UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

                                  -----------

(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the Quarter Ended March 31, 2003

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Transition Period from ____________ to ____________

                       Commission File Number 000-1084047

                                  ------------

                     Innovative Software Technologies, Inc.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

         California                                     95-4691878
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)

   204 NW Platte Valley Drive
         Riverside, MO                                    64150
     (Address of Principal                             (Zip Code)
      Executive Offices)

                                 (816) 584-8030
                                 --------------
              (Registrant's Telephone Number, Including Area Code)

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 53,297,958 shares of common stock,  $0.001 par value,  outstanding as
of May 15, 2002.


                                       1
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                                   FORM 10-QSB

                          QUARTER ENDED MARCH 31, 2003

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
                          PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

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

      Condensed Consolidated Statements of Operations (Unaudited) for the
        Three Months Ended March 31, 2003 and 2002.........................    4

      Condensed Consolidated Statements of Comprehensive Income for the
        Three Months Ended March 31, 2003 and 2002.........................    5

      Condensed Consolidated Statement of Stockholders' Equity/(Deficiency)
        (Unaudited) for the Three Months Ended March 31, 2003..............  6-7

      Condensed Consolidated Statements of Cash Flows (Unaudited) for the
        Three Months Ended March 31, 2003 and 2002.........................    8

      Notes to the Condensed Consolidated Financial Statements (Unaudited).    9

Item 2. Management's Discussion and Analysis of Financial Condition and
          Results of Operations............................................   19

Item 3. Controls and Procedures............................................   22

                           PART II - OTHER INFORMATION

Item 2. Changes in Securities..............................................   23

Item 6. Exhibits and Reports on Form 8-K...................................   23

Signatures.................................................................   24


                                       2
<PAGE>

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                   (Restated)
                                                                                    March 31,     December 31,
                                                                                      2003            2002
                                                                                  ------------    ------------
<S>                                                                              <C>             <C>
                                     ASSETS
Current Assets
    Cash                                                                         $  1,462,821    $  1,338,345
    Accounts receivable                                                                 6,678          14,700
    Other receivables                                                                  96,102          59,772
    Prepaid expenses                                                                   85,818          67,179
    Other current assets                                                              918,992         706,486
                                                                                 ------------    ------------
           Total Current Assets                                                     2,570,411       2,186,482
                                                                                 ------------    ------------

Property and Equipment, Net                                                           438,436         379,349
                                                                                 ------------    ------------
Other Assets
    Goodwill                                                                        1,088,686       1,088,686
    Other assets                                                                           --              --
    Deposit                                                                            42,656          48,698
                                                                                 ------------    ------------

        Total Assets                                                             $  4,140,189    $  3,703,215
                                                                                 ============    ============

                               Current Liabilities
    Note payable - Line of credit                                                $      4,518    $     40,660
    Current maturities of long-term debt                                               92,723          44,274
    Accounts payable and accrued expenses                                             755,156         861,366
    Deferred revenue                                                                  267,540         256,148
    Other current liabilities                                                         391,193          83,278
    Accrued income taxes                                                             (125,000)             --
    Reserve for sales returns and allowances                                          470,245         220,266
                                                                                 ------------    ------------
        Total Current Liabilities                                                   1,856,375       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; 1,697,167 shares issued and outstanding; $1.00 stated value          1,650,500       1,650,500
    Series B preferred stock; 328,491 shares issued and outstanding;
        $1.00 stated value                                                            386,848         328,491
    Common stock - $0.001 par value; 52,897,186 shares authorized
        and 52,481,289 shares issued and outstanding, respectively                     52,848          52,481
    Additional paid-in-capital                                                     13,212,269      13,119,719
    Accumulated deficit                                                           (13,018,651)    (13,041,191)
                                                                                 ------------    ------------

Total Stockholders' Equity                                                          2,283,814       2,110,000
                                                                                 ------------    ------------

Total Liabilities and Stockholders' Equity                                       $  4,140,189    $  3,703,215
                                                                                 ============    ============
</TABLE>

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


                                       3
<PAGE>

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

                              For the Three Months
                                 Ended March 31,

                                                  (Restated)
                                                     2003                2002
                                                 ------------        -----------

Sales                                            $  5,579,208        $ 2,794,696

Cost of Sales                                       2,546,892          1,122,455
                                                 ------------        -----------

Gross Profit                                        3,032,316          1,672,241
                                                 ------------        -----------

Operating Expenses
    Selling                                         1,455,118            600,891
    General and administrative                      1,741,157            742,070
                                                 ------------        -----------
    Loss on investment securities
    Non-recurring expenses
    Total Operating Expenses                        3,196,275          1,342,961
                                                 ------------        -----------

Income/(Loss) From Operations                        (163,959)           329,280
                                                 ------------        -----------

Other Income (Expense)
    Other income                                       44,112                 --

    Interest expense                                   17,387                 --
                                                 ------------        -----------
    Interest income
    Total Other Income (Expense)                       61,499                 --
                                                 ------------        -----------

Net Income Before Income Taxes                       (102,460)           330,982
                                                 ------------        -----------

Income Tax Expense                                    125,000            134,674
                                                 ------------        -----------

Net Income                                       $     22,540        $   196,308

Basic and Diluted Income per Share               $       0.00               0.00
                                                 ============        ===========

Weighted Average Number of Common
 Shares Outstanding Used in Per Share
 Calculation - Basic and Diluted                   52,675,733         48,287,416
                                                 ============        ===========

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


                                       4
<PAGE>

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

                              For the Three Months
                                 Ended March 31,

                                                  (Restated)
                                                     2003               2002
                                                 ------------       ------------

Net income/(loss)                                     $22,540         $ 196,308

Other comprehensive loss:

Unrealized loss on investments                             --          (423,396)
                                                 ------------       ------------

Other comprehensive income/(loss)

Comprehensive loss                                     22,540          (227,088)
                                                 ============       ============

   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 THREE MONTHS ENDED MARCH 31, 2003

<TABLE>
<CAPTION>
                                            Preferred Stock Series A        Preferred Stock Series B          Common Stock
                                            Shares            Amount         Shares        Amount         Shares         Amount
                                          ----------       -----------       -------      --------      ----------      -------

<S>                                        <C>             <C>               <C>          <C>           <C>             <C>
Balance - December 31, 2001                1,850,000       $ 1,850,002       248,491      $248,491      48,285,283      $48,285

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Net income for the year ended
ended December 31, 2002                           --                --            --            --              --           --
                                          ----------       -----------       -------      --------      ----------      -------

Balance - December 31, 2002                1,650,500       $ 1,650,500       328,491      $328,491      52,481,289      $52,481
                                          ==========       ===========       =======      ========      ==========      =======
</TABLE>

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


                                       6
<PAGE>

                     INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003

(split table continued)

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

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

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

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

Issuance of Common Stock
    for software                                   69,94               --                 --             70,000

Issuance of Common stock                          23,219               --                 --             23,243

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

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

Issuance of Common stock
    for services provided                            370               --                 --                375

Issuance of Common stock                          18,939               --                 --             19,016

Issuance of Common stock                           3,992               --                 --              4,015

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

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

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

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

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

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

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

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

Net income for the year ended
    ended December 31, 2002                           --               --        (12,667,649)       (12,667,649)

Balance - December 31, 2002                  $13,119,719      $        --       ($13,041,191)      $  2,110,000
                                             ===========      ===========       ============       ============
</TABLE>

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


                                       7
<PAGE>

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

                              For the Three Months
                                 Ended March 31,

<TABLE>
<CAPTION>
                                                                          (Restated)
                                                                             2003             2002
                                                                         -----------       ---------
<S>                                                                      <C>               <C>
Cash Flows From Operating Activities
    Net income/(loss)                                                    $    22,540       $ 196,308
    Adjustments to reconcile net income/(loss) to net cash
    provided by operating activities:
        Depreciation and amortization                                         45,093          17,166
        Allowance for doubtful accounts                                           --          12,000
        Prepaid non-cash executive compensation                               60,000              --
        Prepaid non-cash public relations expense                              2,250              --
        Stock base compensation                                               58,357              --
        Non-cash expenses                                                     30,667          14,200
        Changes in operating assets and liabilities:
        Accounts receivable                                                    8,022        (491,944)
        Prepaid expenses                                                     (18,639)          6,571
        Other receivables                                                    (36,330)          1,046
        Other current assets
        Other assets                                                        (212,506)       (280,940)
        Deposits                                                               6,042              --
        Accounts payable and accrued expenses                               (106,210)        284,569
        Other liabilities                                                    307,915              --
        Reserve for returns and allowances                                   249,979              --
        Deferred revenue                                                      11,392              --
        Accrued federal and state income tax                                (125,000)        134,674
                                                                         -----------       ---------

           Net Cash Provided by/(Used In) Operating Activities               303,572        (106,350)
                                                                         -----------       ---------

Cash Flows Used In Investing Activities
    Capital expenditures                                                    (104,181)       (126,677)
                                                                         -----------       ---------

           Net Cash Used In Investing Activities                            (104,181)       (126,677)
                                                                         -----------       ---------

Cash Flows From Financing Activities
    Issuance of common stock
    Proceeds from borrowings under line of credit                                 --          50,000
    Proceeds from borrowing under note payable                                 8,085          50,877
    Repayments under line of credit agreement                                (36,142)         50,877
    Repayments on notes payable                                              (46,859)         (1,917)
                                                                         -----------       ---------

           Net Cash (Used in)/Provided by Financing Activities               (74,916)         98,960
                                                                         -----------       ---------

Net Increase /(Decrease) in Cash and Cash Equivalents                        124,476        (134,067)

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

Cash and Cash Equivalents at End of Period                               $ 1,462,821       $ 148,240
                                                                         ===========       =========

Supplemental Cash Flow Information:
    Unrealized loss on securities available for sale                     $        --       ($423,396)
                                                                         ===========       =========

Issuance common stock for software                                                         $
                                                                         ===========       =========

Issuance of common stock for services provided
                                                                         ===========       =========

    Issuance of Series B preferred stock for executive compensation      $    20,000       $      --
                                                                         ===========       =========
</TABLE>

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


                                       8
<PAGE>

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

NOTE A - COMPANY DESCRIPTION

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

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

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

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

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

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

      Assets acquired:

      Goodwill                         $13,549,932
       Net assets acquired                  25,068
                                       -----------

            Total Assets Acquired      $13,575,000
                                       ===========

            Total Purchase Price       $13,575,000
                                       ===========

The acquisition  described above was accounted for as a purchase  transaction in
accordance with Statement of Financial  Accounting Standards No. 141 (SFAS 141),
"Business Combinations," and, accordingly,  the results of operations and assets
and  liabilities  of the  acquired  company  are  included  in the  consolidated
financial statements from the acquisition date.


                                       9
<PAGE>

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

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

1. RECENT ACCOUNTING PRONOUNCEMENTS

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

      o     All business combinations initiated after June 30, 2001 must use the
            purchase method of accounting.
      o     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.


                                       10
<PAGE>

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

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

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.

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 otherexisting  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 three months ended
March 31, 2003 are not  necessarily  indicative of the  operating  results to be
expected for the full year.

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
three months ended March 31, 2003. All significant intercompany transactions and
balances have been eliminated in consolidation.


                                       11
<PAGE>

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

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.  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. INVESTMENTS 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 assets whether there exists any
other than temporary impairment.

6. PROPERTY AND EQUIPMENT

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

7. USE OF ESTIMATES

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

8. SOFTWARE DEVELOPMENT COSTS

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

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


                                       12
<PAGE>

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

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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 March 31, 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
                                     ------    ------   ----------  ----------
March 31, 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                       $   --    $   --   $       --  $       --
  Knowledge Transfer Systems, Inc.
  preferred 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.


                                       13
<PAGE>

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

NOTE C - INVESTMENT SECURITIES (CONTINUED)

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.

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  at  the  time  of the
transaction.

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:

                                                       March 31,     December 31
                                                        2003             2002
                                                      ---------       ---------
Machinery and Equipment                               $ 282,603       $ 246,594
Furniture and Fixtures                                   56,594          51,683
Computer Software                                       251,958         190,624
Leasehold improvements                                   36,018          34,092
                                                      ---------       ---------

                                                        627,173         522,993
Less: Accumulated depreciation and amortization        (188,737)       (143,644)
                                                      ---------       ---------

Property and Equipment, Net                           $ 438,436       $ 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 $918,992  and
$706,486 as of March 31, 2003 and December 31, 2002, respectively.


                                       14
<PAGE>

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

NOTE F - LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                      March 31,    December 31,
                                                                                         2003         2002
                                                                                      ---------     ---------
<S>                                                                                   <C>           <C>
Notes payable, financial institution, collaterized by telephone equipment,
principal andimputed interest payable in monthly installments of $1,250 and $385
due in August 2004                                                                    $  24,899     $  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                                                                             57,319        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         10,505        43,853
                                                                                      ---------     ---------
                                                                                         92,723       131,497
Less Current Maturities                                                                  92,723        44,274
                                                                                      ---------     ---------

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

The  Company  has  an  unsecured  line  of  credit  facility  with  a  financial
institution for borrowings up to $50,000  expiring  August 31, 2005.  Borrowings
under the line bear  interest at Prime plus 2% (the Prime rate of interest as of
March 31, 2003 was 4.75%).  As of March 31, 2003, there was $45,482 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.


                                       15
<PAGE>

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

NOTE G - CAPITAL TRANSACTIONS (CONTINUED)

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  91,250 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 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.

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 the lender  under the terms of the  agreement.  The Company is  currently  in
negotiation  with Iwasaka  Investments,  Ltd. to recoup any and all  outstanding
shares issued as part of this Finance  Agreement.  The Company believes that the
termination  of this  agreement will have no adverse effect on the operations of
the Company.

Issuance of Series B preferred  stock - The Company  issued 80,000 shares of its
Series  B  preferred  stock to  certain  directors  of the  Company  as  prepaid
executive compensation and executive compensation at a stated value of $1.00 per
share in the  first  quarter  2003.  The  company  recorded  non-cash  executive
compensation of $20,000 for the three months ended March 31, 2003. The remaining
$60,000 will be incurred during the following three 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.


                                       16
<PAGE>

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

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).  Expenses incurred by the
Company totaled  $663,159 for the three months ended March 31, 2003. The Company
paid ESI a total of  $458,816  for sales lead  generation  for the three  months
ended March 31, 2003. In addition,  the Company will purchase certain  operating
supplies  for ESI. As of March 31,  2003,  the amount owed the Company for these
supplies amounted to $5,417.

The President and Chief Executive Officer of the Company is the former President
and Chief Executive Officer of Ensurge, Inc., which was the parent company of KT
Solutions,  Inc. At the time of the sale of the Business  Development  Series to
Knowledge Transfer Systems,  Inc. for 875,000 Knowledge  Transfer Systems,  Inc.
preferred  shares in 2002, there was no related party  relationship  between the
companies  and/or the officers and directors of the companies at the time of the
transaction.

NOTE I - COMMITMENTS AND CONTINGENCIES

In March,  May and September 2002, the Company entered into operating leases for
certain office space. Future minimum lease payments under these operating leases
as of December 31, 2002 are as follows:

     Year Ending December 31:
     2003                                                         197,998
     2004                                                         223,998
     2005                                                         168,499
     2006                                                          37,467
                                                                 --------

                   Total                                         $627,962
                                                                 ========


                                       17
<PAGE>

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

NOTE N - SUBSEQUENT EVENTS

On April 23,  2003,  Innovative  Software  Technologies,  Inc.  dismissed  Grant
Thornton LLP as the  Company's  independent  accountant.  The Company  dismissed
Grant  Thornton  based on certain  correspondence  received from Grant  Thornton
pursuant to Section 10A of the  Securities  Exchange  Act of 1934 in which Grant
Thornton expressed concern as to the propriety of certain transactions, notified
the Company that the firm could not continue to be associated with the Company's
December 2001 and 2000 financial  statements and that the reports  thereon could
no  longer  be  relied  upon.   The  Company  took  strong   exception  to  such
correspondence  and filed a Current  Report  on Form 8-K  dated  April 24,  2003
presenting its position on the matter.

On April 11, 2003, the Company  engaged the accounting  firm of Robison,  Hill &
Co.,  as the  Company's  new  independent  accountant  to  audit  its  financial
statements for the fiscal years ended December 31, 2002 and 2001.

On April  23,  2003,  the  Company  filed  Form 8-K on 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.

The Company entered into arbitration  with a vendor  concerning the cancellation
of a contract  which  resulted in a  settlement  in April 2003 of $20,000.  This
settlement  amount  between the two parties was fully accrued for as of December
31, 2002.


                                       18
<PAGE>

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      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.

Critical Accounting Policies

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

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

Goodwill and Intangible Assets

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

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

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

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


                                       19
<PAGE>

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

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 during the 2002. 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.  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.

With any accounting policy that applies judgments and estimates,  actual results
could significantly differ from those estimates.

Results of  Operations  for the Three  Months  Ended March 31, 2003  compared to
Three Months Ended March 31, 2002

Sales

Sales for the three  months  ended March 31, 2003 and 2002 were  $5,579,208  and
$2,794,696, respectively, which represents a 97% increase from the prior period.
The Company's  principal  source of revenue for the three months ended March 31,
2003 consisted of product and service sales. The primary reason for the increase
in sales can be attributed to the  consolidation 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
has  enabled  the Utah  office to greatly  improve  its  ability to service  its
customers.  In  conjunction  with  this  consolidation,  the  Company  has hired
additional  sales and marketing  associates  which has also positively  impacted
sales in the first  quarter  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.  We believe that
through  consumer  education  and  enhanced  customer  service,  we can increase
customer participation and generate significant internal growth.


                                       20
<PAGE>

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

Cost of Sales

Cost of sales for the three months ended March 31, 2003 and 2002 was  $2,546,892
and  $1,122,455,  respectively,  representing an increase of 127%. Cost of sales
for the three months ended March 31, 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 March 31,  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.

Selling

Selling   expenses   for  the  three  months  ended  March  31,  2003  and  2002
were$1,455,118  and $600,891,  respectively,  representing  an increase of 104%.
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.

General and Administrative

General and  administrative  expenses  for the three months ended March 31, 2003
and 2002 were $1,741,157 and $742,070, respectively, representing an increase of
127%. 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  costs was attributable to higher
wages paid in the first quarter 2003.

Liquidity and Capital Resources

At March 31, 2003,  cash was  $1,462,821,  an increase of $124,476 from December
31, 2002.  Cash provided by  operations  was $303,572 for the three months ended
March 31, 2003. The primary reason for the positive operating cash for the three
months ended March 31, 2003,  can be attributed  to the  Company's  higher sales
volume  during  the  first  three  months  of 2003.  In  addition,  the  Company
experienced an increase in its deferred revenue for the three months ended March
31, 2003. The Company's higher sales volume regarding  coaching sessions was the
primary  reason  for  the  increase  in  deferred  revenue.   The  Company  also
experienced  non-cash  prepaid  expenses  and non-cash  expenditures  of $92,916
during the current  quarter,  which also  positively  effected cash. The Company
paid down its note  payable and line of credit  balances  by $83,001  during the
current quarter.  The Company  anticipates  paying down additional notes payable
amounts during 2003.  Stockholders' equity amounts to $2,283,814 as of March 31,
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 $20,000 for the three months
ended March 31, 2003,  related to these Series B preferred shares. The remaining
$60,000 will be incurred during the following three quarters of 2003.

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

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

The Company  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.  However,  the
Company will  continue to seek  additional  sources of capital for expansion and
possible  acquisitions  through private  placements of equity  securities.  Such
sources of capital  may,  however,  not be available to the Company at agreeable
interest rates or at all.


                                       21
<PAGE>

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

Item 3.  Controls and Procedures

Based on their  evaluation,  as of a date  within 90 days of the filing  date of
this Form 10-Q, our Chief  Executive  Officer and Chief  Financial  Officer have
concluded  that our  disclosure  controls  and  procedures  (as  defined in Rule
13a-14(c) and 15d-14(c)  under the Securities  Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could  significantly  affect these controls subsequent to the
date of their  evaluation,  including  any  corrective  actions  with  regard to
significant deficiencies and material weaknesses.


                                       22
<PAGE>

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

      None

Item 2. Changes in Securities

The Company in the current  quarter  issued  233,333  shares of common stock for
prepaid public relation services to be provided in future periods.  In addition,
the Company issued  133,333 shares of common stock as a charitable  contribution
during the current  period.  These  securities  were issued under the  exemption
provided by Section 4(2) of the Securities Act of 1933.

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 $20,000 for the three months
ended March 31, 2003,  related to these Series B preferred shares. The remaining
$60,000 will be incurred during the following three quarters of 2003.

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

a. Exhibits

      31.1 - CEO Certification

      31.2 - CFO Certification

b. Reports of Form 8-K

During the period  covered  by this  report,  the  Company  filed the  following
reports  on Form 8-K.  On April 23,  2003,  the  Company  filed  Form 8-K on 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. On April 23, 2003, the Company filed Form 8-K
on the dismissal of Grant Thornton,  LLP as the Company's independent accounting
firm.

OTHER ITEMS

      There were no other items to be reported under Part II of this report.


                                       23
<PAGE>

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

      SIGNATURES

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

                                         Innovative Software Technologies, Inc.


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


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



                                       24