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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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



For the quarter ended September 30, 2003



or



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



Commission File Number 001-16185



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INNOVATIVE COMPANIES, INC.

(Exact
name of small business issuer as specified in its charter)



|STATE OF FLORIDA                                               |  | 59-2600232                       
|-------------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|6950 Bryan Dairy Road, Largo, Florida    |  | 33777     
|---------------------------------------- |  | ----------
|(Address of principal executive offices) |  | (Zip Code)



Issuers
telephone number, including area code: (727) 544-8866



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



The number of shares outstanding of the Issuers common stock at $.01
par value as of November 3, 2003 was 7,612,809 net of 157,960 treasury shares.



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PART I  FINANCIAL INFORMATION



Item 1. CONSOLIDATED FINANCIAL STATEMENTS.



INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                            |  | March 31, 2003 |             |   | September 30,2003 |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | -
|                                                                                                                                            |  | (Audited)      |             |   | (Unaudited)       |  
|ASSETS                                                                                                                                      |  |                |             |   |                   |  
|Current assets:                                                                                                                             |  |                |             |   |                   |  
|Cash and cash equivalents                                                                                                                   |  | $              | 474,033     |   |                   | $
|Certificate of deposit, restricted                                                                                                          |  |                | 409,059     |   |                   |  
|Certificate of deposit                                                                                                                      |  |                | 294,883     |   |                   |  
|Accounts receivable, net                                                                                                                    |  |                | 879,454     |   |                   |  
|Accounts receivable, other                                                                                                                  |  |                | 354,293     |   |                   |  
|Inventories, net                                                                                                                            |  |                | 2,140,709   |   |                   |  
|Prepaid expenses and other current assets                                                                                                   |  |                | 297,114     |   |                   |  
|Due from affiliates, net                                                                                                                    |  |                | 546,426     |   |                   |  
|Deferred tax asset                                                                                                                          |  |                | 147,900     |   |                   |  
|                                                                                                                                            |  |                |             |   |                   |  
|Total current assets                                                                                                                        |  | $              | 5,543,871   |   |                   | $
|                                                                                                                                            |  |               
|Property, leaseholds and equipment, net                                                                                                     |  |                | 1,477,726   |   |                   |  
|                                                                                                                                            |  |               
|Intangible assets, net                                                                                                                      |  |                | 960,047     |   |                   |  
|                                                                                                                                            |  |               
|Other assets                                                                                                                                |  |                | 104,072     |   |                   |  
|                                                                                                                                            |  |                |             |   |                   |  
|Total assets                                                                                                                                |  | $              | 8,085,716   |   |                   | $
|                                                                                                                                            |  |                |             |   |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                        |  |                |             |   |                   |  
|Current liabilities:                                                                                                                        |  |                |             |   |                   |  
|Accounts payable                                                                                                                            |  | $              | 919,710     |   |                   | $
|Credit lines payable                                                                                                                        |  |                | 846,016     |   |                   |  
|Current portion of long-term obligations                                                                                                    |  |                | 369,066     |   |                   |  
|Accrued expenses                                                                                                                            |  |                | 337,952     |   |                   |  
|Obligations to affiliates                                                                                                                   |  |                | 343,624     |   |                   |  
|                                                                                                                                            |  |                |             |   |                   |  
|Total current liabilities                                                                                                                   |  | $              | 2,816,368   |   |                   | $
|Long-term obligations, less current portion                                                                                                 |  |                | 225,282     |   |                   |  
|                                                                                                                                            |  |                |             |   |                   |  
|Total liabilities                                                                                                                           |  | $              | 3,041,650   |   |                   | $
|                                                                                                                                            |  |                |             |   |                   |  
|Redeemable series A preferred stock, no par value, $10 face value 150,000 shares authorized; 45,000 and 0 shares outstanding, at
face value |  | $              | 450,000     |   |                   | $
|Commitments and contingencies                                                                                                               |  |                |             |   |                   |  
|                                                                                                                                            |  |               
|Shareholders equity :                                                                                                                      |  |                |             |   |                   |  
|Preferred stock, no par value, 5,850,000 shares authorized; no shares issued and outstanding                                                |  |                |            |   |                   |  
|Common stock, $.01 par value; 24,000,000 shares authorized; 7,727,634 and 7,767,769 shares issued and outstanding                           |  | $              | 77,276      |   |                   | $
|Treasury Stock ,$.01 par value; 143,600 and 157,960 shares, respectively                                                                    |  |                | (1,436      | ) |                   |  
|Additional paid in capital                                                                                                                  |  |                | 29,840,205  |   |                   |  
|Retained earnings (deficit)                                                                                                                 |  |                | (25,321,979 | ) |                   |  
|                                                                                                                                            |  |                |             |   |                   |  
|Total shareholders equity                                                                                                                  |  | $              | 4,594,066   |   |                   | $
|                                                                                                                                            |  |                |             |   |                   |  
|Total liabilities and shareholders equity                                                                                                  |  | $              | 8,085,716   |   |                   | $
|                                                                                                                                            |  |                |             |   |                   |  



See accompanying notes
to condensed consolidated financial statements.



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                                             |  | Three Months EndedSeptember 30, |           |   | Six Months EndedSeptember 30, |  
|------------------------------------------------------------ |  | ------------------------------- | --------- | - | ----------------------------- | -
|                                                             |  | 2002                            |           |   | 2003                          |  
|Revenues:                                                    |  |                                 |           |   |                               |  
|PBM                                                          |  | $                               | 710,213   |   |                               | $
|Distribution                                                 |  |                                 | 398,292   |   |                               |  
|Manufacturing                                                |  |                                 | 2,144,855 |   |                               |  
|                                                             |  |                                 |           |   |                               |  
|Total revenues                                               |  | $                               | 3,253,360 |   |                               | $
|                                                             |  |                                 |           |   |                               |  
|Cost of goods sold:                                          |  |                                 |           |   |                               |  
|PBM                                                          |  |                                 | 609,737   |   |                               |  
|Distribution                                                 |  |                                 | 280,229   |   |                               |  
|Manufacturing                                                |  |                                 | 1,379,215 |   |                               |  
|                                                             |  |                                 |           |   |                               |  
|Total cost of goods sold                                     |  | $                               | 2,269,181 |   |                               | $
|                                                             |  |                                 |           |   |                               |  
|Gross profit:                                                |  |                                 |           |   |                               |  
|PBM                                                          |  |                                 | 100,476   |   |                               |  
|Distribution                                                 |  |                                 | 118,063   |   |                               |  
|Manufacturing                                                |  |                                 | 765,640   |   |                               |  
|                                                             |  |                                 |           |   |                               |  
|Total gross profit                                           |  | $                               | 984,179   |   |                               | $
|                                                             |  |                                 |           |   |                               |  
|Selling, general and Administrative expenses                 |  |                                 | 874,041   |   |                               |  
|                                                             |  |                                 |           |   |                               |  
|Operating income (loss) before Other income and expense      |  | $                               | 110,138   |   |                               | $
|Other income (expense), net:                                 |  |                                 |           |   |                               |  
|Other income (expense), net                                  |  |                                 | 211,580   |   |                               |  
|Interest expense, net                                        |  |                                 | (17,265   | ) |                               |  
|                                                             |  |                                 |           |   |                               |  
|Total other income (expense), net                            |  | $                               | 194,315   |   |                               | $
|                                                             |  |                                 |           |   |                               |  
|Income (loss) before income taxes                            |  | $                               | 304,453   |   |                               | $
|Income taxes                                                 |  |                                 |          |   |                               |  
|                                                             |  |                                 |           |   |                               |  
|Net income (loss)                                            |  | $                               | 304,453   |   |                               | $
|Preferred stock dividends                                    |  |                                 | 29,613    |   |                               |  
|                                                             |  |                                 |           |   |                               |  
|Net income (loss) available To common shareholders           |  | $                               | 274,840   |   |                               | $
|                                                             |  |                                 |           |   |                               |  
|Basic income(loss) per share                                 |  | $                               | .04       |   |                               | $
|                                                             |  |                                 |           |   |                               |  
|Basic weighted average Number of common shares outstanding   |  |                                 | 7,025,000 |   |                               |  
|                                                             |  |                                 |           |   |                               |  
|Diluted income (loss) per share                              |  | $                               | .04       |   |                               | $
|                                                             |  |                                 |           |   |                               |  
|Diluted weighted average number of common shares outstanding |  |                                 | 7,025,000 |   |                               |  
|                                                             |  |                                 |           |   |                               |  



See accompanying notes
to condensed consolidated financial statements.



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS



|                                                                           |  | Six Months Ended September 30, |         
|-------------------------------------------------------------------------- |  | ------------------------------ | --------
|                                                                           |  | 2002                           |         
|                                                                           |  | (Unaudited)                    |         
|Cash flows from operating activities:                                      |  |                                |         
|Net income                                                                 |  | $                              | 717,671 
|Adjustments to reconcile net income to net cash from operating activities: |  |                                |         
|Depreciation and amortization                                              |  |                                | 188,405 
|Gain on sale of equipment                                                  |  |                                |        
|Changes in operating assets and liabilities:                               |  |                                |         
|Accounts receivable, trade, net                                            |  |                                | 216,609 
|Accounts receivable, other                                                 |  |                                | (473,101
|Inventory, net                                                             |  |                                | 398     
|Prepaid expenses and other current assets                                  |  |                                | (14,907 
|Other assets, net                                                          |  |                                | 766     
|Accounts payable                                                           |  |                                | (240,638
|Accrued expenses                                                           |  |                                | 42,413  
|Due from affiliates, net                                                   |  |                                | (108,455
|                                                                           |  |                                |         
|Net cash provided by operating activities                                  |  | $                              | 329,161 
|                                                                           |  |                                |         
|Cash flows from investing activities:                                      |  |                                |         
|Insured disposal of leasehold improvements                                 |  | $                              | 92,156  
|Purchases of property, leaseholds and equipment                            |  |                                | (86,730 
|Proceeds from sale of equipment                                            |  |                                |        
|                                                                           |  |                                |         
|Net cash provided by (used in) investing activities                        |  | $                              | 5,426   
|                                                                           |  |                                |         
|Cash flows from financing activities:                                      |  |                                |         
|Net change in credit lines payable                                         |  | $                              |        
|Payments of long-term obligations                                          |  |                                | (118,945
|Payments of preferred stock dividends                                      |  |                                | (67,113 
|Redemption of a certificate of deposit                                     |  |                                |        
|Proceeds from stock options exercised                                      |  |                                |        
|Purchase of treasury shares                                                |  |                                |        
|Payments for redemption of preferred stock                                 |  |                                | (200,000
|                                                                           |  |                                |         
|Net cash provided by (used in) financing activities                        |  |                                | (386,058
|                                                                           |  |                                |         
|Net increase (decrease) in cash                                            |  |                                | (51,471 
|Cash at beginning of period                                                |  |                                | 392,638 
|                                                                           |  |                                |         
|Cash at end of period                                                      |  | $                              | 341,167 
|                                                                           |  |                                |         



|                                                  |  | Six Months Ended September 30, 2002 |        | Six Months Ended Sepember 30, 2003
|------------------------------------------------- |  | ----------------------------------- | ------ | ----------------------------------
|Supplemental disclosure of cash flow information: |  |                                     |        |                                   
|Cash paid during the period for interest          |  | $                                   | 38,341 |                                   
|                                                  |  |                                     |        |                                   
|Cash paid during the period for income taxes      |  | $                                   |       |                                   
|                                                  |  |                                     |        |                                   



See accompanying notes
to condensed consolidated financial statements.



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE
AND SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2003

(UNAUDITED)



NOTE 1BASIS OF PRESENTATION



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month period ended
September 30, 2002 and 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2004. For further information, refer to the consolidated financial statements and footnotes included in the
Companys Form-10KSB as of and for the years ended March 31, 2002 and 2003 as filed with the Securities and Exchange Commission on June 30, 2003.



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



a. Principles of Consolidation



The condensed consolidated financial statements as of March 31, and September 30, 2003 and for the three and six months ended September 30, 2002 and 2003
include the accounts of Innovative Companies, Inc. (the Company), (Innovative), which is continuing to doing manufacturing business as Innovative Health Products, Inc. (Innovative), and its Florida wholly-owned
subsidiaries Breakthrough Engineered Nutrition, Inc. (Breakthrough), Belcher Pharmaceuticals, Inc., (Belcher) and Go2PBM Services, Inc. (PBM). Significant intercompany balances and transactions have been
eliminated in consolidation.



b. Industry Segment



In accordance with the provisions of Statement of Financial Accounting Standards No. 131,
(SFAS 131), Disclosures about Segments of an Enterprise and Related Information, a company is required to disclose selected financial and other related information about its operating segments. Operating segments are components of an enterprise
about which separate financial information is available and is utilized by the chief operating decision maker related to the allocation of resources and in the resulting assessment of the segments overall performance. As of March 31, 2003 and
September 30, 2003, the Company had three industry segments: manufacturing, distribution and pharmacy benefit management. The $8,085,716 of total assets as of March 31, 2003 were comprised of $965,740 attributable to corporate, $5,883,651
attributable to manufacturing, $587,411 attributable to distribution and $648,914 attributable to pharmacy benefit management. The $10,906,408 of total assets as of September 30, 2003 were comprised of $593,718 attributable to corporate, $8,054,031
attributable to manufacturing, $1,505,171 attributable to distribution and $739,321 attributable to pharmacy benefit management.



c. Cash and Cash Equivalents



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



d. Restricted Cash



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



e. Inventories



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



f. Property, Leasehold Improvements and Equipment



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



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g. Intangible Assets



Intangible assets consist primarily of goodwill and intellectual property. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets (FAS 141 and FAS 142). FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS 141 also specifies
the criteria by which intangible assets acquired in a purchase method business combination be recognized and reported separately from goodwill. FAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually. FAS 142 will also require the intangible assets with definite useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.



We were required to adopt the provisions of FAS 141 effective July 1, 2001 and FAS 142 effective April 1, 2002 and therefore, amortization expense is not longer recorded.
For the year ended March 31, 2003 and for the six months ended September 30, 2003, no impairment losses have been recorded. The unamortized balance of goodwill at March 31, and September 30, 2003 was $728,896.



h. Impairment of Assets



In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Companys policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain events have taken place that indicate the
remaining unamortized balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted cash flows. Factors considered in the valuation
include current operating results, trends and anticipated undiscounted future cash flows. In accordance with the implementation of FAS 144, a Company is to select an initial valuation and assessment date to perform a valuation to determine whether
there is a risk of asset impairment. The Company has selected its annual valuation date for assessment of long-lived assets, certain identifiable intangibles and goodwill impairment as January 1, 2003 for each of its operating units, for the fiscal
year ending March 31, 2003 and then for each fiscal year thereafter. There have been no impairment losses recorded for the fiscal year ended March 31,2003 or for the six months ended September 30, 2003.



i. Income Taxes



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



j. Earnings (Loss) Per Common Share



Earnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earnings (loss) per share are calculated
by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average
number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method.



As of September 30, 2003, the reconciliation of basic and fully diluted earnings per share is as follows:



|                                   |  | Three monthsended |  | Six monthsended
|---------------------------------- |  | ----------------- |  | ---------------
|Weighted average shares            |  | 7,572,681         |  | 7,571,186      
|Dilutive potential common shares   |  | 1,621,865         |  | 1,621,865      
|                                   |  |                   |  |                
|Diluted weighted average shares    |  | 9,194,546         |  | 9,193,051      
|                                   |  |                   |  |                
|Anti-dilutive options not included |  | 50,000            |  | 50,000         



k. Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at March 31, and September 30, 2003, as well as the reported amounts of
revenues and expenses for the three and six months ended September 30, 2002 and 2003. The actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements.



l. Concentration of Credit and Sales Risk



As related to consolidated sales revenues for the three and six months ended September 30,
2003, two customers accounted for 31.6% and 20.4% for the three months ended and three customers accounted for 24.4%, 24% and 5.7% for the six months ended. The customers with the 20.4%, the 24% and the 5.7% are related parties. As of September 30,
2003, the evaluation of credit risk concentration with respect to consolidated trade accounts receivable resulted in two customers representing 52.4% and 16.1% of the total outstanding; these customers are also the same customers who are disclosed
representing 31.6%, 20.4%, 24.4% and 24% of revenues for each of the respective periods described.



The Company has no concentration of customers within specific geographic areas outside the United States that would give rise to significant geographic credit risk.



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m. Revenue Recognition



In accordance with SAB 101, Revenue Recognition, revenues are recognized by the Company when the merchandise is shipped to the customer.



n. Advertising Costs



The Company charges advertising costs to expense as incurred. Advertising expense was $24,359 and $25,959 for the three months ended
September 30, 2002 and 2003, respectively, with $33,375 and $64,706 representing advertising expense for the six months ended September 2002 and 2003.



o. Fair Value of Financial Instruments



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



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



Long-term Obligations: The fair value of the Companys fixed-rate long-term obligations is estimated using discounted cash flow
analyses, based on the Companys current incremental borrowing rates for similar types of borrowing arrangements. At March 31, and September 30, 2003, the fair value of the Companys long-term obligations approximated its carrying value.



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



p. Reclassifications



Certain reclassifications have been made to the financial statements for the six months ended September 30, 2002 to conform to the presentation for the six months ended September 30, 2003.



NOTE 3ACCOUNTS RECEIVABLE, NET



Accounts receivable, net, consist of the following:



|                                          |  | March 31, 2003 |           |   | September 30 2003 |  
|----------------------------------------- |  | -------------- | --------- | - | ----------------- | -
|Trade accounts receivable                 |  | $              | 1,088,968 |   |                   | $
|Less allowance for uncollectible accounts |  |                | (209,514  | ) |                   |  
|                                          |  |                |           |   |                   |  
|                                          |  | $              | 879,454   |   |                   | $
|                                          |  |                |           |   |                   |  



As of March 31, 2003, the total
accounts receivable balance of $1,088,968 includes $934,484 related to the Companys manufacturing segment and $154,484 related to the Companys distribution segment. As of September 30, 2003, the total accounts receivable balance of
$2,854,839 includes $2,382,017 related to the Companys manufacturing segment and $472,822 related to the Companys distribution segment.



-7-



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NOTE 4STOCK OPTION PLAN



Employee Stock Option Plan



The following represents the employees common stock options outstanding as of September 30, 2003:



|Option balance outstanding, June 30, 2003      |  | 815,000 |  
|---------------------------------------------- |  | ------- | -
|Granted                                        |  | 50,000  |  
|Exercised                                      |  | (30,000 | )
|Forfeited                                      |  | 0       |  
|                                               |  |         |  
|Option balance outstanding, September 30, 2003 |  | 835,000 |  
|                                               |  |         |  



For the three and six months ended
September 30, 2003, 30,000 vested stock options were exercised all at their $0.85 exercise price resulting in $25,500 net proceeds being received by or in transit to the Company as of September 30, 2003.



As of September 30, 2003, of the 835,000 employees common stock options outstanding,
279,999 of those options were vested with 555,001 options being nonvested.



NonEmployee Stock Option Plan



The following
represents the nonemployees common stock options outstanding as of September 30, 2003:



|Option balance outstanding, June 30, 2003      |  | 847,000 |  
|---------------------------------------------- |  | ------- | -
|Granted                                        |  | 0       |  
|Exercised                                      |  | (10,135 | )
|Forfeited                                      |  | 0       |  
|                                               |  |         |  
|Option balance outstanding, September 30, 2003 |  | 836,865 |  
|                                               |  |         |  



For the three and six months ended
September 30, 2003, 10,135 vested stock options were exercised at exercise prices ranging from $0.80 to $1.00 resulting in $8,468 net proceeds being received by or in transit to the Company. Of the 836,865 nonemployees common stock options
outstanding, 262,865 of those options were vested with 574,000 options being nonvested.



NOTE 5RELATED PARTY TRANSACTIONS



Revenues: For the
three months ended September 30, 2002 and 2003, manufacturing revenues of approximately $38,797 and $116,667 respectively, were recorded from sales by the Company to subsidiaries of Dynamic Health Products, an affiliate of the Company, and of which
Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the three months ended September 30, 2002 and 2003, manufacturing revenues of $3,175 and $0, respectively, were recorded from sales by the Company to DrugMax,
Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the three months ended September 30, 2002 and 2003, manufacturing revenues of $5,181 and $204,052,
respectively, were recorded from sales by the Company to VerticalHealth Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a shareholder.



For the three months ended September 30, 2002 and 2003, distribution revenues of
approximately $1,968 and $1,063 were recorded from sales by the Company to VerticalHealth Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a shareholder.



For the three months ended September 30, 2002 and 2003, pharmacy benefit management revenues
of approximately $710,213 and $1,244,265 respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the Companys board member Mr. Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of
its revenues from this contract.



Revenues: For the six months ended September
30, 2002 and 2003, manufacturing revenues of approximately $100,011 and $171,037 respectively, were recorded from sales by the Company to subsidiaries of Dynamic Health Products, an affiliate of the Company, and of which Jugal K. Taneja, the
Chairman of the Board of the Company, is a principal shareholder. For the six months ended September 30, 2002 and 2003, manufacturing revenues of $3,175 and $41,393, respectively, were recorded from sales by the Company to DrugMax, Inc., an
affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the six months ended September 30, 2002 and 2003, manufacturing revenues of $13,330 and $425,055, respectively, were
recorded from sales by the Company to VerticalHealth Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a shareholder.



For the six months ended September 30, 2002 and 2003, distribution revenues of approximately $1,968 and $3,464 were recorded from sales by
the Company to VerticalHealth Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a shareholder.



For the six months ended September 30, 2002 and 2003, pharmacy benefit management revenues of approximately $1,405,762 and $2,446,127 respectively, were recorded from
sales by the Company to CarePlus Health Plan, an affiliate of the Companys board member Mr. Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract



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



As of March 31, and September 30,
2003, for the manufacturing segment, $18,297 and $101,597 was due from subsidiaries of Dynamic Health Products. $57,700 and $57,700, respectively, was due to DrugMax., $28,982 and $154,076 was due from VerticalHealth,Inc.



As of March 31, and September 30, 2003, for the pharmacy benefit management segment, $391,743
and $463,283 was due from CarePlus Health.



Preferred Stock Transactions: In
September 1999, the Company issued 150,000 shares of redeemable series A preferred stock to Dynamic Health Products, Inc. in satisfaction of $1,500,000 of outstanding liabilities. The shares of preferred stock were subsequently transferred to JB
Capital Corp., a company affiliated with our Chairman, Jugal K. Taneja. The redeemable series A preferred stock pays dividends at the rate of 10% per annum, which is cumulative from the date of issuance and payable quarterly which commenced



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March 31, 2001. For the three months ended September 30, 2002 and 2003, $29,613 and $26,070 of accrued preferred dividends were paid with the six months
ended September 30, 2002 and 2003, $67,113 and $52,140 of accrued preferred dividends were paid to JB Capital Corp. As of September 30, 2003, the holders of the preferred stock have redeemed 77,500 shares, or $775,000 with the balance of 72,500
preferred shares, or $725,000, representing the remaining preferred shares to be redeemed as included within current liabilities within due to affiliates based on the Company attaining certain positive net income as defined by the
redeemable preferred stock agreement.



|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- |  | --------------------------------------------------------------------------------------



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



General



We manufacture, package and ship high-quality private label dietary supplements, over-the-counter drugs, and health and beauty care products for companies
worldwide from our two manufacturing locations. Through our wholly-owned subsidiary, Breakthrough Engineered Nutrition, Inc. (Breakthrough), we market the Companys product lines, Carbslim, Lean Proteinand Thermo ZXEThrough our wholly-owned subsidiary, Go2PBM Services, Inc., (PBM) we administer pharmacy benefit management services to health
plans for unions, insurance companies, and other self-insured companies.



Results of Operations



Overview



We derive our revenues from developing, manufacturing, and wholesaling a
wide variety of non-prescription dietary supplements, and health and beauty care products. We also derive revenues from the distribution of our branded product lines, Carbslim, Lean Protein and Thermo ZXE. In addition, we derive revenues from the
services provided in connection with pharmacy benefit management. Revenues derived from our manufacturing and distribution segments are billed and recognized as product is produced and shipped, net of discounts, allowances, returns and credits.
Service revenues are billed and recognized once the service has been provided.



Cost of goods sold is comprised of direct manufacturing and distribution material product costs, contracted service fees, direct personnel compensation and other statutory benefits and indirect costs relating to labor
to support product manufacture and the warehousing of production and other manufacturing overhead as well as for prescription and claim-related costs attributable to providing pharmacy benefit management services. Research and development expenses
are charged against cost of goods sold as incurred. Selling, general and administrative costs include management and general office salaries, advertising and promotional expenses, sales and marketing and other indirect operating costs.



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



Three Months Ended September 30, 2002 Compared To Three Months Ended September 30, 2003



Revenues. Total revenues increased approximately $2,845,000, or
87.4%, to approximately $6,098,000 for the three months ended September 30, 2003, as compared to approximately $3,253,000 for the three months ended September 30, 2002. Pharmacy benefit management revenues increased approximately $723,000, or
138.5%, to approximately $1,244,000 for the three months ended September 30, 2003, as compared to $522,000 for the three months ended September 30, 2002. Pharmacy benefit management revenues increased for the three months ended September 30, 2003
solely due to the increase of participating plan members based on the PBM activity derived from two HMO health plans as compared to only one HMO health plan in the corresponding period in 2002. Distribution revenues increased approximately $818,000,
or 502.5%, to approximately $981,000 for the three months ended September 30, 2003, as compared to $163,000 for the three months ended September 30, 2002. For the three months ended September 30, 2003, revenues were derived primarily from three
product lines, 11,737 cases of CarbSlim, 8,501 cases of Lean Protein Bites and



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1,620 cases of Thermo ZXE were sold as compared to 6,530 cases sold for Lean Protein Bites and 5,265 cases of Thermo ZXE for the corresponding period in
2002. Thermo ZXE product line was introduced in September 2002 and the CarbSlim product line was introduced during July 2003. Distribution revenues increased overall due to new product line introductions and the related increased sales volumes and
increased sales customers attributable to product line expansion. Manufacturing revenues increased approximately $2.8 million or 263.9%, to approximately $3,873,000 for the three months ended September 30, 2003, as compared to approximately
$1,064,000 for the corresponding period. Increases in manufacturing segment revenues were primarily caused by the increased number of customers in addition to increases in the sizes of customer orders and shipments of private label and OTC
manufacturing segment sales in the current three month period as compared to the previous three month period ended September 30, 2002.



Gross profit. Total gross profit increased approximately $832,000, or 84.6%, to approximately $1,817,000 for the three months ended September 30,
2003, as compared to approximately $984,000 for the three months ended September 30, 2002. Total gross margins decreased from 30.3% for the three months ended September 30, 2002, to 29.8% for the three months ended September 30, 2003. Pharmacy
benefit management gross profits decreased approximately $4,000, or 5.2%, to approximately $80,000 for the three months ended September 30, 2003, as compared to $84,000 for the three months ended September 30, 2002. Pharmacy benefit management gross
margin decreased to 6.4% for the three months ended September 30, 2003 as compared to 16.2% for the three months ended September 30, 2002. Gross profit dollars and gross margins decreased although sales revenues and HMO members increased due to
continued increasing costs associated with member-generated pharmacy claims which translate into higher net claims dollars incurred and paid per member as compared to the corresponding three-month period. Distribution gross profit increased
approximately $310,000, to approximately $418,000 for the three months ended September 30, 2003, as compared to $109,000 for the three months ended September 30, 2002. Distribution gross margins decreased to 42.7% for the three months ended
September 30, 2003 as compared to 66.7% in the corresponding period in 2002. Although sales revenues increased and gross profit dollars increased, gross margins decreased due to the change in the mix of sales in the current three month period as
caused by the introduction of the CarbSlim new product line which includes mass, distributor, convenience store, and retail-level promotional product mailings and sampling and other demo programs that were employed during that period thus causing
increased net product costs. Manufacturing gross profit increased approximately $1,102,000, or 508.6%, to approximately $1,318,000 for the three months ended September 30, 2003, as compared to approximately $217,000 in the corresponding three-month
period in 2002. For the three months ended September 30, 2003, manufacturing gross margins increased to 34%, from 20.4% in the corresponding three-month period in 2002. The increases in gross profit dollars and gross margins are primarily
attributable to a current change in our private-label and OTC contract manufacturing sales portfolio that is yielding a higher gross margin.



Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of advertising and promotional
expenses; personnel costs related to general management functions, finance, accounting and information systems, payroll expenses and sales commissions; professional fees related to legal, audit and tax matters, rents, insurance; and depreciation and
leasehold amortization expense. Selling, general and administrative expenses increased approximately $309,000, or 35.4%, to approximately $1,183,000 for the three months ended September 30, 2003, as compared to approximately $874,000 in the
corresponding period. The increase is primarily attributable to rising insurance expenses in addition to increases in advertising and promotional expenses associated with our distribution segment, rents, as well as payroll expenses and costs
associated with fringe benefits to support our distribution, manufacturing and pharmacy benefit management growth. As a percentage of sales, selling, general and administrative expenses decreased to 19.4% for the three months ended September 30,
2003 from 26.9% in the corresponding three-month period in 2002.



Interest income (expense), net. Interest expense, net of interest income, increased approximately $3,000 to approximately $(20,000) for the three months ended September 30, 2003, from approximately $(17,000) for the three months
ended September 30, 2002. The increase in net interest expense is primarily attributable to the increase in credit line borrowings as partially offset by lower income earned based on amounts held in banks.



Income taxes. At September 30, 2003, the Company has $147,900 recorded
as a deferred tax asset as it is more likely than not that the asset will be recognized in the future based on current earnings levels, available net operating loss carryforwards and other financials assumptions made based on current and future
earnings projections.



Six Months Ended September 30, 2002 Compared To Six
Months Ended September 30, 2003



Revenues. Total
revenues increased approximately $2,540,000, or 33.1%, to approximately $10,204,000 for the six months ended September 30, 2003, as compared to approximately $7,664,000 for the six months ended September 30, 2002. Pharmacy benefit management
revenues increased approximately $1,040,000, or 74.0%, to approximately $2,446,000 for the six months ended September 30, 2003, as compared to $1,406,000 for the six months ended September 30, 2002. Pharmacy benefit management revenues increased for
the six months ended September 30, 2003 solely due to the increase of participating plan members based on the PBM activity derived from two HMO health plans as compared to only one HMO health plan in the corresponding period in 2002. Distribution
revenues increased approximately $519,000, or 69.9%, to approximately $1,262,000 for the six months ended September 30, 2003, as compared to $743,000 for the six months ended September 30, 2002. For the six months ended September 30, 2003, revenues
were derived primarily from three product lines, 11,737 cases of CarbSlim, 14,406 cases of Lean Protein Bites and 2,985 cases of Thermo ZXE were sold as compared to 15,771 cases sold for Lean Protein Bites and 5,265 cases of Thermo ZXE for the
corresponding period in 2002. Thermo ZXE product line was introduced in September 2002 and the CarbSlim product line was



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introduced during July 2003. Distribution revenues increased overall due to new product line introductions and the related increased sales volumes and
increased sales customers attributable to product line expansion. Manufacturing revenues increased approximately $980,000 or 17.8%, to approximately $6,496,000 for the six months ended September 30, 2003, as compared to approximately $5,516,000 for
the corresponding period. Increases in manufacturing segment revenues was primarily caused by the increase in the Companys customer base in addition to increased sizes of customer orders and shipments of private label and OTC manufacturing
segment sales in the current six month period as compared to the previous six month period ended September 30, 2002.



Gross profit. Total gross profit increased approximately $539,000, or 24%, to approximately $2,785,000 for the six months ended September 30, 2003,
as compared to approximately $2,246,000 for the six months ended September 30, 2002. Total gross margins decreased from 29.3% for the six months ended September 30, 2002, to 27.3% for the six months ended September 30, 2003. Pharmacy benefit
management gross profits decreased approximately $38,000, or 19.3%, to approximately $159,000 for the six months ended September 30, 2003, as compared to $197,000 for the six months ended September 30, 2002. Pharmacy benefit management gross margin
decreased to 6.5% for the six months ended September 30, 2003 as compared to 14% for the six months ended September 30, 2002. Gross profit dollars and gross margins decreased although sales revenues and HMO members increased as due to continued
increasing costs associated with member-generated pharmacy claims which translate into higher net claims dollars incurred and paid per member as compared to the corresponding six-month period. Distribution gross profit increased approximately
$306,000, to approximately $574,000 for the six months ended September 30, 2003, as compared to $268,000 for the six months ended September 30, 2002. Distribution gross margins increased to 45.5% for the six months ended September 30, 2003 as
compared to 36.1% in the corresponding period in 2002. Sales revenues, gross profit dollars and gross margins increased due to the change in the mix of sales in the current six month period due to new product line introductions as partially offset
by the initial introduction costs of the new product line which includes costs associated with mass, distributor, convenience store, and retail-level promotional product mailings and sampling and other demo programs that were employed during the
current 2003 period. Manufacturing gross profit increased approximately $271,000, or 15.2%, to approximately $2,053,000 for the six months ended September 30, 2003, as compared to approximately $1,782,000 in the corresponding six-month period in
2002. For the six months ended September 30, 2003, manufacturing gross margins decreased to 31.6%, from 32.3% in the corresponding six-month period in 2002. The changes in gross profit dollars and gross margins are primarily attributable to a
current change in our private-label and OTC contract manufacturing sales portfolio, in addition to the research and development efforts being employed as based on our plans to gain FDA approval via NDA and ANDA applications in process for the
formulation and manufacture of generic drugs in the future.



Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of advertising and promotional expenses; personnel costs related to general management functions, finance, accounting and
information systems, payroll expenses and sales commissions; professional fees related to legal, audit and tax matters, rents, insurance; and depreciation and leasehold amortization expense. Selling, general and administrative expenses increased
approximately $397,000, or 23.2%, to approximately $2,108,000 for the six months ended September 30, 2003, as compared to approximately $1,711,,000 in the corresponding period. The increase is primarily attributable to rising insurance expenses in
addition to increases in advertising and promotional expenses associated with our distribution segment, rents, as well as payroll expenses and costs associated with fringe benefits to support our distribution, manufacturing and pharmacy benefit
management growth. As a percentage of sales, selling, general and administrative expenses decreased to 20.7% for the six months ended September 30, 2003 from 22.3% in the corresponding six-month period in 2002.



Interest income (expense), net. Interest expense, net of interest
income, increased approximately $4,000 to approximately $(42,000) for the six months ended September 30, 2003, from approximately $(37,000) for the six months ended September 30, 2002. The increase in net interest expense is primarily attributable
to the increase in credit line borrowings as partially offset by lower income earned based on amounts held in banks.



Income taxes. At September 30, 2003, the Company has $147,900 recorded as a deferred tax asset as it is more likely than not that the asset will be
recognized in the future based on current earnings levels, available net operating loss carryforwards and other financials assumptions made based on current and future earnings projections.



Financial Condition, Liquidity and Capital Resources



The Company has financed its operations through available borrowings under
its credit line facilities, cash provided from operations and cash provided from the proceeds received from our initial public offering consummated November 2000. The Company had working capital of approximately $2,832,000 at September 30, 2003,
inclusive of current portion of long-term obligations and credit facilities, as compared to working capital of approximately $2,728,000 at March 31, 2003. The increase in working capital is primarily attributable to net increases in inventory and
receivables due to increased customer base and increasing sales dollar volumes as partially offset by increases in trade payables and in amounts due to affiliates. All of which is in line with the Companys business plans.



Net cash provided by operating activities was approximately $47,000 for the
six months ended September 30, 2003, as compared to net cash provided by operating activities of approximately $329,000 for the six months ended September 30, 2002. Cash provided is primarily attributable to net income of approximately $715,000,
declines in prepaid expenses of approximately $68,000 based on normal amortization of prepaid account balances, increases in accrued expenses of



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approximately $172,000, depreciation of approximately $207,000, increases in trade accounts payable of approximately $2,128,000 due to increased purchasing
for the manufacturing segment in order to meet open manufacturing customer orders in addition to purchasing for the distribution segment related to CarbSlim, the new product line launched July 2003, a decrease in accounts receivable-other of
approximately $57,000 primarily based on collections received from our insurance company as related to our August 27, 2002 fire insurance claim, all of which is partially offset by an approximate $1.8 million increase in trade accounts receivable
representing increases in credit sales, a net increase in inventory of approximately $1.2 million primarily due to customary purchasing cycles to meet open distribution and manufacturing segment customer orders and an approximate $218,000 increase
in due from affiliates, net based on trade credit sales.



Net
cash used in investing activities of approximately ($210,000) for the six months ended September 30, 2003 as compared to $5,000 net cash provided by investing activities for the corresponding period in 2002. The amounts were used primarily to
purchase manufacturing machinery and lab equipment and related upgrades in addition to continued leasehold improvements in order to continue to meet our business plans surrounding our ability and belief in the future to receive FDA approval to
formulate and manufacture our own brand of generic drugs.



Net
cash provided by financing activities was approximately $67,000 for the six months ended September 30, 2003, as compared to net cash used in financing activities of approximately $(386,000) for the six months ended September 30, 2002. Net cash
provided primarily represents liquidation of a $294,000 certificate of deposit that funded investing activities as described above, $50,000 of proceeds from lines of credit, approximately $16,000 received by the Company from vested stock options
exercised, all of which was partially offset by payments on long-term obligations of approximately $237,000 and preferred stock dividend payments of approximately $52,000, which is a related party activity.



Subsequent to September 30, 2003, the Company received insurance proceeds of
approximately $270,000 as related to the claims outstanding, that were recorded in accounts receivable-other as of September 30, 2003, as a direct result from the August 27, 2002 fire insurance claim. The final amount of the insurance proceeds due
and payable to the Company has not yet been finalized by the Company or by the Companys insurance company.



Management believes that cash expected to be generated from operations, current cash reserves, and existing financial arrangements will be sufficient for
the Company to meet its capital expenditures and working capital needs for its operations as presently conducted. The Companys future liquidity and cash requirements will depend on a wide range of factors, including the level of business in
existing operations, continued expansion of existing capacities and capabilities, the publics acceptance as evidenced through sales of our own branded distribution product lines Lean Protein Bites, Thermo ZXE and our new product line launched
in July 2003, CarbSlim, the successful completion of and the FDAs acceptance of our ANDAs and NDAs for generic drug formulation and manufacture currently in process, and possible acquisitions. In particular, if cash flows from operations and
available credit facilities are not sufficient, it will be necessary for the Company to seek additional financing. There can be no assurance that such financing will be available in amounts and on terms acceptable to the Company.



Item 3. Controls and Procedures



Based on their most recent review, which was completed within 90 days prior
to the filing of this report, the Companys principal executive officer and principal financial officer have concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Companys management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
There were no significant changes in the Companys internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.



Part IIOTHER INFORMATION



Item 1. LEGAL PROCEEDINGS.



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



From time to time the Company is subject to litigation incidental to its business. Such claims, if successful, could exceed applicable insurance coverage.
The Company is not currently a party to any material legal proceedings other than what is currently disclosed herein.



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Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.



None.



Item 3. DEFAULTS UPON SENIOR SECURITIES.



Not applicable.



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



Not applicable.



Item 5. OTHER INFORMATION.



Not applicable.



Item 6. EXHIBITS AND REPORTS ON FORM 8-K.



(a) Exhibits.



|Exhibit 31.1 |  | Certification of Principal Executive Officer    
|------------ |  | ------------------------------------------------
|Exhibit 31.2 |  | Certification of Principal Financial Officer    
|Exhibit 32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350
|Exhibit 32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350



(b) Reports on Form
8-K.



The Company filed an 8-K on October 24, 2003 as
related to the September 30, 2003 fiscal quarter ended revenues.



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SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  | Innovative Companies, Inc.                     
|----------------------- |  | -----------------------------------------------
|                        |  |                                                
|Date: November 14, 2003 |  | By:                                            
|                        |  | Mihir K. Taneja                                
|                        |  | Chief Executive Officer, Secretary and Director
|                        |  |                                                
|Date: November 14, 2003 |  | By:                                            
|                        |  | Carol Dore-Falcone                             
|                        |  | Vice President and Chief Financial Officer     



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