10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: June 30, 2008

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________

Commission file number 000-27465

INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

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

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

(512) 266-2000

(Registrant’s Telephone Number, Including Area Code)

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

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

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x    NO o

Indicate by check mark whether the issuer is a shell company (as defined in Regulation 12b-2 of the Exchange Act):   YES o NO x

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

103,514,199 Common Shares (post-reverse split) outstanding as of August5, 2008

Transitional Small Business Disclosure Format:  YES o    NO x

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

(Check One):

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

i

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheet as of June 30, 2008 (unaudited) and March 31, 2008	F-1
	Consolidated Statements of Operations for the three months Ended June 30, 2008 and 2007 and for the period from inception (January 12, 2005) through June 30, 2008 (unaudited)	F-2
	Consolidated Statements of Cash Flows for the three  months Ended June 30, 2008 and 2007 and for the period from inception (January 12, 2005) through June 30, 2008 (unaudited)	F-3
	Notes to Consolidated Financial Statements (unaudited)	F-4
Item 2.	Management's Discussion and Analysis or Plan of Operation	F-13
Item 3.	Controls and Procedures	F-16
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	1
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	1
Item 3.	Defaults Upon Senior Securities	1
Item 4.	Submission of Matters to a Vote of Security Holders	1
Item 5.	Other Information	1
Item 6.	Exhibits	1
SIGNATURES		2

ii

INTRODUCTORY NOTE

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

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

iii

INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEET

(A Development Stage Company)

	June 30,			March 31,
	2008			2008
Assets	(unaudited)
Current assets
Cash and cash equivalents	$	76,188		$	29,126
Accounts receivable, net		-			8,450
Prepaid services and other current assets		839			839
Total current assets		77,027			38,415
Property and equipment, net (note 4 )		100,014			114,487
Deposits and other assets		2,400			2,400
Total assets	$	179,441		$	155,302
Liabilities and stockholders' deficit
Current liabilities
Accounts payable and accrued liabilities	$	752,828		$	725,400
Accrued taxes		7,152			4,475
Accrued interest		115,658			89,727
Accrued officer salary and expenses		34,071			58,500
Advances payable (note 3)		50,000			155,511
Current portion of capital lease obligation		43,898			57,559
Deferred revenue (note 5)		170,560			112,781
Penalty for late registration		81,140			81,140
Deferred gain of sale of fixed assets		3,545			4,874
Note payable		158,079			-
Convertible debentures (note 6)		104,003			70,394
Total current liabilities		1,520,934			1,360,361
Commitments and contingencies (note 9)		-			-
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;
102,514,199 and 101,184,199 shares issued and outstanding at June 30, 2008 and March 31, 2008, respectively (note 7)		102,515			101,185
Additional paid-in capital		3,283,112			3,142,017
Deficit Accumulated during the Development Stage		(5,177,120	)		(4,898,261	)
Total stockholder's deficit		(1,341,493	)		(1,205,059	)
Total liabilities and stockholders' deficit	$	179,441		$	155,302

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

F-1

INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF LOSSES AND COMPREHENSIVE LOSS

 (A Development Stage Company)

(Unaudited)

							Cumulative from
	For the Three			For the Three			Inception
	Months Ended			Months Ended			(January 12, 2005)
	June 30,			June 30,			June 30,
	2008			2007			2008
Revenue	$	109,942		$	32,140		$	451,100
Total revenue		109,942			32,140			451,100
Cost of revenue		37,659			21,712			190,917
Total cost of revenue, excluding depreciation below		37,659			21,712			190,917
Gross profit		72,283			10,428			260,183
Operating expenses:
Sales, general and administrative expenses		284,901			330,500			4,211,632
Total operating expenses		284,901			330,500			4,211,632
Operating loss		(212,618	)		(320,072	)		(3,951,449	)
Other income (expense):
Income from change in fair value of derivative liabilities		-			620,163			169,241
Interest expense		(67,570	)		(245,877	)		(1,456,527	)
Interest income		-			2,263			7,978
Gain on sale of fixed assets		1,329			-			3,847
Other income (expense)		-			(1,790	)		49,790
Total other income (expense)		(66,241	)		374,759			(1,225,671	)
Income (loss) before  taxes		(278,859	)		54,687			(5,177,120	)
Provision for taxes		-			-			-
Net income (loss)	$	(278,859	)	$	54,687		$	(5,177,120	)
Undeclared preferred stock dividends		(4,500	)		(4,500	)		(36,000	)
Loss applicable to common stockholders	$	(283,359	)	$	50,187		$	(5,213,120	)
Net loss per share - basic	$	0.00		$	0.00		$	(0.07	)
Net loss per share - diluted	$	0.00		$	0.00		$	(0.07	)
Weighted average shares outstanding -
basic		101,637,276			72,846,566			77,898,660
Weighted average shares outstanding -
diluted		101,637,276			106,139,423			77,898,660

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

F-2

INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(A Development Stage Company)

(Unaudited)

	For the Three			For the Three			Cumulative
	Months Ended			Months Ended			from Inception
	June 30,			June 30,			(January 12, 2005) to
	2008			2007			June 30, 2008
Net loss	$	(278,859	)	$	54,688		$	(5,177,120	)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization		23,458			2,115			156,592
Common stock and stock option based compensation		75,925			22,989			1,032,602
Notes payable issued for expenses paid by affiliates and third parties		-			-			258,605
Amortization of deferred gain on sale of assets		(1,329	)		-			2,673
Services paid in common stock		-			-			126,560
Amortization of convertible debt discount		33,608			146,676			1,022,286
Change in fair value of derivative liabilities		-			(620,163	)		(169,241	)
Amortization of deferred financing costs		-			21,833			232,199
Net change in operating assets and liabilities:
Accounts receivable		8,450			(10,410	)		-
Prepaid expenses and other current assets		-			4,950			9,961
Deposits		-			19,557			(1,400	)
Accounts payable and accrued expenses		100,676			101,874			307,772
Deferred revenue		57,779			-			170,560
Net cash used in operating activities		19,708			(255,891	)		(2,027,951	)
Cash flows from investing activities:
Purchase of property and equipment		(8,985	)		(19,260	)		(234,083	)
Proceeds from sale-leaseback of property and equipment		-			-			125,000
Increase in deferred financing costs		-			-			(156,200	)
Net cash used in investing activities		(8,985	)		(19,260	)		(265,283	)
Cash flows from financing activities:
Stock issued for cash		-			-			113,000
Proceeds from notes payable		-			-			427,969
Proceeds from advances payable		50,000			-			205,511
Principal payments on notes payable		-			-			(30,000	)
Proceeds from convertible debentures		-			-			1,663,500
Principal payments under capital lease		(13,661	)		(8,686	)		(61,707	)
Cash acquired in the reverse acquisition of Innovative		-			-			51,149
Net cash provided by (used in) financing activities		36,339			(8,686	)		2,369,422
Net increase (decrease) in cash and cash equivalents		47,062			(283,837	)		76,188
Cash and cash equivalents at beginning of period		29,126			440,648			-
Cash and cash equivalents at end of period	$	76,188		$	156,811		$	76,188
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	-		$	-		$	34,100
Taxes	$	-		$	-		$	-
Issuance of common stock for acquisition	$	-		$	-		$	440,000
Issuance of common stock in exchange for debt	$	-		$	-		$	1,114,602
Assets acquired under capital lease	$	-		$	-		$	136,512
Fixed assets exchanged for lease payment	$	-		$	-		$	2,490
Issuance of common stock to retire notes payable - affiliate	$	-		$	-		$	22,337
Charge warrants and embedded derivative liabilities
to additional paid-in capital	$	-		$	-		$	1,952,451
Convertible debt issued for financing costs	$	-		$	-		$	44,000
Issuance of shares to officer for accrued payroll	$	66,500		$	-		$	127,000

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

F-3

INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND REPORTING

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not contain all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s financial condition as of June 30, 2008, and the results of its operations for the three  months ended June 30, 2008, and June 30, 2007, and the cash flows for the three months ended June 30, 2008, and June 30, 2007. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited 2008 consolidated financial statements, including the notes thereto, and the other information set forth therein, included in the Company's Annual Report on Form 10-KSB for the year ended March 31, 2008. Operating results for the three month period ended June 30, 2008, are not necessarily indicative of the operating results that may be expected for the year ending March 31, 2009.

On June 26, 2006, Innovative Software Technologies, Inc., (“Innovative”), completed the acquisition of AcXess, Inc., a Florida corporation (“AcXess”), in a stock exchange transaction. As a result of the Transaction, AcXess became a wholly owned subsidiary of Innovative.

On November 28, 2007 the  (“Effective Date”) Innovative Software Technologies, Inc., (“Innovative Software – CA”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Innovative Software Technologies, Inc., a Delaware entity (“Innovative Software-DE”). Pursuant to the Merger Agreement, Innovative Software-CA and Innovative Software-DE were merged with and into the surviving corporation, Innovative Software-DE, (“Innovative”, or  the “Company.”).   As of the Effective Date, the certificate of incorporation and bylaws of the surviving corporation became the certificate of incorporation and bylaws of the Company, and the directors and officers in office of the surviving corporation became the members of the board of directors and officers of the Company. Following the execution of the Merger Agreement, on July 9, 2007 the Company filed with the Secretary of State of Delaware a Certificate of Merger with respect to the Innovative Software-CA and Innovative Software - DE merger.

The accompanying unaudited consolidated financial statements present the accounts of Innovative and its wholly owned subsidiaries, AcXess, Inc., and EPMG, Inc. (collectively, the “Company”). All intercompany balances and significant transactions have been eliminated.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has incurred a loss of $5,177,120 from inception (January 12, 2005) through June 30, 2008, and has a working capital deficiency and stockholder deficit of $1,443,907 and $1,341,493, respectively,  at June 30, 2008. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. The Company expects to incur operating losses for the foreseeable future.

Management intends to continue to finance operations through fundraising activities as well as to seek potential acquisitions that have positive cash flows; however, there can be no assurance of successful fundraising or acquisition activity in the future.

On July 24, 2007, the Company entered into a Stock Purchase Agreement (the “Agreement”) with AcXess, Inc., its wholly owned subsidiary,  Thomas Elowson, President of AcXess, Raymond Leitz, Chief Technical Officer of AcXess, and Helge Solberg, Chief Architect of AcXess,  (collectively, Elowson, Leitz, and Solberg referred to herein as the “Buyers”) wherein (i) AcXess redeemed shares of its common stock from the Company in return for the issuance of a promissory note to the benefit of the Company and the signing of a Non-Exclusive License Agreement with the Company, and (ii) the Buyers exchanged stock of the Company held by them  in exchange for stock in AcXess and Elowson canceled options for stock in the Company held by him in exchange for stock in AcXess.  Immediately following the above redemptions and exchanges, the Company will continue to own 984,457 shares, or approximately 21.9% of the outstanding common stock, of AcXess.  The transactions contemplated by the Agreement  are expected to close upon approval of the transactions by the Company’s shareholders.  AcXess has 4,500,000 shares of common stock outstanding.  The Company has determined that it is in its best interests to close this transaction after acquiring another operating entity; however, there can be no assurance that the Company will be successful in negotiating an agreement to acquire another operating entity nor can there be any assurance that the Company, should it successfully negotiate an agreement to acquire another operating entity, will be successful in closing such a transaction. Please refer to the Company’s current report on Form 8-K as filed with the Securities and Exchange Commission on July 30, 2007.

F-4

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.

Long-lived Assets

The Company accounts for its long-lived assets under the provision of Statements of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company's long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted Inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should an impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.

Revenue Recognition

The Company  recognizes  revenues from  contracts in which the Company  provides  website hosting and consulting services as the services are performed. The contractual terms of the  agreements  dictate the  recognition  of revenue by the  Company.  Payments received in advance are deferred until the service is provided.

Contract costs include all direct equipment, material, and labor costs and those indirect costs related to contract performance, such as indirect labor. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in contract performance, contract conditions, and estimated profitability that may result in revisions to costs and income are recognized in the period in which the revisions are determined.

For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which superseded SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. SAB No. 104  incorporates  Emerging  Issues Task Force  (“EITF”) No. 00-21, “Multiple-Deliverable Revenue Arrangements.” EITF No. 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.  Through June 30, 2008, all of the Company’s revenue has been service revenue.

Offering Costs

Direct costs of an equity offering are charged to additional paid-in capital upon closing of the offering and receipt of funds.

Income Taxes

The Company has implemented the provisions on Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires that income tax accounts be computed using the liability method. Deferred taxes are determined based upon the estimated future tax effects of differences between the financial reporting and tax reporting bases of assets and liabilities given the provisions of currently enacted tax laws.

F-5

Fair Value of Financial Instruments

The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. The estimated fair values approximate their carrying value because of the short-term maturity of these instruments or the stated interest rates are indicative of market interest rates.

Stock Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised) (“SFAS No. 123(R)”), “Share Based Payment,” (SFAS 123(R)) which eliminates the use of APB Opinion No. 25 and require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward—known as the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments.

(a) Loss per Common Share

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

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

(b) Customer Concentration

During the three months ended June 30, 2008 and 2007, two customers accounted for approximately 73% and 98% of revenues, respectively. The loss of these customers would have a material adverse effect on financial results.

F-6

Recent Accounting Developments:

In March 2008, the Financial Accounting Standards Board issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an Amendment of Statement No. 133 (SFAS 161). SFAS 161 enhances disclosure requirements about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact of adoption of SFAS 161.

In May 2008, the FASB issued Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. This staff position addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the allocation in computing earnings per share under the two-class method described in SFAS 128, Earnings Per Share. The FASB concluded that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. If awards are considered participating securities, the Company is required to apply the two-class method of computing basic and diluted earnings per share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the impact of adoption of this guidance.

In November 2007, FASB issued EITF 07-1, “Accounting for Collaborative Arrangements" (“EITF 07-1”).”   EITF 07-1 requires additional disclosures related to collaborative arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008.  The Company is currently assessing the impact the adoption of EITF 07-1 will have on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations - Revised 2007. SFAS 141 R 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 is 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.

In December 2007, the FASB also issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, 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 the Company does not expect the adoption of this pronouncement to have a material impact on its financial statements.

In May 2008, the FASB released SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.”   SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that presented in conformity with generally accepted accounting principles in the United States of America. SFAS No. 162 will be effective 60 days following the SEC’s approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The Company does not believe SFAS 162 will have a significant impact on the Company’s consolidated financial statements.

Recently adopted accounting pronouncements

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

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

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

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

F-7

3.  ADVANCES PAYABLE

Advances payable of $50,000 at June 30, 2008 consist of  cash advances to the Company by Aspen Capital and a shareholder, Peter Peterson. These cash advances will accrue interest at a rate of 10% per annum.  During the three months ended June 30, 2008, we accrued interest in the amount of $208 for these cash advances.

During the three months ended June 30, 2008, the Company converted a cash advance of $155,511 and capitalized interest in the amount of $2,568, into a promissory note payable in the amount of $158,079 to Xalles, an Irish corporation (“Xalles”).  The Company has been involved in negotiations to purchase Xalles.  These funds were advanced to the Company by Xalles for the purpose of general working capital and trade payables of both Xalles and the Company.

4. PROPERTY AND EQUIPMENT

 Property and equipment consist of the following as of June 30, 2008 and March 31, 2008:

	June 30, 2008			March 31, 2008
Equipment	$	77,567		$	68,583
Computer software		4,930			4,930
Furniture and fixtures		1,258			1,258
Property and equipment under capital lease		134,022			134,022
		217,777			208,793
Accumulated depreciation and amortization		(117,763	)		(94,306	)
	$	100,014		$	114,487

Depreciation expense was $23,458 and $2,115 for the three month ended June 30, 2008 and 2007, respectively.

5.  DEFERRED REVENUE

The Company’s wholly-owned subsidiary AcXess, Inc.  receives payment in advance for certain of its services, primarily website hosting.  These payments are recognized as revenue over the period for which the services is provided.  As of June 30, 2008 and March 31, 2008, these advance payments aggregated a total of $170,560 and $112,781, respectively; this amount will be taken into revenue over the following twelve months.

6.  CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

The Company reviews the terms of convertible debt and equity instruments issued to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non-employees in connection with consulting or other services they provide.

F-8

Certain instruments, including convertible debt and equity instruments and the freestanding options and warrants issued in connection with those convertible instruments, may be subject to registration rights agreements which impose penalties for failure to register the underlying common stock by a defined date. These penalties are measured and accrued in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”.  When the ability to physical or net-share settle the conversion option or the exercise of the freestanding options or warrants is deemed to be not within the control of the Company, the embedded conversion option or freestanding options or warrants may be required to be accounted for as a derivative instrument liability.

Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments.

When freestanding options or warrants are issued in connection with the issuance of convertible debt or equity instruments and will be accounted for as derivative instrument liabilities (rather than as equity), the total proceeds received are first allocated to the fair value of those freestanding instruments. When the freestanding options or warrants are to be accounted for as equity instruments, the proceeds are allocated between the convertible instrument and those derivative equity instruments, based on their relative fair values. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount.

 To the extent that the fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value.

The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, usually using the effective interest method. When the instrument is convertible preferred stock, the dividends payable are recognized as they accrue and, together with the periodic amortization of the discount, are charged directly to retained earnings.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed periodically, including at the end of each reporting period. If re-classification is required, the fair value of the derivative instrument, as of the determination date, is re-classified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.  During the year ended March 31, 2008, due to the conversion of the Convertible Notes Payable to common stock (see below), the Company reclassified derivative liabilities in the amount of $993,015  from liability to equity.

In January 2006 the Board of Directors of the Company approved the raising of up to $1,000,000 via the issuance of promissory notes (the “Notes”) to accredited investors. These notes have a term of six months, an interest rate of 12% per annum, and are convertible into shares of common stock of the Company at a 30% discount to a future Qualified Financing (as therein described). As a result of this, the Company could ultimately issue an unlimited number of shares of common stock.  This resulted in liability treatment for all of the related derivatives. In addition, each of the Notes is issued with warrants to purchase Company common stock at a strike price of $0.05 per share. The number of warrants granted is determined by multiplying the face value of each note issued by four. In October the Board of Directors of the Company approved an increase in the amount to be raised under this financing to $1,500,000. A total of $1,107,500 had been raised as of November 10, 2006, when the Company closed the round. During the three and nine months ended June 30, 2008, the Company was in default on all Notes totaling a principal amount of $1,107,500. In the event of a default resulting from the Company's non-payment of principal or interest when due, a holder of the Notes may declare all unpaid principal and accrued interest due and payable immediately. The Company was served a complaint from one investor demanding repayment of $55,000 under one of the Notes.  The Company reached a settlement agreement with this investor, and executed a mutual release and the complaint was dismissed on October 25, 2007  (see Note 9). No notice has been received from any other holder of the Notes and the Company is currently in the process of renegotiating the terms of the Notes (as noted below); however there can be no assurance that such negotiations will be successful.

On December 22, 2006, the Company entered into a securities purchase agreement with an accredited investor (the “Investor”) for the sale of $1,000,000 Convertible Debentures (the “Debentures”). In connection with the Agreement, the Investor received (i) a warrant to purchase 8,928,571 shares of common stock (“Long-Term Warrants”) exercisable at $0.30 and (ii) a warrant to purchase 1,785,714 shares of common stock (“Short Term Warrants”) exercisable at $0.143 per share. The Long Term Warrants and the Short Term Warrants are exercisable for a period four years from the date of issuance and the earlier of (i) December 22, 2007 and (ii) the date a registration statement(s) covering the resale of all Registrable Securities (as defined in the Registration Rights Agreement) is declared effective by the SEC (the “Initial Exercise Date”) and on or prior to the close of business on the four month anniversary of the Initial Exercise Date, respectively. The Company incurred approximately $81,140 in interest expense relating to the Debentures due to the “Liquidating Damages” clause specified in the Purchase Agreement as a registration statement covering the Registrable Securities was declared effective by the SEC on July 23, 2007, 123 days after the agreed upon date in the Purchase Agreement, March 23, 2007.  The penalty is calculated as 2% per 30 day period or partial 30 day period beyond the dates stipulated above.  The maximum aggregate liquidated damages payable to a Holder under this Agreement is 10.5% of the aggregate subscription amount paid by such Holder pursuant to the Purchase Agreement. Pursuant to Emerging Issues Task Force issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, there are no gains or losses associated with this penalty, as it is not indexed to or settled in the stock of the Company.

F-9

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 $22,438 due on July 1, 2007 and intends to negotiate a settlement with the Debenture holder; however there can be no assurance that such negotiation will be successful

Warrants were initially accounted for as derivative instrument liabilities (see below) in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company's Own Common Stock" (“EITF 00-19”) primarily as a result of the possible conversion of other debt into a possible unlimited number of shares. Accordingly, the initial fair values of the warrants, amounting to an aggregate of $82,239 relating to the issuance of the Notes, and $964,286 relating to the issuance of the Debentures, were recorded as a derivative instrument liability. The fair value of the warrants was determined using the Black-Scholes valuation model, based on the market price of the common stock on the dates the warrants were issued, an expected dividend yield of 0%, a risk-free interest rate based on constant maturity rates published by the U.S. Federal Reserve, applicable to the life of the warrants, expected volatility of 114% (based on analysis of historical stock prices of the Company and its selected peers), and the five year and four year life of the warrants relating to the Notes and Debentures, respectively. The Company is required to re-measure the fair value of the warrants at each reporting period.

Because the conversion price of the Notes is not fixed, they are not “conventional convertible debt” as that term is used in EITF 00-19 primarily as a result of the possible conversion of other debt into a possible unlimited number of shares. Accordingly, the Company is required to bifurcate and account separately for the embedded conversion options, together with any other derivative instruments embedded in the Notes. The Debentures are a hybrid instrument that embodies several derivative features. The instrument is not afforded the “conventional” convertible exemption because of certain full-ratchet anti-dilution protections afforded the investors. Further, certain derivative features did not meet the conditions for equity classification set forth in EITF 00-19. As a result, the Company has combined all embedded derivatives into one compound derivative financial instrument for financial accounting and reporting.

The freestanding warrants issued with the Debentures are also hybrid instruments that embody derivative features. While bifurcation of the embedded derivatives was not required, the warrants did not otherwise meet all of the conditions for equity classification set forth in EITF 00-19. As a result, the Company has recorded the warrants as derivative liabilities at fair value.

The conversion option related to each of the Notes was bifurcated from the Note and accounted for separately as a derivative instrument liability (see below). The bifurcated embedded derivative instruments, including the embedded conversion options which were valued using the Flexible Monte Carlo Simulation methodology, were recorded at their initial fair value of an aggregate of $801,911.

The discount from the face amount of the Notes represented by the value assigned to the warrants and bifurcated derivative instruments is being amortized over the period to the due date of each of the Notes, using the effective interest method. Amortization related to the Notes for the three months ended June 30, 2008 and 2007 was $0 and $139,622.

On August 23, 2007, the Company issued an aggregate of 5,672,655 shares of common stock in exchange for the conversion of the Notes with the principal amount of $263,315 and accrued interest of $20,318 totaling $283,633, based on a conversion price of $0.05 per share. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The balance of the Notes at September 30, 2007 was $902,722. During the three months ended December 31, 2007, the Company also converted the following Notes:  on October 12, 2007, the Company issued 14,633,759 shares of its common stock in exchange for the conversion of convertible promissory notes and accrued interest therein in the aggregate amount of $731,688, based on a conversion price of $0.05 per share; On October 19, 2007, the Company issued 574,630 shares of its common stock in exchange for the conversion of convertible promissory notes and accrued interest therein in the aggregate amount of $28,732, based on a conversion price of $0.05 per share; and on December 17, 2007, the Company issued 3,581,314 shares of its common stock in exchange for the conversion of convertible promissory notes and accrued interest therein in the aggregate amount of $179,066, based on a conversion price of $0.05 per share.  These transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.  At December 31, 2007, all of the Notes had been converted and none remain outstanding.  At the time of the conversions, the Company reclassified the outstanding derivative liabilities at the time of the conversions in the aggregate amount of  $993,015 related to the Convertible Promissory Notes to additional paid-in capital during the year ended March 31, 2008.

As a result of this conversion, all outstanding warrants and embedded derivative liabilities were recharacterized as equity and reclassified to additional paid-in capital.

The conversion option related to the Debentures was bifurcated from the Debentures and accounted for separately as a derivative instrument liability (see below). The bifurcated embedded derivative instruments, including the embedded conversion option which was valued using the Flexible Monte Carlo Simulation methodology, was recorded at its initial fair value of an aggregate of $553,466.

The discount from the face amount of the Debentures represented by the value assigned to the warrants and bifurcated derivative instruments is being amortized over the period to the due date of the Debentures, using the effective interest method. Amortization related to the Debentures for the three months ended June 30, 2008 and 2007, was $33,609 and $7,054, respectively.

F-10

A summary of the Debentures and unamortized discount  at June 30 and March 31, 2008 , is as follows:

	June 30,			March 31,
	2008			2008
Debenture; 4% per annum (increased to 9%
per annum in July 2007); due December 22, 2009	$	1,000,000		$	1,000,000
Less: Unamortized discount		(895,997	)		(929,606	)
Net carrying value	$	104,003		$	70,394

The Registration Rights Agreement contains a “Liquidating Damages” provision, whereby the Company is obligated to file a registration statement covering the Registrable Securities within 60 days of the Purchase Agreement,  and cause  such registration statement to become effective within 90 days of the Purchase Agreement.  If either of these deadlines is not  met, the Company incurs a penalty in the amount of 2% per month of the aggregate purchase price of the securities.  The Company filed such registration statement within the 60 day period, but the registration statement did not become effective until 123 days after the Purchase Agreement, and the Company incurred liquidated damages in the amount of $81,140. The Purchase Agreement became effective on July 23, 2007, 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 June 30, 2008 (see note  3).

7.  COMMON STOCK

During the three months ended June 30, 2008, the Company had the following common stock issuances:

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

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

Options

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 123(R) and estimates the fair value of each option grant on the grant date using an option-pricing model.

On August 24, 2007, the Company adopted the Innovative Software Technologies, Inc. 2007 Equity Incentive Plan (the “2007 Plan”). An aggregate of 60 million shares of common stock is authorized for issuance under the 2007 Plan. The Company accounts for stock-based compensation using the fair value method as defined in SFAS 123(R) and estimates the fair value of each option grant on the grant date using an option-pricing model. During the three months ended June 30, 2008 and 2007 the Company recognized $75,925 and $22,989  in stock-based compensation.

A summary of the Company's stock option 2006 and 2007 Plans as of June 30, 2008 is presented below:

				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		4.3	$	0.05		11,718,750	$	0.05
$	0.08		6,000,000		3.6	$	0.08		5,833,334	$	0.08
$	0.13		250,000		3.2	$	0.13		250,000	$	0.13
$	0.14		5,978,349		3.1	$	0.14		5,978,349	$	0.14
			40,728,349		3.5	$	0.07		23,780,433	$	0.08

F-11

				Weighted Average
	Options			Exercise Price
Outstanding at March 31, 2008		40,887,349		$	0.08
Issued		-			-
Exercised		-			-
Forfeited or expired		(159,000	)		0.11
Outstanding at June 30, 2008		40,728,349		$	0.08
Non-vested at June 30, 2008		16,947,916		$	0.05
Exercisable at June 30, 2008		23,780,433		$	0.08

Aggregate intrinsic value of options outstanding and exercisable at June 30, 2008 was $0. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $0.02 as of June 30, 2008, and the exercise price multiplied by the number of options outstanding. As of June 30, 2008, total unrecognized stock-based compensation expense related to stock options was $376,050.

8.   RELATED PARTY TRANSACTIONS

During the three months ended  June 30, 2008, the Company had the following transactions with related parties:

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

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

The Company accrued salary in the amount of $21,000 to the Company’s Chief executive Officer.

The Company accrued salary in the amount of $17,500 to the  Company’s previous Chief Financial Officer, who resigned effective May 31, 2008.

The Company accrued salary in the amount of $5,000 to the Company’s new Chief Financial Officer, whose tenure with the Company began June 1, 2008. ..

9.  COMMITMENTS AND CONTINGENCIES

(a) Leases:

In February 2007 the Company entered into a $500,000 Master Lease Line for Equipment Purchases (the “Master Lease Agreement”). At that time, the Company sold property and equipment for $125,000 and leased them back under the Master Lease Agreement. The Company recognized a gain on the sale of those assets of $10,633 which was deferred and will be recognized over the 24 month term of the lease.  At June 30, 2008, the balance of this deferred gain was $3,545.

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 three  months ended June 30, 2008 and 2007, was $2,700  and $17,550, 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.

F-12

(b) Litigation:

Kansas City Explorers

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

Bernard F. Mathaisel

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

10. SUBSEQUENT EVENTS

During July 2008, the Company issued 1,000,000 shares of common stock to a service provider to satisfy an accounts payable  of $20,000.

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

The information presented in this section should be read in conjunction with our audited financial statements and related notes for the periods ended March 31, 2008 and 2007  included in our Form 10-KSB, filed July 15, 2008, as well as the information contained in the financial statements, including the notes thereto, appearing elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this report.

The following discussion includes statements that are forward looking in nature. The accuracy of such statements depends on a variety of factors that may affect the business and operations of the Company. Certain of these factors are discussed under “Business - Factors Influencing Future Results and Accuracy of Forward-Looking Statements” included in Part 1 of this report. When used in this discussion, the words “expect(s)”, “feel(s)”, “believe(s)”, “will”, “may”, “anticipate(s)” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, and actual results could differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, and are urged to carefully review and consider the various disclosures elsewhere in this Form 10-Q.  

Overview

The following discussion summarizes information about our accounting policies and practices and information about our operations in a comparative manner for the three months ended June 30, 2008, and 2007. Our management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere herein.

Acquisition of AcXess, Inc.

On June 26, 2006, we completed the acquisition of AcXess, Inc., a Florida corporation, in a stock exchange transaction pursuant to a Stock Exchange Agreement by and between us, AcXess, the Shareholders of AcXess, and Anthony F. Zalenski, acting as the Shareholder's Agent (the "Exchange Agreement"). As a result of the Transaction, AcXess became our wholly owned subsidiary. In accordance with the provisions of Statements of Financial Accounting Standards No. 141 (“SFAS”) “Business Combination (“SFAS 141”)”, AcXess was deemed to be the purchaser in the transaction for financial reporting purposes.  For accounting purposes, AcXess is treated as the continuing reporting entity and the inception date of AcXess was January 12, 2005.

F-13

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.

Critical Accounting Policies and Estimates

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

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company’s critical accounting policies are discussed in its annual report on Form 10-KSB for the year ended March 31, 2008.

Results of Operations

Three months ended June 30, 2008, compared to the three months ended June 30, 2007.

Revenues

Revenues for the three months ended June 30, 2008, and 2007 were $109,942 and $32,140, respectively, an increase of $77,802 or approximately 242%. Revenue is derived primarily from our contracts with Microsoft, Citrix, and SAP.

Cost of Sales and Margins

Cost of sales for the three months ended June 30, 2008, and 2007 were $37,659 and $21,712, respectively, an increase of $15,947 or approximately 73%. Cost of sales primarily comprise network charges due at our data site.

Operating Expenses

General and administrative expenses for the three months ended June 30, 2008, and 2007 were $284,901 and $330,500, respectively, a decrease of $45,599 or approximately 14%. General and administrative expenses consisted primarily non-cash compensation of $75,925 representing the vesting of stock options to officers; legal and accounting fees in the amount of $66,255; consulting fees in the amount of $60,000; payroll and related costs of $30,811; depreciation and amortization expense in the amount of $23,458; insurance expense in the amount of $7,530; travel and entertainment costs in the amount of $8,751; facilities and related expense in the amount of $4,600; and office expenses in the amount of $1,607.

F-14

Other Income (Expense)

Other income (expense) for the three months ended June 30, 2008 were expense of ($66,241) compared to  income of $374,759 for the three months ended June 30, 2007, a net increase in expense of $441,000.  During the three months ended June 30, 2008 the Company had no derivative liabilities outstanding and thus recognized no gain or loss from the change fair value of any  derivative liabilities.  During the three months ended June 30, 2007, the Company recognized a gain on derivative liability of $620,163  During the three months ended June 30, 2008 the Company incurred interest expense of $67,570 compared to $245,877 during the three months ended June 30, 2007. The reason for the decrease in interest expense was decrease in debt due to the conversion of notes payable during the year ended March 31, 2008.  During the three months ended June 30, 2008, the Company had a gain on the sale of fixed assets of $1,329, compared to a gain on the sale of assets of $0 during the three months ended June 30, 2007.  The Company also had other expenses of $0 during the three months ended June 30, 2008, compared to other expenses of $1,790 during the three months ended June 30, 2007.

Net Income (Loss)

For the reasons stated above, our net loss for the three months ended June 30, 2008, amounted to $278,859 compared to a net income of $54,687 during the prior period, a net increase in loss of $333,546. 

Liquidity and Capital Resources

The June 30, 2008, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $5,177,120 from inception (January 12, 2005) through June 30, 2008, and has a working capital deficiency and stockholder deficit of $1,443,907  and $1,341,493, respectively, at June 30, 2008. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future.  The accompanying financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

Management intends to continue to finance operations through financings activities; however there can be no assurance of successful financings or acquisition activity in the future.

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

The Debentures bear interest at 4% until June 22, 2007, and 9% thereafter, payable in arrears and mature three years from the date of issuance. Accrued interest will be payable in cash semi-annually, beginning on July 1, 2007.

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

At June 30, 2008, we had current liabilities of $1,520,934. We have no material commitments for capital expenditures.

Contractual Obligations

In February 2007 the Company entered into a $500,000 Master Lease Line for Equipment Purchases (the “Master Lease Agreement”). At that time, the Company sold property and equipment for $125,000 and leased them back under the Master Lease Agreement. The Company recognized a gain on the sale of those assets of $10,633 which was deferred and will be recognized over the 24 month term of the lease.  At June 30, 2008, the balance of this deferred gain was $3,545.

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.

F-15

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.

Item 3. 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 June 30, 2008 as discussed in the 10-KSB for the year ended March 31, 2008.

F-16

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

SEC Investigation

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

Kansas City Explorers

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

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

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 issuances and sales were deemed to be exempt under Rule 506 of Regulation D and Section (2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of Innovative Software Technologies, Inc. or executive officers of the Company, and transfer was restricted by the Company in accordance with the requirement of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities

None

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

None.

Item 5. Other Information

None.

Item 6. Exhibits.

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

1

SIGNATURES

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

	Innovative Software Technologies, Inc.
Date: August 14, 2008		/s/ Philip D. Ellett                         Philip D. Ellett Chief Executive Officer

Date: August 14, 2008 /s/ Robert V. Rudman              Robert V. Rudman Chief Financial Officer

2

 INDEX TO EXHIBITS

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

3

EX-31.1

Exhibit 31.1
CERTIFICATION
I, Philip D. Ellett, Chief Executive Officer of Innovative Software Technologies, Inc. certify that:
 1. 
        I have reviewed this Quarterly Report on Form 10-Q of Innovative Software Technologies, Inc. (the “small business issuer”); 
      
 2. 
        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 
      
 
 3. 
        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 
      
      
 4. 
        The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: 
      
 
 a. 
        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
      
 
 b. 
        Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
      
 
 c. 
        Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 
      
 
 5. 
        The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): 
      
 
 a. 
        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and 
      
 
 b. 
        Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. 
      
      
Date: August 14, 2008 
      
/s/ Philip D. Ellett                     
      
      
Philip D. Ellett 
Chief Executive Officer 
      
      
      
      
    

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Robert V. Rudman, Chief Financial Officer of Innovative Software Technologies, Inc. certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Innovative Software Technologies, Inc. (the “small business issuer”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: August 14, 2008	/s/ Robert V. Rudman
	Robert V. Rudman  Chief Financial Officer

EX-32.1

 Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. Sec. 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Innovative Software Technologies, Inc (the “Company”) on Form 10-Q for the period ending June 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip D. Ellett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/  Philip D. Ellett             

Philip D. Ellett

Chief Executive Officer

August 14, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. Sec. 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Innovative Software Technologies, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert V. Rudman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Robert V. Rudman          

Robert V. Rudman

Chief Financial Officer

August 14, 2008