UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549













FORM
10-QSB








x QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





FOR THE QUARTERLY PERIOD
ENDED: December 31, 2007





o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934




For the
transition period from _________ to ___________





Commission file number
000-27465






INNOVATIVE
SOFTWARE TECHNOLOGIES,
INC.


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




Delaware
            
            26-1469061(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)911
      Ranch Road 620 N., Suite 204
              Austin,
      TX 78734
              (Address
      of principal executive offices)




(512)
266-2000


(Registrant’s
Telephone Number, Including Area Code)




Securities
      Registered Pursuant to Section 12(b) of the Act: NoneSecurities
      Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.001 par
      Value




Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter time
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days.





YES x    
NO o





Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act):





YES o    NO
x








State
the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: As
of  February  14, 2007, the registrant had
101,184,199  shares of common stock, par value $0.001,
outstanding.


Transitional
Small Business Issuer Disclosure Format: YES o    NO
ý





i
 Table of Contents





Table of Contents




PagePART
      I.
            FINANCIAL
      INFORMATIONItem
      1.
            Financial StatementsConsolidated Balance Sheet as of December 31, 2007
      (unaudited)
            
            F-1Consolidated Statements of Operations for the three and
      nine monthsEnded December 31, 2007 and 2006 and for the period
      from inception(January 12, 2005) through December 31, 2007
      (unaudited)
            
            F-2Consolidated Statements of Cash Flows for the nine
      monthsEnded December 31, 2007 and 2006 and for the period from
      inception(January 12, 2005) through December 31, 2007
      (unaudited)
            
            F-3Notes to Consolidated Financial Statements
      (unaudited)
            
            F-5Item
      2.
            Management's Discussion and Analysis or Plan of
      Operation
            
            F-13Item
      3.
            Controls and Procedures
            
            F-16PART
      II.
            OTHER
      INFORMATIONItem
      1.
            Legal Proceedings
            
            1Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            1Item
      3.
            Defaults Upon Senior Securities
            
            1Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            
            1Item
      5.
            Other Information
            
            1Item
      6.
            Exhibits
            
            1SIGNATURES
            
            2




ii
 Table of Contents





INTRODUCTORYNOTE





This
Report on Form 10-QSB for Innovative Software Technologies, Inc., (the
“Company”) may contain forward-looking statements. You can identify these
statements by forward-looking words such as “may,” “will,” “expect,” “intend,”
“anticipate,” “believe,” “estimate,” and “continue” or similar words.
Forward-looking statements include information concerning possible or assumed
future business success or financial results. You should read statements that
contain these words carefully because they discuss future expectations and
plans, which contain projections of future results of operations or financial
condition or state other forward-looking information. We believe that it is
important to communicate future expectations to investors. However, there may be
events in the future that we are not able to accurately predict or control.
Accordingly, we do not undertake any obligation to update any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.





The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties set forth under “Risk Factors”
in this report and in our Form 10-KSB and any other periodic reports filed with
the SEC. Accordingly, to the extent that this Quarterly Report contains
forward-looking statements regarding the financial condition, operating results,
business prospects or any other aspect of the Company, please be advised that
the Company’s actual financial condition, operating results and business
performance may differ materially from that projected or estimated by the
Company in forward-looking statements.




iii
 Table of Contents




INNOVATIVE
SOFTWARE TECHNOLOGIES, INC.


(A
DEVELOPMENT STAGE COMPANY)


CONSOLIDATEDBALANCE SHEET


AS
OF DECEMBER 31, 2007


(UNAUDITED)








December
      31, 2007AssetsCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  366,836Accounts
      receivable
                  
                  
                  22,695Prepaid
      services and other current assets
                  
                  
                  5,740Total
      current assets
                  
                  
                  395,271Furniture
      and equipment, net of accumulated depreciation of $40,739
                  
                  
                  129,344Deposits
      and other assets
                  
                  
                  2,400Total
      assets
                  
                  $
                  527,015Liabilities
      and stockholders' deficitCurrent
      liabilitiesAccounts
      payable and accrued liabilities  (note 3)
                  
                  $
                  899,259Advances
      payable (note 4)
                  
                  
                  336,177Current
      portion of capital lease obligation
                  
                  
                  61,673Deferred
      revenue (note 5)
                  
                  
                  93,863Deferred
      gain of sale of fixed assets (note 9)
                  
                  
                  6,203Convertible
      debentures (note 6)
                  
                  
                  47,646Total
      current liabilities
                  
                  
                  1,444,821Capital
      lease obligation, less current portion (note 9)
                  
                  
                  12,091Total
      liabilities
                  
                  
                  1,456,912Commitments
      and contingencies (note 9)
                  
                  
                  -Stockholders'
      deficitPreferred
      stock, 25,000,000 shares authorized, no par value:Series
      A, 1,500,000 shares authorized, 450,000 shares outstanding
                  
                  
                  450,000Common
      stock, $0.001 par value; 30,000,000 shares authorized;101,184,199
      shares issued and outstanding at December 31, 2007 (note
7)
                  
                  
                  101,184Additional
      paid-in capital
                  
                  
                  3,088,936Deficit
      accumulated during the development stage
                  
                  
                  (4,570,017
                  )Total
      stockholder's deficit
                  
                  
                  (929,897
                  )Total
      liabilities and stockholders' deficit
                  
                  $
                  527,015








See
accompanying notes form an integral part of these unaudited  condensed
consolidated financial statements.





F-1
 Table of Contents





INNOVATIVE
SOFTWARE TECHNOLOGIES, INC.


(A
DEVELOPMENT STAGE COMPANY)


CONSOLIDATED
STATEMENTSOF LOSSES AND COMPREHENSIVE LOSS


(UNAUDITED)





Cumulative
      fromFor
      the Three
                
                
                For
      the Three
                
                
                For
      the Nine
                
                
                For
      the Nine
                
                
                InceptionMonths
      Ended
                
                
                Months
      Ended
                
                
                Months
      Ended
                
                
                Months
      Ended
                
                
                (January
      12, 2005)December
      31,
                
                
                December
      31,
                
                
                December
      31,
                
                
                December
      31,
                
                
                December
      31,2007
                
                
                2006
                
                
                2007
                
                
                2006
                
                
                2007RevenueRevenue
                
                $
                75,802
                
                
                $
                20,770
                
                
                $
                147,022
                
                
                $
                59,437
                
                
                $
                271,597-
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Total
      revenue
                
                
                75,802
                
                
                
                20,770
                
                
                
                147,022
                
                
                
                59,437
                
                
                
                271,597Cost
      of revenueCost
      of revenue
                
                
                7,943
                
                
                
                22,402
                
                
                
                47,850
                
                
                
                58,967
                
                
                
                133,606Total
      cost of revenue, excluding depreciation below
                
                
                7,943
                
                
                
                22,402
                
                
                
                47,850
                
                
                
                58,967
                
                
                
                133,606Gross
      profit (loss)
                
                
                67,859
                
                
                
                (1,632
                )
                
                
                99,172
                
                
                
                470
                
                
                
                137,991Operating
      expenses:Sales,
      General and administrative expenses
                
                
                564,893
                
                
                
                537,179
                
                
                
                1,115,481
                
                
                
                1,791,913
                
                
                
                3,601,941Total
      operating expenses
                
                
                564,893
                
                
                
                537,179
                
                
                
                1,115,481
                
                
                
                1,791,913
                
                
                
                3,601,941Operating
      loss
                
                
                (497,034
                )
                
                
                (538,811
                )
                
                
                (1,016,309
                )
                
                
                (1,791,443
                )
                
                
                (3,463,950
                )Other
      expense:Income
      (expense) from change in fair value of derivative
    liabilities
                
                
                -
                
                
                
                (1,045,818
                )
                
                
                270,919
                
                
                
                (1,056,398
                )
                
                
                169,241Interest
      (expense)
                
                
                (111,122
                )
                
                
                (361,435
                )
                
                
                (419,813
                )
                
                
                (571,150
                )
                
                
                (1,336,845
                )Interest
      income
                
                
                146
                
                
                
                317
                
                
                
                2,731
                
                
                
                361
                
                
                
                7,893Gain
      on sale of fixed assets
                
                
                1,329
                
                
                
                -
                
                
                
                3,987
                
                
                
                -
                
                
                
                1,329Other
      income (expense)
                
                
                (1,295
                )
                
                
                23,165
                
                
                
                (280
                )
                
                
                32,145
                
                
                
                52,315Total
      other income (expense)
                
                
                (110,942
                )
                
                
                (1,383,771
                )
                
                
                (142,456
                )
                
                
                (1,595,042
                )
                
                
                (1,106,067
                )Loss
      before  taxes
                
                
                (607,976
                )
                
                
                (1,922,582
                )
                
                
                (1,158,765
                )
                
                
                (3,386,485
                )
                
                
                (4,570,017
                )Provision
      for taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss
                
                $
                (607,976
                )
                
                $
                (1,922,582
                )
                
                $
                (1,158,765
                )
                
                $
                (3,386,485
                )
                
                $
                (4,570,017
                )Undeclared
      preferred stock dividends
                
                
                (4,500
                )
                
                
                -
                
                
                
                (13,500
                )
                
                
                -
                
                
                
                (27,000
                )Loss
      applicable to common stockholders
                
                $
                (612,476
                )
                
                $
                (1,922,582
                )
                
                $
                (1,172,265
                )
                
                $
                (3,386,485
                )
                
                $
                (4,597,017
                )Net
      loss per share - basic and diluted
                
                $
                (0.01
                )
                
                $
                (0.03
                )
                
                $
                (0.01
                )
                
                $
                (0.05
                )
                
                $
                (0.06
                )Weighted
      average shares outstanding -basic
      and diluted
                
                
                95,962,617
                
                
                
                72,473,638
                
                
                
                81,929,794
                
                
                
                67,265,237
                
                
                
                72,036,745








See
accompanying notes form an integral part of these unaudited condensed
consolidated financial statements.





F-2
 Table of Contents




INNOVATIVE
SOFTWARE TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)




For
      the Nine
              
              
              For
      the Nine
              
              
              InceptionMonths
      Ended
              
              
              Months
      Ended
              
              
              (January
      12, 2005)December
      31,
              
              
              December
      31,
              
              
              to
      December 31,2007
              
              
              2006
              
              
              2007(restated)Cash flows from operating activities:Net
      loss
              
              $
              (1,158,765
              )
              
              $
              (3,386,485
              )
              
              $
              (4,570,017
              )Adjustments
      to reconcile net loss to netcash
      used in operating activities:Depreciation
      and amortization
              
              
              64,083
              
              
              
              32,248
              
              
              
              109,926Common
      stock and stock option based compensation
              
              
              247,713
              
              
              
              726,528
              
              
              
              903,596Notes
      payable issued for expenses paid by affiliates and third
      parties
              
              
              
              
              
              
              
              
              
              
              258,605Amortization
      of deferred gain on sale of assets
              
              
              (3,987
              )
              
              
              -
              
              
              
              (3,987
              )Services
      paid in common stock
              
              
              29,727
              
              
              
              80,307
              
              
              
              126,559Amortization
      of convertible debt discount
              
              
              229,575
              
              
              
              495,503
              
              
              
              965,930Change
      in fair value of derivative liabilities
              
              
              (270,919
              )
              
              
              1,056,398
              
              
              
              (169,241
              )Amortization
      of deferred financing costs
              
              
              136,222
              
              
              
              72,444
              
              
              
              232,199Net
      change in operating assets and liabilities:Accounts
      receivable
              
              
              (13,700
              )
              
              
              -
              
              
              
              (22,695
              )Prepaid
      expenses and other current assets
              
              
              1,405
              
              
              
              (17,722
              )
              
              
              5,060Advances
      payable
              
              
              336,177
              
              
              
              -
              
              
              
              336,177Deposits
              
              
              32,857
              
              
              
              16,350
              
              
              
              (1,400
              )Accounts
      payable and accrued expenses
              
              
              170,608
              
              
              
              (36,600
              )
              
              
              147,113Customer
      deposits
              
              
              93,863
              
              
              
              2,940
              
              
              
              93,863Net
      cash used in operating activities
              
              
              (105,140
              )
              
              
              (958,089
              )
              
              
              (1,588,312
              )Cash
      flows from investing activities:Purchase
      of fixed assets
              
              
              (42,102
              )
              
              
              (145,824
              )
              
              
              (215,429
              )Proceeds
      from sale-leaseback of property and equipment
              
              
              -
              
              
              
              -
              
              
              
              125,000Increase
      in deferred financing costs
              
              
              -
              
              
              
              (166,200
              )
              
              
              (156,200
              )Net
      cash used in investing activities
              
              
              (42,102
              )
              
              
              (312,024
              )
              
              
              (246,629
              )Cash
      flows from financing activities:Stock
      issued for cash
              
              
              100,000
              
              
              
              -
              
              
              
              121,000Proceeds
      from notes payable
              
              
              -
              
              
              
              372,114
              
              
              
              427,969Principal
      payments on notes payable
              
              
              -
              
              
              
              -
              
              
              
              (30,000
              )Proceeds
      from convertible debentures
              
              
              -
              
              
              
              1,707,500
              
              
              
              1,663,500Principal
      payments under capital lease
              
              
              (26,570
              )
              
              
              
              
              
              
              (31,841
              )Cash
      acquired in the reverse acquisition of Innovative
              
              
              -
              
              
              
              51,148
              
              
              
              51,149Net
      cash provided by financing activities
              
              
              73,430
              
              
              
              2,130,762
              
              
              
              2,201,777Net
      increase (decrease) in cash and cash equivalents
              
              
              (73,812
              )
              
              
              860,649
              
              
              
              366,836Cash
      and cash equivalents at beginning of period
              
              
              440,648
              
              
              
              6,269
              
              
              
              -Cash
      and cash equivalents at end of period
              
              $
              366,836
              
              
              $
              866,918
              
              
              $
              366,836






The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
   F-3
 Table of Contents
  INNOVATIVE
SOFTWARE TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)


For
      the Nine
                
                
                For
      the Nine
                
                
                CumulativeMonths
      Ended
                
                
                Months
      Ended
                
                
                from
      InceptionDecember
      31,
                
                
                December
      31,
                
                
                (January
      12, 2005) to2007
                
                
                2006
                
                
                December
      31, 2007Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                
                $
                17,050
                
                
                $
                -
                
                
                $
                17,050Taxes
                
                $
                -
                
                
                $
                -
                
                
                $
                -Non-cash
      investing and financing activities:Issuance
      of common stock for acquisition
                
                $
                -
                
                
                $
                440,000
                
                
                $
                440,000Issuance
      of common stock for debt repayment
                
                $
                1,223,119
                
                
                $
                183,115
                
                
                $
                1,398,234Assets
      acquired under capital lease
                
                $
                -
                
                
                $
                -
                
                
                $
                136,512Fixed
      assets exchanged for lease payment
                
                $
                2,490
                
                
                $
                -
                
                
                $
                2,490Issuance
      of common stock to retire notes payable - affiliate
                
                $
                -
                
                
                $
                -
                
                
                $
                22,337Charge
      warrants and embedded derivative liabilitiesto
      additional paid-in capital
                
                $
                1,668,817
                
                
                $
                -
                
                
                $
                1,668,817Convertible
      debt issued for financing costs
                
                $
                44,000
                
                
                $
                -
                
                
                $
                88,000Issuance
      of shares to officer for accrued payroll
                
                $
                60,500
                
                
                $
                -
                
                
                $
                60,500








See
accompanying notes form an integral part of these unaudited condensed
consolidated financial statements.





F-4
 Table of Contents







INNOVATIVE
SOFTWARE TECHNOLOGIES, INC.


(A
DEVELOPMENT STAGE COMPANY)


UNAUDITED
NOTESTO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS





1. BASIS
OF PRESENTATION AND REPORTING





The
accompanying unaudited consolidated financial statements have been prepared in
accordance accounting principles generally accepted in the United States (GAAP)
for interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not contain all of the information and
footnotes required by GAAP for complete consolidated financial statements. In
the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of the
Company’s financial condition as of December 31, 2007, and the results of its
operations for the three and nine months ended December 31, 2007, and December
31, 2006, and the cash flows for the nine months ended December 31, 2007, and
December 31, 2006. These unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited 2007 consolidated
financial statements, including the notes thereto, and the other information set
forth therein, included in the Company's Annual Report on Form 10-KSB for the
year ended March 31, 2007. Operating results for the three and nine month period
ended December 31, 2007, are not necessarily indicative of the operating results
that may be expected for the year ending March 31, 2008.
 
 On June
26, 2006, Innovative Software Technologies, Inc., (“Innovative”), completed the
acquisition of AcXess, Inc., a Florida corporation (“AcXess”), in a stock
exchange transaction. As a result of the Transaction, AcXess became a wholly
owned subsidiary of Innovative.
  On
November 28, 2007 the  (“Effective Date”) Innovative Software
Technologies, Inc., (“Innovative Software – CA”), entered into an Agreement and
Plan of Merger (the “Merger Agreement”) with Innovative Software
Technologies, Inc., a Delaware entity (“Innovative Software-DE”). Pursuant to
the Merger Agreement, Innovative Software-CA and Innovative Software-DE were
merged with and into the surviving corporation, Innovative Software-DE,
(“Innovative”, or  the “Company.”).   As of the
Effective Date, the certificate of incorporation and bylaws of the surviving
corporation became the certificate of incorporation and bylaws of the Company,
and the directors and officers in office of the surviving corporation became the
members of the board of directors and officers of the Company. Following the
execution of the Merger Agreement, on July 9, 2007 the Company filed with the
Secretary of State of Delaware a Certificate of Merger with respect to the
Innovative Software-CA and Innovative Software - DE merger.
  The
accompanying unaudited consolidated financial statements present the accounts of
Innovative and its wholly owned subsidiaries, AcXess, Inc., and EPMG, Inc.
(collectively, the “Company”). All intercompany balances and significant
transactions have been eliminated.
  The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. However, the Company has incurred a loss of
$4,570,017 from inception (January 12, 2005) through December 31, 2007, and has
a working capital deficiency and stockholder deficit of $1,049,550
  and $929,897  respectively, at December 31, 2007. The
Company currently has minimal revenue generating operations and expects to incur
substantial operating expenses in order to expand its business. The Company
expects to incur operating losses for the foreseeable future.
 Management
intends to continue to finance operations through fundraising activities as well
as to seek potential acquisitions that have positive cash flows; however, there
can be no assurance of successful fundraising or acquisition activity in the
future.
 
 On July
24, 2007, the Company entered into a Stock Purchase Agreement (the “Agreement”)
with AcXess, Inc., its wholly owned subsidiary,  Thomas Elowson,
President of AcXess, Raymond Leitz, Chief Technical Officer of AcXess, and Helge
Solberg, Chief Architect of AcXess,  (collectively, Elowson, Leitz,
and Solberg referred to herein as the “Buyers”) wherein (i) AcXess redeemed
shares of its common stock from the Company in return for the issuance of a
promissory note to the benefit of the Company and the signing of a Non-Exclusive
License Agreement with the Company, and (ii) the Buyers exchanged stock of the
Company held by them  in exchange for stock in AcXess and Elowson
canceled options for stock in the Company held by him in exchange for stock in
AcXess.  Immediately following the above redemptions and exchanges,
the Company will continue to own 984,457 shares, or approximately 21.9% of the
outstanding common stock, of AcXess.  The transactions contemplated by
the Agreement  are expected to close upon approval of the transactions
by the Company’s shareholders.  AcXess has 4,500,000 shares of common
stock outstanding.  The Company has determined that it is in its best
interests to close this transaction after acquiring another operating
entity; however,
there can be no assurance that the Company will be successful in negotiating an
agreement to acquire another operating entity nor can there be any assurance
that the Company, should it successfully negotiate an agreement to acquire
another operating entity, will be successful in closing such a transaction.
Please
refer to the Company’s current report on Form 8-K as filed with the Securities
and Exchange Commission on July 30, 2007.




2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Use of
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could materially differ from those
estimates.
 
 Cash and Cash
Equivalents
 
 For
purposes of the statement of cash flows, cash equivalents include all highly
liquid debt instruments with original maturities of three months or less which
are not securing any corporate obligations.
 
 Long-lived
Assets
 
 The
Company accounts for its long-lived assets under the provision of Statements of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets”. The Company's long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Events relating to
recoverability may include significant unfavorable changes in business
conditions, recurring losses, or a forecasted Inability to achieve break-even
operating results over an extended period. The Company evaluates the
recoverability of long-lived assets based upon forecasted undiscounted cash
flows. Should an impairment in value be indicated, the carrying value of
intangible assets will be adjusted, based on estimates of future discounted cash
flows resulting from the use and ultimate disposition of the
asset.
 F-5
  Revenue
Recognition
 
 The
Company  recognizes  revenues from  contracts in
which the Company  provides  website hosting and consulting
services as the services are performed. The contractual terms of
the  agreements  dictate
the  recognition  of revenue by
the  Company.  Payments received in advance are deferred
until the service is provided.
 Contract
costs include all direct equipment, material, and labor costs and those indirect
costs related to contract performance, such as indirect labor. Selling, general
and administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in contract performance, contract conditions, and
estimated profitability that may result in revisions to costs and income are
recognized in the period in which the revisions are determined.
  For
revenue from product sales, the Company recognizes revenue in accordance with
Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which
superseded SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No.
104 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the selling price is fixed and determinable; and (4)
collectibility is reasonably assured. Determination of criteria (3) and (4) are
based on management’s judgments regarding the fixed nature of the selling prices
of the products delivered and the collectibility of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances, and
other adjustments are provided for in the same period the related sales are
recorded. The Company defers any revenue for which the product has not been
delivered or is subject to refund until such time that the Company and the
customer jointly determine that the product has been delivered or no refund will
be required. SAB No.
104  incorporates  Emerging  Issues Task
Force  (“EITF”) No. 00-21, “Multiple-Deliverable Revenue
Arrangements.” EITF No. 00-21 addresses accounting for arrangements that may
involve the delivery or performance of multiple products, services and/or rights
to use assets. This issue addresses determination of whether an arrangement
involving more than one deliverable contains more than one unit of accounting
and how the arrangement consideration should be measured and allocated to the
separate units of accounting.  Through December 31, 2007, all of the
Company’s revenue has been service revenue.
 
 Offering
Costs
 
 Direct
costs of an equity offering are charged to additional paid-in capital upon
closing of the offering and receipt of funds.
 
 Income
Taxes
 
 The
Company has implemented the provisions on Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
that income tax accounts be computed using the liability method. Deferred taxes
are determined based upon the estimated future tax effects of differences
between the financial reporting and tax reporting bases of assets and
liabilities given the provisions of currently enacted tax laws.
 
 F-6
  Fair Value of Financial
Instruments
 
 The
Company measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States of America. The
estimated fair values approximate their carrying value because of the short-term
maturity of these instruments or the stated interest rates are indicative of
market interest rates.
  Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based
Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the
adoption of SFAS 123(R) we accounted for stock option grant in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic
value method), and accordingly, recognized compensation expense for stock option
grants.
 
 Under the
modified prospective approach, SFAS 123(R) applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized in the nine months of fiscal 2006 includes compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and compensation cost for all share-based
payments granted subsequent to January 1, 2006 based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). Prior periods
were not restated to reflect the impact of adopting the new
standard.
 
 A summary
of option activity under the Plan as of December 31, 2007, and changes during
the period ended are presented below:
 
 Weighted
      AverageOptions
              
              
              Exercise
      PriceOutstanding
      at March 31, 2007
              
              
              13,983,349
              
              
              $
              0.11Issued
              
              
              28,500,000
              
              
              
              0.05Exercised
              
              
              -
              
              
              
              -Forfeited
      or expired
              
              
              (65,000
              )
              
              
              0.25Outstanding
      at December 31, 2007
              
              
              42,418,349
              
              
              $
              0.06Non-vested
      at December 31, 2007
              
              
              22,207,390
              
              
              $
              0.05Exercisable
      at December 31, 2007
              
              
              20,210,959
              
              
              $
              0.06
  Aggregate
intrinsic value of options outstanding and exercisable at December 31, 2007 was
$0. Aggregate intrinsic value represents the difference between the Company's
closing stock price on the last trading day of the fiscal period, which was
$0.03 as of December 31, 2007, and the exercise price multiplied by the number
of options outstanding. As of December 31, 2007, total unrecognized stock-based
compensation expense related to stock options was $601,588. The total stock
based compensation expense  for the three and
nine months  ended December 31, 2007 was $247,713.


(a) Loss per Common
Share




The
Company calculates net income (loss) per share as required by Statement of
Financial Accounting Standards (SFAS) 128, "Earnings per Share." Basic earnings
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Diluted earnings
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of common shares and dilutive common stock equivalents
outstanding during periods when anti-dilutive common stock equivalents are not
considered in the computation.




Basic
loss per share is based on the weighted effect of common shares issued and
outstanding, and is calculated by dividing net loss by the weighted average
shares outstanding during the period. Diluted loss per share is calculated by
dividing net loss by the weighted average number of common shares used in the
basic loss per share calculation plus the number of common shares that would be
issued assuming exercise or conversion of all potentially dilutive common shares
outstanding.




Shown
below are the incremental common shares attributable to the exercise of
outstanding options, warrants and convertible debentures that were excluded from
the computation of diluted loss per share  at December 31 because the
effect would be antidilutive.


F-7
 Table of Contents





For
      the Three Months Ended December 31, 2007
              
              
              For
      the Three Months Ended December 31, 2006
              
              
              For
      the Nine Months Ended December 31, 2007
              For
      the Nine Months Ended December 31, 2006
              
              
              Inception
      (January 12, 2005) to December 31, 2007Warrants,
      stock options, and convertible debentures
              
              
              31,578,280
              
              
              
              38,530,920
              
              
              
              31,578,280
              
              
              
              38,530,920
              
              
              
              31,578,280





(b) Customer
Concentration




During
the nine months ended December 31, 2007 and 2006, two customers accounted for
approximately 96% and 83% of revenues, respectively. The loss of these customers
would have a material adverse effect on financial results.




(c) Deferred Financing
Costs




The
Company capitalizes financing costs as incurred and amortizes these costs to
interest expense over the life of the underlying instruments.  During
the three months ended December 31, 2007, the Company charged deferred financing
costs in the amount of $102,556 to interest expense as the notes payable related
to these financing costs were converted to equity.


Recent Accounting
Developments:
  In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140.” SFAS No.
155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
“Application of Statement 133
to Beneficial Interests in Securitized Financial Assets,” and permits fair
value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives and amends SFAS No.
140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. SFAS No. 155 is effective
for all financial instruments acquired or issued after the beginning of the
first fiscal year that begins after September 15, 2006. The implementation of
this standard did not have a material impact on its financial position, results
of operations or cash flows.
   In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of income tax uncertainties with
respect to position taken or expected to be taken in income tax returns. FIN 48
is effective for fiscal years beginning after December 15, 2006. The
implementation of this standard did not have a material impact on its financial
position, results of operations or cash flows.
  In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No 87, 88, 106 and 132(R).” This Statement improves financial reporting by
requiring an employer to recognize the under funded or over funded status of a
defined benefit postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through accumulated other comprehensive income.
Additionally, SFAS No. 158 requires employers to measure the funded status of a
plan as of the date of its year-end statement of financial position. The new
reporting requirements and related new footnote disclosure rules of SFAS No. 158
are effective for fiscal years ending after December 15, 2006. The new
measurement date requirement applies for fiscal years ending after December 15,
2008. The Company does not expect the adoption of SFAS No. 158 will have a
material impact on its financial position or results of operations.
  In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements
("Statement No. 157"). Statement No. 157 prescribes a definition of the term
"fair value", establishes a framework for measuring fair value and expands
disclosure about fair value measurements. Statement No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company does not expect the
application of Statement No. 157 to have a material effect on the financial
statements.
  F-8
  In
September 2006, the SEC staff issued Staff Accounting Bulletin Topic 1N,
Financial Statements - Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB
108 provides guidance on how prior year misstatements should be evaluated when
determining the materiality of misstatements in the current year financial
statements. SAB 108 requires materiality to be determined by considering the
effect of prior year misstatements on both the current year balance sheet and
income statement, with consideration of their carryover and reversing effects.
SAB 108 also addresses how to correct material misstatements. The Company
adopted the provisions of this bulletin effective October 1, 2007. The Company
did not incur any material impact to its financial condition or results of
operations due to the adoption of SAB 108.
  In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("Statement No. 159"). Statement No.
159 permits an instrument by instrument election to account for selected
financial assets and liabilities at fair value. Statement No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company does not expect
the application of Statement No. 159 to have a material effect on the financial
statements.


3.  ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities consist of the following at December 31,
2007:





Trade
      Payables
            
            $
            166,729Penalty
      for non-registration of shares (see note 6)
            
            
            81,140Accrued
      interest
            
            
            67,288Accrued
      payroll
            
            
            15,071Sales
      cost reserve - EPMG
            
            
            569,031Total
            
            $
            899,259





4.  ADVANCES
PAYABLE





Advances
payable of $336,177 at December 31, 2007 consist of amounts advanced to the
Company by Xalles Limited, an Irish corporation (“Xalles”).  The
Company has been involved in negotiations to purchase Xalles.  These
funds were advanced to the Company by Xalles for the purpose of general working
capital and trade payables of both Xalles and the
Company.


5.  DEFERRED
REVENUE





The
Company’s wholly-owned subsidiary AcXess, Inc.  receives payment in
advance for certain of its services, primarily website hosting.  These
payments are recognized as revenue over the period for which the services is
provided.  As of December 31, 2007, these advance payments aggregated
a total of $93,863; this amount will be taken into revenue over the following
twelve months.


6.  CONVERTIBLE
NOTES AND DERIVATIVE LIABILITIES




Derivative
Financial Instruments
  The
Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.
  The
Company reviews the terms of convertible debt and equity instruments issued to
determine whether there are embedded derivative instruments, including the
embedded conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. In circumstances where the
convertible instrument contains more than one embedded derivative instrument,
including the conversion option, that is required to be bifurcated, the
bifurcated derivative instruments are accounted for as a single, compound
derivative instrument. Also, in connection with the sale of convertible debt and
equity instruments, the Company may issue freestanding options or warrants that
may, depending on their terms, be accounted for as derivative instrument
liabilities, rather than as equity. The Company may also issue options or
warrants to non-employees in connection with consulting or other services they
provide.
  Certain
instruments, including convertible debt and equity instruments and the
freestanding options and warrants issued in connection with those convertible
instruments, may be subject to registration rights agreements which impose
penalties for failure to register the underlying common stock by a defined date.
These penalties are measured and accrued in accordance with Statement of
Financial Accounting Standards No. 5, “Accounting for
Contingencies”.  When the ability to physical or net-share settle the
conversion option or the exercise of the freestanding options or warrants is
deemed to be not within the control of the Company, the embedded conversion
option or freestanding options or warrants may be required to be accounted for
as a derivative instrument liability.
 F-9
  Derivative
financial instruments are initially measured at their fair value. For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported as charges or credits to
income. For option-based derivative financial instruments, the Company uses the
Black-Scholes option pricing model to value the derivative
instruments.
  When
freestanding options or warrants are issued in connection with the issuance of
convertible debt or equity instruments and will be accounted for as derivative
instrument liabilities (rather than as equity), the total proceeds received are
first allocated to the fair value of those freestanding instruments. When the
freestanding options or warrants are to be accounted for as equity instruments,
the proceeds are allocated between the convertible instrument and those
derivative equity instruments, based on their relative fair values. When the
convertible debt or equity instruments contain embedded derivative instruments
that are to be bifurcated and accounted for as liabilities, the total proceeds
allocated to the convertible host instruments are first allocated to the fair
value of all the bifurcated derivative instruments. The remaining proceeds, if
any, are then allocated to the convertible instruments themselves, usually
resulting in those instruments being recorded at a discount from their face
amount.
  To the extent that the fair values of
the freestanding and/or bifurcated derivative instrument liabilities exceed the
total proceeds received, an immediate charge to income is recognized, in order
to initially record the derivative instrument liabilities at their fair
value.
  The
discount from the face value of the convertible debt, together with the stated
interest on the instrument, is amortized over the life of the instrument through
periodic charges to income, usually using the effective interest method. When
the instrument is convertible preferred stock, the dividends payable are
recognized as they accrue and, together with the periodic amortization of the
discount, are charged directly to retained earnings.
  The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed periodically,
including at the end of each reporting period. If re-classification is required,
the fair value of the derivative instrument, as of the determination date, is
re-classified. Any previous charges or credits to income for changes in the fair
value of the derivative instrument are not reversed. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be
required within twelve months of the balance sheet date.  During the
three months ended December 31, 2007, due to the conversion of the Convertible
Notes Payable to common stock (see below), the Company reclassified derivative
liabilities in the amount of $1,652,617 from liability to equity.
  In
January 2006 the Board of Directors of the Company approved the raising of up to
$1,000,000 via the issuance of promissory notes (the “Notes”) to accredited
investors. These notes have a term of six months, an interest rate of 12% per
annum, and are convertible into shares of common stock of the Company at a 30%
discount to a future Qualified Financing (as therein described). As a result of
this, the Company could ultimately issue an unlimited number of shares of common
stock.  This resulted in liability treatment for all of the related
derivatives. In addition, each of the Notes is issued with warrants to purchase
Company common stock at a strike price of $0.05 per share. The number of
warrants granted is determined by multiplying the face value of each note issued
by four. In October the Board of Directors of the Company approved an increase
in the amount to be raised under this financing to $1,500,000. A total of
$1,107,500 had been raised as of November 10, 2006, when the Company closed the
round. During the three and nine months ended December 31, 2007, the Company was
in default on all Notes totaling a principal amount of $1,107,500. In the event
of a default resulting from the Company's non-payment of principal or interest
when due, a holder of the Notes may declare all unpaid principal and accrued
interest due and payable immediately. The Company was served a complaint from
one investor demanding repayment of $55,000 under one of the
Notes.  The Company reached a settlement agreement with this investor,
and executed a mutual release and the complaint was dismissed on October 25,
2007  (see Note 9). No notice has been received from any other holder
of the Notes and the Company is currently in the process of renegotiating the
terms of the Notes (as noted below);
however there can be no assurance that such negotiations will be
successful.
 On
December 22, 2006, the Company entered into a securities purchase agreement with
an accredited investor (the “Investor”) for the sale of $1,000,000 Convertible
Debentures (the “Debentures”). In connection with the Agreement, the Investor
received (i) a warrant to purchase 8,928,571 shares of common stock (“Long-Term
Warrants”) exercisable at $0.30 and (ii) a warrant to purchase 1,785,714 shares
of common stock (“Short Term Warrants”) exercisable at $0.143 per share. The
Long Term Warrants and the Short Term Warrants are exercisable for a period four
years from the date of issuance and the earlier of (i) December 22, 2007 and
(ii) the date a registration statement(s) covering the resale of all Registrable
Securities (as defined in the Registration Rights Agreement) is declared
effective by the SEC (the “Initial Exercise Date”) and on or prior to the close
of business on the four month anniversary of the Initial Exercise Date,
respectively. The Company incurred approximately $81,140 in interest expense
relating to the Debentures due to the “Liquidating Damages” clause specified in
the Purchase Agreement as a registration statement covering the Registrable
Securities was declared effective by the SEC on July 23, 2007, 123 days after
the agreed upon date in the Purchase Agreement, March 23, 2007.  The
penalty is calculated as 2% per 30 day period or partial 30 day period beyond
the dates stipulated above.  The maximum aggregate liquidated damages
payable to a Holder under this Agreement is 10.5% of the aggregate subscription
amount paid by such Holder pursuant to the Purchase Agreement. Pursuant to
Emerging Issues Task Force issue No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”,
there are no gains or losses associated with this penalty, as it is not indexed
to or settled in the stock of the Company.
  The
default on the Notes discussed above is an “Event of Default” in accordance with
the terms of the Debenture and, therefore, the Debenture holder may declare all
principal and interest due and payable immediately; however, the Company has
received no notice from the Debenture holder demanding such
repayment.
  The
Debentures bear interest at 4% until June 22, 2007 and 9% thereafter, payable in
arrears and mature three years from the date of issuance. Accrued interest is
payable in cash semi-annually, beginning on July 1, 2007. The Company has not
made the interest payment of $21,271 due on July 1, 2007 and intends to
negotiate a settlement with the Debenture holder; however there can be no
assurance that such negotiation will be successful
 
 F-10
  Warrants
were initially accounted for as derivative instrument liabilities (see below) in
accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In, a Company's Own Common Stock" (“EITF
00-19”) primarily as a result of the possible conversion of other debt into a
possible unlimited number of shares. Accordingly, the initial fair values of the
warrants, amounting to an aggregate of $82,239 relating to the issuance of the
Notes, and $964,286 relating to the issuance of the Debentures, were recorded as
a derivative instrument liability. The fair value of the warrants was determined
using the Black-Scholes valuation model, based on the market price of the common
stock on the dates the warrants were issued, an expected dividend yield of 0%, a
risk-free interest rate based on constant maturity rates published by the U.S.
Federal Reserve, applicable to the life of the warrants, expected volatility of
114% (based on analysis of historical stock prices of the Company and its
selected peers), and the five year and four year life of the warrants relating
to the Notes and Debentures, respectively. The Company is required to re-measure
the fair value of the warrants at each reporting period.
  Because
the conversion price of the Notes is not fixed, they are not “conventional
convertible debt” as that term is used in EITF 00-19 primarily as a result of
the possible conversion of other debt into a possible unlimited number of
shares. Accordingly, the Company is required to bifurcate and account separately
for the embedded conversion options, together with any other derivative
instruments embedded in the Notes. The Debentures are a hybrid instrument that
embodies several derivative features. The instrument is not afforded the
“conventional” convertible exemption because of certain full-ratchet
anti-dilution protections afforded the investors. Further, certain derivative
features did not meet the conditions for equity classification set forth in EITF
00-19. As a result, the Company has combined all embedded derivatives into one
compound derivative financial instrument for financial accounting and
reporting.
  The
freestanding warrants issued with the Debentures are also hybrid instruments
that embody derivative features. While bifurcation of the embedded derivatives
was not required, the warrants did not otherwise meet all of the conditions for
equity classification set forth in EITF 00-19. As a result, the Company has
recorded the warrants as derivative liabilities at fair value.
  The
conversion option related to each of the Notes was bifurcated from the Note and
accounted for separately as a derivative instrument liability (see below). The
bifurcated embedded derivative instruments, including the embedded conversion
options which were valued using the Flexible Monte Carlo Simulation methodology,
were recorded at their initial fair value of an aggregate of
$801,911.
 
 The
discount from the face amount of the Notes represented by the value assigned to
the warrants and bifurcated derivative instruments is being amortized over the
period to the due date of each of the Notes, using the effective interest
method. Amortization related to the Notes for the period ended December 31,
2007, was $139,622.
  On August
23, 2007, the Company issued an aggregate of 5,672,655 shares of common stock in
exchange for the conversion of convertible promissory notes with the principal
amount of $263,315 and accrued interest of $20,318 totaling $283,633, based on a
conversion price of $0.05 per share. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. The balance
of the notes at September 30, 2007 is $902,722. During the three months ended
December 31, 2007, the Company also converted the following notes:  on
October 12, 2007, the Company issued 14,633,759 shares of its common stock in
exchange for the conversion of convertible promissory notes and accrued interest
therein in the aggregate amount of $731,688, based on a conversion price of
$0.05 per share; On October 19, 2007, the Company issued 574,630 shares of its
common stock in exchange for the conversion of convertible promissory notes and
accrued interest therein in the aggregate amount of $28,732, based on a
conversion price of $0.05 per share; and on December 17, 2007, the Company
issued 3,581,314 shares of its common stock in exchange for the conversion of
convertible promissory notes and accrued interest therein in the aggregate
amount of $179,066, based on a conversion price of $0.05 per
share.  These transactions were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.  At December 31, 2007, all
of the Notes had been converted and none remain outstanding.  At the
time of the conversions, the Company reclassified  the outstanding
derivative liabilities at the time of the conversions in the aggregate amount
of  $993,015 related to the Convertible Promissory Notes to additional
paid-in capital during the three months ended December 31, 2007.
  As a
result of this conversion, all outstanding warrants and embedded derivative
liabilities were recharacterized as equity and reclassified to additional
paid-in capital.
  The
conversion option related to the Debentures was bifurcated from the Debentures
and accounted for separately as a derivative instrument liability (see below).
The bifurcated embedded derivative instruments, including the embedded
conversion option which was valued using the Flexible Monte Carlo Simulation
methodology, was recorded at its initial fair value of an aggregate of
$553,466.
  The
discount from the face amount of the Debentures represented by the value
assigned to the warrants and bifurcated derivative instruments is being
amortized over the period to the due date of the Debentures, using the effective
interest method. Amortization related to the Debentures for the three months and
nine months ended December 31, 2007, was $15,397 and $47,647,
respectively.
 
 A summary
of the Debentures and unamortized discount  at December 31, 2007, is
as follows:
 
 Debenture;
      4% per annum(increasing to 9% per annum in July 2007); Due December
      22, 2009
              
              $
              1,000,000Less:
      Unamortized discount
              
              
              (952,354
              )Net
      carrying value at December 31, 2007
              
              $
              47,646
  The total
carrying value of the  Debentures at December 31, 2007 was
$47,646.
  The
Company uses the Black-Scholes valuation model to value the warrants and the
embedded conversion option components of any bifurcated embedded derivative
instruments that are recorded as derivative liabilities.
  In
valuing the warrants and the embedded conversion option components of the
bifurcated embedded derivative instruments at the reclassification
date,  the Company used the market price of our common stock on the
date of valuation, an expected dividend yield of 0% and the remaining period to
the expiration date of the warrants or repayment date of the Notes. All warrants
and conversion options can be exercised by the holder at any time.
 Because
of the limited historical trading period of the Company’s common stock, the
expected volatility of the Company’s common stock over the remaining life of the
conversion options and warrants has been estimated at 114% (based on analysis of
historical stock prices of the Company and its selected peers). The risk-free
rates of return used were based on constant maturity rates published by the U.S.
Federal Reserve, applicable to the remaining life of the conversion options or
warrants.


F-11
 Table of Contents




The
Registration Rights Agreement contains a “Liquidating Damages” provision,
whereby the Company is obligated to file a registration statement covering the
Registrable Securities within 60 days of the Purchase Agreement,  and
cause  such registration statement to become effective within 90 days
of the Purchase Agreement.  If either of these deadlines is
not  met, the Company incurs a penalty in the amount of 2% per month
of the aggregate purchase price of the securities.  The Company filed
such registration statement within the 60 day period, but the registration
statement did not become effective until 123 days after the Purchase Agreement,
and the Company incurred liquidated damages in the amount of $81,140. The
Purchase Agreement became effective on July 23, 2007, 123 days after the agreed
upon date in the Purchase Agreement, March 22, 2007.   This
penalty is payable in cash, and accordingly the provisions of and the amount of
$81,140 was charged to accrued liabilities on the Company’s balance sheet at
December 31, 2007 (see note  3).




7.  COMMON
STOCK





On June
5, 2007, the Company issued 459,778 shares of its common stock with a fair
market value of $22,989 for legal expenses.





On July
27, 2007, the Company issued 336,862 shares of its common stock with a fair
market value of $6,737 for legal expenses. The shares of stock issued in the
above transactions were valued at the closing market price on the date of
issue.




On August
9, 2007, the Company sold 2,000,000 shares of its common stock to an accredited
investor at a price of $0.05 per share. The Company also issued a warrant to the
investor to purchase 2,000,000 shares of its common stock at an exercise price
of $0.05 per share. The warrant has an expiration of 2 years from the date of
issue.





On
August 23, 2007, the Company issued an aggregate of 5,672,655 shares of common
stock in exchange for the conversion of convertible promissory notes and accrued
interest therein in the aggregate amount of $283,633, based on a conversion
price of $0.05 per share.





On
October 12, 2007, the Company issued 1,210,000 shares of its common stock valued
at $60,500 to an officer for accrued salary.  The fair value of these
shares was accrued in a prior period.





On
October 12, 2007, the Company issued 14,633,759 shares of its common stock in
exchange for the conversion of convertible promissory notes and accrued interest
therein in the aggregate amount of $731,688, based on a conversion price of
$0.05 per share.





On
October 19, 2007, the Company issued 574,630 shares of its common stock in
exchange for the conversion of convertible promissory notes and accrued interest
therein in the aggregate amount of $28,732, based on a conversion price of $0.05
per share





On
December 17, 2007, the Company issued 3,581,314 shares of its common stock in
exchange for the conversion of convertible promissory notes and accrued interest
therein in the aggregate amount of $179,066, based on a conversion price of
$0.05 per share




8.   RELATED
PARTY TRANSACTIONS
 
 During
the three months ended  December 31, 2007, the Company had the
following transactions with related parties:
 
 The
Company granted options to purchase 21,000,000 shares of its common stock at a
price of $0.05 per share to its President and Chief Executive Officer. These
options have a term of ten years, and vest as follows:  5,250,000 at
the grant date, and the balance at the rate of 437,500 per month over the
succeeding thirty-six months.   During the three months ended
December 31, 2007, the Company recognized an expense of $182,525 for the value
of these options vested during the quarter.
 
 The
Company granted options to purchase 7,500,000 shares of its common stock at a
price of $0.05 per share to its Vice President and Chief Financial Officer.
These options have a term of ten years, and vest as follows: 1,000,000 at the
grant date, and the balance at the rate of 156,500 per month over the succeeding
thirty-six months.   During the three months ended December 31,
2007, the Company recognized an expense of $65,188 for the value of these
options vested during the quarter.
  The
Company converted accrued salary to its Vice President and Chief Financial
Officer in the amount of $60,500 into common stock at the fair value of $0.05
per share for a total of 1,210,000 shares.


F-12
 Table of Contents




9.  COMMITMENTS
AND CONTINGENCIES





(a)
Leases:




In
February 2007 the Company entered into a $500,000 Master Lease Line for
Equipment Purchases (the “Master Lease Agreement”). At that time, the Company
sold property and equipment for $125,000 and leased them back under the Master
Lease Agreement. The Company recognized a gain on the sale of those assets of
$10,633 which was deferred and will be recognized over the 24 month term of the
lease.  At December 31, 2007, the balance of this deferred gain was
$6,203.




The
Master Lease Agreement calls for draws of a minimum of $100,000, a minimum term
of 18 months and a maximum term of 36 months. The lease entered into in February
2007 has monthly payments of $6,363. The Company accounted for this lease as a
capital lease.




In
connection with the Master Lease Agreement, the Company agreed to issue five
year warrants to the lender to purchase 1,350,000 shares of the Company’s common
stock at an exercise price of $0.18 per share. Ten percent (135,000) of the
warrants vested upon execution of the Master Lease Agreement. The remaining 90%
of the warrants vest as on a pro rata basis as the lender provides funding under
the Master Lease Agreement. As such 303,750 warrants vested upon execution of
the sale lease-back described above. The total number of warrants, 438,750, was
valued using the Black-Scholes method and applied to the capital lease
obligation in accordance with Accounting Principles Board (“APB”) No. 14. This
resulted in a decrease in capital lease obligation of $37,726 and a
corresponding increase in additional paid-in capital.




Rent
expense under all operating leases for the nine month periods ended December 31,
2007, and 2006, was $24,049 and $71,534 respectively. As of July 1, 2007, our
principal executive offices are located at 911 Ranch Road 620 North, Austin,
Texas 78734. This office consists of approximately 340 square feet which we
rent for $900 per month. The term of the lease is month to month with a 60 day
notice period.




(b) Litigation:




Kansas
City Explorers




The
Company is a defendant in a lawsuit in the Circuit Court of Platte County,
Missouri, “Kansas City Explorers vs. Innovative Software” Case no. 04CV82050 in
which the claimant is seeking money for advertising which it alleges is still
due, and have alleged damages of $50,028. The claimant has been court ordered to
produce answers to certain discovery requests of the Company which they have
failed to produce. Management intends to aggressively defend the claim based
upon the lack of contract between the parties, lack of proof of damages, as well
as minimal proof of advertising services actually performed for Company products
and services, and other legal and equitable defenses. The Company has not
accrued any amount for the contingency.




Bernard
F. Mathaisel




On June
14, 2007 the Company was served with a complaint from Bernard F. Mathaisel for
breach of contract relating to an alleged consulting agreement with the Company
and breach of contract alleging failure to repay a Note due him in the principal
amount of $55,000. On October 11, 2007, Mr. Mathaisel and the Company executed a
mutual release and the complaint was dismissed on October 25, 2007 following the
purchase of the Mathaisel note by another investor.




Item
2. Management’s
Discussion and Analysis or Plan of Operations




The
information presented in this section should be read in conjunction with our
audited financial statements and related notes for the periods ended March 31,
2007 and 2006 included in our Form 10-KSB, filed July 19,2007, as well as the
information contained in the financial statements, including the notes thereto,
appearing elsewhere in this report. This discussion contains forward-looking
statements reflecting our current expectations that involve risks and
uncertainties. Actual results and the timing of events may differ materially
from those contained in these forward-looking statements due to a number of
factors, including those discussed in the section entitled “Risk Factors” and
elsewhere in this report.





The following discussion includes
statements that are forward looking in nature. The accuracy of such statements
depends on a variety of factors that may affect the business and operations of
the Company. Certain of these factors are discussed under “Business - Factors
Influencing Future Results and Accuracy of Forward-Looking Statements” included
in Part 1 of this report. 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.


F-13
 Table of Contents




Overview





The
following discussion summarizes information about our accounting policies and
practices and information about our operations in a comparative manner for the
three and nine months ended December 31, 2007, and 2006. Our management’s
discussion and analysis of financial condition and results of operations should
be read in conjunction with our consolidated financial statements and related
notes thereto included elsewhere herein.





Acquisition
of AcXess, Inc.




On June
26, 2006, the Company completed the acquisition of AcXess, Inc., a Florida
corporation (“AcXess”), in a stock exchange transaction (the “Transaction”)
pursuant to a Stock Exchange Agreement by and between Innovative, AcXess, the
Shareholders of AcXess, and Anthony F. Zalenski, acting as the Shareholder’s
Agent (the “Exchange Agreement”). As a result of the Transaction, AcXess became
a wholly owned subsidiary of the Company. Following FAS 141, as governing and
operating control of the combined entity was under Mr. Zalenski, AcXess is
deemed to be the purchaser in the Transaction for financial reporting purposes.
Therefore, reverse acquisition accounting applies whereby AcXess is deemed to
have issued its common stock for the net assets or liabilities of Innovative
accompanied by a recapitalization of AcXess. For accounting purposes, AcXess is
treated as the continuing reporting entity.





AcXess
was formed to provide Business Continuity (“BC”) products and services to the
Small and Medium Enterprise (“SME”) market. “Business Continuity” products and
services are an advanced form of disaster recovery solutions for electronic data
backup wherein the data and/or applications are available upon failure through
means of connectivity to remote server locations. Management believes that the
North American SME market for BC services (defined as companies with 50 to 5,000
employees) is underserved and that various technologies have matured to a point
where the SME market can now be supplied robust BC services, which were
previously only available to large corporations and at substantial
cost.  Currently, AcXess derives most of its revenue from its “High
Availability” hosting services.





Critical
Accounting Policies and Estimates





The
discussion and analysis of our financial condition and results of operations are
based upon the Company's 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
us 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’s critical
accounting policies are discussed in its annual report on Form 10-KSB for the
year ended March 31, 2007.





Results
of Operations





Three
months ended December 31, 2007, compared to the three months ended December 31,
2006.





Revenues





Revenues
for the three months ended December 31, 2007, and 2006 were $75,802 and $20,770,
respectively, an increase of $55,032. Revenues derived primarily from our High
Availability product line and increased due to continued increase in obtaining
and expanding contracts with customers.





Cost of Sales and
Margins





Cost of
sales for the three months ended December 31, 2007, and 2006 were $7,943 and
$22,402, respectively. The decrease in the cost of sales over the two periods is
primarily due to the termination of our Boca collocation agreement which was
primarily used for initial project setup purposes and which is no longer needed.
Our gross margins increased to approximately 90% from -8% for the three months
ended December 31, 2007 and 2006, respectively, due primarily to the reduction
in network costs, the termination of the Boca collocation agreement, and the
decrease in set-up costs.





Operating
Expenses





General
and administrative expenses for the three months ended December 31, 2007, and
2006 were $564,893 and $537,179, respectively. General and administrative
expenses consisted primarily of salaries and wages, professional fees, rent,
travel expenses, payroll taxes, telephone expenses and other general and
administrative expenses.





F-14
 Table of Contents




Other Income
(Expense)





Other
income (expense)  for the three months ended December 31, 2007, and
2006 was $110,942 and $1,383,771, respectively. Other loss for the period ended
December 31, 2007 is primarily interest expense of $111,122; $102,556 of the
interest expense was the amortization of the deferred financing costs related to
the notes payable which were converted to common stock during the
period.  Other loss for the period ended December 31, 2006 is
primarily loss due to change in valuation of derivative instruments and related
interest expenses.  Securities requiring periodic valuation leading to
such gains and losses were converted in the second and third fiscal quarters of
2008 (see Note 6 in the Notes to the Financial Statements).
 
 Net Loss
 
 Our net
loss for the three months ended December 31, 2007, amounted to $607,976, and
resulted primarily from operating expenses as described above.  Our
net loss for the three months ended December 31, 2006 was $1,922,582 and
resulted primarily from loss from operations and loss due to change in valuation
of derivative instruments as described above.
  Nine
months ended December 31, 2007, compared to the nine months ended December 31,
2006.
  Revenues
  Revenues
for the nine months ended December 31, 2007, and 2006 were $147,022 and $59,437,
respectively. Revenues derived primarily from our High Availability product
line and increased due to continued increase in obtaining and expanding
contracts with customers.
  Cost of Sales and
Margins
  Cost of
sales for the nine months ended December 31, 2007, and 2006 were $47,850 and
$58,967, respectively.  Our gross margins increased to approximately
67% from 1% for the nine months ended December 31, 2007 and 2006, respectively,
due primarily to the reduction in network costs, the termination of the Boca
collocation agreement, and the decrease in set-up costs.
 
 Operating
Expenses
 
 General
and administrative expenses for the nine months ended December 31, 2007, and
2006 were $1,115,481 and $1,791,443, respectively.  General and
administrative expenses consisted primarily of salaries and wages, professional
fees, rent, travel expenses, payroll taxes, telephone expenses and other general
and administrative expenses.  The decrease in general and
administrative expenses is due primarily to the decrease in number of employees
and related in salaries, and in decreased marketing and travel
expenses.
  Other Income
(Expense):
  Other
income (expense)  for the nine months ended December 31, 2007, and
2006 was $142,456 and $1,595,042, respectively. Other loss for the period ended
December 31, 2007 is due primarily to a gain in change in valuation of
derivative instruments of $270,919, offset by interest expense of $419,813;
$136,222 of the interest expense was the amortization of the deferred financing
costs related to the notes payable which were converted to common stock during
the period. Other loss for the period ended December 31, 2006 is primarily
loss due to change in valuation of derivative instruments and related interest
expenses.  Securities requiring periodic valuation leading to such
gains and losses were converted in the second and third fiscal quarters of 2008
(see Note 6 in the Notes to the Financial Statements).
 
 Net Loss
  Our net
loss for the nine months ended December 31, 2007, amounted to $1,158,765, and
resulted from primarily from loss from operations of $1,016,309 .  Our
net loss for the nine months ended December 31, 2006 was $3,386,485 and resulted
from a loss from operations of $1,791,443 and other loss as described above of
$1,595,042.
  Liquidity
and Capital Resources
  The
December 31, 2007, financial statements have been prepared assuming the Company
will continue as a going concern. However, the Company has incurred a loss of
$4,570,017 from inception (January 12, 2005) through December 31, 2007, and has
a working capital deficiency and stockholder deficit of
$1,049,550  and $ 929,897, respectively, at December 31, 2007. The
Company currently has minimal revenue generating operations and expects to incur
substantial operating expenses in order to expand its business. As a result, the
Company expects to incur operating losses for the foreseeable
future.  The accompanying financial statements do not include any
adjustments that might become necessary should the Company be unable to continue
as a going concern.
  Management
intends to continue to finance operations through fundraising activities as well
as to seek potential acquisitions that have positive cash flows; however there
can be no assurance of successful fundraising or acquisition activity in the
future.


F-15
 Table of Contents




In
January 2006, our Board of Directors approved the raising of up to $1,000,000
via the issuance of promissory notes to accredited investors. These notes have a
term of six months, are convertible into shares of our common stock at a 30%
discount to a future Qualified Financing (as therein described), and have 20%
warrant coverage at a strike price of $0.05 and an expiration of 5 years from
the date of issuance. In October our board of directors approved an increase in
the limit of funding under these terms to $1,500,000. A total of $1,107,500 had
been raised as of November 10, 2006, when the Company closed the
round.  All of these notes converted to common stock in the second and
third fiscal quarters of 2008 (see Item 2 “Unregistered Sales of Equity
Secutiries and Use of Proceeds”).




On
December 22, 2006, the Company entered into a securities purchase agreement with
an accredited investor (the “Investor”) for the sale of $1,000,000 Convertible
Debentures (the “Debentures”). In connection with the Agreement, the Investor
received (i) a warrant to purchase 8,928,571 shares of common stock (“Long-Term
Warrants”) exercisable at $0.30 and (ii) a warrant to purchase 1,785,714 shares
of common stock (“Short Term Warrants”) exercisable at $0.143 per share. The
Long Term Warrants and the Short Term Warrants are exercisable for a period four
years from the date of issuance and the earlier of (i) December 22, 2007 and
(ii) the date a registration statement(s) covering the resale of all Registrable
Securities (as defined in the Registration Rights Agreement) is declared
effective by the SEC (the “Initial Exercise Date”) and on or prior to the close
of business on the four month anniversary of the Initial Exercise Date,
respectively. The Company incurred approximately $81,140 in penalties relating
to the Debentures due to the “Liquidating Damages” clause specified in the
Purchase Agreement as a registration statement covering the Registrable
Securities was declared effective by the SEC on July 23, 2007.





The
Debenture bears interest at 4% until June 22, 2007 and 9% thereafter, payable in
arrears, and matures three years from the date of issuance.  Accrued
interest is payable in cash semi-annually, beginning on July 1,
2007.  The Company failed to pay the interest payments of $21,271 and
$45,370 due on July 1, 2007and January 1, 2008, respectively, and intends to
negotiate an extension with the Investor; however there can be no assurance that
such negotiation will be successful.




In
February 2007, we entered into a master leasing arrangement with Gulf Pointe
Capital, LLC for equipment purchases up to a total of $500,000 (see Contractual
Obligations below).




At
December 31, 2007, we had current liabilities of $1,444,821. We have
no material commitments for capital expenditures.




Contractual
Obligations




In
February 2007, the Company entered into a $500,000 Master Lease Line for
Equipment Purchases (the “Master Lease Agreement”). At that time, the Company
sold property and equipment for $125,000 and leased them back under the Master
Lease Agreement. The Company recognized a gain on the sale of those assets of
$10,633, which was deferred and is being recognized over the 24 month term of
the lease.




The
Master Lease Agreement calls for draws of a minimum of $100,000, a minimum term
of 18 months and a maximum term of 36 months. The leasing factor for each new
lease under the master lease is as follows; 18 Months - 0.06476, 24 Months -
0.05090, 30 Months - 0.04263, 36 Months - 0.03716. The lease entered into in
February 2007 has a lease factor of 0.0509 resulting in monthly payments of
$6,363. The lease entered into in February 2007 has a lease factor of 0.0509
resulting in monthly payments of $6,363. The Company accounted for this lease as
a capital lease.




In
connection with the Master Lease Agreement, the Company agreed to issue five
year warrants to the lender to purchase 1,350,000 shares of the Company’s common
stock at an exercise price of $0.18 per share. Ten percent (135,000) of the
warrants vested upon execution of the Master Lease Agreement. The remaining 90%
of the warrants vest as on a pro rata basis as the lender provides funding under
the Master Lease Agreement. As such 303,750 warrants vested upon execution of
the sale lease-back described above. The total number of warrants, 438,750, was
valued using the Black-Scholes method and applied to the capital lease
obligation in accordance with APB 14. This resulted in a decrease in capital
lease obligation of $37,726 and a corresponding increase in additional paid-in
capital.




Item3.Controls and
Procedures





As of
December 31, 2007, we carried out an evaluation, under the supervision and with
the participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective in ensuring that information required to be disclosed by us in our
periodic reports is recorded, processed, summarized and reported, within the
time periods specified for each report and that such information is accumulated
and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.




There was
no change in our internal controls over financial reporting that has materially
affected, or is reasonable likely to materially affect, our internal control
over financial reporting during the quarter covered by this Report.




F-16
 Table of Contents




PART
II - OTHER
INFORMATION
 
 Item
1.LegalProceedings


From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm business. Except as disclosed below we are
currently not aware of any such legal proceedings or claims that will have,
individually or in the aggregate, a material adverse affect on business,
financial condition, operating results, or cash flows.





Kansas CityExplorers





The
Company is a defendant in a lawsuit in the Circuit Court of Platte County,
Missouri, “Kansas City Explorers vs. Innovative Software” Case no. 04CV82050 in
which the claimant is seeking money for advertising which it alleges is still
due, and have alleged damages of $50,028. The claimant has been court ordered to
produce answers to certain discovery requests of the Company which they have
failed to produce. Management intends to aggressively defend the claim based
upon the lack of contract between the parties, lack of proof of damages, as well
as minimal proof of advertising services actually performed for Company products
and services, and other legal and equitable defenses.





Item2. Unregistered Sales of Equity Securities and Use of
Proceeds





Between
October 12, 2007 and October 18, 2007, the Company issued an aggregate of
14,633,759 shares of common stock in exchange for the conversion of convertible
promissory notes and accrued interest therein in the aggregate amount of
$731,688, based on a conversion price of $0.05 per share.   Also
on October 12, 2007, the Company’ Chief Financial Officer accepted an offer from
the Company to convert $60,500 in accrued expenses and wages into 1,210,000
shares of the Company’s common stock, based on a conversion price of $0.05 per
share. The accrued expenses comprised wages and expenses accrued in the 2006
calendar year.  These transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
 
 On
October 19, 2007 the Company issued an aggregate of 574,630 shares of common
stock in exchange for the conversion of a convertible promissory note and
accrued interest therein in the aggregate amount of $28,732, based on a
conversion price of $0.05 per share.  This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of
1933.
 
 Between
December 17, 2007 and December 18, 2007, the Company issued an aggregate of
3,581,314 shares of common stock in exchange for the conversion of convertible
promissory notes and accrued interest therein in the aggregate amount of
approximately $179,066, based on a conversion price of $0.05 per share. These
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
  *All of
the above issuances and sales were deemed to be exempt under Rule 506 of
Regulation D and Section (2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of Innovative Software Technologies,
Inc. or executive officers of the Company, and transfer was restricted by the
Company in accordance with the requirement of the Securities Act of
1933.


Item3. Defaults Upon Senior Securities





None





Item4. Submission of Matters to a Vote of Security
Holders




None.




Item 5. Other Information





None.




Item6. Exhibits.







Exhibits
included or incorporated by reference herein are set forth in the attached
Exhibit Index.




1
 Table of Contents







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: February 19,
      2008
            
            /s/
      Philip D.
      Ellett
              Philip
      D. Ellett
              Chief
      Executive Officer




Date: February 19,
      2008
            
            /s/ Christopher
      J.
      Floyd
              Christopher
      J. Floyd
              Chief
      Financial Officer,
              Vice
      President of Finance, and Secretary









2
 Table of Contents







INDEX
TO EXHIBITS





Exhibit
              Number
            
            Description31.1
            
            Certification
      of Chief Executive Officer of Innovative Software Technologies, Inc.
      pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of
      1934, as amended.31.2
            
            Certification
      of Chief Financial Officer of Innovative Software Technologies, Inc.
      pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of
      1934, as amended.32.1
            
            Certification
      of Chief Executive Officer of Innovative Software Technologies, Inc.
      pursuant to 18 U.S.C. 1350.32.2
            
            Certification
      of Chief Financial Officer of Innovative Software Technologies, Inc.
      pursuant to 18 U.S.C. 1350.



























3