UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number 000-27397

INOVA TECHNOLOGY INC.
(Exact name of small business issuer in its charter)

2300 W. Sahara Ave. Suite 800 Las Vegas, NV 89102
(Address of principal executive offices)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.

[ X ] Yes   [   ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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 definition of “large accelerated filler”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ]        Accelerated Filer [   ]        Non-accelerated Filer [   ]        Smaller reporting Company [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[   ] Yes   [ X ] No

State the number of shares of outstanding of each of the issuer’s classes of common equity, as of March 19, 2011: 60,115,260

Inova Technology Inc.

Form 10-Q

Table of Contents

Item 1. Financial Statements

INOVA TECHNOLOGY, INC. 
CONSOLIDATED BALANCE SHEETS 
 (Unaudited) 

See summary of accounting policies and notes to consolidated financial statements.

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INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended January 31, 2011 and 2010
(Unaudited)

See summary of accounting policies and notes to consolidated financial statements.

4

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended January 31, 2011 and 2010
(Unaudited)

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CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended January 31, 2011 and 2010
(Unaudited)

See summary of accounting policies and notes to consolidated financial statements

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INOVA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 –BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Inova Technology, Inc. (“Inova” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in Inova’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements that would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year as reported in Form 10-K have been omitted.

Fair Value Measurements

Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

As of January 31, 2011, Inova measured its derivative liabilities using Level 3 inputs as defined by ASC 820 with a total fair value of $907,977.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Restatements

The consolidated statements of operations and cash flows for the three and nine months ended January 31, 2010 have been restated due to errors discovered in April 2010. See Note 9 for details.

NOTE 2 – GOING CONCERN

As shown in the accompanying consolidated financial statements, we have an accumulated deficit and negative working capital and are in default on the majority of our notes payable as of January 31, 2011. These conditions raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements contained herein do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, there is no assurance that profitable operations or sufficient cash flows will occur in the future. Management is trying to raise additional capital through sales of stock and refinancing debt.

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NOTE 3 – RELATED PARTY TRANSACTIONS

Loans payable from related parties consists of advances from existing shareholders. These notes are unsecured, bear interest at 7%, and are due in May 21, 2017. The amount due to Southbase, LLC, a company owned by Inova’s controlling shareholder, was $142,532 as of January 31, 2011.

Seller notes with a balance of $1,500,000 relate to the Desert Communications, Inc. (“Desert”) purchase in December of 2007. They have interest rates of 18%, are secured by a majority ownership of Desert Communications, Inc. stock and were due in December of 2010. The notes are now in default.

In addition, the Desert sellers were owed $150,000 under a working capital facility established during fiscal 2010 with an interest rate of 18%, due December 2010. These notes were repaid in December 2010.

NOTE 4 - DERIVATIVE LIABILITIES & ADDITIONAL CONVERTIBLE NOTES

ASC 815-40 Put Warrant Liabilities

Under ASC 815-40 “Put Warrants”, warrants for put shares should be classified as liabilities and measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. As a result, the fair value of the warrants granted to Inova’s debt holders in prior years were recorded as derivative liabilities at inception. These liabilities are subsequently measured at fair value at the end of each reporting period with the changes recorded to earnings. As of January 31, 2011, Inova had $571,002 of derivative liabilities as a result of these provisions.

Boone Lenders, LLC (“Boone”) Convertible Put Exercise Notes

Inova determined that the instruments embedded in a convertible put note exercised by Boone during fiscal 2010 should be classified as liabilities and recorded at fair value due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. During the quarter ended July 31, 2010, Boone exercised warrants to purchase 30,111,440 shares of Inova common stock and 130.90 shares of Desert common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $1,515,900. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note during the quarter ended July 31, 2010.

Additionally, Inova determined that the instruments embedded in a second convertible put note exercised by Boone during fiscal 2011 should be classified as liabilities and recorded at fair value due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. During the quarter ended January 31, 2011, Boone exercised warrants to purchase 7,444,240 shares of Inova common stock and 19.44% of Trakkers common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $792,000. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note during the quarter ended January 31, 2011.

These notes are convertible into shares of Desert or Trakkers common stock at an amount equal to (A) 350% of the subsidiary’s EBITDA for the 12 full-months preceding such date, minus (i) the aggregate amount of the subsidiary’s indebtedness to the initial Holder at such date and (ii) the aggregate amount of the Company’s indebtedness to the subsidiary’s Sellers at such date, divided by (B) the total number of issued and outstanding shares of common stock at such date. The note is also convertible into shares of Inova common stock at the lower of (i) $30 per share of Inova common stock and (ii) the lowest per share price of Inova common stock conversion price in effect in any warrant, option, convertible note or other instrument that has been issued by Inova or that is otherwise convertible or exchangeable into Inova, after taking into effect any applicable reset or other conversion or exchange price adjustments. The conversion options are subject to reset provisions that can reduce the conversion prices based on subsequent equity or rights offerings by Desert, Trakkers or Inova below the prices above. As a result of the exercise, the put option liabilities were transferred from derivative liabilities to notes payable during the quarter.

Because the number of shares to be issued upon settlement cannot be determined under these instruments, Inova cannot determine whether it will have sufficient authorized shares at a given date to settle any other of its share-settleable instruments. As a result of this, under ASC 815-15 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock” (formerly EITF 00-19), the conversion options noted above and all other share-settleable instruments are classified as liabilities. Inova has three conversion options embedded in notes payable agreements and 2,528,142 warrants to purchase Inova common stock that are classified as liabilities as a result of the provisions of the convertible put notes. As of January 31, 2011, Inova had $336,975 of derivative liabilities as a result of these provisions.

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The following table summarizes the derivative liabilities included in the consolidated balance sheet:

Valuation Models

Inova values its warrant derivatives and simple conversion option derivatives using the Black-Scholes option-pricing model. Assumptions used include (1) 4% risk-free interest rate, (2) warrant life is the remaining contractual life of the warrants, (3) expected volatility 261% to 390%, (4) zero expected dividends (5) exercise prices as set forth in the agreements, (6) common stock price of the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted.

Inova valued the conversion options and reset provisions under its convertible put exercise note with Boone using a Monte Carlo simulation model utilizing present value and various probabilities of events. Assumptions used include (1) 0.34% risk free rate, (2) conversion prices as set forth in the agreement, (3) expected Inova stock price volatility of 261%, (4) expected Desert stock price volatility of 25%, and (6) common stock price of the underlying share on the valuation date. Inova valued the note as a combination of the underlying debt payment and series of two options. Since the options are mutually exclusive, the Monte Carlo simulation was used to estimate when either of the options is exercisable. When both are exercisable Inova assumed that the more valuable of the two would be exercised.

NOTE 5 –SEGMENT INFORMATION

Inova has three reportable segments, one providing IT solutions and services (Edgetech Services, Inc.), one providing network solutions (Desert Communications, Inc.) and one which manufactures standards compliant and durable RFID (Radio Frequency Identification) equipment (Trakkers, LLC & RightTag, Inc). Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly in deciding how to allocate resources and in assessing performance.

The following table presents nine month segment information:

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NOTE 6 – WARRANTS

Inova issued 1,000,000 warrants to a public relations firm with a fair value of $56,500 that were fully vested and non-forfeitable on the date of grant. The fair value of these warrants was reclassified to derivative liabilities at $52,000 due to provisions in certain convertible note agreements (described in Note 4) that cause all share-settable instruments issued by Inova to be classified as liabilities.

The following tables summarize common stock warrants outstanding by entity:

All warrants above were exercisable as of January 31, 2011.

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NOTE 7 – COMMON STOCK

During the quarter ended October 31, 2010 1,600,000 shares of common stock with a fair value of $48,000 were issued to Advisors, LLC for services rendered. Advisors, LLC is controlled by a director of the Company. The fair value of the stock was recorded to expense during the quarter ended October 31, 2010.

On August 3, 2010, Inova entered into an agreement with a public relations firm. Under the terms of the agreement, Inova issued 2% of its outstanding common shares at the inception of the agreement as an advance and non-refundable fee for future services. This resulted in the issuance of 1,126,960 shares of common stock with a fair value of $11,270. This amount was expensed during the quarter ended October 31, 2010. In addition, after six months, the firm is entitled to receive another 2% of Inova’s outstanding common stock as a non-refundable fee for services to be performed in the future.

During the quarter ended October 30, 2010 50,000 shares of common stock with a fair value of $1,500 were issued to a public relations firm for services rendered. The fair value of the stock was recorded to expense during the quarter ended October 30, 2010.

On October 20, 2010 the Board of Directors approved a resolution to complete the issue of a stock dividend to all current shareholders. The ratio will be 20 new shares for every one share held by all shareholders as at the record date. The authorized shares of the company will be adjusted by the same ratio. All share and per share amounts have been adjusted retroactively as if the dividend occurred on the first day of the first period presented.

During the quarter ended January 31, 2011, Inova issued 1,000,000 shares of common stock for the conversion of $40,500 of debt to Agile Opportunity Fund, LLC.

NOTE 8 – DEBT

The following table summarizes outstanding debt as of April 30, 2010 and January 31, 2011:

Of the total outstanding debt, $11,695,440 was in default as of January 31, 2011. Principal owed to Boone Lenders, LLC (“Boone”) increased due to the convertible put notes described in Note 4 and paid-in kind interest described below. Principal owed to Agile Opportunity Fund, LLC decreased due to a $150,000 cash repayment and a conversion of $40,500 to common stock (see Note 7). Principal owed to IBM, the Desert Communications, Inc. Sellers and other debt decreased due to cash repayments.

Boone is capitalizing and charging paid in kind interest on several of its notes. Each period, at a rate mutually agreed to by the Company and Boone, interest is recognized on the outstanding principal balance and added to the principal balance of the note. This started in May 2010 for Boone’s notes as a temporary arrangement which can be cancelled at any time. The interest rates range from 11% to 20% on various notes.

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For the nine months ended January 31, 2011, a total of $134,472 of interest was recognized and recorded to the principal balance of all loans from Boone Lenders, LLC except the convertible put notes described in Note 4.

NOTE 9 – RESTATEMENT

On April 30, 2010, Inova’s Board of Directors identified a classification error in the Company’s financial statements as of and for the three months ended January 31, 2010. The Company determined that the accounting for put warrants granted with various notes payable was incorrect. The original accounting for these transactions classified the relative fair values of the put warrants as equity. After consideration of ASC 480-10-25-8 through 25-13 and 815-40-55-16 through 55-18 “Put Warrants”, the Company determined that these warrants should have originally been recorded as liabilities at their fair value with subsequent changes in fair value recorded through earnings. In addition, the Company identified certain unrecorded expenses and liabilities during fiscal 2010, and has adjusted for these unrecorded transactions as well.

The following tables summarizes the impact of the restatements for the three and nine months ended January 31, 2010:

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Item 2. Management Discussion and Analysis of Financial Condition and Result of Operations.

The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operation contains “forward looking statements.” Actual results may materially differ from those projected in the forward looking statements as a result of certain risks and uncertainties set forth in this report. Although our management believes that the assumptions made and expectations reflected in the forward looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be materially different from the expectations expressed in this Annual Report. The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and related Notes included in Item 1.

RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED JANUARY 31, 2011

Net revenues increased from $3,810,135 in the three-month period ending January 31, 2010 to $4,394,716 for the three-month period ending January 31, 2011. The increase in revenue is due to changes in the timing of various projects.

Cost of sales increased from $2,218,844 in the three-month period ending January 31, 2010 to $2,971,818 for the three-month period ending January 31, 2011. The increase is a result of the revenue increase described above.

Operating expenses increased from $1,349,382 for the three months ending January 31, 2010 to $1,682,158 for the same period in 2011. This was mainly due to the increase in bonus and professional fee expense.

Net income decreased from $495,665 for the three months ending January 31, 2010 to a net loss of ($797,530) for the same period in 2011. This is due to an increase in interest and depreciation expense.

RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED JANUARY 31, 2011

Net revenues increased from $12,874,705 in the nine month period ending January 31, 2010 to $17,068,621 for the nine month period ending January 31, 2011. The increase in revenue is due to changes in the timing of various projects, and higher than typical revenues this year.

Cost of sales increased from $7,736,763 in the nine month period ending January 31, 2010 to $11,400,574 for the nine month period ending January 31, 2011. The increase is a result of the revenue increase described above.

Operating expenses increased from $4,804,429 for the nine months ending January 31, 2010 to $5,406,991 for the same period in 2011. This was mainly due to the expansion of the Company with the acquisition of Trakkers in September, 2008, which has now had a full year of operations.

Net loss decreased from ($3,697,037) for the nine months ending January 31, 2010 to a net income of $999,882 for the same period in 2011. This is due to a one-time loss on derivatives last year of $1,907,658.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations for the nine month period ended January 31, 2011 was $1,477,430 as compared to cash provided by operations of $247,128 for the nine months ended January 31, 2010. This change is primarily due to the one-time derivative gain. Cash used in investing activities for the nine month period ended January 31, 2011 was $15,410, as compared to $0 for the nine months ended January 31, 2010. Cash used by financing activities for the period ended January 31, 2011 was $505,194, as compared to $1,125,963 used by financing activities for the nine months ended January 31, 2010.

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Our operating activities for the nine months ended January 31, 2011, have generated adequate cash to meet our operating needs. As of January 31, 2011, we had cash and cash equivalents totaling $1,293,572, and accounts receivable of $917,216.

As of the date of the filing the Company is attempting to restructure its debt with Boone and some other creditors. If successful there would be a significant decrease in the current portion of debt outstanding, interest rate reductions and extended maturity dates. If unsuccessful, we will continue to be in default on these loans and incur additional interest expense.

EBITDA

EBITDA for the 9 month period is $1,001,247. EBITDA is Earnings before interest, tax, depreciation and amortization:

Stock Dividend

On October 20, 2010 the Board of Directors to approved a resolution to complete the issue of a stock dividend to all current shareholders. The ratio will be 20 new shares for every one share held by all shareholders as at the record date. The record date is Friday, November 1, 2010. The authorized shares of the company will be adjusted by the same ratio.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of the end of the period covered by this report and concluded that our disclosure controls and procedures were not effective to ensure that all material information required to be disclosed in this Quarterly Report on Form 10-Q has been made known to them in a timely fashion. We are in the process of improving our internal control over financial reporting in an effort to remediate these deficiencies through improved supervision and training of our accounting staff. These deficiencies have been disclosed to our Board of Directors. We believe that this effort is sufficient to fully remedy these deficiencies and we are continuing our efforts to improve and strengthen our control processes and procedures. Our Chief Executive Office, Chief Financial Officer and directors will continue to work with our auditors and other outside advisors to ensure that our controls and procedures are adequate and effective.

(b) Changes in internal controls

There have been no significant changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings.

None

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

None

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Other Information

None

Item 5. Exhibits

(A) Exhibits

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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