10KSB 1 innsoft-10k3312008.htm innsoft-10k3312008.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 
 
FORM 10-KSB
 
 
(Mark One)
 
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended March 31, 2008
 
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to                   

COMMISSION FILE NUMBER: 000-1084047


INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

 
DELAWARE
95-4691878
(State or Other Jurisdiction of Incorporation or Organization
(I.R.S. Employer Identification No.)
   
911 Ranch Road 620 North Suite 204, Austin, Texas
78734
(Address of Principal Executive Offices)
(Zip Code)

(813) 387 - 3304
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:
  
Name of each exchange on which registered:
Common Stock, par value $0.001 per share
  
The NASDAQ Capital Market
 
Securities registered pursuant to Section 12(b) of the Act:
 
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $.001 par value
(Title of Class)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K.  o.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
State issuer's revenues for its most recent fiscal year: $216,583
 
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of July 2, 2008 was approximately $2,050,279. The registrant had issued and outstanding 102,513,929  shares of its common stock on July 2, 2008.
 




TABLE OF CONTENTS
                        
 
 
PART I
  
     
ITEM 1.
3
ITEM 2.
7
ITEM 3.
7
ITEM 4.
7
     
 
 PART II
  
     
ITEM 5.
8
ITEM 6
10
ITEM 7.
16
ITEM 8.
33
ITEM 8A.
34
     
 
 PART III
  
     
ITEM 9.
35
ITEM 10.
36
ITEM 11.
38
ITEM 12.
39
ITEM 13.
40
ITEM 14.
40
     
 
41
 
42



CAUTIONARY STATEMENTS ABOUT FORWARD LOOKING INFORMATION AND STATEMENTS

Statements in this annual report may be "forward-looking statements." Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this annual report, including the risks described under "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this annual report and in other filings we make with the SEC. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this annual report.
 
 
 

PART I

ITEM  1.  DESCRIPTION  OF  BUSINESS

OVERVIEW

We were incorporated in the State of California in May 1998 under the name "Innovative Software Technologies, Inc." On November 30 2007 we were incorporated in the State of Delaware under the name “Innovative Software Technologies, Inc.” Immediately prior to the acquisition of AcXess, Inc. (“AcXess”)on June 26, 2006, we had nominal assets and revenues and no business operations.
 
Innovative commenced business on April 16, 2001, when it acquired 100% of the outstanding common stock of Triad Media, Inc. ("Triad"), formerly known as Hackett Media, Inc. ("Hackett") in a share exchange transaction. The acquisition resulted in the owners of Hackett holding 90% of our outstanding capital stock and having effective operating control of the combined entity after the acquisition. As a result of this acquisition, our primary business consisted of Internet sales and marketing.

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

On September 26, 2003, the former principals of EPMG alleged in writing that they were entitled to rescind the 2001 acquisition of EPMG. On July 2, 2004, we entered into a Settlement Agreement with the former principals of EPMG under the terms of which the former principals surrendered all of their 6,784,762 shares of common stock, 1,200,500 shares of Series A Preferred Stock, and 80,000 shares of Series B Preferred Stock, in exchange for certain assets and liabilities of EPMG. Subsequent to the settlement agreement, the former principals filed an action against us for breach of the Settlement Agreement related to certain reserve liabilities. On February 6, 2007, we entered into a Settlement Agreement and Mutual Release with Prosper, Inc. pursuant to which we agreed to pay Prosper, Inc. $10,000 in consideration for our release and dismissal of this action.

On August 4, 2004, Peter M. Peterson replaced Douglas S. Hackett as our Chief Executive Officer (with Mr. Hackett remaining as President), and Christopher J. Floyd was appointed as our Chief Financial Officer. In October 2004 we relocated our corporate headquarters from Kansas City, Missouri, to Tampa, Florida. Effective April 7, 2005, Mr. Hackett resigned as President and as a director of the Company.

On April 20, 2005, we entered into a stock purchase agreement with Mr. Hackett for the sale to Mr. Hackett of all common shares of our subsidiary Triad in exchange for the surrender by Mr. Hackett of 4,935,015 shares of our common stock held by him. Since the transaction involves receipt of our common stock in exchange for the subsidiary, we recorded this transaction in April 2005 as an equity transaction.

On May 6, 2005, our IST Integrated Solutions, Inc. subsidiary completed an acquisition of the assets and operations of Lietz Development, Inc. and Saphire of Tampa Bay, Inc. (collectively "Data Tech"), a Tampa, Florida based computer equipment reseller, and hosting and network services provider. Subsequent to the closing of the acquisition the Company identified and/or discovered certain facts that constituted undisclosed liabilities or breaches of representation or warranty by Data Tech. On June 27, 2005 the Company executed a mutual rescission agreement and release with Data Tech the effect of which was to rescind the earlier acquisition agreement between the parties. No portion of the Purchase Price or Performance Consideration (as defined in Section 1.4 of the Asset Purchase Agreement) had been paid by the Company in connection with the transaction.

For the remainder of the 2005 calendar year we had no business operations and sought to engage in a business combination with a company with operations. As a result of the sale of Triad we were no longer engaged in the development, marketing and delivery of business-type educational programs and also had no continuing involvement with the business of EPMG.
 
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.
 
This sale-transaction is expected to close upon the successful  completion of a new acquisition by the Company


 
CURRENT OPERATING PLAN

The focus of the Company is on acquiring software and software services based companies. Any potential acquisition candidate must be able to demonstrate
 
§  
A sustainable competitive advantage
§  
A value proposition that is simple to articulate and present
§  
A strong and committed management team that values the opportunity to be part of a publicly traded company

To assess the viability of a potential acquisition the Company utilizes both its management team and a team of industry experts. This combined expertise provides significant knowledge in the area of software architecture, product development, establishment of distribution channels, maximization of revenue channels and the true value and nature of the “competitive advantage”.

The Company plans on acquiring these companies by utilizing the Company’s stock and by raising additional capital for operating expenses if required.

INSURANCE MATTERS

We carry directors and officers liability insurance.
 
EMPLOYEES

As of July 2, 2008, we had two employees who are the Company’s Chief Executive Officer and President.
 
RISK FACTORS

WE ARE A DEVELOPMENT STAGE COMPANY AND WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN BASE AN INVESTMENT DECISION.

We have a limited operating history upon which you can make an investment decision, or upon which we can accurately forecast future sales. You should, therefore, consider us subject to the business risks associated with a new business. The likelihood of our success must be considered in light of the expenses, difficulties and delays frequently encountered in connection with the formation and initial operations of a new business.

TO DATE WE HAVE HAD SIGNIFICANT OPERATING LOSSES, AND AN ACCUMULATED DEFICIT AND HAVE HAD LIMITED REVENUES AND DO NOT EXPECT TO BE PROFITABLE FOR AT LEAST THE FORESEEABLE FUTURE, AND CANNOT PREDICT WHEN WE MIGHT BECOME PROFITABLE, IF EVER.

We have been operating at a loss since our inception, and we expect to continue to incur losses for the foreseeable future. Net loss for the year ended March 31, 2008 was $1,487,009 resulting in an accumulated deficit of $4,898,261. We may not be able to generate significant revenues in the future. As a result, we expect to continue to experience negative cash flow for at least the foreseeable future and cannot predict when, or even if, we might become profitable.

OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

We have experienced significant operating losses in the current and prior years. At March 31, 2008, our principal sources of liquidity were cash and cash equivalents of $29,126. We do not expect that our cash on hand and cash generated by operations will be sufficient to fund our operating and capital needs beyond the next three months. As a result of our limited cash resources and history of operating losses, our auditors have expressed in their report on our consolidated financial statements that there is substantial doubt about our ability to continue as a going concern. We presently have no commitments for additional financing. If we are unable to obtain financing on terms acceptable to us, or at all, we may not be able to fulfill our customer commitments and/or be forced to cease all operations and liquidate our assets.
 
ADDITIONAL FINANCING IS NECESSARY FOR THE IMPLEMENTATION OF OUR GROWTH STRATEGY.

We will require additional debt and/or equity financing to pursue our growth strategy. Given our limited operating history and existing losses, there can be no assurance that we will be successful in obtaining additional financing. Lack of additional funding could force us to curtail substantially our growth plans or cease operations. Furthermore, the issuance by us of any additional securities pursuant to any future financing activities undertaken by us would dilute the ownership of existing shareholders and may reduce the price of our common stock.
Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. Our failure to successfully obtain additional future funding may jeopardize our ability to continue our business and operations.

 
WE MAY BE UNABLE TO IMPLEMENT OUR GROWTH STRATEGY.

We may not be successful in finding acquisition candidates that meet our requirements or are interested in our offering. We may not be able to expand our product and service offerings, our client base and markets, or implement the other features of our business strategy at the rate or to the extent presently planned. Our projected growth will place a significant strain on our administrative, operational and financial resources. If we are unable to successfully manage our future growth, establish and continue to upgrade our operating and financial control systems, recruit and hire necessary personnel or effectively manage unexpected expansion difficulties, our financial condition and results of operations could be materially and adversely affected.

POTENTIAL CLAIMS ALLEGING INFRINGEMENT OF THIRD PARTY'S INTELLECTUAL PROPERTY BY US COULD HARM OUR ABILITY TO COMPETE AND RESULT IN SIGNIFICANT EXPENSE TO US AND LOSS OF SIGNIFICANT RIGHTS.

From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays, disrupt our relationships with our customers or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon our operating results. Royalty or licensing agreements, if required, may not be available on terms acceptable to us. If a claim against us is successful and we cannot obtain a license to the relevant technology on acceptable terms, license a substitute technology or redesign our products to avoid infringement, our business, financial condition and results of operations would be materially adversely affected.

WE MAY FACE PRODUCT LIABILITY FOR THE SERVICES WE PROVIDE.

Developing, marketing and sale of our products and services may subject us to product liability claims. We currently do not have insurance coverage against product liability risks. Although we intend to purchase such insurance, such insurance coverage may not be adequate to satisfy any liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a service, injury to our reputation, and loss of revenues. As a result, regardless of whether we are insured, a product liability claim or product recall may result in losses that could be material to us.
 
WE FACE COMPETITION IN OUR MARKETS FROM A NUMBER OF LARGE AND SMALL COMPANIES, SOME OF WHICH HAVE GREATER FINANCIAL, RESEARCH AND DEVELOPMENT, PRODUCTION AND OTHER RESOURCES THAN WE HAVE.

A DOWNTURN IN ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS.

The software industry historically has been subject to substantial cyclical variations, and our business typically relies upon the expenditure of corporate information technology spending. A significant downturn in the United States or global economy or any other uncertainties regarding future economic prospects could affect corporate information technology spending habits which would have a material adverse impact on our operations and financial results.

WE ARE DEPENDENT UPON KEY PERSONNEL.

Our success is heavily dependent on the continued active participation of our current executive officers listed under "Management." Loss of the services of one or more of our officers could have a material adverse effect upon our business, financial condition or results of operations. Further, our success and achievement of our growth plans depend on our ability to recruit, hire, train and retain other highly qualified technical and managerial personnel. Competition for qualified employees among companies in the technology industry is intense, and the loss of any of such persons, or an inability to attract, retain and motivate any additional highly skilled employees required for the expansion of our activities, could have a materially adverse effect on us. The inability on our part to attract and retain the necessary personnel and consultants and advisors could have a material adverse effect on our business, financial condition or results of operations.

WE ARE CONTROLLED BY CURRENT OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS.

Our directors, executive officers and principal (5%) stockholders and their affiliates beneficially own approximately 44% of the outstanding shares of Common Stock. Accordingly, our executive officers, directors, principal stockholders and certain of their affiliates will have substantial influence on the ability to control the election of our Board of Directors of the Company and the outcome of issues submitted to our stockholders.


OUR BUSINESS MAY BE AFFECTED BY FACTORS OUTSIDE OF OUR CONTROL.

Our ability to increase sales, and to profitably distribute and sell our products and services, is subject to a number of risks, including changes in our business relationships with our principal distributors, competitive risks such as the entrance of additional competitors into our markets, pricing and technological competition, risks associated with the development and marketing of new products and services in order to remain competitive and risks associated with changing economic conditions and government regulation.

THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE NOTES AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.

The issuance of shares upon conversion of the convertible notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholders may not convert their convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholders from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholders could sell more than this limit while never holding more than this limit.

OUR COMMON STOCK TRADES IN A LIMITED PUBLIC MARKET; ACCORDINGLY, INVESTORS FACE POSSIBLE VOLATILITY OF SHARE PRICE.

Our common stock is currently quoted on the OTC.BB under the ticker symbol INIV.OB. As of July 2, 2008, there were 102,513,929 shares of Common Stock outstanding.

There can be no assurance that a trading market will be sustained in the future. Factors such as, but not limited to, technological innovations, new products, acquisitions or strategic alliances entered into by us or our competitors, government regulatory actions, patent or proprietary rights developments, and market conditions for penny stocks in general could have a material effect on the liquidity of our common stock and volatility of our stock price.

FLUCTUATIONS IN OUR OPERATING RESULTS AND ANNOUNCEMENTS AND DEVELOPMENTS CONCERNING OUR BUSINESS AFFECT OUR STOCK PRICE.

Our operating results are subject to numerous factors, including purchasing policies and requirements of our customers, our ability to grow through strategic acquisitions, and any expenses and capital expenditure which we incur in distributing products. These factors, along with other factors described under "Risk Factors" may affect our operating results and may result in fluctuations in our quarterly results all of which could affect our stock price or could result in volatility in our stock price.

OUR COMMON STOCK WILL BE SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC.

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
 
●
 
that a broker or dealer approve a person's account for transactions in   penny stocks; and

●
 
the broker or dealer receive from the investor a written agreement to the   transaction, setting forth the identity and quantity of the penny stock to   be purchased.

In order to approve a person's account for transactions in penny stocks, the broker or dealer must:

●
 
obtain financial information and investment experience objectives of the   person; and

●
 
make a reasonable determination that the transactions in penny stocks are   suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable   of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

●
 
sets forth the basis on which the broker or dealer made the suitability   determination; and
 
●
   that the broker or dealer received a signed, written agreement from the   investor prior to the transaction.

 
 
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON STOCK.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.

ITEM 2.   PROPERTIES

Our principal executive offices are located at 911 Ranch Road 620 North, Austin, Texas 78734. This office consists of approximately 340 square feet which we rent for $900 per month. The term of the lease is month to month with a 60 day notice period.

ITEM 3.   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 or operating results.

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 Complaint

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.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
 
 
 
PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the OTCBB under the symbol "INIV.OB". The high and the low trades for our shares for each quarter of actual trading were:
 
   
High
    
Low
  
YEAR ENDING MARCH 31, 2008:
            
   First Quarter
   $  0.05     $  0.01  
   Second Quarter
     0.05       0.01  
   Third Quarter
     0.05       0.01  
   Fourth Quarter
     0.05       0.02  

The closing price for the common stock on July 2, 2008 was $0.02 per share.

HOLDERS

As of July 2, 2008, we had approximately 1,225 active holders of our common stock. The number of active record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Island Stock Transfer, 100 Second Avenue South, Suite 104N, St. Petersburg, Florida 33701.

DIVIDENDS

We have neither declared nor paid any cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future. We have had minimal revenue and losses since inception. Our current policy is that if we were to generate revenue and earnings we would retain any earnings in order to finance our operations. Our board of directors will determine future declaration and payment of dividends, if any, in light of the then-current conditions they deem relevant and in accordance with applicable corporate law.

EQUITY COMPENSATION PLAN INFORMATION

The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance as of the fiscal year ended March 31, 2008.
 
On August 9, 2006, our Board of Directors adopted the 2006 Innovative Software Technologies, Inc. Equity Incentive Plan which stipulated 20 million shares of common stock available for option grants. The table below shows the activity under this plan as of March 31, 2008:

   
NUMBER OF
SECURITIES
TO BE ISSUED UPON
EXERCISE OF
OUTSTANDING
OPTIONS,
WARRANTS AND
RIGHTS
    
 
WEIGHTED AVERAGE
EXERCISE PRICE OF
OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS
    
NUMBER OF  SECURITIES
REMAINING
AVAILABLE FOR
FUTURE ISSUANCE
UNDER EQUITY
COMPENSATION
PLANS (EXCLUDING
SECURITIES
REFLECTED IN
S  COLUMN (A))
  
PLAN CATEGORY
  
(A)
    
(B)
    
(C)
  
EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS
     -       -       -  
                         
EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS
     12,387,349     $ 0.11       7,612,651  
                         
TOTAL
     12,387,349     $ 0.11       7,612,651  
 
 

On August 24, 2007 our Board of Directors adopted the 2007 Innovative Software Technologies, Inc. Equity Incentive Plan which stipulated 60 million shares of common stock available for option grants.  The Table below shows the activity under this plan as of March 31, 2008:
 
   
NUMBER OF
SECURITIES
TO BE ISSUED UPON
EXERCISE OF
OUTSTANDING
OPTIONS,
WARRANTS AND
RIGHTS
    
 
WEIGHTED AVERAGE
EXERCISE PRICE OF
OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS
    
NUMBER OF  SECURITIES
REMAINING
AVAILABLE FOR
FUTURE ISSUANCE
UNDER EQUITY
COMPENSATION
PLANS (EXCLUDING
SECURITIES
REFLECTED IN
S  COLUMN (A))
  
PLAN CATEGORY
  
(A)
    
(B)
    
(C)
  
EQUITY COMPENSATION PLANS
     28,500,000     $ 0.05       31,500,000  
                         
TOTAL
     28,500,000     $ 0.05       31,500,000  
 
OPTIONS GRANTS IN LAST FISCAL YEAR

In the last fiscal year we granted a total of  28,500,000 options to purchase common stock under our 2007 Equity Incentive Plan. The options have a weighted average strike price of $0.05 and a term of ten years.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES

There have been no options exercised in the last fiscal year.

RECENT SALES OF UNREGISTERED SECURITIES

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

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

On July 27, 2007, the Company issued 336,862 shares of its common stock with a fair market value of $6,737 for legal expenses. The shares of stock issued in the above transactions were valued at the closing market price on the date of issue.
 
On August 9, 2007, the Company sold 2,000,000 shares of its common stock to an accredited investor at a price of $0.05 per share. The Company also issued a warrant to the investor to purchase 2,000,000 shares of its common stock at an exercise price of $0.05 per share. The warrant has an expiration of 2 years from the date of issue.

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

 
On October 12, 2007, the Company issued 1,210,000 shares of its common stock valued at $60,500 to an officer for accrued salary.  The fair value of these shares was accrued during the year ended March 31, 2007.

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

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

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

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.

All of the above offerings and sales were deemed to be exempt under Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of our company or executive officers of our company, and transfer was restricted by our company in accordance with the requirements of the Securities Act of 1933.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

OVERVIEW

The following discussion summarizes information about our accounting policies and practices and information about our operations in a comparative manner for the fiscal years ended March 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 (the "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 a wholly owned subsidiary. Following SFAS 141, as governing and operating control of the combined entity is under Mr. Zalenski, AcXess is deemed to be the purchaser in the Transaction for financial reporting purposes. Therefore, reverse acquisition accounting applies whereby AcXess is deemed to have issued its common stock for the net assets or liabilities of Innovative accompanied by a recapitalization of AcXess. For accounting purposes, AcXess is treated as the continuing reporting entity.

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

 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our 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.

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 March 31, 2008, all of the Company’s revenue has been service revenue.
 
Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2008. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, accounts payable and notes payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values.

Offering Costs

We defer costs associated with the raising of capital until such time as the offering is completed, at which time the costs are charged against the capital raised. Should the offering be terminated the costs are charged to operations during the period when the offering is terminated.

Net Income (Loss) Per Common Share

We calculate net income (loss) per share as required by SFAS No. 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 in which the Company incurs losses common stock equivalents, if any, are not considered, as their effect would be anti dilutive.

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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Property and Equipment

Property and equipment is recorded at cost. Expenditures for major improvements and additions are added to the property and equipment accounts while replacements, maintenance and repairs, which do not extend the life of the assets, are expensed.

Depreciation and amortization are computed by using the straight-line method over the estimated useful lives of the assets.

 
Long Lived Assets

The carrying value of long-lived assets is reviewed on a regular basis for the existence of facts and circumstances that suggest impairment. Should there be an impairment, the Company measures the amount of the impairment based on the amount that the carrying value of the impaired asset exceeds the discounted cash flows expected to result from the use and eventual disposal of the from the impaired assets.

Segment Information

We follow SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information ("SFAS 131")." Certain information is disclosed, per SFAS 131, based on the way management organizes financial information for making operating decisions and assessing performance. We currently operate in a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Income Taxes

We follow SFAS No. 109 "Accounting for Income Taxes" for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

Stock-Based Compensation

Compensation expense related to the grant of equity instruments and stock-based awards to employees are accounted for using the fair value of such equity instruments recognizing expenses as services are performed following SFAS No. 123(R), "Accounting for Stock-Based Compensation", issued in December 2004 and effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005.

Impairment of Long-Lived Assets

We account for long-lived assets and goodwill in accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144")" and SFAS No. 142, "Goodwill and Other Intangible Assets ("SFAS 142")." SFAS 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. SFAS 142 requires annual tests for impairment of goodwill and intangible assets that have indefinite useful lives and interim tests when an event has occurred that more likely than not has reduced the fair value of such assets.

Recent Pronouncements

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109” (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, The Company recognized no liability for uncertain income tax positions at March 31, 2008.

In May 2007, the FASB issued FASB Staff Positions FIN 48-1, "Definition of a Settlement in FASB Interpretation No. 48" (“FSP FIN 48-1”). FSP FIN 48-1 clarifies when a tax position is considered settled under FIN 48. Under FSP FIN 48-1, a tax position is considered effectively settled upon completion of the examination by the taxing authority without being legally extinguished. For effectively settled tax positions, a company can recognize the full amount of the tax benefit. FSP FIN 48-1 is effective upon a company’s adoption of FIN 48. FSP FIN 48-1 did not have a material impact on Innovative Software’s financial position or results of operations.

Innovative Software’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. At December 31, 2007, Innovative Software had no accrued interest related to uncertain tax positions and no accrued penalties.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to provide additional information that will help investors and other financial statement users to more easily understand the effect of the company’s choice to use fair value on its earnings. Finally, SFAS 159 requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157 (see below). Innovative Software is currently assessing the impact of SFAS 159 which it will be required to adopt no later than the first quarter of its 2008 fiscal year.

 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements ("SFAS 160"),” which establishes accounting and reporting standards to improve the relevance, comparability, and transparency of financial information in its consolidated financial statements that include an outstanding noncontrolling interest in one or more subsidiaries. SFAS 160 is effective for fiscal years, and the interim periods within those fiscal years, beginning on or after December 15, 2008. Management of Innovative Software does not expect the adoption of this pronouncement to have a material impact on its financial statements.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities and also expands information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other accounting standards require or permit assets and liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Innovative Software is currently assessing the impact of SFAS 157 which it will be required to adopt no later than the first quarter of its 2008 fiscal year.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations – Revised 2007 ("SFAS 141R")". SFAS 141R provides guidance on improving the relevance, representational faithfulness, and comparability of information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies to business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Innovative Software is in the process of analyzing the effects SFAS 141R will have on Innovative Software’s financial statements.

RESULTS OF OPERATIONS

Fiscal year ended March 31, 2008, compared to the fiscal year ended March 31, 2007.

The revenues and costs of sales are wholly attributed to AcXess.  An agreement has been entered into to sell the Company’s interest in AcXess.  The General and Administrative expenses are attributable to both AcXess and Innovative Software.

Revenues

Revenues for the fiscal years ended March 31, 2008, and 2007 were $216,583 and $124,575, respectively, reflecting our startup nature. Revenue was due primarily to High Availability (HA) contracts with Microsoft, Citrix and SAP.

Cost of Sales and Margins

Cost of sales for the fiscal years ended March 31, 2008, and 2007 were $67,502 and $85,756, respectively. Cost of sales primarily comprise network charges at our data site. Gross profit of $149,081 and $38,819 resulted in a gross profit margin of 69% and 31% for the year ended March 31, 2008 and 2007, respectively. Gross margins increased due to volume efficiencies attained during the fiscal year ended March 31, 2008.
 
General and Administrative Expenses

General and administrative expenses for the fiscal years ended March 31, 2008, and 2007 were $1,440,271 and $2,012,918, respectively. General and administrative expenses consisted primarily of consulting and legal fees, rent, payroll, travel expenses, and other general and administrative expenses.

Other Income (Expense)

Other expenses for the year ended March 31, 2008 were $195,819 compared to other expenses of $949,802 for the year ended March 31, 2007.  During the year ended March 31, 2008 the Company recognized a gain from the change fair value of the derivative liability of $270,919 compared to a loss from the change in fair value of the derivative liability of $101,678 during the year ended March 31, 2007. The reason for this increase is the decrease in value of the Company’s common stock from a price of $0.05 per share at March 31, 2007, to $0.03 per share at March 31, 2008.  During the year ended March 31, 2008 the Company incurred interest expense of $469,109 compared to $898,061 during the year ended March 31, 2007. The reason for the decrease in interest expense was decrease in debut due to the conversion of notes payable during the year ended March 31, 2008.  During the year ended March 31, 2008, the Company had a gain on the sale of fixed assets of $2,518, compared to a gain on the sale of assets of $0 during the year ended March 31, 2007.  The Company also had other expenses of $147 during the year ended March 31, 2008, compared to other income of $49,937 during the year ended March 31, 2007. The reason for this decrease is the recovery of security deposits which had been fully reserved.
 
Net Loss

Our net loss for the fiscal years ended March 31, 2008 and 2007, amounted to $1,487,009 and $2,923,901, respectively.

 
LIQUIDITY AND CAPITAL RESOURCES

The March 31, 2008 financial statements have been prepared assuming that we will continue as a going concern. However, we have incurred a loss of $4,898,261 from inception (January 12, 2005) through March 31, 2008, and have working capital and stockholder deficits of $1,321,946 and $1,205,059, respectively, at March 31, 2008. In addition, the Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, we expect to incur operating losses for the foreseeable future. Our 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 fund operations through additional financings.  However there can be no assurance of successful financing or acquisition activity in the future. As of March 31, 2008, the Company had cash and cash equivalents of approximately $29,126.
 
In January 2006, our Board of Directors approved the raising of up to $1,000,000 via the issuance of promissory notes to accredited investors. These notes have a term of six months, are convertible into shares of our common stock at a 30% discount to a future Qualified Financing (as therein described), and have 20% warrant coverage at a strike price of $0.05 and an expiration of 5 years from the date of issuance. In October our board of directors approved an increase in the limit of funding under these terms to $1,500,000. We raised $1,107,500 under such notes.

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 March 31, 2008, we had current liabilities of $1,360,361.

We have no material commitments for capital expenditures. Capital expenditures for the fiscal years ended March 31, 2008 and 2007, amounted to $59,771 and $168,641, respectively.

OFF BALANCE-SHEET ARRANGEMENTS

We have no material off-balance sheet arrangements as of March 31, 2008.

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 March 31, 2008, the balance of this deferred gain was $4,874.
 
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.  The outstanding principal balance of this Note, plus accrued but unpaid interest, is due and payable on December 18, 2008.  This Note may be prepaid, either in whole or in part, at any time without penalty.
 
 

 
Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Innovative Software Technologies, Inc.

We have audited the accompanying consolidated balance sheet of Innovative Software Technologies, Inc. (the Company) as of March 31, 2008, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended March 31, 2008 and the period from inception (January 12, 2005) to March 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Innovative Software Technologies, Inc. as of March 31, 2008, and the results of its operations and its cash flows for the year ended March 31, 2008 and the period from inception (January 12, 2005) to March 31, 2008., in conformity with generally accepted accounting principles in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has experienced circumstances which raise substantial doubt about its ability to continue as a going concern. Management's plans regarding these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
PMB Helin Donovan, LLP
  
July 11, 2008  
Austin, Texas
  
 
 
 
REPORT  OF  INDEPENDENT  REGISTERED  PUBLIC  ACCOUNTING  FIRM
 
To  the  Board  of  Directors
 
Innovative  Software  Technologies,  Inc.
 
We  have  audited  the  accompanying  consolidated  balance  sheet of Innovative Software  Technologies,  Inc.  as of March 31, 2007 and the related consolidated statements  of  operations, stockholders' (deficit), and cash flows for the year ended  March 31, 2007, and the period from inception (January 12, 2005) to March 31,  2007. These consolidated financial statements are the responsibility of the Company's  management.  Our  responsibility  is  to  express an opinion on these consolidated  financial  statements  based  on  our  audit.
 
We  conducted  our  audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the consolidated  financial  statements  are free of material misstatement. An audit includes examining, on  a  test  basis,  evidence  supporting  the amounts and disclosures  in  the  consolidated  financial statements. An audit also includes assessing  the  accounting  principles  used  and  significant estimates made by management, as well as evaluating the overall financial statement presentation. We  believe  that  our  audit  provides  a  reasonable  basis  for  our opinion.
 
In  our opinion, the consolidated financial statements referred to above present fairly,  in all material respects, the financial position of Innovative Software Technologies,  Inc.  as of March 31, 2007, and the results of its operations and its  cash flows for the year ended March 31, 2007, and the period from inception (January 12, 2005) to March 31, 2007, in conformity with U.S. generally accepted accounting  principles.
 
The  accompanying  consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated  financial  statements,  the  Company  has  suffered  losses  from operations  since inception and has a significant working capital deficiency and stockholders'  deficit at March 31, 2007. In addition, the Company is in default on  its convertible notes and debentures and is incurring liquidating damages in connection  with  its  convertible  debentures.  These factors raise substantial doubt  about  the Company's ability to continue as a going concern. Management's plans  in  regard  to this matter are also discussed in Note 2. The consolidated financial  statements  do not include any adjustments that might result from the outcome  of  this  uncertainty.
 
Boca Raton, Florida
July 12, 2007
 

ITEM 7.   FINANCIAL STATEMENTS

INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET

   
March 31,
    
March 31,
  
   
2008
    
2007
  
Assets
            
Current assets
            
             
  Cash and cash equivalents
  
$
29,126
    
$
440,648
  
  Accounts receivable, net
    
8,450
      
8,995
  
  Prepaid services and other current assets
    
839
      
7,145
  
                 
      Total current assets
    
38,415
      
456,788
  
                 
  Property and equipment, net (note 4 )
    
114,487
      
156,835
  
  Deferred financing costs
    
-
      
136,222
  
  Deposits and other assets
    
2,400
      
35,257
  
                 
Total assets
  
$
155,302
    
$
785,102
  
                 
Liabilities and stockholders' deficit
                
Current liabilities
                
Accounts payable and accrued liabilities 
  
$
725,400
    
$
679,202
  
Accrued officer salary and expenses
    
58,500
      
60,500
  
Accrued commissions
    
-
      
12,500
  
Accrued taxes
    
4,475
      
-
  
Accrued interest
    
89,727
      
40,833
  
Advances payable (note 5)
    
155,511
      
-
  
Current portion of capital lease obligation
    
57,559
      
41,460
  
Deferred revenue (note 6)
    
112,781
      
-
  
Penalty for late registration of common stock offering
    
81,140
      
-
  
Deferred gain of sale of fixed assets
    
4,874
      
10,633
  
Derivative financial instruments
    
-
      
1,939,736
  
Convertible debentures (note 7)
    
70,394
      
1,041,189
  
                 
      Total current liabilities
    
1,360,361
      
3,826,053
  
                 
Capital lease obligation, less current portion
    
-
      
52,056
  
                 
  Total liabilities
    
1,360,361
      
3,878,109
  
                 
Commitments and contingencies
    
-
      
-
  
                 
Stockholders' deficit
                
   Preferred stock, 25,000,000 shares authorized, no par value:
                
      Series A, 1,500,000 shares authorized, 450,000 shares outstanding
    
450,000
      
450,000
  
   Common stock, $0.001 par value; 300,000,000 shares authorized;
                
      101,148,199 and 72,715,201 shares issued and outstanding at March 31, 2008 and 2007, respectively (note 8)
    
101,185
      
72,715
  
   Additional paid-in capital
    
3,142,017
      
(204,470
)
   Deficit accumulated during the development stage
    
(4,898,261
)
    
(3,411,252
)
   Total stockholders' deficit
    
(1,205,059
)
    
(3,093,007
)
                 
Total liabilities and stockholders' deficit
  
$
155,302
    
$
785,102
  


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





INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF EARNINGS
 
 
               
Cumulative from
  
   
For the
   
For the
   
Inception
  
   
Year Ended
    
Year Ended
    
(January 12, 2005)
  
   
March 31,
    
March 31,
    
March 31,
  
   
2008
    
2007
    
2008
  
   Revenue
   $ 216,583     $ 124,575     $ 341,158  
                         
Total revenue
     216,583       124,575       341,158  
                         
   Cost of revenue
     67,502       85,756       153,258  
Total cost of revenue, excluding depreciation below
     67,502       85,756       153,258  
                         
Gross profit
     149,081       38,819       187,900  
                         
Operating expenses:
                        
   Sales, General and administrative expenses
     1,440,271       2,012,918       3,926,731  
      Total operating expenses
     1,440,271       2,012,918       3,926,731  
                         
Operating loss
     (1,291,190 )     (1,974,099 )     (3,738,831 )
                         
Other expense:
                        
   Income (expense) from change in fair value of derivative liabilities
     270,919       (101,678 )     169,241  
   Interest expense
     (471,925 )     (903,223 )     (1,388,957 )
   Interest income
     2,816       5,162       7,978  
   Gain on sale of equipment
     2,518       -       2,518  
   Other income (expense)
     (147 )     49,937       49,790  
Total other income (expense)
     (195,819 )     (949,802 )     (1,159,430 )
                         
   Loss before  taxes
     (1,487,009 )     (2,923,901 )     (4,898,261 )
                         
   Provision for taxes
     -       -       -  
                         
Net loss
   $ (1,487,009 )   $ (2,923,901 )   $ (4,898,261 )
                         
Undeclared preferred stock dividends
     (18,000 )      (13,500 )     (31,500 )
                         
Loss applicable to common stockholders
  $ (1,505,009 )   $ (2,937,401 )   $ (4,929,761 )
                         
Net loss per share - basic and diluted
   $ (0.02 )   $ (0.04 )   $ (0.07 )
                         
Weighted average shares outstanding -
   basic and diluted
     86,717,092       68,582,401       75,267,462  

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

 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDR’S EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2008, 2007, AND 2006
AND THE PERIOD FROM INCEPTION (JANUARY 12, 2005) THROUGH MARCH 31, 2008
 
 
 
Common Stock
            
Preferred Stock A
    
Accumulated
        
 
Shares
  
Amount
    
APIC
  
Shares
    
Amount
    
Deficit
    
Total
  
Balance at inception
   -   $ -     $ -     -     $ -     $ -     $ -  
                                                   
Founder's shares issued for cash at inception at $0.33 per share
   3,000,000     10,000       -     -       -       -       10,000  
Common stock issued for cash at $0.05 per share
   220,000     11,000       -     -       -       -       11,000  
Common stock issued to extinguish debt
                                               -  
   and interest at $0.05 per share
   670,123     33,506       -     -       -       -       33,506  
Common stock issued as compensation
                                                  
   at $0.05 per share
   3,829,882     191,494       -     -       -       -       191,494  
Net loss
   -     -       -     -       -       (487,351 )     (487,351 )
Balance as of March 31, 2006
   7,720,005   $ 246,000     $ -     -     $ -     $ (487,351 )   $ (241,351 )
                                                   
Adjustments to reflect reverse acquisition
   59,735,374     (178,546 )     (962,102 )   450,000       450,000       -       (690,648 )
Issuance for retirement of debt at $0.04 per share
   4,377,872     4,378       170,737     -       -       -       175,115  
Issuance for consulting services at $0.11 per share
   523,811     524       57,095     -       -       -       57,619  
Issuance of options for employees and consultants
   -     -       370,418     -       -       -       370,418  
Issuance for legal services at $0.13 per share
   174,519     175       22,512     -       -       -       22,687  
Issuance of warrant with equipment leasing line
   -     -       37,726     -       -       -       37,726  
Issuance for legal services at $0.09 per share
   183,620     184       16,342     -       -       -       16,526  
 Issuance of options for employee
   -     -       82,802     -       -       -       82,802  
 Net loss
   -     -       -     -       -       (2,923,901 )     (2,923,901 )
Balance as of March 31, 2007
   72,715,201   $ 72,715     $ (204,470 )   450,000     $ 450,000     $ (3,411,252 )   $ (3,093,007 )
                                                   
Issuance of common stock for legal services
   459,778     460       22,529     -       -       -       22,989  
Issuance of common stock for cash
   2,000,000     2,000       90,000     -       -       -       92,000  
Issuance of common stock for legal services
   336,862     337       6,400     -       -       -       6,737  
Exchange of debt and embedded derivative liabilities for common stock
   5,672,655     5,673       1,946,778     -       -       -       1,952,451  
Conversion of notes payable to common stock
   18,789,703     18,790       920,696     -       -       -       939,486  
Issuance of common stock for accrued compensation
   1,210,000     1,210       59,290     -       -       -       60,500  
Stock based compensation
   -     -       300,794     -       -       -       300,794  
Net Loss
   -     -       -     -       -       (1,487,009 )     (1,487,009 )
Balance as of March 31, 2008
   101,184,199   $ 101,185     $ 3,142,017     450,000     $ 450,000     $ (4,898,261 )   $ (1,205,059 )


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

INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
   
For the Year
    
For the Year
    
Cumulative
  
   
Ended
    
Ended
    
from Inception
  
   
March 31,
    
March 31,
    
(January 12, 2005) to
  
   
2008
    
2007
    
March 31, 2008
  
Cash flows from operating activities:
                  
   Net loss
   $ (1,487,009 )   $ (2,923,901 )   $ (4,898,261 )
  Adjustments to reconcile net loss to net
                        
  cash used in operating activities:
                        
  Depreciation and amortization
     87,291       45,765       133,134  
  Common stock and stock option based compensation
     300,794       453,220       956,677  
  Notes payable issued for expenses paid by affiliates and third parties
     -       -       258,605  
  Amortization of deferred gain on sale of assets
     4,002       -       4,002  
  Services paid for with common stock
     29,728       96,832       126,560  
  Amortization of convertible debt discount
     252,323       736,355       988,678  
  Change in fair value of derivative liabilities
     (270,919 )     101,678       (169,241 )
  Amortization of deferred financing costs
     136,222       95,977       232,199  
  Net change in operating assets and liabilities:
                        
        Accounts receivable
     545       (8,995 )     (8,450 )
        Prepaid expenses and other current assets
     6,306       15,056       9,961  
        Advances payable
     155,511       -       155,511  
        Deposits
     32,857       (1,507 )     (1,400 )
        Accounts payable and accrued expenses
     230,592       (27,752 )     207,096  
        Customer deposits
     112,781       -       112,781  
                         
   Net cash used in operating activities
     (408,976 )     (1,417,272 )     (1,892,148 )
                         
Cash flows from investing activities:
                        
   Purchase of fixed assets
     (51,771 )     (168,641 )     (233,098 )
   Proceeds from sale-leaseback of property and equipment
     -       125,000       125,000  
   Increase in deferred financing costs
     -       (156,200 )     (156,200 )
                         
   Net cash used in investing activities
     (51,771 )     (199,841 )     (264,298 )
                         
Cash flows from financing activities:
                        
   Stock issued for cash
     92,000       -       121,000  
   Proceeds from notes payable
     -       372,114       427,969  
   Principal payments on notes payable
     -       (30,000 )     (30,000 )
   Proceeds from convertible debentures
     -       1,663,500       1,663,500  
   Principal payments under capital lease
     (42,775 )     (5,271 )     (48,046 )
   Cash acquired in the reverse acquisition of Innovative
     -       51,149       51,149  
                         
   Net cash provided by financing activities
     57,225       2,051,492       2,185,572  
                         
Net increase (decrease) in cash and cash equivalents
     (411,522 )     434,379       29,126  
                         
Cash and cash equivalents at beginning of period
     440,648       6,269       -  
                         
Cash and cash equivalents at end of period
   $ 29,126     $ 440,648     $ 29,126  
                         
Supplemental disclosures of cash flow information:
                        
                         
Cash paid during the period for:
                        
Interest
   $ 17,050     $ 17,050     $ 34,100  
                         
Taxes
   $ -     $ -     $ -  
                         
Issuance of common stock for acquisition
   $ -     $ 440,000     $ 440,000  
                         
Issuance of common stock in exchange for debt
   $ 939,487     $ 175,115     $ 1,114,602  
                         
Assets acquired under capital lease
   $ -     $ 136,512     $ 136,512  
                         
Fixed assets exchanged for lease payment
   $ 2,490     $ -     $ 2,490  
                         
Issuance of common stock to retire notes payable - affiliate
   $ -     $ -     $ 22,337  
                         
Exchange of debt and embedded derivative
                        
   liabilities for common stock
   $ 1,952,451     $ -     $ 1,952,451  
                         
Convertible debt issued for financing costs
   $ -     $ 44,000     $ 44,000  
                         
Issuance of shares to officer for accrued payroll
   $ 60,500     $ -     $ 60,500  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007

(1)  DESCRIPTION  OF  BUSINESS  AND  SUMMARY  OF SIGNIFICANT ACCOUNTING POLICIES

(a)  Organization  and  Description  of  Business:

Innovative Software Technologies, Inc. (the "Company") was incorporated in the State of Delaware in November 2007. Prior to the acquisition of AcXess, Inc. ("AcXess"), a Florida corporation, discussed in Note 3, the Company had no operations. The Company is in the development stage and has not commenced significant operations as of March 31, 2008. Therefore the Company's activities are reported in accordance with Statement of Financial Accounting Standards ("SFAS") No. 7, "Development Stage Enterprises", which requires the Company's statements of operations, stockholders' deficit and cash flows to include activity from the date of the Company's inception (January 12, 2005).
 
On June 26, 2006, the Company, 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.
 
AcXess was formed to provide Business Continuity ("BC") products and services to the Small and Medium Enterprise ("SME") market. BC products and services are an advanced form of disaster recovery solutions for electronic data backup wherein the data and/or applications are available upon failure through means of connectivity to remote server locations. The Company intends to deliver its BC service through reseller channels including but not limited to Citrix Systems, Inc. ("Citrix") resellers. Management has identified Citrix mid-market client companies as its initial target market in North America. We currently have one BC customer.

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.

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.

We also provide High Availability ("HA") service to large companies. HA is an advanced form of hosting service that provides application access to multiple concurrent users and includes specialized scheduling and tracking features. HA services are sold using in-house business development personnel. We currently have three customers: Microsoft, Inc., Citrix and SAP, Inc.

Our number of customers to date is limited and 98% of our revenue for the past year has been generated through our HA business.

(b) Principles of Consolidation:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AcXess, and its inactive subsidiaries EPMG, Inc. and SoftSale, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007

(c) 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.

(d) Accounts Receivable:

Trade accounts receivable consist of outstanding billings to customers for both HA and BC services. Both types of services are provided under contracts ranging from three to twenty-four months in duration. Past due balances over 90 days are reviewed individually for collectibility. An allowance for doubtful accounts is established based on the Company's best estimate of the amount of probable credit losses in its existing accounts receivable. At March 31, 2008 and 2007, the Company made an allowance for doubtful accounts  in the amount of $6,310 and $0, respectively. Interest is not charged on past due accounts.

 (e) Deferred Financing Costs:

The Company capitalizes financing costs as incurred and amortizes these costs to interest expense over the life of the underlying instruments.  During the year ended March 31, 2008, the Company charged deferred financing costs in the amount of $136,222 to interest expense as the notes payable related to these financing costs were converted to equity.

 (f) Property and Equipment:

Property and equipment are stated at cost. Property and equipment acquired under capital leases are stated at the present value of the minimum lease payments.

Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets, generally 5 years for office equipment, 5 years for furniture and fixtures, and 3 years for computers and software. Equipment acquired pursuant to capital leases is amortized over the term of the lease.

 (g) Income Taxes:

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(h) 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.
 
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007

For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” (“SAB No. 109”) 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 March 31, 2008, all of the Company’s revenue has been service revenue.

(i) Earnings Per Common Share:

The Company calculates net income (loss) per share as required by SFAS No. 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.
 
(j) Stock-Based Compensation:

Effective April 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R) we accounted for stock option grant in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic value method), and accordingly, recognized compensation expense for stock option grants.

Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were outstanding on April 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized in the nine months of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Prior periods were not restated to reflect the impact of adopting the new standard.

 
 
 
 
 
 
 
 
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007


 
(k) 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.

(l) 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.

(m) Recent Accounting Standards:

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109” (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no liability for uncertain income tax positions at March 31, 2008.

In May 2007, the FASB issued FASB Staff Position FIN 48-1, Definition of a Settlement in FASB Interpretation No. 48 (“FSP FIN 48-1”). FSP FIN 48-1 clarifies when a tax position is considered settled under FIN 48. Under FSP FIN 48-1, a tax position is considered “effectively settled” upon completion of the examination by the taxing authority without being legally extinguished. For “effectively settled” tax positions, a company can recognize the full amount of the tax benefit. FSP FIN 48-1 is effective upon a company’s adoption of FIN 48. FSP FIN 48-1 did not have a material impact on the Company’s  financial position or results of operations.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. At March 31, 2008, the Company had no accrued interest related to uncertain tax positions and no accrued penalties.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to provide additional information that will help investors and other financial statement users to more easily understand the effect of the company’s choice to use fair value on its earnings. Finally, SFAS 159 requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157 (see below). The Company is currently assessing the impact of SFAS 159 which it will be required to adopt no later than the first quarter of its 2008 fiscal year.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements “(SFAS 160”),” which establishes accounting and reporting standards to improve the relevance, comparability, and transparency of financial information in its consolidated financial statements that include an outstanding noncontrolling interest in one or more subsidiaries. SFAS 160 is effective for fiscal years, and the interim periods within those fiscal years, beginning on or after December 15, 2008. Management of Innovative Software does not expect the adoption of this pronouncement to have a material impact on its financial statements.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities and also expands information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other accounting standards require or permit assets and liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS 157 which it will be required to adopt no later than the first quarter of its 2008 fiscal year.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations – Revised 2007 (“SFAS 141R”)”. SFAS 141R provides guidance on improving the relevance, representational faithfulness, and comparability of information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies to business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is in the process of analyzing the effects SFAS 141R will have on the Company’s  financial statements.

INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007
 
(2) LIQUIDITY AND MANAGEMENT'S PLANS

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has incurred a loss of $4,898,261 from inception (January 12, 2005) through March 31, 2008, and has a working capital deficiency and stockholder deficit of $1,321,946 and $1,205,059 respectively, at March 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 financing activities as well as to seek potential acquisitions that have positive cash flows; however, there can be no assurance of successful financing or acquisition activity in the future.
 
(3) ACQUISITION OF ACXESS, INC.

On June 26, 2006, the Company completed the acquisition of AcXess in a stock exchange transaction (the "Transaction") pursuant to a Stock Exchange Agreement by and between the Company, AcXess, the Shareholders of AcXess, and Anthony F. Zalenski, acting as the Shareholder's Agent. As a result of the Transaction, AcXess became a wholly owned subsidiary of the Company. However, as governing and operating control of the combined entity was under the direction of Mr. Zalenski, in accordance with the provisions of SFAS No. 141, "Business Combinations", AcXess was deemed to be the purchaser in the Transaction for financial reporting purposes. Therefore, reverse acquisition accounting applied under which AcXess was deemed to have issued its common stock for the net assets or liabilities of the Company accompanied by a recapitalization of AcXess. For accounting purposes, AcXess is treated as the continuing reporting entity and the operations of the Company are included in the consolidated statement of operations from June 26, 2006. The acquisition of AcXess provided the Company with operations and personnel.

Pursuant to the Exchange Agreement, the shareholders of AcXess exchanged 100% of the outstanding share of capital stock of AcXess for an aggregate of 11,000,000 shares of common stock of the Company, $0.001 par value per share.
 
The following audited actual and unaudited pro forma financial information presents the operating results for the years ended March 31, 2008 and 2007, respectively, as though the Transaction had occurred as of April 1 of each year:
 
     
2007
  
     
Proforma
(unaudited)
  
 REVENUE
     $ 124,575  
           
 NET (LOSS)
     $ (3,012,063 )
           
 NET (LOSS) PER SHARE
     $ (0.04 )

(4) PROPERTY AND EQUIPMENT

 Property and equipment consist of the following as of March 31, 2008 and 2007:

   
March 31, 2008
    
March 31, 2007
  
Equipment
   $ 68,583     $ 21,781  
 Computer software
     4,930       3,977  
 Furniture and fixtures
     1,258       1,258  
 Property and equipment under capital lease
     134,022       136,512  
      208,793       163,528  
 Accumulated depreciation and amortization
     (94,306 )     (6,693 )
    $ 114,487     $  156,835  
    
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007
 
(5) ADVANCES PAYABLE

Advances payable of $155,511 and $0 at March 31, 2008 and 2007, respectively, consist of amounts advanced to the Company by Xalles Limited, an Irish corporation (“Xalles”).  The Company has been involved in negotiations to purchase Xalles.  These funds were advanced to the Company by Xalles to provide working capital for the Company.

(6) DEFERRED REVENUE

The Company’s wholly-owned subsidiary AcXess, Inc.  receives payment in advance for certain of its services, primarily website hosting.  These payments are recognized as revenue over the period for which the services is provided.  As of March 31, 2008 and 2007, these advance payments aggregated a total of $112,781 and $0, respectively; this amount will be taken into revenue over the following twelve months.

(7) CONVERTIBLE NOTES AND DERIVATIVE INSTRUMENT LIABILITIES

Derivative Financial Instruments
 
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
 
The Company reviews the terms of convertible debt and equity instruments issued to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non-employees in connection with consulting or other services they provide.
 
Certain instruments, including convertible debt and equity instruments and the freestanding options and warrants issued in connection with those convertible instruments, may be subject to registration rights agreements which impose penalties for failure to register the underlying common stock by a defined date. 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.
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007

In January 2006 the Board of Directors of the Company approved the raising of up to $1,000,000 via the issuance of promissory notes (the “Notes”) to accredited investors. These notes have a term of six months, an interest rate of 12% per annum, and are convertible into shares of common stock of the Company at a 30% discount to a future Qualified Financing (as therein described). As a result of this, the Company could ultimately issue an unlimited number of shares of common stock.  This resulted in liability treatment for all of the related derivatives. In addition, each of the Notes is issued with warrants to purchase Company common stock at a strike price of $0.05 per share. The number of warrants granted is determined by multiplying the face value of each note issued by four. In October the Board of Directors of the Company approved an increase in the amount to be raised under this financing to $1,500,000. A total of $1,107,500 had been raised as of November 10, 2006, when the Company closed the round. During the three and nine months ended December 31, 2007, the Company was in default on all Notes totaling a principal amount of $1,107,500. In the event of a default resulting from the Company's non-payment of principal or interest when due, a holder of the Notes may declare all unpaid principal and accrued interest due and payable immediately. The Company was served a complaint from one investor demanding repayment of $55,000 under one of the Notes.  The Company reached a settlement agreement with this investor, and executed a mutual release and the complaint was dismissed on October 25, 2007. No notice has been received from any other holder of the Notes and the Company is currently in the process of renegotiating the terms of the Notes (as noted below); however there can be no assurance that such negotiations will be successful.

On December 22, 2006, the Company entered into a securities purchase agreement with an accredited investor (the “Investor”) for the sale of $1,000,000 Convertible Debentures (the “Debentures”). In connection with the Agreement, the Investor received (i) a warrant to purchase 8,928,571 shares of common stock (“Long-Term Warrants”) exercisable at $0.30 and (ii) a warrant to purchase 1,785,714 shares of common stock (“Short Term Warrants”) exercisable at $0.143 per share. The Long Term Warrants and the Short Term Warrants are exercisable for a period four years from the date of issuance and the earlier of (i) December 22, 2007 and (ii) the date a registration statement(s) covering the resale of all Registrable Securities (as defined in the Registration Rights Agreement) is declared effective by the SEC (the “Initial Exercise Date”) and on or prior to the close of business on the four month anniversary of the Initial Exercise Date, respectively. The Company incurred approximately $81,140 in interest expense relating to the Debentures due to the “Liquidating Damages” clause specified in the Purchase Agreement as a registration statement covering the Registrable Securities was declared effective by the SEC on July 23, 2007, 123 days after the agreed upon date in the Purchase Agreement, March 23, 2007.  The penalty is calculated as 2% per 30 day period or partial 30 day period beyond the dates stipulated above.  The maximum aggregate liquidated damages payable to a Holder under this Agreement is 10.5% of the aggregate subscription amount paid by such Holder pursuant to the Purchase Agreement. Pursuant to Emerging Issues Task Force issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, there are no gains or losses associated with this penalty, as it is not indexed to or settled in the stock of the Company.
 
The default on the Notes discussed above is an “Event of Default” in accordance with the terms of the Debenture and, therefore, the Debenture holder may declare all principal and interest due and payable immediately; however, the Company has received no notice from the Debenture holder demanding such repayment.
 
The Debentures bear interest at 4% until June 22, 2007 and 9% thereafter, payable in arrears and mature three years from the date of issuance. Accrued interest is payable in cash semi-annually, beginning on July 1, 2007. The Company has not made the interest payment of $21,271 due on July 1, 2007 and intends to negotiate a settlement with the Debenture holder; however there can be no assurance that such negotiation will be successful.

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.
 
 
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007

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 on the date of grant.
 
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 years ended March 31, 2008 and 2007, was $252,323 and $721,581, respectively.

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. 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 year ended March 31, 2008 and 2007, was $60,395 and $14,774, respectively.

A summary of the Debentures and unamortized discount  at March 31, 2008 and 2007, is as follows:

     
March 31, 2008
    
March 31, 2007
  
Debenture; 4% per annum (increasing to 9% per annum in July 2007); Due December 22, 2009
  
$
1,000,000
   $
1,000,000
  
Less: Unamortized discount
    
(929,606
)
  
(985,228
 ) 
Net carrying value
  
$
70,394
   $
14,774
  
 
 
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007

The total carrying value of the  Debentures at March 31, 2008 was $70,394.

The Company uses the Black-Scholes valuation model to value the warrants and the embedded conversion option components of any bifurcated embedded derivative instruments that are recorded as derivative liabilities.
 
In valuing the warrants and the embedded conversion option components of the bifurcated embedded derivative instruments at the reclassification date,  the Company used the market price of our common stock on the date of valuation, an expected dividend yield of 0% and the remaining period to the expiration date of the warrants or repayment date of the Notes. All warrants and conversion options can be exercised by the holder at any time.
 
Because of the limited historical trading period of the Company’s common stock, the expected volatility of the Company’s common stock over the remaining life of the conversion options and warrants has been estimated at 114% (based on analysis of historical stock prices of the Company and its selected peers). The risk-free rates of return used were based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining life of the conversion options or warrants.

The Registration Rights Agreement contains a “Liquidating Damages” provision, whereby the Company is obligated to file a registration statement covering the Registrable Securities within 60 days of the Purchase Agreement,  and cause  such registration statement to become effective within 90 days of the Purchase Agreement.  If either of these deadlines is not  met, the Company incurs a penalty in the amount of 2% per month of the aggregate purchase price of the securities.  The Company filed such registration statement within the 60 day period, but the registration statement did not become effective until 123 days after the Purchase Agreement, and the Company incurred liquidated damages in the amount of $81,140. The Purchase Agreement became effective on July 23, 2007, 123 days after the agreed upon date in the Purchase Agreement, March 22, 2007. This penalty is payable in cash, and accordingly the provisions of and the amount of $81,140 was charged to accrued liabilities on the Company’s balance sheet at March 31, 2008.

(8) STOCKHOLDERS' EQUITY

(a) Recent issuances of common stock:

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

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

On July 27, 2007, the Company issued 336,862 shares of its common stock with a fair market value of $6,737 for legal expenses. The shares of stock issued in the above transactions were valued at the closing market price on the date of issue.
 
On August 9, 2007, the Company sold 2,000,000 shares of its common stock to an accredited investor at a price of $0.05 per share. The Company also issued a warrant to the investor to purchase 2,000,000 shares of its common stock at an exercise price of $0.05 per share. The warrant has an expiration of 2 years from the date of issue.

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

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

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

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

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

(b) Convertible Preferred Stock:
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007

The Company has 25,000,000 shares of preferred stock authorized and has designated 1,500,000 shares as $1.00 stated value Series A Preferred and 3,000,000 shares as $1.00 stated value Series B Preferred, of which 450,000 and -0- shares, respectively, are issued and outstanding as of March 31, 2007. Series A and Series B Preferred Stock (collectively "Preferred Stock") have the same terms and conditions. The Preferred Stock is (i) entitled to cumulative dividends at a rate of 4.0% of the liquidation value ($1.00 per share), (ii) convertible at any time into common stock at a rate of 95% of the average closing market price of the common stock for five days preceding conversion, (iii) redeemable at any time by the Company for $1.00 per share, and (iv) entitled to one vote per share.
 
During the year ended March 31, 2008, the Company had 450,000 shares of preferred stock outstanding.   The Company has accrued 4% or $4,500 per quarter of undeclared preferred stock dividends. As of March 31, 2008, the Company has $18,000 and $31,500 in undeclared preferred stock dividends for the year ended March 31, 2008 and from inception (January 12, 2005) through March 31, 2008, respectively

(c) Equity Incentive Plan:

On August 9, 2006, the Company adopted the Innovative Software Technologies, Inc. 2006 Equity Incentive Plan (the "Plan"). An aggregate of 20 million shares of common stock is authorized for issuance under the 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 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 No. 123, "Accounting for Stock-Based Compensation" 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 No. 123, "Accounting for Stock-Based Compensation" and estimates the fair value of each option grant on the grant date using an option-pricing model. During the years ended March 31, 2008 and 2007, the Company recognized $300,794 and $453,220, respectively, in stock-based compensation.

A summary of the Company's stock option 2006 and 2007 Plans as of March 31, 2008, and the changes during the years ending March 31, 2008 and 2007, is presented below:
 
Exercise prices of options outstanding at March 31, 2008:
 
         
Weighted
    
Weighted
average
        
Weighted
average
         
average
    
exercise
        
exercise
 
Range of
  
Number of
  
remaining
    
price of
  
Number of
    
price of
 
exercise
  
options
  
contractual
    
outstanding
  
options
    
exercisable
 
prices
  
outstanding
  
life (years)
    
options
  
exercisable
    
options
                           
 $ 
        0.05
  
  28,500,000
  
             4.5
   $ 
         0.05
  
  10,093,750
   $ 
        0.05
$ 
         0.08
  
    6,000,000
  
             3.9
   $ 
         0.08
  
    5,416,667
   $ 
            0.08
 $ 
        0.11
  
       159,000
  
             3.6
   $ 
         0.11
  
       159,000
   $ 
            0.11
$ 
         0.13
  
       250,000
  
             3.4
   $ 
         0.13
  
       250,000
   $ 
            0.13
$ 
         0.14
  
    5,978,349
  
             3.3
   $ 
         0.14
  
    5,978,349
   $ 
            0.14
 
Total
  
  40,887,349
  
             3.8
   $ 
         0.10
  
  21,897,766
   $ 
            0.10
 
   
Options
      
Weighted Average
Exercise Price 
  
Outstanding at March 31, 2006
      
 
  
Issued
  
13,983,349
     $
0.11
  
Exercised
  
-
      
-
  
Forfeited or expired
  
(1,596,000
 )     
0.12
  
Outstanding at March 31, 2007
  
12,387,349
    
$
0.11
  
Issued
  
28,500,000
      
0.05
  
Exercised
  
-
      
-
  
Forfeited or expired
   -
 
    
-
  
Outstanding at March 31, 2008
  
40,887,349
    
$
0.08
  
               
Non-vested at March 31, 2008
  
18,989,583
    
$
0.05
  
Exercisable at March 31, 2008
  
21,897,766
    
$
0.08
  
 
Aggregate intrinsic value of options outstanding and exercisable at March 31, 2008 and 2007 was $0. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $0.02 and $ 0.05 as of March 31, 2008 and 2007, respectively, and the exercise price multiplied by the number of options outstanding. As of March 31, 2008, total unrecognized stock-based compensation expense related to stock options was $547,886. The total stock based compensation expense  for the years  ended March 31, 2008 and 2007 was $300,794 and $453,220, respectively.
 
All options were granted at exercise prices that either equaled or exceeded fair market value at the respective dates of grant. No options had been granted to a 10% Owner-Employee.

During the year ended March 31, 2007, the Company used the Trinomial Lattice method of valuation. During the year ended March 31, 2008, the Company used the Black-Scholes method. The significant assumptions made were as follows:

   
2008
    
2007
  
Expected life of award (years)
     10       5.84  
Risk free interest rate range
     4.75 %     4.69%-4.92 %
Expected volatility range
     169.85 %     182.10-242.96 %
Expected dividend yield
     0.00 %     0.00 %
Suboptimal Exercise Factor
     0       2.00  
Post Vesting Forfeiture Rate
     0       25.00 %

The expected life of the awards is based on the Company's historical exercise patterns and the term of the options. The risk free interest rate range is based on zero coupon U.S Treasury strips for the comparable term. The expected volatility is derived from the changes in the Company's historical common stock prices over a time frame similar to the expected life of the awards. The dividend yield is based on the Company's historical yield, which was considered a non-dividend paying equity assumption. The suboptimal exercise option is the stock-price-to-exercise-price ratio at which suboptimal early option exercise is assumed, generally between 1.5 and 3. Empirical data from actual exercise patterns at S&P 1500 companies indicated a median price ratio for exercise of 2.0, which is the assumption applied in Lattice models. Lastly, the post vesting forfeiture rate is based on the Company's rate at which employees may lose unvested options when they leave their jobs and may be forced to exercise prematurely then unexercised but vested options.
 
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007


(9) RELATED PARTY TRANSACTIONS

In August 2006 the Company executed a contract with Aspen Capital Partners, LLC ("Aspen") to provide investment banking services including financing. The owner of Aspen is Peter Peterson, our former Chairman and CEO. Our contract with Aspen calls for a commission of 8% on funds raised by Aspen as well as normal expense reimbursement. During 2007 Aspen earned $120,200 in commissions of which $76,200 was paid in cash and the balance paid via a convertible promissory note with terms as described in Note 7.
 
On February 16, 2007, we entered into an employment agreement with Philip Ellett, the Company's Chief Executive Officer. Pursuant to the terms of the agreement Mr. Ellett is to receive an annual base salary of $84,000 a year and is entitled to receive an increase to his base salary and receive certain bonuses if certain managed business objectives are met by the Company during the 2007 calendar year. Mr. Ellett also received options to purchase 6,000,000 shares of common stock at an exercise price of $0.08 per share. The options vest according to the following schedule: (1) 1,000,000 vested upon approval by the board of directors of the Plan (2) the remaining 5,000,000 will begin vesting on January 31, 2008 at 138,889 per month, for a total of 36 months. The options  expire on February 16, 2017. Mr. Ellett's salary and bonus schedule will be reviewed by the Board of Directors on an annual basis. During the term of his employment and for a period thereafter, Mr. Ellett will be subject to non-competition and non-solicitation provisions, subject to standard exceptions.

In October, 2007, The Company granted options to purchase an additional 21,000,000 shares of its common stock at a price of $0.05 per share to its Chief Executive Officer. These options have a term of ten years, and vest as follows:  5,250,000 at the grant date, and the balance at the rate of 437,500 per month over the succeeding thirty-six months.   During the years ended March 31, 2008, and 2007 the Company recognized an expense of $221,638 and $0, respectively,  for the value of these options vested during the year.

Included in the accompanying balance sheet at March 31, 2008  is  $21,000, in accrued salary due to the Company's Chief Executive Officer.
 
On August 9, 2006, the Company entered into an employment agreement with Thomas J. Elowson, the Company's Chief Operating Officer and President. The agreement has a term of 3 years, stipulates a minimum annual salary of $84,000, and has certain provisions regarding termination of employment with and without "cause" as therein defined. In addition, the employment contract provides for a signing bonus of $10,000 payable upon a fundraising event or series of related fundraising events under which the Company raises a cumulative gross amount of at least $2 million. As of March 31, 2008, this signing bonus has not been paid as the condition for its payment has not been met. In connection with his employment agreement the Company granted Mr. Elowson options to purchase 5,978,349 shares of common stock in the Company. The options have an exercise price of $0.13 per share, expire on August 8, 2016, and vested immediately.

Included in the accompanying balance sheet at March 31, 2008 and 2007 is $37,500 and $60,500, respectively, in accrued salary due to the Company's Chief Financial Officer.

In October 2007, the Company granted options to purchase 7,500,000 shares of its common stock at a price of $0.05 per share to its Vice President and Chief Financial Officer. These options have a term of ten years, and vest as follows: 1,875,000 at the grant date, and the balance at the rate of 156,250 per month over the succeeding thirty-six months.   During the year ended March 31, 2008 and 2007, the Company recognized an expense of $79,156 and $0, respectively, for the value of these options vested during the year.

In October 2007, the Company converted accrued salary to its Vice President and Chief Financial Officer in the amount of $60,500 into common stock at the fair value of $0.05 per share for a total of 1,210,000 shares
 
 
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007
 
(10) INCOME TAXES

In July 2006, the FASB issued FIN No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109,  “Accounting for Income Taxes.”  This pronouncement prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in the our tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 were adopted on April 1, 2007. The adoption of FIN 48 did not have a material impact on our financial statements. As of March 31, 2008, all of the federal income tax returns Innovative Software has filed are still subject to adjustment upon audit.
 
The Company’s provision for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 34% to income before income taxes as a result of the following (in thousands):
 
 
  
Year Ended
 March 31,
 2008
    
Year Ended
March 31,
2007
  
Tax at U.S. statutory rate of 34%
  
$
(506,000
)
 $ 
(994,000
)
Permanent Differences
    
-
    
-
  
Change in valuation allowance
  
  
506,000
    
994,000
  
Income tax provision (benefit)
  
$
 -
   $ 
-
  

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
 
   
Year ended
 March 31, 2008
    
Year ended
 March 31, 2007
  
Deferred tax assets (liabilities):
            
Federal and state net operating loss
  
$
1, 665,000
   $ 
1,159,000
  
Other temporary tax differences
  
$
(695,000
 )  $ 
(573,000
 ) 
Total net deferred tax assets
    
970,000
    
586,000
  
Valuation allowance
    
(970,000
 )   
(586,000
 ) 
Deferred tax asset, net
  
$
-
   $
-
  

Due to the uncertainty of the Company’s ability to generate taxable income to realize its net deferred tax assets at March 31, 2008, a full valuation allowance has been recognized for financial reporting purposes. The Company’s valuation allowance for deferred tax assets increased by $506,000 during the year ended March 31, 2008. The increase in the deferred tax assets in 2008 was primarily the result of increasing net operating loss carryforwards during the year.

At March 31, 2008, the Company had federal net operating loss carryforwards of approximately $4.9 million for income tax reporting purposes, which begin to expire in 2025. The Company’s ability to utilize the carryforwards may be limited in the event of an ownership change as defined in current income tax regulations.
 
 
 
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 AND 2007

 (11) COMMITMENTS AND CONTINGENCIES

(a) Leases:

The Company does not have any noncancellable operating leases with initial terms in excess of one year as of March 31, 2008.  Future minimum capital lease payments as of March 31, 2008, are as follows:
 
   
Capital
  
Year ending March 31:
  
Leases
  
Total noncancelable lease payments
  
$
69,975
  
Less amount representing interest
    
(12,416
 ) 
Present value of minimum lease payments
  
$
57,559
  
 
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 March 31, 2008, the balance of this deferred gain was $4,874.
 
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 year ended March 31, 2008, and 2007, was $27,649 and $92,411 respectively. As of July 1, 2007, our principal executive offices are located at 911 Ranch Road 620 North, Austin, Texas 78734. This office consists of approximately 340 square feet which we rent for $900 per month. The term of the lease is month to month with a 60 day notice period.

(b) SEC Investigation:

On June 24, 2003, the Securities and Exchange Commission ("SEC") issued a formal order of investigation authorizing subpoenas for documents and testimony in connection with the investigation of certain securities matters. On April 8, 2005, the Independent Committee appointed by the Board of Directors of the Company delivered to the SEC its report based on its internal investigation. 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.

(c) 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.
 
 
 
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008 And 2007

(12) SUBSEQUENT EVENTS

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.  The outstanding principal balance of this Note, plus accrued but unpaid interest, is due and payable on December 18, 2008.  This Note may be prepaid, either in whole or in part, at any time without penalty.

On May 30, 2008, Christopher J. Floyd, Innovative Software Technologies, Inc.’s (the “Company”) Chief Financial Officer and Secretary gave notice to the Company of his resignation, effective May 31, 2008. Mr. Floyd is resigning to pursue another career opportunity.

In connection with the announced resignation of Mr. Floyd, the Company announced that Mr. Robert V. Rudman, currently Managing Director of Aspen Capital Partners, LLC, the Company’s investment bank, would be serving as the principal financial officer of the Company, effective upon the resignation of Mr. Floyd. Mr. Rudman, age 60, has served as Managing Director of Aspen Capital, LLC since November 2007. He served as Director of Finance of D.P. Martin & Associates Inc. from May 2005 until November 2007. Previously, he served as President & Chief Executive Officer of SmarTire Systems Inc. since January 1996. 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.

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.
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On February 8, 2006, Lougheed, Scalfaro & Company LLC ("LSC") resigned as our independent registered public accounting firm.

LSC had not performed an audit of our financial statements prior to its resignation.

There have been no disagreements with LSC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of LSC, would have caused it to make reference to the subject matter of the disagreement in a report. None of the events described in Item 304(a)(1)(iv)(B) of Regulation S-B has occurred with respect to LSC.

We provided to LSC the disclosure contained herein and requested LSC to furnish a letter addressed to the Commission stating whether it agrees with the statements made by us herein and, if not, stating the respects in which it does not agree. A letter from LSC is incorporated herein by reference as Exhibit 16.1.

On October 27, 2006, our Board of Directors approved the dismissal of Stark Winter Schenkein & Co., LLP ("Stark") as our independent auditors for the Company and its subsidiaries.

Stark's reports on our financial statements as of and for the fiscal year ended March 31, 2006 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to audit scope or accounting principles. Stark's report for the year ended March 31, 2006 was modified to include an emphasis regarding uncertainty about our ability to continue as a going concern.
 
 
 
 
There have been no disagreements with Stark on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Stark, would have caused it to make reference to the subject matter of the disagreement in connection with its reports during the fiscal year ended December 31, 2005 and through October 26, 2006. None of the events described in Item 304(a)(1)(iv)(B) of Regulation S-B has occurred with respect to Stark.
 
We provided to Stark the disclosure contained herein and requested Stark to furnish a letter addressed to the Commission stating whether it agrees with the statements made by us herein and, if not, stating the respects in which it does not agree. A letter from Stark is incorporated herein by reference as Exhibit 16.2.
 
On November 1, 2007, the Company dismissed Mayer Hoffman McCann P.C. (“MHM”) as independent auditors.
 
MHM's reports on our financial statements as of and for the fiscal year ended March 31, 2007 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to audit scope or accounting principles. MHM's report for the year ended March 31, 2007 was modified to include an emphasis regarding uncertainty about our ability to continue as a going concern.
 
There have been no disagreements with MHM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of MHM, would have caused it to make reference to the subject matter of the disagreement in connection with its reports.
 
We provided to MHM the disclosure contained in our Form 8-K dated November 1, 2007, and requested MHM to furnish a letter addressed to the Commission stating whether it agrees with the statements made by us therein and, if not, stating the respects in which it does not agree.
 
ITEM 8A.   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 below.
 
Management’s Report on Internal Control
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f), as amended) of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
 
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2008. Management’s assessment identified the following material weakness in internal control over financial reporting:
 
Management determined there was an insufficient number of personnel with appropriate technical accounting and SEC reporting expertise to adhere to certain control disciplines, and to evaluate and properly record certain non-routine and complex transactions.  
 
Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2008 because of the material weakness described in the preceding paragraph. A material weakness in internal control over financial reporting is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis.
 
The effectiveness of the Company’s internal control over financial reporting as of March 31, 2008 has not been audited by PMB Helin Donovan, LLP, an independent registered public accounting firm.
 
 
 
PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

Below are the names and certain information regarding our executive officers and directors.

NAME
  
AGE
  
POSITION
Philip D. Ellett
  
54
  
Chief Executive Officer and Director
Robert V. Rudman
  
60
  
Chief Financial Officer, Secretary
Thomas J. Elowson
  
47
  
President and Chief Operating Officer

Officers are elected annually by the Board of Directors, at our annual meeting, to hold such office until an officer's successor has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.

BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS

Philip Ellett, Chief Executive Officer and Director

Mr. Ellett has served as Chief Executive Officer, Director and Principal Executive Officer since December 2006. From September 2006 until December 2006, Mr. Ellett served as an executive consultant to us. From 2004 to the present, Mr. Ellett has served as a principal at Fontaine Builders, Inc., a construction and real estate development company. From 2002 to 2004, Mr. Ellett served as president and CEO of Realvue, Inc., a software developer. From 2001 to 2002, he served as Senior Vice President of Sales at Motive Computing, a software developer. From 2000 to 2001, Mr. Ellett was an investor and served as President and CEO of Netier, Inc. a manufacturer of thin client computers, which was subsequently sold to Wyse, Inc. From 1996 to 2000, Mr. Ellett held various positions with Ingram Micro, Inc., a computer products distributor, serving as President of Europe for three years and President of the Americas for the final year of his tenure. Mr. Ellett received his Higher National Certificate in Electrical and Electronic Engineering in 1977 from Slough College of Technology in England.

Robert V. Rudman, Chief Financial Officer and Secretary

Mr. Rudman is a Canadian Chartered Accountant with more than thirty years of experience in the field of accounting and financial management in positions of increasing responsibility. In 1977, he left his employment with Price Waterhouse to join the Park Lane group of companies operating in the property/casualty insurance industry. Mr. Rudman served as Chief Financial Officer until 1982 when he established his own financial advisory firm based in Vancouver, Canada. Specializing in valuations, mergers and acquisitions, the firm grew significantly by way of a merger and organic growth. In 1992, Mr. Rudman joined the automotive technology firm, SmarTire Systems Inc. as the Chief Financial Officer and in 1995, he accepted his new role as Chief Executive Officer. In May of 2005, Mr. Rudman moved to West Palm Beach, Florida to join the financial advisory firm of D.P. Martin & Associates Inc. as the Director of Finance. In November of 2007, he accepted the position of Managing Director in the financial advisory firm of Aspen Capital Partners LLC based in Tampa, Florida. During his career as a professional accountant and financial adviser, Mr. Rudman has been instrumental in arranging a wide range of debt and equity financings, in structuring a number of mergers and acquisitions, in developing strategic and operational business plans, and in the preparation and filing of all required regulatory reports. His scope of experience includes both domestic and international transactions. On June 1, 2008, Mr. Rudman accepted the position of Chief Financial Officer and Secretary of Innovative Software Technologies, Inc. in addition to his role at Aspen Capital Partners LLC.

Thomas Elowson, President and Chief Operating Officer

Mr. Elowson has served as our President and Chief Operating Officer since August 2006. From August 2004 to August 2006 Mr. Elowson served as an independent consultant in development of the company. From January 2004 to August 2004, Mr. Elowson served as President & COO of SecureCore AS, a smart card security consulting company. From March 2001 until January 2004, Mr. Elowson served as Executive Vice President of Sospita AS, a smartcard software technology company based in Oslo, Norway. As a co-founder of TeleComputing, Inc., from 1998 to 2001, he served as vice president on the executive team that raised $45 million for the U.S. launch of this world-leading ASP, and was responsible for developing the key partnerships with Microsoft, Compaq, MCI and Citrix. TeleComputing also achieved a successful IPO on the Oslo exchange during his time with the company. Mr. Elowson is also a founder of the ASP Industry Consortium, and served two terms on the Industry Board of Directors. Elowson has led teams to develop remote application hosting strategies for both business and consumers along with corporate growth strategies for major partnerships in the U.S., Europe and Asia.


 
ELECTION OF DIRECTORS AND OFFICERS

Holders of our Common Stock are entitled to one (1) vote for each share held on all matters submitted to a vote of the stockholders, including the election of directors.

The Board of Directors will be elected at the annual meeting of the shareholders or at a special meeting called for that purpose. Each director shall hold office until the next annual meeting of shareholders and until the director's successor is elected and qualified. If a vacancy occurs on the Board of Directors, including a vacancy resulting from an increase in the number of directors, then the shareholders may fill the vacancy at the next annual meeting or at a special meeting called for the purpose, or the Board of Directors may fill such vacancy.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS

Based solely upon the written representations of our executive officers and directors and upon copies of the reports that they have filed with the Securities and Exchange Commission ("SEC"), during the year ended March 31, 2008, our executive officers and directors filed with the SEC on a timely basis all required reports relating to transactions involving shares of our common stock beneficially owned by them.

COMMITTEES

Our business, property and affairs are managed by or under the direction of the board of directors. Members of the board are kept informed of our business through discussion with the chief executive and financial officers and other officers, by reviewing materials provided to them and by participating at meetings of the board and its committees.

AUDIT COMMITTEE

Presently, the Company is not in a position to attract, retain and compensate additional directors in order to acquire a director who qualifies as an "audit committee financial expert", but the Company intends to retain an additional director who will qualify as such an expert, as soon as reasonably practicable.

CODE OF ETHICS

The Company has not yet adopted a formal written code of ethics that applies to its principal executive, financial and accounting officers as described in Item 406 of Regulation S-B.

DIRECTOR INDEPENDENCE

Mr. Ellett is not an independent director.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation paid to our Chief Executive Officer and the other executive officers at the end of the last two completed fiscal years. We refer to all of these officers collectively as our "named executive officers."
 
 
 
Summary Compensation Table

Name &
Principal Position
Year
  
Salary ($)
    
Bonus
($)
    
Stock
Awards
($)
    
Option
Awards
($)
    
Non-Equity
Incentive
Plan
Compensation
($)
    
Change in
Pension
Value
and Non-
Qualified
Deferred
Compensation
Earnings ($)
    
All Other
Compensation
($)
    
Total ($)
  
Philip Ellett, CEO,
                                                  
   Principal Executive
2007
   $  28,000     $   -     $   -     $   86,412     $   -     $   -     $   -     $   114,412  
   Officer
2008
   $   84,000     $   -     $   -     $   625,343     $   -     $   -     $   -     $   709,343  
Christopher J. Floyd,
                                                                  
 former  Chief
 2007
   $   104,500     $   -     $   -     $   -     $   -     $   -     $   800     $   105,300  
   Financial Officer
2008
   $   84,000     $   -     $   -     $   223,337     $   -     $   -     $   -     $   307,337  
Tom Elowson
                                                                  
   President and Chief
2007
   $   76,000     $   -     $   -     $   356,014     $   -     $   -     $   -     $   432,014  
   Operating Officer
2008
   $   84,000     $   -     $   -     $   -     $   -     $   -     $   -     $   84,000  

Outstanding Equity Awards at Fiscal Year-End Table.
 
 
 
 
 
 
 
 
Option Awards
  
Stock Awards
 
Name
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercise
Unearned
Options
(#)
Option
Exercise
Price
($)
  
Option
Expiration
Date
Number of
Shares or
Units of
Stock That Have Not
Vested
(#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($) 
Philip  Ellett
7,437,500
13,562,500
-
 $
0.05
10/12/2017
-
-
-
-
Phillip Ellett
5,416,667
583,333
-
 $ 0.08
2/15/2017
-
-
-
-
Christopher Floyd (1)
2,656,250
4,843,750
-
 $ 0.05
10/12/2017
-
-
-
-
Tom Elowson
5,978,349
-
-
 $ 0.13
8/8/2016
-
-
-
-
 
On May 31, 2008, our Chief Financial Officer, resigned.  As a result of his resignation, 3,968,750 options  to purchase additional shares of common stock, that have not vested as of May 31, 2008, were forfeited.
 
COMPENSATION OF DIRECTORS

It is intended that each member of our board of directors who is not an employee (a "non-employee director") will receive an annual retainer in cash and/or shares of Common Stock or in options to purchase shares of Common Stock as determined by our board of directors and all directors will be reimbursed for costs and expenses related to attendance at meetings of the board of directors. The amount of this retainer has not yet been determined.

Our employee directors will not receive any additional compensation for serving on our board of directors or any committee of our board of directors, and our non-employee directors will not receive any compensation from us for their roles as directors other than the retainer, attendance fees and stock or stock option grants described above.

EMPLOYMENT AGREEMENTS

On February 16, 2007, we entered into an employment agreement with Philip Ellett, the Company's Chief Executive Officer. Pursuant to the terms of the agreement, the Company will employ Mr. Ellett until such time it terminates him. Mr. Ellett is to receive an annual base salary of $84,000 a year. Mr. Ellett is entitled to receive an increase to his base salary and receive certain bonuses if certain managed business objectives are met by the Company during the 2007 calendar year. Mr. Ellett also received 6,000,000 options to purchase common stock at a strike price of $0.08. The options vest according to the following schedule: (1) 1,000,000 vested upon approval of the Plan (2) the remaining 5,000,000 will begin vesting on January 31, 2008 at 138,889 per month, for a total of 36 months. The options with expire on February 16, 2017. Mr. Ellett's salary and bonus schedule will be reviewed by the Board of Directors on an annual basis. During the term of his employment and for a period thereafter, Mr. Ellett will be subject to non-competition and non-solicitation provisions, subject to standard exceptions.

On August 9, 2006, we entered into an employment agreement with Thomas J. Elowson for the position of Chief Operating Officer and President. The contract has a term of three years, stipulates a minimum annual salary of $84,000, and has certain provisions regarding termination of employment with and without "cause" as therein defined. In addition, the employment contract provides for a signing bonus of $10,000 payable upon a financing event or series of related financing events wherein we raise a cumulative gross amount of at least $2 million. In connection with his employment agreement, we granted Mr. Elowson 5,978,349 options to purchase shares of our common stock. The options vest immediately and have an exercise price of $0.13 per share, the closing price on the Over the Counter Bulletin Board on August 9, 2006.
 


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information, as of July 2, 2008, with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company's executive officers and directors; and (iii) the Company's directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.


 
Name and Address of Owner
  
Amount Owned (1)
    
Percent of Class (2)
  
Philip D. Ellett
            
Chief Executive Officer and Director
            
15900 Soleil Court
            
Austin, Texas 78734
     22,782,824 (3)     18.4 %
                 
Robert V. Rudman
                
Chief Financial Officer and Secretary
                
9630 Via Grandezza East
                
Wellington Florida, 33411
      -       0.0 %
                 
Tom Elowson
                
President and Chief Operating Officer
                
3853 N. W. 5th Terrance
                
Boca Raton, Florida 33431
     6,884,158 (4)     6.3 %
                 
Christopher J. Floyd
                
Former Chief Financial Officer and Secretary
                
6516 Windjammer Place
                
Bradenton, Florida 34202
     16,296,874 (5)     14.8 %
                 
All Officer and Directors as a group (4 persons)
     45,963,856       33.6 %
                 
Peter M. Peterson (6)
                
1413 S Howard Avenue, #220
                
Tampa, FL 33606
     7,156,874       7.2 %
                 
Terri Zalenski (7)
                
4090 Northwest 24th Terrance
                
Boca Raton, Florida 33431
     7,258,559       7.2 %
                 
Individuals holding over 5%
     14,415,433       14.2 %
                 
All Officer and Directors and individuals holding over 5%
     60,379,289       44.1 %
 
 
 
(1) Information with respect to beneficial ownership is based upon information furnished by each stockholder or contained in filings made with the Securities and Exchange Commission. Unless otherwise indicated, beneficial ownership includes both sole investment and voting power.

(2) Based upon 102,513,929 shares of common stock outstanding as of July 2, 2008 and, with respect to each stockholder, the number of shares which would be outstanding upon the exercise by such stockholder of outstanding rights to acquire stock, either upon exercise of outstanding options, warrants or conversion of other securities within 60 days of July 2, 2008.

(3) This included 21,000,000 options to purchase additional shares of common stock at a price of $0.05 per share, which have an expiration date of October 12, 2017.

(4) This includes 5,978,349 fully vested options to purchase common stock of the Company at a strike price of $0.13 and an expiration date of August 8, 2016.

(5) This includes 7,500,000 options to purchase additional shares of common stock at a price of $0.05 per share, which have an expiration date of October 12, 2017.

(6) Mr. Peterson was the chairman and CEO of the Company from August 2004 through June 2006.

(7) Mrs. Zalenski is the wife of our former chairman and CEO, Anthony F. Zalenski.

Title of Class
  
Name and Address
of Owner
  
Amount
Owned (1)
  
Percent
of Class(2)
Series A
Preferred
  Stock
  
Glendower Holdings, Ltd.
Shareholder
36 Hilgrove Street
St. Helier, Jersey JE4 8TR
Channel Islands
  
350,000
  
77.8%
             
Series A
Preferred
  Stock
  
Jarbridge, Ltd.
Shareholder
1934 Driftwood Bay
Belize City, Belize
Central America
  
100,000
  
22.2%
All Officers and Directors as a Group
(0 persons)
  
450,000
  
10%

(1) Information with respect to beneficial ownership is based upon information   furnished by each stockholder or contained in filings made with the  Securities and Exchange Commission. Unless otherwise indicated, beneficial  ownership includes both sole investment and voting power.

(2) Based upon 450,000 shares of Series A Preferred Stock outstanding as of   July 2, 2008 and, with respect to each stockholder, the number of shares which would be outstanding upon the exercise by such stockholder of  outstanding rights to acquire stock, either upon exercise of outstanding options, warrants or conversion of other securities within 60 days of July 2, 2008.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Effective August 1, 2004, we entered into an employment agreement with Peter Peterson that provided for his employment as Chief Executive Officer of the Company, which agreement was to expire on August 1, 2007. The agreement stipulated an annual base salary of $180,000 and an incentive compensation plan to be determined by the board. Mr. Peterson's employment agreement was mutually terminated by Mr. Peterson and the Company effective January 4, 2006. In lieu of paying Mr. Peterson's salary for January 2006 and the following 12 months thereafter as stipulated in the employment contract, we agreed to a one-time issuance to Mr. Peterson of 950,495 shares of common stock, payment of salary though January 2006, and health benefits to continue for the 2006 calendar year. Mr. Peterson retained the office of Chief Executive Officer until the date of our acquisition of AcXess.
 
 
 
ITEM 13. EXHIBITS AND REPORTS ON 8-K

a.  Exhibits

The exhibits required by this item are listed in the Index to Exhibits   set forth at the end of this Form 10-KSB.

ITEM 14. PRINCIPAL AUDITOR FEES AND SERVICES

AUDIT FEES

The aggregate fees billed for professional services rendered by our principal accountants for the audit of our financial statements and for the reviews of the financial statements included in our annual report on Form 10-KSB and 10-QSBs respectively, and for other services normally provided in connection with statutory filings were $41,000 and $50,398, respectively, for the fiscal years ended March 31, 2008 and March 31, 2007.

AUDIT-RELATED FEES

We did not incur any other fees for the years ended March 31, 2008 and March 31, 2007 for professional services rendered by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements that are not included in "Audit Fees".

TAX FEES

We did not incur any fees for tax compliance by our independent auditors during  the fiscal years ended March 31, 2008 and March 31, 2007.

ALL OTHER FEES

We did not incur any fees for other professional services rendered by our independent auditors during the fiscal years ended March 31, 2008 and March 31, 2007.




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: July 15, 2008     By: /s/ Philip D. Ellett
                                      Philip D. Ellett
                                  
                                      Chief Executive Officer
                                      (Principal Executive Officer)


Date: July 15, 2008     By: /s/ Robert V. Rudman
                                      Robert V. Rudman
                                      Chief Financial Officer
      (Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name
Position
Date
/s/ Philip D. Ellett              
Philip D. Ellett             
Chief Executive Officer
(Principal Executive Officer) and Director
July 15, 2008
     
/s/ Robert V. Rudman    
 Robert V. Rudman
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
July 15, 2008




Exhibit Number                         Description Of Exhibit

2.1  
Stock Exchange Agreement by and between Innovative Software Technologies, Inc., AcXess, Inc., the Shareholders of  AcXess, Inc., and Anthony F. Zalenski, acting as the Shareholder's Agent, dated as of June 26, 2006. (4)

3.1 
Amendment to the Articles of Incorporation of Innovative Software Technologies, Inc.(1)

3.2 
Articles of Incorporation of Innovative Software Technologies, Inc., as amended.(1)

3.3 
Certificate of Designation of the Series A Preferred Stock of Innovative Software Technologies, Inc. (incorporated by reference from Exhibit 2.2 to the Company's Current Report on Form 8-K/A filed March 14, 2002).

3.4  
Certificate of Designation of the Series B Preferred Stock of Innovative Software Technologies, Inc.(1)

3.5  
By-laws of Innovative Software Technologies, Inc. (incorporated by reference from Exhibit B to Amendment No. 1 to the Company's Information Statement on Schedule 14C filed with the Commission on January 11, 2007).

3.6 
Certificate of Amendment to Articles of Incorporation filed on August 8, 2001 (9)

4.1  
Specimen Certificate of Common Stock (incorporated by reference from Exhibit 4(a) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999).

4.2  
Form of Investor Certificate (6)

4.3 
Form of Promissory Note, dated October 16, 2006 (6)

4.4  
Form of Warrant, dated October 16, 2006 (6)

4.5 
Form of Convertible Debenture, dated December 22, 2006 (7)

4.6 
Form of Long Term Warrant, dated December 22, 2006 (7)

4.7  
Form of Short Term Warrant, dated December 22, 2006 (7)

10.1 
Director Indemnification Agreement dated August 14, 2003 between Innovative Software Technologies, Inc. and Peter M. Peterson(2)

10.2 
Director Indemnification Agreement dated August 4, 2003 between Innovative Software Technologies, Inc. and William E. Leathem(2)

10.3 
Employment Agreement dated August 1, 2004 between Innovative Software Technologies, Inc. and Christopher J. Floyd.(4)

10.4  
Innovative Software Technologies Inc. 2006 Equity Incentive Plan (5)

10.5 
Form of Stock Option Award under 2006 Equity Incentive Plan (5)

10.6  
Employment Agreement by and between Anthony F. Zalenski and Innovative Software Technologies, Inc., dated as of August 9, 2006 (5)

10.7
Employment Agreement by and between Thomas J. Elowson and Innovative Software Technologies, Inc., dated as of August 9, 2006 (5)

10.8 
Form of Registration Rights Agreement, dated as of October 16, 2006 (6)

10.9  
Form of Securities Purchase Agreement, dated as of December 22, 2006 (7)

10.10 
Form of Registration Rights Agreement, dated as of December 22, 2006(7)

10.11
Employment Agreement by and between Philip Ellett and Innovative Software Technologies, Inc., dated as of August 9, 2006 (8)

16.1 
Letter of Stark Winter Schenkein & Co., LLP, dated October 27, 2006 (incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K filed with the SEC on October 31, 2006)

16.2
Letter of Lougheed, Scalfaro & Company LLC, dated February 8, 2006 (incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K filed with the SEC on February 17, 2006)

21.1
List of Subsidiaries







Exhibit  Number                     Description Of Exhibit

(1)                                              Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2004 which bears the same exhibit number.

(2)                                              Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 2004 which bears the same exhibit number.

(3)                                              Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2004 which bears exhibit number 10.1.

(4)                                              Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on June 30, 2006

(5)                                              Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on August 15, 2006

(6)                                              Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on October 20, 2006

(7)                                              Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on December 29, 2006

(8)                                              Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on February 23, 2007

(9)                                              Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2004 which bears the exhibit number 3.1.