UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                  FORM 10-QSB/A
                                (Amendment No. 1)

                                   (Mark One)
                    |X| QUARTERLY REPORT UNDER SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the Quarter Ended September 30, 2003

       |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                       Commission File Number: 000-1084047

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

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

          California                                    95-4691878
---------------------------------           ---------------------------------
  (State or other jurisdiction              (IRS Employer Identification No.)
of incorporation or organization)

                            204 NW Platte Valley Dr.
                               Riverside, MO 64150
                    (Address of principal executive offices)
                    ----------------------------------------

                                 (816) 584-8030
                           ---------------------------
                           (Issuer's telephone number)

      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 such shorter period that the
      Registrant was required to file such report(s)), and (2) has been subject
      to such filing requirements for the past 90 days.

                                 Yes |X|         No |_|

There were 52,897,186 shares of common stock, $0.001 par value, outstanding as
of November 19, 2003.
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                                   FORM 10-QSB

                        QUARTER ENDED SEPTEMBER 30, 2003

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
                          PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

   Condensed Consolidated Balance Sheets - September 30, 2003 (Unaudited)
     and December 31, 2002...............................................     3

   Condensed Consolidated Statements of Operations (Unaudited) for the
     Three and Nine Months Ended September 30, 2003 and 2002..............    4

   Condensed Consolidated Statement of Stockholders' Equity/(Deficiency)
     (Unaudited) for the Nine Months Ended September 30, 2003............     5

   Condensed Consolidated Statements of Cash Flows (Unaudited) for the
     Nine Months Ended September 30, 2003 and 2002.......................     6

   Notes to the Condensed Consolidated Financial Statements (Unaudited)..     7

Item 2. Management's Discussion and Analysis of Financial Condition and
   Results of Operations.................................................    21

Item 3. Controls and Procedures..........................................    30

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings................................................    32

Item 3. Defaults upon Senior Securities..................................    33

Item 6. Exhibits and Reports on Form 8-K.................................    33

Signatures...............................................................    34
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                (Unaudited)
                                                                               September 30,   December 31,
                                                                                   2003          2002
                                                                              ------------    ------------
                                                                               (RESTATED)
                                     ASSETS
<S>                                                                           <C>             <C>
Current Assets
   Cash                                                                       $  3,857,987    $  1,338,345
   Accounts receivable                                                             154,501          14,700
   Investments - available for sale                                                     --              --
   Other receivables                                                               114,868          59,772
   Prepaid expenses                                                                 23,586          67,179
   Other assets                                                                  1,140,874         706,486
                                                                              ------------    ------------
       Total Current Assets                                                      5,291,815       2,186,482
                                                                              ------------    ------------

Property and Equipment, Net                                                        455,167         379,349
                                                                              ------------    ------------

Other Assets
   Goodwill                                                                      1,088,686       1,088,686
   Deferred income taxes - Non-current                                                  --              --
   Deposits                                                                         42,965          48,698
                                                                              ------------    ------------

       Total Assets                                                           $  6,878,632    $  3,703,215
                                                                              ============    ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
   Line of credit                                                             $      3,740    $     40,660
   Current maturities of long-term debt                                             11,508          44,274
   Accounts payable and accrued expenses                                         1,208,534         861,366
   Deferred revenue                                                                587,455         256,148
   Other current liabilities                                                     1,215,796          83,278
   Accrued income taxes                                                          1,134,890              --
   Reserve for sales returns and allowances                                      1,010,686         220,266
                                                                              ------------    ------------
     Total Current Liabilities                                                   5,172,609       1,505,992
                                                                              ------------    ------------
Note payable - long-term                                                            66,272          87,223
                                                                              ------------    ------------
     Total liabilities                                                           5,238,881       1,593,215

Stockholders' Equity
   Preferred stock - authorized, 25,000,000 shares of $1.00 stated value;
     Series A preferred stock; issued and outstanding, 1,697,167 shares          1,650,500       1,650,500
     Series B preferred stock; issued and outstanding, 328,491 shares              450,006         328,491
   Common stock - authorized, 100,000,000 shares of $.001 par value;
     issued and outstanding, 52,897,186 and 52,481,289 shares, respectively         52,897          52,481
   Additional paid-in-capital                                                   13,216,970      13,119,719
   Accumulated deficit                                                         (13,730,623)    (13,041,191)
                                                                              ------------    ------------
Total Stockholders' Equity                                                       1,639,751       2,110,000
                                                                              ------------    ------------
Total Liabilities and Stockholders' Equity                                    $  6,878,632    $  3,703,215
                                                                              ============    ============
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


                                       3
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                  For the                      For the
                                            Three Months Ended             Nine Months Ended
                                    ------------------------------  ------------------------------
                                      September 30,   September 30,  September 30,   September 30,
                                          2003           2002           2003            2002
                                    ------------    ------------    ------------    ------------
                                       (RESTATED)                    (RESTATED)
<S>                                 <C>             <C>             <C>             <C>
Sales                               $  9,076,162    $  4,225,488    $ 21,648,365    $ 10,014,523

Cost of sales                          4,612,375       1,528,534      10,674,800       3,650,218
                                    ------------    ------------    ------------    ------------

Gross profit                           4,463,787       2,696,954      10,973,565       6,364,305

Operating expenses:
    General and administrative         1,863,694       1,069,191       5,368,018       2,727,968
    Selling                            2,072,032         729,388       5,138,849       2,011,587
    Loss on investment securities             --         687,750              --         687,750
    Non-recurring expenses                    --              --              --         169,578
                                    ------------    ------------    ------------    ------------

       Total Operating Expenses        3,935,726       2,486,329      10,506,667       5,596,883
                                    ------------    ------------    ------------    ------------

Income (Loss) from Operations            528,061         210,625         466,698         767,422

Other Income (Expense):
   Interest and penalties on late
    tax payments                         (73,000)             --        (146,000)             --
   Other income                           11,588         154,105          86,460         172,197
   Interest income                        26,131              --          61,962              --
   Interest expense                       (9,993)         (2,500)        (23,661)         (9,055)
                                    ------------    ------------    ------------    ------------

     Total Other Income (Expense)        (45,274)        151,605         (21,239)        163,142
                                    ------------    ------------    ------------    ------------

Income (Loss) before income taxes        482,787         362,230         445,459         930,564

Income Taxes                          (1,067,373)        137,048      (1,134,890)        357,048
                                    ------------    ------------    ------------    ------------

Net Income                          ($   584,586)   $    225,182    ($   689,431)   $    573,516
                                    ============    ============    ============    ============

Basic and Diluted Income (Loss)
   per Share                        ($      0.01)   $       0.00    $       0.00    $       0.01
                                    ============    ============    ============    ============

Weighted Average Number of
     Common Shares Used in Per
     Share Calculation (basic and
     diluted)                         52,870,136      48,402,172      52,846,602      48,336,469
                                    ============    ============    ============    ============
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       4
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
                               EQUITY/(DEFICIENCY)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                        Preferred Stock Series A     Preferred Stock Series B     Common Stock
                                          Shares      Amount          Shares      Amount     Shares       Amount
                                         ---------   ----------      -------   ----------   ----------   ----------
<S>                                      <C>         <C>             <C>       <C>          <C>          <C>
Balance - December 31, 2001              1,850,000   $1,850,000      248,491   $  248,491   48,285,283   $   48,285

Issuance of Common stock
   for services provided                        --           --           --           --        4,000            4

Issuance of Common stock                        --           --           --           --       40,730           41

Issuance of Common stock
   for services provided                        --           --           --           --        6,125            6

Issuance of Common Stock for software           --           --           --           --       53,845           54

Issuance of Common stock                        --           --           --           --       24,375           24

Issuance of Common Stock
   for services provided                        --           --           --           --      291,250          291

Conversion of Series A Preferred
   Stock to Common Stock                  (199,500)    (199,500)          --           --    3,000,000        3,000

Issuance of Common stock
   for services provided                        --           --           --           --        5,000            5

Issuance of Common stock                        --           --           --           --       76,960           77

Issuance of Common stock                        --           --           --           --       23,169           23

Issuance of Common stock
   for services provided                        --           --           --           --       39,702           40

Series A Preferred Stock Dividend               --           --           --           --      107,568          108

Series A Preferred Stock Dividend               --           --           --           --       30,734           31

Series A Preferred Stock Dividend               --           --           --           --      420,054          420

Series B Preferred Stock Dividend               --           --           --           --       72,494           72

Issuance of Series B Preferred
   Stock for Executive Compensation             --           --       80,000       80,000           --           --

Unrealized loss on investments                  --           --           --           --           --           --

Unrealized loss on investments
   recognized in income due to
   other than temporary impairment              --           --           --           --           --           --

Net income for the year ended
ended December 31, 2002                         --           --           --           --           --           --
                                         ---------   ----------      -------   ----------   ----------   ----------
Balance - December 31, 2002              1,650,500    1,650,500      328,491      328,491   52,481,289       52,481
                                         =========   ==========      =======   ==========   ==========   ==========

Issuance of Common stock
   for prepaid public relations                                                                233,333          233

Issuance of Common stock
   for charitable contribution                                                                 133,333          134

Issuance of Series B Preferred
   Stock for Executive Compensation                                   80,000       80,000

Issuance of Common Stock
   for services provided                                                                        49,231           49

Net income for the nine months
   Ended September 30, 2002                     --           --                                     --           --
                                         ---------   ----------      -------   ----------   ----------   ----------
Balance as of September 30, 2003         1,650,500   $1,650,500      408,491   $  408,491   52,897,186   $   52,897
                                         =========   ==========      =======   ==========   ==========   ==========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


                                       5
<PAGE>


(table continued)

<TABLE>
<CAPTION>
                                                                        Retained
                                       Additional      Accum.           Earnings         Total
                                        paid-in     Comprehensive        Accum.       Stockholders'
                                        capital         Loss            Deficit)        Equity
                                      ------------   ------------    ------------    ------------
                                                                      (RESTATED)       (RESTATED)
<S>                                    <C>            <C>             <C>             <C>
Balance - December 31, 2001           $ 12,626,679   ($   204,354)   ($   290,941)   $ 14,278,160

Issuance of Common stock
   for services provided                    14,196             --              --          14,200

Issuance of Common stock                    36,951             --              --          36,992

Issuance of Common stock
   for services provided                    20,644             --              --          20,650

Issuance of Common Stock
   for software                             69,946                                         70,000


Issuance of Common stock                    23,219                                         23,243

Issuance of Common Stock
   for services provided                    21,553                                         21,844

Conversion of Series A Preferred
    Stock to Common Stock                  196,500                                             --

Issuance of Common stock
   for services provided                       370                                            375

Issuance of Common stock                    18,939                                         19,016

Issuance of Common stock                     3,992                                          4,015

Issuance of Common stock
   for services provided                     4,760                                          4,800

Series A Preferred Stock Dividend           13,892                        (14,000)              0

Series A Preferred Stock Dividend            3,969             --          (4,000)             (0)

Series A Preferred Stock Dividend           54,250             --         (54,670)             --

Series B Preferred Stock Dividend            9,859             --          (9,931)              1

Issuance of Series B Preferred
   Stock for Executive Compensation             --             --                          80,000

Unrealized loss on investments                  --     (1,424,896)                     (1,424,896)

Unrealized loss on investments
recognized in income due to
other than temporary impairment                         1,629,250                       1,629,250

Net income for the year ended
ended December 31, 2002                         --             --     (12,667,649)    (12,667,649)
                                      ------------   ------------    ------------    ------------
Balance - December 31, 2002           $ 13,119,719   $         --    ($13,041,191)   $  2,110,000
                                      ============   ============    ============    ============
Issuance of Common stock
   for prepaid public relations              2,017                                          2,250

Issuance of Common stock
   for charitable contribution              10,533                                         10,667

Issuance of Series B Preferred
   Stock for Executive Compensation         80,000                                         80,000

Issuance of Common Stock
   for services provided                     4,701                                          4,750

Net (loss) for the nine months
   ended September 30, 2003                     --             --        (689,432)       (689,432)
                                      ------------   ------------    ------------    ------------
Balance as of September 30, 2003      $ 13,216,970   $         --    ($13,730,623)   $  1,639,751
                                      ============   ============    ============    ============
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


                                       6
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    For the Nine Months
                                                                    Ended September 30,
                                                                 --------------------------
                                                                    2003           2002
                                                                 -----------    -----------
Cash Flows From Operating Activities                              (Restated)
<S>                                                              <C>            <C>
   Net income/(loss)                                             ($  689,431)   $   573,516
   Adjustments to reconcile net income/(loss) to net cash
     provided by operating activities:
       Depreciation and amortization                                 150,498         83,016
       Sale of software platform for investment securities                --       (875,000)
       Write down on investment securities                                --        687,750
       Prepaid non-cash executive compensation                        20,000             --
       Stock base compensation                                       121,515             --
       Allowance for doubtful accounts                                    --        132,000
       Non-cash expenses                                              77,767         34,850
       Net change in operating assets and liabilities:
           Accounts receivable                                      (139,801)      (594,133)
           Prepaid expenses                                           43,593        (13,664)
           Other receivables                                         (55,095)       (10,999)
           Other current assets                                     (434,387)      (428,336)
           Deposits and other assets                                   5,733        (20,397)
           Accounts payable and accrued expenses                     347,169        396,700
           Deferred revenue                                          331,307        252,956
           Other current liabilities                               1,132,518             --
           Reserve for returns and allowances                      1,031,420        179,472
           Accrued federal and state income tax                      893,890        374,362
                                                                 -----------    -----------
           Net Cash Provided by/(Used In) Operating Activities     2,836,595        772,093
                                                                 -----------    -----------
Cash flows from investing activities
     Capital expenditures                                           (226,316)      (362,520)
                                                                 -----------    -----------
           Net cash used in investing activities                    (226,316)      (362,500)
                                                                 -----------    -----------
Cash Flows From Financing Activities
     Issuance of common stock                                             --         60,235
     Proceeds from borrowings under line of credit                        --         50,000
     Proceeds from borrowing under note payable                        8,085        155,360
     Repayments under line of credit agreement                       (36,920)        (6,758)
     Repayments on notes payable                                     (61,802)       (14,555)
                                                                 -----------    -----------
       Net cash provided by/(used in) financing activities           (90,537)       244,282
                                                                 -----------    -----------
Net Increase /(Decrease) in Cash and Cash Equivalents              2,519,642        653,855

Cash and Cash Equivalents at Beginning of Year                     1,338,345        282,307
                                                                 -----------    -----------

Cash and Cash Equivalents at End of Year                         $ 3,857,987    $   936,162
                                                                 ===========    ===========
Supplemental Cash Flow Information:
   Unrealized loss on securities available for sale              $        --    $        --
                                                                 ===========    ===========
Issuance common stock for software                                        --    $    70,000
                                                                 ===========    ===========
Issuance of common stock for services/charitable contributions        17,667         34,850
                                                                 ===========    ===========
Issuance of Series B Preferred Stock as executive compensation   $    80,000    $        --
                                                                 ===========    ===========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


                                       7
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE A - COMPANY DESCRIPTION

Innovative Software Technologies, Inc. (the "Company" or "Innovative"),
operating in one business segment, is a software company specializing in small
business and financial eLearning tools and consulting services. The Company's
main products are: EMS, a turnkey web builder, e-commerce solution and data
management system targeted to small businesses; The Financial Toolkit 1.0, an
integrated financial services and education program; Skills in Demand,
consisting of eLearning courses that cater to small business owners and
entrepreneurs; OneCrypt, an email and file encryption software product; and
eTaxNet, a provider of online tax and consulting services. In addition for most
of its software and learning products the Company offers technical support and
coaching services.

The Company's management combines its expertise in the field of direct
marketing, software, coaching and sales management to small businesses and
consumers. The combination of marketing and technological support offers clients
complete end-to-end business services solutions designed to fit their e-business
transactional technology training needs.

On April 16, 2001, Innovative, with immaterial net assets, acquired 100% of the
outstanding common stock of Hackett Media, Inc. (Hackett). The acquisition
resulted in the owners and management of Hackett having effective operating
control of the combined entity after the acquisition, with the prior Innovative
investors continuing as passive investors.

Under accounting principles generally accepted in the United States (US GAAP),
the above noted acquisition is considered to be a capital transaction in
substance, rather than a business combination. That is, the acquisition is
equivalent to the issuance of stock by Hackett for the net monetary assets of
Innovative, accompanied by a recapitalization, and is accounted for as a change
in capital structure. Accordingly, the accounting for the acquisition is
identical to that resulting from a reverse acquisition, except that no goodwill
intangible is recorded. Under reverse takeover accounting, the post
reverse-acquisition comparative historical financial statements of the "legal
acquirer" (Innovative Software Technologies), are those of the "legal acquiree"
(Hackett) (i.e. the accounting acquirer).

On December 31, 2001, the Company purchased all of the outstanding shares of
Energy Professional Marketing Group, Inc. (EPMG), a technology marketing company
specializing in product fulfillment for outside vendors and technology and
database marketing, based in Provo, Utah. In connection with the acquisition the
Company issued 1,500,000 shares of Series A preferred stock and 3,529,412 shares
of common stock.

The purchase price for the acquisition of EPMG has been allocated on the fair
value basis on the acquisition date as follows:

Assets acquired:

Goodwill                                                             $13,549,932
Net assets acquired                                                  $    25,068
                                                                     -----------
Total Assets Acquired                                                $13,575,000
                                                                     ===========
Total Purchase Price                                                 $13,575,000
                                                                     ===========

The acquisition described above was accounted for as a purchase transaction in
accordance with Statement of Financial Accounting Standards No. 141 (SFAS 141),
"Business Combinations," and, accordingly, the results of operations and assets
and liabilities of the acquired company are included in the consolidated
financial statements from the acquisition date. A portion of the goodwill has
been written down by the Company as of December 31, 2002. See Note B to the
Condensed Consolidated Financial Statements (Unaudited).


                                       8
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies applied in the
preparation of the accompanying financial statements follows.

1. Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 141, Business Combinations, and SFAS
142, Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
and their effective dates for the Company are as follows:

      o     All business combinations initiated after June 30, 2001 must use the
            purchase method of accounting. The pooling of interests method of
            accounting is prohibited except for transactions initiated before
            July 1, 2001.
      o     Intangible assets acquired in a business combination must be
            recorded separately from goodwill if they arise from contractual or
            other legal rights or are separable from the acquired entity and can
            be sold, transferred, licensed, rented or exchanged, either
            individually or as part of a related contract, asset or liability.
      o     Goodwill, as well as intangible assets with indefinite lives,
            acquired after June 30, 2001, will not be amortized.
      o     Effective January 1, 2002, all previously recognized goodwill and
            intangible assets with indefinite lives will no longer be subject to
            amortization.
      o     Effective January 1, 2002, goodwill and intangible assets with
            indefinite lives will be tested for impairment annually and whenever
            there is an impairment indicator.
      o     All acquired goodwill must be assigned to reporting units for
            purposes of impairment testing and segment reporting.

As of January 1, 2002, which is the beginning of fiscal 2002, the Company will
not amortize the goodwill which it recognized in connection with the acquisition
of EPMG. The Company's goodwill was subject to a transitional impairment test as
of December 31, 2001 and an annual impairment test, using a two-step process
prescribed by SFAS No. 142. The Company completed the transitional impairment
test for EPMG at September 30, 2002, the applicable reporting unit, and no
impairment of goodwill was found to exist as of the beginning of fiscal 2002.

During 2002, the trading price of the Company's stock declined significantly,
raising questions about whether the fair value of goodwill exceeds its carrying
amount. An evaluation of the carrying amount of goodwill was conducted during
the 4th quarter 2002, which included an evaluation of whether the decline in the
trading price of the Company's stock is other than temporary. The Company
determined that the decline in its trading price was other than temporary and
subsequent to December 31, 2002, engaged an independent valuation firm to
perform a valuation of the Company. This resulted in a write-down in goodwill by
the Company of $12,461,246 as of December 31, 2002.

In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 applies to all entities, including rate-regulated
entities, that have legal obligations associated with the retirement of a
tangible long-lived asset that result from acquisition, construction or
development and (or) normal operations of the long-lived asset. A liability for
an asset retirement obligation should be recognized if the obligation meets the
definition of a liability and can be reasonably estimated. The initial recording
should be at fair value. SFAS 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The provisions of the Statement are not expected to have a material
impact on the financial condition or results of operations of the Company.

In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS 144 retains the existing requirements to
recognize and measure the impairment of long-lived assets to be held and used or
to be disposed of by sale. However, SFAS 144 makes changes to the scope and
certain measurement requirements of existing accounting guidance. SFAS 144 also
changes the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of this Statement did not have a
significant impact on the financial condition or results of operations of the
Company.

                                       9
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

In April 2002, the FASB issued SFAS No. 145 (SFAS 145). Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB 30 for classification
as an extraordinary item shall be reclassified. SFAS 145 also amends SFAS 13,
Accounting for Leases as well as other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. Certain provisions of SFAS 145 are
effective for transactions occurring after May 15, 2002 while other are
effective for fiscal years beginning after May 15, 2002. The Company does not
expect SFAS 145 to have a material effect on its financial condition or results
of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). This standard addresses financial
accounting and reporting for costs associated with exit or disposal activities.
SFAS 146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of SFAS
146 are effective for exit or disposal activities that are initiated by the
Company after December 31, 2002. The Company does not expect SFAS 146 to have a
material effect on its financial condition or results of operations.

In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions" (SFAS 147). This standard relates to the application of
the purchase method of accounting to all acquisitions of financial institutions,
except transactions between two or more mutual enterprises. This standard also
relates to the application of SFAS 144 to certain long-term
customer-relationship intangible assets recognized in an acquisition of a
financial institution, including those acquired in transactions between mutual
enterprises. SFAS 147 is effective on October 1, 2002. The Company does not
expect SFAS 147 to have a material effect on its financial condition or results
of operations.

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation--Transition and Disclosure (SFAS 148). This standard amends the
disclosure and certain transition provisions of SFAS 123, Accounting for
Stock-Based Compensation. Its disclosure provisions are effective for 2002
annual financial statements for calendar year-end companies. The Company does
not expect that adoption of SFAS 148 will have a material impact on its
financial condition or results of operations.

2. Interim Condensed Consolidated Financial Statements

The accompanying condensed consolidated financial statements are unaudited. In
the opinion of management, all necessary adjustments (which include only normal
recurring adjustments) have been made to present fairly the financial position,
results of operations and cash flows for the periods presented. Certain
information and disclosures normally included in financial statements prepared
in accordance with US GAAP have been condensed or omitted. Accordingly, these
condensed consolidated financial statements should be read in conjunction with
the Company's financial statements and notes thereto included in the Form 10-KSB
dated December 31, 2002. The results of operations for the nine months ended
September 30, 2003 are not necessarily indicative of the operating results to be
expected for the full year. The balance sheet as of December 31, 2002 has been
derived from the Company's audited consolidated balance sheet as of that date.

3. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Innovative Software Technologies, Inc., and the accounts of its wholly-owned
subsidiaries, Energy Professional Marketing Group, Inc. (EPMG), and Hackett
Media, Inc., as of and for the nine months ended September 30, 2003. All
significant intercompany transactions and balances have been eliminated in
consolidation.

4. Revenue Recognition

The Company recognizes revenue after delivery of the product. To the extent the
Company sells software, revenue is recognized in accordance with Statement of
Position 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9
and clarified by Staff Accounting Bulletin (SAB) 101 Revenue Recognition in
Financial Statements. In most cases this occurs the same day payment is received
from our customers. The Company also reserves for sales returns and allowances
based upon historical experience.

                                       10
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


The Company provides support services for some of its products. Payments
received by the Company for these services are generally recorded as deferred
revenue and recognized over the term of the services.

The Company also provides extended payment terms on the sale of its software and
related coaching for up to two years. Since payments terms on these sales exceed
12 months, the fee for the software and license is presumed not to be
determinable. In addition, the probability of collection decreases as the
payment terms are extended. As a result, the Company recognizes revenue on these
sales as the payments are collected from the customer.

5. Investment Securities

All investment securities are classified as available-for-sale. These investment
securities have been adjusted to their fair market value based upon quoted
market prices. Unrealized holding gains and losses are reported as a separate
component of stockholder's equity. The Company will regularly perform reviews of
the fair value of its investment securities and assess whether there exists any
other than temporary impairment.

6. Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is recognized using the straight-line and double-declining balance
method over the estimated useful lives of the assets, which range from three to
seven years. Leasehold improvements are amortized using the straight-line method
over the lesser of the estimated useful lives or remaining lease term.

7. Use of Estimates

To comply with US GAAP, the Company makes estimates and assumptions that effect
the amounts reported in the financial statements and disclosures made in the
accompanying notes. Estimates are used for, but not limited to reserves for
product returns, the collectibility of accounts receivable and deferred taxes.
The Company also uses estimates to determine the remaining economic lives and
carrying value of goodwill and fixed assets. Despite our intention to establish
accurate estimates and assumptions, actual results may differ from our
estimates.

8. Software Development Costs

In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased, or otherwise
Marketed," software development costs are expensed as incurred until the product
is available for general release to customers. To date, the Company's software
has been available for general release concurrent with the establishment of
technological feasibility and, accordingly, no development costs have been
capitalized.

The Company capitalizes costs related to the development of computer software
developed or obtained for internal use in accordance with the American Institute
of Certified Public Accountants Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Costs
incurred in the application development phase are capitalized and amortized over
their useful life, not to exceed five years.

9. Advertising Costs

Advertising and promotion costs are expensed as incurred.

10. Impairment and Long-lived Assets

The Company will regularly perform reviews to determine if the carrying values
of our long-lived assets are impaired. The reviews take into account facts or
circumstances, either internal or external, which indicate that the carrying
value of the asset cannot be recovered.

11. Income Taxes

The Company records its federal and state tax liability in accordance with
Financial Accounting Standards Board Statement No. 109 "Accounting for Income
Taxes". Deferred taxes payable are recorded for temporary differences between
the recognition of income and expenses for tax and financial reporting purposes,
using current tax rates. Deferred assets and liabilities represent the future
tax consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.

                                       11
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


12. 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 to the extent the funds are not being held for investment
purposes.

NOTE C - INVESTMENT SECURITIES

The Company held three investment securities during the fiscal quarter ended
September 30, 2003, which the Company acquired in connection with strategic
business transactions and relationships. Our available-for-sale securities are
carried at fair value and unrealized gains or losses are included in
stockholders' equity. The Company held the following investment securities at
September 30, 2003 and December 31, 2002. The cost basis of our investment
securities reflects adjustments for other than temporary impairments in value.

Investment                     Cost            Gross Unrealized      Estimated
Securities                     Basis         Gains        Losses     Fair Value
--------------------------  ---------      ---------     --------    ----------
September  30, 2003
EnSurge, Inc. common stock  $       -      $       -     $      -    $        -

                            $       -      $       -     $      -    $        -
                            =========      =========     ========    ==========

Investment                     Cost            Gross Unrealized      Estimated
Securities                     Basis         Gains        Losses     Fair Value
--------------------------  ---------      ---------     --------    ----------
December 31, 2002
EnSurge, Inc. common stock  $       -      $       -     $      -    $        -

                            $       -      $       -     $      -    $        -
                            =========      =========     ========    ==========

The Company received EnSurge, Inc. common stock in consideration for the sale of
certain vintage furniture in 2000. Due to the decline in market value of
EnSurge, Inc. common stock, the Company considered the carrying value of $26,250
permanently impaired which resulted in a loss on investment securities of
$26,250 during the year ended December 31, 2002.

The Company received Knowledge Transfer Systems, Inc. common stock from EnSurge,
Inc. in consideration for the sale of four software coaching platforms to
EnSurge, Inc. in September - December, 2001. These investment securities were
recorded at a 30% discount due to restrictions and limitations contained in Rule
144 of the Securities and Exchange Commission. The primary restriction relates
to the one-year holding period of the investment securities after the effective
date of sale. As of December 31, 2002, the one-year holding period on these
investment securities expired and the investment securities were recorded at
100% of their fair market value. Due to the decline in market value of Knowledge
Transfer Systems, Inc. common stock, the Company considered the value of these
securities permanently impaired and wrote down the entire carrying value of
these investment securities as of December 31, 2002. The reduction in carrying
value on these investment securities resulted in a loss on investment of
$728,000 during the year ended December 31, 2002. Shane Hackett, who is the
President and Chief Executive Officer of the Company, was the President and
Chief Executive Officer of EnSurge, Inc. from November 1, 1999 until February
28, 2001, and owned 7,725,000 shares of the common stock of EnSurge, Inc. during
the time of the transactions in 2001, which then constituted approximately nine
percent (9%), of the outstanding common stock of EnSurge, Inc.


                                       12
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

The Company received 875,000 Knowledge Transfer Systems, Inc. preferred shares
with a stated value of $1.00 per share from Knowledge Transfer Systems, Inc. on
September 23, 2002 as consideration for the sale of the Business Development
Series, e-learning content and software. The preferred shares are convertible,
at the discretion of the Company, to Knowledge Transfer Systems, Inc. common
stock at 95% of the fair market value of Knowledge Transfer System's common
stock based on a five day average preceding the date of conversion. Due to the
disclosure by the management of Knowledge Transfer Systems, Inc. of the possible
bankruptcy of its wholly-owned subsidiary, KT Solutions, Inc., the Company
considered the value of these securities permanently impaired and wrote down the
entire carrying value of these investment securities as of December 31, 2002.
The reduction in carrying value on these investment securities resulted in a
loss on investment of $875,000 during the year ended December 31, 2002. The
Company has retained a valuation firm to determine the value of the 875,000
shares of preferred stock of the Knowledge Transfer Systems, Inc., as of the
time of their transfer to the Company on September 23, 2002, to determine the
tax consequences of the transaction. See Note I - Commitments and Contingencies.

At the time of the sale of the Business Development Series to Knowledge Transfer
Systems, Inc. for 875,000 shares of Knowledge Transfer Systems, Inc. preferred
stock, there was no related party relationship between the companies and/or the
officers and directors of the companies except for the interest described below.
According to the Form 10-KSB of Knowledge Transfer Systems, Inc. for the period
ended December 31, 2002, EnSurge, Inc. beneficially owned 2,600,000 shares, or
5.1% of the outstanding common stock of Knowledge Transfer Systems, Inc., and
according to the Form 10-KSB of Knowledge Transfer Systems, Inc. for the period
ended December 31, 2001, EnSurge, Inc. beneficially owned 5,700,000 shares, or
14.1% of the outstanding common stock of Knowledge Transfer Systems, Inc. Shane
Hackett, who is the President and Chief Executive Officer of the Company, was
the President and Chief Executive Officer of EnSurge, Inc. from November 1, 1999
until February 28, 2001, and owned 7,725,000 shares of the common stock of
EnSurge, Inc. during the time of the transaction between the Company and
Knowledge Transfer Systems, Inc. in 2002, which then constituted approximately
eight percent (8%), of the outstanding common stock of EnSurge, Inc. Mr. Hackett
continues to own 7,725,000 shares of the common stock of EnSurge, Inc.

During the quarter ended September 30, 2003, the Company entered into a Purchase
and Sale Agreement (the "KT Purchase Agreement") with Knowledge Transfer
Systems, Inc., and a Content License and Resale Agreement (the "KT License
Agreement") with both KT Solutions, Inc. and Knowledge Transfer Systems, Inc.
The transactions each occurred on August 25, 2003. KT Solutions, Inc. is a
subsidiary of Knowledge Transfer Systems, Inc. Pursuant to the KT Purchase
Agreement, the Company purchased the Business Development Series from Knowledge
Transfer Systems, Inc. in exchange for the 875,000 shares of Knowledge Transfer
Systems, Inc. preferred stock owned by the Company. The Business Development
Series consists of multimedia software titles, hard copy titles, website,
domain, copyright, titles, and all related interests, including certain product
deliverables, product contracts and product licenses. Pursuant to the KT License
Agreement, the Company obtained a non-exclusive, world-wide license to a line of
KT Solutions, Inc. products for resale through the Company's on-line learning
services, in exchange for a 35% royalty on product revenues recognized by the
Company, subject to a $125,000 royalty credit as a start-up concession to the
Company. The licensed product line consists of training materials suitable for
access and use by a customer through on-line learning services. The initial
license term is for five years and is renewable year-to-year thereafter unless
canceled by either party. Due to concerns the Company had about the continued
existence of KT Solutions, Inc. as an operating entity, the Company also
obtained a guarantee by its parent, Knowledge Transfer Systems, Inc., of all of
KT Solutions Inc.'s obligations under the KT License Agreement, in exchange for
the 1,900,000 shares of Knowledge Transfer Systems, Inc. common stock owned by
the Company. As a result of these transactions, among other things, the Company
has reacquired full ownership of the Business Development Series previously sold
by the Company to Knowledge Transfer Systems, Inc., and the Company no longer
owns any common or preferred stock or any other equity interest in Knowledge

Transfer Systems, Inc. The Company did not record any gain or loss with respect
to the transactions that occurred during the quarter that ended September 30,
2003.


                                       13
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE D - PROPERTY & EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation as
follows:

                                                       September 30, December 31
                                                           2003          2002
                                                        ---------     ---------
Machinery and Equipment                                 $ 341,243     $ 246,594
Furniture and Fixtures                                     65,263        51,683
Computer Software                                         306,785       190,624
Leasehold improvements                                     36,018        34,092
                                                        ---------     ---------
                                                          749,309       522,993
Less: Accumulated depreciation and amortization          (294,142)     (143,644)
                                                        ---------     ---------
Property and Equipment, Net                             $ 455,167     $ 379,349
                                                        =========     =========

NOTE E - OTHER ASSETS

The Company has established several merchant service accounts whereby the
Company processes a high volume of customer sales transactions through certain
credit card vendors. These merchant service companies typically hold a
percentage of each sales transaction as a reserve against future cancellations.
The amount held by these merchant service companies amounts to $1,073,850 and
$706,486 as of September 30, 2003 and December 31, 2002, respectively.

NOTE F - LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                September 30,  December 31
                                                                                     2003       2002
                                                                                   --------   --------
<S>                                                                                <C>        <C>
Notes payable, financial institution, collateralized by telephone equipment,
principal and imputed interest payable in monthly installments of $1,250 and
$385 respectively, due in August 2004, and January 2006
                                                                                   $ 18,606   $ 20,469

Notes payable, financial institution, secured by a lien on certain furniture and
equipment, principal and interest payable
in monthly installments of $2,464 due in July 2005                                   49,928     67,175

Notes payable, financial institution, collateralized by Vehicles, principal and
accrued interest at 7.78% payable in monthly installments of principal and
imputed interest maturing
from $217 to $655 from November 2006 to February 2007                                 9,246     43,853
                                                                                   --------   --------

                                                                                     77,780    131,497

Less Current Maturities                                                              11,508     44,274
                                                                                   --------   --------

Long-term - net of current maturities                                              $ 66,272   $ 87,223
                                                                                   ========   ========
</TABLE>

The Company has an unsecured line of credit facility with a financial
institution for borrowings up to $50,000 expiring August 31, 2005. Borrowings
under the line bear interest at Prime plus 2% (the Prime rate of interest as of
September 30, 2003 was 4.00%). As of September 30, 2003, there was $46,260
available on the credit facility


                                       14
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE G - CAPITAL TRANSACTIONS

Stock-split - Innovative's Board of Directors authorized a three-for-one stock
split on July 11, 2001. This was effective on August 10, 2001 to stockholders of
record on July 31, 2001. All share and per share amounts referred to in the
financial statements and notes have been restated to reflect this stock split.

Issuance of common stock - The Company issued 40,730, 24,375, 76,960, and 23,169
shares of its common stock in 2002 through private placements to individual
foreign investors.

Issuance of Series B preferred stock - The Company issued 80,000 shares of its
Series B preferred stock to certain directors of the Company as compensation at
a stated value of $1.00 per share in 2002.

Issuance of common stock for software - The Company issued 53,845 shares of its
common stock in 2002 as part of payment under the terms of a software purchase
agreement entered into by the Company. The agreement stipulates that the Company
receives business management software for both the Internet and real estate
markets as well as hosting and maintenance services.

Stock issued for services - The Company issued 4,000 shares of its common stock
at a fair market value of $3.55 per share in the first quarter 2002. In
addition, the Company issued 6,125 shares of its common stock during the second
quarter 2002 at fair market value of $3.37 per share.

Stock issued for services - The Company issued 291,250 and 5,000 shares of its
common stock at a fair market value of $0.075 per share in the fourth quarter
2002. In addition, the Company issued 39,702 shares of its common stock during
the first quarter 2003 for services rendered in fourth quarter 2002 at an
average fair market value of $0.121 per share.

Conversion of Series A Preferred Stock - Two directors of the Company converted
199,500 shares of Series A preferred stock to 3,000,000 shares of common stock
during the fourth quarter 2002. The Series A preferred stock is convertible to
the Company's common stock at 95% of the fair market value of the common stock
at the date of conversion. The Market Price of the Company's common stock on the
date of conversion was $0.07.

Series A Preferred Stock Dividend - The Company issued 558,356 shares of its
common stock as a Series A preferred stock dividend during the fourth quarter
2002. The holders of the shares of Series A Preferred received dividends at the
rate of 4% per annum payable in shares of the Company's common stock. The number
of shares of common stock distributed as a dividend was calculated by dividing
such payment by 95% of the Market Price on the average of the first five trading
days after January 1 of each year. The term "Market Price" means, as of any
date, the average of the daily closing price for the five consecutive trading
days ending on such date. The Company has withheld 137,942 of such shares of
common stock payable to two stockholders in connection with a dispute with such
stockholders.

Series B Preferred Stock Dividend - The Company issued 72,494 shares of its
common stock as a Series B preferred stock dividend during the fourth quarter
2002. The holders of the shares of Series B Preferred received dividends at the
rate of 4% per annum payable in shares of the Company's common stock. The number
of shares of common stock distributed as a dividend was calculated by dividing
such payment by 100% of the Market Price on the average of the first five
trading days after January 1 of each year. The term "Market Price" means, as of
any date, the average of the daily closing price for the five consecutive
trading days ending on such date.

Financing Agreement - During 2001, Hackett Media, Inc. financed its operation
primarily through a Financing Agreement of convertible debt and securities. The
Financing Agreement calls for financing of up to $2.5 million of which $1
million would be received in increments in 2001, if necessary, and the remaining
$1.5 million would be received based upon the Company's performance. As of
September 30, 2002, $700,000 of the initial $1 million investment was received
by the Company. These proceeds were converted to equity securities during 2001.
During the fourth quarter 2001, all of the common shares issued in connection
with the conversion of debt in connection with the Financing Agreement above
were reissued as Series A preferred shares and common shares as follows: of the
$700,000 invested in 2001, $350,000 was converted to Series A preferred shares
at a stated value of $1 per share and the remaining $350,000 was reissued as
700,000 shares of common stock at $0.50 per share. During the fourth quarter
2002, the Company passed a Board of Directors' resolution to formally terminate
the Financing Agreement with Iwasaka Investments, Ltd. due to the non-compliance
by Iwasaka Investments, Ltd. with the terms of the agreement. The Company
believes that the termination of this agreement will have no adverse effect on
the operations of the Company.

                                       15
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Issuance of Series B preferred stock - The Company issued 80,000 shares of its
Series B preferred stock to certain directors of the Company as prepaid
executive compensation and executive compensation at a stated value of $1.00 per
share in the first quarter 2003. The Company recorded non-cash executive
compensation of $60,000 for the nine months ended September 30, 2003. The
remaining $20,000 will be incurred during the fourth quarter of 2003.

Stock issued for prepaid services - The Company issued 233,333 shares of its
common stock in exchange for $2,250 of prepaid public relation services in the
first quarter 2003.

Stock issued for charitable contribution - The Company issued 133,333 shares of
its common stock as a charitable contribution at a fair market value of $0.08
per share in the first quarter 2003.

Stock issued for services - The Company issued 49,231 shares of its common stock
at a fair market value of $0.096 per share in the second quarter 2003 for
professional services rendered.

NOTE H - RELATED PARTY TRANSACTIONS

On December 31, 2001, a Company executive and shareholder converted a
non-interest bearing note payable amounting to $248,491 to Series B preferred
stock at a conversion rate of a $1 per share stated value. There was no formal
maturity date and there was no interest associated with the note.

Also, in September - December 2001, the Company sold four software coaching
platforms to NowSeven.com, Inc., Ziabon, Inc., SF Acquisition Corp., Inc., and
Ishopper Internet Services, Inc., which are subsidiaries of EnSurge, Inc., in
exchange for investment securities of Knowledge Transfer Systems, Inc. amounting
to $308,000, $133,000, $147,000, and $140,000, respectively. Shane Hackett, who
is the President and Chief Executive Officer of the Company, was the President
and Chief Executive Officer of Ensurge, Inc. from November 1, 1999 until
February 28, 2001, and owned 7,725,000 shares of the common stock of EnSurge,
Inc. during the time of the transactions in 2001, which then constituted
approximately nine percent (9%), of the outstanding common stock of EnSurge,
Inc. Due to the decline in market value of Knowledge Transfer Systems, Inc.
common stock, the Company considered the value of these securities permanently
impaired and wrote down the entire carrying value of these investment securities
as of December 31, 2002. At the time of the sale of the Business Development
Series to Knowledge Transfer Systems, Inc. for 875,000 Knowledge Transfer
Systems, Inc. preferred shares in 2002, EnSurge, Inc. was a stockholder of
Knowledge Transfer Systems, Inc. According to the Form 10-KSB of Knowledge
Transfer Systems, Inc. for the period ended December 31, 2002, EnSurge, Inc.
beneficially owned 2,600,000 shares, or 5.1% of the outstanding common stock of
Knowledge Transfer Systems, Inc., and according to the Form 10-KSB of Knowledge
Transfer Systems, Inc. for the period ended December 31, 2001, EnSurge, Inc.
beneficially owned 5,700,000 shares, or 14.1% of the outstanding common stock of
Knowledge Transfer Systems, Inc. Shane Hackett, who is the President and Chief
Executive Officer of the Company, was the President and Chief Executive Officer
of Ensurge, Inc. from November 1, 1999 until February 28, 2001, and owned
7,725,000 shares of the common stock of EnSurge, Inc. during the time of the
transaction between the Company and Knowledge Transfer Systems, Inc. in 2002,
which then constituted approximately eight percent (8%), of the outstanding
common stock of EnSurge, Inc. (See Note C: Investment Securities).

During the quarter ended September 30, 2003, the Company entered into a Purchase
and Sale Agreement (the "KT Purchase Agreement") with Knowledge Transfer
Systems, Inc., and a Content License and Resale Agreement (the "KT License
Agreement") with both KT Solutions, Inc. and Knowledge Transfer Systems, Inc.
The transactions each occurred on August 25, 2003. KT Solutions, Inc. is a
subsidiary of Knowledge Transfer Systems, Inc. Pursuant to the KT Purchase
Agreement, the Company purchased the Business Development Series from Knowledge
Transfer Systems, Inc. in exchange for the 875,000 shares of Knowledge Transfer
Systems, Inc. preferred stock owned by the Company. The Business Development
Series consists of multimedia software titles, hard copy titles, website,
domain, copyright, titles, and all related interests, including certain product
deliverables, product contracts and product licenses. Pursuant to the KT License
Agreement, the Company obtained a non-exclusive, world-wide license to a line of
KT Solutions, Inc. products for resale through the Company's on-line learning
services, in exchange for a 35% royalty on product revenues recognized by the
Company, subject to a $125,000 royalty credit as a start-up concession to the
Company. The licensed product line consists of training materials suitable for
access and use by a customer through on-line learning services. The initial
license term is for five years and is renewable year-to-year thereafter unless
canceled by either party. Due to concerns the Company had about the continued
existence of KT Solutions, Inc. as an operating entity, the Company also
obtained a guarantee by its parent, Knowledge Transfer Systems, Inc., of all of
KT Solutions Inc.'s obligations under the KT License Agreement, in exchange for
the 1,900,000 shares of Knowledge Transfer Systems, Inc. common stock owned by
the

                                       16
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Company. As a result of these transactions, among other things, the Company has
reacquired full ownership of the Business Development Series previously sold by
the Company to Knowledge Transfer Systems, Inc., and the Company no longer owns
any common or preferred stock or any other equity interest in Knowledge Transfer
Systems, Inc. The Company did not record any gain or loss with respect to the
transactions that occurred during the quarter that ended September 30, 2003.

During 2002, the Company initiated the purchase of sales leads from Education
Success Institute, Inc. (ESI). ESI is owned and operated by two officers of the
Company's operating subsidiary, Energy Professional Marketing Group Inc. (Ethan
Andrew Willis and James Randolph Garn). The Company paid ESI a total of
$3,894,816 for sales lead generation for the nine months ended September 30,
2003. In addition, the Company reserved for potential returned sales from ESI in
the amount of $296,140 as of September 30, 2003. Also, revenue received by the
Company for ESI's use of merchant accounts, office supplies and rent totaled
$72,554 for the nine months ended September 30, 2003.

NOTE I - COMMITMENTS AND CONTINGENCIES

Leases
In March, May and September 2002, the Company entered into operating leases for
certain office space. In October 2003 we leased additional space for our
coaching office. The Company leases space for three separate locations. The
total monthly obligation is $23,601. Future minimum lease payments under these
operating leases as of September 30, 2003 are as follows:

     Year Ending December 31:
                  2003                                                 $  71,261
                  2004                                                   239,922
                  2005                                                   173,853
                  2006                                                    37,467
                                                                       ---------
                  Total                                                $ 522,502
                                                                       =========

SEC Investigation
As described in Part II, Section 1, on June 24, 2003, the Securities and
Exchange Commission ("SEC") issued a formal order of investigation with respect
to the Company, authorizing the investigation of certain securities matters
relating to the Company. The SEC staff has taken the testimony of certain
officers of the Company and has informed the Company that it intends to take
additional testimony. The SEC staff has also issued additional requests for the
voluntary production of documents. Prior to the issuance of the order, the
Company had voluntarily provided documents and information to the SEC staff in
response to informal, non-public inquiries by the staff. The Company intends to
fully cooperate with the SEC in its investigation.

Legal Proceedings
On or about September 5, 2003, a lawsuit was filed by Independent Marketing,
Inc. (IMI) against certain employees of the Company. The lawsuit was filed in
the Fourth Judicial District Court of Utah County, State of Utah as Case No.
030403929. While the Company was initially named as a Defendant, the Company was
not named in the Amended Complaint filed in this lawsuit, In the lawsuit, IMI is
claiming that these employees have breached certain employment and non-compete
agreements and IMI is seeking compensatory damages and injunctive relief.
Although the Company is not a party to the litigation, because the lawsuit
affects certain employees of the Company, some or all of whom are key employees,
the Company's operating results and competitive position may be adversely
affected in the event of a Court ruling which limits those employees'
involvement with the Company.

As disclosed in Part II, Item 1, James Randolph Garn and Ethan Andrew Willis
have resigned as officers of the Company and as members of the Company's Board
of Directors and have informed the Company that they are prepared to file a suit
to rescind the Company's December 31, 2001 acquisition from them of the
Company's operating subsidiary, Energy Professional Marketing Group, Inc.,
unless the Company reaches a negotiated compromise with them effecting a
rescission of the acquisition. The Company is not aware of any suit being filed.
The Company is investigating this matter and the parties have attempted to
negotiate a resolution of this matter. The commencement of litigation or any
adverse determination in such litigation could have a material adverse effect on
the Company's business, financial condition and results of operations.

                                       17
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Valuation of the 2002 Sale of Business Development Series for Stock. As noted in
Note C - Investment Securities, the Company has retained a valuation firm to
determine the value of the 875,000 shares of preferred stock of the Knowledge
Transfer Systems, Inc., as of the time of their transfer to the Company on
September 23, 2002, to determine the tax consequences of the transaction. The
results of this valuation cannot be predicted at this time. However, should the
valuation be substantially lower than the previously reported amount, the
Company may need to restate its SEC filing for the third quarter of 2002 and for
the 2002 year. In the event such a restatement is required the Company expects
the effect to be limited as the entire amount of this consideration was written
off at the end of 2002. However, if the valuation of the preferred stock exceeds
approximately $300,000, the Company will be required to accrue tax liability
relating to the excess.

NOTE J - CONCENTRATION OF CREDIT RISK

The Company has increasingly relied on ESI to provide the Company with sales
leads. As a percentage of the overall sales leads provided to the Company for
the three months ended September 30, 2003, 89% of the leads were provided by
ESI. This is compared to 57% for the three months ended June 30, 2003.

NOTE K - SUBSEQUENT EVENTS

In October of 2003 we entered into a capital lease for the amount of $139,940
for phone equipment, the term of which is 4 years. In November, 2003 the Company
entered into an equipment lease in the amount of approximately $5,000 for 2
years.

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

The Company is a software company specializing in small business and financial
eLearning tools and consulting services. The Company's main products are EMS, a
turnkey web builder, e-commerce solution and data management system targeted to
small businesses; The Financial Toolkit 1.0, an integrated financial services
and education program; Skills in Demand, consisting of eLearning courses that
cater to small business owners and entrepreneurs, and eTaxNet, a provider of
online tax and consulting services. In addition, the Company offers, for most of
its software and learning products, technical support and coaching services.

When used in this discussion, the words "expect(s)", "feel(s)", "believe(s)",
"will", "may", "anticipate(s)" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, and actual results could differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, and are urged to carefully review and consider the various
disclosures elsewhere in this Form 10-QSB, including those set forth under
"Cautionary Statement Concerning Forward-Looking Statements" below.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations
are based upon the Company's condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities at the date of the Company's financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company
believes that its critical accounting policies include those described below.
For a detailed discussion on the application of these and other accounting
policies, see Note B in the Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002.


                                       18
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


                         Goodwill and Intangible Assets

As discussed in Note A in the accompanying consolidated financial statements,
the Company, on December 31, 2001, purchased all of the outstanding shares of
Energy Professional Marketing Group Inc. (EPMG) for $13.5 million in Innovative
common and Series A preferred stock.

Purchase accounting requires extensive use of accounting estimates and judgments
to allocate the purchase price to the fair market value of the assets purchased
and liabilities assumed. The Company has accounted for its acquisitions using
the purchase method of accounting. Values were assigned principally to goodwill
based upon management's allocation of the purchase price to EPMG's workforce in
place at the date of the transaction.

Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS 142). This statement affects the
Company's treatment of goodwill and other intangible assets. The statement
requires that goodwill existing at the date of adoption be reviewed for possible
impairment and that impairment tests be periodically repeated, with impaired
assets written down to fair value. Additionally, existing goodwill and
intangible assets must be assessed and classified within the statement's
criteria. Intangible assets with finite useful lives will continue to be
amortized over those periods. Amortization of goodwill and intangible assets
with indeterminable lives will cease.

During 2002, the trading price of the Company's stock declined significantly,
raising questions about whether the fair value of goodwill exceeds its carrying
amount. An evaluation of the carrying amount of goodwill was conducted during
the 4th quarter 2002, which included an evaluation of whether the decline in the
trading price of the Company's stock is other than temporary. The Company
determined that the decline in its trading price was other than temporary and
subsequent to December 31, 2002, engaged an independent valuation firm to
perform a valuation of the Company. This resulted in a write-down in goodwill by
the Company of $12,461,246 as of December 31, 2002. Goodwill amounts to
$1,088,868 as of September 30, 2003.

                              Investment Securities

Investment securities are considered to be impaired when a decline in fair value
below cost basis is determined to be other than temporary. The Company employs a
methodology in evaluating whether a decline in fair value below cost basis is
other than temporary that considers available evidence regarding its investment
securities. In the event that the cost basis of a security exceeds its fair
value, the Company evaluates, among other factors: the duration of the period
that, and extent to which, the fair value is less than cost basis; the financial
health of and business outlook for the investee, including industry and sector
performance, changes in technology and operational and financing cash flow
factors; overall market conditions and trends, and the Company's intent and
ability to hold the investment. Once a decline in fair value is determined to be
other than temporary, a write-down is recorded and a new cost basis in the
security is established. Assessing the above factors involves inherent
uncertainty. Accordingly, write-downs, if recorded, could be materially
different from the actual market performance of investment securities in the
Company's portfolio, if, among other things, relevant information related to the
Company's investment securities was not publicly available or other factors not
considered by the Company would have been relevant to the determination of
impairment. As discussed in Note C to the accompanying financial statements, the
Company wrote down the value of investment securities by $1,629,250 in 2002. The
new cost basis in the investment securities written-down, as of December 31,
2002, is $0.

                               Revenue Recognition

The Company recognizes revenue after delivery of the product. To the extent the
Company sells software, revenue is recognized in accordance with Statement of
Position 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9
and clarified by Staff Accounting Bulletin (SAB) 101 Revenue Recognition in
Financial Statements. In most cases this occurs the same day payment is received
from our customers. The Company also reserves for sales returns and allowances
based upon historical experience.

The Company provides support services for some of its products. Payments
received by the Company for these services are generally recorded as deferred
revenue and recognized over the term of the services. The Company estimates the
amount earned for services based upon the period of time that has elapsed since
the invoice date. For example, if an agreement provides for a ten-week course of
coaching services, the Company estimates that one-half of the revenues for
coaching services are earned after five weeks. If the ten-week course begins
five weeks before the end of a fiscal quarter, the Company will recognize
one-half of the coaching revenues as revenues received in the fiscal quarter and
will record one-half as deferred revenue. The Company makes two assumptions in
recognizing coaching revenues: (1) that coaching services begin immediately
after the invoice date and (2) that customers do not make-up missed coaching
sessions. The Company believes that these assumptions are reasonable based upon
the Company's experience.

                                       19
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

The Company also provides extended payment terms on the sale of its software and
related coaching for up to two years. Since payments terms on these sales exceed
12 months, the fee for the software and license is presumed not to be
determinable. In addition, the probability of collection decreases as the
payment terms are extended. As a result, the Company recognizes revenue on these
sales as the payments are collected from the customer.

Results of Operations for the Three Months Ended September 30, 2003 Compared to
Three Months Ended September 30, 2002

                                      Sales

Sales for the three months ended September 30, 2003 and 2002 were $9,076,162 and
$4,225,488, respectively, which represents a 118% increase from the prior
period. The Company's principal source of revenue for the three months ended
September 30, 2003 consisted of software product and service sales. The primary
reason for the increase in sales can be attributed to the consolidation of all
of its administrative and accounting functions to the Provo, UT office in an
effort to improve the Company's fulfillment and shipping operations and improve
corporate responsiveness. This consolidation was completed in September 2002.
This has enabled the Utah office to greatly improve its ability to service its
customers. The Company has experienced substantial increases in sales per sales
associate as a result of the consolidation. In conjunction with this
consolidation, the Company has hired additional sales and marketing associates
which has also positively impacted sales for the nine months ended September 30,
2003. Also, in first quarter 2003, the Company initiated the utilization of its
training center in Orem, UT to assist its customers in maintaining and expanding
their Internet presence. Among the Company's products and services, sales of the
Company's personal finance products and services have been increasing at a
faster rate than its other products and services.

                                  Cost of Sales

Cost of sales for the three months ended September 30, 2003 and 2002 was
$4,612,375 and $1,528,534, respectively, representing an increase of 202%. Cost
of sales for the three months ended September 30, 2003 and 2002 represented
costs associated with the generation of sales leads and the providing of
coaching services to customers that purchase the Company's products. The main
reason for the increase in cost of sales for the three months ended September
30, 2003, as compared to a year ago for the same period, can be attributed to
cost of sales increasing in conjunction with the increase in sales for the
period as well as the rise in the cost of generating sales leads and the
providing of coaching services for the same period a year ago. See "Related
Party Transactions - Relationship with ESI" below.

                                  Gross Margin

Gross profit as a percentage of revenues was 50% for the three months ended
September 30, 2003 and 63.8% for the three months ended September 30, 2002. The
decrease was caused by the rise in costs of generating sales leads and the
providing of coaching services. See "Cost of Sales" above.

                                     Selling

Selling expenses for the three months ended September 30, 2003 and 2002 were
$2,072,032 and $729,388, respectively, representing an increase of 168%. These
costs consisted primarily of commissions paid to sales associates as well as
marketing and advertising expenses associated with key products and services.
The main reason for the increase in selling costs can be attributed to the
increase in sales of products and services from new and existing sales
associates. Selling costs have increased as a percentage of sales for the three
months ended September 30, 2003 and 2002.

                           General and Administrative

General and administrative expenses for the three months ended September 30,
2003 and 2002 were $1,863,694 and $1,069,191, respectively, representing an
increase of 71%. The Company's general and administration expenses consisted
primarily of salaries and wages, professional and legal fees, rent, travel
expenses, payroll taxes, telephone expenses and other general and administrative
expenses necessary to support the operations of the Company in the current
period. The

                                       20
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

primary reason for the increase in general and administrative expenses was
attributable to higher administrative wage costs and legal expenses for the
three months ended September 30, 2003. The Company pays 40% of net earnings
before taxes into a profit sharing pool that is divided equally among three
executive officers of the Company and its subsidiaries.

                                  Income Taxes

The Company accrued $1,067,373 and $137,048 for income taxes for the three
months ended September 30, 2003 and 2002, respectively. The Company's effective
income tax rates were 39% and 36% for the three months ended September 30, 2003
and 2002, respectively

                                   Net Income

The Company had net loss of $584,586 for the three months ended September 30,
2003, a net margin of 5.7% of revenue, compared to net income of $225,182 for
the three months ended September 30, 2002, a net margin of 5.3% of revenue. Net
income increased over the comparable period in 2002 primarily due to a loss on
investment securities during the comparable period in 2002.

Results of Operations for the Nine Months Ended September 30, 2003 Compared to
Nine Months Ended September 30, 2002

                                      Sales

Sales for the nine months ended September 30, 2003 and 2002 were $21,648,365 and
$10,014,523, respectively, which represents a 117% increase from the prior
period. The Company's principal source of revenue for the nine months ended
September 30, 2003 consisted of software product and service sales. The primary
reason for the increase in sales can be attributed to the consolidation of all
of its administrative and accounting functions to the Provo, UT office in an
effort to improve its fulfillment and shipping operations and improve corporate
responsiveness. This consolidation was completed in September 2002. This has
enabled the Utah office to greatly improve the Company's ability to service its
customers. The Company has experienced substantial increases in sales per sales
associate as a result of the consolidation. In conjunction with this
consolidation, the Company has hired additional sales and marketing associates,
which has also positively impacted sales for the first nine months of 2003.
Also, in first quarter 2003, the Company initiated the utilization of its
training center in Orem, UT to assist its customers in maintaining and expanding
their Internet presence. Among the Company's products and services, sales of the
Company's personal finance products and services have been increasing at a
faster rate than its other products and services.

                                  Cost of Sales

Cost of sales for the nine months ended September 30, 2003 and 2002 was
$10,674,800 and $3,650,218, respectively, representing an increase of 192%. Cost
of sales for the nine months ended September 30, 2003 and 2002 represented costs
associated with the generation of sales leads and the providing of coaching
services to customers that purchase the Company's products. The main reason for
the increase in cost of sales for the nine months ended September 30, 2003, as
compared to a year ago for the same period, can be attributed to cost of sales
increasing in conjunction with the increase in sales for the period as well as
the rise in the cost of generating sales leads and the providing of coaching
services for the same period a year ago. See "Related Party Transactions -
Relationship with ESI" below.

                                  Gross Margin

Gross profit as a percentage of revenues was 50.9% for the nine months ended
September 30, 2003 and 63.6% for the nine months ended September 30, 2002. The
decrease was caused by the rise in the cost of generating sales leads and of
providing of coaching services for the same period a year ago.


                                       21
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                     Selling

Selling expenses for the nine months ended September 30, 2003 and 2002 were
$5,138,849 and $2,011,587, respectively, representing an increase of 134%. These
costs consisted primarily of commissions paid to sales associates as well as
marketing and advertising expenses associated with key products and services.
The increase in selling costs can be attributed primarily to the increase in
sales of products and services from new and existing sales associates. Selling
costs have increased as a percentage of sales for the nine months ended
September 30, 2003 and 2002.

                           General and Administrative

General and administrative expenses for the nine months ended September 30, 2003
and 2002 were $5,368,018 and $2,727,968, respectively, representing an increase
of 92%. The Company's general and administration expenses consisted primarily of
salaries and wages, professional fees, rent, travel expenses, payroll taxes,
telephone expenses and other general and administrative expenses necessary to
support the operations of the Company in the current period. The primary reason
for the increase in general and administrative expenses was attributable to
higher administrative wages and legal fees for the nine months ended September
30, 2003. The Company pays 40% of net earnings before taxes into a profit
sharing pool that is divided equally among three executive officers of the
Company and its subsidiaries.

                             Non-recurring Expenses

Non-recurring expense for the nine months ended September 30, 2003 and 2002 was
$0 and $169,578, respectively. Non-recurring expense in 2002 represented back
wages due to EPMG's employees. This cost resulted from a completed examination
of the Company's labor practices by the United States Department of Labor. The
period of examination covered the Company's operations from May 2000 to May
2002.

                                  Income Taxes

The Company accrued $471,890 and $357,048 for income taxes for the nine months
ended September 30, 2003 and 2002, respectively. The Company's effective income
tax rates were 39% and 36% for the nine months ended September 30, 2003 and
2002, respectively. In its 10-QSB filing for the period ended June 30, 2003, the
Company did not accrue income taxes as management believed at that time that a
portion of the write-down in goodwill (See Note B in the "Notes to the Condensed
Consolidated Financial Statements") provided an offset to Net Income for tax
purposes. The Company now believes that the write-down in goodwill does not
provide an offset to Net Income for tax purposes. The $471,890 income tax
accrual recognizes the full amount of tax liability without consideration of the
write-down in goodwill. The Company has retained a tax expert to confirm the
Company's conclusion.

                                   Net Income

We had net loss of $689,431 for the nine months ended September 30, 2003
compared to net income of $573,516 for the nine months ended September 30, 2002,
an increase of 29%. The increase in net income was due to overall increased
revenues and better cost controls. Net income increased over the comparable
period in 2002 primarily due to a loss on investment securities during the
comparable period in 2002.

                           Related Party Transactions

Relationship with ESI. In September 2002, Energy Professional Marketing Group,
Inc. (EPMG), a wholly-owned subsidiary of the Company, entered into an
Opportunity and Strategic Alliance Agreement with Education Success Institute
(ESI). Under the agreement, EPMG purchases sales leads from ESI. ESI is owned
and operated by Ethan A. Willis and James R. Garn, each of whom serves as a vice
president and director of EPMG and served as an officer and director of the
Company prior to September 26, 2003. Under the agreement, with respect to cash
sales made by EPMG to sales leads generated by ESI, gross sales after a reserve
of 4% are divided 66% to EPMG and 34% to ESI. The Company believes that the
agreement is the product of arm's length negotiation between the parties. The
Company was generating a significant portion of their sales leads internally;
however, this was generally unprofitable for the


                                       22
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Company and the decision was made to outsource the generation of sales leads to
ESI. The Company paid ESI a total of $2,044,027 for sales lead generation for
the three months ended September 30, 2003and $3,894,816 for sales lead
generation for the nine months ended September 30, 2003. In addition, the
Company reserved for potential returned sales from ESI in the amount of $296,140
as of September 30, 2003. Also, revenue received by the Company for ESI's use of
merchant accounts, office supplies and rent totaled $39,876 for the three months
ended September 30, 2003 and $72,554 for the nine months ended September 30,
2003.

                         Liquidity and Capital Resources

At September 30, 2003, the Company had cash and cash equivalents of $3,857,987,
an increase of $2,519,642 from December 31, 2002. At September 30, 2003, the
Company had net working capital of $1,425,205 compared to net working capital of
$680,490 at December 31, 2002. The ratio of current assets to current
liabilities decreased to 1.37 at September 30, 2003 from 1.45 at December 31,
2002. Cash provided by operations was $2,715,080 for the nine months ended
September 30, 2003. The primary reason for the positive operating cash for the
nine months ended September 30, 2003 can be attributed to the Company's higher
sales volume during the first nine months of 2003. In addition, the Company's
primary merchant service company ceased holding a percentage of each sales
transaction as a reserve against future cancellations, which has positively
impacted cash in the current quarter. The Company also experienced non-cash
prepaid expenses and non-cash expenditures of $97,667 during the nine months
ended September 30, 2003, which also positively effected cash. The Company paid
down its note payable and line of credit balances by a net amount of $90,637
during the nine months ended September 30, 2003. The Company anticipates paying
down additional notes payable amounts during 2003. Stockholders' equity amounts
to $1,639,751 as of September 30, 2003.

The Company issued 80,000 shares of its Series B preferred stock to certain
directors of the Company as prepaid executive compensation and executive
compensation at a stated value of $1.00 per share in the first quarter 2003. The
Company recorded non-cash executive compensation of $60,000 for the nine months
ended September 30, 2003, related to these Series B preferred shares. The
remaining $20,000 will be incurred during the fourth quarter of 2003.

The Company issued 233,333 shares of its common stock during the first quarter
2003 for prepaid public relation services to be provided in future periods.

The Company issued 133,333 shares of its common stock as a charitable
contribution during the first quarter 2003.

The Company issued 39,702 shares of its common stock for professional services
provided during the first quarter 2003.

The Company issued 49,231 shares of its common stock for professional services
provided during the second quarter 2003.

The Company expects that its existing cash resources and cash flow generated
from operations will be sufficient to meet its operating requirements and
ordinary capital expenditure needs during the next twelve months.

                                     Trends

The following is a description of certain trends, events and uncertainties that
may affect the Company's future financial results. Due to the potential for
change in factors associated with our business, it is impossible to predict or
quantify future changes in the Company's business, results of operations and
financial condition. See "-Cautionary Statement Concerning Forward-Looking
Statements."

Resignation of Garn & Willis and Threatened Litigation. As disclosed in Part II,
Item 1, James Randolph Garn and Ethan Andrew Willis resigned as Officers of the
Company and as members of the Company's Board of Directors and have informed the
Company that they are prepared to file a suit to rescind the Company's December
31, 2001 acquisition from them of the Company's operating subsidiary, Energy
Professional Marketing Group, Inc., unless the Company reaches a negotiated
compromise with them effecting a rescission of the acquisition. The Company is
not aware of any such complaint being filed. The Company is investigating this
matter and the parties have attempted to negotiate a resolution of this matter.
The commencement of litigation or any adverse determination in such litigation
could have a material adverse effect on the Company's business, financial
condition and results of operations.

                                       23
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

SEC Investigation. As disclosed in Part II, Item 1, the Securities and Exchange
Commission issued a formal order of investigation with respect to the Company,
authorizing the investigation of certain securities matters relating to the
Company. The Company cannot predict the length or potential outcome of the SEC
investigation, or the potential impact of the investigation on the Company. If
the SEC's investigation results in any formal adverse determination, which may
include a fine or other remedies, the Company's financial condition, results of
operations and business could be materially adversely affected. The Company has
incurred, and may continue to incur, significant legal and other costs in
connection with this investigation.

Reliance on Education Success Institute, Inc. (ESI). As disclosed in the
"Related Party Transactions" section above, the Company has increasingly relied
on ESI to provide the Company with sales leads. As a percentage of the overall
sales leads provided to the Company for the three months ended September 30,
2003, 89% of the leads were provided by ESI. This is compared to 57% for the
three months ended June 30, 2003. ESI is owned by James Randolph Garn and Ethan
Andrew Willis, who have threatened litigation against the Company relating to
the Company's December 31, 2001 acquisition from them of the Company's operating
subsidiary, Energy Professional Marketing Group, Inc. If the lead generation
provided by ESI were to cease for any reason, the Company's financial condition,
results of operations and business could be materially adversely affected.

Internet Marketing Programs. A substantial portion of the Company's sales are
developed through marketing programs on the Internet. In the Company's
experience, specific marketing programs or methods of marketing on the Internet
generally have limited periods of effectiveness. The Company may not rely upon
any single marketing program or method of marketing for any significant period
of time. In order to continue to market effectively on the Internet, the Company
must continue to adapt its current marketing programs and develop new effective
programs. Any failure by the Company to continue to develop effective Internet
marketing programs could have a material adverse effect on the Company's
business, results of operations and financial condition.

Retention of Sales Personnel. The Company's business is substantially dependent
upon the Company's ability to attract and retain effective sales personnel. Any
substantial turnover among sales personnel or the loss of key sales personnel
could have a material adverse effect on the Company's business, results of
operations and financial condition.

      Valuation of the 2002 Sale of Business Development Series for Stock.

As noted in Note C - Investment Securities, the Company has retained a valuation
firm to determine the value of the 875,000 shares of preferred stock of the
Knowledge Transfer Systems, Inc., as of the time of their transfer to the
Company on September 23, 2002, to determine the tax consequences of the
transaction. The results of this valuation cannot be predicted at this time.
However, should the valuation be substantially lower than the previously
reported amount, the Company may need to restate its SEC filing for the third
quarter of 2002 and for the 2002 year. In the event such a restatement is
required the Company expects the effect to be limited as the entire amount of
this consideration was written off at the end of 2002. However, if the valuation
of the preferred stock exceeds approximately $300,000, the Company will be
required to accrue tax liability relating to the excess.

Cautionary Statement Concerning Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-QSB that are
not statements of historical fact may constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. These statements are subject to risks and uncertainties, as described
below.

Examples of forward-looking statements include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, the payment or non-payment of dividends, capital structure and
other financial items, (ii) statements of plans and objectives of the Company's
management or Board of Directors, including plans or objectives relating to the
Company's products or services, (iii) statements of future economic performance,
and (iv) statements of assumptions underlying the statements described in (i),
(ii) and (iii). Forward-looking statements can often be identified by the use of
forward-looking terminology, such as "believes," "expects," "may," "will,"
"should," "could," "intends," "plans," "estimates" or "anticipates," variations
thereof or similar expressions.


                                       24
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Forward-looking statements are not guarantees of future performance or results.
They involve risks, uncertainties and assumptions. The Company's future results
of operations, financial condition and business operations may differ materially
from those expressed in these forward-looking statements. Investors are
cautioned not to put undue reliance on any forward-looking statement.

There are a number of factors that could cause actual results to differ
materially from those discussed in the forward-looking statements, including
those factors described below. Other factors not identified herein could also
have such an effect. The Company provides a detailed discussion of risk factors
in various SEC filings, including its Form 10-KSB for the fiscal year ended
December 31, 2002, and readers are encouraged to review these filings. Among the
factors that could cause actual results to differ materially from those
discussed in the forward-looking statements are the following:

      o     the outcome of the current dispute between the Company and Garn and
            Willis regarding the acquisition of Energy Professional Marketing
            Group, Inc. by the Company from Garn and Willis;

      o     the Company's ability to generate sales leads in a cost-effective
            manner;

      o     the Company's ability to develop strategic relationships with other
            businesses;

      o     the level of competition in the Company's industry;

      o     the rate of growth of the Internet and online commerce;

      o     the Company's ability to manage rapid growth in its business;

      o     customer spending patterns;

      o     the mix of products sold to customers;

      o     the mix of net sales derived from products as compared with
            services;

      o     the Company's ability to develop new products and services that keep
            up with rapid technological change;

      o     the Company's ability to attract and retain qualified personnel;

      o     the Company's ability to retain senior management and other key
            employees;

      o     the outcome of the current SEC investigation involving the Company;

      o     the effects, if any, of the valuation of the 2002 Sale of the
            Business Development Series eLearning Software for stock

      o     changes in general economic conditions.

All statements herein are made as of the date of this report. The Company does
not undertake to publicly release any revisions to forward-looking statements to
reflect events occurring or information obtained after the date of this report.

Item 3. Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
that are designed to ensure that information required to be disclosed in the
Company's reports under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
design and operation of the Company's disclosure controls

                                       25
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

and procedures as of September 30, 2003. Based upon that evaluation and subject
to the foregoing, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the design and operation of the Company's disclosure
controls and procedures provided reasonable assurance that the disclosure
controls and procedures are effective to accomplish their objectives.

In addition, there was no change in the Company's internal control over
financial reporting that occurred during the quarter ended September 30, 2003
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Resignation of Garn & Willis and Threatened Litigation. On September 26, 2003,
the Company received, by certified mail and hand delivery, letters from James
Randolph Garn and Ethan Andrew Willis stating that each was resigning
immediately as an Officer of the Company and as a member of the Company's Board
of Directors (the "Letters"). The Letters also indicate that neither Garn nor
Willis is resigning from positions as an officer or director of the operating
subsidiary, Energy Professional Marketing Group, Inc. (EPMG). The Letters did
not state a reason for the resignations of Garn or Willis; however, the Company
did receive a Memorandum dated September 26, 2003 ("Memorandum") from the law
firm of Holme Roberts & Owen LLP, which represents Garn and Willis. The
Memorandum alleges that Garn and Willis are entitled to rescind the Company's
December 31, 2001 acquisition of EPMG from Garn and Willis because they were
defrauded in connection with this acquisition. This acquisition was reported in
the Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 15, 2002. The Memorandum states that Garn and Wills are
prepared to file a suit to effect this rescission unless the Company reaches a
negotiated compromise with Garn and Willis affecting a rescission of the
acquisition. The Company is not aware of any such complaint being filed. The
Company is investigating this matter and the parties have attempted to negotiate
a resolution of this matter. The commencement of litigation or any adverse
determination in such litigation could have a material adverse effect on the
Company's business, financial condition and results of operations.

SEC Investigation. As previously disclosed, on June 24, 2003, the Securities and
Exchange Commission ("SEC") issued a formal order of investigation with respect
to the Company, authorizing the investigation of certain securities matters
relating to the Company. The SEC staff has taken the testimony of certain
officers of the Company and has informed the Company that it intends to take
additional testimony. The SEC staff has also issued additional requests for the
voluntary production of documents. Prior to the issuance of the order, the
Company had voluntarily provided documents and information to the SEC staff in
response to informal, non-public inquiries by the staff. The Company intends to
fully cooperate with the SEC in its investigation.

The Company cannot predict the length or potential outcome of the SEC
investigation, or the potential impact of the investigation on the Company. If
the SEC's investigation results in any formal adverse determination, which may
include a fine or other remedies, the Company's financial condition, results of
operations and business could be materially adversely affected. The Company has
incurred, and may continue to incur, significant legal and other costs in
connection with this investigation.

In addition, the Company has formed a committee of independent directors of the
Company to investigate the matters raised by Grant Thornton LLP in a letter to
the Company dated April 4, 2003, which is filed as Exhibit 99.2 to the Current
Report on Form 8-K filed by the Company on April 24, 2003. The committee is also
authorized to investigate such other matters relating to the Company as it deems
advisable.

IMI Litigation. On or about September 5, 2003, a lawsuit was filed by
Independent Marketing, Inc. (IMI) against certain employees of the Company. The
lawsuit was filed in the Fourth Judicial District Court of Utah County, State of
Utah as Case No. 030403929. While the Company was initially named as a
Defendant, the Company was not named in the Amended Complaint filed in this
lawsuit, In the lawsuit, IMI is claiming that these employees have breached
certain employment and non-compete agreements and IMI is seeking compensatory
damages and injunctive relief. Although the Company is not a party to the
litigation, because the lawsuit affects certain employees of the Company, some
or all of whom are key employees, the Company's operating results and
competitive position may be adversely affected in the event of a Court ruling
which limits those employees' involvement with the Company.

                                       26
<PAGE>


                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

The Company is subject to various other claims and lawsuits from time to time in
the ordinary course of business. Management does not believe that the outcome of
these other matters will have a material adverse effect on the Company's
financial condition, results of operations or business.

Item 3. Defaults upon Senior Securities

(b) There has not been any material arrearage in the payment of dividends on any
preferred stock. The Company has withheld a dividend payment of 137,942 shares
of common stock payable on Series A Preferred Stock to two stockholders in
connection with a dispute with such stockholders.

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

a. Exhibits

The exhibits required by this item are listed in the Index to Exhibits set forth
at the end of this Form 10-QSB.

b. Reports of Form 8-K

During the period covered by this report, the Company filed the following report
on Form 8-K:

On October 3rd, 2003, the Company filed a Current Report on Form 8-K regarding
the receipt of letters of resignation from officers and directors James Randolph
Garn and Ethan Andrew Willis, and the receipt of a Memorandum dated September
26, 2003 from the law firm of Holme Roberts & Owen LLP, which represents Garn
and Willis. The Memorandum alleges that Garn and Willis are entitled to rescind
the Company's December 31, 2001 acquisition of the Subsidiary from Garn and
Willis because they were defrauded in connection with this acquisition. The
Memorandum states that Garn and Wills are prepared to file a suit to effect this
rescission unless the Company reaches a negotiated compromise with Garn and
Willis affecting a rescission of the acquisition.


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<PAGE>

                                   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 SOFTWARE TECHNOLOGIES, INC.

Date:    October 19, 2004                 /s/ Peter M. Peterson
                                          ------------------------
                                          Peter M. Peterson
                                          Chief Executive Officer
                                          and Director

                                          /s/ Christopher J. Floyd
                                          ------------------------
                                          Christopher J. Floyd
                                          Chief Financial Officer


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<PAGE>

                                INDEX TO EXHIBITS

Exhibit
Number                              Description
------                              -----------

3.1            Amendment to the Articles of Incorporation of Innovative Software
               Technologies, Inc.*

3.2            Articles of  Incorporation of Innovative  Software  Technologies,
               Inc., as amended.*

3.3            Certificate  of  Designation  of the Series A Preferred  Stock of
               Innovative Software Technologies, Inc. (incorporated by reference
               from Exhibit 2.2 to the  Company's  Current  Report on Form 8-K/A
               filed March 14, 2002).

3.4            Certificate  of  Designation  of the Series B Preferred  Stock of
               Innovative Software Technologies, Inc.*

3.5            By-laws of Innovative Software  Technologies,  Inc. (incorporated
               by reference from Exhibit 3(b) to the Company's  Annual Report on
               Form 10-KSB for the year ended December 31, 1999).

4.1            Specimen  Certificate of Common Stock  (incorporated by reference
               from Exhibit 4(a) to the  Company's  Annual Report on Form 10-KSB
               for the year ended December 31, 1999).

4.2            Articles  FOURTH and FIFTH of the  Articles of  Incorporation  of
               Innovative Software Technologies,  Inc., as amended (incorporated
               by reference  from Exhibit 3.2 to this  Quarterly  Report on Form
               10-QSB).

4.3            Certificate  of  Designation  of the Series A Preferred  Stock of
               Innovative Software Technologies, Inc. (incorporated by reference
               from Exhibit 2.2 to the  Company's  Current  Report on Form 8-K/A
               filed March 14, 2002).

4.4            Certificate  of  Designation  of the Series B Preferred  Stock of
               Innovative Software Technologies, Inc. (incorporated by reference
               from Exhibit 3.4 to this Quarterly Report on Form 10-QSB).

4.5            Sections  3 - 17,  28,  39 - 46  and 51 - 53 of  the  By-laws  of
               Innovative Software Technologies, Inc. (incorporated by reference
               from Exhibit 3(b) to the  Company's  Annual Report on Form 10-KSB
               for the year ended December 31, 1999).

4.6            Financing   Agreement   dated  January  25,  2001  among  Iwasaka
               Investments Limited, Shane Hackett and Hackett Media, Inc.*

4.7            Amendment to Finance  Agreement  dated  December 31, 2001 between
               Iwasaka Investments Limited and Innovative Software Technologies

Executive Compensation Plans and Arrangements: Exhibits 10.2, 10.3, 10.4, 10.5
and 10.6 to the Quarterly Report on Form 10-QSB for fiscal quarter ended
September 30, 2003

                                       29
<PAGE>

10.1           Opportunity and Strategic  Alliance  Agreement dated September 1,
               2002 by and between Energy Professional Marketing Group, Inc. and
               Education Success, Inc.*

10.2           Employment  Agreement  dated  April 15, 2001  between  Innovative
               Software Technologies, Inc. and Douglas S. Hackett.*

10.3           Employment  Agreement  dated  December  31, 2001  between  Energy
               Professional Marketing Group, Inc. and James R. Garn.*

10.4           Amendment dated July 15, 2002 to the Employment Agreement between
               Energy Professional Marketing Group, Inc. and James R. Garn.*

10.5           Employment  Agreement  dated  December  31, 2001  between  Energy
               Professional Marketing Group, Inc. and Ethan A. Willis.*

10.6           Amendment dated July 15, 2002 to the Employment Agreement between
               Energy Professional Marketing Group, Inc. and Ethan A. Willis.*

10.7           Indemnity  Agreement  dated  August 17, 2001  between  Innovative
               Software Technologies, Inc. and Douglas Shane Hackett.*

10.8           Indemnity Agreement/Hold Harmless Agreement dated August 17, 2001
               among Innovative Software Technologies,  Inc. and Scott Mehaffey,
               Shawn M. Thomas, Margie Hackett and Douglas S. Hackett.*

10.9           Indemnity  Agreement  dated  August 17, 2001  between  Innovative
               Software Technologies, Inc. and Margie Hackett.*

10.10          Indemnity  Agreement  dated  August 17, 2001  between  Innovative
               Software Technologies, Inc. and Scott Mehaffey.*

10.11          Indemnity  Agreement  dated  August 17, 2001  between  Innovative
               Software Technologies, Inc. and Margie Hackett.*

10.12          Indemnity Agreement dated August 17, 2001 between Innovative
               Software Technologies, Inc. and Shawn M. Thomas.*

10.13          Indemnity  Agreement  dated  January  9,  2002  among  Innovative
               Software Technologies, Inc. and Ethan Willis and Randy Garn.*

10.14          Indemnity  Agreement  dated  August  16,  2002  among  Innovative
               Software Technologies, Inc. and Ethan Willis and Randy Garn.*


                                       30
<PAGE>

10.15          Indemnity  Agreement  dated  August  15,  2002  among  Innovative
               Software Technologies, Inc. and Douglas Shane Hackett.*

10.16          Director  Indemnification  Agreement  dated  September  15,  2003
               between Innovative Software Technologies, Inc. and Peter Justen

10.17          Director Indemnification  Agreement dated August 14, 2003 between
               Innovative Software Technologies, Inc. and Peter M. Peterson

10.18          Director  Indemnification  Agreement dated August 4, 2003 between
               Innovative Software Technologies, Inc. and William E. Leathem

21             Subsidiaries of the Registrant.*

31.1           Certification  of  Chief Executive Officer of Innovative Software
               Technologies, Inc. dated November 19, 2003.

31.2           Certification of Chief Financial  Officer of Innovative  Software
               Technologies, Inc. dated November 19, 2003.

32.1           Certification of Chief Executive  Officer of Innovative  Software
               Technologies, Inc. dated November 19, 2003, which is accompanying
               this  Quarterly  Report  on Form  10-QSB  for the  quarter  ended
               September  30,  2003 and is not  treated as filed in  reliance on
               Section 601(b)(32) of Regulation S-B.

32.2           Certification of Chief Financial  Officer of Innovative  Software
               Technologies, Inc. dated November 19, 2003, which is accompanying
               this  Quarterly  Report  on Form  10-QSB  for the  quarter  ended
               September  30,  2003 and is not  treated as filed in  reliance on
               Section 601(b)(32) of Regulation S-B.

99.1           Resignation  Letter dated  September 26, 2003 from James Randolph
               Garn to the Company.**

99.2           Resignation  Letter  dated  September  26, 2003 from Ethan Andrew
               Willis to the Company.**

99.3           Memorandum  of Holme  Roberts  & Owen  LLP  dated  September  26,
               2003.**

* Incorporated by reference from the exhibit to the Company's Quarterly Report
on Form 10-QSB for the fiscal quarter ended June 30, 2003 which bears the same
exhibit number.

** Incorporated by reference from the exhibit to the Company's Current Report on
Form 8-K filed with the Commission on October 3, 2003 which bears the same
exhibit number.


                                       31