innovativesoft-10q63009.htm

10-Q 1 innovativesoft-10q63009.htm innovativesoft-10q63009.htm

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, 2009

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________

Commission file number 000-27465

INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

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

Delaware	26-1469061
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1413 S. Howard Avenue, Suite 220

Tampa, Florida 33606-7102

(Address of principal executive offices)

(813) 387-3310

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

99,036,851 Common Shares outstanding as of August 17, 2009

Transitional Small Business Disclosure Format: YES r 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 x

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		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	F-1
	Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and March 31, 2009	F-1
	Condensed Consolidated Statements of Operations for the three months ended June 30, 2009 and 2008 and for the period from inception (January 12, 2005) through June 30, 2009 (unaudited)	F-2
	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2009 and 2008 and for the period from inception (January 12, 2005) through June 30, 2009 (unaudited)	F-3
	Notes to Condensed Consolidated Financial Statements (unaudited)	F-5
Item 2.	Management's Discussion and Analysis or Plan of Operation	1
Item 3.	Controls and Procedures	4

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	5
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5
Item 3.	Defaults Upon Senior Securities	5
Item 4.	Submission of Matters to a Vote of Security Holders	5
Item 5.	Other Information	5
Item 6.	Exhibits	5

SIGNATURES		6

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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-K 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.

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INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS


	June 30, 2009 (unaudited)			March 31, 2009
Assets
Current assets
Cash and cash equivalents	$	140		$	348
Prepaid services and other current assets		880			-

Total current assets		1,020			348

Interest receivable (note 3)		1,205			-
Intangible assets (note 4)		615,000			-
Note receivable (note 3)		150,000			-
Assets from discontinued operations		-			36,738

Total assets	$	767,225		$	37,086

Liabilities and stockholders' deficit
Current liabilities
Accounts payable and accrued liabilities	$	694,300		$	683,607
Accrued interest		236,455			203,664
Accrued officer salary and expenses		137,750			116,500
Penalty for late registration (note 8)		81,140			81,140
Preferred stock liability(note 9)		86,850			86,850
Advances payable (note 6)		105,603			89,742
Payable to related party		100,000			-
Note payable (note 7)		658,079			158,079
Convertible debentures (note 8)		495,539			335,405
Current liabilities from discontinued operations		-			286,918

Total current liabilities		2,595,716			2,041,905

Commitments and contingencies (note 11)		-			-

Stockholders' deficit
Preferred stock, 25,000,000 shares authorized, no par value:
Series A, 1,500,000 shares authorized, 450,000 shares outstanding		363,150			363,150
Common stock, $0.001 par value; 300,000,000 shares authorized;
99,036,851 and 103,514,199 shares issued and		99,037			103,515
outstanding at June 30, 2009 and March 31, 2009, respectively (note 9)
Additional paid-in capital		3,404,954			3,395,908
Deficit accumulated during the development stage		(5,695,632	)		(5,867,392	)
Total stockholder's deficit		(1,828,491	)		(2,004,819	)

Total liabilities and stockholders' deficit	$	767,225		$	37,086

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

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INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended			Three Months Ended			Cumulative from Inception (January 12, 2005) to
	June 30,			June 30,			June 30,
	2009			2008			2009

Revenue
Revenue	$	-		$	-		$	-

Total revenue		-			-			-

Cost of revenue
Cost of revenue		-			-			-
Total cost of revenue, excluding depreciation below		-			-			-

Gross profit		-			-			-

Operating expenses:
Sales, general and administrative expenses		50,180			187,670			2,315,407
Total operating expenses		50,180			187,670			2,315,407

Operating loss		(50,180	)		(187,760	)		(2,315,407	)

Other income:
Income from change in fair value of derivative liabilities		-			-			169,241
Interest expense		(192,924	)		(62,018	)		(1,916,139	)
Interest income		1,250			-			8,963
Gain on sale of fixed assets		-			-			2,849
Other income		-			-			62,290
Total other expense, net		(191,674	)		(62,018	)		(1,678,494	)

Loss from continuing operations before provision for income taxes		(241,854	)		(249,778	)		(3,993,901	)

Provision for taxes		-			-			-

Net loss from continuing operations		(241,854	)		(249,778	)		(3,993,901	)
Net income (loss)from discontinued operations and gain on sale of discontinued operations		413,614			(29,081	)		(1,701,731	)

Net income (loss)	$	171,760		$	(278,859	)	$	(5,695,632	)

Undeclared preferred stock dividends		(4,500	)		(4,500	)		(54,000	)

Income (loss) applicable to common stockholders	$	167,260		$	(283,359	)	$	(5,749,632	)

Net loss per share from continuing operations- basic	$	(0.00	)	$	(0.00	)	$	(0.05	)
Net loss per share from continuing operations- diluted	$	(0.00	)	$	(0.00	)	$	(0.05	)
Net income (loss) per share from discontinued operations - basic	$	0.00		$	(0.00	)	$	(0.02	)
Net income (loss) per share from discontinued operations - diluted	$	0.00		$	(0.00	)	$	(0.02	)

Weighted average shares outstanding -
Basic		102,972,981			101,637,276			85,052,610
Diluted		252,972,981			101,637,276			85,062,610

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

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INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(A Development Stage Company)

(Unaudited)

	For the Three Months Ended			For the Three Months Ended			Cumulative from Inception (January 12, 2005) to
	June 30,			June 30,			June 30,
	2009			2008			2009

Cash flows from operating activities:
Net income (loss) from discontinued operations and gain on sale of discontinued operations	$	413,614		$	(29,081	)	$	(1,701,731	)
Net income (loss) from continuing operations		(241,854	)		(249,778	)		(3,993,907	)

Adjustments to reconcile net income (loss ) to net
cash used in operating activities:
Depreciation and amortization		-			304			31,587
Gain on sale of assets		-			-			2,851
Stock based compensation		2,999			75,925			878,826
Issuance of shares to officer for accrued payroll		-			-			127,000
Notes payable issued for expenses paid by affiliates and third parties		-			-			258,605
Amortization of deferred gain on sale of assets		-			-			(872	)
Services paid in common stock		-			-			146,560
Amortization of convertible debt discount		160,134			33,608			1,413,823
Change in fair value of derivative liabilities		-			-			(169,241	)
Amortization of deferred financing costs		-			-			232,199
Amortization of the discount on preferred stock liability		-			-			4,571
Net change in operating assets and liabilities:
Interest receivable		(1,205	)		-			(1,205	)
Prepaid expenses and other current assets		(880	)		-			9,920
Deposits		-			-			1,000
Accounts payable and accrued expenses		64,857			94,707			(88,983	)
Customer deposits		-			-			30,301

Cash used in operating activities - continuing operations		(15,949	)		(45,224	)		(1,188,389	)
Discontinued operations		(120	)		79,042			(1,032,920	)
Net cash (used in) provided by operating activities		(16,069	)		33,818		(2,221,309		)

Cash flows from investing activities:
Purchase of fixed assets		-			-			(126,599	)
Proceeds from sale-leaseback of property and equipment		-			-			125,000
Increase in deferred financing costs		-			-			(156,200	)

Cash used in investing activities - continuing operations		-			-			(157,799	)
Discontinued operations		-			(8,985	)		(107,484	)
Net cash used in investing activities		-			(8,985	)		(265,283	)

Cash flows from financing activities:
Stock issued for cash		-			-			113,000
Proceeds from notes payable		-			-			427,969
Principal payments on notes payable		-			-			(30,000	)
Proceeds from cash advances, net of repayments		15,861			50,000			261,114
Proceeds from convertible debentures		-			-			1,663,500
Cash acquired in the reverse acquisition of Innovative		-			-			51,149

Cash used in financing activities - continuing operations		15,861			50,000			2,486,732
Discontinued operations		-			(13,661	)		(71,430	)
Net cash provided by financing activities		15,861			36,339			2,415,302


Net increase (decrease) in cash and cash equivalents		(208	)		61,172			140

Cash and cash equivalents at beginning of period		348			15,016			-

Cash and cash equivalents at end of period	$	140		$	76,188		$	140

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

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INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(continued)

Supplemental disclosures of cash flow information:

Cash paid during the period for:
Interest	$	-	$	-	$	46,516

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 officers for accrued payroll	$	-	$	66,500	$	127,000

Issuance of shares for accrued legal payable	$	-	$	-	$	20,000

Reclassification of preferred stock to liability	$	-	$	-	$	86,850

Issuance of note payable and payable to related party for Web Channel acquisition	$	600,000	$	-	$	600,000

Issuance of common stock warrants in Web Channel acquisition	$	15,000	$	-	$	15,000

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

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INNOVATIVE SOFTWARE TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND REPORTING

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not contain all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s financial condition as of June 30, 2009, and the results of its operations for the three months ended June 30, 2009 and 2008, and the cash flows for the three months ended June 30, 2009 and 2008. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited 2009 consolidated financial statements, including the notes thereto, and the other information set forth therein, included in the Company's Annual Report on Form 10-K for the year ended March 31, 2009. Operating results for the three month periods ended June 30, 2009 are not necessarily indicative of the operating results that may be expected for the year ending March 31, 2010.

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.

On June 19, 2009, the Company reached a revised agreement with the AcXess management team (the “AcXess Sale Agreement”). Pursuant to the AcXess Sale Agreement, the Company sold all of its shares of capital stock of AcXess to the management team in exchange for

(1)	all 4,477,292 shares of the Company’s common stock held by the AcXess Managers;

(2)	the cancellation of options to purchase 5,978,349 shares of the Company’s common stock held by the AcXess Managers;

(3)

a Secured Promissory Note ("the Note") in the principal amount of $500,000, with a three year maturity date, an 8% interest rate, a prepayment discount schedule that allows for gradually decreasing discounts beginning with a maximum prepayment discount of $350,000 if $150,000 is paid within three months of the June 19, 2009 issue date, and a pledge of all of the assets of AcXess as security for the Note, as specified in a separate Security Agreement. The Company has recorded a $150,000 note receivable as of June 30, 2009, as this is the amount that is likely to be received.

(4)

a release from AcXess and the AcXess Managers of all claims they may have against the Company and its officers, directors, employees, shareholders, affiliates and affiliated companies and for all damages that relate to the Initial Agreement, the transactions contemplated thereby, and any matter relating to AcXess or its business, operations, assets or liabilities.

On June 17, 2009 the Company purchased substantially all of the assets of The WEB Channel Network, LLC., a Florida limited liability company (the “Seller”), and certain other assets of Robert W. Singerman, the manager and sole owner of the Seller. The Company also entered into an Employment Agreement with Mr. Singerman, and Mr. Singerman entered into a Non-Disclosure, Non-Competition, Non-Solicitation and Invention Agreement with the Company.

The purchased assets include substantially all of the assets of the Seller, including all of its intellectual property and its signed and pending production agreements, and all of Mr. Singerman’s equity positions in several limited liability companies and various web channels. The intellectual property acquired includes all such property intended to be used in: (i) the development and application of standard definition video integrated with Internet protocol television and web design; (ii) the encoding process of FLASH video with Internet protocol television; (iii) audio digital recording for Internet protocol radio and television; (iv) a Content Management System for Internet protocol television; acquiring, formatting, programming, encoding, testing and deploying licensed previously produced broadcast video; and (v) PODCASTS with Internet protocol television. The intellectual property components also include (a) the unencumbered ownership of over 100 strategic web domain names, (b) all inventions (whether patentable or un-patentable and whether or not reduced to practice), all trademarks, service marks, trade dress, logos, trade names, and corporate names, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, and (d) all trade secrets and confidential business information including ideas, research and development, and know-how.

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The purchase price consisted of: (i) the Company’s agreement to make cash installment payments of $25,000 within 15 days of the June 17, 2009 sale and $75,000 prior to September 30, 2009; (ii) a promissory note in the amount of $500,000 payable over five years in annual installments of $100,000 in principal plus accrued interest, secured by all of the Purchased Assets pursuant to a Security Agreement; and (iii) stock purchase warrants of the Company for 5,000,000 shares of the Company’s common stock at an exercise price of $0.03 per share

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has incurred a loss of $5,695,632 from inception (January 12, 2005) through June 30, 2009, and has a working capital deficiency and stockholder deficit of $2,594,696 and $1,828,491, respectively, at June 30, 2009. The Company currently has no 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principals of Consolidation

The consolidated financial statements include the accounts of the Company including Web Channel and its inactive subsidiaries EPMG, Inc. and SoftSale, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

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.

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Stock Based Compensation

The Company measures 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.

Basic and Diluted Income (Loss) Per Share

In accordance with SFAS No. 128, "Earnings Per Share," the basic loss per common share is computed by dividing net income available to common stockholders less preferred dividends by the weighted average number of common shares outstanding. Diluted loss per common share is computed similarly to basic loss per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were not anti-dilutive, and the numerator is changed to reflect any changes to net loss that would have occurred had the dilutive shares been issued.

The components of earnings per share are as follows:

	Three months ended June 30,						Cumulative period from
	2009			2008			from Inception to June 30, 2009
Numerators
Numerators for basic and diluted earnings per share:
Net loss from continuing operations	$	(241,854	)	$	(249,778)		$ (3,993,901)
Net income (loss) from discounted operations	$	413,614		$	(29,081)		$ (1,701,731)

Denominators
Denominators for basic and diluted earnings per share:
Weighted average shares outstanding basic		102,972,981			101,637,276		85,052,610

Dilutive potential common shares
Stock options (1)		0			0		0
Common stock warrants (2)		0			0		0
Convertible debentures (3)		0			0		0
Convertible preferred stock (4)		150,000,000			0		0
Denominator for dilutive earnings per share		252,972,981			101,637,276		85,052,610
Net loss income per common share from continuing operations– basic	$	(0.00	)	$	(0.00)		$ (0.05)
Net loss income per common share from continuing – diluted	$	(0.00	)	$	(0.00)		$ (0.05)

Net income (loss) per share from discontinued operations – basic	$	0.00		$	(0.00)	$	(0.02)

Net income (loss) per share from discontinued operations – diluted	$	0.00		$	(0.00)	$	(0.02)

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(1)	For the three months ended June 30, 2009 and 2008, and cumulative period from Inception to June 30, 2009, none of the outstanding options were included in dilutive shares, as the effect would be anti-dilutive.

(2)	For the three months ended June 30, 2009 and 2008, and cumulative period from Inception to June 30, 2009, none of the outstanding warrants were included in dilutive shares, as the effect would be anti-dilutive.

(3)	For the three months ended June 30, 2009 and 2008, and cumulative period from Inception to June 30, 2009, none of the shares issuable upon the conversion of convertible debt were included in dilutive shares, as the effect would be anti-dilutive.
(4)	For the three months ended June 30, 2008 and cumulative period from Inception to June 30, 2009, none of the shares issuable upon the conversion of preferred stock were included in dilutive shares, as the effect would be anti-dilutive.

Recent Accounting Developments:

SFAS No. 160 — In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. SFAS No. 160 will apply to fiscal years and interim periods beginning on or after December 15, 2008. We adopted SFAS No. 160 on January 1, 2009 and it had no material impact on our consolidated financial statements.

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SFAS No. 165 - We adopted SFAS No. 165, Subsequent Events for the Quarterly Report for the period ending June 30, 2009. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, which are referred to as subsequent events. The statement clarifies existing guidance on subsequent events, including a requirement that a public entity should evaluate subsequent events through the issue date of the financial statements, the determination of when the effects of subsequent events should be recognized in the financial statement and disclosures regarding all subsequent events. Adoption of SFAS 165 did not have a material affect on our condensed consolidated financial statements. We have updated subsequent events through August 14, 2009, which is the date of this filing.

SFAS No. 141(R) — In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS No. 141(R) also requires transaction costs related to the business combination to be expensed as incurred. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted SFAS No. 141(R) on April 1, 2009 and it had no material impact on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification, or Codification, will become the single official source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, with the exception of guidance issued by the SEC and its staff. The Codification did not change GAAP, but reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. SFAS No. 168 is effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009. The Company does not expect the adoption of SFAS No. 168 to have a material impact on its condensed consolidated financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force ("EITF"), the American Institute of Certified Public Accountants ("AICPA"), and the SEC did not or are not believed by management to have a material impact on our present condensed consolidated financial statements.

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3. NOTE RECEIVABLE

On June 19, 2009, the Company sold AcXess to the AcXess management team. The Company issued a Secured Promissory Note in the principal amount of $500,000, with an 8% interest rate, interest and principal are due on June 19, 2012. The note contains a prepayment discount schedule that allows for gradually decreasing discounts beginning with a maximum prepayment discount of $350,000 if $150,000 is paid within three months of the June 19, 2009 issue date. The Company has secured the note with all of the assets of AcXess with a separate Security Agreement. The Company considers it probable that the maximum discount will be taken and has recorded the note at the amount of $150,000 on its balance sheet at June 30, 2009. Interest in the amount of $1,205 was accrued during the three months ended June 30, 2009.

4. ASSET PURCHASE AGREEMENT WITH THE WEB CHANNEL NETWORK, LLC

On June 17, 2009, the Company, purchased substantially all of the assets of The WEB Channel Network, LLC a Florida limited liability company, and certain other assets of Robert W. Singerman, the manager and sole owner of Seller. The Company also entered into an Employment Agreement with Mr. Singerman, Mr. Singerman also entered into a Non-Disclosure, Non-Competition, Non-Solicitation and Invention Agreement with the Company.

The Purchased Assets include substantially all of the assets of The Web Channel Network, including all of its intellectual property and its signed and pending production agreements, and all of Mr. Singerman’s equity positions in several limited liability companies and various web channels. The intellectual property acquired includes all such property intended to be used in: (i) the development and application of standard definition video integrated with Internet protocol television and web design; (ii) the encoding process of FLASH video with Internet protocol television; (iii) audio digital recording for Internet protocol radio and television; (iv) a Content Management System for Internet protocol television; acquiring, formatting, programming, encoding, testing and deploying licensed previously produced broadcast video; and (v) PODCASTS with Internet protocol television. The intellectual property components also include (a) the unencumbered ownership of over 100 strategic web domain names, (b) all inventions (whether patentable or un-patentable and whether or not reduced to practice), all trademarks, service marks, trade dress, logos, trade names, and corporate names, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, and (d) all trade secrets and confidential business information including ideas, research and development, and know-how.

The Merger has been accounted for under the acquisition method of accounting in accordance with Statement of Financial Accounting Standard (SFAS) No. 141(R), “Business Combinations.” After considering all the relevant factors in determining the acquiring enterprise, including, but not limited to, relative voting rights, composition of the board of directors and senior management, and the relative size of the companies, the merger was deemed an acquisition and the Company was treated as the acquiring entity for accounting and financial reporting purposes.

A summary of the components of the estimated purchase price for the acquisition, is as follows:

Cash payments due within ninety days of the acquisition date	$	100,000
Note payable		500,000
Warrants		15,000
Total	$	615,000

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The Company is still in the process of determining the fair value of the tangible and intangible assets acquired and liabilities assumed. The preliminary purchase price was allocated based on a determination of the value of the assets acquired. No liabilities were assumed. The following represents the allocation of the purchase price to the acquired assets of $615,000. This allocation was based on the fair value of the assets as of June 17, 2009:

Identifiable intangible assets		$	615,000
Total		$	615,000

5. SALE OF ACXESS

On June 19, 2009, the Company reached a revised agreement with the AcXess management team. Pursuant to this revised agreement, the Company sold all of its shares of capital stock of AcXess to the AxCess management team in exchange for

(1)	all 4,477,292 shares of the Company’s common stock held by the AcXess Managers;

(2)	the cancellation of options to purchase 5,978,349 shares of the Company’s common stock held by the AcXess Managers;

(3)

a Secured Promissory Note in the principal amount of $500,000, with an 8% interest rate, interest and principal are due on June 19, 2012. The note contains a prepayment discount schedule that allows for gradually decreasing discounts beginning with a maximum prepayment discount of $350,000 if $150,000 is paid within three months of the June 19, 2009 issue date. The Company has secured the note with all of the assets of AcXess with a separate Security Agreement. The Company considers it probable that the maximum discount will be taken and has recorded the note at the amount of $150,000 on its balance sheet at June 30, 2009. Interest in the amount of $1,205 was accrued during the three months ended June 30, 2009.

(4)

The follow table illustrates the components of the sale of AcXess:

Assets sold	$	(27,539)
Liabilities assumed		271,277
Net liabilities assumed by AcXess managers		243,738
Common stock returned for cancellation		13,432
Note receivable issued to the Company		150,000
Gain on the sale of AcXess	$	407,170

The following table presents the components of discontinued operations reported in the consolidated statements of operations:

	For the Three Months Ended June 30,
	2009		2008
Revenue	$	30,606	$	109,942
Cost of goods sold		14,340		37,659

Selling, general and administrative expenses		9,822		101,364

Net income (loss) from discontinued operations	$	6,444	$	(29,081	)

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6. ADVANCES PAYABLE

Advances payable of $105,603 and $89,742 at June 30, 2009 and March 31, 2009, respectively, consists of cash advances to the Company by Aspen Capital and a shareholder, Peter Peterson. These cash advances will accrue interest at a rate of 10% per annum. During the three months ended June 30, 2009 and 2008, the Company accrued interest in the amount of $2,839 and $208 for these cash advances, respectively.

7. NOTE PAYABLE

On April 14, 2008, the Company issued a promissory note (the “Note”) to the benefit of Xalles Inc. (Xalles) in the amount of $158,079 pursuant to the conversion of an advance made to the Company by Xalles. The outstanding principal amount of the Note bears interest beginning on April 14, 2008, calculated on the basis of a 360-day year for the actual number of days elapsed through the actual payment date at the following rates of interest: eight percent (8%) per annum through June 15, 2008; ten percent (10%) per annum through August 16, 2008, twelve percent (12%) per annum through October 17, 2008; and fourteen percent (14%) per annum through December 18, 2008. At June 30, 2009, the Company has accrued interest on the Note in the aggregate amount of $24,223. This Note may be prepaid, either in whole or in part, at any time without penalty. The outstanding principal balance of this Note, plus accrued but unpaid interest, was due and payable on December 18, 2008 and is in default at June 30, 2009. During the three months ended June 30, 2009, an agreement was reached between Aspen Capital and Xalles, whereby Xalles transferred its interest in the Note to Aspen Capital, and the Company’s liability under the Note is now payable to Aspen Capital, a related party.

During the three months ended June, 30, 2009, the Company issued a promissory note to Web Channel, pursuant to the terms of the asset acquisition agreement, in the amount of $500,000. This note carries interest at a rate of 8% per annum and is payable in five installments of $100,000 each along with accrued interest on each anniversary dates of the execution of this note. During the three months ended June 30, 2009, the Company accrued interest in the amount of $1,425.

8. CONVERTIBLE NOTES AND COMMONS STOCK WARRANTS

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 of 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 Debentures are convertible at the option of the note holder into shares of common stock at a price of $0.112 per share.

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 interest payments in the aggregate amount of $203,397, as of June 30, 2009 and intends to negotiate a settlement with the Debenture holder; however there can be no assurance that such negotiation will be successful.

Warrants are accounted for as derivative a discount to the debentures in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company's Own Common Stock" (“EITF 00-19”). Accordingly, the initial fair values of the warrants was $964,286. 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 Debentures.

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, 2009 and 2008 was $160,134 and $33,609, respectively.

A summary of the Debentures and unamortized discount at June 30, 2009 and March 31, 2009, is as follows:

	June 30,			March 31,
	2009			2009
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		(504,461	)		(664,595	)
Net carrying value	$	495,539		$	335,405

The Registration Rights Agreement contains a “Liquidating Damages” provision, whereby the Company is obligated to file a registration statement covering the Registrable Securities within 60 days of the Purchase Agreement, and cause such registration statement to become effective within 90 days of the Purchase Agreement. If either of these deadlines is not met, the Company incurs a penalty in the amount of 2% per month of the aggregate purchase price of the securities. The Company filed such registration statement within the 60 day period, but the registration statement did not become effective until 123 days after the Purchase Agreement, and the Company incurred liquidated damages in the amount of $81,140. The Purchase Agreement became effective on July 23, 2007, which was 123 days after the agreed upon date in the Purchase Agreement, March 22, 2007. This penalty is payable in cash and was shown as accrued liabilities on the Company’s balance sheet at June 30, 2009 and March 31, 2009.

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9. EQUITY

Common Stock

During the three months ended June 30, 2009, pursuant to the terms of the AcXess Sale Agreement, the Company cancelled 4,478,348 shares of stock previously held by the managers of AcXess. The Company recorded the fair value of these shares of $13,432 as a component of the gain on the sale of AcXess.

Convertible Preferred Stock

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 June 30, 2009. 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 three months ended June 30, 2009, 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 June 30, 2009, the Company has $4,500 and $54,000 in undeclared preferred stock dividends for the three months ended June 30, 2009 and from inception (January 12, 2005) through June 30, 2009, respectively.

Total preferred stock on the Company’s balance sheet at June 30, 2009 was $450,000. The number of shares of common stock issuable for the conversion of preferred stock exceeded the number of shares of common stock authorized by 39,477,094 shares, which represents 19.3% of the total number of shares into which the preferred shares are convertible at June 30, 2009. The Company reclassified 19.3% of the total value of its preferred shares, or $86,850, to current liabilities on its balance sheet at June 30, 2009.

Options

During the three months ended June 30, 2009, the Company issued 5,000,000 options to purchase shares of common stock as a price of $0.03 per share, pursuant to an employment agreement. These options expire on June 17, 2013. These options vest as follows: 1,000,000 immediately, 2,000,000 on the one year anniversary of the date of issuance, and 2,000,000 on the two year anniversary of the date of issuance.

A summary of the Company's 2006 and 2007 stock option plans as of June 30, 2009 is presented below:

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

0.03

5,000,000

4.0

0.03

1,000,000

0.03

				Weighted Average
	Options			Exercise Price
Outstanding at March 31, 2009		5,978,349		$	0.14
Issued		5,000,000			0.03
Exercised		-			-
Forfeited or expired		(5,978,349	)		0.14
Outstanding at June 30, 2009		5,000,000		$	0.03

Non-vested at June 30, 2009		4,000,000		$	0.03
Exercisable at June 30, 2009		1,000,000		$	0.03

Aggregate intrinsic value of options outstanding and exercisable at June 30, 2009 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 $0.003 as of June 30, 2009, and the exercise price multiplied by the number of options outstanding. As of June 30, 2009, total unrecognized stock-based compensation expense related to stock options was $11,998.

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Warrants

During the three months ended June 30, 2009, the Company issued 5,000,000 warrants with an exercise price of $0.03 per share pursuant to an asset acquisition agreement. These warrants expire on June 17, 2012.

A summary of the Company's warrants as of June 30, 2009, and the changes during the three months ending June 30, 2009, is presented below:

				Weighted		Weighted average				Weighted average
				average		exercise				exercise
Range of		Number of		remaining		price of		Number of		price of
exercise		warrants		contractual		outstanding		warrants		exercisable
prices		outstanding		life (years)		warrants		exercisable		warrants

$	0.03		5,000,000		3.0	$	0.03		5,000,000	$	0.03
$	0.05		4,446,235		0.6	$	0.05		4,446,235	$	0.05
$	0.14		1,785,714		1.5	$	0.14		1,785,714	$	0.14
$	0.18		1,350,000		2.5	$	0.18		1,350,000	$	0.18
$	0.30		8,928,571		1.5	$	0.30		8,928,571	$	0.30
Total			21,510,520		2.3	$	0.17		21,510,520	$	0.17

	Warrants		Weighted Average Exercise Price
Outstanding at March 31, 2009		16,510,520	$	0.21
Issued		5,000,000		0.03
Exercised		-		-
Forfeited or expired		-		-
Outstanding at June 30, 2009		21,510,520	$	0.17

10. RELATED PARTY TRANSACTIONS

During the three months ended June 30, 2009, the Company had the following transactions with related parties:

During the three months ended June 30, 2009, the Company accrued salary in the amount of $15,000 to the Company’s Chief Executive Officer and Chief Financial Officer. As of June 30, 2009, $65,000 in accrued salary is on the balance sheet payable to the Company’s Chief Executive Officer and Chief Financial Officer.

During the three months ended June 30, 2009, the Company accrued salary in the amount of $6,250 to the Company’s President. As of June 30, 2009, $6,250 in accrued salary is on the balance sheet payable to the Company’s President.

During the three months ended June, 30, 2009, the Company issued a promissory note to Web Channel, pursuant to the terms of the asset acquisition agreement, in the amount of $500,000. This note carries interest at a rate of 8% per annum and is payable in five installments of $100,000 and accrued interest on each anniversary dates of the execution of this note. During the three months ended June 30, 2009, the Company accrued interest in the amount of $1,425.

During the three months ended June 30, 2009, the Company entered into an asset acquisition agreement where the Company is required to pay to Mr. Singerman, the principal manager of Web Channel, a cash sum in the amount of $100,000. This amount is payable in two installments, $25,000 15 days after the execution of the asset acquisition agreement, or July 2, 2009, the second installment in the amount of $75,000 is due on or before September 30, 2009.

During the three months ended June 30, 2009, an agreement was reached between Aspen Capital and Xalles, whereby Xalles transferred its interest in the Company’s note payable in the amount of the $158,079 Note and interest payable in the amount of $24,223 to Aspen Capital. At June 30, 2009, the Company’s liability under the Note is now payable to Aspen Capital, a related party.

11. CAPITAL LEASE OBLIGATION

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, 2009 and March 31, 2009, the balance of this deferred gain was $0.

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.

During the three months ended June 30, 2009, the Company, Acxess Inc, and Gulf Point Capital, LLC entered into a Transfer and Assumption agreement, whereby the Master Lease Agreement and equipment and the balance due under the agreement in the amount of $34,175 was transferred from the Company to Acxess, Inc. As of June 30, 2009, the Company remains the guarantor of this lease.

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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, 2009 and 2008 included in our Form 10-K, filed August 14, 2009, 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, 2009 and 2008. 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 and subsequent disposition of AcXess, Inc.

(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.

(1)	all 4,477,292 shares of the Company’s common stock held by the AcXess Managers;

(2)	the cancellation of options to purchase 5,978,349 shares of the Company’s common stock held by the AcXess Managers;

(3)

a Secured Promissory Note (the “Note”) in the principal amount of $500,000, with a three year maturity date, an 8% interest rate, a prepayment discount schedule that allows for gradually decreasing discounts beginning with a maximum prepayment discount of $350,000 if $150,000 is paid within three months of the June 19, 2009 issue date, and a pledge of all of the assets of AcXess as security for the Note, as specified in a separate Security Agreement. The Company has recorded a $150,000 note receivable as of June 30, 2009, as this is the amount that is likely to be received.

(4)

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Acquisition of the WEB Channel Network

On June 17, 2009, the Company, purchased substantially all of the assets of The WEB Channel Network, LLC., a Florida limited liability company (the “Seller”), and certain other assets of Robert W. Singerman, the manager and sole owner of the Seller. The Company also entered into an Employment Agreement with Mr. Singerman, and Mr. Singerman entered into a Non-Disclosure, Non-Competition, Non-Solicitation and Invention Agreement with 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-K for the year ended March 31, 2009.

Results of Operations

Three months ended June 30, 2009, compared to the three months ended June 30, 2008.

Revenues

On June 19, 2009, the Company completed the sale of its operating subsidiary AcXess, Inc., which had provided all of our revenue in the current and prior periods. The activity of AcXess is disclosed in discontinued operations in the Company’s statement of operations through the sale date of June 19, 2009.

Cost of Sales

On June 19, 2009, the Company completed the sale of its operating subsidiary AcXess, Inc., which had incurred all of our cost of sales in the prior period. The activity of AcXess is disclosed in discontinued operations in the Company’s statement of operations through the sale date of June 19, 2009.

Sales, General and Administrative Expenses

Sales, general and administrative expenses for the three months ended June 30, 2009 were $50,180, a decrease of $137,490 or approximately 73%. Sales, general and administrative expenses consisted primarily of payroll and related costs of $25,875 (including non-cash compensation of $2,999); insurance expense in the amount of $ 10,223; legal and accounting fees in the amount of $9,097; facilities and related expense of $3,000; and professional fees in the amount of $1,093.

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Other Expense, net

Other expense, net for the three months ended June 30, 2009 was $191,674 compared to $62,108 for the three months ended June 30, 2008, a net increase of $129,566. During the three months ended June 30, 2009 the Company incurred net interest expense of $192,924 compared to $62,108 during the three months ended June 30, 2008. The reason for the increase in interest expense was due to increases in cash advances and the amortization of the discount on the convertible note payable.

Net Income (Loss) from Continuing Operations

For the reasons stated above, our net income (loss) from continuing operations for the three months ended June 30, 2009 amounted to a net loss from continuing operations of $241,854 compared to a net loss from continuing operations of $249,778 during the prior period, a net decrease in net loss from continuing operations of $7,924, or approximately 3%.

Net Income (Loss) from Discontinued Operations

Our net income (loss) from discontinued operations for the three months ended June 30, 2009 amounted to net income from discontinued operations of $413,614 compared to a loss from discontinued operations of $29,081 for the three months ended June 30, 2008, an increase in net income of $442,695. The increase in net income from discontinued operations was the result of the sale of our subsidiary AcXess, Inc. for a gain in the amount of $407,170.

Liquidity and Capital Resources

The June 30, 2009 financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $5,695,632 from inception (January 12, 2005) through June 30, 2009, and has a working capital deficiency and stockholder deficit of $2,594,696 and $1,828,491, respectively, at June 30, 2009. 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, 2009, we had current liabilities of $2,595,716. We have no material commitments for capital expenditures.

Contractual Obligations

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During the three months ended June 30, 2009, the Company, Acxess Inc, and Gulf Point Capital, LLC entered into an Transfer and Assumption agreement, whereby the Master Lease Agreement and equipment was transferred from the Company to Acxess, Inc. As of June 30, 2009, the Company remains the guarantor of this lease.

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

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

During the three months ended June 30, 2009, an agreement was reached between Aspen Capital and Xalles, whereby Xalles transferred its interest in the Company’s note payable in the amount of the $158,079 and accrued interest of $24,223 to Aspen Capital. At June 30, 2009, the Company’s liability under the Note is now payable to Aspen Capital, a related party.

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, 2009.

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, 2009 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, 2009. 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, 2009 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, 2009 has not been audited by PMB Helin Donovan, LLP, an independent registered public accounting firm.

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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

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. Kansas City Explorers have pursued the court and have been granted a court date of September 23, 2009.

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

None.

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.

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SIGNATURES

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

	Innovative Software Technologies, Inc.

Date: August 19, 2009		/s/ Robert V. Rudman Robert V. Rudman Chief Executive Officer and Chief Financial Officer

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