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


                                   FORM 10-QSB

(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)


                               5072 North 300 West
                                 Provo, UT 84604
                    (Address of principal executive offices)

                                 (801) 371-0755
                           (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>





PART I -  FINANCIAL INFORMATION

Item 1. Financial Statements

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS



                                               (Unaudited)
                                                  June 30,         December 31,
                                                   2003               2002
                                              -------------    ----------------
                                 ASSETS


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............................    460,062           256,148
   Other current liabilities...................    738,974            83,278
   Reserve for sales returns and allowances....    402,038           220,266
                                                ----------      ------------
      Total Current Liabilities................ 3,055,710          1,505,992
                                                ----------      ------------

Long-term debt, net of current maturities......         -            87,223

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..............................    408,491           328,491
   Common stock - $0.001 par value; 100,000,000
      shares authorized and 52,897,186
      and 52,481,289 shares issued and
      outstanding, respectively ...............     52,897            52,481
   Additional paid-in-capital.................. 13,136,970        13,119,719
   Accumulated deficit.........................(12,688,583)      (13,041,191)
                                                -----------       ----------
Total Stockholders' Equity.....................  2,560,275         2,110,000
                                                -----------       ----------
Total Liabilities and Stockholders' Equity..... $5,615,985       $ 3,703,215
                                                ==========       ===========

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


                                       3
<PAGE>


                     Innovative Software Technologies, Inc.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>



                                                           For the Three Months       For the Six Months
                                                             Ended June 30,             Ended June 30,
                                                       --------------------------  ----------------------------
                                                           2003            2002      2003            2002
                                                       -------------  -----------  ------------  --------------
<S>  <C>                                               <C>            <C>          <C>           <C>

Sales................................................  $   6,997,995  $ 2,994,339  $ 12,491,203   $   5,789,035

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

Gross Profit.........................................      3,482,462    1,995,110     6,428,778       3,667,351
                                                       -------------  -----------  ------------   -------------

Operating Expenses
     General and administrative......................      1,731,588      916,707     3,414,388       1,658,777
     Selling.........................................      1,533,699      681,308     2,758,817       1,282,199
     Loss on investment securities...................              -            -             -               -
     Non-recurring expenses..........................              -      169,578             -         169,578
                                                       -------------  -----------  ------------   -------------

     Total Operating Expenses........................      3,265,287    1,767,593     6,173,205       3,110,554
                                                       -------------  -----------  ------------   -------------

Income (Loss) From Operations........................        217,175      227,517       255,573         556,797
                                                       -------------  -----------  ------------   -------------

Other Income (Expense)
     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)....................         35,536        9,835        97,035          11,537
                                                       -------------  -----------  ------------   -------------

Income (Loss) Before Income Taxes....................        252,711      237,352       352,608         568,334

Income Taxes.........................................              -       85,326             -         220,000
                                                       -------------  ------------ ------------   --------------

Net Income (Loss)....................................  $     252,711  $   152,026  $    352,608   $     348,334
                                                       =============  ===========  ============   =============

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


<TABLE>
<CAPTION>
                                                          For the Three Months      For the Six Months
                                                             Ended June 30,            Ended June 30,
                                                          ---------------------     --------------------
                                                            2003           2002       2003       2002
<S>                                                    <C>           <C>           <C>         <C>


Net income/(loss)....................................  $   252,711   $  152,026    $ 352,608   $ 348,334
Other comprehensive income/(loss), net of tax:
Unrealized loss on investments.......................            -      (86,518)         -      (509,914)
                                                       -----------   ----------    ---------   ---------


Other comprehensive income/(loss)....................  $   252,711    $ (86,518)   $ 352,608   $(509,914)
                                                       -----------   ----------   ----------   ---------
Comprehensive income/(loss)..........................      252,711       65,508      352,608    (161,580)
                                                       ===========   ==========   ==========   =========


</TABLE>


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

                                       5
<PAGE>

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


<TABLE>
<CAPTION>


                                                                                                              Retained     Total
                      Preferred Stock        Preferred Stock       Common Stock     Additional    Accum.      Earnings     Stock-
                         Series A               Series B                             paid-in-    Comprehen- (Accumulated)  holders'
                      Shares     Amount      Shares   Amount    Shares      Amount    capital    sive Loss     Defict)     Equity

<S>       <C>          <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 impariment                                                                         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

                                       6
</TABLE>

<PAGE>

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

                                                        For the Six Months
                                                           Ended June 30,
                                                        2003            2002
                                                      -----------------------

Cash Flows From Operating Activities
 Net income/(loss).........................           $  352,608   $  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            -
   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........................             655,696      169,578
   Reserve for returns and allowances.......             181,772       34,964
   Deferred revenue.........................             203,914      179,690
   Accrued federal and state income tax.....                   -      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 of 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   $        -
                                                     ===========   ==========

         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 entreprenuers, 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.



                                       8

<PAGE>



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

    NOTE A  -  COMPANY DESCRIPTION - Continued

    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).



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:







                                       9


<PAGE>



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

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.

                                       10
<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.

                                       11
<PAGE>



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

     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.

          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.



                                       12

<PAGE>


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

    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.

                                       13


<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.


                                       14

<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.


                                       15
<PAGE>




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

NOTE F - LONG-TERM DEBT

Long-term debt consists of the following:
                                                June 30,    December 31,
                                                  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.

                                       16
<PAGE>



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

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

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

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

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

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

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.


                                    <PAGE>17



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

Issuance of Series B preferred  stock - The Company  issued 80,000 shares of its
Series  B  preferred  stock to  certain  directors  of the  Company  as  prepaid
executive compensation and executive compensation at a stated value of $1.00 per
share in the  first  quarter  2003.  The  Company  recorded  non-cash  executive
compensation  of $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.

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.

                                       18

<PAGE>


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


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.






                                       19



<PAGE>





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  entreprenuers,  and eTaxNet,  a
provider of online tax and consulting services. In addition, the Company offers,
for most of its software and learning  products,  technical support and coaching
services.

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

     Critical Accounting Policies

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

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

     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

                                       20
<PAGE>


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.

     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

                                       21
<PAGE>


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 $6,997,995 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.


                                       22
<PAGE>



     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.

     Selling

     Selling  expenses  for the three  months  ended June 30, 2003 and 2002 were
$1,533,699 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  $1,731,588  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 $0 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.

                                       23

<PAGE>



     Net Income

     The Company had net income of $252,711  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  $12,491,203 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.


     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.


                                       24
<PAGE>



     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
$2,758,817 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 $0 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.


     Net Income

     We had net  income of  $352,608  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


<PAGE>


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 $2,560,275 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.

                                       26
<PAGE>



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

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

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


Trends

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

     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.

                                       27
<PAGE>


     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.

   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;

                                       28
<PAGE>



     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.


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

                                       29

<PAGE>


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.


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:

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<PAGE>



          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:   August 14, 2003             /s/ Douglas S. Hackett
                                    --------------------------
                                    Douglas S. Hackett
                                    President, Chief Executive Officer
                                        and Director

                                    /s/ Linda W. Kerecman
                                    --------------------------
                                    Linda W. Kerecman
                                    Chief Financial Officer



                                       31


<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


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<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.

                                       33
<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.



                                       34