UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM
10-Q







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


EXCHANGE
ACT OF 1934





FOR THE QUARTERLY PERIOD
ENDED: December 31, 2008





r 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.)


1413
S. Howard Avenue, Suite 220
 Tampa,
Florida 33606-7102
 (Address
of principal executive offices)




(813)
387-3310


(Registrant’s
Telephone Number, Including Area Code)




Securities
Registered Pursuant to Section 12(b) of the Act: None




Securities
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 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. 
YESxNOr





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




State the
number of shares outstanding of each of the issuer's classes of Common equity,
as of the latest practicable date:





103,514,199
Common Shares (post-reverse split) outstanding as of March 23, 2009





Transitional
Small Business Disclosure Format:  YESrNOx




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.




(Check
One):




Large
      Accelerated filer r
            Accelerated
      filer
                         rNon-accelerated
      filer    r
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x







Table of Contents




Table
ofContents




PagePART
      I.
              FINANCIAL
      INFORMATIONItem
      1.
              Financial
      StatementsCondensed
      Consolidated Balance Sheets as of December 31, 2008 (unaudited) and March
      31, 2008
              F-1Condensed
      Consolidated Statements of Operations for the three and nine months Ended
      December 31, 2008 and 2007 and for the period from inception (January 12,
      2005) through December 31,
2008 (unaudited)
              F-2Condensed Consolidated Statements of
      Cash Flows for the nine  months Ended December 31, 2008 and 2007
      and for the period from inception (January 12, 2005) through December 31,
      2008 (unaudited)
              F-3Notes to
      Condensed Consolidated Financial Statements
      (unaudited)
              F-5Item
      2.
              Management's
      Discussion and Analysis or Plan of Operation
              1Item
      3.
              Controls and
      Procedures
              4PART
      II.
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              4Item
      2.
              Unregistered Sales
      of Equity Securities and Use of Proceeds
              4Item
      3.
              Defaults Upon
      Senior Securities
              4Item
      4.
              Submission of
      Matters to a Vote of Security Holders
              4Item
      5.
              Other
      Information
              4Item
      6.
              Exhibits
              4SIGNATURES
              5







INTRODUCTORY
NOTE





This
Report on Form 10-Q 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.




Table of Contents





INNOVATIVESOFTWARE TECHNOLOGIES, INC.
 CONSOLIDATED BALANCE SHEETS
 (A
Development Stage
Company)
  December
      31,2008
                                (unaudited)
                              
                              
                              March
      31,2008AssetsCurrent
      assetsCash
      and cash equivalents
                              
                              $
                              4,842
                              
                              
                              $
                              29,126Accounts
      receivable, net of allowance of $36,655
                              
                              
                              -
                              
                              
                              
                              8,450Prepaid
      services and other current assets
                              
                              
                              -
                              
                              
                              
                              839Total
      current assets
                              
                              
                              4,842
                              
                              
                              
                              38,415Property
      and equipment, net of accumulated depreciation (note 3)
                              
                              
                              52,100
                              
                              
                              
                              114,487Deposits
      and other assets
                              
                              
                              2,400
                              
                              
                              
                              2,400Total
      assets
                              
                              $
                              59,342
                              
                              
                              $
                              155,302Liabilities
      and stockholders' deficitCurrent
      liabilitiesAccounts
      payable and accrued liabilities
                              
                              $
                              920,475
                              
                              
                              $
                              725,400Accrued
      taxes
                              
                              
                              11,398
                              
                              
                              
                              4,475Accrued
      interest
                              
                              
                              172,704
                              
                              
                              
                              89,727Accrued
      officer salary and expenses
                              
                              
                              106,071
                              
                              
                              
                              58,500Advances
      payable (note 4)
                              
                              
                              53,000
                              
                              
                              
                              155,511Capital
      lease obligation
                              
                              
                              12,091
                              
                              
                              
                              57,559Deferred
      revenue (note 5)
                              
                              
                              71,995
                              
                              
                              
                              112,781Penalty
      for late registration
                              
                              
                              81,140
                              
                              
                              
                              81,140Deferred
      gain of sale of fixed assets
                              
                              
                              887
                              
                              
                              
                              4,874Note
      payable (note 6)
                              
                              
                              158,079
                              
                              
                              
                              -Convertible
      debentures (note 7)
                              
                              
                              227,019
                              
                              
                              
                              70,394Total
      current liabilities
                              
                              
                              1,814,859
                              
                              
                              
                              1,360,361Commitments
      and contingencies (note 10)
                              
                              
                              -
                              
                              
                              
                              -Stockholders'
      deficitPreferred
      stock, 25,000,000 shares authorized, no par value:Series
      A, 1,500,000 shares authorized, 450,000 shares outstanding
                              
                              
                              450,000
                              
                              
                              
                              450,000Common
      stock, $0.001 par value; 30,000,000 shares authorized;103,514,199
      and 101,148,199 shares issued and outstanding at
                              
                              
                              103,514
                              
                              
                              
                              101,148December
      31, 2008 and March 31, 2008, respectively (note 8)Additional
      paid-in capital
                              
                              
                              3,391,337
                              
                              
                              
                              3,142,054Deficit
      Accumulated during the Development Stage
                              
                              
                              (5,700,368
                              )
                              
                              
                              (4,898,261
                              )Total
      stockholder's deficit
                              
                              
                              (1,755,517
                              )
                              
                              
                              (1,205,059
                              )Total
      liabilities and stockholders' deficit
                              
                              $
                              59,342
                              
                              
                              $
                              155,302




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




F-1
 Table of Contents




INNOVATIVESOFTWARE TECHNOLOGIES, INC.


CONSOLIDATED
STATEMENTS OF EARNINGS


(A Development Stage Company) (Unaudited)





For
      the ThreeMonths
      EndedDecember
      31,2008
                                          
                                          
                                          For
      the ThreeMonths
      EndedDecember
      31,2007
                                          
                                          
                                          For
      the NineMonths
      EndedDecember
      31,2008
                                          
                                          
                                          For
      the NineMonths
      EndedDecember
      31,2007
                                          
                                          
                                          Cumulative
      fromInception(January
      12, 2005)to
      December 31,2008RevenueRevenue
                                          
                                          $
                                          108,570
                                          
                                          
                                          $
                                          56,452
                                          
                                          
                                          $
                                          315,827
                                          
                                          
                                          $
                                          127,672
                                          
                                          
                                          $
                                          656,985Total
      revenue
                                          
                                          
                                          108,570
                                          
                                          
                                          
                                          56,452
                                          
                                          
                                          
                                          315,827
                                          
                                          
                                          
                                          127,672
                                          
                                          
                                          
                                          656,985Cost
      of revenueCost
      of revenue
                                          
                                          
                                          60,060
                                          
                                          
                                          
                                          7,943
                                          
                                          
                                          
                                          155,371
                                          
                                          
                                          
                                          47,850
                                          
                                          
                                          
                                          308,629Total
      cost of revenue, excluding depreciation below
                                          
                                          
                                          60,060
                                          
                                          
                                          
                                          7,943
                                          
                                          
                                          
                                          155,371
                                          
                                          
                                          
                                          47,850
                                          
                                          
                                          
                                          308,629Gross
      profit
                                          
                                          
                                          48,510
                                          
                                          
                                          
                                          48,509
                                          
                                          
                                          
                                          160,456
                                          
                                          
                                          
                                          79,822
                                          
                                          
                                          
                                          348,356Operating
      expenses:Sales,
      General and administrative expenses
                                          
                                          
                                          193,136
                                          
                                          
                                          
                                          564,893
                                          
                                          
                                          
                                          712,585
                                          
                                          
                                          
                                          1,115,481
                                          
                                          
                                          
                                          4,639,316Total
      operating expenses
                                          
                                          
                                          193,136
                                          
                                          
                                          
                                          564,893
                                          
                                          
                                          
                                          712,585
                                          
                                          
                                          
                                          1,115,481
                                          
                                          
                                          
                                          4,639,316Operating
      loss
                                          
                                          
                                          (144,626
                                          )
                                          
                                          
                                          (516,384
                                          )
                                          
                                          
                                          (552,129
                                          )
                                          
                                          
                                          (1,035,659
                                          )
                                          
                                          
                                          (4,290,960
                                          )Other
      income (expense):Income
      from change in fair value of derivative liabilities
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          270,919
                                          
                                          
                                          
                                          169,241Interest
      expense
                                          
                                          
                                          (104,434
                                          )
                                          
                                          
                                          (111,122
                                          )
                                          
                                          
                                          (253,965
                                          )
                                          
                                          
                                          (419,813
                                          )
                                          
                                          
                                          (1,642,922
                                          )Interest
      income
                                          
                                          
                                          -
                                          
                                          
                                          
                                          146
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2,731
                                          
                                          
                                          
                                          7,978Gain
      on sale of fixed assets
                                          
                                          
                                          1,329
                                          
                                          
                                          
                                          1,329
                                          
                                          
                                          
                                          3,987
                                          
                                          
                                          
                                          3,987
                                          
                                          
                                          
                                          6,505Other
      income (expense)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,295
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (280
                                          )
                                          
                                          
                                          49,790Total
      other expense, net
                                          
                                          
                                          (103,105
                                          )
                                          
                                          
                                          (110,942
                                          )
                                          
                                          
                                          (249,978
                                          )
                                          
                                          
                                          (142,456
                                          )
                                          
                                          
                                          (1,409,408
                                          )Loss
      before  taxes
                                          
                                          
                                          (247,731
                                          )
                                          
                                          
                                          (627,326
                                          )
                                          
                                          
                                          (802,107
                                          )
                                          
                                          
                                          (1,178,115
                                          )
                                          
                                          
                                          (5,700,368
                                          )Provision
      for taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Net
      loss
                                          
                                          $
                                          (247,731
                                          )
                                          
                                          $
                                          (627,326
                                          )
                                          
                                          $
                                          (802,107
                                          )
                                          
                                          $
                                          (1,178,115
                                          )
                                          
                                          $
                                          (5,700,368
                                          )Undeclared
      preferred stock dividends
                                          
                                          
                                          (4,500
                                          )
                                          
                                          
                                          (4,500
                                          )
                                          
                                          
                                          (13,500
                                          )
                                          
                                          
                                          (13,500
                                          )
                                          
                                          
                                          (45,000
                                          )Loss
      applicable to common stockholders
                                          
                                          $
                                          (252,231
                                          )
                                          
                                          $
                                          (631,826
                                          )
                                          
                                          $
                                          (815,607
                                          )
                                          
                                          $
                                          (1,191,615
                                          )
                                          
                                          $
                                          (5,745,368
                                          )Net
      loss per share - basic and diluted
                                          
                                          $
                                          (0.00
                                          )
                                          
                                          $
                                          (0.01
                                          )
                                          
                                          $
                                          (0.01
                                          )
                                          
                                          $
                                          (0.01
                                          )
                                          
                                          $
                                          (0.07
                                          )Weighted
      average shares outstanding -Basic
      and diluted
                                          
                                          
                                          103,514,199
                                          
                                          
                                          
                                          95,962,617
                                          
                                          
                                          
                                          102,853,108
                                          
                                          
                                          
                                          81,929,794
                                          
                                          
                                          
                                          82,189,043




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




F-2
 Table of Contents




INNOVATIVESOFTWARE TECHNOLOGIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(A
Development Stage Company)
 (Unaudited)
  For
      the Nine
                                Months
      Ended
                                December
      31,
                                2008
                              
                              
                              For
      the Nine
                                Months
      Ended
                                December
      31,
                                2007
                              
                              
                              Cumulative
                                from
      Inception
                                (January
      12, 2005) to
                                December
      31,
                                2008Cash
      flows from operating activities:Net
      loss
                              
                              $
                              (802,107
                              )
                              
                              $
                              (1,178,115
                              )
                              
                              $
                              (5,700,368
                              )Adjustments
      to reconcile net loss to netcash
      used in operating activities:Depreciation
      and amortization
                              
                              
                              71,372
                              
                              
                              
                              64,083
                              
                              
                              
                              204,506Common
      stock and stock option based compensation
                              
                              
                              165,150
                              
                              
                              
                              247,713
                              
                              
                              
                              1,121,827Issuance
      of shares to officer for accrued payroll
                              
                              
                              66,500
                              
                              
                              
                              -
                              
                              
                              
                              127,000Notes
      payable issued for expenses paid by affiliates and third
      parties
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              258,605Amortization
      of deferred gain on sale of assets
                              
                              
                              (3,987
                              )
                              
                              
                              (3,987
                              )
                              
                              
                              15Services
      paid in common stock
                              
                              
                              20,000
                              
                              
                              
                              29,727
                              
                              
                              
                              146,560Amortization
      of convertible debt discount
                              
                              
                              156,625
                              
                              
                              
                              229,575
                              
                              
                              
                              1,145,303Change
      in fair value of derivative liabilities
                              
                              
                              -
                              
                              
                              
                              (270,919
                              )
                              
                              
                              (169,241
                              )Amortization
      of deferred financing costs
                              
                              
                              -
                              
                              
                              
                              136,222
                              
                              
                              
                              232,199Net
      change in operating assets and liabilities:Accounts
      receivable
                              
                              
                              8,450
                              
                              
                              
                              5,650
                              
                              
                              
                              -Prepaid
      expenses and other current assets
                              
                              
                              839
                              
                              
                              
                              1,405
                              
                              
                              
                              10,800Deposits
                              
                              
                              -
                              
                              
                              
                              32,857
                              
                              
                              
                              (1,400
                              )Accounts
      payable and accrued expenses
                              
                              
                              335,114
                              
                              
                              
                              170,609
                              
                              
                              
                              481,710Deferred
      revenue
                              
                              
                              (40,786
                              )
                              
                              
                              93,863
                              
                              
                              
                              71,995Net
      cash used in operating activities
                              
                              
                              (22,831
                              )
                              
                              
                              (441,317
                              )
                              
                              
                              (2,070,490
                              )Cash
      flows from investing activities:Purchase
      of fixed assets
                              
                              
                              (8,985
                              )
                              
                              
                              (42,102
                              )
                              
                              
                              (234,083
                              )Proceeds
      from sale-leaseback of property and equipment
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              125,000Increase
      in deferred financing costs
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (156,200
                              )Net
      cash used in investing activities
                              
                              
                              (8,985
                              )
                              
                              
                              (42,102
                              )
                              
                              
                              (265,283
                              )Cash
      flows from financing activities:Stock
      issued for cash
                              
                              
                              -
                              
                              
                              
                              100,000
                              
                              
                              
                              113,000Proceeds
      from notes payable
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              427,969Principal
      payments on notes payable
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (30,000
                              )Proceeds
      from cash advances, net of repayments
                              
                              
                              53,000
                              
                              
                              
                              336,177
                              
                              
                              
                              208,511Proceeds
      from convertible debentures
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,663,500Principal
      payments under capital lease
                              
                              
                              (45,468
                              )
                              
                              
                              (26,570
                              )
                              
                              
                              (93,514
                              )Cash
      acquired in the reverse acquisition of Innovative
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              51,149Net
      cash provided by financing activities
                              
                              
                              7,532
                              
                              
                              
                              409,607
                              
                              
                              
                              2,340,615Net
      increase (decrease) in cash and cash equivalents
                              
                              
                              (24,284
                              )
                              
                              
                              (73,812
                              )
                              
                              
                              4,842Cash
      and cash equivalents at beginning of period
                              
                              
                              29,126
                              
                              
                              
                              440,648
                              
                              
                              
                              -Cash
      and cash equivalents at end of period
                              
                              $
                              4,842
                              
                              
                              $
                              366,836
                              
                              
                              $
                              4,842


The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
 F-3
 Table of Contents
  INNOVATIVE
SOFTWARE TECHNOLOGIES, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (A
Development Stage Company)
 (Unaudited)
 (continued)
 For
      the NineMonths
      EndedDecember
      31,2008
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    For
      the NineMonths
      EndedDecember
      31,2007
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    Cumulativefrom
      Inception(January
      12, 2005) toDecember
      31,2008
 Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                                    
                                    $
                                    11,795
                                    
                                    
                                    $
                                    17,050
                                    
                                    
                                    $
                                    45,895Taxes
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Issuance
      of common stock for acquisition
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    440,000Issuance
      of notes payable in exchange for advances payable and accrued
      interest
                                    
                                    $
                                    158,079
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    158,079Issuance
      of common stock in exchange for debt
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    1,114,602Assets
      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
                                    
                                    
                                    $
                                    1,952,451Convertible
      debt issued for financing costs
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    44,000
                                    
                                    
                                    $
                                    44,000





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




F-4
 Table of Contents




INNOVATIVESOFTWARE TECHNOLOGIES, INC.


(A
DEVELOPMENT STAGE COMPANY)


UNAUDITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.
BASIS OF PRESENTATION AND REPORTING





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and with the instructions
to Form 10-Q. 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, 2008, and the results of its
operations for the three and nine months ended December 31, 2008, and
December 31, 2007, and the cash flows for the nine months ended December 31,
2008, and December 31, 2007. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's audited 2008
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, 2008. Operating results for the three and
nine month periods ended December 31, 2008, are not necessarily indicative of
the operating results that may be expected for the year ending March 31,
2009.


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 condensed 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 unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. However,
the Company has incurred a loss of $ 5,700,368 from inception (January 12, 2005)
through December 31, 2008, and has a working capital deficiency and stockholder
deficit of $1,810,017 and  $1,755,517, respectively, at
December 31, 2008. 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.






F-5
 Table of Contents




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.


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, 2008, 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
 Table of Contents


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.




Stock Based
Compensation


We
recognize the cost of stock options and restricted stock in accordance with SFAS
No. 123 (Revised 2004) (“SFAS No. 123(R)”), “Share Based
Payment.”  SFAS No. 123(R) requires us to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award.  That cost will be recognized over
the period during which an employee is required to provide service in exchange
for the reward—known as the requisite service period. No compensation cost is
recognized for equity instruments for which employees do not render the
requisite service. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments.
  We may,
from time to time, issue common stock, stock options or common stock warrants to
acquire services or goods from non-employees. Common stock, stock options and
common stock warrants issued to persons other than employees or directors are
recorded on the basis of their fair value, as required by SFAS No. 123
(“SFAS No. 123”), “Accounting
for Stock Based Compensation”, which is measured as of the date required
by EITF Issue 96-18 (“EITF 96-18”), “Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.”  In accordance with EITF 96-18,
the stock options or common stock warrants are valued using the Black-Scholes
model on the basis of the market price of the underlying common stock on the
“valuation date,” which for options and warrants related to contracts that have
substantial disincentives to non-performance, is the date of the contract, and
for all other contracts is the vesting date. Expense related to the options and
warrants is recognized on a straight-line basis over the shorter of the period
over which services are to be received or the vesting period. Where expense must
be recognized prior to a valuation date, the expense is computed under the
Black-Scholes model on the basis of the market price of the underlying common
stock at the end of the period, and any subsequent changes in the market price
of the underlying common stock through the valuation date is reflected in the
expense recorded in the subsequent period in which that change
occurs.





(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.




(b) Customer
Concentration




During
the three and nine months ended December 31, 2008 and 2007, three customers
accounted for approximately  95%
and  92%,  and  67% and 88% of revenues,
respectively. The loss of these customers would have a material adverse effect
on financial results.




Recent Accounting
Developments:




Recently
adopted accounting pronouncements




Effective
at the beginning of the first quarter of 2009, the Company adopted the provision
of FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109” (“FIN 48”).  FIN 48 contains a two-step
approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109, “Accounting for Income Taxes.”  The
first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any.  The second step is to measure the tax
benefit as the largest amount that is more than 50% likely of being realized
upon ultimate settlement.





As a
result of the implementation of FIN 48, the Company has not changed any of its
tax accrual estimates.  The Company files U.S. federal and U.S. state
tax returns.  For state tax returns the Company is generally no longer
subject to tax examinations for years prior to 1996.




Effective
April 1, 2008, the Company partially adopted SFAS 157, which provides a
framework for measuring fair value. Fair value is defined as the price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants at the measurement date. The
partial adoption of this standard only resulted in additional disclosure
requirements and had no financial statement impact. Delayed application of this
statement is permitted for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years. The Company has not applied the provisions of SFAS 157 for intangible
assets and long-lived assets measured for fair value for impairment assessment
under Statement 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.




Effective
April 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for
Financial Assets and Liabilities — Including an Amendment of SFAS No. 115
(SFAS 159). This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions in
SFAS No. 159 are elective; however, the amendment to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, applies to all
entities with available-for-sale and trading securities. The fair value option
established by SFAS 159 permits the Company to choose to measure eligible items
at fair value at specified election dates. The Company will report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. The fair value option: (a) may
be applied instrument by instrument, with a few exceptions, such as
investments otherwise accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to
entire instruments and not to portions of instruments. In connection with the
adoption of this standard, the Company did not elect any additional financial
instruments to be recorded at fair value.





F-7
 Table of Contents




3.
PROPERTY AND EQUIPMENT





Property
and equipment consist of the following as of December 31, 2008 and March 31,
2008:





December
      31
                        2008
                      
                      
                      March
      31,
                        2008Equipment
                      
                      $
                      77,567
                      
                      
                      $
                      68,583Computer
      software
                      
                      
                      4,930
                      
                      
                      
                      4,930Furniture
      and fixtures
                      
                      
                      1,258
                      
                      
                      
                      1,258Property
      and equipment under capital lease
                      
                      
                      134,022
                      
                      
                      
                      134,022217,777
                      
                      
                      
                      208,793Accumulated
      depreciation and amortization
                      
                      
                      (165,677
                      )
                      
                      
                      (94,306
                      )$
                      52,100
                      
                      
                      $
                      114,487





Depreciation
expense was $23,885 and $ 21,989 for the three months ended December 31, 2008
and 2007, respectively.  Depreciation expense was $71,372 and $64,083
for the nine months ended December 31, 2008 and 2007, respectively.





4.  ADVANCES
PAYABLE





Advances
payable of $53,000 at December 31, 2008, consists of cash advances to the
Company by Aspen Capital and a shareholder, Peter Peterson. These cash advances
will accrue interest at a rate of 10% per annum.  During the three and
nine months ended December 31, 2008, we accrued interest in the amount of $1,336
and $2,875, respectively, for these cash advances.


During
the nine months ended December 31, 2008, the Company converted a cash advance of
$155,511 and accrued interest in the amount of $2,568, into a promissory note
payable in the amount of $158,079 to Xalles, an Irish corporation (“Xalles”)
(see note 6).  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 are
provided.  As of December 31, 2008 and March 31, 2008, these advance
payments aggregated a total of $71,995 and $112,781, respectively; this
amount will be taken into revenue over the following twelve
months.


6.   NOTE
PAYABLE





On April
14, 2008, the Company issued a promissory note (the “Note”) to the benefit of
Xalles in the amount of $158,079 pursuant to the conversion of an advance made
to the Company by Xalles (see note 4).  The outstanding principal
amount of the Note bears interest beginning on April 14, 2008, calculated on the
basis of a 360-day year for the actual number of days elapsed through the actual
payment date at the following rates of interest: eight percent (8%) per annum
through June 15, 2008; ten percent (10%) per annum through August 16, 2008,
twelve percent (12%) per annum through October 17, 2008; and fourteen percent
(14%) per annum through December 18, 2008.  This Note may be prepaid,
either in whole or in part, at any time without penalty.  The
outstanding principal balance of this Note, plus accrued but unpaid interest,
was due and payable on December 18, 2008 and is in default at December 31,
2008.  At March 13, 2009, the Company is in negotiations with Xalles
regarding a restructuring or renegotiation of the Note. However, there is no
assurance that such a restructuring will be achieved at terms beneficial to the
Company if at all.


7.  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.






F-8
 Table of Contents




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.




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
year ended March 31, 2008, due to the conversion of the Convertible Notes
Payable to common stock (see below), the Company reclassified derivative
liabilities in the amount of $993,015 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 six months ended 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.  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 10).
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.




F-9
 Table of Contents




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 $22,438 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
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 three and nine months ended
December 31, 2008 was $73,361 and $156,625.




On August
23, 2007, the Company issued an aggregate of 5,672,655 shares of common stock in
exchange for the conversion of the 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 was $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 year ended March 31, 2008.


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
ended December 31, 2008 and 2007 was $73,361 and $15,397, respectively.
Amortization related to the Debentures for the nine months ended December 31,
2008 and 2007 was $156,625 and $32,872, respectively.






F-10
 Table of Contents


A summary
of the Debentures and unamortized discount at December 31 and March 31,
2008, is as follows:




December
      31,
                  
                  
                  March
      31,2008
                  
                  
                  2008Debenture;
      4% per annum (increased to 9%per
      annum in July 2007); due December 22, 2009)
                  
                  $
                  1,000,000
                  
                  
                  $
                  1,000,000Less:
      Unamortized discount
                  
                  
                  (772,981
                  )
                  
                  
                  (929,606
                  )Net
      carrying value
                  
                  $
                  227,019
                  
                  
                  $
                  70,394





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, which was 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
shown as accrued liabilities on the Company’s balance sheet at December 31,
2008.




8.  COMMON
STOCK





During
the nine months ended December 31, 2008, the Company had the following common
stock issuances:





On May
30, 2008, the Company issued shares of common stock at a price of $0.05 per
shares for previously accrued salary in the amount of $31,500 to the Company’s
Chief Financial Officer.  A total of 630,000 shares of common
stock were issued to the officer.





On May
30, 2008, the Company issued shares of common stock at a price of $0.05 per
shares for previously accrued salary in the amount of $35,000 to the Company’s
Executive Officer.  A total of 700,000 shares of common stock
were issued to the officer.





On July
11, 2008 the Company issued 1,000,000 shares of common stock as a price of $0.02
per share for a previously accrued liability in the amount of $20,000 for legal
fees.





Options





On August
9, 2006, the Company adopted the Innovative Software Technologies, Inc. 2006
Equity Incentive Plan (the "2006 Plan"). An aggregate of 20 million shares of
common stock is authorized for issuance under the 2006 Plan. Options must
terminate no later than the tenth (10th) anniversary of the date of grant, and
each incentive stock option granted to any 10% Owner-Employee (as defined in the
2006 Plan) must terminate no later than the fifth (5th) anniversary of the date
of grant. The Company accounts for stock-based compensation using the fair value
method as defined in SFAS 123(R) and estimates the fair value of each option
grant on the grant date using an option-pricing model.





On August
24, 2007, the Company adopted the Innovative Software Technologies, Inc. 2007
Equity Incentive Plan (the “2007 Plan”). An aggregate of 60 million shares of
common stock is authorized for issuance under the 2007 Plan. The Company
accounts for stock-based compensation using the fair value method as defined in
SFAS 123(R) and estimates the fair value of each option grant on the grant date
using an option-pricing model. During the three months ended December 31, 2008
and 2007, the Company recognized $39,113 and $247,713, respectively, in
stock-based compensation. During the nine months ended December 31, 2008 and
2007, the Company recognized $165,150 and $247,713, respectively, in
stock-based compensation.






F-11
 Table of Contents





A summary
of the Company's 2006 and 2007 stock option Plans as of December 31, 2008 is
presented below:




Weighted
                      
                      
                      Weighted
                        average
                      
                      
                      
                      
                      
                      Weighted
                        Averageaverage
                      
                      
                      exercise
                      
                      
                      
                      
                      
                      ExerciseRange
      of
                      
                      
                      Number
      of
                      
                      
                      remaining
                      
                      
                      price
      of
                      
                      
                      Number
      of
                      
                      
                      price
      ofexercise
                      
                      
                      options
                      
                      
                      contractual
                      
                      
                      outstanding
                      
                      
                      options
                      
                      
                      Exercisableprices
                      
                      
                      outstanding
                      
                      
                      life
      (years)
                      
                      
                      options
                      
                      
                      exercisable
                      
                      
                      Options$
                      0.05
                      
                      
                      
                      23,968,750
                      
                      
                      
                      3.8
                      
                      
                      $
                      0.05
                      
                      
                      
                      14,343,750
                      
                      
                      $
                      0.05$
                      0.08
                      
                      
                      
                      6,000,000
                      
                      
                      
                      3.1
                      
                      
                      $
                      0.08
                      
                      
                      
                      6,000,000
                      
                      
                      $
                      0.08$
                      0.13
                      
                      
                      
                      250,000
                      
                      
                      
                      2.7
                      
                      
                      $
                      0.13
                      
                      
                      
                      250,000
                      
                      
                      $
                      0.13$
                      0.14
                      
                      
                      
                      5,978,349
                      
                      
                      
                      2.6
                      
                      
                      $
                      0.14
                      
                      
                      
                      5,978,349
                      
                      
                      $
                      0.1436,197,099
                      
                      
                      
                      3.0
                      
                      
                      $
                      0.07
                      
                      
                      
                      26,572,099
                      
                      
                      $
                      0.08





Weighted
      AverageOptions
                    
                    
                    Exercise
      PriceOutstanding
      at March 31, 2008
                    
                    
                    40,887,349
                    
                    
                    $
                    0.08Issued
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Forfeited
      or expired
                    
                    
                    (4,690,250
                    )
                    
                    
                    0.11Outstanding
      at December 31, 2008
                    
                    
                    36,197,099
                    
                    
                    $
                    0.07Non-vested
      at December 31, 2008
                    
                    
                    9,625,000
                    
                    
                    $
                    0.05Exercisable
      at December 31, 2008
                    
                    
                    26,572,099
                    
                    
                    $
                    0.08




Aggregate
intrinsic value of options outstanding and exercisable at December 31, 2008 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
$0.001 as of December 31, 2008, and the exercise price multiplied by the number
of options outstanding. As of December 31, 2008, total unrecognized stock-based
compensation expense related to stock options was $286,825.




9.   RELATED
PARTY TRANSACTIONS





During
the nine months ended December 31, 2008, the Company had the following
transactions with related parties:





On May
30, 2008, the Company issued shares of common stock at a price of $0.05 per
shares for previously accrued salary in the amount of $31,500 to the Company’s
Chief Financial Officer.  A total of 630,000 shares of common
stock were issued to the officer.





On May
30, 2008, the Company issued shares of common stock at a price of $0.05 per
shares for previously accrued salary in the amount of $35,000 to the Company’s
Executive Officer.  A total of 700,000 shares of common stock
were issued to the officer.





The
Company accrued salary in the amount of $49,000 to the Company’s Chief Executive
Officer.





The
Company accrued salary in the amount of $22,017 to the Company’s previous
Chief Financial Officer, who resigned effective May 31, 2008.





The
Company accrued salary in the amount of $35,000 to the Company’s current Chief
Financial Officer, whose tenure with the Company began June 1,
2008.






F-12
 Table of Contents




10.  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, 2008, the balance of this deferred gain was
$887.




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 months ended December 31,
2008 and 2007, was $9,057 and $24,049, respectively. Since July 1,
2007, our principal executive offices have been  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.  During the month of
March 2009, this office is being closed and the operations are being moved to
1413 S. Howard Avenue, Suite 220, Tampa, Florida, 33606-7102. The new office
will be a co-sharing arrangement with one of the Company’s major shareholders,
Aspen Capital Partners, LLC. and the rent expense has yet to be
determined.


(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.




11.
SUBSEQUENT EVENTS





Resignation of Chief
Executive Officer and Director





On
February 12, 2009, Philip D. Ellett, the Company’s Chief Executive Officer and a
Director, gave notice to the Company of his resignation, effective February 19,
2009. Mr. Ellett is resigning to pursue another career opportunity.





In
connection with the announced resignation of Mr. Ellett, the Company announced
that Mr. Robert V. Rudman, currently the Company’s Chief Financial Officer would
also be serving as the Acting Chief Executive Officer and Director of Innovative
Software Technologies, Inc. until a replacement for Mr. Ellett can be recruited.
Mr. Rudman has not engaged in any transactions with the Company or any of its
subsidiaries that would be required to be reported under Item 404(a) of
Regulation S-K promulgated by the Securities and Exchange
Commission.








F-13
 Table of Contents




Item2. 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,
2008 and 2007  included in our Form 10-KSB, filed July 15, 2008, 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-Q.




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, 2008, and 2007. 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, we completed the acquisition of AcXess, Inc., a Florida corporation,
in a stock exchange transaction pursuant to a Stock Exchange Agreement by and
between us, 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 our wholly owned subsidiary. In accordance with the
provisions of Statements of Financial Accounting Standards No. 141 (“SFAS”)
“Business Combination (“SFAS 141”)”, AcXess was deemed to be the purchaser in
the transaction for financial reporting purposes.  For accounting
purposes, AcXess is treated as the continuing reporting entity and the inception
date of AcXess was January 12, 2005.




AcXess’
strategy was to provide Business Continuity (BC) and application hosting
services to the Small and Medium Enterprise (SME) market. After careful
review the Company determined that the capital requirements and time to
market for the products and services of AcXess were greater than previously
expected. As a result of this finding the Company entered into an agreement on
July 24, 2007 to sell approximately 78.1% of the common stock of AcXess to the
AcXess management team. In exchange for this sale the Company will
receive:




(1)
            A
      promissory note in the amount of $1,000,000. The note will have a term of
      two years and will bear interest at a rate of 10% per year. The note is
      collateralized with all assets of AcXess and has an acceleration clause
      for any material default.(2)
            A
      license agreement grant that gives the Company a non-exclusive worldwide
      right and license products under Axcess’ patents relating to Business
      Continuity (BC) solutions.





(3)
            The
      return of 4,477,292 shares of common stock and the cancellation
      of  fully vested options to purchase 5,978,349 shares of the
      Company’s common stock.




As a
result of the delay experienced in completing this sale transaction, the Company
is currently in negotiations with the AcXess management team regarding possible
changes in the terms of the proposed transaction. .





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, 2008.





1
 Table of Contents




Results
of Operations





Three
months ended December 31, 2008, compared to the three months ended December 31,
2007.





Revenues





Revenues
for the three months ended December 31, 2008 and 2007 were $108,570 and $56,452,
respectively, an increase of $52,118 or approximately 92%. Revenue is derived
primarily from the contracts that AcXess has with Microsoft, Citrix, and SAP and
we experienced an increase in activity from these customers during our third
quarter ended December 31, 2008.


Cost of
Sales





Cost of
sales for the three months ended December 31, 2008, and 2007 were $60,060 and
$7,943, respectively, an increase of $52,117 or approximately 656%. Cost of
sales is primarily comprised of network charges that AcXess incurs at its data
site and we experienced significant cost increases from our hosting company
during our third quarter ended December 31, 2008.


Sales, General, and
Administrative Expenses





Sales,
general and administrative expenses for the three months ended December 31,
2008, and 2007 were  $193,136 and $564,893, respectively, a decrease
of  $371,757 or approximately 66%  General and
administrative expenses consisted primarily of  payroll and related
costs of $77,867; bad debt expense of $29,320; consulting fees in the amount of
$24,000; depreciation and amortization expense in the amount of $23,885; legal
and accounting fees in the amount of $19,783; insurance expense in the amount of
$ 12,392; and facilities and related expense in the amount of $2,912. Although
the revenue of AcXess was greater during the three months ended December 31,
2008 compared to the same quarter in 2007, the overall level of activity in the
consolidated company was significantly lower as reflected by the reduced
operating expenses.
  Other Expense,
net





Other
expense, net for the three months ended December 31, 2008 was expense of
$103,105 compared to expenses of $110,942 for the three months ended
December 31, 2007, a net decrease in expense of $7,837.    During
the three months ended December 31, 2008 the Company incurred interest expense
of $104,434 compared to $111,122 during the three months ended December 31,
2007. The reason for the decrease in interest expense was decrease in debt due
to the conversion of notes payable.   During the three months ended
December 31, 2008 and 2007, the Company had a gain on the sale of fixed assets
of $1,329.  The Company also had other expenses of $0 during the three
months ended December 31, 2008, compared to other income of $1,295 during the
three months ended December 31, 2007.


Net Loss





For the
reasons stated above, our net loss for the three months ended December 31, 2008,
amounted to $247,731 compared to a net loss of $627,326 during the prior
period, a net decrease in loss of $379,595, or
approximately 61%. The decrease in net loss can be attributed to the
reduction of overall activity in the consolidated company.
  Nine
months ended December 31, 2008, compared to the nine months ended December 31,
2007.





Revenues





Revenues
for the nine months ended December 31, 2008, and 2007 were $315,827 and
$127,672, respectively, an increase of $188,155, or approximately 147%. Revenue
is derived primarily from the contracts that AcXess has with Microsoft, Citrix,
and SAP and we experienced an increase in activity from these customers during
the nine months ended December 31, 2008..


Cost of Sales and
Margins





Cost of
sales for the nine months ended December 31, 2008, and 2007 were $155,371 and
$47,850, respectively, an increase of $107,521 or approximately 225%. Cost of
sales is primarily comprised of network charges that AcXess incurs at its data
site and we experienced significant cost increases from our hosting company
during the nine months ended December 31, 2008.


Sales, General, and
Administrative  Expenses





Sales,
general and administrative expenses for the nine months ended December 31, 2008,
and 2007 were $712,585 and $1,115,481, respectively, a decrease
of $402,896, or approximately  36%. Sales, general and
administrative expenses consisted primarily payroll and related costs of
$271,073; accounting fees in the amount of $152,819; consulting fees in the
amount of $114,000; depreciation and amortization expense in the amount of
$71,372; bad debt expense of $29,320; insurance expense in the amount of
$28,369; facilities and related expense in the amount of $18,982; travel
and entertainment costs in the amount of $10,453; and professional fees in the
amount of $5,291. Although the revenue of AcXess was greater during the nine
months ended December 31, 2008 compared to the same period in 2007, the overall
level of activity in the consolidated company was significantly lower as
reflected by the reduced operating expenses.


2
 Table of Contents




Other Expense,
net





Other
expense, net for the nine months ended December 31, 2008 were expense of
$249,978 compared to expenses of $142,456 for the nine months ended
December 31, 2007, a net increase in expense of $107,522 or approximately
75%.  During the nine months ended December 31, 2008 the Company had
no derivative liabilities outstanding and thus recognized no gain or loss from
the change in fair value of any derivative liabilities.  During
the nine months ended December 31, 2007, the Company recognized a gain on
derivative liability of $270,919.  During the nine months ended December
31, 2008 the Company incurred interest expense of $253,965 compared to $419,813
during the nine months ended December 31, 2007. The reason for the decrease in
interest expense was a decrease in debt due to the conversion of notes
payable.  During the nine months ended December 31, 2008 and 2007, the
Company had a gain on the sale of fixed assets of $3,987.  The Company
also had other expenses of $0 during the nine months ended December 31, 2008,
compared to other expense of $280 during the nine months ended December 31,
2007.


Net Loss





For the
reasons stated above, our net loss for the nine months ended December 31, 2008,
amounted to $802,107 compared to a net loss of $1,178,115 during the prior
period, a net decrease in loss of $376,008 or approximately 32%.  The
decrease in net loss can be attributed to the reduction of overall activity in
the consolidated company.
  Liquidity
and Capital Resources




The
December 31, 2008, financial statements have been prepared assuming the Company
will continue as a going concern. However, the Company has incurred a loss
of $5,700,368 from inception (January 12, 2005) through December 31, 2008,
and has a working capital deficiency and stockholder deficit
of  $1,810,017 and  $1,755,517, respectively, at
December 31, 2008. 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 financings activities. However
there can be no assurance of successful financings or acquisition activity in
the future.





On
December 22, 2006, the Company entered into a securities purchase agreement (the
"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 Commission (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
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
will be payable in cash semi-annually, beginning on July 1, 2007.





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, 2008, we had current liabilities of  $1,814,859. 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 will be recognized over the 24 month term of the
lease.  At December 31, 2008, the balance of this deferred gain was
$887.




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.





On April
16, 2008, the Company announced that it had terminated its planned acquisition
of Xalles Limited that had been announced on October 5, 2007. In conjunction
with this planned acquisition, Xalles had advanced to the Company the
amount of $158,079 to provide working capital for the Company. On April 14, 2008
(the “Effective Date”), Innovative Software Technologies, Inc., (the “Company”),
Xalles Limited, an Irish corporation (“Xalles”), and Meridian Bay Limited, an
Hong Kong corporation (“Meridian”) terminated an agreement to purchase all of
the outstanding shares of Xalles which had been entered into by the parties on
October 1, 2007 (the “Agreement”).  Continued due diligence by the
Company resulted in the Company’s decision to not pursue the acquisition under
the terms specified by the Agreement.





As a
result of the termination of the Agreement and the signing of the Release, and
in order to recognize the obligation of the Company due to a series of
advancements made to it by Xalles, the Company issued a promissory note to the
benefit of Xalles in the amount of $158,079, on April 14, 2008, repayable on or
before December 18, 2008 (the “Note”).  The outstanding principal
amount of the Note bears interest beginning on April 14, 2008, calculated on the
basis of a 360-day year for the actual number of days elapsed through the actual
payment date at the following rates of interest: eight percent (8%) per annum
through June 15, 2008; ten percent (10%) per annum through August 16, 2008,
twelve percent per annum through October 17, 2008; and fourteen percent per
annum through December 18, 2008.  This Note may be prepaid, either in
whole or in part, at any time without penalty.  The outstanding
principal balance of this Note, plus accrued but unpaid interest, was due and
payable on December 18, 2008 and is in default at December 31,
2008.  At March 13, 2009, the Company is in negotiations with Xalles
regarding a restructuring or renegotiation of the Note; however, there is no
assurance that such a restructuring will be achieved at terms beneficial to the
Company if at all.




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Item3. Controls and Procedures




Evaluation
and Conclusion of Disclosure Controls and Procedures




The
Company conducted an evaluation, under the supervision and with the
participation of the Company’s principal executive officer and principal
financial officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e), as amended) as of
March 31, 2008.




Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures as of the end of
the period covered by this Report were not effective as a result of a material
weakness in internal control over financial reporting as of March 31, 2008 as
discussed in the 10-KSB for the year ended March 31, 2008.




PART
II - OTHER INFORMATION





Item1. 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.





SEC
Investigation





On June
24, 2003, the Securities and Exchange Commission ("SEC") issued a formal order
of investigation, authorizing the investigation of certain securities matters.
The SEC staff has taken the testimony of certain officers and previously
management had voluntarily provided documents and information to the SEC staff
in response to informal, non-public inquiries by the staff. On April 8, 2005,
the Independent Committee of the Board of Directors turned over the results of
its investigation to the SEC. On June 25, 2007, the SEC notified the Company
that it had concluded the investigation as it relates to the Company and was not
recommending any enforcement action.





Kansas City
Explorers





We are 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 ours 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 our products and services.





Item2. Unregistered Sales of Equity Securities and Use of
Proceeds





None.




Item3. Defaults Upon Senior Securities





None





Item4. Submission of Matters to a Vote of Security
Holders




None.




Item5. Other Information





None.




Item6. Exhibits.




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




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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: March
      26, 2009
              
              /s/ Robert
      V.
      Rudman
                Robert
      V. Rudman
                Chief
      Executive Officer andChief Financial
      Officer











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