**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





WASHINGTON,
      D.C. 20549





**FORM
      10-KSB**





**x ANNUAL
      REPORT
      PURSUANT TO SECTION 13 OR 15(D) OF THE**


**SECURITIES
      EXCHANGE OF** 1934





**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**





**o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(D) OF THE**


**SECURITIES
      EXCHANGE** **ACT
      OF 1934**





**FOR
      THE TRANSITION PERIOD FROM ________________ TO _________________**





*COMMISSION
      FILE NUMBER: 000-33231*





**INNOVA
      ROBOTICS & AUTOMATION, INC.**


**F/K/A
      INNOVA HOLDINGS, INC.** ****


(EXACT
      NAME OF THE COMPANY AS SPECIFIED IN ITS CHARTER)





DELAWARE
            
            95-4868120(STATE
                OR OTHER JURISDICTION OF
            
            (IRS
                EMPLOYER IDENTIFICATION NO.)INCORPORATION
                OR ORGANIZATION)





**15870
      PINE RIDGE ROAD**


**FORT
      MYERS FL 33908**


(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICES)





(239)
      466-0488


(ISSUER
      TELEPHONE NUMBER)





**SECURITIES
      REGISTERED UNDER SECTION 12(B) OF THE ACT:**





TITLE
                OF EACH CLASS REGISTERED:
            
            NAME
                OF EACH EXCHANGE ON WHICH REGISTERED:NONE
            
            NONE




1




**SECURITIES
      REGISTERED UNDER SECTION 12(G) OF THE ACT:**





**COMMON
      STOCK, PAR VALUE $.001**


(TITLE
      OF
      CLASS)





Indicate
      by check mark whether the Company (1) has filed all reports required to be
      filed
      by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 12 months (or for such shorter period that the Company was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days. x Yes o
      No





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of the Company's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x Yes o
      No





State
      issuer's revenues for its most recent fiscal year. $1,340,222. State the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days. (See definition of affiliate in Rule
      12b-2 of the Exchange Act.) As of April 5, 2007, approximately $6,878,718.





As
      of
      March 30, 2007 there were 80,943,293 shares of the issuer's $.001 par value
      common stock issued and outstanding.





Documents
      incorporated by reference. There are no annual reports to security holders,
      proxy information statements, or any prospectus filed pursuant to Rule 424
      of
      the Securities Act of 1933 incorporated herein by reference.





Transitional
      Small Business Disclosure format (check one):





o Yes x
      No




2




**EXPLANATORY
      NOTE**





All
      common share amounts and per share amounts in the accompanying financial
      statements and in this Report on Form 10-KSB for the years ended December 31,
      2006 and 2005, reflect the one-for-ten reverse stock split of the issued and
      outstanding shares of common stock of the Company, effective on November 20,
      2006 as well as the name change of the Company from Innova Holdings, Inc. to
      Innova Robotics and Automation, Inc.




TABLE
      OF CONTENTS




ITEM
                NUMBER AND CAPTION
            PAGESpecial
                Note Regarding Forward-Looking Statements
            4PART
                I1.
                Description of Business
            52.
                Description of Property
            133.
                Legal Proceedings
            134.
                Submission of Matters to a Vote of Security Holders
            13PART
                II5.
                Market for Common Equity and Related Stockholder Matters
            146.
                Management's Discussion and Analysis or Plan of Operation
            167.
                Financial Statements
            208.
                Changes in and Disagreements with Accountants on Accounting and Financial
                Disclosures
            208A.
                Controls and Procedures
            208B.
                Other Information
            22PART
                III9.
                Directors, Executive Officers, Promoters and Control Persons
                Compliance with Section 16(a) of the Exchange Act
            2210.
                Executive Compensation
            2511.
                Security Ownership of Certain Beneficial Owners and
                Management
            2712.
                Certain Relationships and Related Transactions
            2713.
                Exhibits.
            2814.
                Principal Accountant Fees and Services
            30





3





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





This
      report contains certain financial information and statements regarding our
      operations and financial prospects of a forward-looking nature. Although these
      statements accurately reflect management's current understanding and beliefs,
      we
      caution you that certain important factors may affect our actual results and
      could cause such results to differ materially from any forward-looking
      statements, which may be deemed to be made in this report. For this purpose,
      any
      statements contained in this Report, which are not statements of historical
      fact, may be deemed to be forward-looking statements. Without limiting the
      generality of the foregoing, words such as, "may", "will", "intend", "expect",
      "believe", "anticipate", "could", "estimate", "plan" or "continue" or the
      negative variations of those words or comparable terminology are intended to
      identify forward-looking statements. There can be no assurance of any kind
      that
      such forward-looking information and statements will be reflective in any way
      of
      our actual future operations and/or financial results, and any of such
      information and statements should not be relied upon either in whole or in
      part
      in connection with any decision to invest in the shares.




4





**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS:**





**Overview**




Innova
      Robotics & Automation, Inc. is a robotics and automation technology company
      providing technology and software business solutions that pioneers innovative
      control and communication solutions making robotics and businesses more
      productive and profitable for customers in the telecommunications, aerospace,
      research, academic, and industrial, personal and service robotic markets. Our
      plan of operation is to sell and license our patented technology, sell
      solutions, experience and know-how to meet our customers’ robotic &
automation technology needs.





In
      addition, the company is chartered to continue expanding its growing suite
      of
      technologies through acquisitions and organic growth.





Our
      four
      subsidiaries are Robotic Workspace Technologies, Inc. (RWT), Innova Robotics,
      Inc., CoroWare Technologies, Inc. (CoroWare), and Altronics Service,
      Inc.





**ROBOTIC
      WORKSPACE TECHNOLOGIES, INC. (RWT)**





RWT
      provides open-architecture PC controls, software, and related products that
      improve the performance, applicability, and productivity of robots and other
      automated equipment in industrial environments. RWT’s robot controller extends
      the mechanical life of manufacturing devices and provides added
      functionality.





Through
      RWT, we deliver our software through the sale of control systems and the
      licensing of our software to end-user companies, system integrators,
      manufacturing support providers, and other parties. We hold three pioneer
      patents issued by the USPTO that covers all applications pertaining to the
      interface of a general use computer and the mobility of robots, regardless
      of
      specific applications.





**Products:**





**Universal
      Robot Controller**





The
      Universal Robot Controller (URC(TM)) is the open-architecture control system
      that operates the robot. It includes the general purpose PC running Microsoft(R)
      Windows, the RWT-developed RobotScript® robot programming software, and other
      software programs that can be used to communicate with other PC devices and
      platforms including the Internet. The URC also contains dedicated processors
      for
      real-time motion control of the robot. The URC provides a range of standard
      communication and interface ports for plug-and-play connectivity and
      interoperability. The URC features an expandable input/output bus required
      for
      auxiliary equipment. All electro-mechanical systems in the URC are programmed
      using RobotScript, which is an easy-to-use English-like language programming
      environment.





The
      recently launched third generation robot controller, the URC3, is smart, easy,
      and open. It features improved processing speed, improved path following,
      increased speed control, and increased communications ability.





The
      URC3
      has expanded RWT from its typical industrial market into Space. NASA Goddard’s
      Space Flight Center is using the URC3 to control a robot simulating the robot
      on
      the Hubble making repairs in zero gravity. To accomplish this, the URC3 must
      receive commands from NASA’s host computer at 1000Hz. The robot OEM controller
      could not come near this communication speed. The URC3 gives robot users
      extended functionality and flexibility with their existing robots.





**RobotScript**





RobotScript
      is a universal programming library based on Microsoft's .NET® environment. From
      a plain text file, robot programmers can control robot motion, coordinate input
      and output for auxiliary equipment, and communicate with other PC devices for
      reporting and data sharing. Because RobotScript operates in the Windows
      environment, challenges common to proprietary control schemes, such as
      networking and file sharing, are eliminated. RobotScript can access the
      operating system or network as well as utilize the Internet for remote
      monitoring and control of equipment.




5




The
      RobotScript software can also be used to create custom applications specific
      to
      customer needs. A software development kit (SDK) allows novice as well as
      experienced developers to create their specialized interface for a particular
      use in meeting a customer's need.




RobotScript
      has supported the development of a number of application-specific modules such
      as arc welding, vision, and material handling. Additional modules are in
      development.





**INNOVA
      ROBOTICS, INC.**





In
      the
      world of non-industrial robotics, there are two distinct markets emerging,
      in
      our opinion, that apply advanced robotic software and hardware technologies.
      These distinct markets are unmanned robotic vehicles and service robots.





Unmanned
      robotic vehicles - these vehicles typically are autonomous and function on
      the
      ground, in the air, under sea and in space and are controlled with an advanced
      Operating Control Unit. Many of these unmanned vehicles are deployed in Iraq
      and
      Afghanistan as well as by many police departments around the world. Our
      value-added proposition is to add our unmanned vehicle control software to
      provide advanced functionality of all unmanned vehicles in a coordinated
      fashion.





Service
      robots - these robotic devices tend to operate semi or fully autonomously to
      perform services useful to individuals and their care and well-being, either
      as
      Personal Robots or as Domestic Robots.





**Product:**





**Mission
      & Robotic Control System (MRCS)**





An
      unmanned autonomous vehicle is no more effective than the software and person
      controlling it. Intelligent and advanced semi-autonomous unmanned vehicles
      will
      require intelligent and advanced software to command, control, and coordinate
      their behavior, both on the battlefield and on our nation’s borders. Mission and
      Robotic Control Systems and operator control units (OCU) of the future can
      be
      used to control multiple, proprietary robots from disparate manufacturers,
      and
      provide autonomous behavior. We are in the final stages of development of our
      MRCS, a Mission & Robotic Control System that will coordinate various makes
      and types of unmanned robotic vehicles under one control.





Additionally,
      we have strategic development relationships with Embry Riddle Aeronautical
      University (ERAU) and the University of South Florida (USF). In late 2006,
      we
      laid the foundations for building strategic alliances with certain governmental
      agencies which we believe will bring value in 2007 and into 2008.





**COROWARE
      TECHNOLOGIES, INC.**





CoroWare
      delivers solutions that integrate business applications and robotic systems
      into
      unified solutions for the improved delivery of goods, services and information.
      CoroWare’s expertise includes the deployment and integration of computing
      platforms and applications, as well as the development of unmanned vehicle
      software and solutions for customers in the research, commercial, and homeland
      security market segments.





CoroWare
      is focused on the global market and offers its robotic integration expertise
      to
      customers who are looking for software systems development and integration
      services in areas such as architectural design and software applications
      development. CoroWare specializes in offering its services in two distinct
      areas: Robotics & Automation and Enterprise Systems.





**Robotics
      & Automation**





CoroWare
      was among the first third-parties to support the development and deployment
      of
      Microsoft Robotics Studio®. We believe CoroWare is uniquely positioned with its
      knowledge of Microsoft Robotics Studio to offer software systems development
      and
      integration services to customers who are considering how to take full advantage
      of Microsoft Robotics Studio for the development of commercial products or
      educational services.




6




Services:




CoroWare
      designs, develops and integrates software and solutions for homeland security,
      service, and university research applications. CoroWare engineers and developers
      manage significant projects on-site at its customer’s locations as well as
      working virtually from remote locations and collaborating with on-site
      staff.




**Products:**





**Plus
      Pak**





The
      CoroWare Robotics PlusPack is a collection of applications, services, tools,
      assets and utilities that complement and extend the capabilities of Microsoft
      Robotics Studio. This suite is an add-on set of tools that allow the user to
      expand modeling and simulation situations that are not available in the base
      Robotics Studio offering from Microsoft.





**Surveyor**





Surveyor
      is a flexible, mobile service robot that can be remotely operated or programmed
      to run semi-autonomously for applications such as surveillance and monitoring,
      and research and development. This is primarily intended, at this time, to
      be
      used for higher education research and training, and for the serious
      hobbyist.





**Enterprise
      Systems Services:**





**Enterprise
      Business Solutions**





More
      and
      more businesses are looking to utilize automation to solve problems such as
      bringing products to the market faster, reducing operating costs and improving
      service while delivering IT services faster, cheaper, and with fewer failures.
      CoroWare’s Enterprise Business Solutions business is divided in two areas:





**1.**
            **Customer
                Care Practice**





CoroWare
      Customer Care Practice provides customized software and implementation services
      to small to medium sized businesses for Microsoft Customer Care Framework (CCF),
      a software product that supports the rapid, flexible and cost-effective
      development and deployment of customer care solutions.





We
      believe that CoroWare’s subject matter expertise on Microsoft’s CCF can enhance
      the customer care environment with applications customized for the way
      individual companies do business. In addition, we believe their relationship
      with Microsoft has the potential to help drive efficiencies and progress in
      the
      field of customer service, especially with small and mid-sized customer service
      organizations.





The
      Customer Care Practice is also designed to provide customers a new approach
      in
      maximizing the benefit and reducing the risk of automated business solutions.
      CoroWare specializes in Architectural Design and Integration of XML Web
      Services, Microsoft (CCF) and customer service applications with core systems
      such as customer relationship management (CRM), billing, order management,
      ERP,
      and other line-of-business applications.





**2.**
            **Microsoft
                Practice**





CoroWare's
      Microsoft Practice combines expertise the following areas:





**Release
      and Project Management**





CoroWare's
      program managers are experts in Microsoft's product and solution development
      tools and processes. CoroWare uses that experience to create product
      specifications, develop project plans and manage technology for
      businesses.





7





**Technology
      Adoption Lab Management**





CoroWare's
      team of experienced hardware and software deployment engineers architect, deploy
      and support state-of-the-art computer lab facilities that include the latest
      builds of operating systems, developer tools, and servers. CoroWare engineers
      work side-by-side with Microsoft employees and partners to ensure that they
      can
      deploy and test applications on pre-release and newly released Microsoft
      platforms. CoroWare employees currently manage two Microsoft Labs.





**Solution
      Delivery**





CoroWare
      is focused on delivering solutions around a key set of Microsoft products.
      CoroWare offers solutions, envisioning, design, development and testing services
      through architects and developers who are experienced in a range of Microsoft
      solutions and technologies.





**Product
      Release Testing and Packaging Services**





CoroWare's
      engineers design complex test environments using the latest Microsoft
      virtualization technology, ensuring rapid, scalable and low-fault testing.
      In
      addition, CoroWare can create installation packages that provide seamless
      adoption of many Microsoft applications.





**Altronics
      Service, Inc.**





Altronics
      Service, Inc. is a service-based company targeting industrial automation in
      machine shops. We specialize in retrofitting, repairing and servicing
      Westinghouse, Flexmate and Automation Intelligence equipment. This includes
      phone support as well as repair and maintenance of printed circuit boards for
      NC’s and CNC controls. The company controls the majority of existing replacement
      inventory of many of the electronic circuit boards for a number of the older
      controller systems, principally those for Westinghouse built controllers. Over
      2,000 customers across the United States rely on the technical support and
      replacement board capabilities of the company.





**Control
      Systems**





The
      Company offers two control systems - the Universal Robot Controller and the
      Universal Automation Controller.





**Universal
      Robot Controller**





The
      Universal Robot Controller(TM) (URC(TM)), which is offered by RWT, is the
      open-architecture control system that operates the robot. It includes the
      general purpose PC running Microsoft(R) Windows, the RWT-developed RobotScript®
robot programming software, and other software programs that can be used to
      communicate with other PC devices and platforms including the Internet. The
      URC
      also contains dedicated separate processors for real-time motion control of
      the
      robot. The URC provides a range of standard communication and interface ports
      for plug-and-play connectivity and interoperability. The URC features an
      expandable input/output bus required for auxiliary equipment. All
      electro-mechanical systems in the URC are programmed using RobotScript, which
      is
      an easy-to-use English-language programming environment.





**Universal
      Automation Controller**





The
      Universal Automation Controller(TM) (UAC(TM)), which is offered by Altronics,
      is
      in the later stages of development and is expected to be released soon, is
      a
      general-purpose motion control system for automated machines with fewer than
      5-6
      axis of movement. The UAC provides the power of a full-featured open PC motion
      controller and Programmable Logic Controller (PLC) in one easy to use PC control
      system. It provides direct motion control for complex machines and adds "soft
      PLC" (software control of Input/Output). The enhanced motion control
      capabilities provide greater functionality and full motion control of less
      sophisticated machinery as well. The UAC is powered by RWT's RobotScript
      software.





The
      UAC
      provides standard communications and interface ports, providing maximum
      flexibility in choosing off-the-shelf user interface and communications
      components. The Company believes that the UAC shortens development time, reduces
      manufacturing time, and dramatically decreases the time to market of
      motion-based machines, and therefore will greatly improve productivity and
      reduce costs in all manufacturing environments.




8




**Licensing
      of Proprietary Software Solutions - Middleware**





Robotscript





RobotScript
      is a universal programming language based on Microsoft's Visual Basic(R)
      Scripting Edition (VBScript(R)) software. It provides a robot programming
      environment that is simple to use and easy to learn. From a plain text file,
      robot programmers can easily control robot motion, coordinate input and output
      for auxiliary equipment, and communicate with other PC devices for reporting
      and
      data sharing. Because RobotScript operates in the Windows environment,
      challenges common to proprietary control schemes, such as networking and file
      sharing, are eliminated. RobotScript can access anything on the operating system
      or network as well as utilize the Internet for remote monitoring and control
      of
      equipment.





The
      software can also be used to easily create custom applications specific to
      customer needs. A software development kit (SDK) is available to allow even
      novice developers to quickly create a specialized interface for a particular use
      in meeting a customer's need.





The
      proven success of RobotScript has supported the development of a number of
      evolutionary, application-specific modules such as arc welding, vision systems
      and automation control. Additional modules are also in development or planned
      for other robotic applications such as:





o
      Guidance Systems





o
      Sensor
      Systems





o
      Voice
      Control Systems





o
      Tactile
      Control Systems





o
      Laser
      Welding





o
      Material Handling





o
      Medical
      Applications





o
      Elder
      Care Control Systems





o
      Plasma
      Cutting





o
      Autonomous Underwater Vehicles





o
      Homeland Security Systems





o
      Security Systems





o
      Pharmaceutical Production





o
      TIG/MIG
      Welding





o
      Medical
      Robotics




9




The
      Innova suite of software is marketed and sold to the service and personal robot
      markets through Innova Robotics, Inc., a wholly owned subsidiary of Innova.
      Generally, the Innova suite of software solutions is referred to as Middleware,
      which is connectivity software that consists of a set of enabling services
      that
      allow multiple processes running on one or more machines to interact across
      a
      network. Middleware is essential to migrating mainframe applications to
      client/server applications and to providing for communication across
      heterogeneous platforms. This technology has evolved during the 1990s to provide
      for interoperability in support of the move to client/server architectures.
      In
      the context of Innova’s markets, it is this Middleware that enables industrial
      robots to communicate with enterprise systems like purchasing, inventory control
      and other enterprise wide systems. In the military arena, this Middleware,
      in
      management’s opinion, would enable an unmanned mobile robotic vehicle to
      communicate reconnaissance intelligence with the Logistics Command and in return
      receive updated operational instructions. Communications to and between unmanned
      aircraft (UAV) is also possible.





**Markets
      Served**





The
      markets served are the military, service, commercial software, personal, and
      industrial robotic and automation markets, which are discussed
      below.





**Users**




The
      primary users of industrial robots and automation in the United States include
      automotive manufacturers and automotive suppliers, food and consumer goods
      companies, semiconductor and electronics firms, metalworking companies, plastics
      and rubber manufacturers, and increasingly sciences, pharmaceutical, and
      biomedical businesses. According to RIA, small, medium, and large companies
      in
      just about every industry have taken advantage of the productivity, quality,
      and
      flexibility gains that robots and automation provide in order to compete
      successfully in the global market. RIA notes that robot use jumped 30% in the
      life sciences, pharmaceutical, and biomedical industries in 2005, but the sales
      of new robots into these markets is reported to be down 30% in 2006. Automotive
      manufacturers, the largest users of robots, increased their orders by 49% in
      2005 but are down approximately 30% in 2006.




**Applications**





With
      regard to applications, the biggest growth areas this year have been for robots
      and automation used in material handling applications (+45%), arc welding (+37%)
      and spot welding (+19%), according to RIA.





**Sales**





The
      market for the Company's Universal Robot Controller is the retrofit market
      for
      mechanical arms which benefit from a controls replacement. In management’s
      opinion, virtually all of the 848,000 + older robots have antiquated control
      systems that require replacement in order to improve functionality to current
      standards of the robotic industry, and to drastically reduce the costs of spare
      parts. Currently, owners of these older robots must buy their spare parts from
      the Original Equipment Manufacturers (OEMs) and management believes that since
      these spare parts for the controller are proprietary to the OEM, the costs
      of
      these spare parts is very high compared to the cost of standard, commercially
      available, off-the-shelf components and thus provide a substantial profit margin
      to the OEMs. RWT's Universal Robotic Controller is a state-of-the-art solution
      built using standard components whenever possible which in management's opinion
      provides more features, functionality, and value than the controllers of the
      robot OEMs. The URC was developed and has been successful as a “Plug and Play”
upgrade.





**Service
      Robots - Market Overview**





The
      service robot industry is rapidly emerging and according to many it is expected
      to be large. In reporting the following data, UNECE cautions that because many
      companies did not provide market data, the figures reported probably
      underestimate significantly the true sales amounts as well as the installed
      base
      of service robots.




10


Regardless,
      the scope of applications is beginning to expand and we are experiencing an
      increasing demand for software to function as the middleware for connectivity,
      interoperability, and ease of integration between high-powered software and
      devices. We are beginning to see in the professional service robot sector robots
      used for handling bombs and hazardous materials evolve such that there is a
      need
      to interface with, for example, Homeland Security systems using vision, audio,
      mobility, and for data collection and data delivery. The U.S. Government has
      appropriated several billion to develop an unmanned fighting force. The goal
      is
      to convert a significant percent of its fighting force to unmanned systems
      by
      the end of the decade.. As the market better realizes the potential of such
      applications, there will be a substantial push for open software standards.
      RWT's RobotScript is now poised to enter this market as the only proven
      middleware offering with substantial scope of applications and functionality
      throughout all sectors of the Service Robots market.





**Professional
      Use**





According
      to UNECE, at the end of 2005 and 2006, it is estimated that some 25,000 and
      33,000 units were in operation respectively. The value of professional service
      robots in use is estimated at $4.5 billion. This market is expected to grow
      by
      50,000 units between 2005 and 2008. Specific areas of use are:





o
      Underwater systems


o
      Cleaning robots


o
      Laboratory robots


o
      Demolition and construction


o
      Medical
      robots


o
      Mobile
      robot platforms/general


o
      Defense, rescue, security


o
      Field
      robots (milking, forestry)





Underwater
      systems accounted for 21 percent of the total number of service robots for
      professional use installed through 2005. Thereafter followed cleaning robots
      and
      laboratory robots with 14 percent each, and construction and demolition robots
      with 13 percent. Medical robots and mobile robot platforms for general use
      accounted for 11 percent each. Field robots, e.g., milking robots and forestry
      robots, had a share of nearly 9 percent and defense, rescue, and security
      applications 5 percent. Minor installation numbers were counted for logistic
      systems (270 units), inspection systems (235 units) and public relation robots
      (20).





The
      unit
      prices for professional service robots range from less than $10,000 to well
      over
      $1,000,000. The most expensive service robots are the underwater systems
      ($300,000 to more than $1,000,000), medical robots with a wide range from
      $100,000 to $1,000,000, followed by milking robots ($200,000).





The
      stock
      of service robots for professional use is forecast to increase by 50,000 units
      in the period 2005-2008. Application areas with strong growth are humanoid
      robots, underwater systems, defense, rescue and security applications,
      laboratory robots, professional cleaning robots, medical robots, and mobile
      robot platforms for multiple uses.





**Entertainment
      Use**





Robots
      for entertainment and leisure use, which include toy robots, is forecast at
      about 2.5 million units most of which are very low cost. The sales value is
      estimated at $4.4 billion, according to UNECE.





**Personal
      Use**





Autonomous
      vacuum cleaners and lawn-mowing robots are presently in operation. It is
      projected that sales of all types of domestic robots (vacuum cleaning, lawn
      mowing, window cleaning and other types) in the period 2005-2008 could reach
      some 4.5 million units with an estimated value of $3 billion, according to
      UNECE.




11


**SALES
      AND MAKETING**





The
      sales
      and marketing channels employed by Innova include direct sales, re-sellers,
      websites, distributors, system integrators and other partners. The Company
      continues to establish these relationships with new and additional businesses
      that specialize in these delivery channels.





**Industrial
      Controls**





The
      sales
      for the Universal Robot Controller (URC) and the Universal Automation Controller
      (UAC) will be directed from the company's offices in Ft. Myers, Florida. RWT
      and
      Altronics will have a sales representative organization in place to address
      sales opportunities as market awareness of the URC3 and UAC increases.




**Service
      Robots**





The
      sales, licensing and software applications support for the service robot
      activity is headquartered out of Ft. Myers, Florida, Another event for the
      Company will be several service robot conferences and expositions sponsored
      by
      Robotics Trends and AUVSI as well as other conferences and trade shows for
      the
      military market. Additionally, partnerships have been established and will
      continue to be forged with key universities such as Florida Gulf Coast
      University and another recently agreed to with Embry-Riddle Aeronautical
      University.





**Marketing**





Our
      marketing and sales materials are generated from the home office in Ft. Myers,
      Florida using our existing marketing and public relations firm, INCOMM
      International Inc. Additional high-level support for closing deals at corporate
      levels is also supported out of the corporate offices located in Ft. Myers,
      Florida.





**Trademarks
      and Patents**





The
      Company has the following trademarks and patents:


**RWT(TM)**


**Universal
      Robot Controller(TM)**


**URC(TM)**


RobotScript(R)


TeachPoint
      File Creator(TM)


Gatekeeper(TM)


ControlScript(TM)


CMMScript(TM)


MediScript(TM)


Robotic
      Artists(TM)


Service
      Robots(TM) SM





**RWT
      Patents**





First
      Patent number 6,442,451 - awarded September 5, 2002 - Versatile robot control
      system - Abstract - An improved, versatile robot control system comprises a
      general purpose computer with a general purpose operating system in electronic
      communication with a real-time computer subsystem. The general-purpose computer
      includes a program execution module to selectively start and stop processing
      of
      a program of robot instructions and to generate a plurality of robot move
      commands. The real-time computer subsystem includes a move command data buffer
      for storing the plurality of move commands, a robot move module linked to the
      data buffer for sequentially processing the moves and calculating a required
      position for a robot mechanical joint. The real-time computer subsystem also
      includes a dynamic control algorithm in software communication with the move
      module to repeatedly calculate a required actuator activation signal from a
      robot joint position feedback signal.





Second
      Patent number 6,675,070 - awarded April 5, 2004 - Automation equipment control
      system Abstract - An automation equipment control system comprises a
      general-purpose computer with a general-purpose operating system in electronic
      communication with a real-time computer subsystem. The general-purpose computer
      includes a program execution module to selectively start and stop processing
      of
      a program of equipment instructions and to generate a plurality of move
      commands. The real-time computer subsystem includes a move command data buffer
      for storing the plurality of move commands, a move module linked to the data
      buffer for sequentially processing the moves and calculating a required position
      for a mechanical joint. The real-time computer subsystem also includes a dynamic
      control algorithm in software communication with the move module to repeatedly
      calculate a required actuator activation signal from a joint position feedback
      signal.




12


Third
      Patent number 6,922,611 - awarded July 26, 2005 - Reflects the company’s
      continuing R&D efforts in open-architecture PC control technology
      spearheaded by RWT. Each of the Company’s patents pertains to RWT’s versatile PC
      control system suitable for controlling robots of various electromechanical
      configurations, other automation equipment, and its common programmer/operator
      interface.





**ITEM
      2. DESCRIPTION OF PROPERTY**





On
      May
      15, 2005 the Company leased 4,000 square feet of space at 15870 Pine Ridge
      Road,
      Ft Myers, Florida which will be used for primary operations. The lease is with
      Gulf To Bay Construction, Inc., with monthly payments of $3,639 through June
      1,
      2010. The lease has five (5) successive renewal options each for a period of
      two
      (2) years. The rent will increase annually by 3%. The space is the location
      of
      the Company's Research, Design and Engineering center as well as office space
      for up to fifteen (15) employees.





On
      June
      15, 2005 the Company entered into a month-to-month lease with Bola Industries,
      LLC for approximately 4,000 square feet of production space located at 30946
      Industrial Road, Livonia Michigan. The lease expired on March 31, 2006. The
      rent
      was $3,775 monthly and included all utilities, use of all equipment on site
      including certain heavy equipment, and use of internet service.





On
      May 5,
      2006 the Company leased 1,400 square feet of space at 4074 148 th Avenue,
      Redmond, Washington, which will be used as the primary location for CoroWare.
      The lease was with the Yett Family Partnership, LP, with monthly payments of
      $1,944 through May 31, 2007. The company subsequently entered into a lease
      with
      PS Business Park at the same location beginning on June 1, 2007 for a period
      of
      three (3) years. The rent will increase annually by 3%.The space is the location
      of CoroWare’s headquarters and consists of office and warehouse space for its
      employees.





Rental
      expense for the operating leases for the years ended December 31, 2006 and
      2005
      was $90,383 and $51,035, respectively.





**ITEM
      3. LEGAL PROCEEDINGS**





There
      are
      no lawsuits against the Company as of March 31, 2007. There are no material
      proceedings to which any director, officer or affiliate of the Company, any
      owner of record or beneficially of more than 5% of the common stock of the
      Company is a party adverse to the Company.





The
      Company received
      a subpoena from the SEC dated May 10, 2005 relating to an investigation of
      trading in certain OTC stocks, including our common stock. The subpoena sought
      documents relating to the merger and financing transactions entered into by
      us
      in April 2003. We believe we provided all information requested under the
      subpoena promptly in 2005. We are not able to predict what actions, if any,
      the
      SEC may take against us as a result of the investigation.





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





1.
      On
      November 3, 2006, the Company held its Special Meeting of
      Stockholders.




2.
      There
      were present in person or by proxy 75,099,826 shares of Common Stock, of a
      total
      of 75,099,826 shares of Common Stock entitled to vote.




13




3.
      The
      number of shares voted in favor of the election of the following nominees for
      director is set forth opposite each nominee's name:




Nominee
            Number
                of SharesWalter
                K. Weisel
            66,463,270Martin
                Nielson
            66,332,099Gary
                f. McNear
            66,333,149Craig
                W. Conklin
            66,332,149Rick
                Wynns
            66,316,099




4.
      65,082,993 shares were voted in favor of amending our Certificate of
      Incorporation to effect a reverse stock split of the issued and outstanding
      shares of our Common Stock at a ratio of either one-for-eight or one-for-ten,
      as
      determined at the discretion of the board of directors to be in the best
      interests of the Company without further approval from our
      stockholders.




5.
      44,584,751 shares were voted in favor of adopting our Amended and Restated
      2005
      Stock Option Plan, including all amendments thereto adopted by the Board of
      Directors.




The
      Board
      of Directors subsequently authorized a reverse split of our issued and
      outstanding shares of common stock at a ratio of one-for-ten. The reverse split
      was effectuated on November 20, 2006. In addition, on November 20, 2006, the
      Company changed its corporate name from Innova Holdings, Inc. to Innova Robotics
      and Automation, Inc.





**PART
      II**





**ITEM
      5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





**Reports
      to Security Holders**





We
      are a
      reporting company with the Securities and Exchange Commission, or SEC. The
      public may read and copy any materials filed with the SEC at the SEC's Public
      Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may
      also
      obtain information on the operation of the Public Reference Room by calling
      the
      SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
      proxy and information statements, and other information regarding issuers that
      file electronically with the SEC. The address of that site is
      http://www.sec.gov.





**Prices
      of Common Stock**





Since
      February 2002, we have been eligible to participate in the OTC Bulletin Board,
      an electronic quotation medium for securities traded outside of the NASDAQ
      Stock
      Market, and prices for our common stock were published on the OTC Bulletin
      Board
      under the trading symbol "SRMW" until such time as our acquisition of Hy-Tech
      Technology Group, Inc. on January 31, 2003 when our symbol became HYTT. In
      November 2006 the name of the Company was changed to Innova Robotics &
Automation, Inc. and the trading symbol was changed to INRA.




The
      following table sets forth, for the fiscal quarters indicated, the high and
      low
      closing sales price of our Common Stock as reported on the NASD Over-the-Counter
      Bulletin Board for each quarterly period during fiscal years ended December
      31,
      2006 and December 31, 2005.




14




COMMON
                STOCKYear
                Ended December 31, 2006
            
            High
            
            LowFirst
                Quarter
            
            $
            0.241
            
            $
            0.065Second
                Quarter
            
            $
            0.450
            
            $
            0.110Third
                Quarter
            
            $
            0.330
            
            $
            0.120Fourth
                Quarter
            
            $
            0.300
            
            $
            0.020Year
                Ended December 31, 2005First
                Quarter
            
            $
            0.032
            
            $
            0.008Second
                Quarter
            
            $
            0.067
            
            $
            0.015Third
                Quarter
            
            $
            0.042
            
            $
            0.010Fourth
                Quarter
            
            $
            0.023
            
            $
            0.009





There
      are
      approximately 130 record holders of common equity as of March 16,
      2007.





**Dividend
      Policy**





The
      Company has never declared or paid any cash dividends on its common stock.
      The
      Company anticipates that any earnings will be retained for development and
      expansion of its business and does not anticipate paying any cash dividends
      in
      the foreseeable future. Additionally, as of December 31, 2006 the Company has
      issued and has outstanding 284,334 shares of Series B Preferred Stock all of
      which earns a 5% dividend, payable in either cash or common stock of the
      Company. Such dividends on these Preferred Stocks will be paid before any
      dividends on common stock. The board of directors has sole discretion to pay
      cash dividends based on the Company's financial condition, results of
      operations, capital requirements, contractual obligations and other relevant
      factors. As of December 31, 2006 all of the Series A preferred stock had been
      converted into common stock and 240,666 shares of Series B Preferred and an
      additional $9,772 of Series B Preferred dividends had been converted into common
      stock.





**Securities
      Authorized for Issuance Under Equity Compensation Plans**





The
      following table sets forth the information as of December 31, 2006 with respect
      to compensation plans under which equity securities of the Company are
      authorized for issuance:





**EQUITY
      COMPENSATION PLAN INFORMATION**





DECEMBER
                31, 2006Plan
                Category
            
            Number
                of shares to be issued upon exercise of outstanding
                options
            
            Weighted
                average exercise price of outstanding options
            
            Number
                of securities available for future issuanceEquity
                compensation plans approved by security holders
            
            -
            
            -
            
            -Equity
                compensation plans not approved by security holders
            
            
            15,887,676
            
            $
            0.11
            
            
            4,927,324Total
            
            
            15,887,676
            
            $
            0.11
            
            
            4,927,324





As
      of
      December 31, 2006 the company had three stock option plans; the 2003 Stock
      Option Plan, the 2004 Stock Option Plan, and the 2005 Stock Option Plan. The
      authorized options under the 2003, 2004, and 2005 Stock Option Plans are 500,000
      shares, 315,000 shares, and 20,000,000 shares respectively.




15




**Stock
      Options**





There
      are
      a total 15,887,676 outstanding options to purchase common equity of Innova
      Robotics & Automation, Inc. as of March 16, 2007.





**Penny
      Stock Regulation**





Shares
      of
      our common stock are subject to rules adopted by the Securities and Exchange
      Commission that regulate broker-dealer practices in connection with transactions
      in "penny stocks.” Penny stocks are generally equity securities with a price of
      less than $5.00 (other than securities registered on certain national securities
      exchanges or quoted on the NASDAQ system, provided that current price and volume
      information with respect to transactions in those securities is provided by
      the
      exchange or system). The penny stock rules require a broker-dealer, prior to
      a
      transaction in a penny stock not otherwise exempt from those rules; deliver
      a
      standardized risk disclosure document prepared by the Securities and Exchange
      Commission, which contains the following:





o
      a
      description of the nature and level of risk in the market for penny stocks
      in
      both public offerings and secondary trading;





o
      a
      description of the broker's or dealer's duties to the customer and of the rights
      and remedies available to the customer with respect to violation to such duties
      or other requirements of securities' laws;





o
      a
      brief, clear, narrative description of a dealer market, including "bid" and
      "ask" prices for penny stocks and the significance of the spread between the
      "bid" and "ask" price;





o
      a
      toll-free telephone number for inquiries on disciplinary actions;





o
      definitions of significant terms in the disclosure document or in the conduct
      of
      trading in penny stocks; and





o
      such
      other information is in such form (including language, type, size and format),
      as the Securities and Exchange Commission shall require by rule or
      regulation.




Prior
      to
      effecting any transaction in penny stock, the broker-dealer also must provide
      the customer the following:





o
      the bid
      and offer quotations for the penny stock;





o
      the
      compensation of the broker-dealer and its salesperson in the transaction;





o
      the
      number of shares to which such bid and ask prices apply, or other comparable
      information relating to the depth and liquidity of the market for such stock;
      and





o
      monthly
      account statements showing the market value of each penny stock held in the
      customer's account.





In
      addition, the penny stock rules require that prior to a transaction in a penny
      stock not otherwise exempt from those rules, the broker-dealer must make a
      special written determination that the penny stock is a suitable investment
      for
      the purchaser and receive the purchaser's written acknowledgment of the receipt
      of a risk disclosure statement, a written agreement to transactions involving
      penny stocks, and a signed and dated copy of a written suitably statement.
      These
      disclosure requirements may have the effect of reducing the trading activity
      in
      the secondary market for a stock that becomes subject to the penny stock rules.
      Holders of shares of our common stock may have difficulty selling those shares
      because our common stock will probably be subject to the penny stock rules.





**ITEM
      6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION.**





**Plan
      of Operation**





During
      the next twelve months, the Company expects to aggressively market and sell
      its
      Universal Robot Controller, complete the development of its Universal Automation
      Controller and license its software in the service, personal and industrial
      markets. The Company, during the past ten years, successfully developed its
      open
      architecture PC based Universal Robot Controller and developed its RobotScript
      and related software. Additionally, the development of the Universal Automation
      Controller is now in its final stages and will be marketed through our Altronics
      Service subsidiary. As discussed in Item 1 of this document, management believes
      there is a large market opportunity for its controllers and software, and
      management intends to aggressively pursue those opportunities. Specifically,
      the
      Company is implementing its operating plan and is expanding its sales
      organization by adding additional direct sales representatives and partnering
      with system integrators. Also, the Company is aggressively implementing its
      current marketing plan to create awareness of its products and to communicate
      the value of its solutions to the industrial, military, homeland security and
      other robotic markets. The Company has commenced the technology development
      activities to develop the next generation of control systems and communication
      systems for the markets it serves. Management expects to constantly upgrade
      and
      improve its software and system solutions offerings as the markets continue
      to
      change.




16




The
      Company has determined a strategic plan for growing the business beyond organic
      growth. This growth strategy revolves around making strategic acquisitions
      that
      will enhance the solutions offerings of the various operating units of the
      business. As highlighted in our subsequent events dialog, the Company acquired
      its first company this year that has a special niche in the machine tool
      industry which is a very dynamic and large market and will be reported in the
      Robotic Workspace Technologies subsidiary. The company strategy is also to
      add
      acquisitions in the software and technical services markets to support our
      other
      solutions offerings. The acquisition targets are all established companies
      that
      will be accretive in earnings and stockholder value from the time of acquisition
      and integration. No turnaround opportunities are being considered.





Looking
      forward into Fiscal Year 2007, CoroWare is well positioned to continue its
      revenue growth by further expanding its Enterprise Business Solutions business
      and rapidly growing its Robotics and Automation business. The Enterprise
      Business Solutions group intends to achieve its expansion through its ongoing
      business relationship with Microsoft, and through its professional services
      that
      provide customized software and service implementations of Microsoft solutions
      such as Microsoft Customer Care Framework. The Robotics and Automation group
      expects to accomplish its rapid growth by continuing to offer expert systems
      development services that address embedded systems, robotic simulation and
      Microsoft Robotics Studio opportunities, and by addressing the rapidly expanding
      mobile robot marketplace through the introduction of hardware and software
      products that are built upon and compatible with Microsoft Robotics
      Studio.





The
      Company does not expect to sell any of its fixed assets, including its property
      or equipment in the next twelve months, nor does it expect to purchase any
      real
      property in the next twelve months. During the next twelve months, the Company
      expects to purchase certain equipment to support software development, testing
      and continued deployment of its technologies. Additionally, the Company expects
      to purchase office equipment, computer equipment and laboratory development
      and
      testing equipment to support the planned increase of the number of employees
      of
      the Company.





Recent
      Financing Transactions





On
      June
      14, 2005, the Company entered into a Standby Equity Distribution Agreement
      (the
“Equity Distribution Agreement”) with Cornell Capital Partners, LP (“Cornell”).
      Under the Equity Distribution Agreement, the Company may issue and sell to
      Cornell common stock for a total purchase price of up to $10,000,000 over a
      period of up to twenty four (24) months. The purchase price for the shares
      is
      equal to 96% of their market price, which is defined in the Equity Distribution
      Agreement as the lowest volume weighted average price of the common stock during
      the five trading days following the date notice is given by the Company that
      it
      desires an advance of funds. Cornell is paid a fee equal to 5% of each advance,
      which is retained by Cornell from each advance. The amount of each advance
      is
      subject to an aggregate maximum advance amount of $400,000, with no advance
      occurring within five trading days of a prior advance. The Company will pay
      a
      structuring fee of $500 for each advance made under the Equity Distribution
      Agreement. The Company agreed to file a registration statement with the
      Securities and Exchange Commission (“SEC”) that registers for resale the common
      stock that will be issued to Cornell under the Equity Distribution Agreement.
      No
      advance of funds will be made under the Equity Distribution Agreement until
      the
      registration statement is declared effective by the SEC. The registration
      statement was declared effective by the SEC on December 22, 2005.





In
      connection with the transaction, Cornell received a one-time commitment fee
      of
      2,608,696 restricted shares of the Company's common stock, equal to
      approximately $90,000 based on the Company’s stock price on May 4, 2005. These
      shares were registered for resale in the registration statement for the common
      stock to be issued under the Equity Distribution Agreement. The Company also
      issued to Cornell its promissory note for $300,000. The principal of the note
      is
      payable in three $100,000 installments due on the 30 th ,
      60 th and
      90 th days
      following the date the registration statement for the Cornell shares was
      declared effective. The promissory note does not bear interest except in the
      event of a default. The Company also paid $20,000 in cash to Cornell and its
      affiliates for structuring and due diligence fees.




17


On
      June
      14, 2005, the Company entered into a Placement Agent Agreement with Monitor
      Capital Inc. (the “Placement Agent”), a registered broker-dealer, to act as its
      exclusive placement agent in connection with the Equity Distribution Agreement.
      The Placement Agent agreed to advise the Company regarding the Equity
      Distribution Agreement. Pursuant to the Placement Agent Agreement, the Company
      paid a one-time placement agent fee of 289,855 restricted shares of common
      stock, equal to approximately $10,000 based on the Company’s stock price on May
      4, 2005. These shares were registered for resale in the registration statement
      for the Cornell shares.





During
      the year ended December 31, 2006, the Company utilized the Equity Distribution
      Agreement and sold 16,173,617 shares of common stock to Cornell for gross
      proceeds of $2,435,000. Of the gross proceeds received, Cornell was paid
      $121,750 in commitment fees and $9,000 in structuring fees. Additionally,
      $120,000 of the promissory note due Cornell was paid to Cornell and the
      remaining balance of $80,000 was settled by the issuance of 484,850 shares
      of
      the Company’s common stock.





On
      July
      22, 2005 the Company borrowed $30,000 from a beneficial shareholder and entered
      into a short term note for that amount, the terms of which are: interest at
      the
      annual rate of 5%, due date in six months, and principal and accrued interest
      are convertible into common stock of the Company at $.015 per share. The lender
      has agreed to a repayment plan that extends the term to December 31,
      2007.





On
      October 7, 2005, the Company entered into a Securities Purchase Agreement with
      Cornell. Pursuant to this Agreement, the Company sold a Convertible Debenture
      in
      the principal amount of $55,000 to Cornell. The Convertible Debenture bears
      interest at the rate of 12% per annum and is due on April 7, 2006. The principal
      of the Convertible Debenture is convertible into common stock of the Company
      at
      a price of $.03 per share (the “Conversion Shares”). The Company granted demand
      registration rights to Cornell Capital for the Conversion Shares. The
      Convertible Debenture is secured by a second lien on all of the assets of the
      Company. The convertible debenture was repaid in full by the due
      date.





During
      September through December 2005, the Company also entered into short-term debt
      obligations other than in the ordinary course of business. All of the short-term
      debt bears interest at the rate of 10% per annum. The following table sets
      for
      the names of the lenders, the amount of the loans, the dates of the loans and
      the due date of the loans:





Lender
            Amount
                of Loan
            Date
                of Loan
            Due
                DateEugene
                Gartlan
            $40,000
            September
                19, 2005
            October
                19, 2005Jerry
                Horne
            $50,000
            September
                22, 2005
            October
                22, 2005James
                Marks
            $30,000
            September
                22, 2005
            October
                22, 2005Eugene
                Gartlan
            $5,000
            October
                5, 2005
            January
                5, 2006Rick
                Wynns
            $30,000
            October
                3, 2005
            November
                3, 2005Rick
                Wynns
            $30,000
            October
                14, 2005
            February
                14, 2006Gary
                McNear
            $1,000
            November
                22, 2005
            February
                22, 2006Jerry
                Horne
            $50,000
            November
                28, 2005
            December
                28, 2005James
                Marks
            $21,000
            December
                21, 2005
            March
                21, 2006





All
      of
      the lenders are shareholders of the Company. Mr. Gartlan, Mr. McNear, and Mr.
      Wynns are Directors of the Company. During the year ended December 31, 2006,
      Mr.
      Gartlan and Mr. Marks were paid in full and Mr. Wynns was paid back a total
      of
      $20,000 of principal. All lenders have agreed to repayment terms that extend
      the
      due date to December 31, 2007.





On
      July
      21, 2006, the Company consummated a Securities Purchase Agreement dated July
      21,
      2006 with Cornell providing for the sale by the Company to Cornell of its 10%
      secured convertible debentures in the aggregate principal amount of $2,825,000,
      net of deferred financing costs of $263,143 of which $1,250,000 was advanced
      immediately and $575,000 was advanced in August concurrent with our filing
      of
      the Registration Statement with the Securities and Exchange Commission (SEC).
      The last installment of $1,000,000 was advanced on December 7,
      2006.




18


The
      Debentures mature on the third anniversary of the date of issuance. The holder
      of the Debentures may, at any time, convert amounts outstanding under the
      Debentures into shares of common stock of the Company at a fixed conversion
      price per share equal to $0.40. The Company's obligations under the Purchase
      Agreement are secured by substantially all of the assets of the Company and
      those of its wholly owned subsidiary, CoroWare.





Under
      the
      Purchase Agreement, the Company also issued to Cornell five-year warrants to
      purchase 1,000,000 and 1,500,000 shares of Common Stock at prices equal to
      $0.50
      and $1.00, respectively, together with three-year warrants to purchase
      2,300,000, 2,000,000 and 2,500,000 shares of Common Stock at prices equal to
      $0.25, $0.65 and $0.75, respectively.





The
      Company has the right to redeem a portion or all amounts outstanding under
      the
      Debenture prior to the Maturity Date at a 10% redemption premium provided that
      the closing bid price of the Common Stock is less than the Conversion Price
      and
      there is an effective Registration Statement covering the shares of Common
      Stock
      issuable upon conversion of the Debentures and exercise of the Warrants (as
      defined below). In addition, beginning on the earlier of: (i) the first trading
      day following the day which the Registration Statement is declared effective
      by
      the Commission, or (ii) December 1, 2006, and continuing on the first trading
      day of each calendar month thereafter, Cornell may require the Company to redeem
      up to $500,000 of the remaining principal amount of the Debentures per calendar
      month. However, Cornell may not require the Company to redeem the Debentures
      if
      the closing bid price of the Common Stock exceeds the Conversion Price for
      each
      of the five consecutive trading days immediately prior to the redemption date,
      and the Registration Statement has been declared effective and remains effective
      on the redemption date. The Company has the option, in its sole discretion,
      to
      settle any requested redemptions by either paying cash or issuing the number
      of
      shares of the Company’s common stock equal to the cash amount owed divided by a
      stock price equal to 95% of the lowest daily volume weighted average price
      of
      the Company’s common stock during the thirty (30) trading days immediately
      preceding the date of the redemption.





The
      Company does not have any off-balance sheet arrangements.





**YEAR
      ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31,
      2005:**





During
      the year ended December 31, 2006 (the "2006 Period") revenues were $1,340,222
      compared to revenues of $-0- during the year ended December 31, 2005 (the "2005
      Period"). The 2006 revenues resulted primarily from the inclusion of CoroWare’s
      results since the closing date of the acquisition, May 16, 2006 which totaled
      $1,046,407. Additionally, Robotic Workspace Technologies, a wholly owned
      subsidiary of the Company, recorded revenues in the amount of $293,815. Gross
      profit on these revenues amounted to $288,514.




Cost
      of
      goods sold was $1,051,708 and $-0- for the years ended December 31, 2006 and
      2005, respectively. Cost of goods sold represents primarily labor and
      labor-related costs in addition to overhead costs. Additionally, costs include
      materials to assemble the Universal Robot Controllers, including electronic
      parts and components, electrical amplifiers, cabinetry to house all of the
      materials, and teach pendants as well as labor to assemble the controllers
      and
      install software is included. The 2006 cost of goods sold resulted primarily
      from the inclusion of CoroWare’s results since the closing date of the
      acquisition, May 16, 2006 which totaled $818,573. Robotic Workspace
      Technologies, a wholly owned subsidiary of the Company, recorded cost of goods
      sold in the amount of $233,135.





Operating
      expenses were $4,790,960 for the year ended December 31, 2006 compared to
      $1,758,273 during the year ended December 31, 2005. The increase in operating
      expenses primarily resulted from increased employee stock based compensation
      of
      $729,618 and the inclusion of CoroWare since the date of acquisition, May 16,
      2006. Selling, general and administrative expenses amounted to $3,422,657 during
      the year ended December 31, 2006 compared to $857,515 during the year ended
      December 31, 2005, and represented mostly labor and related compensation costs,
      trade shows, travel expenses, rental expense and related office expenses.
      Selling, general and administrative costs included $340,930 and $43,000 of
      research and development costs during the year ended December 31, 2006 and
      2005,
      respectively. Other operating costs were $1,368,303 for the year ended December
      31, 2006 compared to $900,758 for the year ended December 31, 2005 and consisted
      of legal and professional fees, outside services and depreciation and
      amortization.





Net
      loss
      for the 2006 Period was $5,607,098 compared to a net loss of $1,881,125 for
      the
      2005 Period, due largely to increased employee stock based compensation of
      $729,618, a derivative loss of $335,041 which resulted from the recent
      convertible debenture financing and the inclusion of CoroWare’s results since
      the closing date of May 16, 2006.




19


**LIQUIDITY
      AND CAPITAL RESOURCES**





At
      December 31, 2006, we had current assets of $736,298 and current liabilities
      of
      $5,167,287. At December 31, 2006, we had negative working capital of $4,430,989
      and an accumulated deficit of $15,115,203.





The
      Company will continue to seek funds through private placements as well as debt
      financing. The Company will also continue to investigate alternative sources
      of
      financing. We cannot guarantee that additional funding will be available on
      favorable terms, if at all. If we are unable to obtain debt and/or equity
      financing upon terms that our management deems sufficiently favorable, or at
      all, it would have a materially adverse impact upon our ability to pursue our
      business strategy and maintain our current operations.





**ITEM
      7 FINANCIAL STATEMENTS**





The
      financial statements immediately follow ITEM 14 - Principal Accountant Fees
      and
      Services





**ITEM
      8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURES**





None





**ITEM
      8A CONTROLS AND PROCEDURES**





As
      of
      December 31, 2006, our principal executive officer and principal financial
      officer evaluated the effectiveness of the Company's disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934, as amended). This evaluation of the disclosure controls
      and procedures included controls and procedures designed to ensure that
      information required to be disclosed by the Company in its reports that it
      files
      or submits under the Act is recorded, processed, summarized and reported within
      the time periods specified in the Security and Exchange Commission’s rules and
      forms. Such disclosure controls and procedures include controls and procedures
      designed to ensure that information required to be disclosed by the Company
      in
      the reports that it files or submits under the Act is accumulated and
      communicated to the Company's management, including its principal executive
      and
      principal financial officers, to allow timely decisions regarding required
      disclosure. Based on this evaluation, the Company's principal executive officer
      and principal financial officer concluded that the Company's disclosure controls
      and procedures were effective as of December 31, 2006.





As
      of
      December 31, 2005, our principal executive officer and principal financial
      officer evaluated the effectiveness of the Company's disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934, as amended). This evaluation of the disclosure controls
      and procedures included controls and procedures designed to ensure that
      information required to be disclosed by the Company in its reports that it
      files
      or submits under the Act is recorded, processed, summarized and reported within
      the time periods specified in the Security and Exchange Commission’s rules and
      forms. Such disclosure controls and procedures include controls and procedures
      designed to ensure that information required to be disclosed by the Company
      in
      the reports that it files or submits under the Act is accumulated and
      communicated to the Company's management, including its principal executive
      and
      principal financial officers, to allow timely decisions regarding required
      disclosure. Based on this evaluation, the Company's principal executive officer
      and principal financial officer concluded that the Company's disclosure controls
      and procedures were ineffective because the Company had not properly accounted
      for certain beneficial conversion features associated with its Series A
      Preferred Stock and Series B Preferred Stock issued in 2004 and the accounting
      guidance provided by Emerging Issues Task Force Issue Numbers 98-5 and 00-27.
      Management concluded that the failure to properly account for and disclose
      the
      beneficial conversion features was a material weakness in its disclosure
      controls and procedures.




The
      Company issued its Series A Preferred Stock in June 2004 and its Series B
      Preferred Stock in September 2004. In its financial statements for the year
      ended December 31, 2004, the Company did not allocate any portion of the
      proceeds of these stock issuances to any beneficial conversion features of
      the
      preferred stock. After filing its annual report on Form 10-KSB, the Company
      received a comment letter from the staff of the Securities and Exchange
      Commission dated June 22, 2005 that requested, among other things, confirmation
      that management of the Company considered the guidance of certain accounting
      pronouncements in determining whether a portion of the proceeds of the Company’s
      Series A Preferred Stock issued in June 2004 and Series B Preferred Stock issued
      in September 2004 should be allocated to the beneficial conversion feature.




20




After
      receipt of the SEC’s comment letter, the Company’s Chief Executive Officer and
      Chief Financial Officer reevaluated the Company’s disclosure controls and
      procedures regarding the proper accounting treatment of the preferred stock
      issuances in 2004 and presented to the Company’s independent certified public
      accountants its plan to institute remedial actions to address this material
      weakness in its disclosure controls and procedures regarding the issuance of
      convertible securities and any associated beneficial conversion features and
      the
      accounting guidance provided by Emerging Issues Task Force Issue Numbers 98-5
      and 00-27. These remedial actions were the following:





-the
      Company hired a new Chief Financial Officer effective June 14, 2005 who has
      reviewed the Company’s disclosure controls and procedures regarding the issuance
      of convertible securities and any associated beneficial conversion features
      and
      the accounting guidance provided by Emerging Issues Task Force Issue Numbers
      98-5 and 00-27 and has implemented a special review and analysis process prior
      to the execution of legal agreements for all planned issuances of convertible
      securities to determine the amount of any beneficial conversion features, their
      related accounting treatment and disclosure requirements. This remedial action
      was implemented by June 30, 2005.





-
      the
      Chief Financial Officer reviewed all of the Company’s other disclosure controls
      and procedures, as well as all accounting policies and procedures and internal
      controls. There were no other material weaknesses or significant deficiencies
      identified;





-the
      Company’s accounting policies and checklists relating to the selection and
      application of appropriate accounting policies now includes an item requiring
      the consideration of whether or not convertible securities issuances include
      a
      beneficial conversion feature and, if so, to describe the method of accounting
      for this feature, as well as the method of calculating the amount of the
      beneficial conversion feature;




-the
      Company is in the process of diversifying the composition of the Board of
      Directors and has established an audit committee, nominating committee,
      technology committee, and a compensation committee of the Board of
      Directors.





The
      remedial actions to correct the material weakness associated with the disclosure
      controls and procedures for beneficial conversion features were implemented
      as
      of June 30, 2005. All other actions were completed as of December 31,
      2005.




The
      Company received a comment letter from the staff of the Securities and Exchange
      Commission dated June 22, 2005 that requested, among other things, confirmation
      that management of the Company considered the guidance of certain accounting
      pronouncements in determining whether a portion of the proceeds of the Company’s
      Series A Preferred Stock issued in June 2004 and Series B Preferred Stock issued
      in September 2004 should be allocated to the beneficial conversion feature.
      After receipt of the SEC’s comment letter, the Company reevaluated its internal
      controls over financial reporting and presented to the Company’s independent
      certified public accountants its plan to institute remedial actions to address
      this material weakness in its internal control over financial reporting for
      the
      issuance of convertible securities and any associated beneficial conversion
      features and the accounting guidance provided by Emerging Issues Task Force
      Issue Numbers 98-5 and 00-27.. These remedial actions were the
      following:





-the
      Company hired a new Chief Financial Officer effective June 14, 2005 who has
      reviewed the Company’s internal controls over financial reporting regarding the
      issuance of convertible securities and any associated beneficial conversion
      features and the accounting guidance provided by Emerging Issues Task Force
      Issue Numbers 98-5 and 00-27 and has implemented a special review and analysis
      process prior to the execution of legal agreements for all planned issuances
      of
      convertible securities to determine the amount of any beneficial conversion
      features, their related accounting treatment and disclosure requirements. This
      remedial action was implemented by June 30, 2005.





-
      the
      Chief Financial Officer of reviewed all of the Company’s other internal controls
      over financial reporting, as well as all accounting policies and procedures
      and
      internal controls.,. There were no other material weaknesses or significant
      deficiencies identified;





-the
      Company’s accounting policies and checklists relating to the selection and
      application of appropriate accounting policies now includes an item requiring
      the consideration of whether or not convertible securities issuances include
      a
      beneficial conversion feature and, if so, to describe the method of accounting
      for this feature, as well as the method of calculating the amount of the
      beneficial conversion feature.




21




-the
      Company is in the process of diversifying the composition of the Board of
      Directors and has established an audit committee, nominating committee,
      technology committee, and a compensation committee of the Board of
      Directors.





The
      remedial actions to correct the material weakness associated with the internal
      controls over financial reporting for beneficial conversion features were
      implemented as of June 30, 2005. All other actions were completed as of December
      31, 2005.





**ITEM
      8B OTHER INFORMATION**





None





**PART
      III**





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





Our
      directors, principal executive officers and significant employees are as
      specified on the following table:





Name
            Age
            PositionWalter
                K. Weisel
            66
            Chairman,
                Chief Executive Officer, and DirectorMartin
                Nielson
            55
            Previously
                Chief Executive Officer and Chairman of the Board of Directors;
                DirectorGary
                F. McNear
            62
            Director;
                Previously C F O, Vice President, and SecretaryCraig
                W. Conklin
            57
            Director;
                Previously Chief Operating Officer, and Vice PresidentEugene
                V. Gartlan
            62
            Previously
                Chief Financial Officer, Executive Director of Strategic Development,
                and
                DirectorRichard
                Wynns
            61
            DirectorSheri
                Aws
            46
            Secretary








WALTER
      K.
      WEISEL became the Company's Chairman and Chief Executive Officer on August
      25,
      2004, the date the merger closed between the Company and RWT. With over thirty
      year’s experience, Mr. Weisel is recognized as a pioneer and leader in the
      robotics industry. An original founding member of the Robotic Industries
      Association (RIA), the U.S. robot manufacturers' trade association, Mr. Weisel
      served three terms as President. He served on the RIA Board of Directors and
      Executive Committee and, as a spokesperson for the industry, served as an
      advisor to members of the U.S. Trade Commission and the U.S. Department of
      Commerce. Mr. Weisel was a founding member of Robotics International (RI),
      a
      member society dedicated to the advancement of robotic technology. During his
      term as President the membership grew to over 16,000 members. In 1992 Mr. Weisel
      was awarded the Joseph F. Engelberger Award, which recognizes the most
      significant contribution to the advancement of robotics and automation in the
      service of mankind. Each year nominations are received from 26 nations
      worldwide. This award has been presented since 1977.





Mr.
      Weisel has a long record of advancing technology and growing companies that
      develop and commercialize technology. Mr. Weisel served 13 years with Prab
      Robots, Inc. as Chief Executive Officer, President, and Chief Operating Officer.
      During his tenure, Prab Robots, Inc. was transformed into an international
      organization and leader in the fields of industrial robots and automation.
      While
      under his direction, Prab Robots, Inc. was taken public in an Initial Public
      Offering and Unimation, Inc. and several other companies in the U.S. and Europe
      were acquired. By 1990, Prab Robots, Inc. was responsible for the largest
      installed base of robots in North America and had developed a very successful
      robot retrofit business with customers such as General Motors, Ford, and
      Chrysler. Mr. Weisel has served as Chairman and Chief Executive Officer of
      RWT
      since its incorporation in 1994, and continues to serve in that capacity.




22




Mr.
      Weisel's employment agreement is dated July 19, 2000. Mr. Weisel's salary is
      $150,000 per annum plus a bonus at the discretion of the Board of Directors.
      The
      agreement stipulates that Mr. Weisel's salary will be increased to $200,000
      and
      $250,000 when certain sales and profit objectives are met. The agreement is
      for
      a term of three years and automatically renews for successive one-year periods
      unless terminated by either party upon not less than sixty days prior to the
      renewal date. Mr. Weisel has agreed not to compete with the Company or solicit
      its customers or employees for a period of two years following the termination
      of his employment. The agreement also requires the Company to pay Mr. Weisel
      all
      accrued compensation, which amounted to $312,500 as of December 31, 2006, upon
      receipt of additional capital of no less than $3,000,000. This amount has been
      offset with a $132,500 advance made by the Company to Mr. Weisel in the
      accompanying financial statements.





MARTIN
      NIELSON was the Company's Chief Executive Officer and Chairman of the Board
      of
      Directors since May 2003. He resigned effective June 1, 2004. Mr. Nielson is
      a
      principal of Altos Bancorp, Inc., serving as its Chairman and Chief Executive
      Officer since November 2002. He has also served as Chief Executive Officer
      and
      director of Inclusion Inc. since September, 2000. Mr. Nielson and Altos were
      instrumental in assisting the Company in the negotiations that led to the
      Company's settlement of its litigation with SunTrust Bank and in securing the
      financing that funded that settlement. Mr. Nielson will continue as a director
      of the Company. Mr. Nielson is a senior executive with extensive experience
      in
      operations and finance. He has been a business builder for 30 years with such
      companies as Gap, Businessland, and Corporate Express.





Altos,
      which is an outgrowth of Nielson's M&A practice during his ten years in
      London is engaged in providing investment banking and business development
      services to growth oriented, emerging companies throughout the United States
      and
      Europe. Altos was retained by the Company to act as its business advisor, but
      that contract was concluded to coincide with the acquisition of RWT. Mr. Nielson
      is also a director of Advanced Communications Technologies, Inc.





GARY
      F.
      MCNEAR was the Chief Financial Officer, Vice President and Secretary since
      May
      2003 through August 25, 2004, and a Director since May 2003. From January 2003,
      through May 2003 he served as Chief Executive Officer and Director of the
      Company. Mr. McNear has served as the Chief Executive Officer, Chairman of
      the
      Board, and Treasurer of Hy-Tech Computer Systems(HTCS) since HTCS's inception
      in
      November 1992, and was a founding shareholder. Mr. McNear has also served as
      Secretary of HTCS since March 2001. HTCS acquired the Company in a reverse
      acquisition in January 2003. Mr. McNear's duties included banking relationships,
      cash management, and financial reporting. Mr. McNear's formal education is
      in
      Industrial Administration at Iowa State University. Mr. McNear is a former
      officer and pilot in the U.S. Air Force, and a former airline
      pilot.





CRAIG
      W.
      CONKLIN was the Chief Operating Officer and Vice President since May 2003
      through August 25, 2004, and a Director since May 2003. From January 2003
      through May 2003, he served as President and Director of the Company. Mr.
      Conklin has served as President and Director of HTCS since HTCS's inception
      in
      November 1992, and was a founding shareholder. HTCS acquired the Company in
      a
      reverse acquisition in January 2003. Mr. Conklin's duties included marketing
      and
      operations of the Company. Mr. Conklin holds a B.S. in engineering from the
      Dartmouth College, and an MBA from the Amos Tuck School of business. Mr. Conklin
      was formerly employed by Owens-Corning Fiberglas, Inc. and he successfully
      operated and sold Golf & Electric Carriages, Inc., a local distributorship
      for Club Car Golf Carts.





EUGENE
      V.
      GARTLAN was appointed Chief Financial Officer of the Company in June 2005.
      Mr.
      Gartlan served as a consultant to the Company since December 15, 2004 through
      his wholly owned company, Stratex Solutions, LLC. ("Stratex"), a business
      consulting firm. Stratex earned 1,200,000 shares of the Company's common stock
      and received reimbursement of business expenses of approximately $12,000 as
      consideration for these consulting services. Mr. Gartlan served as the President
      of Stratex since June 2003. Stratex's compensation was based on a monthly salary
      of $10,000, payable in cash or common stock of the Company at the option of
      the
      Company. The price per share used to determine the number of shares earned
      if
      stock was paid was $.05 per share, the stock price on the date the Company
      and
      Stratex entered into the consulting agreement. No cash salary was paid to
      Stratex in 2004, 2005 and 2006. From June 2000 through June 2003 Mr. Gartlan
      was
      a self employed business consultant doing business under the name CFO Strategies
      and E. V. Gartlan. From June 2000 to June 2003, Mr. Gartlan was also an
      independent contractor with Whitestone Communications, Inc. serving in the
      capacity as a Managing Director of this investment banking firm specializing
      in
      mergers and acquisitions in the publishing industry. Mr. Gartlan's prior
      experience include positions as Chief Financial Officer of The Thomson
      Corporation's Information Publishing Group, Chief Financial Officer with Moody's
      Investors Service, Chief Financial Officer with International Data Group as
      well
      as several top financial management positions with The Dun & Bradstreet
      Corporation. Mr. Gartlan worked with Price Waterhouse earlier in his career
      and
      is a CPA in New York.




23


On
      June
      30, 2005, the Company and Mr. Gartlan entered into an Employment Agreement
      effective as of June 14, 2005. The term of the employment agreement is five
      years. The agreement is automatically extended for one year periods unless
      terminated on not less than thirty days notice by either party prior to any
      termination date. For all the services to be rendered by Mr. Gartlan from June
      14, 2005 through December 14, 2005, Mr. Gartlan shall be granted stock options
      to purchase 1,800,000 shares of common stock of the Company at the purchase
      price of $0.36. Such options shall be granted under the terms of the Company's
      Stock Option Plan and shall vest equally over a period of three years, or upon
      death if sooner. After December 14, 2005, Mr. Gartlan shall be paid a salary
      of
      fifteen thousand dollars per month. The Company shall have the option to pay
      the
      salary in cash or in shares of common stock of the Company registered on Form
      S-8. The stock price shall be determined by the market price for the shares
      on
      the first business day of the month in which the salary is earned. If the
      Executive is terminated without cause, all remaining outstanding stock options
      that have not been exercised by Mr. Gartlan, including stock options to purchase
      1,212,128 shares of common stock of the Company awarded by the Board of
      Directors of the Company to Stratex Solutions, LLC on December 15, 2004, shall
      immediately vest on the effective date of termination. If there is a change
      of
      ownership of the Company or any of its subsidiaries, all remaining outstanding
      stock options, including the Stratex Solutions options, that have not been
      exercised by Mr. Gartlan, shall immediately vest on the day immediately
      preceding the effective date of the change of ownership. Stratex Solutions
      is
      owned by Mr. Gartlan.





If
      employment is terminated by the Company without cause, Mr. Gartlan shall receive
      a payment equal to twenty four months of salary paid prior to the effective
      date
      of termination. The Company has the option to make this payment either in cash
      or in the common stock of the Company based on the per share market price of
      common stock at the time of termination. If during Mr. Gartlan's employment,
      the
      Company enters into an agreement which effectively will result in a change
      of
      control of the ownership of either the Company or Robotic Workspace
      Technologies, Inc. ("RWT"), the Company's wholly-owned subsidiary, or if the
      Company enters into an agreement which effectively will result in a change
      of
      ownership of the assets of the Company or RWT, Mr. Gartlan shall receive a
      payment equal to twenty four months of the salary paid prior to the effective
      date of the change of control. The Company shall make such payment in the common
      stock of the Company based on a price per share of $0.05 if the effective date
      of the change of control is December 14, 2005 or sooner; thereafter the price
      per share shall be the market price of common stock at the time of the change
      in
      control. Regarding the change of ownership of the assets of the Company or
      RWT,
      such change of ownership shall be deemed to have occurred if the rights to
      use
      the software of Robotic Workspace Technologies, Inc., is granted or sold in
      settlement of claims made by the Company or RWT of trade secret violations
      or
      patent infringements, and such rights to use the software results in a
      settlement payment to the Company or RWT in a single payment or multiple
      payments, other than a long term licensing agreement typical of software
      licensing agreements.





In
      March
      2006 the Company modified the 1,800,000 options granted to Mr. Gartlan as part
      of his employment agreement dated June 30, 2005 by changing their vesting from
      a
      three year period to 100% vested as of December 14, 2005, and by modifying
      the
      exercise price from $0.36 to $0.10. Additionally, Mr. Gartlan has 1,212,128
      options that were granted to Stratex Solutions, Inc in December 2004 with an
      exercise price of $.05 per share and vest monthly over 5 years. These options
      were modified in March 2006 to vest over three years. Additionally, Mr. Gartlan
      received a bonus of 562,500 shares of the Company’s stock on March 10, 2006
      which were valued at $50,000, based on $0.09 per share, the closing price of
      the
      Company stock on the previous day. Mr. Gartlan resigned as Chief Financial
      Officer at the end of December 2006 and assumed a directorship with the
      Company.





SHERI
      AWS
      was appointed Secretary of the Company on September 14, 2004. Ms. Aws has served
      as Vice President of Administration of RWT, the Company's wholly owned
      subsidiary, since February 2004. Prior to that, Ms. Aws served as Executive
      Administrator, General Mortgage Corporation of America, from August 24, 2003
      to
      February 2004; Director of Just for Kids, an after school and summer camp
      program for children, from December 2002 to August 2003; Assistant to the Chief
      Executive Officer of RWT from December 2002 through February 2004; and
      Administrative Assistant to Vice President of Marketing and Sales and Manager
      of
      Proposals and Contracts Administration for RWT.





Ms.
      Aws
      is employed as Vice President of Administration by RWT under an Employment
      Agreement dated February 24, 2004. Ms. Aws compensation is $60,000 per annum
      plus a bonus in the discretion of RWT. The agreement is for a term of one year,
      and automatically renews for successive one-year periods unless terminated
      by
      either party upon not less than thirty days notice prior to the renewal date.
      Ms
      Aws has agreed not to compete with RWT or solicit its customers or employees
      for
      a period of one year following the termination of her employment.





There
      is
      no family relationship between any of our officers or directors. There are
      no
      orders, judgments, or decrees of any governmental agency or administrator,
      or of
      any court of competent jurisdiction, revoking or suspending for cause any
      license, permit or other authority to engage in the securities business or
      in
      the sale of a particular security or temporarily or permanently restraining
      any
      of our officers or directors from engaging in or continuing any conduct,
      practice or employment in connection with the purchase or sale of securities,
      or
      convicting such person of any felony or misdemeanor involving a security, or
      any
      aspect of the securities business or of theft or of any felony or any conviction
      in a criminal proceeding or being subject to a pending criminal
      proceeding.




24


Our
      directors will serve until the next annual meeting of stockholders. Our
      executive officers are appointed by our Board of Directors and serve at the
      discretion of the Board of Directors.





**Section
      16(a) Beneficial Ownership Reporting Compliance.** We
      believe that our officers, directors, and principal shareholders have filed
      all
      reports required to be filed on, respectively, a Form 3 (Initial Statement
      of
      Beneficial Ownership of Securities), a Form 4 (Statement of Changes of
      Beneficial Ownership of Securities), or a Form 5 (Annual Statement of Beneficial
      Ownership of Securities).





**CODE
      OF ETHICS DISCLOSURE COMPLIANCE**





The
      Company has adopted a Code of Ethics that applies to the Company's principal
      executive officer, principal financial officer, principal accounting officer
      and
      other employees performing similar functions. The Code of Ethics filed with
      the
      Securities and Exchange Commission as part of the Company’s report on Form
      10-KSB for the year ended December 31, 2004 is being updated in 2007 for recent
      changes.





**ITEM
      10 EXECUTIVE COMPENSATION**





Any
      compensation received by our officers, directors, and management personnel
      will
      be determined from time to time by our board of directors. Our officers,
      directors, and management personnel will be reimbursed for any out-of-pocket
      expenses incurred on our behalf.





**Summary
      Compensation Table**





The
      table
      set forth below summarizes the annual and long-term compensation for services
      payable to our executive officers during the years ending December 31, 2006
      and
      December 31, 2005.





Innova
      Holdings, Inc. Summary Compensation Table





Name
                & Position
            
            Year
            
            Salary
            
            Bonus
            
            Other
            
            Restricted
                Stock Options
            
            LTIP
            
            All
                OtherWalter
                K. Weisel,
              Chairman
                and CEO
              (see
                note 1 and 2 below
            
            
            2006
              2005
            
            $
            150,000
              150,000
            
            
            -
              -
            
            
            -
              -
            
            
            500,000
              1,500,000
            
            
            -
              -
            
            $
            69,000Eugene
                V. Gartlan
              Chief
                Financial Officer
              (see
                Note 3 below)
            
            
            2006
              2005
            
            $
            180,000
              -
            
            $
            50,000
              -
            
            
            -
              -
            
            
            -
              1,200,000
            
            
            -
              1,800,000
            
            $
            12,000





Note
      1.
      Walter K. Weisel has served as Chairman and CEO of the Company since August
      25,
      2004, the date the merger between the Company and RWT closed. During 2005,
      Mr.
      Weisel was reimbursed for expenses incurred over the prior three years in an
      amount of $69,100.





Note
      2
      During 2003, 2004 and 2005 Walter K. Weisel did not received any
      cash **** compensation.
      The amounts owed to Mr. Weisel remain accrued by the Company as of December
      31,
      2006.





Note
      3
      Eugene V. Gartlan did not receive any cash compensation in 2005. Mr. Gartlan
      served as a consultant to the company since December 15, 2004 through his wholly
      owned company, Stratex Solutions, LLC. ("Stratex"), a business consulting firm.
      Stratex earned 1,200,000 shares of the Company's common stock and received
      reimbursement of business expenses of approximately $12,000 as consideration
      for
      these consulting services. Additionally, on December 15, 2004 Stratex received
      1,212,128 options at an exercise price of $0.05 per share with a term of ten
      years, expiring in December 2014. On June 30, 2005, the Company and Mr. Gartlan
      entered into an Employment Agreement effective as of June 14, 2005. For all
      the
      services to be rendered by Mr. Gartlan from June 14, 2005 through December
      14,
      2005, Mr. Gartlan shall be granted stock options to purchase 1,800,000 shares
      of
      common stock of the Company at the purchase price of $0.36 with a term of ten
      years. After December 14, 2005, Mr. Gartlan shall be paid a salary of fifteen
      thousand dollars per month, which payment commenced in January 2006. In March
      2006 the Company modified the 1,800,000 options granted to Mr. Gartlan as part
      of his employment agreement dated June 30, 2005 by changing their vesting from
      a
      three year period to 100% vested as of December 14, 2005, and by modifying
      the
      exercise price from $0.036 to $0.1. They expire in June 2015. Additionally,
      the
      1,212,128 options that were granted to Stratex Solutions, Inc in December 2004
      were modified in March 2006 to vest over three years. They expire in December
      2014.




25


**Stock
      Option Plans**





The
      plan
      is presently administered by the Company's board of directors, which selects
      the
      eligible persons to whom options shall be granted, determines the number of
      common shares subject to each option, the exercise price therefore and the
      periods during which options are exercisable, interprets the provisions of
      the
      plan and, subject to certain limitations, may amend the plan. Each option
      granted under the plan shall be evidenced by a written agreement between the
      Company and the optionee.





Options
      may be granted to employees (including officers) and directors and certain
      consultants and advisors.





The
      exercise price for incentive stock options granted under the plan may not be
      less than the fair market value of the common stock on the date the option
      is
      granted, except for options granted to 10% stockholders which must have an
      exercise price of not less than 110% of the fair market value of the common
      stock on the date the option is granted. The exercise price for nonstatutory
      stock options is determined by the board of directors. Incentive stock options
      granted under the plan have a maximum term of ten years, except for 10%
      stockholders who are subject to a maximum term of five years. The term of
      nonstatutory stock options is determined by the board of directors. Options
      granted under the plan are not transferable, except by will and the laws of
      descent and distribution.





Options
                in Year Ended December 31, 2006Individual
                GrantsName
            Number
                of Shares Underlying Options
            %
                of Total Options Granted to Employees
            Exercise
                Price
            Market
                Price
            Expiration
                DateWalter
                K. Weisel
            500,000
            30.8%
            $.10
            $.10
            3/10/2016







**Director's
      Compensation**





The
      Company has not paid and does not presently propose to pay cash compensation
      to
      any director for acting in such capacity. However, the Company will give the
      directors a grant of shares of common stock or options and reimbursement for
      reasonable out-of-pocket expenses for attending meetings. In December 2004
      and
      in March 2006, the Company awarded each director 500,000 options in each year
      for services as a director, each with an exercise price of $0.10 per share
      and a
      term of ten years. In addition, Mr. Weisel received 1,500,000 options in April
      2005 for services as Chief Executive Officer of the Company. Originally these
      options had an exercise price of $0.17 per share but were modified in March
      2006
      to have an exercise price of $0.10 per share. These options have a term of
      ten
      years and expire in April 2015.




26


**Employment
      Agreements with Executive Officers**





Currently
      there are employment agreements with four executives, Walter Weisel, Chairman,
      CEO, , Sheri Aws, Vice President and Secretary, Lloyd Spencer, President and
      CEO
      of CoroWare, and David Hyams, CTO of CoroWare.





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





The
      following table sets forth certain information regarding the beneficial
      ownership of our common stock as of March 30, 2007, by each person or entity
      known by us to be the beneficial owner of more than 5% of the outstanding shares
      of common stock, each of our directors and named executive officers, and all
      of
      our directors and executive officers as a group. Beneficial ownership has been
      determined in accordance with Rule 13d-3 of the Securities Exchange Act of
      1934,
      as amended. Generally, a person is deemed to be the beneficial owner of a
      security if he has the right to acquire voting or investment power within 60
      days.





Percentage
      ownership in the following table is based on 80,943,293 shares of common
      stock outstanding as of March 31, 2007. A person is deemed to be the beneficial
      owner of securities that can be acquired by that person within 60 days from
      March 31, 2007 upon the exercise of options, warrants or convertible securities,
      or other rights. Each beneficial owner's percentage ownership is determined
      by
      dividing the number of shares beneficially owned by that person by the base
      number of outstanding shares, increased to reflect the shares underlying
      options, warrants, convertible securities, or other rights included in that
      person's holdings, but not those underlying shares held by any other
      person.





Name
                and Address of Beneficial Owner
            Amount
                and Nature of Beneficial Ownership
            Percent
                of ClassWalter
                K. Weisel
              15870
                Pine Ridge Road
              Fort
                Myers, FL 33908
            7,643,833
              Direct
                Ownership
            9.44%Martin
                Nielsen
              15870
                Pine Ridge Road
              Fort
                Myers, FL 33908
            3,626,560
              Direct
                Ownership
            4.48%Gary
                McNear
              15870
                Pine Ridge Road
              Fort
                Myers, FL 33908
            1,799,979
              Direct
                Ownership
            2.22%Craig
                Conklin
              15870
                Pine Ridge Road
              Fort
                Myers, FL 33908
            2,225,752
              Direct
                Ownership
            2.75%Eugene
                V. Gartlan
              15870
                Pine Ridge Road
              Fort
                Myers, FL 33908
            5,216,114
              Direct
                Ownership
            6.44%Jerry
                Horne
              15870
                Pine Ridge Road
              Fort
                Myers, FL 33908
            7,432,922
              Direct
                Ownership
            9.18%Richard
                K & Johanna Wynns
              15870
                Pine Ridge Road
              Fort
                Myers, FL 33908
            7,114,552
              Direct
                Ownership
            8.79%Directors
                and Officers as a Group
            27,626,790
            34.13%





**ITEM
      12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





On
      July
      22, 2005 the Company borrowed $30,000 from a beneficial shareholder and
      director, Rick Wynns, and entered into a short term note for that amount, the
      terms of which are: interest at the annual rate of 5%, due date in six months,
      and principal and accrued interest are convertible into common stock of the
      Company at $0.15 per share. The due date of the note has been extended to
      December 31, 2007. To date there have been no conversions.




27


During
      September through December 2005, the Company also entered into short-term debt
      obligations other than in the ordinary course of business. All of the short-term
      debt bears interest at the rate of 10% per annum. The following table sets
      forth
      the names of the lenders, the amount of the loans, the dates of the loans and
      the due date of the loans:








Lender
            Amount
                of Loan
            Date
                of Loan
            Due
                DateEugene
                Gartlan
            $40,000
            September
                19, 2005
            October
                19, 2005Jerry
                Horne
            $50,000
            September
                22, 2005
            October
                22, 2005Eugene
                Gartlan
            $5,000
            October
                5, 2005
            January
                5, 2006Rick
                Wynns
            $30,000
            October
                3, 2005
            November
                3, 2005Rick
                Wynns
            $30,000
            October
                14, 2005
            February
                14, 2006Gary
                McNear
            $1,000
            November
                22, 2005
            February
                22, 2006Jerry
                Horne
            $50,000
            November
                28, 2005
            December
                28, 2005





All
      of
      the lenders are shareholders of the Company. Mr. Gartlan, Mr. McNear, and Mr.
      Wynns are Directors of the Company. During the year ended December 31, 2006,
      Mr.
      Gartlan and Mr. Marks were paid in full and Mr. Wynns was paid back a total
      of
      $20,000 of principal. All lenders have agreed to repayment terms that extend
      the
      due date to December 31, 2007.





**ITEM
      13. EXHIBITS**





2.1
            Exchange
                Agreement (1)2.2
            Agreement
                and Plan of Merger dated as of April 29, 2003 between the Company
                and
                Sanjay Haryama (4)2.3
            Certificate
                of Merger between The Company and Sanjay Haryama as filed with the
                Delaware Secretary of State on April 29, 2003. (4)2.4
            Agreement
                and Plan of Merger among the Company, RWT Acquisition, Inc and Robotic
                Workspace Technologies, Inc. dated July 21, 2004. (5)2.5
            Agreement
                between the Company and Encompass Group Affiliates, Inc. dated June
                23,
                2004. (5)2.6
            Agreement
                between the Company and Aegis Finance, Inc. dated August 18, 20043.1
            Articles
                of Incorporation (2)3.2
            Bylaws
                (2)3.3
            Certificate
                of Amendment to Articles of Incorporation (3)3.4
            Certificate
                of Amendment to Articles of Incorporation (6)4.1
            Certificate
                of Designation of Series A Preferred Stock (5)4.2
            Certificate
                of Designation of Series B Preferred Stock (9)10.1
            Advisory
                Agreement between The Company and Altos Bancorp Inc. dated April
                22, 2003
                (4)10.2
            Stock
                Option and Irrevocable Proxy Agreement among Altos Bancorp, Inc.,
                the Gary
                F. McNear Trust, the Susan M. McNear Trust, the Craig W. Conklin
                Trust and
                the Margaret L. Conklin Trust (4)10.3
            Convertible
                Debenture Purchase Agreement dated as of April 21, 2003 between Sanjay
                Haryama and HEM Mutual Assurance LLC.
                (4)




28




10.4
            Convertible
                Debenture Purchase Agreement dated as of April 28, 2003 between The
                Company and HEM Mutual Assurance Fund Limited. (4)10.5
            Option
                Purchase Agreement between the Company and SunTrust Bank
                (4)10.6
            License
                Agreement between the Company and Encompass Group Affiliates, Inc.
                dated
                June 23, 2004 for customer list (5)10.7
            License
                Agreement between the Company and Encompass Group Affiliates, Inc.
                dated
                June 23, 2004 for website (5)10.8
            Assumption
                Agreement between the Company and Encompass Group Affiliates, Inc.
                dated
                June 23, 2004 (5)10.9
            Noncompetition
                and Nondisclosure Agreement between the Company and Encompass Group
                Affiliates, Inc. dated June 23, 2004 (5)10.10
            Employment
                Agreement of Sheri Aws dated February 24, 2004 (7)10.11
            Renewal
                Promissory Note payable to Fifth Third Bank, Florida for $225,000
                effective July 22, 2003 (8)10.12
            Security
                Agreement in favor of Fifth Third Bank, Florida effective July 22,
                2003
                (8)10.13
            Consulting
                Agreements with Stratex Solutions, LLC (9)10.14
            Business
                Development Agreement with B. Smith Holdings, Inc (9)10.15
            Employment
                Agreement with Walter K. Weisel dated July 19, 2000 (9)10.16
            Standby
                Equity Distribution Agreement with Cornell Capital Partners, LP dated
                June
                14, 2005 (10)10.17
            Registration
                Rights Agreement with Cornell Capital Partners, LP dated June 14,
                2005
                (10)10.18
            Escrow
                Agreement with Cornell Capital Partners, LP and David Gonzalez, Esq.
                dated
                June 14, 2005 (10)10.19
            Promissory
                Note for $300,000 issued to Cornell Capital Partners, LP dated June
                14,
                2005 (10)10.20
            Placement
                Agent Agreement with Monitor Capital Inc. dated June 14, 2005
                (10)10.21
            Securities
                Purchase Agreement with Cornell Capital Partners, LP dated October
                7, 2005
                (11)10.22
            Registration
                Rights with Cornell Capital Partners, LP dated October 7, 2005
                (11)10.23
            Convertible
                Debenture issued to Cornell Capital Partners, LP dated October 7,
                2005
                (11)10.24
            Security
                Agreement with Cornell Capital Partners, LP dated October 7, 2005
                (11)10.25
            Escrow
                Agreement with David Gonzalez and Cornell Capital Partners, LP dated
                October 7, 2005 (11)10.26
            Employment
                Agreement dated June 30, 2005 between Eugene Gartlan and Innova Holdings,
                Inc. (12)10.27
            Termination
                of Consulting Agreement dated June 30, 2005 between Stratex Solutions,
                LLC
                and Innova Holdings, Inc. (12)10.28
            Stock
                Option Plan adopted on April 12, 2005 and amended on April 12,
                200614.1
            Code
                of Ethics (9)




29




31.1
            Rule
                13(a) -14(a)/15d-14(a) Certification of Principal Executive
                Officer*31.2
            Rule
                13(a) -14(a)/15d-14(a) Certification of Principal Financial
                Officer*32.1
            Section
                1350 Certification of Chief Executive Officer *32.2
            Section
                1350 Certification of Chief Financial Officer *(1)
            Incorporated
                by reference to the Form 8-K filed on February 4, 2003(2)
            Incorporated
                by reference to the Form SB-2 filed on August 7, 2001(3)
            Incorporated
                by reference to the Form 10-KSB filed on April 24, 2003(4)
            Incorporated
                by reference to the Form 8-K filed on May 13, 2003(5)
            Incorporated
                by reference to the Form 8-K filed on August 8, 2004(6)
            Incorporated
                by reference to the Form 14C filed on June 30, 2004(7)
            Incorporated
                by reference to the Form 8-K filed on September 28,
                2004(8)
            Incorporated
                by reference to the Form 8-K filed on January 11, 2005(9)
            Incorporated
                by reference to the Form 10-KSB filed on April 19, 200510)
            Incorporated
                by reference to the Form 8-K filed on June 16, 2005(11)
            Incorporated
                by reference to the Form 8-K filed on October 19, 2006(12)
            Incorporated
                by reference to the Form 8-K filed on July 6, 2005(13)
            Incorporated
                by reference to the Form 8-K filed on January 27,
                2006





*Filed
      with this report





**ITEM
      14 PRINCIPAL ACCOUNTANT FEES AND SERVICES**





(1)
      Audit
      Fees





The
      aggregate fees billed for professional services rendered by LBB & Associates
      Ltd., LLP for the audit of the Registrant's annual financial statements and
      review of the financial statements included in the Registrant's Forms 10-QSB
      or
      services that are normally provided by the accountant in connection with
      statutory and regulatory filings or engagements for fiscal years 2006 and 2005,
      were $84,395 and $37,435, respectively.





(2)
      Audit
      Related Fees





The
      aggregate fees billed for professional services rendered by LBB & Associates
      Ltd., LLP for audit related fees for fiscal years 2006 and 2005 were $0 and
      $0,
      respectively.





(3)
      Tax
      Fees





The
      aggregate fees billed for professional services rendered by LBB & Associates
      Ltd., LLP for the preparation of the Registrant's tax returns, including tax
      planning for fiscal years 2006 and 2005 were $0 and $0,
      respectively.




30


(4)
      All
      Other Fees





No
      other
      fees were paid to LBB & Associates Ltd., LLP for fiscal years 2006 and
      2005.





(5)
      Audit
      Committee Policies and Procedures





The
      Registrant does have an audit committee. The Board of Directors of the
      Registrant approved all of the services rendered to the Registrant by LBB &
Associates Ltd., LLP for fiscal years 2006 and 2005.





(6)
      Audit
      Work Attributed to Persons Other than LBB & Associates Ltd., LLP and Malone
& Bailey, PLLC Full-time, Permanent Employees.





Not
      applicable.




31


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


Innova
      Robotics & Automation, Inc. and Subsidiaries


Ft
      Myers,
      Florida





We
      have
      audited the accompanying consolidated balance sheet of Innova Robotics &
Automation, Inc. and Subsidiaries (the “Company”) as of December 31, 2006 and
      the related consolidated statements of operations, stockholders' deficit, and
      cash flows for each of the two years then ended. These financial statements
      are
      the responsibility of Innova's management. Our responsibility is to express
      an
      opinion on these financial statements based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Innova Robotics
      & Automation, Inc. and Subsidiaries as of December 31, 2006 and the
      consolidated results of its operations and its cash flows for each of the two
      years then ended, in conformity with accounting principles generally accepted
      in
      the United States of America..





As
      discussed in Note 2 to the consolidated financial statements, the Company's
      recurring losses from operations, and its need for additional financing in
      order
      to fund its projected loss in 2007 raise substantial doubt about its ability
      to
      continue as a going concern. The 2006 consolidated financial statements do
      not
      include any adjustments that might result from the outcome of this
      uncertainty.





LBB
&
      Associates Ltd., LLP


Houston,
      Texas





April
      16,
      2007





F-1




**INNOVA
      ROBOTICS AND AUTOMATION, INC.**


**(F/K/A
      INNOVA HOLDINGS, INC.)**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2006**




**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            584,349Accounts
                receivable, net
            
            
            105,275Inventory
            
            
            46,674Total
                current assets
            
            
            736,298Property
                and equipment, net
            
            
            155,924Intangible
                assets, net
            
            
            605,023Deferred
                finance costs, net
            
            
            332,671Other
                assets
            
            
            6,690Total
                assets
            
            $
            1,836,606**LIABILITIES
                AND STOCKHOLDERS’ DEFICIT**Current
                liabilities:Accounts
                payable
            
            $
            1,007,360Accrued
                expenses
            
            
            565,797Accrued
                expenses, related parties
            
            
            202,309Notes
                payable
            
            
            357,750Notes
                payable, related parties
            
            
            306,000Dividend
                payable
            
            
            29,117Derivative
                liability
            
            
            2,698,954Total
                current liabilities
            
            
            5,167,287Long-term
                obligations:Convertible
                debt, net of discount
            
            
            119,678Long-term
                debt
            
            
            989,100CommitmentsStockholders’
                deficit:Preferred
                stock, $.001 par value, 10,000,000 sharesauthorized,
                284,334 shares issued and outstanding
            
            
            284Common
                stock, $.001 par value, 900,000,000 sharesauthorized,
                76,467,303 shares issued and outstanding
            
            
            76,467Additional
                paid-in capital
            
            
            10,598,993Accumulated
                deficit
            
            
            (15,115,203
            )Total
                stockholders' deficit
            
            
            (4,439,459
            )Total
                liabilities and stockholders’ deficit
            
            $
            1,836,606








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




F-2


**INNOVA
      ROBOTICS AND AUTOMATION, INC.**


**(F/K/A
      INNOVA HOLDINGS, INC.)**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the Years Ended December 31, 2006 and 2005**





**2006**
            
            **2005**Revenues:Services
            
            $
            1,046,407
            
            $
            -Products
            
            
            293,815
            
            
            -Total
                revenues
            
            
            1,340,222
            
            
            -Cost
                of revenues:Services
            
            
            818,573
            
            
            -Products
            
            
            233,135
            
            
            -Total
                cost of revenues
            
            
            1,051,708
            
            
            -Gross
                profit
            
            
            288,514
            
            
            -Operating
                expenses:Selling,
                general and administration
            
            
            3,422,657
            
            
            857,515Outside
                services
            
            
            695,573
            
            
            411,707Legal
                fees
            
            
            301,695
            
            
            83,212Professional
                fees
            
            
            203,549
            
            
            392,885Depreciation
                and amortization
            
            
            167,486
            
            
            12,954Total
                operating expenses
            
            
            4,790,960
            
            
            1,758,273Loss
                from operations
            
            
            (4,502,446
            )
            
            (1,758,273
            )Other
                income (expense):Interest
                expense
            
            
            (510,090
            )
            
            (133,544
            )Derivative
                income (loss)
            
            
            (335,041
            )
            
            10,692Gain
                (loss) on extinguishment of debt
            
            
            (287,546
            )
            
            -Other
                income
            
            
            28,025
            
            
            -Net
                Loss
            
            $
            (5,607,098
            )
            $
            (1,881,125
            )Loss
                applicable to common stockholdersNet
                loss
            
            $
            (5,607,098
            )
            $
            (1,881,125
            )Beneficial
                conversion features andaccretions
                of preferred stock
            
            
            -
            
            
            (149,758
            )Dividends
                declared on preferred stock
            
            
            (9,129
            )
            
            (25,293
            )Net
                loss applicable to common stockholders
            
            $
            (5,616,227
            )
            $
            (2,056,176
            )Net
                loss per shareBasic
                and diluted
            
            $
            (0.09
            )
            $
            (0.05
            )Weighted
                average shares outstandingBasic
                and diluted
            
            
            65,242,574
            
            
            43,011,971





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




F-3




**INNOVA
      ROBOTICS AND AUTOMATION, INC.**


**(F/K/A
      INNOVA HOLDINGS, INC.)**


**STATEMENT
      OF STOCKHOLDERS’ DEFICIT**


**For
      the Year Ended December 31, 2005**




Common
                Stock
            
            
            Preferred
                Stock
            
            
            Additional
                Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalances,
                January 1, 2005
            
            
            37,129,690
            
            $
            37,130
            
            
            376,834
            
            $
            377
            
            $
            4,021,588
            
            $
            (7,440,780
            )
            $
            (3,381,685
            )Issuance
                of Series B Preferred stock
            
            
            -
            
            
            -
            
            
            148,166
            
            
            148
            
            
            148,018
            
            
            -
            
            
            148,166Common
                stock issued for services rendered
            
            
            5,450,830
            
            
            5,451
            
            
            -
            
            
            -
            
            
            699,582
            
            
            -
            
            
            705,033Sale
                of common stock
            
            
            2,593,333
            
            
            2,593
            
            
            -
            
            
            -
            
            
            465,407
            
            
            -
            
            
            468,000Conversion
                of Series A Preferred stock
            
            
            873,551
            
            
            874
            
            
            
            
            
            -
            
            
            43,926
            
            
            (13,832
            )
            
            30,968Conversion
                of Series B Preferred Stock
            
            
            660,000
            
            
            660
            
            
            (33,000
            )
            
            (33
            )
            
            (627
            )
            
            -
            
            
            -Dividend
                declared on preferred stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (25,293
            )
            
            -
            
            
            (25,293
            )Amortization
                of beneficial conversion feature
              Series
                B Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            141,500
            
            
            (141,500
            )
            
            -Amortization
                of beneficial conversion feature
              convertible
                note payable
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            30,000
            
            
            -
            
            
            30,000Dividend
                related to beneficial
              conversion
                feature
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (8,258
            )
            
            (8,258
            )Amortization
                of deferred finance costs
              equity
                line of credit
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,400
            )
            
            -
            
            
            (4,400
            )Stock
                options issued for services
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            25,061
            
            
            -
            
            
            25,061Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,881,125
            )
            
            (1,881,125
            )Balances,
                December 31, 2005
            
            
            46,707,404
            
            $
            46,708
            
            
            492,000
            
            $
            492
            
            $
            5,544,762
            
            $
            (9,485,495
            )
            $
            (3,893,533
            )




**Continued.**





F-4


**INNOVA
      ROBOTICS AND AUTOMATION, INC.**


**(F/K/A
      INNOVA HOLDINGS, INC.)**


**STATEMENT
      OF STOCKHOLDERS’ DEFICIT (Continued)**


**For
      the Year Ended December 31, 2006**




Common
                Stock
            
            
            Preferred
                Stock
            
            
            Additional
                Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            Total


Balances,
                January 1, 2006
            
            
            46,707,404
            
            $
            46,708
            
            
            492,000
            
            $
            492
            
            $
            5,544,762
            
            $
            (9,485,495
            )
            $
            (3,893,533
            )Common
                stock issued in acquisition of CoroWare
            
            
            500,000
            
            
            500
            
            
            -
            
            
            -
            
            
            505,900
            
            
            
            
            
            506,400Common
                stock issued under Standby Equity
              Distribution
                Agreement
            
            
            16,173,616
            
            
            16,174
            
            
            -
            
            
            -
            
            
            2,281,415
            
            
            -
            
            
            2,297,589Common
                stock issued in connection with a
              private
                placement
            
            
            1,159,409
            
            
            1,159
            
            
            -
            
            
            -
            
            
            99,491
            
            
            -
            
            
            100,650Common
                stock issued in satisfaction of note payable
            
            
            484,850
            
            
            485
            
            
            -
            
            
            -
            
            
            72,243
            
            
            -
            
            
            72,728Common
                stock issued for services
            
            
            5,397,297
            
            
            5,397
            
            
            -
            
            
            -
            
            
            773,682
            
            
            -
            
            
            779,079Common
                stock issued for redemption
              of
                convertible debenture
            
            
            189,000
            
            
            189
            
            
            -
            
            
            -
            
            
            181,082
            
            
            -
            
            
            181,271Dividends
                declared on preferred stock - Series A
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (9,129
            )
            
            -
            
            
            (9,129
            )Conversion
                of Series A Preferred stock
            
            
            1,629,000
            
            
            1,629
            
            
            -
            
            
            -
            
            
            79,821
            
            
            (22,610
            )
            
            58,840Conversion
                of Series A Preferred dividends
            
            
            11,217
            
            
            11
            
            
            -
            
            
            -
            
            
            4,062
            
            
            -
            
            
            4,073Conversion
                of Series B Preferred stock
            
            
            4,153,320
            
            
            4,153
            
            
            (207,666
            )
            
            (208
            )
            
            (3,945
            )
            
            -
            
            
            -Conversion
                of Series B Preferred dividends
            
            
            62,190
            
            
            62
            
            
            
            
            
            
            
            
            9,772
            
            
            
            
            
            9,834Stock
                options issued for services
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            729,618
            
            
            -
            
            
            729,618Settlement
                of $55,000 convertible debenture financing
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            185,500
            
            
            -
            
            
            185,500Imputed
                interest on related party loan
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,095
            
            
            -
            
            
            6,095Fair
                value adjustment on other warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            138,624
            
            
            -
            
            
            138,624Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,607,098
            )
            
            (5,607,098
            )Balances,
                December 31, 2006
            
            
            76,467,303
            
            $
            76,467
            
            
            284,334
            
            $
            284
            
            $
            10,598,993
            
            $
            (15,115,203
            )
            $
            (4,439,459
            )





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





F-5




**INNOVA
      ROBOTICS AND AUTOMATION, INC.**


**(F/K/A
      INNOVA HOLDINGS, INC.)**


**STATEMENTS
      OF CASH FLOWS**


**For
      the Years Ended December 31, 2006 and 2005**





**2006**
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (5,607,098
            )
            $
            (1,881,125
            )Adjustments
                to reconcile net loss to cash flows used byoperating
                activities:Depreciation
                and amortization
            
            
            167,486
            
            
            12,954Stock
                based compensation
            
            
            729,618
            
            
            25,061Imputed
                interest expense
            
            
            6,095
            
            
            40,280Common
                stock issued for services
            
            
            244,976
            
            
            605,033Derivative
                (income) loss
            
            
            335,041
            
            
            (10,692
            )Amortization
                of debt discount
            
            
            187,433
            
            
            -Amortization
                of deferred finance costs
            
            
            142,687
            
            
            -Loss
                on extinguishment of debt
            
            
            287,546
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (6,729
            )
            
            -Inventory
            
            
            13,488
            
            
            (60,162
            )Other
                assets
            
            
            (860
            )
            
            -Accounts
                payable
            
            
            (8,691
            )
            
            267,710Accrued
                expenses
            
            
            (341,058
            )
            
            176,124NET
                CASH FLOWS FROM OPERATING ACTIVITIES
            
            
            (3,850,066
            )
            
            (824,817
            )CASH
                FLOWS FROM INVESTING ACTIVITIESAdditions
                to property and equipment
            
            
            (50,713
            )
            
            (121,357
            )Purchase
                of CoroWare assets, net of cash acquired
            
            
            (2,422
            )
            
            -NET
                CASH FLOWS USED BY INVESTING ACTIVITIES
            
            
            (53,135
            )
            
            (121,357
            )CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from sale of common stock
            
            
            2,398,239
            
            
            616,166Proceeds
                from convertible debt financing
            
            
            2,451,856
            
            
            -Payments
                on convertible debt
            
            
            (58,301
            )
            
            -Payments
                on notes payable
            
            
            (360,780
            )
            
            (2,500
            )Proceeds
                from notes payable
            
            
            49,750
            
            
            336,500NET
                CASH FLOWS FROM FINANCING ACTIVITIES
            
            
            4,480,764
            
            
            950,166NET
                INCREASE IN CASH
            
            
            577,563
            
            
            3,992Cash
                and cash equivalents, beginning of period
            
            
            6,786
            
            
            2,794Cash
                and cash equivalents, end of period
            
            $
            584,349
            
            $
            6,786





Continued.





F-6


**INNOVA
      ROBOTICS AND AUTOMATION, INC.**


**(F/K/A
      INNOVA HOLDINGS, INC.)**


**STATEMENTS
      OF CASH FLOWS (Continued)**


**For
      the Years Ended December 31, 2006 and 2005**





SUPPLEMENTAL
                CASH FLOW INFORMATIONInterest
                paid
            
            $
            98,405
            
            $
            19,876Income
                taxes paid
            
            $
            -
            
            $
            -NON
                CASH TRANSACTIONSConversion
                of convertible debt to stock
            
            $
            25,000
            
            $
            -Conversion
                of Series A preferred stock
            
            $
            58,840
            
            $
            -Conversion
                of Series B preferred stock dividends
            
            $
            9,834
            
            $
            -Stock
                issued in satisfaction of note payable
            
            $
            72,728
            
            $
            -Settlement
                of derivative liability resulting from repayment of debt
            
            $
            185,500
            
            $
            -Stock
                issued in satisfaction of accrued liabilities
            
            $
            534,103
            
            $
            -Stock
                issued for acquisition of CoroWare
            
            $
            506,400
            
            $
            -Stock
                issued for redemption of convertible debentures
            
            $
            181,271
            
            $
            -Conversion
                of Series A preferred dividends
            
            $
            4,073
            
            $
            -Common
                stock issued for commitment fee
            
            $
            -
            
            $
            100,000Issuance
                of convertible note for commitment fee
            
            $
            -
            
            $
            300,000





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





F-7




**INNOVA
      ROBOTICS AND AUTOMATION, INC.**


**F/K/A
      INNOVA HOLDINGS, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1 - NATURE OF THE COMPANY, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES**





***Nature
      of the company:***





Innova
      Robotics & Automation, Inc. (“Innova” or the "Company") is a robotics
      automation technology company providing hardware and software systems-based
      solutions to the military, service, personal, and industrial robotic markets
      in
      the United States of America. The Company's plan of operations is to identify,
      develop and acquire technology that is or will become a market leader and to
      create opportunities to leverage its software into value-added applications
      when
      combined with other software solutions offered by the Innova group of companies.





Innova
      has three wholly-owned subsidiaries, Robotic Workspace Technologies, Inc.
      (“RWT”) , Innova Robotics, Inc. (“IR”), and CoroWare Technologies, Inc.
      (“CoroWare”). RWT delivers its software through the sale of control systems and
      the licensing of its software to end-user companies, system integrators,
      manufacturing support providers, software development companies, and other
      parties, primarily in the industrial markets. RWT also offers complete system
      development and system integration services. The control systems include the
      Universal Robot Controller and the Universal Automation Controller. The
      Universal Automation Controller is in the final stages of development. The
      proprietary patents, including three pioneer utility patents issued by the
      USPTO, are owned by RWT and cover all applications pertaining to the interface
      of a general use computer and the mobility of robots, regardless of specific
      applications.





The
      Innova suite of software will be marketed and sold to the service and personal
      robot markets through Innova Robotics, Inc. Generally, the Innova suite of
      software solutions is referred to as Middleware, which is connectivity software
      that consists of a set of enabling services that allow multiple processes
      running on one or more machines to interact across a network. Middleware is
      essential to migrating mainframe applications to client/server applications
      and
      to providing for communication across heterogeneous platforms. This technology
      has evolved during the 1990s to provide for interoperability in support of
      the
      move to client/server architectures. In the context of Innova’s markets, it is
      this Middleware that enables industrial robots to communicate with enterprise
      systems like purchasing. In the military arena, this Middleware would enable
      an
      unmanned mobile robotic vehicle to communicate recon intelligence with the
      Logistics Command and in return receive updated operation
      instructions.




CoroWare
      is a software systems integration firm with particular expertise in the area
      of
      mobile service robotics. CoroWare is the only mobile service robotics company
      to
      join the Microsoft ® Windows Embedded Partner Program. CoroWare uses the Windows
      XP Embedded operating system to power its mobile service robots, which are
      based
      on de facto standards, off-the-shelf hardware and proven software.




***Basis
      of presentation and consolidation policy:***





The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries, RWT, IR and CoroWare (herein are referred to as
      the
“Subsidiaries”). All significant inter-company balances and transactions have
      been eliminated in the consolidated financial statements.





***Summary
      of significant accounting policies:***





***Cash
      and cash equivalents:***





Cash
      and
      cash equivalents include cash and all highly liquid financial instruments with
      original purchased maturities of three months or less.





F-8





***Accounts
      receivable:***





Our
      accounts receivable are exposed to credit risk. During the normal course of
      business, we extend unsecured credit to our customers with normal and
      traditional trade terms. Typically credit terms require payments to be made
      by
      the thirtieth day following the sale.  We regularly evaluate and monitor
      the creditworthiness of each customer.  We provide an allowance for
      doubtful accounts based on our continuing evaluation of our customers’ credit
      risk and our overall collection history. At December 31, 2006 and December
      31,
      2005, no allowance was deemed necessary.





***Inventories:***





Inventories
      consist of raw materials and are stated at the lower of cost (first-in,
      first-out basis) or market.





***Property
      and equipment:***





Property
      and equipment are stated at cost less accumulated depreciation. Major
      renovations, renewals and improvements are capitalized; minor replacements,
      maintenance and repairs are charged to current operations. Depreciation is
      computed by applying the straight-line method over the estimated useful lives
      which are generally five to ten years.





***Intangible
      assets:***





The
      Company’s intangible assets, which are recorded at cost, consist primarily of
      the unamortized cost basis of customer lists and employment contracts.
 These assets are being amortized on a straight line basis over estimated
      useful lives, which range from three to five years.





***Impairment
      of long-lived assets:***





The
      Company evaluates the carrying value and recoverability of its long-lived assets
      when circumstances warrant such evaluation by applying the provisions of
      Financial Accounting Standard No. 144, Accounting
      for the Impairment or Disposal of Long-Lived Assets (“FAS
      144”). FAS 144 requires that long-lived assets be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable through the estimated undiscounted cash flows
      expected to result from the use and eventual disposition of the assets. Whenever
      any such impairment exists, an impairment loss will be recognized for the amount
      by which the carrying value exceeds the fair value.





***Deferred
      finance costs:***





Deferred
      finance costs are associated with the convertible debenture financings (see
      Note
      9) and are being amortized on a straight line basis over the term of the
      underlying debt instrument.





***Income
      taxes:***





Income
      taxes are computed using the asset and liability method. Under the asset and
      liability method, deferred income tax assets and liabilities are determined
      based on the differences between the financial reporting and tax bases of assets
      and liabilities and are measured using the currently enacted tax rates and
      laws.
      A valuation allowance is provided for the amount of deferred tax assets that,
      based on available evidence, are not expected to be realized. Additionally,
      taxes are calculated and expensed in accordance with the applicable tax
      code.





***Financial
      instruments:***





Financial
      instruments, as defined in Financial Accounting Standard No. 107 Disclosures
      about Fair Value of Financial Instruments (FAS 107), consist of cash, accounts
      receivable, accounts payable, accrued expenses, notes payable, derivative
      financial instruments, and convertible debt.





We
      carry
      cash, accounts receivable, accounts payable, and accrued liabilities at
      historical costs; their respective estimated fair values approximate carrying
      values due to their current nature. We also carry notes payable and convertible
      debt; however, fair values of debt instruments are estimated for disclosure
      purposes (below) based upon the present value of the estimated cash flows at
      market interest rates applicable to similar instruments.




F-9


As
      of
      December 31, 2006, estimated fair values and respective carrying values of
      our
      notes payable and long-term debt are as follows:





Instrument
            
            Note
            
            Fair
                Value
            
            Carrying
                ValueNote
                payable - Merger
            
            
            7(a)
            
            $
            230,000
            
            $
            230,000Note
                payable - Principal shareholder
            
            
            7(b)
            
            $
            165,000
            
            $
            165,000Shareholder
                notes payable
            
            
            7(c)
            
            $
            141,000
            
            $
            141,000Note
                payable - Viejo Coro
            
            
            7(d)
            
            $
            50,000
            
            $
            50,000Other
                notes payable
            
            
            7(e)
            
            $
            77,500
            
            $
            77,500Long-term
                debt
            
            
            8
            
            $
            989,100
            
            $
            989,100





Derivative
      financial instruments, as defined in Financial Accounting Standard No. 133,
      Accounting for Derivative Financial Instruments and Hedging Activities (FAS
      133), consist of financial instruments or other contracts that contain a
      notional amount and one or more underlying (e.g. interest rate, security price
      or other variable), require no initial net investment and permit net settlement.
      The caption Derivative Liability consists of (i) the fair values associated
      with
      derivative features embedded in the Cornell Capital Partners, L.P. (“Cornell”)
      financings and (ii) the fair values of the detachable warrants that were issued
      in connection with those financing arrangements.





We
      generally do not use derivative financial instruments to hedge exposures to
      cash-flow, market or foreign-currency risks. However, we have entered into
      certain other financial instruments and contracts, such as debt financing
      arrangements and freestanding warrants with features that are either (i) not
      afforded equity classification, (ii) embody risks not clearly and closely
      related to host contracts, or (iii) may be net-cash settled by the counterparty.
      As required by FAS 133, these instruments are required to be carried as
      derivative liabilities, at fair value, in our financial statements.





The
      following table illustrates the components of derivative liabilities at December
      31, 2006:





Note
            
            Compound
                derivative
            
            Warrant
                liability
            
            Other
                warrants
            
            Total$    
                55,000 financing
            
            
            9(a)
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            --$2,825,000
                financing
            
            
            9(b)
            
            $
            1,718,934
            
            $
            980,020
            
            $
            -
            
            $
            2,698,954





We
      estimate fair values of derivative financial instruments using various
      techniques (and combinations thereof) that are considered to be consistent
      with
      the objective of measuring fair values. In selecting the appropriate technique,
      we consider, among other factors, the nature of the instrument, the market
      risks
      that it embodies and the expected means of settlement. For less complex
      derivative instruments, such as free-standing warrants, we generally use the
      Black-Scholes-Merton option valuation technique because it embodies all of
      the
      requisite assumptions (including trading volatility, estimated terms and risk
      free rates) necessary to fair value these instruments. For complex derivative
      instruments, such as embedded conversion options, we generally use the Flexible
      Monte Carlo valuation technique because it embodies all of the requisite
      assumptions (including credit risk, interest-rate risk and exercise/conversion
      behaviors) that are necessary to fair value these more complex instruments.
      Estimating fair values of derivative financial instruments requires the
      development of significant and subjective estimates that may, and are likely
      to,
      change over the duration of the instrument with related changes in internal
      and
      external market factors. In addition, option-based techniques are highly
      volatile and sensitive to changes in the trading market price of our common
      stock, which has a high-historical volatility. Since derivative financial
      instruments are initially and subsequently carried at fair values, our income
      will reflect the volatility in these estimate and assumption
      changes.





The
      following table summarizes the number of common shares indexed to the derivative
      financial instruments as of December 31, 2006:





Financing
                or other contractual arrangement:
            
            Note
            
            Conversion
              Features
            
            Warrants
            
            Total$2,825,000
                Convertible Note Financing
            
            
            9(b)
            
            
            16,506,711
            
            
            9,300,000
            
            
            25,806,711





F-10





***Share-based
      payments:***





Effective
      January 1, 2006, we adopted Financial Accounting Standards No. 123(R),
“Share-Based Payments” (“Statement 123(R)”). Under the fair value method, we
      recognize compensation expense for all share-based payments granted after
      January 1, 2006, as well as all share-based payments granted prior to, but
      not
      yet vested, as of January 1, 2006, in accordance with Statement 123(R). This
      standard further requires that we recognize share-based compensation expense,
      net of an estimated forfeiture rate, over the requisite service period of the
      award. Prior to the adoption of Statement 123(R), the Company accounted for
      share-based payments to employees under the intrinsic-value method prescribed
      in
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” (“APB 25”), and the disclosure provisions of Financial Accounting
      Standards No. 123. Under
      APB
      25, when the exercise price of options granted to employees equaled the market
      price of the common stock on the date of grant, no compensation expense was
      recorded.





SFAS
      123R
      requires share-based payments to employees to be measured at fair value.
      However, the valuation of employee stock options is an inherently subjective
      process, since market values are generally not available for long-term,
      non-transferable employee stock options. Accordingly, an option pricing model
      is
      utilized to derive an estimated fair value. The Company uses the
      Black-Scholes-Merton pricing model in order to calculate the estimated fair
      value for its stock options.





For
      further information regarding the adoption of SFAS No. 123(R), see Note 11
      to
      the consolidated financial statements.





***Revenue
      recognition:***





The
      Company recognizes revenue when persuasive evidence of an arrangement exists,
      delivery has occurred, the sales price is fixed or determinable and
      collectibility is probable.





Product
      sales are recognized by the Company generally at the time product is shipped.
      Shipping and handling costs are included in cost of goods sold.





Service
      revenues are recognized as services are provided, in accordance with customer
      agreements.





***Research
      and development:***





Research
      and development costs relate to the development of new products, including
      significant improvements and refinements to existing products, and are expensed
      as incurred. Research and development expenses for the years ended December
      31,
      2006 and 2005 were $340,930 and $43,000, respectively.





***Advertising
      expense:***





The
      Company expenses advertising costs as they are incurred. Advertising expense
      for
      the years ending December 31, 2006 and 2005 were $201,507 and $122,521,
      respectively.





***Concentration
      of Credit Risk:***





Financial
      instruments which potentially expose the Company to concentrations of credit
      risk are cash and cash equivalents and trade accounts receivable.





The
      Company maintains its cash and cash equivalents in deposit accounts with high
      quality, credit-worthy financial institutions. Funds with these institutions
      exceeded the federally-insured limits by approximately $444,424 at December
      31,
      2006.





At
      December 31, 2006, 67% of the Company's revenues were from one customer. That
      customer also comprised 22% of the Company’s accounts receivable balance at
      December 31, 2006.




F-11


***Basic
      loss per share:***





The
      Company is required to provide basic and dilutive earnings (loss) per common
      share information. The basic net loss per common share is computed by dividing
      the net loss applicable to common stockholders by the weighted average number
      of
      common shares outstanding.





Diluted
      net loss per common share is computed by dividing the net loss applicable to
      common stockholders, adjusted on an "as if converted" basis, by the weighted
      average number of common shares outstanding plus potential dilutive securities.
      For the years ended December 2006 and 2005, potential dilutive securities had
      an
      anti-dilutive effect and were not included in the calculation of diluted net
      loss per common share.





***Dividend
      Policy***





The
      Company has never declared or paid any cash dividends on its common stock.
      The
      Company anticipates that any earnings will be retained for development and
      expansion of its business and does not anticipate paying any cash dividends
      in
      the foreseeable future. Additionally, as of December 31, 2006 the Company has
      issued and has outstanding shares of Series B Preferred Stock which earns a
      5%
      dividend, payable in either cash or common stock of the Company. Such dividends
      on these Preferred Stocks will be paid before any dividends on common stock.
      The
      board of directors has sole discretion to pay cash dividends based on the
      Company's financial condition, results of operations, capital requirements,
      contractual obligations and other relevant factors.





***Recent
      accounting pronouncements:***





In
      July
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48 Accounting for
      Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. 
FIN 48 prescribes detailed guidance for the financial statement recognition,
      measurement, and disclosure of uncertain tax positions recognized in an
      enterprise’s financial statements in accordance with SFAS No. 109, Accounting
      for Income Taxes.  Tax positions must meet a more-likely-than-not
      recognition threshold at the effective date to be recognized upon the adoption
      of FIN 48 and in subsequent periods.  FIN 48 will be effective for fiscal
      years beginning after December 15, 2006, and the provisions of FIN 48 will
      be
      applied to all positions upon the adoption of the Interpretation.  The
      cumulative effect of this applying the provisions of this Interpretation will
      be
      reported as an adjustment to the opening balance of retained earnings for that
      fiscal year.  Management is currently evaluating the impact of FIN 48 on
      the financial statements but does not believe that its adoption will have a
      material effect on the Companies’ financial position, results of operations, or
      cash flows.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108,
      Considering the Effects of Prior Year Misstatements when quantifying
      Misstatements in Current Year Financial Statements (“SAB 108”).
      SAB 108 requires companies to evaluate the materiality of identified
      unadjusted errors on each financial statement and related financial statement
      disclosure using both the rollover approach and the iron curtain approach,
      as
      those terms are defined in SAB 108. The rollover approach quantifies
      misstatements based on the amount of the error in the current year financial
      statement, whereas the iron curtain approach quantifies misstatements based
      on
      the effects of correcting the misstatement existing in the balance sheet at
      the
      end of the current year, irrespective of the misstatement’s year(s) of origin.
      Financial statements would require adjustment when either approach results
      in
      quantifying a misstatement that is material. Correcting prior year financial
      statements for immaterial errors would not require previously filed reports
      to
      be amended. If a Company determines that an adjustment to prior year financial
      statements is required upon adoption of SAB 108 and does not elect to
      restate its previous financial statements, then it must recognize the cumulative
      effect of applying SAB 108 in fiscal 2006 beginning balances of the
      affected assets and liabilities with a corresponding adjustment to the fiscal
      2006 opening balance in retained earnings. SAB 108 is effective for interim
      periods of the first fiscal year ending after November 15, 2006.  The
      Company does not expect the adoption of this interpretation to have an impact
      on
      its financial position or results of operations.





F-12





On
      October 10, 2006, the FASB issued FSP No. FAS 123(R)-5, titled AMENDING GUIDANCE
      FOR ACCOUNTING FOR MODIFICATIONS OF INSTRUMENTS IN CONNECTION WITH EQUITY
      RESTRUCTURING ("FSP FAS 123(R)-5"). FSP FAS 123(R)-5 addresses whether a
      modification of an instrument in connection with an equity restructuring should
      be considered a modification for purposes of applying FSP FAS 123(R)-1. It
      stipulates that for instruments that were originally issued as employee
      compensation and then modified solely to reflect an equity restructuring that
      occurs when the holders are no longer employees, that there is no change in
      the
      recognition or measurement of those instruments if (a) there is no increase
      in
      fair value of the award and (b) all holders of the same class of instruments
      are
      treated in the same manner.  The guidance in FSP FAS 123(R)-5 is effective
      in the first reporting period beginning after October 10, 2006. Ea rly
      application is permitted in periods for which financial statements have not
      been
      issued. Management is currently evaluating the impact of FSP FAS 123(R)-5 on the
      financial statements but does not believe that its adoption will have a material
      effect on the Companies’ financial position, results of operations, or cash
      flows.





FSP
      FAS
      123(R)-6 was issued to make several technical corrections to SFAS 123(R). These
      include exemption for non-public entities from disclosing the aggregate
      intrinsic value of outstanding fully vested share options, revision to the
      computation of the minimum compensation cost that must be recognized, indication
      that at the date the illustrative awards were no longer probable of vesting,
      any
      previously recognized compensation cost should have been reversed, and changes
      to the definition of short-term inducement to exclude an offer to settle an
      award. The guidance in FSP FAS 123(R)-6 is effective in the first reporting
      period beginning after October 20, 2006. Early application is permitted in
      periods for which financial statements have not yet been issued. Management
      is
      currently evaluating the impact of FSP FAS 123(R)-6 on the financial statements
      but does not believe that its adoption will have a material effect on the
      Companies’ financial position, results of operations, or cash
      flows.





In
      February 2006, the FASB issued SFAS No. 155, “” (“SFAS No. 155”)
      which amends SFAS No. 133, “Accounting for Derivative Instruments and
      Hedging Activities” (“SFAS No. 133”) and SFAS No. 140, “Accounting for
      Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”
(“SFAS No. 140”). SFAS No. 155 simplifies the accounting for certain
      derivatives embedded in other financial instruments by allowing them to be
      accounted for as a whole if the holder elects to account for the whole
      instrument on a fair value basis. SFAS No. 155 also clarifies and amends
      certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS
      No. 155 is effective for all financial instruments acquired, issued or
      subject to a re-measurement event occurring in fiscal years beginning after
      September 15, 2006. Earlier adoption is permitted, provided the company has
      not yet issued financial statements, including for interim periods, for that
      fiscal year. SFAS No. 155 will be effective for the Company in the first
      quarter of fiscal 2007 and is not expected to have an impact on the Company’s
      financial statements.





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, Fair Value Measurements.  SFAS No. 157 defines fair value,
      establishes a framework for measuring fair value in GAAP, and expands
      disclosures about fair value measurements.  This statement is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007.  Management is currently evaluating the impact SFAS No. 157 will have
      on the Company’s financial position, results of operations, and cash
      flows.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - including an amendment of FASB
      statement No. 115.” This Statement permits all entities to choose, at specified
      election dates, to measure eligible items at fair value (the “fair value
      option”). A business entity shall report unrealized gains and losses on items
      for which the fair value option has been elected in earnings (or another
      performance indicator if the business entity does not report earnings) at each
      subsequent reporting date. Upfront costs and fees related to items for which
      the
      fair value option is elected shall be recognized in earnings as incurred and
      not
      deferred. If an entity elects the fair value option for a held-to-maturity
      or
      available-for-sale security in conjunction with the adoption of this Statement,
      that security shall be reported as a trading security under Statement 115,
      but
      the accounting for a transfer to the trading category under paragraph 15(b)
      of
      Statement 115 does not apply. Electing the fair value option for an existing
      held-to-maturity security will not call into question the intent of an entity
      to
      hold other debt securities to maturity in the future. This statement is
      effective as of the first fiscal year that begins after November 15, 2007. 
The Company is currently analyzing the effects SFAS 159 will have on the
      Company's financial condition and results of operations.





F-13





***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 reporting period. Among the more significant estimates included
      in
      our financial statements are the following:





·
            estimating
                future bad debts on accounts receivable that are carried at net realizable
                values;·
            estimating
                the fair value of our financial instruments that are required to
                be
                carried at fair value; and·
            estimating
                the recoverability of our long-lived
                assets.




We
      use
      all available information and appropriate techniques to develop our estimates.
      However, actual results could differ from our estimates.





**NOTE
      2 - FINANCIAL CONDITION AND GOING CONCERN**





The
      Company has incurred losses for the years ended December 31, 2006 and 2005
      of
      $5,607,098 and $1,881,125, respectively. Because of these losses, the Company
      will require additional working capital to develop its business
      operations.





The
      Company intends to raise additional working capital through the use of private
      placements, public offerings and/or bank financing. During 2006, the Company
      raised approximately $2,398,239 from the sale of common stock, $2,451,856
      from the sale of convertible notes, and $49,750 from other debt.





There
      are
      no assurances that the Company will be able to either (1) achieve a level of
      revenues adequate to generate sufficient cash flow from operations; or (2)
      obtain additional financing through either private placements, public offerings
      and/or bank financing necessary to support the Company's working capital
      requirements. To the extent that funds generated from operations, any private
      placements, public offerings and/or bank financing are insufficient, the Company
      will have to raise additional working capital. No assurance can be given that
      additional financing will be available, or if available, will be on terms
      acceptable to the Company





These
      conditions raise substantial doubt about the Company's ability to continue
      as a
      going concern. The financial statements do not include any adjustments relating
      to the recoverability and classification of asset carrying amounts or the amount
      and classification of liabilities that might be necessary should the Company
      be
      unable to continue as a going concern.





**NOTE
      3 - PURCHASE OF BUSINESS**





On
      May
      16, 2006, the Company completed the purchase of all of the assets of CoroWare,
      Inc. pursuant to the Asset Purchase Agreement the Company entered into with
      CoroWare Technologies, Inc., a wholly owned subsidiary of the Company, dated
      as
      of May 12, 2006. We made this acquisition in order to engage CoroWare’s
      principal employees and to benefit from CoroWare’s strategic business
      relationships. Under the terms of the Agreement, the Company purchased, and
      CoroWare sold, all of its assets including, without limitation, all hardware,
      software, employee relations, customer contacts in the military and homeland
      security markets, contacts with Microsoft, Inc. and all other customers, and
      all
      other tangible and intangible assets including all developed software, and
      the
      Company further agreed to assume certain liabilities; however, the amount of
      such assumed liabilities will not exceed $100,000 more than the amount of
      certain accounts receivable and cash assets purchased. Additionally, the Company
      agreed to assume certain bank credit card debt in an amount up to
      $98,168.





The
      Company paid a purchase price for the assets equal to: (i) $450,000 in cash,
      of
      which $100,000 is guaranteed and $350,000 is contingent based upon the financial
      results of CoroWare for the one year following May 16, 2006; (ii) $1,200,000
      million in the restricted shares of our common stock (3,000,000 shares), of
      which 500,000 shares were delivered to CoroWare at the closing and the remaining
      2,500,000 shares are contingent based upon the financial results of CoroWare
      for
      the three years following May 16, 2006, and (iii) options to purchase 1,200,000
      shares of our common stock, exercisable at a price equal to $0.018 per share,
      allocated to employees of CoroWare. Of the 2,500,000 shares of contingent common
      stock, 1,250,000 shares are being held in escrow to be released at such time
      as
      a certain legal proceeding brought by Manor Systems, LLC against CoroWare and
      Lloyd Spencer, the President of CoroWare, is settled; see discussion below.
      The
amount
      of
      contingent cash paid to CoroWare will be reduced by the amount of assumed
      liabilities, and the amount of contingent shares paid to CoroWare will be
      reduced by the amount of all bank credit card debt assumed.




F-14




On
      March
      1, 2006, Manor Systems, LLC (Manor) filed a lawsuit against Lloyd Spencer,
      President of CoroWare, Inc and an ex-employee of Manor, and CoroWare, Inc.
      for
      violation of Mr. Spencer’s contractual duties to Manor pertaining to an
      agreement Mr. Spencer signed with Manor wherein he agreed to certain restrictive
      actions including prohibiting Mr. Spencer during his employment with Manor
      and
      for two years thereafter from soliciting or interfering with any Manor employee,
      contacting or soliciting any Manor customers and retaining and misappropriating
      any confidential information. On June 19, 2006, this lawsuit was successfully
      settled and the parties entered into a Settlement Agreement wherein Mr. Spencer
      paid Manor a total of $110,000.





The
      purchase price for the CoroWare assets amounted to $606,400 and, as discussed
      below, additional purchase price is contingent upon the financial performance
      of
      the business acquired. The purchase of CoroWare was accounted for as a purchase
      business combination, where the fair value of the purchase consideration was
      allocated to the assets acquired and liabilities assumed based upon fair values.
      In connection with the allocation, the fair values of assets acquired and
      liabilities assumed exceeded the purchase price by $273,090. As a result,
      long-lived tangible and intangible assets acquired were reduced for this amount,
      which was allocated on a relative fair value basis. The operating results of
      the
      acquired business will be included in results of the Company following its
      acquisition on May 16, 2006.





The
      following table summarizes the components of the purchase price
      allocation:





Purchase
              Allocation
            
            Fair
              ValuesCurrent
                assets
            
            $
            126,125
            
            $
            126,125Long-lived
                assets:Acquired
                customer lists
            
            
            605,242
            
            
            822,000Acquired
                employment contracts
            
            
            132,977
            
            
            180,600Fixed
                assets
            
            
            23,409
            
            
            33,026Accounts
                payable and accrued liabilities
            
            
            (281,353
            )
            
            (282,261
            )$
            606,400
            
            $
            879,490Purchase
                price:Cash
            
            $
            30,000Note
                payable
            
            
            70,000Common
                stock
            
            
            150,000Common
                stock options
            
            
            356,400$
            606,400








Notes:(a)
            Customer
                lists are estimated to have an economic life of three years. The
                Company
                will amortize this acquired intangible asset using the straight-line
                method over the estimated life.(b)
            Acquired
                employment contracts with key members of former CoroWare management
                have
                terms of five years and embody significant restrictive covenants
                and
                non-competition agreements. The fair value of these intangible assets
                will
                be amortized over the contractual term of five years using the
                straight-line method.





The
      purchase price includes both fixed and contingent components. The fixed purchase
      price, as reflected above, included $100,000 in cash, 500,000 shares of common
      stock, valued at the closing market price, and 1,200,000 common stock purchase
      options, valued using the Black Scholes Merton technique. The contingent
      purchase price includes an additional $350,000 in cash and 2,500,000 shares
      of
      common stock that may be issuable over a three year period based upon the
      financial performance (sales and gross margins) of the business acquired.
      Contingent consideration is recorded when the contingencies are resolved. Any
      future consideration will be allocated to the value of the long-lived assets
      acquired.





F-15


The
      following unaudited pro forma statement of operations for the year ended
      December 31, 2006 and 2005 gives effect to our acquisition of CoroWare as if
      the
      acquisition had occurred on January 1, 2006 or 2005, respectively.





The
      unaudited pro forma financial information is not necessarily indicative of
      the
      financial condition or results of operations that we would have achieved had
      the
      acquisition occurred on the dates referred to above. In addition, unaudited
      pro
      forma operating information is not necessarily indicative of the results of
      operations that we may achieve during the year ended December 31,
      2006.





Twelve
                months ended2006
            
            2005Sales
            
            $
            1,559,189
            
            $
            1,278,618Net
                loss
            
            $
            (
                5,789,060
            )
            $
            (
                2,224,473
            )Loss
                per share
            
            $
            (0.09
            )
            $
            (0.05
            )





The
      determination of the consideration to be paid in the transaction was determined
      in arms length negotiations between the Boards of Directors of the Company
      and
      CoroWare. The negotiations took into account the value of the assets sold to
      Company and the consideration paid. At the time of the transaction, there were
      no material relationships between CoroWare and the Company, or any of its
      affiliates, any director or officer of the Company, or any associate of any
      such
      officer or director.





**NOTE
      4 - PROPERTY AND EQUIPMENT**





Property
      and equipment consists of the following at December 31, 2006:





Computer
                equipment
            
            $
            135,804Equipment
            
            
            9,589Furniture
                and fixtures
            
            
            23,906Leasehold
                improvements
            
            
            37,838207,137Less:
                accumulated depreciation
            
            
            (51,213
            )$
            155,924





Depreciation
      expense for the years ended December 31, 2006 and 2005 was $34,290 and $12,954,
      respectively.





**NOTE
      5 - INTANGIBLE ASSETS**





Intangible
      assets, which arose during our business acquisitions activities discussed in
      Note 3, consisted of the following as of December 31, 2006:





Amount
            
            LifeEmployment
                contracts
            
            $
            605,242
            
            
            5
                YearsCustomer
                lists
            
            
            132,977
            
            
            3
                Years738,219Less:
                accumulated amortization
            
            
            (133,196
            )$
            605,023





Amortization
      expense amounting to $133,196 and $-0- during the years ended December 31,
      2006
      and 2005, respectively is reflected as a component of our operating expenses
      in
      our consolidated financial statements.




F-16


**NOTE
      6 - ACCRUED EXPENSES**





Accrued
      expenses consist of the following at December 31, 2006:





Related
                Party
            
            Third
                PartyAccrued
                interest
            
            $
            -
            
            $
            237,698Accrued
                legal and consulting
            
            
            -
            
            
            128,030Accrued
                payroll and related expenses
            
            
            202,309
            
            
            126,184Accrued
                warranty costs
            
            
            -
            
            
            20,000Accrued
                other
            
            
            -
            
            
            53,885$
            202,309
            
            $
            565,797





**NOTE
      7 - NOTES PAYABLE**





Notes
      payable consist of the following at December 31, 2006:





Related
                Party
            
            Third
                PartyNote
                payable - merger
            
            
            7(a
            )
            $
            230,000
            
            $
            -Note
                payable - principal shareholder
            
            
            7(b
            )
            
            -
            
            
            165,000Shareholder
                notes payable
            
            
            7(c
            )
            
            -
            
            
            141,000Note
                payable - CoroWare
            
            
            7(d
            )
            
            50,000
            
            
            -Other
                notes payable
            
            
            7(e
            )
            
            77,750
            
            
            -SEDA
                commitment fee
            
            
            7(f
            )
            
            -$
            357,750
            
            $
            306,000





*(a)
      Note payable - merger:*





In
      February 2003, the Company issued $230,000 of notes payable, the terms of which
      were subsequently modified in July 2003. The notes earn interest at 8% per
      annum
      unless they are in default, in which case they earn default interest at a rate
      of 15%; the notes are currently in default. Additionally, the notes had warrants
      attached to purchase 11,500 shares of common stock at $15.00 per share and
      were
      exercisable through February 12, 2005. None of these warrants were exercised
      prior to their expiration.





*(b)
      Note payable - principal shareholder:*





In
      November 2004, a principal shareholder loaned the Company $165,000 to pay down
      the line of credit with Fifth Third Bank. The loan has the same terms as the
      Fifth Third Bank line of credit, except that it remains unsecured until such
      time as the Fifth Third Bank line of credit is fully paid, including principal
      and accrued interest, and is due upon demand. In January 2005, the Fifth Third
      Bank line of credit was paid off.





*(c)
      Shareholder notes payable:*





During
      September through December 2005, the Company entered into short-term debt
      obligations totaling $257,000. All of this short-term debt bears interest at
      the
      rate of 10% per annum and is due between ninety and one hundred twenty days.
      All
      of the lenders are shareholders of the Company. During the year ended December
      31, 2006, $116,000 was repaid. The notes matured on December 31, 2006 and have
      not been repaid.





*(d)
      Note payable - CoroWare:*





In
      accordance with the terms of the Asset Purchase Agreement (“Agreement”) with
      CoroWare, Inc. discussed in Note 3 above, the Company has recognized a
      promissory note of $70,000, without interest, due to CoroWare, Inc. and payable
      during the twelve months ending May 15, 2007. This note is part of the $100,000
      cash payment guaranteed under the terms of the Agreement; the remaining $30,000
      was paid at the closing of the transaction on May 16, 2006. During the year
      ended December 31, 2006, $20,000 of this note was repaid. The Company has
      imputed interest at 10% per annum. Imputed interest for the year ended December
      31, 2006 was $3,655.




F-17


*(e)
      Other notes payable*





Other
      notes payable consist of three notes to third parties with interest rates
      ranging from 5% to 10% and maturity dates through December 31, 2007. The Company
      has imputed interest at 10% per annum on one of these notes. Imputed interest
      for the year ended December 31, 2006 was $2,440.








*(f)
      June 14, 2005 Standby Equity Distribution Agreement:*





On
      June
      14, 2005 the Company entered into a Standby Equity Distribution Agreement
      discussed in Note 9(b). In connection with this agreement, the Company issued
      a
      $300,000 promissory note to Cornell. The promissory note was recorded as a
      note
      payable and as deferred financing costs. During the six months ended June 30,
      2006, $220,000 of the promissory note was repaid. The Company paid the remaining
      $80,000 owed by issuing 484,850 shares of the Company’s common stock as part of
      the Termination Agreement for the Standby Equity Distribution Agreement, which
      was entered into with Cornell in July 2006. The Company recorded a gain on
      extinguishment of $7,272 related to this transaction.





**NOTE
      8 - LONG-TERM DEBT**





On
      April
      17, 2002, the Company borrowed $989,100 under a note agreement with the Small
      Business Administration. The note bears interest at 4% and is secured by the
      equipment and machinery assets of the Company and by the personal residence
      and
      other assets of the Company's Chairman and CEO, a principal shareholder and
      founder of RWT. The balance outstanding at December 31, 2006 was $989,100.
      The
      note calls for monthly installments of principal and interest of $4,813
      beginning September 17, 2002 and continuing until April 17, 2032. The company
      is
      currently in arrears on the interest payments and has received payment
      deferments from the Small Business Administration. During 2006 all payments
      were
      being applied to accrued interest. Accrued interest at December 31, 2006 was
      approximately $73,000. It is anticipated that it during 2007 all payments will
      be applied against accrued interest payable and therefore none of the debt
      has
      been classified as a current liability on the balance sheet.





Current
      maturities of long term debt and notes payable as of December 31, 2006 are
      as
      follows:





Year
                ending December 31, 2007
            
            $
            663,750Year
                ending December 31, 2008
            
            
            18,336Year
                ending December 31, 2009
            
            
            2,818,336Year
                ending December 31, 2010
            
            
            18,336Year
                ending December 31, 2011
            
            
            18,336Thereafter
            
            
            915,756$
            4,452,850





**NOTE
      9 - CONVERTIBLE DEBT**





The
      following table illustrates the carrying value of convertible debt at December
      31, 2006:





Carrying
                value$
                55,000 financing 9(a)
            
            $
            -$2,825,000
                financing 9(b)
            
            
            119,678$
            119,678





*(a)
      $55,000 Convertible debenture financing:*





On
      October 7, 2005, the Company entered into a Securities Purchase Agreement with
      Cornell Capital Partners, LP (“Cornell”). Pursuant to this Agreement, the
      Company sold a Convertible Debenture in the principal amount of $55,000 to
      Cornell. The Convertible Debenture bore interest at the rate of 12% per annum
      and was due on April 7, 2006. The principal of the Convertible Debenture was
      convertible into common stock of the Company at a price equal to $.30 per share
      (the "Conversion Shares"). In the event of default by the Company, the principal
      of the Convertible Debenture was convertible into Conversion Shares at a price
      of $.50 per share. The Company granted demand registration rights to Cornell
      for
      the Conversion Shares. The Convertible Debenture was secured by a second lien
      on
      all of the assets of the Company. The full amount
      of
      principal and interest were repaid to Cornell by April 7, 2006.




F-18


In
      the
      Company’s evaluation of this instrument in accordance with Financial Accounting
      Standard No. 133, Derivative Financial Instruments (FAS133), it was determined
      that the conversion feature was not afforded the exemption as a conventional
      convertible instrument and did not otherwise meet the conditions for equity
      classification. As such, the conversion and other features were compounded
      into
      one instrument, bifurcated from the debt instrument and carried as a derivative
      liability, at fair value. The Company estimated the fair value of the bifurcated
      derivative instruments using the Monte Carlo valuation model because this
      methodology provides for all of the necessary assumptions necessary for fair
      value determination; including assumptions for credit risk, interest risk and
      conversion/redemption behavior. Significant assumptions underlying this
      methodology were: Effective Term—remaining term of the host instrument;
      Effective Volatility—44.19%; Effective Risk Adjusted Yield—12.36%. As a result
      of these estimates, the valuation model resulted in a compound derivative
      balance of $163,240 at inception. This amount exceeded the proceeds by $108,240.
      In accordance with FAS133, the excess was immediately charged to expense. During
      the period from issuance to December 31, 2005, the fair value of the derivative
      declined in value by $118,932. In accordance with FAS133, this amount was
      credited to income during the period. During 2006, the fair value of the
      derivative declined in value by $141,192 and was credited to income during
      the
      period. This debenture financial instrument was settled in April
      2006.





The
      resulting discount on the host instrument was amortized over the term of the
      instrument using the effective interest method. Amortization of the debt
      discount for the year ended December 31, 2006 amounted to $52,471.





*(b)
      $2,825,000 Convertible debenture financing:*





On
      July
      21, 2006, the Company consummated a Securities Purchase Agreement dated July
      21,
      2006 with Cornell providing for the sale by the Company to Cornell of its 10%
      secured convertible debentures in the aggregate principal amount of $2,825,000,
      net of deferred financing costs of $263,143 of which $1,250,000 was advanced
      immediately and $575,000 was advanced in August concurrent with our filing
      of
      the Registration Statement with the Securities and Exchange Commission (SEC).
      The last installment of $1,000,000 was advanced on December 7,
      2006.





The
      Debentures mature on the third anniversary of the date of issuance (see Note
      8
      for debt maturity schedule). The holder of the Debentures may, at any time,
      convert amounts outstanding under the Debentures into shares of common stock
      of
      the Company at a fixed conversion price per share equal to $0.40. The Company's
      obligations under the Purchase Agreement are secured by substantially all of
      the
      assets of the Company and those of its wholly owned subsidiary, CoroWare. The
      Company is in violation of one of the covenants of the Purchase Agreement
      related to filing its annual report on Form 10KSB with the Securities and
      Exchange Commission on a timely basis. The violation will be cured within the
      grace period specified in the Purchase Agreement and therefore the convertible
      debenture has been classified as long-term in the financials.





Under
      the
      Purchase Agreement, the Company also issued to Cornell five-year warrants to
      purchase 1,000,000 and 1,500,000 shares of Common Stock at prices equal to
      $0.50
      and $1.00, respectively, together with three-year warrants to purchase
      2,300,000, 2,000,000 and 2,500,000 shares of Common Stock at prices equal to
      $0.25, $0.65 and $0.75, respectively.





The
      Company has the right to redeem a portion or all amounts outstanding under
      the
      Debenture prior to the Maturity Date at a 10% redemption premium provided that
      the closing bid price of the Common Stock is less than the Conversion Price
      and
      there is an effective Registration Statement covering the shares of Common
      Stock
      issuable upon conversion of the Debentures and exercise of the Warrants (as
      defined below). In addition, beginning on the earlier of: (i) the first trading
      day following the day which the Registration Statement is declared effective
      by
      the Commission, or (ii) December 1, 2006, and continuing on the first trading
      day of each calendar month thereafter, Cornell may require the Company to redeem
      up to $500,000 of the remaining principal amount of the Debentures per calendar
      month. However, Cornell may not require the Company to redeem the Debentures
      if
      the closing bid price of the Common Stock exceeds the Conversion Price for
      each
      of the five consecutive trading days immediately prior to the redemption date,
      and the Registration Statement has been declared effective and remains effective
      on the redemption date. The Company has the option, in its sole discretion,
      to
      settle any requested redemptions by either paying cash or issuing the number
      of
      shares of the Company’s common stock equal to the cash amount owed divided by a
      stock price equal to 95% of the lowest daily volume weighted average price
      of
      the Company’s common stock during the thirty (30) trading days immediately
      preceding the date of the redemption.





F-19





The
      following redemptions have occurred in conjunction with this debenture
      financing:








Date
                of Redemption
            
            Principal
                Redeemed
            
            Number
                of shares issuedDecember
                18, 2006
            
            $
            25,000
            
            
            189,000





In
      the
      Company’s evaluation of this instrument in accordance with Financial Accounting
      Standard No. 133, Derivative Financial Instruments (FAS133), it was determined
      that the conversion feature was not afforded the exemption as a conventional
      convertible instrument and did not otherwise meet the conditions for equity
      classification. As such, the conversion and other features were compounded
      into
      one instrument, bifurcated from the debt instrument and carried as a derivative
      liability, at fair value. The Company estimated the fair value of the bifurcated
      derivative instruments using the Monte Carlo valuation model because this
      methodology provides for all of the necessary assumptions necessary for fair
      value determination; including assumptions for credit risk, interest risk and
      conversion/redemption behavior. Significant assumptions underlying this
      methodology were: Effective Term (using the remaining term of the host
      instrument); Effective Volatility (89.08% - 123.72%); and Effective Risk
      Adjusted Yield (15.97% - 33.59%). As a result of these estimates, the valuation
      model resulted in a compound derivative balance of $1,108,250 at inception.
      The
      Company also determined that the warrants did not meet the conditions for equity
      classification because share settlement and maintenance of an effective
      registration statement are not within its control. The fair value allocated
      to
      the warrants instruments was $637,700 at inception. The remaining $79,050 was
      recorded as derivative loss.





The
      following table illustrates the fair value adjustments that were recorded
      related to the derivative financial instruments associated with the convertible
      debenture financings:





2006Derivative
                income (expense)
            
            Inception
            
            Fair
                Value Adjustments
            
            Redemptions
            
            Total$55,000
                Cornell Financing
            
            $
            -
            
            $
            (44,308
            )
            $
            185,500
            
            $
            141,192$2,825,000
                Financing
            
            
            (388,950
            )
            
            262,904
            
            
            181,271
            
            
            55,225$
            (
                388,950
            )
            $
            218,596
            
            $
            366,271
            
            $
            196,417




2005Derivative
                income (expense)
            
            Inception
            
            Fair
                Value Adjustments
            
            Redemptions
            
            Total$55,000
                Cornell Financing
            
            $
            (10,692
            )
            $
            -
            
            $
            -
            
            $
            (10,692
            )$2,825,000
                Financing
            
            
            -
            
            
            -
            
            
            -
            
            
            -$
            (10,692
            )
            $
            -
            
            $
            -
            
            $
            (10,692
            )





Changes
      in the fair value of the compound derivative and, therefore, derivative income
      (expense) related to the compound derivative is significantly affected by
      changes in the Company’s trading stock price and the credit risk associated with
      its financial instruments. The fair value of the warrant derivative is
      significantly affected by changes in the Company’s trading stock
      prices.





The
      aforementioned allocations to the compound and warrant derivatives resulted
      in
      the discount in the carrying value of the note to zero. The discount, related
      deferred finance costs and future interest payments are amortized through
      periodic charges to interest expense using the effective method. Interest
      expense associated with the derivative instruments during the year ended
      December 31, 2006 and 2005 amounted to approximately $327,000 and $6,000,
      respectively.





F-20





**NOTE
      10 - INCOME TAXES**





The
      Company follows Statement of Financial Accounting Standards Number 109 (SFAS
      109), "Accounting for Income Taxes". Deferred income taxes reflect the net
      effect of (a) temporary difference between carrying amounts of assets and
      liabilities for financial purposes and the amounts used for income tax reporting
      purposes, and (b) net operating loss carryforwards. No net provision for
      refundable Federal income tax has been made in the accompanying statement of
      loss because no recoverable taxes were paid previously. Similarly, no deferred
      tax asset attributable to the net operating loss carryforward has been
      recognized, as it is not deemed likely to be realized. The valuation allowance
      increased approximately $1,900,000, and $540,000 during the years ended December
      31, 2006 and 2005, respectively.





The
      current year provision for refundable Federal income tax consists of the
      following:





December
                31, 2006
            
            December
                31, 2005Refundable
                income tax attributable toCurrent
                operations
            
            $
            1,900,000
            
            $
            540,000Less,
                change in valuation allowance
            
            $
            (1,900,000
            )
            $
            (540,000
            )Net
                refundable amount
            
            $
            -
            
            $
            -








The
      cumulative tax effect at the expected rate of 34% of significant items
      comprising our net deferred tax amount is as follows:





December
                31, 2006
            
            December
                31, 2005Deferred
                tax asset attributable toNet
                operating loss carryover
            
            $
            6,600,000
            
            $
            4,700,000Less,
                change in valuation allowance
            
            $
            (6,600,000
            )
            $
            (4,700,000
            )Net
                deferred tax asset
            
            $
            -
            
            $
            -





At
      December 31, 2006, we had an unused net operating loss carryover approximating
      $19,000,000 that, subject to certain utilization limitations, is available
      to
      offset future taxable income, if any. It expires beginning in 2022.





**NOTE
      11 - STOCK BASED COMPENSATION**





*Common
      stock:*





In
      2005,
      the Company awarded 5,450,830 shares of the Company's common stock to
      twenty-four (24) employees, independent contractors and individuals for services
      provided to the Company in 2004 and 2005 valued at $705,033 or the equivalent
      of
      $0.13 per share. These amounts were fully accrued at December 31,
      2005.





In
      July
      2006, the Company issued 3,788,503 shares of the Company’s common stock to
      Martin Nielson, Gary McNear and Craig Conklin, directors of the Company and
      previously the CEO, CFO and COO of the Company, respectively, for amounts owed
      associated with expense reimbursement and accrued compensation pursuant to
      the
      Merger Agreement dated July 21, 2004 between Innova Holdings, Inc., Robotic
      Workspace Acquisition, Inc. and Robotic Workspace Technologies, Inc., Inc.
      and
      in accordance with Section 6.1(e) of said Merger Agreement. The Company had
      recorded a liability for these shares of $378,850 since the merger date to
      reimburse expenses and compensate accrued salaries for Altos Bancorp, Inc.,
      Martin Nielson, Gary McNear and Craig Conklin by issuing the stated shares
      as
      reflected in said Merger Agreement which shall be paid with shares of the
      Company’s Common Stock at $.01 a share, the closing price of the Company’s stock
      on the date of the agreement. The shares were issued as follows:





Martin
                Nielson
            3,008,503
                sharesGary
                McNear
            390,000
                sharesCraig
                Conklin
            390,000
                shares




F-21




Further,
      the Chief Financial Officer received a bonus, which had been accrued at December
      31, 2005, of 562,500 shares of the Company’s common stock on March 10, 2006,
      which was valued at $50,000 based on $.09 per share, the closing price of the
      Company stock on the previous day.





In
      July
      2006, the Company issued 1,024,800 shares for services performed by employees,
      consultants and outside advisors totaling $366,398 (of which $156,255 was
      accrued at December 31, 2005) at share prices from $0.32 per share to $0.41
      per
      share, the closing price of the Company’s stock on the date the shares were
      granted.





During
      the fourth quarter of 2006 the Company issued 312,466 shares of common stock
      to
      certain employees of CoroWare in lieu of cash payments for compensation. The
      shares were valued at prices ranging from $0.15 per share to $0.24 per share,
      the closing price of the Company’s stock on the date the shares were
      granted





During
      the year ended December 31, 2006 the Company cancelled 291,000 shares of stock
      valued at the time of grant at $65,000 that had been previously awarded to
      an
      employee because the terms and conditions related to the award were not
      met.





*Employee
      stock options:*





As
      of
      December 31, 2006 the company had three stock option plans; the 2003 Stock
      Option Plan, the 2004 Stock Option Plan, and the 2005 Stock Option Plan. The
      authorized options under the 2003, 2004, and 2005 Stock Option Plans are 500,000
      shares, 315,000 shares, and 20,000,000 shares respectively.





During
      the first quarter of 2006 2,000,000 options were granted to directors and
      1,300,000 options were granted to employees. The share purchase options granted
      to directors vested upon the award while the employee options vest evenly over
      a
      three year period from date of grant. All of these options are exercisable
      at
      $.10 per share and expire ten years after the grant date. The options had a
      fair
      value of $330,000 on the grant date.





In
      March
      2006 the Company modified 1,800,000 options granted in 2005 to the then Chief
      Financial Officer by changing their vesting from a three year period to 100%
      vested as of December 14, 2005 and by reducing the exercise price from $.36
      to
      $.10. In addition, the Company modified 1,500,000 options granted to the Chief
      Executive Officer and 565,862 options granted to an employee in 2005 by reducing
      the exercise price from $.17 per share to $.10 per share. In connection with
      the
      modification the Company recorded a charge of $260,000.





During
      the second quarter of 2006, 1,600,000 options were granted to employees,
      including the 1,200,000 options granted to employees of CoroWare (see Note
      3
      above). These options are exercisable at $.18 per share, vest evenly over a
      three year period, and expire ten years after grant date. The fair value
      associated with the remaining 400,000 options was $92,000 at the grant date.
      Numerous CoroWare employees were terminated in the fourth quarter resulting
      in
      the forfeiture of 100,000 of these options.





Also,
      during the second quarter of 2006, 133,000 options were granted to an
      independent contractor at an exercise price of $.17 per share and a term of
      three years with complete vesting by December 31, 2006, and 1,150,000 options
      were granted to an independent contractor at an exercise price of $.13 per
      share
      and a term of three years; vesting is one third at the end of each calendar
      year
      ending December 31, 2008. The options had a fair value of $47,332 on the grant
      date. During 2006 the Company recognized an expense of $16,347 associated with
      these options.





During
      the third quarter of 2006, 100,000 options were granted to an employee,
      exercisable at $.26 per share vesting evenly over a three year period, and
      expiring ten years after grant date. During 2006 the Company recognized an
      expense of $1,256 associated with these options





During
      the forth quarter of 2006, 1,000,000 options were granted to an employee,
      exercisable at $.20 per share vesting evenly over a three year period, and
      expiring ten years after grant date. During 2006 the Company recognized an
      expense of $2,333 associated with these options.





In
      July
      2006, but effective May 15, 2006, the Company increased the number of authorized
      shares allocated for the Company’s 2005 Stock Option Plan from 15,000,000 to
      20,000,000.




F-22


The
      following table summarizes stock option activity for the years ending December
      31, 2006 and 2005:





Number
            
            Weighted
                Average Exercise Price
            
            Intrinsic
                Value
            
            Weighted
                Average Life (years)Outstanding,
                January 1, 2005
            
            
            4,838,814
            
            $
            0.08Granted
            
            
            8,071,926
            
            $
            0.14Forfeited
            
            
            (2,600,000
            )
            $
            0.21Exercised
            
            
            -Outstanding,
                December 31, 2005
            
            
            10,310,740
            
            $
            0.10Granted
            
            
            7,283,000
            
            $
            0.14Forfeited
            
            
            (1,706,064
            )
            $
            0.18Exercised
            
            
            -Outstanding,
                December 31, 2006
            
            
            15,887,676
            
            $
            0.11
            
            $
            603,981
            
            
            7.87Options
                exercisable atDecember
                31, 2006
            
            
            8,483,632
            
            $
            0.10
            
            $
            448,234
            
            
            7.40





*Adoption
      of FASB Statement No. 123 (R)*





Prior
      to
      January 1, 2006, the Company accounted for stock options under the recognition
      and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued
      to
      Employees, and related Interpretations, as permitted by FASB Statement No.
      123,
      Accounting for Stock-Based Compensation (“Statement 123”). No stock-based
      employee compensation cost was recognized in the statement of operations for
      the
      fiscal years or interim periods ended prior to December 31, 2005, as all options
      granted under those plans had an exercise price equal to the market value of
      the
      underlying common stock on the date of grant. Effective January 1, 2006, the
      Company adopted the fair value recognition provisions of Statement 123(R),
      using
      the modified-prospective-transition method. Under that transition method,
      compensation cost recognized in 2006 includes: (a) compensation cost for
      share-based payments granted prior to January 1, 2006, but vesting during 2006,
      based on the grant date fair value estimated in accordance with the original
      provisions of Statement 123, and (b) compensation cost for all share-based
      payments granted subsequent to January 1, 2006, based on the grant-date fair
      value estimated in accordance with the provisions of Statement 123(R). Results
      for prior periods have not been restated.





As
      a
      result of adopting Statement 123(R) on January 1, 2006, the Company’s net loss
      for year ended December 31, 2006 is $705,987 higher than if it had continued
      to
      account for share-based compensation under Opinion 25. Basic and diluted loss
      per share, as well as loss per share attributable to common shareholders, are
      each higher by $0.01 per share for the year ended December 31, 2006 than they
      would have been if the Company had not adopted Statement 123(R). Estimated
      income tax benefits recognized during the year ended December 31, 2006 were
      offset by a valuation allowance since realization was not reasonably assured.





Prior
      to
      the adoption of Statement 123(R), it was the Company’s policy to present all tax
      benefits of deductions resulting from the exercise of stock options as operating
      cash flows in its statement of cash flows, however, due to the Company’s tax
      loss carryforward, any such benefits were always fully offset by a valuation
      allowance. Statement 123(R) requires the cash flows resulting from the tax
      benefits resulting from tax deductions in excess of the compensation cost
      recognized for those options (excess tax benefits) to be classified as financing
      cash flows. The Company will use this presentation if and when it has exhausted
      its tax loss carryforward.





The
      following table illustrates the effect on net loss and loss per share if the
      Company had applied the fair value recognition provisions of Statement 123(R)
      to
      options granted under the Company’s stock option plan in 2005. For purposes of
      this pro forma disclosure, the value of the options is estimated using the
      Black-Scholes-Merton option-pricing model and amortized to expense over the
      options’ vesting periods.




F-23




2005Net
                loss, applicable to common stockholders, as reported
            
            ($1,881,125
            )Add:
            stock-based
              employee compensation expense included in
              reported
                net income, net of related tax effects
            
            25,061Deduct:
            Total
              stock-based employee compensation expense
              determined
                under the fair value method for all
              awards,
                net of related tax effects
            
            (277,865
            )Pro-forma
                net loss
            
            ($
                2,133,929
            )Net
                Loss per share:Basic
                and diluted - as reported
            $
            (0.05
            )Basic
                and diluted - pro-forma
            $
            (0.05
            )





Option
      awards are generally granted with an exercise price equal to the market price
      of
      the Company’s stock at the date of grant; those option awards generally vest
      over a period of 3 years and have 10-year contractual terms. Shares granted
      upon
      the exercise of stock options are newly issued shares. Prior to the adoption
      of
      FAS 123(R) on January 1, 2006, the fair value of each option award was estimated
      on the date of grant using the Black-Scholes valuation model using the
      assumptions noted in the following table:





Volatility
            
            
            79.00
            %Expected
                dividends
            
            
            -0-Expected
                term (in years)
            
            
            5Risk-free
                rate
            
            
            2.75
            %





Expected
      volatilities were based on the expected impact on future stock price of expected
      future revenue and earnings, historical volatility of the Company’s stock, and
      other factors. The expected term of options granted represents the period of
      time that options granted are expected to be outstanding.





For
      new
      share-based payments made after adoption of SFAS 123(R), the Company has
      estimated fair value at the date of grant using the Flexible Binomial Model
      with
      the following assumptions:





Volatility
            
            
            44.19
            %Expected
                dividends
            
            
            -0-Expected
                term (in years)
            
            
            0-5Risk-free
                rate
            
            
            2.45
            %Forfeiture
                rate
            
            
            5.00
            %




F-24


A
      summary
      of the status of the Company’s nonvested shares as of December 31, 2006, and
      changes during the year ended December 31, 2006 is presented below:





Number
            
            Weighted
                Average
              Grant
                Date
              Fair
                ValueOutstanding,
                January 1, 2006
            
            
            6,439,740
            
            $
            0.11Granted
            
            
            7,283,000
            
            $
            0.03Vested
            
            
            (5,193,356
            )
            $
            0.12Forfeited
            
            
            (1,125,339
            )
            $
            (0.08
            )Outstanding,
                December 31, 2006
            
            
            7,404,045
            
            $
            0.08








As
      of
      December 31, 2006, there was $501,301 of total unrecognized compensation cost
      related to nonvested share-based compensation arrangements granted under the
      Plans. That cost is expected to be recognized over a weighted-average period
      of
      3 years.





**NOTE
      12 - OTHER STOCKHOLDERS’ EQUITY**





All
      common share amounts and per share amounts in the accompanying financial
      statements for the years ended December 31, 2006 and 2005, reflect the
      one-for-ten reverse stock split of the issued and outstanding shares of common
      stock of the Company, effective on November 20, 2006.





*Issuances
      of common stock:*





During
      the year ended December 31, 2005, the Company obtained $468,000 of funds through
      the private placement sale of 2,593,333 shares of the Company's common stock
      at
      prices ranging from $0.125 to $0.30 per share.





From
      January 1, 2006 through July 21, 2006, the Company utilized the Standby Equity
      Distribution Agreement and sold 16,173,616 shares of common stock to Cornell
      for
      gross proceeds of $2,435,000. Of the gross proceeds received, Cornell was paid
      $121,750 in commitment fees and $9,000 in structuring fees.





On
      July
      21, 2006, the Company terminated the Standby Equity Distribution
      Agreement dated June 14, 2005 with Cornell, together with all of the definitive
      agreements related thereto. In addition, on July 21, 2006 Cornell agreed to
      terminate the promissory note in the remaining principal amount of $80,000
      in
      exchange for the Company's issuance of 484,850 shares of common stock
      to Cornell. The Company recognized a gain of $7,272 on the
      extinguishment of the debt.





During
      the year ended December 31, 2006, the Company obtained an additional $100,650
      of
      funds through the private placement sale of 1,159,409 shares of the Company's
      common stock at prices ranging from $.073 to $0.171 per share.





*Issuances
      of preferred stock:*





*Series
      A:*





On
      June
      23, 2004, the Company entered into a private placement and sold 125,000 shares
      of Series A Preferred Stock for $125,000. Each share of the Series A Preferred
      Stock (i) pays a dividend of 5%, payable at the discretion of the Company in
      cash or common stock, (ii) is convertible immediately after issuance into the
      number of shares of common stock equal to $1.00 divided by a conversion price
      equal to the lesser of 75% of the average closing bid price of the Company's
      common stock over the twenty trading days preceding conversion or $0.05, (iii)
      has a liquidation preference of $1.00 per share, (iv) must be redeemed by the
      Company five years after issuance at $1.00 per share plus accrued and unpaid
      dividends, (v) may be redeemed by the Company at any time for $1.30 per share
      plus accrued and unpaid dividends,(vi) grants rights to acquire one share of
      Common Stock for each share of Common Stock issued on conversion at a price
      per
      share equal to the average of  the
      closing price of the common stock on the five business days preceding the date
      of conversion for a period of one year from the date of conversion and,(vii)
      has
      no voting rights except when mandated by Delaware law.




F-25




Of
      the
      $125,000 proceeds received from the issuance of the Series A Preferred Stock,
      $50,000 was allocated to the beneficial conversion feature embedded in the
      Series A Preferred Stock on the date of issuance based on a conversion price
      of
      $.05 per share. Of this amount, $48,300 was the unamortized embedded beneficial
      feature assumed as part of the reverse merger with Robotic Workspace
      Technologies, Inc. Amortization of the beneficial conversion feature for the
      years ended December 31, 2006 and 2005 was $22,610 and $22,090, respectively.
      Additionally, the excess of the aggregate fair value of the common stock to
      be
      issued upon conversion over the $125,000 of proceeds received when the Series
      A
      Preferred Stock was issued amounted to $50,000.





During
      the years ended December 31, 2006 and 2005, respectively, 81,450 and 43,550
      shares of Series A Preferred Stock were converted into 1,629,000 and 871,000
      shares of Common Stock of the Company. Additionally, during the years ended
      December 31, 2006 and 2005, respectively, accrued dividends of $4,073 and $1,250
      were converted into 11,217 and 2,551 shares of common stock of the
      Company.





*Series
      B:*





The
      Company has authorized $525,000 of Series B Preferred Stock. Each share of
      Series B Preferred Stock i) pays a dividend of 5%, payable at the discretion
      of
      the Company in cash or common stock, (ii) is convertible immediately after
      issuance into the Company's common stock at the lesser of $.05 per share or
      75%
      of the average closing bid prices over the 20 trading days immediately preceding
      the date of conversion (iii) has a liquidation preference of $1.00 per share,
      (iv) may be redeemed by the Company at any time up to five years after the
      issuance date for $1.30 per share plus accrued and unpaid dividends, (v) ranks
      junior to the Series A Preferred Stock upon liquidation of the Company and
      (vi)
      has no voting rights except when mandated by Delaware law.





During
      2005, the Company sold the remaining $148,166 of the Series B Preferred Stock,
      bringing the total sold to $525,000. Of the $148,166 proceeds received from
      that
      issuance of the Series B Preferred Stock, $141,500 was allocated to the
      beneficial conversion feature embedded in the Series B Preferred Stock on the
      date of issuance, based on a conversion price of $.05 per share. The entire
      $141,500 beneficial conversion feature was amortized through Accumulated Deficit
      on the date of issuance. Additionally, the excess of the aggregate fair value
      of
      the common stock to be issued upon conversion over the $148,000 of proceeds
      received when the Series B Preferred Stock was issued amounted to $39,400.
      During 2005, 33,000 shares of Series B Preferred Stock were converted into
      660,000 shares of Common Stock of the Company.





During
      the year ended December 31, 2006, 207,666 shares of the Company’s Series B
      preferred stock converted into 4,153,320 shares of the Company’s common stock at
      the conversion price of $.05 per share, and an additional 62,190 shares of
      common stock were issued for accrued dividends converted at $.175 per share
      in
      accordance with the terms of the Series B preferred shares certificate of
      designation.





*Outstanding
      warrants:*





At
      December 31, 2006, we had the following warrants outstanding:





Note
            
            Grant
                date
            
            Expiration
                date
            
            Warrants
                granted
            
            Exercise
                priceSeries
                A Preferred
              stock
                rights
            
            
            12(a
            )
            
            01/23/06
            
            
            1/23/07
            
            
            1,129,000
            
            $
            .072Series
                A Preferred
              stock
                rights
            
            
            12(a
            )
            
            03/15/06
            
            
            3/15/07
            
            
            500,000
            
            $
            .094$2,825,000
                financing
            
            
            9(b
            )
            
            7/21/06
            
            
            7/21/09
            
            
            2,500,000
            
            $
            .50
                - 1.00$2,825,000
                financing
            
            
            9(b
            )
            
            7/21/06
            
            
            7/21/11
            
            
            6,800,000
            
            $
            .25
                - .7510,929,000




F-26
 
  (a)
        These
        warrants were initially recorded in equity. The fair value of these warrants
        ($468,280) was reclassified to liabilities when the Company entered into
        the
        $2,825,000 Cornell financing on July 21, 2006 at which time it lost the ability
        to net share-settle all of its obligations. The fair value of the warrants
        was
        determined using the Black-Scholes-Merton valuation technique because it
        embodies all of the requisite assumptions (including trading volatility,
        estimated terms and risk free rates) necessary to fair value these instruments.
        The company affected a 1 for 10 reverse stock split on November 20, 2006
        at
        which time it regained the ability to net share-settle all of its obligations.
        As such, the fair value of these warrants ($606,904) was reclassified back
        to
        equity.





Derivative
      income (expense) associated with these other warrants is summarized in the
      table
      below.





Derivative
                income (expense)
            
            For
                the year ended
              December
                31, 2006
            
            For
                the year ended
              December
                31, 2005Warrant
                derivative
            
            $
            138,624
            
            $
            -





**NOTE
      13 - COMMITMENTS**





**Other
      commitments:**





In
      May
      2006 the Company recorded a liability associated with the indemnification of
      a
      Director for his personal liability in an amount of $110,000 resulting from
      his
      personal guarantee of amounts owed by a former subsidiary of the Company and
      the
      settlement of such indebtedness of the Company’s former subsidiary incurred in
      the ordinary course of business in accordance with the provisions of Article
      V,
      Paragraph 6.2 (k) of the Merger Agreement the Company entered into with RWT
      Acquisition, Inc., and Robotic Workspace Technologies, Inc. dated July 21,
      2004.
      The action was settled during the quarter ending September 30, 2006 and the
      Company has been relieved of this liability.





In
      August
      2006 the Company agreed to award a strategic advisor and consultant 2,000,000
      shares of the Company’s common stock and agreed to award warrants to purchase
      another 2,000,000 shares of the Company’s common stock at an exercise price of
      $0.15 per share if certain sales contributions are achieved. As of December
      31,
      2006 these sales contributions had not been achieved so no warrants had been
      issued. The warrants, when issued, will have a term of five years.





**Lease
      Agreements**





On
      May
      15, 2005 the Company leased 4,000 square feet of space at 15870 Pine Ridge
      Road,
      Ft Myers, Florida which will be used as its primary operations. The lease is
      with Gulf To Bay Construction, Inc., with monthly payments of $3,639 through
      June 1, 2010. The lease has five (5) successive renewal options each for a
      period of two (2) years. The rent will increase annually by 3%. The space is
      the
      location of the Company's Research, Design and Engineering center as well as
      office space for up to fifteen (15) employees.





On
      June
      15, 2005 the Company entered into a month-to-month lease with Bola Industries,
      LLC for approximately 4,000 square feet of production space located at 30946
      Industrial Road, Livonia Michigan. The lease expired on March 31, 2006. The
      rent
      was $3,775 monthly and included all utilities, use of all equipment on site
      including certain heavy equipment, and use of internet service.





On
      May 5,
      2006 the Company leased 1,400 square feet of space at 4074 148 th Avenue,
      Redmond, Washington, which will be used as the primary location for CoroWare.
      The lease was with the Yett Family Partnership, LP, with monthly payments of
      $1,944 through May 31, 2007. The company subsequently entered into a lease
      with
      PS Business Park at the same location beginning on June 1, 2007 for a period
      of
      three (3) years. The rent will increase annually by 3%.The space is the location
      of CoroWare’s headquarters and consists of office and warehouse space for its
      employees.





Rental
      expense for the years ended December 31, 2006 and 2005 was $121,138 and $51,035,
      respectively.





F-27





Future
      minimum rentals on non-cancelable leases are as follows:





December
                31,2007
            
            $
            66,7672008
            
            
            67,8462009
            
            
            68,4122010
            
            
            43,1792011
            
            
            -$
            246,204





**Employment
      Agreements**





Walter
      Weisel is Chairman and Chief Executive Officer of the Company. Mr. Weisel’s
      employment agreement is dated July 19, 2000. Mr. Weisel's salary is $150,000
      per
      annum plus a bonus at the discretion of the Board of Directors. The agreement
      stipulates that Mr. Weisel's salary will be increased to $200,000 and $250,000
      when certain sales and profit objectives are met. The agreement was for a term
      of three years and automatically renews for successive one-year periods unless
      terminated by either party upon not less than sixty days prior to the renewal
      date. Mr. Weisel has agreed not to compete with the Company or solicit its
      customers or employees for a period of two years following the termination
      of
      his employment. The agreement also requires the Company to pay Mr. Weisel all
      accrued compensation, which amounted to $312,500 as of December 31, 2006. This
      amount has been offset with a $132,500 advance from the Company to Mr. Weisel
      in
      the financial statements.





Eugene
      Gartlan was appointed Chief Financial Officer of the Company in June 2005.
      Mr.
      Gartlan served as a consultant to the Company since December 15, 2004 through
      his wholly owned company, Stratex Solutions, LLC. ("Stratex"), a business
      consulting firm. Stratex earned 12,000,000 shares of the Company's common stock
      and received reimbursement of business expenses of approximately $12,000 as
      consideration for these consulting services. Mr. Gartlan served as the President
      of Stratex since June 2003. Stratex's compensation was based on a monthly salary
      of $10,000, payable in cash or common stock of the Company at the option of
      the
      Company. The price per share used to determine the number of shares earned
      if
      stock was paid was $.005 per share, the stock price on the date the Company
      and
      Stratex entered into the consulting agreement. No cash salary was paid to
      Stratex.





On
      June
      30, 2005, the Company and Mr. Gartlan entered into an Employment Agreement
      effective as of June 14, 2005. The term of the employment agreement is five
      years. The agreement is automatically extended for one year periods unless
      terminated on not less than thirty days notice by either party prior to any
      termination date. For all the services to be rendered by Mr. Gartlan from June
      14, 2005 through December 14, 2005, Mr. Gartlan was granted stock options to
      purchase 1,800,000 shares of common stock of the Company at the purchase price
      of $0.10. Such options were granted under the terms of the Company's Stock
      Option Plan and vested immediately. Mr. Gartlan resigned his position as Chief
      Financial Officer in December 2006.





Sheri
      Aws
      was appointed Secretary of the Company on September 14, 2004. Ms. Aws has served
      as Vice President of Administration of RWT, the Company's wholly owned
      subsidiary, since February 2004. Under an Employment Agreement dated February
      24, 2004, Sheri Aws, Vice President of Administration of RWT, receives
      compensation is $60,000 per annum plus a bonus in the discretion of RWT. The
      agreement was for a term of one year, and automatically renews for successive
      one-year periods unless terminated by either party upon not less than thirty
      days notice prior to the renewal date. Ms Aws has agreed not to compete with
      RWT
      or solicit its customers or employees for a period of one year following the
      termination of her employment.





Lloyd
      Spencer is the President and Chief Executive Officer of CoroWare. On May 15,
      2006 the Company and Mr. Spencer entered into an employment agreement. The
      term
      of the employment agreement is five years. The agreement is automatically
      extended for one year periods unless terminated on not less than thirty days
      notice by either party prior to any termination date. Mr. Spencer’s compensation
      is $150,000 per annum plus a bonus at the discretion of the Board of Directors.
      Mr. Spencer has agreed not to compete with the Company or solicit its customers
      or employees for a period of two years following the termination of his
      employment.





F-28





David
      Hyams is the Chief Technology Officer of CoroWare. On May 15, 2006 the Company
      and Mr. Hyams entered into an employment agreement. The term of the employment
      agreement is five years. The agreement is automatically extended for one year
      periods unless terminated on not less than thirty days notice by either party
      prior to any termination date. Mr. Hyams’ compensation is $150,000 per annum
      plus a bonus at the discretion of the Board of Directors. Mr. Hyams has agreed
      not to compete with the Company or solicit its customers or employees for a
      period of two years following the termination of his employment.





**NOTE
      14 - SUBSEQUENT EVENTS (UNAUDITED)**





On
      February 23, 2007, RWT entered into a Settlement Agreement (the “Settlement
      Agreement”) dated as of February 20, 2007 with ABB, Inc. and ABB Automation
      Technologies AB (collectively, “ABB”) in which ABB agreed to make a settlement
      payment to RWT in the amount of $2,925,000, which the Company received in March
      2007, in exchange for RWT filing a Stipulation of Dismissal with the Court
      to
      dismiss the Action with prejudice. In addition, the parties agreed to forever
      settle, resolve and dispose of all claims, demands and causes of action
      asserted, existing or claimed to exist between the parties because of or in
      any
      way related to the Action.





On
      March
      16, 2007, Robotics Workspace Technologies, Inc. (“RWT”), a wholly owned
      subsidiary of Innova Robotics and Automation, Inc. (the “Company”), completed
      the purchase of all of the issued and outstanding shares of common stock of
      Altronics Service, Inc. (“Altronics”) pursuant to a certain Stock Purchase
      Agreement dated as of March 16, 2007 (the “Agreement”) which RWT entered into
      with Alfred Fleming and Andrea Fleming (the “Sellers”), being all of the
      shareholders of Altronics.





Under
      the
      terms of the Agreement, RWT purchased, and the Sellers sold, an aggregate of
      280
      shares of common stock of Altronics, representing all of the issued and
      outstanding shares of Altronics (the “Shares”) for an aggregate purchase price
      of $300,000 (the “Purchase Price”), paid or to be paid by the Company as
      follows: (i) $150,000 was paid on March 16, 2007 (the “Closing Date”); (ii)
      $100,000 shall be paid in two installments, the first installment of $50,000
      within 180 days after the Closing Date, and the second installment within 1
      year
      after the Closing Date, which was evidenced in the form of a $100,000 principal
      amount Promissory Note issued by the Company to the Sellers on the Closing
      Date;
      and (iii) $50,000 in restricted shares of common stock of the Company at a
      per
      share price equal to $0.20 (250,000 shares), which was delivered to the Sellers
      on the Closing Date and vest as follows, provided that Alfred Fleming is an
      employee of Altronics at each vesting date: (x) 100,000 shares on the first
      anniversary of the Closing Date; (y) 100,000 shares on the second anniversary
      of
      the Closing Date; and (z) 50,000 shares on the third anniversary of the Closing
      Date.





The
      Company claims an exemption from the registration requirements of the Securities
      Act of 1933, as amended (the “Act”), for the issuance of the securities pursuant
      to Section 4(2) of the Act and/or Regulation D promulgated thereunder since,
      among other things, the transaction did not involve a public offering, the
      Sellers are accredited investors, they had access to information about the
      Company, the Sellers took the securities for investment and not resale, and
      the
      Company took appropriate measures to restrict the transfer of the
      securities.





In
      addition, on March 16, 2007, Altronics entered into an Employment Agreement
      (the
“Employment Agreement”) with Alfred Fleming under which the Company will employ
      Mr. Fleming as a Vice President for a period of 3 years commencing March 16,
      2007 and ending on March 15, 2010 which will be automatically renewed for
      successive 1 year periods until 30 days prior written notice not to renew is
      delivered by either the Company or Mr. Fleming. Mr. Fleming will be paid a
      monthly salary of $6,250, or $75,000 per annum, and shall be issued stock
      options in accordance with Altronics’ executive level option schedule, which
      will vest over the 3 year term of the Employment Agreement. Further, Mr. Fleming
      may be eligible for Altronics’ employee bonus program, to be determined by the
      Board of Directors of Altronics based on meeting performance objectives and
      bonus criteria. During the term of his employment and for a period thereafter,
      Mr. Fleming will be subject to confidentiality and non-competition provisions,
      subject to standard exceptions.





On
      January 17, 2007, Charles H. House was appointed as a director of Innova
      Robotics & Automation, Inc. (“Innova” or the “Company”). There was no
      understanding or arrangement between Mr. House and any other person pursuant
      to
      which Mr. House was appointed as a director. Mr. House does not have any family
      relationship with any director, executive officer or person nominated or chosen
      by us to become a director or executive officer. Furthermore, there has not
      been
      a transaction, nor is there any proposed transaction, between Mr. House and
      us.




F-29


Since
      November, 2006, Mr. House has been the Executive Director of the Media X program
      in the Division of Research at Stanford University. From 2001 until October
      2006, Mr. House served as Director, Virtual Collaboratory, IT Research for
      Intel
      Corporation. Mr. House has been Chairman of TII Networks (NASDAQ: TII) since
      December 2005, and a director since December 2003. Mr. House also served as
      Chairman of Applied Microsystems (NASDAQ: APPC) until it was acquired in
      2003.





The
      following redemptions of the convertible debenture were made subsequent to
      the
      year ended December 31, 2006. See Note 9 for further information.





Date
                of Redemption
            
            Principal
                Redeemed
            
            Number
                of shares issuedJanuary
                18, 2007
            
            
            55,000
            
            
            509,165March
                1, 2007
            
            
            475,000
            
            
            3,766,825$
            530,000
            
            
            4,275,990




F-30


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, as amended, the Registrant has duly caused this report to be signed on
      its
      behalf by the undersigned, thereunto duly authorized, on this 16th day of
      April 2007.





**INNOVA
      HOLDINGS, INC.**




*/s/
              Walter K. Weisel**Walter
                K. Weisel**Chief
                Executive Officer (Principal Executive
                Officer)*




*/s/
              Kenneth D. Vanden
              Berg**Kenneth
                D. Vanden Berg**Chief
                Financial Officer (Principal Accounting and Financial
                Officer)*