



                           For all nominees the results of the vote were as
                           follows:

                                    For                             46,462,442
                                    Against                             85,000
                                    Abstained                            8,227


                           (ii)     To approve and ratify the Company's 2000
                                    Omnibus Equity Incentive Plan, as amended
                                    (the "Plan"), which authorizes the issuance
                                    of up to 6,000,000 shares of the Company's
                                    common stock in the form of stock awards or
                                    upon the exercise of options that previously
                                    were granted or that may be granted under
                                    the Plan at various times:


                           For all nominees the results of the vote were as
                           follows:

                                     For                            31,950,152
                                     Against                         1,246,821
                                     Abstained                         827,715


                           (iii)    To approve an ratify a resolution to issue
                                    to the Company's non-employee directors an
                                    aggregate of 400,000 shares of the Company's
                                    common stock in the form of stock awards
                                    under the Plan, at a price of $.25 per share
                                    and such other terms and conditions as
                                    described in the Proxy Statement:


                           For all nominees the results of the vote were as
                           follows:

                                    For                             32,588,955
                                    Against                          1,400,663
                                    Abstained                           35,070


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


                           For all nominees the results of the vote were as
                           follows:

                                     For                            46,506,427
                                     Against                             5,500
                                     Abstained                          43,742


         (d)      Not applicable

                                       19
<PAGE>

Item 5.  Other Information
         -----------------

In September 2001, the Company signed a letter of intent with Let's Go Shopping,
Inc. ("LGS"), whereby the two entities agreed to enter into a joint marketing
agreement to market a patented coupon distribution program to both retailers and
manufacturers. The agreement calls for the Company to have an exclusive
sublicense to all patents issued and pending relating to the LGS patented retail
coupon merchandising program in exchange for the payment of minimum royalty
amounts designated by the terms of the agreement. The agreement also calls for
the Company to have the exclusive right to market the program to major
retailers.


Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------

         (a)      Exhibits

                  None

         (b)      There were no Form 8-K's filed during the quarter ended
                  September 30, 2001


                                       20
<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, 2001                            IN STORE MEDIA SYSTEMS, INC.
                                                   (Registrant)


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


                                       21