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 JUNE 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 Drive
                               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 August 14, 2003.

<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                                   FORM 10-QSB

                           QUARTER ENDED JUNE 30, 2003

                                TABLE OF CONTENTS

                                                                            Page

                          PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

   Condensed Consolidated Statements of Comprehensive Income for the
    Three and Six Months Ended June 30, 2003 and 2002.....................    5

   Condensed Consolidated Statement of Stockholders' Equity/(Deficiency)
    (Unaudited) for the Six Months Ended June 30, 2003....................    6

   Condensed Consolidated Statements of Cash Flows (Unaudited) for the
    Six Months Ended June 30, 2003 and 2002...............................    7

   Notes to the Condensed Consolidated Financial Statements (Unaudited)...    8

Item 2. Management's Discussion and Analysis of Financial Condition and
   Results of Operations..................................................   20

Item 3. Controls and Procedures...........................................   29


                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings.................................................   29

Item 2. Changes in Securities.............................................   30

Item 3. Defaults upon Senior Securities...................................   30

Item 5. Other Information.................................................   30

Item 6. Exhibits and Reports on Form 8-K..................................   30

Signatures................................................................   31

Index to Exhibits.........................................................   32

<PAGE>

<TABLE>
<CAPTION>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                                                               (Unaudited)
                                                                                 June 30,    December 31,
                                                                                  2003          2002
                                                                               -----------   -----------
                                                                               (RESTATED)
                                     ASSETS
<S>                                                                            <C>           <C>
Current Assets
   Cash                                                                        $ 2,561,901   $ 1,338,345
   Accounts receivable                                                             108,309        14,700
   Other receivables                                                                79,104        59,772
   Prepaid expenses                                                                 40,000        67,179
   Other current assets                                                          1,241,109       706,486
                                                                               -----------   -----------
       Total Current Assets                                                      4,030,423     2,186,482
                                                                               -----------   -----------
Property and Equipment, Net                                                        454,220       379,349
                                                                               -----------   -----------
Other Assets
   Goodwill                                                                      1,088,686     1,088,686
   Other assets                                                                         --            --
   Deposit                                                                          42,656        48,698
                                                                               -----------   -----------
     Total Assets                                                              $ 5,615,985   $ 3,703,215
                                                                               ===========   ===========

Current Liabilities
   Note payable - Line of credit                                               $     3,974   $    40,660
   Current maturities of long-term debt                                             85,738        44,274
   Accounts payable and accrued expenses                                         1,364,924       861,366
   Deferred revenue                                                                379,062       256,148
   Other current liabilities                                                       811,974        83,278
   Accrued income taxes                                                            (70,000)           --
   Reserve for sales returns and allowances                                        710,038       220,266
                                                                               -----------   -----------
     Total Current Liabilities                                                   3,285,710     1,505,992
                                                                               -----------   -----------
     Note Payable - Long-term                                                           --        87,223
                                                                               -----------   -----------
     Total liabilities                                                           3,285,710     1,593,215
                                                                               -----------   -----------

Stockholders' Equity
   Preferred stock - no par; 25,000,000 shares authorized Series A preferred
     Stock; 1,650,500 shares issued and outstanding; $1.00 stated value          1,650,500     1,650,500
   Series B preferred stock; 408,491 shares issued and outstanding;
     $1.00 stated value                                                            418,427       328,491
   Common stock - $0.001 par value; 100,000,000 shares authorized and
     52,481,289 shares issued and outstanding, `respectively                        52,897        52,481
   Additional paid-in-capital                                                   13,216,970    13,119,719
   Accumulated deficit                                                         (13,008,519)  (13,041,191)
                                                                               -----------   -----------

Total Stockholders' Equity                                                       2,330,275     2,110,000
                                                                               -----------   -----------

Total Liabilities and Stockholders' Equity                                     $ 5,615,985   $ 3,703,215
                                                                               ===========   ===========
</TABLE>

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


                                       3
<PAGE>

<TABLE>
<CAPTION>

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

                                           For the Three Months              For the Six Months
                                                 June 30,                         June 30,
                                        ----------------------------    ----------------------------
                                            2003            2002            2003            2002
                                        ------------    ------------    ------------    ------------
                                         (RESTATED)                      (RESTATED)

<S>                                     <C>             <C>             <C>             <C>
Sales                                   $  6,992,995    $  2,994,339    $ 12,572,203    $  5,789,035

Cost of sales                              3,515,533         999,229       6,062,425       2,121,684
                                        ------------    ------------    ------------    ------------

Gross Profit                               3,477,462       1,995,110       6,509,778       3,667,351

Operating expenses:
    General and administrative             1,763,167         916,707       3,504,324       1,658,777
    Selling                                1,611,699         681,308       3,066,817       1,282,199
    Loss on investment securities                 --              --              --              --
    Non-recurring expenses                        --         169,578              --         169,578
                                        ------------    ------------    ------------    ------------

       Total Operating Expenses            3,374,866       1,767,593       6,571,141       3,110,554
                                        ------------    ------------    ------------    ------------

Income (Loss) From Operations                102,596         227,517         (61,363)        556,797

Other Income (Expense):
   Interest and penalties on late tax
     Payments                                (73,000)             --         (73,000)             --
   Other income                               30,760          16,390          74,872          18,092
   Interest income                            18,444              --          35,831              --
Interest expense                             (13,668)         (6,555)        (13,668)         (6,555)
                                        ------------    ------------    ------------    ------------

     Total Other Income (Expense)            (37,464)          9,835          24,035          11,537
                                        ------------    ------------    ------------    ------------

Income (Loss) Before Income Taxes             65,132         237,352         (37,328)        568,334

Income Taxes                                 (55,000)         85,326          70,000         220,000
                                        ------------    ------------    ------------    ------------

Net Income (Loss)                       $     10,132    $    152,026    $     32,672    $    348,334
                                        ============    ============    ============    ============

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

Weighted Average Number of
     Common Shares Used in Per
     Share Calculation (basic and
     diluted)                             52,870,136      48,319,952      52,821,170      48,303,618
                                        ============    ============    ============    ============
</TABLE>

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

                                       4
<PAGE>

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

                                 For the Three Months      For the Six Months
                                    Ended June 30,            Ended June 30,
                                 ---------------------    ---------------------
                                    2003       2002          2003       2002
                                 ---------   ---------    ---------   ---------
                                 (RESTATED)               (RESTATED)

Net income/(loss)                $  10,132   $ 152,026    $  32,672   $ 348,334

Other comprehensive
 income/(loss), net of tax:
Unrealized loss on investments          --     (86,518)          --    (509,914)
                                 ---------   ---------    ---------   ---------

Other comprehensive
 income/(loss)                   $  10,132   $ (86,518)   $  32,672   $(509,914)
                                 ---------   ---------    ---------   ---------

Comprehensive income/(loss)         10,132      65,508       32,672    (161,580)
                                 =========   =========    =========   =========

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

                                       5
<PAGE>

<TABLE>
<CAPTION>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE SIX MONTHS ENDED JUNE 30, 2003

                                                                                                              Retained
                                                                                                    Accum.    Earnings     Total
                         Preferred Stock      Preferred Stock      Common Stock       Additional  Comprehen-   (Accum-     Stock-
                            Series A            Series B                               paid-in-     sive        ulated)   holders'
                        Shares     Amount    Shares   Amount      Shares     Amount    capital      Loss       Deficit)    Equity
                      ---------   ---------  -------   -------  ----------   ------   ----------  --------- ----------- -----------
                                                                                                            (RESTATED)  (RESTATED)
<S>                   <C>       <C>          <C>     <C>        <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 $ 12,626,679  $(204,354) $(290,941) $14,278,160

Issuance of Common
 stock for
 services provided                                                   4,000        4       14,196                             14,200

Issuance of Common
 stock                                                              40,730       41       36,951                             36,992

Issuance of Common
 stock for
 services provided                                                   6,125        6       20,644                             20,650

Issuance of Common
 Stock for software                                                 53,845       54       69,946                             70,000

Issuance of Common
 stock                                                              24,375       24       23,219                             23,243

Issuance of Common
 Stock for
 services provided                                                 291,250      291       21,553                             21,844

Conversion of Series A
 Preferred Stock to
 Common Stock          (199,500)   (199,500)                     3,000,000    3,000      196,500                                -

Issuance of Common
 stock for
 services provided                                                   5,000        5          370                                375

Issuance of Common
 stock                                                              76,960       77       18,939                             19,016

Issuance of Common
 stock                                                              23,169       23        3,992                              4,015

Issuance of Common
 stock for
 services provided                                                  39,702       40        4,760                              4,800

Series A Preferred
 Stock Dividend                                                    107,568      108       13,892                (14,000)        -

Series A Preferred
 Stock Dividend                                                     30,734       31        3,969                 (4,000)        -

Series A Preferred
 Stock Dividend                                                    420,054       20       54,250                (54,670)        -

Series B Preferred
 Stock Dividend                                                     72,494       72        9,859                 (9,931)        -

Issuance of Series B
 Preferred Stock for
 Executive Compensation                       80,000    80,000                                                               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
 December 31, 2002         -            -                              -         -           -        -     (12,667,649)(12,667,649)
                      ---------   ---------  -------   -------  ----------   ------   ----------  --------- ----------- -----------

Balance -
 December 31, 2002    1,650,500   1,650,500  328,491   328,491  52,481,289   52,481   13,119,719      -     (13,041,191)  2,110,000
                      =========   =========  =======   =======  ==========   ======   ==========  ========= =========== ===========
Issuance of
 Common Stock

</TABLE>

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


                                       6
<PAGE>

<TABLE>
<CAPTION>

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

                                                                      For the Six Months
                                                                        Ended June 30,
                                                                  --------------------------
                                                                      2003          2002
                                                                  -----------    -----------
                                                                  (RESTATED)
<S>                                                               <C>            <C>
Cash Flows From Operating Activities
   Net income/(loss)                                              $    32,672    $   348,334
   Adjustments to reconcile net income/(loss) to net cash
     provided by operating activities:
       Depreciation and amortization                                   95,102         40,798
       Allowance for doubtful accounts                                     --        124,500
       Prepaid non-cash executive compensation                         40,000             --
       Prepaid non-cash public relations expense                        2,250             --
       Stock-based compensation                                        89,936             --
       Non-cash expenses                                               55,417         34,850
       Changes in operating assets and liabilities:
         Accounts receivable                                          (93,609)      (564,128)
         Prepaid expenses                                              27,179        (13,664)
         Other receivables                                            (19,332)       (17,569)
         Other current assets                                        (534,623)      (311,911)
         Other assets                                                      --         23,810
         Deposits                                                       6,042        (31,707)
         Accounts payable and accrued expenses                        503,558        423,850
         Other liabilities                                            728,696        169,578
         Reserve for returns and allowances                           489,772         34,964
         Deferred revenue                                             122,914        179,690
         Accrued federal and state income tax                         (70,000)       221,844
                                                                  -----------    -----------

           Net Cash Provided by/(Used In) Operating Activities      1,475,974        663,239
                                                                  -----------    -----------

Cash Flows Used In Investing Activities
     Capital expenditures                                            (169,973)      (325,037)
                                                                  -----------    -----------

           Net Cash Used In Investing Activities                     (169,973)      (325,037)
                                                                  -----------    -----------

Cash Flows From Financing Activities
     Issuance of common stock                                              --         36,992
     Proceeds from borrowings under line of credit                         --         50,000
     Proceeds from borrowing under note payable                         8,085         81,186
     Repayments under line of credit agreement                        (36,686)        (5,029)
     Repayments on notes payable                                      (53,844)        (7,176)
                                                                  -----------    -----------

       Net Cash (Used in)/Provided by Financing Activities            (82,445)       155,973
                                                                  -----------    -----------

Net Increase /(Decrease) in Cash and Cash Equivalents               1,223,556        494,175

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

Cash and Cash Equivalents at End of Period                        $ 2,561,901    $   776,482
                                                                  ===========    ===========

Supplemental Cash Flow Information:
   Unrealized loss on securities available for sale               $        --    $  (509,914)
                                                                  ===========    ===========

Issuance common stock for software                                         --    $    70,000
                                                                  ===========    ===========

Issuance of common stock for services provided                          4,750         34,850
                                                                  ===========    ===========

Issuance of Series B Preferred Stock for executive compensation   $    40,000    $        --
                                                                  ===========    ===========

</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, 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.

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 ebusiness
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  existing
Innovative investors continuing as only 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  and  3,529,412 of Series A preferred  and common
shares, respectively.

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 June 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 six months ended June
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  includes the accounts of
Innovative  Software  Technologies,  Inc. and the  accounts of its  wholly-owned
subsidiary  Energy  Professional  Marketing Group, Inc. (EPMG) as of and for the
six months ended June 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.

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.

                                       10
<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.

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. 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 June 30,  2003,  57% of the leads were  provided by ESI.
This is compared to 35% for the three months ended March 31, 2003.


                                       11
<PAGE>

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

NOTE C - INVESTMENT SECURITIES

The Company  currently  holds  three  investment  securities,  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 June 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

June  30, 2003
 EnSurge, Inc. common stock       $   -     $   -   $    -     $       -
 Knowledge Transfer Systems, Inc.
 common stock                         -         -        -             -
 Knowledge Transfer Systems, Inc.
 preferred stock                      -         -        -             -
                                 -------    ------  ------     ---------
                                 $    -     $    -  $    -     $       -
                                 =======    ======  ======     =========



Investment                      Cost       Gross Unrealized   Estimated
Securities                      Basis      Gains    Losses   Fair Value

December 31, 2002
EnSurge, Inc. common stock      $   -      $    -   $    -    $      -
Knowledge Transfer Systems, Inc.
common stock                        -           -        -           -
                               -------     ------   -------   --------
                               $    -           -   $     -   $      -
                               =======     ======   =======   ========

The Knowledge Transfer Systems,  Inc. common stock was received in consideration
for the  sale  of four  software  coaching  platforms  to  Ensurge,  Inc.  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.

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.


                                       12
<PAGE>

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

On  September  23,  2002,  the Company  sold the  Business  Development  Series,
e-learning content and software to Knowledge Transfer Systems,  Inc. in exchange
for 875,000  Knowledge  Transfer  Systems,  Inc.  preferred shares with a stated
value  of  $1.00  per  share.  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  proceeding the date of conversion.  Due to the disclosure
by the management of Knowledge Transfer Systems,  Inc. of a possible  bankruptcy
by 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 President
and Chief  Executive  Officer of the Company is the former  President  and Chief
Executive  Officer  of  Ensurge,  Inc.,  which  was  the  parent  company  of KT
Solutions,  Inc. 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,  there was no related party relationship between the companies
and/or the officers and directors of the companies.

The above common stock investment securities are traded on the OTC Bulletin
Board. All of the Company's investment securities are stocks of high technology
companies whose market prices have been extremely volatile. The market prices of
these companies' stocks have declined substantially in the past two years.

NOTE D - PROPERTY & EQUIPMENT

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



                                June 30,    December 31,
                                  2003         2002
                                ------------------------
Machinery and Equipment.........$314,344     $   246,594
Furniture and Fixtures..........  61,994          51,683
Computer Software............... 280,610         190,624
Leasehold improvements..........  36,018          34,092
                                --------    ------------
................................. 692,966         522,993
Less: Accumulated depreciation
      and amortization          (238,746)       (143,644)
                                ---------   ------------


Property and Equipment, Net.....$454,220    $    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 $1,219,397 and
$706,486 as of June 30, 2003 and December 31, 2002, respectively.


                                       13
<PAGE>

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

NOTE F - LONG-TERM DEBT

Long-term debt consists of the following:
                                                               2003      2002
                                                             --------  --------

Notes payable,  financial  institution,  collaterized by
telephone  equipment,  principal  and  imputed  interest
payable in monthly  installments  of $1,250 and $385 due
in August 2004.                                              $ 23,648  $ 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.                                                  52,276    67,175

Notes payable,  financial  institution,  collaterized 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.                                               9,814    43,853
                                                             --------  --------
                                                               85,738   131,497
   Less current maturities                                     85,738    44,274
                                                             --------  --------

   Long-term - net of current maturities                     $     --  $ 87,223
                                                             ========  ========

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
June 30, 2003 was 4.00%).  As of June 30, 2003,  there was $46,026  available on
the credit facility.

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.


                                       14
<PAGE>

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

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.

Finance  Agreement - During 2001,  Hackett  Media,  Inc.  financed its operation
primarily  through a Finance  Agreement of convertible debt and securities.  The
Finance  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 Finance  Agreement above were reissued
as Series A  preferred  shares  and common  shares as  follows:  Of the  initial
$700,000  invested in 2001,  $350,000 was converted to Series A preferred shares
at a stated  value of $1 per share.  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 Finance 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.

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 $40,000 for the six months ended June 30, 2003.  The  remaining
$40,000 will be incurred during the following two quarters 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,  during  2001,  the  Company  sold four  software  coaching  platforms  to
NowSeven.com,  Inc.,  Ziabon,  Inc., SF  Acquisition  Corp.,  Inc., and Ishopper
Internet  Services,  Inc. in exchange  for  investment  securities  amounting to
$308,000,  $133,000,  $147,000,  and $140,000,  respectively.  The President and
Chief  Executive  Officer  of the  Company  is the  former  President  and Chief
Executive  Officer  of  Ensurge,  Inc.,  which  is  the  parent  company  of the
wholly-owned  subsidiaries  listed above.  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.


                                       15
<PAGE>

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

During 2002,  the Company  initiated the purchase of sales leads from  Education
Success Institute, Inc. (ESI). ESI is owned and operated by two directors of the
Company  (Ethan Andrew Willis and James Randolph  Garn).  The Company paid ESI a
total of $1,850,789 for sales lead  generation for the six months ended June 30,
2003. In addition, the Company reserved for potential returned sales from ESI in
the amount of  $177,441  as of June 30,  2003.  Also,  revenue  received  by the
Company for ESI's use of merchant  accounts,  office  supplies  and rent totaled
$39,558 for the six months ended June 30, 2003.

The President and Chief Executive Officer of the Company is the former President
and Chief Executive Officer of Ensurge, Inc., which was the parent company of KT
Solutions,  Inc. 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, there was no related party  relationship  between the
companies  and/or the officers and directors of the companies at the time of the
transaction.

NOTE I - COMMITMENTS AND CONTINGENCIES

In March,  May and September 2002, the Company entered into operating leases for
certain office space. Future minimum lease payments under these operating leases
as of June 30, 2003 are as follows:

     Year Ending December 31:
                2003                                              $   131,999
                2004                                                  223,998
                2005                                                  168,499
                2006                                                   37,467
                                                                  -----------

                Total                                             $   561,963
                                                                  ===========

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 informed the Company that it intends to take the  testimony of certain
officers of the  Company.  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.

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.


                                       16
<PAGE>

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

                          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.

                         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's 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 June 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.


                                       17
<PAGE>

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

                               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,  unless customers specifically request that their coaching sessions be
placed on hold. The Company believes that these assumptions are reasonable based
upon the Company's experience.

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 June 30, 2003 compared to Three
Months Ended June 30, 2002

                                      SALES

Sales for the three  months  ended June 30,  2003 and 2002 were  $6,992,995  and
$2,994,339,  respectively,  which  represents  a 134%  increase  from the  prior
period.  The  Company's  principal  source of revenue for the three months ended
June 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 six months ended June 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 June 30, 2003 and 2002 was  $3,515,533
and $999,229, respectively,  representing an increase of 252%. Cost of sales for
the three months ended June 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 June 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.  In  addition,  cost of
sales  increased  17% as a percentage  of sales when  comparing the three months
ended June 30, 2003 and 2002.  This increase is mainly  attributable to 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 49.8% for the three months ended
June 30, 2003 and 66.6% for the three months  ended June 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.


                                       18
<PAGE>

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

                                     SELLING

Selling  expenses  for the  three  months  ended  June 30,  2003  and 2002  were
$1,611,699 and $681,308,  respectively,  representing an increase of 125%. 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 in proportion as a percentage of sales
for the three months  ended June 30, 2003 and 2002.  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.

                           GENERAL AND ADMINISTRATIVE

General and administrative expenses for the three months ended June 30, 2003 and
2002 were  $1,763,167 and $916,707,  respectively,  representing  an increase of
89%. 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 wage costs for the three months ended June 30, 2003.

                             NON-RECURRING EXPENSES

Non-recurring  expense for the three  months ended June 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 for income taxes of $55,000 and $85,326 for the three months
ended June 30, 2003 and 2002,  respectively.  The Company's effective income tax
rates  were 0% and 36% for the  three  months  ended  June 30,  2003  and  2002,
respectively.  The Company did not record a provision  for income  taxes for the
three  months  ended  June 30,  2003,  based on the  Company's  future  tax loss
attributable  to the  goodwill  amortization  from the write off of  goodwill in
2002. See "Critical Accounting Policies - Goodwill and Intangible Assets" above.

                                   NET INCOME

The Company had net income of $10,132 for the three  months  ended June 30, 2003
compared to net income of $152,026 for the three months ended June 30, 2002. The
increase  in net income was due to the Company  not  recording  a provision  for
income taxes in the current quarter. See "Income Taxes" above. Net income before
income taxes  increased  $15,359 or 6.5% when  comparing  the three months ended
June 30, 2003 and 2002 . In addition,  net income before income taxes  decreased
4.3% as a  percentage  of sales when  comparing  the three months ended June 30,
2003 and 2002.  This decrease is mainly  attributable to the rise in the cost of
generating  sales  leads and the  providing  of coaching  services  for the same
period a year ago. See "Cost of Sales" above.

Results of  Operations  for the Six Months  Ended June 30, 2003  compared to Six
Months Ended June 30, 2002

                                      SALES

Sales for the six  months  ended  June 30,  2003 and 2002 were  $12,572,203  and
$5,789,035,  respectively,  which  represents  a 116%  increase  from the  prior
period. The Company's  principal source of revenue for the six months ended June
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 six 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.


                                       19
<PAGE>

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

                                  COST OF SALES

Cost of sales for the six months ended June 30, 2003 and 2002 was $6,062,425 and
$2,121,684,  respectively,  representing  an increase of 186%. Cost of sales for
the six months ended June 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 June 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.  In  addition,  cost of
sales increased 12% as a percentage of sales when comparing the six months ended
June 30, 2003 and 2002. This increase is mainly  attributable to 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 51.5% for the six months ended June
30, 2003 and 63.3% for the six months  ended June 30,  2002.  The  decrease  was
caused by the rise in the cost of  generating  sales leads and the  providing of
coaching services for the same period a year ago. .

                                     SELLING

Selling expenses for the six months ended June 30, 2003 and 2002 were $3,066,817
and  $1,282,199,  respectively,  representing  an increase of 115%.  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 in  proportion as a percentage of sales for the six months
ended June 30, 2003 and 2002.

                           GENERAL AND ADMINISTRATIVE

General and  administrative  expenses for the six months ended June 30, 2003 and
2002 were $3,414,388 and $1,658,777,  respectively,  representing an increase of
106%. 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 for the six months ended June 30, 2003.

                             NON-RECURRING EXPENSES

Non-recurring expense for the six months ended June 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  income  taxes of $70,000 and  $220,000  for the six months
ended June 30, 2003 and 2002,  respectively.  The Company  effective  income tax
rates  were 0% and 39%  for  the six  months  ended  June  30,  2003  and  2002,
respectively.  The Company did not record a provision  for income  taxes for the
three  months  ended  June 30,  2003,  based on the  Company's  future  tax loss
attributable  to the  goodwill  amortization  from the write off of  goodwill in
2002. See "Critical Accounting Policies - Goodwill and Intangible Assets" above.



                                       20
<PAGE>


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

                                   NET INCOME

We had net income of $32,672 for the six months ended June 30, 2003  compared to
net income of $348,334 for the six months  ended June 30, 2002.  The increase in
net income was due to the Company not  recording a provision for income taxes in
the current  quarter.  See "Income Taxes" above.  Net income before income taxes
decreased  $215,726 or 38% when comparing the six months ended June 30, 2003 and
2002. In addition, net income before income taxes decreased 7.0% as a percentage
of sales when  comparing  the six  months  ended  June 30,  2003 and 2002.  This
decrease  is mainly  attributable  to the rise in the cost of  generating  sales
leads and the providing of coaching services for the same period a year ago. See
"Cost of Sales" above.

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 the Company. 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 Company and the decision was
made to outsource  the  generation of sales leads to ESI. The Company paid ESI a
total of $1,391,973  for sales lead  generation  for the three months ended June
30, 2003 and $1,850,789 for sales lead  generation for the six months ended June
30, 2003. In addition,  the Company  reserved for potential  returned sales from
ESI in the amount of $177,441 as of June 30, 2003. Also, revenue received by the
Company for ESI's use of merchant  accounts,  office  supplies  and rent totaled
$6,880 for the three  months  ended June 30, 2003 and $32,678 for the six months
ended June 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2003, cash was  $2,561,901,  an increase of $1,223,556 from December
31, 2002.  Cash provided by operations  was  $1,475,974 for the six months ended
June 30, 2003.  The primary  reason for the positive  operating cash for the six
months ended June 30, 2003,  can be  attributed  to the  Company's  higher sales
volume during the first six 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 six months  ended June 30,  2003,
which also positively  effected cash. The Company paid down its note payable and
line of credit  balances by $90,530  during the six months  ended June 30, 2003.
The Company  anticipates  paying down  additional  notes payable  amounts during
2003. Stockholders' equity amounts to $2,330,275 as of June 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 $40,000 for the six months
ended June 30, 2003,  related to these Series B preferred shares.  The remaining
$40,000 will be incurred during the following two quarters 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.


                                       21
<PAGE>

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

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."

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 June 30, 2003,
57% of the leads were  provided  by ESI.  This is  compared to 35% for the three
months  ended March 31,  2003.  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.

Sales Tax Audit.  The Company is  scheduled to undergo a sales and use tax audit
by the State of Utah.  The Company has reserved  $90,000 as of June 30, 2003 for
payment  of sales  and use  taxes  that  have not been paid to the State of Utah
during the past three years. The Company believes that the accrual is sufficient
to cover  any sales and use  taxes  that may be owed.  However,  there can be no
assurance  that auditors will not determine  that a higher amount is owed by the
Company.

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.

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.


                                       22
<PAGE>

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

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 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     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 and procedures as of
June 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 June 30, 2003 that
has  materially  affected,  or is reasonably  likely to materially  affect,  the
Company's internal control over financial reporting.


                                       23
<PAGE>

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

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 informed the Company that it intends to take the  testimony of certain
officers of the  Company.  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.

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 2. CHANGES IN SECURITIES

The Company issued 39,702 and 49,231 shares of common stock on January 31, 2003,
and May 21, 2003,  respectively,  to legal counsel in partial  payment for legal
services  rendered  to the  Company in the fourth  quarter of 2002 and the first
quarter of 2003,  respectively,  based on the average market value of the shares
during the respective quarter in which the related legal services were rendered.
Such shares were issued in reliance on the exemption provided by section 4(2) of
the Securities Act of 1933,  based on the Company's belief that the recipient of
the shares was a sophisticated  investor and had access to information regarding
the Company. The certificates evidencing those shares contain legends indicating
they were acquired for investment and restricting  transfer in the absence of an
effective registration or satisfaction of other conditions.

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 5. OTHER INFORMATION.

Hans C. Beyer resigned as a director of the Company during the second quarter of
2003.


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<PAGE>

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
reports on Form 8-K:

On April 24, 2003,  the Company filed a Current Report on Form 8-K regarding the
dismissal of Grant Thornton,  LLP as the Company's independent  accounting firm,
and the engagement of a new independent  accounting firm,  Robison,  Hill & Co.,
effective  April 11, 2003, to audit the Company's  financial  statements for the
fiscal years ended  December 31, 2002 and 2001.  This Current Report on Form 8-K
was amended on May 29, 2003 and June 4, 2003.

On April 24, 2003,  the Company filed a Current Report on Form 8-K regarding the
receipt of written  notice under Section 10A of the  Securities  Exchange Act of
1934, as amended, from Grant Thornton, LLP, the Company's independent accounting
firm,  the  dismissal  of  Grant  Thornton,  LLP  as the  Company's  independent
accounting  firm and the  engagement  of Robison Hill & Co. as the Company's new
independent accounting firm.

                                   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.

      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 June 30, 2003

                                       26
<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.

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

21             Subsidiaries of the Registrant.

31.1           Certification of Chief Executive Officer of Innovative
               Software Technologies, Inc. dated August 14, 2003.


                                       27
<PAGE>

31.2            Certification of Chief Financial Officer of Innovative
                Software Technologies, Inc. dated August 14, 2003.

32.1            Certification of Chief Executive Officer of Innovative Software
                Technologies, Inc. dated August 14, 2003, which is accompanying
                this Quarterly Report on Form 10-QSB for the quarter ended June
                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 August 14, 2003, which is accompanying
                this Quarterly Report on Form 10-QSB for the quarter ended June
                30, 2003 and is not treated as filed in reliance on Section
                601(b)(32) of Regulation S-B.


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