**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-QSB**





(Mark
      One)




**x**
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES**
              **EXCHANGE
                ACT OF 1934**





For
      the
      Quarter Ended June 30, 2007





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





**Commission
      File Number: 000-1084047**





**INNOVATIVE
      SOFTWARE TECHNOLOGIES, INC.**


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





**California**
              (State
                or Other Jurisdiction of Incorporation or
              Organization)
            **95-4691878**
              (I.R.S.
                Employer Identification No.)**911
                Ranch Road 620 N, Ste. 204, Austin, TX**
              (Address
                of Principal Executive Offices)
            **78734**
              (Zip
                Code)**(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, $.001 par value





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the 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




There
      were 75,511,841 shares of common stock, $0.001 par value, outstanding as of
      August 14, 2007.








**INNOVATIVE
      SOFTWARE TECHNOLOGIES, INC.**


**FORM
      10-QSB**


**QUARTER
      ENDED JUNE 30, 2007**





**TABLE
      OF CONTENTS**





Page
              Number**PART
                I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheet as of June 30, 2007 (unaudited)
            1Consolidated
                Statements of Operations for the three months Ended
                June 30, 2007 and 2006 and for the period from inception (January
                12, 2005) through June 30, 2007 (unaudited)
            2Consolidated
                Statements of Cash Flows for the three months Ended
                June 30, 2007 and 2006 and for the period from inception (January
                12, 2005) through June 30, 2007 (unaudited)
            3Notes
                to Consolidated Financial Statements (unaudited)
            4Item
                2.
            Management's
                Discussion and Analysis or Plan of Operation
            13Item
                3.
            Controls
                and Procedures
            16PART
                II.
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            17Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            17Item
                3.
            Defaults
                Upon Senior Securities
            17Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            17Item
                5.
            Other
                Information
            18Item
                6.
            Exhibits
            18**SIGNATURES**
            19







**PART
      I - FINANCIAL INFORMATION**





**Item
      1. - Financial Statements**





**INNOVATIVE
      SOFTWARE TECHNOLOGIES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONSOLIDATED
      BALANCE SHEET**


**June
      30, 2007**


**(UNAUDITED)**




**ASSETS****CURRENT
                  ASSETS**Cash
              
              $
              156,811Accounts
                  receivable
              
              
              19,405Prepaid
                  expenses and other current assets
              
              
              2,195**Total
                  current assets**
              
              
              178,411**PROPERTY
                  AND EQUIPMENT, NET**
              
              
              173,979**DEFERRED
                  FINANCING COSTS**
              
              
              114,389**DEPOSITS**
              
              
              15,700**Total
                  assets**
              
              $
              482,479**LIABILITIES
                  AND STOCKHOLDERS’ (DEFICIT)****CURRENT
                  LIABILITIES**Accounts
                  payable and accrued expenses
              
              $
              834,409Accrued
                  officer salary and expenses
              
              
              60,500Deferred
                  gain on sale of fixed assets
              
              
              10,633Current
                  portion of capital lease obligation
              
              
              46,399Convertible
                  notes and debentures
              
              
              1,187,865Derivative
                  financial instruments
              
              
              1,319,573**Total
                  current liabilities**
              
              
              3,459,379**CAPITAL
                  LEASE OBLIGATION**
              
              
              38,431**Total
                  liabilities**
              
              
              3,497,810**COMMITMENTS
                  AND CONTINGENCIES****STOCKHOLDERS’
                  (DEFICIT)**Preferred
                  stock, 25,000,000 shares authorized, $1.00 stated valueSeries
                  A, 1,500,000 shares authorized, 450,000 shares outstanding
              
              
              450,000Common
                  stock - authorized, 300,000,000 shares of $0.001 parvalue;
                  issued and outstanding, 73,174,979 shares
              
              
              73,175Additional
                  paid-in capital
              
              
              (181,941
              )Deficit
                  accumulated during the development stage
              
              
              (3,356,564
              )**Total
                  stockholders' (deficit)**
              
              
              (3,015,331
              )**Total
                  liabilities and stockholders' (deficit)**
              
              $
              482,479





See
      accompanying notes.


1


**INNOVATIVE
      SOFTWARE TECHNOLOGIES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**


**Since
                  Inception****For
                  the Three Months**
              
              **(January
                  12, 2005)****Ended
                  June 30,**
              
              **Through****June
                  30,****2007**
              
              **2006**
              
              **2007****REVENUE**High
                  availability
              
              $
              31,645
              
              $
              -
              
              $
              148,463Business
                  continuity
              
              
              495
              
              
              1,572
              
              
              8,252**REVENUE**
              
              
              32,140
              
              
              1,572
              
              
              156,715**COST
                  OF REVENUE**High
                  availability
              
              
              21,712
              
              
              12,711
              
              
              107,468Business
                  continuity
              
              
              -
              
              
              250
              
              
              -**COST
                  OF REVENUE**
              
              
              21,712
              
              
              12,961
              
              
              107,468**GROSS
                  PROFIT**
              
              
              10,428
              
              
              (11,389
              )
              
              49,247**OPERATING
                  EXPENSES**General
                  and administrative
              
              
              330,500
              
              
              182,318
              
              
              2,804,460Commissions
                  and other selling expenses
              
              
              -
              
              
              -
              
              
              12,500**Total
                  operating expenses**
              
              
              330,500
              
              
              182,318
              
              
              2,816,960**(LOSS)
                  FROM OPERATIONS**
              
              
              (320,071
              )
              
              (193,706
              )
              
              (2,767,713
              )**OTHER
                  INCOME (EXPENSE) NET**Other
                  income (expense)
              
              
              (1,790
              )
              
              5,330
              
              
              48,147Derivative
                  (expense)
              
              
              620,163
              
              
              -
              
              
              518,485Interest
                  (expense)
              
              
              (245,877
              )
              
              (2,680
              )
              
              (1,162,909
              )Interest
                  income, deposits
              
              
              2,263
              
              
              44
              
              
              7,425**OTHER
                  INCOME (EXPENSE) NET**
              
              
              374,759
              
              
              2,694
              
              
              (588,851
              )**INCOME
                  (LOSS) BEFORE INCOME TAXES**
              
              
              54,688
              
              
              (191,012
              )
              
              (3,356,564
              )**INCOME
                  TAXES**
              
              
              -
              
              
              -
              
              
              -**NET
                  INCOME (LOSS)**
              
              $
              54,688
              
              $
              (191,012
              )
              $
              (3,356,564
              )**UNDECLARED
                    PREFERRED****STOCK
                    DIVIDENDS**
              
              
              (4,500
              )
              
              -
              
              
              (18,000
              )**INCOME
                    (LOSS) APPLICABLE****TO
                    COMMON STOCKHOLDERS**
              
              $
              50,188
              
              $
              (191,012
              )
              $
              (3,374,564
              )**BASIC
                    AND DILUTED****(LOSS)
                    PER COMMON SHARE**
              
              $
              0.00
              
              $
              0.00**WEIGHTED
                    AVERAGE NUMBER OF****COMMON
                    SHARES USED IN BASIC PER SHARE CULATION**
              
              
              72,846,566
              
              
              56,067,036**WEIGHTED
                    AVERAGE NUMBER OF****COMMON
                    SHARES USED IN DILUTED PER SHARE CULATION**
              
              
              106,139,423
              
              
              56,067,036





See
      accompanying notes.


2


**INNOVATIVE
      SOFTWARE TECHNOLOGIES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**


**For
                  the Three Months**
                **Ended
                  June 30,**
              
              **Since
                  Inception**
                **(January
                  12, 2005)****Through**
                **June
                  30,****2007**
              
              **2006***
              
              **2007****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  income (loss)
              
              $
              54,688
              
              $
              (191,012
              )
              $
              (3,356,564
              )Adjustments
                  to reconcile net (loss) tonet
                  cash flows from operating activitiesDepreciation
                  and amortization
              
              
              2,115
              
              
              5,877
              
              
              47,958Stock
                  and options based compensation
              
              
              -
              
              
              -
              
              
              655,883Notes
                  payable issued for expenses paid by affiliates and third
                  parties
              
              
              -
              
              
              -
              
              
              258,605Services
                  paid in stock
              
              
              22,989
              
              
              -
              
              
              119,821Amortization
                  of convertible debt discount
              
              
              146,676
              
              
              -
              
              
              883,031Derivative
                  loss (income)
              
              
              (620,163
              )
              
              -
              
              
              (518,485
              )Amortization
                  of deferred financing costs
              
              
              21,833
              
              
              -
              
              
              117,810Net
                  change in operating assets and liabilitiesAccounts
                  receivable
              
              
              (10,410
              )
              
              (939
              )
              
              (19,405
              )Prepaid
                  expenses and other current assets
              
              
              4,950
              
              
              (15,749
              )
              
              8,605Deposits
              
              
              19,557
              
              
              33,909
              
              
              (14,700
              )Accounts
                  payable and accrued expenses
              
              
              101,874
              
              
              (11,881
              )
              
              78,378**Net
                  cash flows from operating activities**
              
              
              (255,891
              )
              
              (179,796
              )
              
              (1,739,063
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchase
                  of fixed assets
              
              
              (19,260
              )
              
              (37,573
              )
              
              (192,587
              )Proceeds
                  from sale lease-back of property and equipment
              
              
              -
              
              
              -
              
              
              125,000Increase
                  in deferred financing costs
              
              
              -
              
              
              -
              
              
              (156,200
              )**Net
                  cash flows from investing activities**
              
              
              (19,260
              )
              
              (37,573
              )
              
              (223,787
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Proceeds
                  from notes payable
              
              
              -
              
              
              346,343
              
              
              427,969Repayments
                  of notes payable
              
              
              -
              
              
              -
              
              
              (30,000
              )Principal
                  payments under capital lease
              
              
              (8,686
              )
              
              -
              
              
              (13,957
              )Proceeds
                  from convertible debt
              
              
              -
              
              
              -
              
              
              1,663,500Stock
                  issued for cash
              
              
              -
              
              
              -
              
              
              21,000Cash
                  acquired in the reverse acquisition of Innovative
              
              
              -
              
              
              51,149
              
              
              51,149**Net
                  cash flows from financing activities**
              
              
              (8,686
              )
              
              397,492
              
              
              2,119,661-**NET
                  INCREASE (DECREASE) IN CASH**
              
              
              (283,837
              )
              
              180,123
              
              
              156,811**CASH
                  AT BEGINNING OF PERIOD**
              
              
              440,648
              
              
              6,270
              
              
              -**CASH
                  AT END OF PERIOD**
              
              $
              156,811
              
              $
              186,393
              
              $
              156,811


*
        Reclassified to conform to the 2007 presentation.




See
      accompanying notes.




3




**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




(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 June 30, 2007, and the results of its
      operations for the three months ended June 30, 2007, and June 30, 2006, and
      the
      cash flows for the three months ended June 30, 2007, and June 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-month period ended June 30, 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., a California corporation
      (“Innovative”), 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 Innovative. 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. The fiscal year end of AcXess is March
      31.





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
      $3,356,564 from inception (January 12, 2005) through June 30, 2007, and has
      a
      working capital deficiency and stockholder deficit of $3,280,968 and $3,015,331,
      respectively, at June 30, 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. In addition, the Company is in
      default on its convertible notes and through June 25, 2007, incurred liquidated
      damages of approximately $62,000 in connection with its convertible debentures
      (see Note 6). 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.





(2)  Earnings
      Per 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.




4




**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


(3)  Deferred
      Financing Costs





The
      Company capitalizes financing costs as incurred and amortizes these costs to
      interest expense over the life of the underlying instruments.





(4)  Stockholders’
      (Deficit)





The
      shares of stock issued in the following transactions were valued at the closing
      market price on the date of issue.





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.





(5)  Commitments,
      Concentrations 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.





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, and leasing factors based on
      term
      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 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.





Rent
      expense under all operating leases for the three month periods ended June 30,
      2007, and 2006, was $17,550 and $25,050 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.




5


**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**





(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.





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. The Company disputes certain items in the complaint and
      intends to defend itself.





(6)  Convertible
      Notes and Derivative Instrument 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.
      If the convertible debt or equity instruments are not considered to be
      "conventional", then the existence of the potential cash penalties under the
      related registration rights agreement requires that the embedded conversion
      option be accounted for as a derivative instrument liability. Similarly, the
      potential cash penalties under the related registration rights agreement may
      require us to account for the freestanding options and warrants as derivative
      instrument liabilities, rather than as equity. In addition, 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.





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.




6




**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


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. As of June 30, 2007
      $1,319,573 of derivative financial instruments have been classified as current
      liabilities.





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). 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. As of June 30, 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 (see
      Note 5). 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;
      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 $62,000 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 June 25, 2007, 93 days after
      the
      agreed upon date in the Purchase Agreement, March 23, 2007.




7


**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




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.





Warrants
      have been 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”). 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. 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 June 30, 2007,
      was $139,622.




8




**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


A
      summary
      of the Notes and derivative instrument liabilities at June 30, 2007, is as
      follows:





Convertible
                Notes; 12% per annum; due December 15, 2006, though April 24,
                2007
            
            $
            1,107,500Plus:
                unamortized premium related to warrants and bifurcated embedded derivative
                instruments
            
            
            58,537Total
                carrying value at June 30, 2007
            
            $
            1,166,037





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 period ended
      June 30, 2007, was $7,054.





A
      summary
      of the Debentures and related derivative instrument liabilities at June 30,
      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 related to warrants and bifurcated embedded
                derivative instruments
            
            
            (
                978,172
            )Total
                carrying value at June 30, 2007
            
            $
            21,828





The
      total
      carrying value of the Notes and Debentures at June 30, 2007 was
      $1,187,865.





Derivative
      financial instrument liabilities





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 time they were issued and
      at
      June 30, 2007, 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.




9


**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**





At
      June
      30, 2007, the following derivative liabilities related to common stock warrants
      and embedded derivative instruments were outstanding as a result of the issuance
      of the Notes:





**Exercise**
            
            **Value**
            
            **Value****Price
                Per**
            
            **Issue**
            
            **June
                30,****Issue
                Dates**
            
            **Expiry
                Dates**
            
            
            
            **Share**
            
            **Date**
            
            **2007**May
                22, through
            
            
            May
                22, through
            
            
            1,600,000October
                26, 2006
            
            
            October
                26, 2011
            
            
            warrants
            
            $
            0.05
            
            $
            82,239
            
            $
            124,086Fair
                value of freestanding derivative instrument liabilities for
                warrants
            
            
            
            
            
            
            $
            124,086May
                22, through
            
            
            May
                22, throughOctober
                26, 2006
            
            
            October
                26, 2011
            
            
            
            
            
            
            
            $
            801,911
            
            $
            580,119Fair
                value of bifurcated embedded derivative instrumentliabilities
                associated with the above convertible notes
            
            
            
            
            
            
            $
            580,119Total
                derivative financial instruments
            
            
            
            
            
            
            
            
            
            $
            704,205




The
      following table reflects the number of common shares into which the
      aforementioned derivatives resulting from the issuance of Notes are indexed
      at
      June 30, 2007:





Embedded
                derivative instruments
            
            
            52,738,095Freestanding
                derivatives (warrants)
            
            
            4,430,00057,168,095





10


**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




At
      June
      30, 2007, the following derivative liabilities related to common stock warrants
      and embedded derivative instruments were outstanding as a result of the issuance
      of the Debentures:





**Exercise**
            
            **Value**
            
            **Value****Price
                Per**
            
            **Issue**
            
            **June
                30,****Issue
                Dates**
            
            **Expiry
                Dates**
            
            
            
            **Share**
            
            **Date**
            
            **2007**December
                22, 2006
            
            
            October
                26, 2011
            
            
            10,714,285
            
            $
            0.05
            
            $
            964,286
            
            $
            321,429warrantsFair
                value of freestanding derivative instrument liabilities for
                warrants
            
            
            
            
            
            
            $
            321,429December
                22, 2006
            
            
            December
                22, 2009
            
            
            
            
            
            
            
            $
            553,466
            
            $
            293,939Fair
                value of bifurcated embedded derivative instrumentliabilities
                associated with the above convertible notes
            
            
            
            
            
            
            $
            293,939Total
                derivative financial instruments
            
            
            
            
            
            
            
            
            
            $
            615,368





The
      following table reflects the number of common shares into which the
      aforementioned derivatives resulting from the issuance of the Debentures are
      indexed at June 30, 2007:





Embedded
                derivative instruments
            
            
            10,170,566Freestanding
                derivatives (warrants)
            
            
            10,714,28520,884,852





The
      total
      value of Derivative Financial Instruments at June 30, 2007 was
      $1,319,573.





(8)  Subsequent Events





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.





AcXess
      Agreement





On
      July
      24, 2007, the Company entered into a securities purchase agreement (the
“Agreement”) with AcXess, Inc., its wholly owned subsidiary, (“AcXess”), Thomas
      Elowson, President of AcXess, (“Elowson”), Raymond Leitz, Chief Technical
      Officer of AcXess, (“Leitz”), and Helge Solberg, Chief Architect of AcXess,
      (“Solberg”), (collectively, Elowson, Leitz, and Solberg the “Buyers”) wherein
      (i) AcXess redeemed shares from the Company in return for the issuance of a
      promissory note to the benefit of the Company (the “Note”) and the signing of a
      licensing agreement with the Company, (the “Licensing Agreement”) and (ii) the
      Buyers exchanged stock of the Company held by them (the “Stock”) in exchange for
      stock in AcXess and Elowson canceled options for stock in the Company held
      by
      him (the “Options”) in exchange for stock in AcXess. As a result of this
      Agreement the Company will own approximately 21% of the outstanding shares
      of
      AcXess. This Agreement will become effective upon approval by the Company’s
      shareholders. AcXess has 4,500,000 shares of common stock
      outstanding.




11


**INNOVATIVE
        SOFTWARE TECHNOLOGIES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


The
      Note
      is in the principal amount of $1,000,000, has a term of two years, and an
      interest rate of 10%, interest to accrue until maturity. The Note is subject
      to
      a security agreement (the “Security Agreement”) which collateralizes the Note
      with all assets of AcXess and has an acceleration clause for any material
      default. AcXess redeemed 1,000,000 shares of its common stock from the Company
      with the issuance of the Note.





The
      Licensing Agreement grants the Company a non-exclusive worldwide right and
      license under the Patents and any Improvements, as defined therein, to make,
      have made, use, sell and otherwise commercialize Licensed Products, with
      restricted rights on the part of the Company to grant sublicenses. In addition,
      the Licensing Agreement grants the Company “Best Pricing” on its current and
      future products and services. AcXess redeemed 1,500,000 shares of its common
      stock from the Company with the execution of the Licensing
      Agreement.





The
      Buyers exchanged 4,477,292 shares of common stock of the Company for 537,275
      shares of common stock of AcXess held by the Company.





Elowson
      received 478,268 shares of common stock of AcXess held by the Company in
      exchange for the cancellation of his options to purchase 5,978,349 shares of
      common stock of the Company. These options were fully vested, had a strike
      price
      of $0.13 per share and an expiration of August 9, 2016.





Following
      shareholder approval of the Agreement the Company will hold 984,457 shares
      of
      AcXess common stock, 21.9% of the total outstanding shares of common stock
      of
      AcXess, 4,500,000 shares.





Gruen-Kennedy
      Resignation





On
      August
      2, 2007, Traver Gruen-Kennedy resigned as member of the Board of Directors
      of
      the Company, effective immediately. There was no disagreement or dispute between
      Mr. Gruen-Kennedy and the Company which led to his resignation.





Amended
      Articles of Incorporation





On
      August
      3, 2007, the Company’s Articles of Incorporation were restated pursuant to a
      Restated Articles of Incorporation filed with the Secretary of State of the
      State of California to increase the number of shares of Common Stock authorized
      from 100,000,000 shares to 300,000,000 shares.





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. There were no registration rights granted with the issuance of the shares
      or the warrant.




12





**Item
      2.** **Management's
      Discussion and Analysis or Plan of Operation**





**Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**





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.





**Overview**





The
      following discussion summarizes information about our accounting policies and
      practices and information about our operations in a comparative manner for
      the
      three months ended June 30, 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.





**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.




13




**Results
      of Operations**





*Three
      months ended June 30, 2007, compared to the three months ended June 30,
      2006.*





Revenues





Revenues
      for the three months ended June 30, 2007, and 2006 were $32,140 and $1,572,
      respectively.





Cost
      of Sales and Margins





Cost
      of
      sales for the three months ended June 30, 2007, and 2006 were $21,712 and
      $12,961, respectively. The change in the cost of sales over the two periods
      is
      primarily due to an increase in charges from our network service provider
      reflecting increased bandwidth usage.





General
      and Administrative Expenses





General
      and administrative expenses for the three months ended June 30, 2007, and 2006
      were $330,500 and $182,318, 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 increase in general and administrative expenses is due primarily
      to the increase in number of employees and concomitant salaries and wages,
      increased professional fees due to increased accounting, legal and consulting
      requirements, and increased marketing and travel expenses due to attending
      trade
      shows.





Other
      Income





Other
      income, for the three months ended June 30, 2007, and 2006 was $374,759 and
      $2,694, respectively. Other income for the period ended June 30, 2007 comprise
      primarily of derivative and interest income offset by interest expense and
      other
      expense (see Note 6 in the Notes to the Financial Statements). Other income
      for
      the period ended June 30, 2006 was interest and other income offset by interest
      expense.





Net
      Income (Loss)





Our
      net
      income for the three months ended June 30, 2007, amounted to $54,688, and
      resulted from a loss from operations of $320,071 offset by other income of
      $374,759. Our net loss for the three months ended June 30, 2006 was $191,012
      and
      resulted from a loss from operations of $193,706 offset by other income of
      $2,694.





**Liquidity
      and Capital Resources**





The
      June
      30, 2007, financial statements have been prepared assuming that the Company
      will
      continue as a going concern. However, the Company has incurred a loss of
      $3,356,564 from inception (January 12, 2005) through June 30, 2007, and has
      a
      working capital deficiency and stockholder deficit of $3,280,968 and $3,015,331,
      respectively, at June 30, 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. In addition, the Company is in
      default on its convertible notes and through June 25, 2007, incurred liquidated
      damages of approximately $62,000 in connection with its convertible debentures
      (see Note 6). 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.





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.




14





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 $62,000 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 June 25, 2007, 93 days after
      the
      agreed upon date in the Purchase Agreement, March 23, 2007.





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 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
      June
      30, 2007, we had current liabilities of $3,459,379.





We
      have
      no material commitments for capital expenditures. Capital expenditures for
      the
      three months ended June 30, 2007 and 2006, amounted to $19,260 and $37,573,
      respectively.





**Off
      Balance-Sheet Arrangements**





We
      have
      no material off-balance sheet arrangements as of June 30, 2007.





**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 will be 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, and leasing factors based on
      term
      as follows:





18
      Months
      - 0.06476


24
      Months
      - 0.05090


30
      Months
      - 0.04263


36
      Months
      - 0.03716




15





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.





**Item
      3.** **Controls
      and Procedures**





As
      of
      June 30, 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.




16




**PART
      II -** **OTHER
      INFORMATION**





**Item
      1.** **Legal
      Proceedings**





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
      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.





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. The Company disputes certain items in the complaint and
      intends to defend itself.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





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. Proceeds will be used for general
      corporate purposes.





The
      shares of stock issued in the following transactions were valued at the closing
      market price on the date of issue.





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.




**Item
      3. Defaults Upon Senior Securities**





As
      of
      August 14, 2007, the Company was in default on nineteen convertible promissory
      notes totaling a principal amount of $1,107,500 as the term of these notes
      had
      passed. In the event of a default resulting from the Company's non-payment
      of
      principal or interest when due, the note holder 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 (see Legal Proceedings above). The Company has received no notice from
      any
      note holder and is currently in the process of renegotiating the terms of its
      convertible promissory notes; however there can be no assurance that such
      negotiations will be successful.





**Item
      4. Submission of Matters to a Vote of Security Holders**





Not
      Applicable




17




**Item
      5. Other Information**





On
      August
      3, 2007, the Company’s Articles of Incorporation were restated pursuant to a
      Restated Articles of Incorporation filed with the Secretary of State of the
      State of California to increase the number of shares of Common Stock authorized
      from 100,000,000 shares to 300,000,000 shares.




A
      copy of
      the Restated Articles of Incorporation, as filed with the Secretary of State
      of
      the State of California, is attached as Exhibit 3.1 to this Quarterly Report
      on
      Form 10-QSB, and is incorporated herein by reference.




**Item
      6. Exhibits.**




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




18




**SIGNATURES**





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


**Innovative
                Software Technologies, Inc.****Date:**August 14, 2007
            
            /s/
                Philip D. EllettPhilip
                D. Ellett
              Chief
                Executive Officer




**Date:**August 14, 2007
              
              /s/ Christopher
                    J. FloydChristopher
                    J. Floyd
                  Chief
                    Financial Officer,
                  Vice
                    President of Finance, and
                    Secretary
  19




**INDEX
      TO EXHIBITS**





**Exhibit**
              **Number**
            
            **Description**3.1
            
            Restated
                Articles of Incorporation of Innovative Software Technologies,
                Inc.31.1
            
            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.




20