UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
      DC 20549





AMENDMENT
      NO. 1 TO


FORM
      10-KSB





x
              ANNUAL
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934For
                  the fiscal year ended: December 31, 2005 ̈
              TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934For
                the transition period from ______________ to
                ________________.Commission
                file number 000-50081.


INVISA,
      INC.


(Name
      of
      Small Business Issuer in Its Charter)





NEVADA
            
            65-1005398(State
                of Other Jurisdiction of
            
            (I.R.S.
                Employer Identification No.)Incorporation
                or Organization6935
                15thStreet East, Suite 120, Sarasota, Florida
            
            34243(Address
                of Principal Executive Offices)
            
            Zip
                Code





941-355-9361





(Issuer’s
      Telephone Number)





Securities
      to be registered pursuant to Section 12(b) of the Exchange Act:
      NONE





Securities
      to be registered pursuant to Section 12(g) of the Exchange Act:





Common
      Stock, Par Value $.001 per share





(Title
      of
      Class)




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





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 registrant’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  ̈ No





Indicate
      by a check mark whether issuer is a shell company (as defined in Rule 12b-2
      of
      the Exchange Act).  ̈ Yes x No





The
      Issuer’s revenues for its most recent fiscal year were $539,285.





Indicate
      by check mark whether Invisa is an accelerated filer as defined in the Exchange
      Act Rule 126-2.  ̈ Yes x No





The
      aggregate market value of the Issuer’s voting stock held as of December 31, 2005
      by non-affiliates of the Issuer based upon the closing bid and asked price
      of
      the Issuer’s Common Stock on that date is $1,230,356. The Issuer does not have
      any non-voting stock.





On
      March
      31, 2006, 23,799,268 shares of Invisa Common Stock, $0.001 par value, were
      outstanding.









**TABLE
      OF CONTENTS**




This
      Amendment is being filed in order to correct the presentation of the
      Consolidated Statements of Operations and to further describe the Company’s
      accounting for capitalized patent costs and preferred stock. This restatement
      had no effect on net loss or net loss attributable to common stockholders
      previously presented nor was there any effect on the consolidated balance sheet,
      consolidated statements of cash flows or consolidated statements of
      stockholders’ equity. See “Note N - Restatement of Previously Issued Financial
      Statements” under Notes to Financial Statements for additional
      discussion.





We
      have
      not updated the disclosures contained herein to reflect events that occurred
      at
      a later date.





Page**Part
                I**
            1Item
                1
            Description
                of Business
            1Item
                2
            Description
                Properties
            6Item
                3
            Legal
                Proceedings
            7Item
                4
            Submission
                of Matters to Vote of Security Holders
            7**Part
                II**
            7Item
                5
            Market
                for Common Equity and Related Stockholder Matters
            7Item
                6
            Managements
                Discussion and Analysis or Plan of Operations
            9Item
                7
            Financial
                Statements
            18Item
                8
            Changes
                in and Disagreements with Accountants on Accounting
            18Item
                8a
            Controls
                and Procedures
            18**Part
                III**
            18Item
                9
            Directors
                and Executive Officers of the Registrant
            18Item
                10
            Executive
                Compensation
            24Item
                11
            Security
                Ownership of Certain Beneficial Owners and Management
            28Item
                12
            Certain
                Relationships and Related Transactions
            30Item
                13
            Exhibits
                and Reports on Form 8-K
            31Item
                14
            Auditor
                Fees
            34**Financial
                Statements**Report
                of Aidman, Piser & Company, P.A.
            F-1Consolidated
                Balance Sheet at December 31, 2005
            F-2Consolidated
                Statements of Operations for the years ended December 31, 2004 and
                2005.
            F-3Consolidated
                Statements of Stockholders’ Equity for the years ended  December 31,
                2004 and 2005
            F-4Consolidated
                Statements of Cash Flows for the years ended
              December
                31, 2004 and 2005.
            F-5Notes
                to Consolidated Financial Statements.
            F-7**Signature
                Page****Index
                to Exhibits**










**PART
      I**





Note
      regarding forward-looking statements. Except for statements of historical fact,
      certain information contained herein constitutes forward-looking statements
      including, without limitation, statements containing the words believes,
      anticipates, intends, expects, and words of similar import, as well as all
      projections of future results. Such forward-looking statements involve known
      and
      unknown risks, uncertainties and other factors which may cause the actual
      results or achievements of Invisa, Inc. to be materially different from any
      future results or achievements expressed or implied by such forward-looking
      statements. Such factors include, but are not limited to, the following: risks
      involved in our implementing our business strategy; our ability to obtain
      financing on acceptable terms; competition; our ability to manage growth; risks
      of technological change; our dependence on key personnel; and our ability to
      protect our intellectual property rights; risks of new technology and new
      products; and government regulation.


**Item
      1 - Description of Business**





**History**





Invisa,
      Inc. is a development stage company that is commercializing patented
      presence-sensing technology under the InvisaShieldTM trade name. The Company was
      incorporated in Nevada in 1998. In 2000, we acquired SmartGate, L.C.
      (“SmartGate”), before it had achieved any significant revenues. SmartGate had
      developed presence-sensing technology for safety applications in the powered
      closure market, such as powered overhead doors and parking barrier gates.
      Subsequently, at the end of 2004, it was merged into Invisa. From an accounting
      perspective, SmartGate was the acquirer in this transaction and the accompanying
      Financial Statements reflect the operations of SmartGate from
      inception.





In
      February of 2002, the Company purchased 100% of the outstanding capital stock
      of
      Radio Metrix Inc. (“RMI”), a company owned by the principal shareholders of
      Invisa, Inc. RMI had virtually no operations since its inception and, therefore,
      the Company has determined that by acquiring RMI, the company acquired an asset
      (a patent) and not a business. RMI, formed to commercialize InvisaShield
      security sensors for applications such as zone and perimeter protection, was
      merged into Invisa at the end of 2004. With that merger, Invisa now owns the
      patent and patent applications, as well as the sole rights to the InvisaShield
      technology in all markets worldwide.





RMI
      was
      owned principally by Steve Michael and Sam Duffey. At the time both were
      significant shareholders of RMI and significant shareholders and officers of
      the
      Company. At the time both Messrs. Michael and Duffey were also Directors of
      the
      Company but refrained from voting on the RMI transaction. RMI had acquired
      the
      patent from the inventor who is not a related party.





In
      April
      2003, the RMI Purchase Agreement was amended whereby the Company agreed to
      issue
      3,250,000 shares of its Common Stock for full satisfaction of the future
      contingent consideration. In November 2003, the Purchase Agreement was further
      amended whereby the $1,300,000 notes payable were forgiven. In August 2004,
      we
      negotiated the cancellation of the 7% royalty agreement in exchange for 400,000
      warrants to purchase Common Stock. As a part of this latter amendment, certain
      compensation owed to affiliated parties was forgiven.




1




In
      December 2004, both of these wholly-owned subsidiaries (SmartGate, L.C. and
      RMI)
      were merged into Invisa.





Our
      offices are located at 6935 15 th Street
      East, Suite 120, Sarasota, FL 34243, telephone (941) 355-9361.





**Overview**





Invisa
      develops, manufactures, markets and licenses the rights to produce and sell
      sensors that use the Company’s patented InvisaShield presence-sensing design and
      technology. Presence-sensing is the reliable, repeatable detection of people
      and
      conductive objects. InvisaShield technology detects objects at a distance of
      typically less than one meter.





There
      are
      two markets in which the InvisaShield technology is used: the *Safety
      Market* and the *Security
      Market* .





In
      the
      safety market, the Company sells a line of SmartGate ® brand
      safety sensors. These sensors are life and property safety devices used in
      or
      with powered closures - mechanisms that include parking gates, slide gates,
      overhead doors and the like.





In
      the
      security market, the Company has installed first generation security ** sensors
      at a major New England museum. These devices create invisible presence-sensing
      fields around displays and exhibits. The InvisaShield sensors detect any person
      who tries to enter the monitored zone, preventing vandalism or inadvertent
      damage. This installation has been in operation at the museum since the summer
      of 2003.





We
      believe that the security market offers significant promise and we plan
      additional investment to further develop sensors for museum exhibit/display
      and
      other security-related applications.





To
      date,
      our revenues have been derived mostly from the sale of SmartGate safety sensors
      which are incorporated into powered parking gates and slide gates. Parking
      and
      slide gates are motorized barriers used to control the flow of vehicular
      traffic, such as at parking facilities, vehicle storage facilities, toll booths,
      and metered entry points for highways.





**Applications**





*Safety
      Market* - Many
      safety devices and safety functions depend upon presence-sensing technology.
      We
      continue to develop a range of presence-sensing devices for the safety market
      under our brand name SmartGate.





We
      believe that our safety sensors offer potential operational and maintenance
      benefits for the powered closure industry. Today, we sell SmartGate safety
      sensors for use with powered parking gates and slide gates.





We
      also
      have developed pre-production versions of presence-sensing devices for use
      in
      powered commercial overhead doors, powered industrial doors (which are used
      in
      commercial, manufacturing, and industrial facilities) and residential garage
      doors. We believe that there may be other applications for our presence-sensing
      technology in the safety market. Ultimately, we plan to offer safety sensors
      based upon our InvisaShield technology to be used with a broad range of powered
      closure products manufactured by other companies.




2




To
      date,
      substantially all revenue has been derived from the sale of SmartGate safety
      sensors used with powered parking barrier gates. These gates are commonly used
      for traffic control and typically have a power-operated barrier arm made of
      metal, wood or PVC. This arm moves vertically between an open and a closed
      position. Our device places an invisible presence-sensing field that precedes
      and moves with the potentially dangerous barrier arm to detect people and
      vehicles in its path. Our device signals the powered gate to trigger a
      predetermined response, such as stopping and reversing the barrier
      arm.





Another
      application of InvisaShield technology is with vertical powered doors. In July
      2002, Rytec Corporation became an exclusive licensee to use our safety devices
      as original equipment on high-speed industrial doors in North America. We
      believe that Rytec is the largest manufacturer in this market. These doors
      are
      frequently used in manufacturing and industrial environments where
      air-conditioned, cooler, and freezer areas are separated within warehouses
      and
      other buildings.





Our
      selling price for InvisaShield safety sensors allows us an acceptable gross
      profit margin and we expect that our cost of goods will continue to decline
      as
      we realize economies of scale.





*Security
      Market* -
      Security systems and security equipment generally rely, to varying degrees,
      on
      presence-sensing technologies to detect the presence of potential intruders
      and
      trespassers, or to provide surveillance of valuable objects. We currently have
      first-generation security sensors in operation and plan further development
      which will be followed by commercialization.





Our
      security sensors are components that provide added features and functions for
      new and/or existing security systems. In the future, we plan for these sensors
      to compete with and, in some applications, complement existing presence-sensing
      technologies used in the security market today. Examples of products using
      these
      technologies are infrared and/or microwave sensors, motion detectors, lasers,
      light beam systems and magnetic contacts.





In
      addition to our first-generation sensors for museum applications, we have
      demonstrated prototypes of InvisaShield security sensors for retail, industrial,
      commercial, defense and government applications. As with our museum security
      sensors, these devices place a monitoring field around objects needing
      protection. Examples of applications that we have demonstrated include safes,
      locking cabinets, display cases, objects of art and jewelry and or exposed
      perimeters (doors, windows, fences etc.). When the detection field is entered,
      the InvisaShield sensor signals the security system. The security system then
      responds with a warning or alarm.





3





**Marketing**





Historically
      we have concentrated our marketing efforts on those prospective customers whom
      we believe to be market leaders or who are well known within specific market
      segments. We sell our safety products to manufacturers, distributors, dealers
      and, in some instances, to selected end-users.





We
      target
      the market for safety devices used with powered parking gates, industrial doors,
      commercial overhead doors, and powered slide gates. A longer term goal is to
      license our InvisaShield technology to manufacturers of powered closure
      products.





**Sales**





During
      2004 and 2005, Magnetic Automation Corp. was our largest customer, comprising
      approximately 20% of our product revenues in both years. During 2005, we
      recognized $300,000 from Rytec Corporation as other operating revenue. The
      payment to us by Rytec was originally an advance against future product
      delivery, but in March 2005, we amended our agreement and recognized the amount
      as compensation for development efforts in 2005.





**Financing**





In
      August
      2005, the Company issued 10,000 shares of Series B Convertible Preferred Stock
      in the face amount of $1,000,000 for $878,000 (net of $122,000 transaction
      expenses) which was paid in the respective amounts of $378,000 and $500,000
      at
      closing. Additionally, the transaction included:





·
            Detachable
                warrants to acquire up to 2,500,000 shares of the Company’s Common Stock
                at $0.30 per share. The warrants expire on August 31, 2010 and are
                subject
                to call by the Company upon the Common Stock trading at a price of
                $0.60,
                a minimum trading volume of 60,000 shares for 20 consecutive days
                and the
                registration statement being
                effective.





·
            In
                addition to the transaction costs referred to above, the Company
                granted
                warrants to acquire up to 666,667 shares of the Company’s Common Stock at
                $0.16 per share to a broker. The term of the warrants is three
                years.





·
            The
                Preferred Stock is non-voting and is entitled to receive dividends
                at an
                annual rate equal to the lower of the Prime Rate plus 3.5% or 9%.
                The
                dividend may either be paid in cash or registered shares of the Company’s
                Common Stock, subject to certain limitations. The Preferred Stock
                is
                convertible into Common Stock at the option of the holder. The conversion
                price is equal to 80% of the market price at the time of conversion,
                subject to a floor of $0.12 per share and a ceiling of $0.275 per
                share.




4




**Technology**





The
      InvisaShield technology uses electronic circuitry that emits, controls, and
      monitors changes in an invisible energy field. The field is based, in part,
      upon
      low energy radio waves oscillating within a controlled frequency range. The
      field that is monitored can be varied in sensitivity from a distance of
      approximately one meter to a centimeter or less, depending upon the selected
      application. Circuitry constantly checks the field to test for the presence
      of
      people, vehicles or other conductive objects (objects that conduct electricity)
      that would disturb the monitored field.





We
      believe that the InvisaShield technology is a novel and proprietary way to
      provide presence-sensing. At the core of the technology is the ability to
      project a field or zone capable of detecting most conductive objects that enter
      the field. The field is projected from a metallic substance, referred to as
      an
      antenna, which may consist of wire, self-adhesive metallic tape or other
      metallic items. The technology allows flexibility in designing and locating
      the
      antenna. This may offer unique opportunities to place presence-sensing fields
      where they can be used more efficiently or effectively. This adaptability may
      mean that the InvisaShield technology can perform non-contact presence-sensing
      tasks not currently possible with competing technologies and/or it may perform
      presence-sensing tasks similar to those performed by competing technologies,
      but
      in a more efficient, effective, and reliable manner.





We
      believe that the InvisaShield technology has a number of operational advantages.
      The technology does not depend upon lenses, beams or reflectors which may
      require replacement, cleaning and aligning. The non-intrusive, non-contact
      presence-sensing capability of our technology is generally not disrupted by
      its
      operating environment, including electronic noise, mechanical noise,
      temperature, dust, frost, snow, ice or other operating conditions. We believe
      that the InvisaShield technology may have greater capability, flexibility and
      benefits than other non-contact sensing technologies.





*Competing
      Technologies* - The
      presence-sensing business is highly competitive, consisting of numerous
      manufacturers of presence-sensing products based on various technologies,
      including infrared, ultrasonic, laser, microwave, and similar technologies.
      For
      the most part, these technologies have been in use for a number of years and,
      in
      many cases, may not be proprietary.





Our
      competitors provide a variety of presence-sensing and other safety and security
      alternatives such as motion detectors, CCTV-based movement detection systems,
      infrared and visible light beam detectors, light curtains, on/off switching
      mats
      and pads, tape switches, contact edges, as well as others.





In
      the
      safety and/or security sectors we compete with many companies, including
      MillerEdge, Stanley, Optex, Napco, Pelco, and DMP, along with other large and
      well-established firms such as Honeywell, Tyco, General Electric, Bosch, and
      Siemens.





Many
      of
      our competitors have substantially greater development, technical, marketing,
      sales and financial capabilities than we have. As a result of these factors,
      competitors and potential competitors may be able to respond more quickly to
      new
      or emerging technologies and changes in customer requirements and/or to devote
      greater resources to the development, promotion and sale of their products
      and
      services than we can. We believe that our ability to successfully compete
      depends, to a large degree, upon the performance of our technology, our current
      and planned presence-sensing products and our ability to finance our
      development, marketing and distribution efforts.




5




*Patents
      and Trademarks* - We own
      two Patents issued by the U.S. Patent Office: Patent No. 5,337,039 issued on
      August 9, 1994 and Patent No. 6,819,242 issued on November 16, 2004. In
      addition, we have filed for three patents (as PCT, or Patent Cooperation Treaty
      filings), one provisional patent application and have one application pending,
      all of which cover improvements to the InvisaShield technology.





We
      have a
      trademark on the trade name “SmartGate” which we use in our safety products
      category. We have filed trademark applications for the following: “Invisa”,
“InvisaShield” and the tagline “Safe. Secure. No Question.” We believe that our
      patent and trademark position will be useful in our efforts to protect our
      perceived competitive advantages.





During
      the year 2004, we concluded three agreements that terminated our obligations
      to
      pay royalties on products sold or licensed. We are unaware of any agreements
      in
      effect that would require us to pay any other royalties.





**Materials
      and Manufacturing**





We
      believe that the materials required and the sources of such materials will
      be
      similar for our various existing and planned product categories. All components
      and parts are modified or manufactured by third parties to our specifications
      or
      are otherwise generally available as off-the-shelf materials. Our products
      have
      a number of components including proprietary electronic circuitry manufactured
      to our specifications by third party manufacturers and a standard power supply
      available in the marketplace. The antenna is standard wire, tape or other
      metallic materials, which can generally be purchased in bulk. Whenever possible,
      we use fixed price manufacturing for our electronic circuitry, placing the
      responsibility for component supply on the manufacturer. We believe that there
      are multiple manufacturers and suppliers for each component and that adequate
      components and materials will be available to support our planned growth. We
      perform some final assembly and predetermined quality control procedures in
      our
      facility.





**Government
      Regulation**





The
      use
      of radio frequency or “RF”, such as that used by our safety products, is
      regulated by the Federal Communications Commission. RMI submitted its patented
      technology for required FCC testing and, in August of 1993, it received FCC
      Certification. We will endeavor to continue satisfying all requirements of
      the
      FCC.





On
      March
      1, 2001, a new safety standard was implemented by Underwriters Laboratory (UL)
      for the powered gate, door and window industry. This rule, UL-325, while not
      a
      governmental regulation, is considered an indication of reasonable safety for
      powered gates, doors and windows, and is a requirement for UL certification
      for
      certain powered gate, door and window operators. Gate and operator manufacturers
      that rely upon UL certification or consider UL certification important for
      components most likely will require that our products be UL certified before
      incorporating our products as original equipment. Likewise, the absence of
      UL
      certification for our products may represent a sales or marketing barrier in
      certain market categories and to certain customers.




6




We
      have
      applied for UL certification for certain of our safety products (those which
      we
      believe meet or exceed the current UL-325 standard). From time to time, we
      anticipate submitting additional products, including safety and security
      products, for UL certification. We also have applied for CE certification,
      which
      is important in Europe, the U.K. and elsewhere (the equivalent to UL
      certification). Other markets may have additional governmental or certification
      requirements.





**Warranty**





Our
      safety products are sold with a 90-day (upgradeable to one year) limited
      warranty. We anticipate that our security products will carry a warranty that
      is
      generally in line with industry suppliers’ practice.





**Employees**





We
      have
      four employees. We have no unions and we have not entered into any collective
      bargaining agreement with any group of employees. We believe that we have a
      good
      relationship with our employees.





**Research
      and Development**





During
      the years ended December 31, 2004 and 2005, research and development expenses
      totaled $352,642 and $174,292, respectively.


**Item
      2 - Description of Property**





As
      of
      March 2006, we lease 5,500 square feet of office and research lab space in
      one
      building in the Airport Business Center, Sarasota, Florida. We believe the
      space
      to be adequate for our needs in the near future. The lease expires December
      2009. Annual payment is approximately $50,000 plus taxes, typical of the local
      market rate for such facilities. We lease the facilities from a non-affiliated
      party. No zoning or other governmental requirements are needed for the continued
      use of our facilities.




We
      have
      adopted a policy pursuant to which we do not invest in real estate or maintain
      an interest in real estate, real estate mortgages or securities issued that
      are
      based upon real estate activities. We maintain lease insurance that we believe
      is adequate.





**Item
      3 - Legal Proceedings**





We
      are,
      from time to time, subject to litigation-related to claims arising out of our
      operations in the ordinary course of business. At this time, there are no claims
      asserted, which management believes, taken in the aggregate, would have a
      material adverse impact on our financial condition or results of
      operations.


**Item
      4 - Submission of Matters to a Vote of Security Holders**





No
      matter
      was submitted during the fourth quarter of the fiscal year covered by this
      report to a vote of the Company’s security holders.




7




**PART
      II**





**Item
      5 - Market for Common Equity and Related Stockholder
      Matters**





**Market
      Information**





Our
      Common Stock has traded in the over-the-counter market through Pink Sheet,
      LLC
      under the symbol INSA (previously SGTI) from July 26, 2000 until July 7, 2003.
      From July 7, 2003 to date, our Common Stock has traded on the NASD OTC BB which
      is the principal market for our Common Stock. The following table sets forth
      the
      range of high and low bids to purchase our Common Stock during the last two
      fiscal years. Such prices represent quotations between dealers, without dealer
      markup, markdown, or commissions, and may not represent actual
      transactions.





As
      of
      March 1, 2006, there were 381 stockholders of record of Invisa Common
      Stock.


**Quarter**
            **High
                Bid**
            **Low
                Bid**First
                Quarter 2004
            4.05
            2.90Second
                Quarter 2004
            2.90
            1.60Third
                Quarter 2004
            2.25
            0.43Fourth
                Quarter 2004
            0.34
            0.28First
                Quarter 2005
            0.53
            0.22Second
                Quarter 2005
            0.24
            0.04Third
                Quarter 2005
            0.32
            0.14Fourth
                Quarter 2005
            0.26
            0.09





On
      March
      31, 2006, the closing bid and closing ask prices for shares of our Common Stock
      in the over-the-counter market, as reported by NASD OTC BB was $0.21 per
      share.





We
      believe that there are presently approximately 20 market makers for our Common
      Stock. When stock is traded in the public market, characteristics of depth,
      liquidity and orderliness of the market may depend upon the existence of market
      makers as well as the presence of willing buyers and sellers. We do not know
      if
      these or other market makers will continue to make a market in our Common Stock.
      Further, the trading volume in our Common Stock has historically been both
      sporadic and light.





**Dividend
      Policy**





The
      payment by the Company of dividends, if any, in the future, rests within the
      sole discretion of its Board of Directors. The payment of dividends will depend
      upon our earnings, our capital requirements and our financial condition, as
      well
      as other relevant factors. The Company has not declared any cash dividends
      since
      its inception, and has no present intention of paying any cash dividends on
      its
      Common Stock in the foreseeable future.





**Transfer
      Agent**





The
      Transfer Agent for the Common Stock of the Company is Liberty Transfer Co.,
      274B
      New York Avenue, Huntington, New York 11743.




8





**Recent
      Sales of Unregistered Securities**





On
      December 16, 2005, we issued 66,666 shares of Common Stock to Christopher
      Maggiore for $0.075 per share.




**Item
      6 - Management’s Discussion and Analysis or Plan of
      Operations**





The
      following discussion and analysis of our financial condition and plan of
      operations should be read in conjunction with our consolidated financial
      statements and related notes appearing elsewhere in this filing. This discussion
      and analysis contains forward-looking statements including information about
      possible or assumed results of our financial conditions, operations, plans,
      objectives and performance that involve risk, uncertainties and assumptions.
      The
      actual results may differ materially from those anticipated in such
      forward-looking statements. For example, when we indicate that we expect to
      increase our product sales and potentially establish additional license
      relationships, these are forward-looking statements. The words expect,
      anticipate, estimate or similar expressions are also used to indicate
      forward-looking statements. The cautionary statements made herein should be
      read
      as being applicable to all related forward-looking statements in this Annual
      Report on Form 10-KSB





**Background
      of our Company**





We
      are a
      development-stage company, and we expect to continue the commercialization
      of
      our InvisaShield technology. For the twelve months ended December 31, 2005,
      we
      had revenue from product sales of $239,285, principally representing sales
      of
      our product for powered parking gates. In addition to limited revenue, these
      sales have been a vehicle for receiving customer feedback on the reliability,
      ease of installation, and determining the market’s acceptance of our safety
      product.





Financing
      for our development activities to date has been derived from limited sales,
      the
      sale of common stock and preferred stock, notes, short-term financing, and
      a
      payment received in connection with the Rytec Corporation Agreement, originally
      intended as a pre-payment for product but used as compensation for development
      work instead. We are working to increase our sales of product and to establish
      additional licensing relationships. Furthermore, we expect to broaden these
      efforts as we develop additional safety and security products and bring them
      to
      market.





In
      February 2002 Invisa acquired Radio Metrix, Inc. (“RMI”) thereby obtaining
      ownership of the patent held by RMI.





Prior
      to
      acquiring ownership of the patent, Invisa was selling safety sensors for gates
      (principally, automobile parking facility gates) under a sub-licensing
      arrangement with RMI for safety products only. Acquiring RMI, and thus the
      patent, was a business decision as it enabled Invisa to gain access to universal
      use of the patent technology, including not only safety but security and other
      products.





Through
      October 2003, we planned to develop, manufacture and sell sensor devises for
      use
      not only in parking facility gates, where we already had developed commercial
      products but in other safety and security devices.




9




In
      October 2003, we hired a new CEO who, shortly after his employment, revised
      our
      strategy to focus more on selling licenses rather than manufacturing and selling
      devices. Because of the constraints on our finances, we did not believe that
      we
      had the available resources to market, manufacture and sell closure, security
      and other devices. The licensing of our technology, although reducing our
      ability to enjoy the full value of the patent, was to provide us with an inflow
      of funds without our having to expend significant resources. In April 2005
      the
      CEO’s employment was terminated and we have reinstated our original sales
      strategy. We plan to work with manufacturers (OEM’s) in embedding our patented
      sensors in their closure devices and developing cooperative marketing and sales
      programs with the OEM’s. In the safety area we have executed agreements with
      five OEM’s and currently are in discussions with several others.





Invisa
      generated sales of parking automated sensors in 2004 and 2005 of $197,484 and
      $239,285, respectively. In 2003, we also sold 30 security devices to a major
      museum which are currently in use. All of these sales relate to our
      patents.





We
      have
      continued to (i) enhance our patent and (ii) work on developing new patents
      compatible with the patent we purchased. For example, the security devices
      sold
      to the museum used the technology represented by our original patent but also
      contained technology developed specifically for security purposes. In the
      future, as additional uses evolve for our technology, we will continue to
      enhance our technology and adapt it to new uses.





**Limited
      Operating History**





We
      have
      had a limited history of operations and anticipate that our quarterly results
      of
      operations will fluctuate significantly for the foreseeable future. We believe
      that period-to-period comparisons of our operating results should not be relied
      upon as predictive of future performance. The information in this Form 10-KSB
      must be considered in light of the risks, expenses and difficulties encountered
      by companies at an early stage of development, particularly companies
      commercializing new and evolving technologies such as InvisaShield.





**Year
      Ended December 31, 2004 Compared to the Year Ended December 31,
      2005**





*Net
      Sales* -
      During
      the years ended December 31, 2004 and 2005, product sales totaled $197,484
      and
      $239,285, respectively. The Company's sales to date have been limited and
      constrained by lack of capital. Other operating revenue of $300,000 relates
      to
      the recognition of development fees from Rytec Corporation. The payment was
      originally received during 2002 and was classified as deferred revenue for
      future product shipments. During 2005 the agreement was modified and the fee
      was
      recognized ratably during the year as compensation for development work
      performed by the Company pursuant to the modification.





Cost
      of
      goods sold - During the years ended December 31, 2004 and 2005, cost of goods
      sold totaled $259,653 and $122,761, respectively. Cost of goods sold in 2004
      includes a write-off of inventory for $157,331 relating to product used in
      our
      research and development activities.





*Research
      and Development Expenses* - During
      the years ended December 31, 2004 and 2005, research and development expenses
      totaled $352,642 and $174,292, respectively. The decrease of $178,350 in 2005
      was due principally to a reduction in facility expense, insurance expense and
      work force, resulting in decreases in salaries and wages and payroll
      taxes.





10





*Selling,
      General and Administrative Expenses* - During
      the years 2004 and 2005, selling, general and administrative expenses totaled
      $2,239,134 and $1,227,592, respectively. The decrease of $1,011,542 in 2005
      principally resulted from reductions in advertising, marketing and tradeshow
      activities, lower compensation and related payroll expenses, rent, insurance
      and
      office supplies.





*Amortization
      and Impairment of Patent -* During
      the year 2003, the Company decreased the carrying amount of its patent costs
      of
      $12,217,808 by $5,517,808 to $6,700,000 to reflect the fair value as determined
      by the Company’s management. In 2003 the Company revised its strategy to focus
      more on selling licenses rather than manufacturing and selling devices. The
      patent impairment resulted principally from the Company’s forecast of reduced
      expected discounted future cash flows associated with the licensing business
      model. Realization of the patent’s carrying value will require 60% minimum
      revenue growth through 2012, which is consistent with the Company’s internal
      budgets and projections over the same period. This assumed level of revenue
      growth is based upon a relatively low level of actual revenues during 2004
      on
      which percentage growth is predicated, management’s assessment of the available
      market for its product and the assumed availability of financing which will
      be
      necessary to fund the Company’s business plan. Amortization after the impairment
      charge is $788,235 per year.





*Debt
      Extinguishment Gain* - During
      the year 2004, the Company negotiated the settlement of the SDR Metro, Inc.
      obligation from the contractual amount of $600,000 to a restructured amount
      of
      $250,000. The difference of $350,000 is reported as a gain. The Company also
      settled an additional obligation of $100,000 for $90,000. The difference of
      $10,000 is reported as a gain.





*Interest
      Income, Net* - During
      2004 interest income totaled $15,360 and during 2005 interest income totaled
      $2,677. The Company maintains excess cash in an interest bearing money market
      account.





*Net
      Loss applicable to Common Stockholders and Net Loss Per Share applicable to
      Common Stockholders* - The
      Company’s net loss applicable to Common Stockholders and net loss per share
      applicable to Common Stockholders for these periods decreased from $4,363,460
      and $0.22 in 2004 to $2,789,788 and $0.12 in 2005, respectively, as a result
      of
      the matters described above and a $296,640 decrease of preferred stock
      accretions in 2005 from those in 2004.





**Plan
      of Development and Operations**





We
      raised
      $1.07 million in equity and debt during 2005. We sought this round of capital
      to
      provide Invisa with funds to support our business plan. We continued to improve
      our efficiency; and we continue to pay close attention to our costs with a
      goal
      of reaching cash flow breakeven and profitability in a reasonable
      timeframe.





Our
      business plan emphasizes gaining support from major manufacturers. We refer
      to
      manufacturers which enter into product support agreements with us as our OEM
      partners. These partners are expected to offer our products directly to their
      customers and to their distribution and dealer network; they are expected to
      install our products as original equipment and are encouraged to create
      dedicated product lines incorporating our products. Further, our products are
      offered for sale by our partners to their installed base as after-market safety
      products. We believe that this OEM emphasis on support from and relationships
      with manufacturers will give our products greater exposure and enhance our
      market position.





11




As
      our
      relationships with the OEM partners grow, we believe our access to their
      existing distribution and dealer networks will also grow. We plan to devote
      significant resources to maximize our opportunity to sell our products through
      this established network. Further, we believe that this access to dealers will
      provide us with an efficient and cost effective way to market our products
      both
      to these dealers and to the owners/operators (and ultimately the
      consumer).





We
      are
      experiencing a rapid pace of adoption of our products by manufactures. At
      December 31, 2005 we had One OEM partner which has grown to six OEM partners
      at
      April 13, 2006. We expect the growing number of OEM partners to encourage
      additional manufacturers to also become our OEM partners. We believe that this
      represents a long-term market trend which will expand our market penetration
      and
      ultimately establish a new expectation for safety in the
      marketplace.





Our
      strategy of emphasizing support from and relationships with manufacturers will
      reduce the number of customers which we deal with directly. We believe our
      strategy will potentially yield a market-wide change in the expectation for
      safety yielding increased sales and revenue, improved market access and lower
      product costs. We are also seeking relationships and agreements with
      manufacturers of other types of powered closing devises to support our strategy
      to expand our products into new safety markets, such as slide and swing gates
      and overhead and garage doors.





Our
      support from and relationships with a growing number of manufacturers will,
      we
      believe, have a positive impact on our strategy to change the expectation for
      safety throughout the marketplace. Our ultimate strategy is to encourage the
      industry to change and make additions to the industry’s formal safety standards
      and rules which strengthen the requirement for safety and in turn enhance the
      value and necessity of our products. We believe that by increasing market
      expectations for safety, the industry’s formal safety rules and standards will
      come under review and increasing pressure to keep pace with the standard of
      care
      being practiced by leading manufactures, dealers and gate owners/operators.
      To
      further support this strategy, we have engaged Underwriters Laboratories, Inc.
      (UL) to research and approve our technology for use in barrier, slide and swing
      applications. Additionally, we are pursuing approval under UL 325 Recognition
      Component Service Program as a component for use with Commercial Gate Operators.
      We also plan to demonstrate that our products offer an opportunity to make
      powered closure devises more safe than is possible with other
      products.





We
      believe that as we execute our business plan, we will improve cash flow and
      achieve profitability. We further believe that our current activities will
      result in the introduction of new products targeted at the commercial, and
      residential overhead door markets. We plan to use a similar strategy as we
      enter
      the security market which is planned for next year.


**Liquidity
      and Capital Resources**





Since
      inception, we have incurred significant net losses and approximately $14.1
      million of negative operating cash flows which we have financed largely from
      the
      sale of Common and Preferred Stock. From inception through December 31, 2005
      we
      raised cash of approximately $13.4 million net of issuance costs, principally
      through private placements of common and preferred stock financings. At December
      31, 2005, we had cash and cash equivalents totaling $585,463.





12





From
      inception (February 12, 1997) through December 31, 2005, we were largely focused
      on technology and product development. The estimated dollar amount spent during
      this period on company-sponsored research and development was $3,351,355,
      including $352,642 for the year ended December 31, 2004 and $174,292 for the
      year ended December 31, 2004. Because of the Company’s losses (which aggregate
      $25,539,538 from inception through December 31, 2005), limited capital, and
      ongoing product development expenses, Footnote C of the Company’s consolidated
      financial statements and the accompanying Report of Independent Registered
      Public Accounting Firm’s report that substantial doubt exists regarding the
      Company’s ability to continue as a going concern.





The
      $3,351,355 of direct research and development expenses that we incurred from
      inception through December 31, 2005 have been directed principally toward our
      InvisaShield technology and safety products, and to a lesser extent, our
      security products. Management estimates that sixty (60%) percent was expended
      toward the development of our core presence-sensing technology, twenty (20%)
      percent was expended in the miniaturization of our circuitry, fifteen (15%)
      percent was expended in the design and development of safety products, and
      five
      (5%) percent was expended in the design and development of additional products
      for the security sector of our business.





During
      2004, the Company sold 705,750 shares of Common Stock for cash totaling
      approximately $1,471,000 (principally from the exercise of warrants) and in
      September 2004, we completed a financing transaction whereby we received
      approximately $1,937,000 net of transaction expenses. Upon completion of this
      Preferred Stock offering, the Company liquidated approximately $800,000 of
      amounts due to related parties and liquidated liabilities to unrelated parties
      of approximately $200,000 through the issuance of Common Stock or Common Stock
      Warrants.





During
      2004, the Company negotiated the settlement of the SDR Metro, Inc. obligation
      from the contractual amount of $600,000 to a restructured amount of
      $250,000.





In
      August
      of 2004, the Company paid off its bank line of credit loan totaling
      approximately $149,000 and discontinued the bank line.





In
      April
      2005, the Company’s Board of Directors anticipated meeting the Company’s cash
      needs as a result of the planned funding arrangement being negotiated
      principally by our then CEO. We learned, however, that the financing would
      not
      be available on a timely basis or on acceptable terms and the negotiations
      were
      ended.





We
      had
      cash in excess of $250,000 at the time which would have met our short term
      needs. However, in view of the unexpected termination of funding negotiations,
      the CEO recommended that the Company’s operations be closed and that the cash on
      hand be reserved for employee severance pay and an orderly liquidation of
      accounts payable. As reported in our Form 8-K filed on April 8, 2005 the then
      CEO, effective April 15, 2005, terminated the employment of all employees,
      including our chief operations officer and our chief technology officers, who
      we
      consider key employees, and disbursed substantially all of our cash for
      severance pay and certain liabilities.





Operations,
      however, were immediately able to resume. Certain of our terminated employees,
      including our chief operations officer, continued to provide services on an
      interim basis, as consultants. Certain former officers also provided assistance.
      Cash for operating purposes was obtained from sales, and over the ensuing two
      months by (i) a convertible $50,000 line of credit (subsequently increased
      to
      $150,000) provided by a stockholder and (ii) a stock purchase commitment from
      a
      current stockholder to acquire 666,666 shares. These arrangements enabled us
      to
      rehire the desired employees. The CEO and CFO, who were our highest paid
      employees, were not rehired. The arrangements allowed us to operate in an
      orderly manner and provided sufficient time for us to negotiate our next round
      of funding for $1,000,000 before transaction expenses of $122,000.




13




In
      October 2005, we completed a Preferred stock offering transaction whereby we
      received $878,000, net of transaction expenses. We intend to use the cash for
      general working capital purposes.





While
      these events improved the Company’s working capital position (we have $94,316 of
      positive working capital at December 31, 2005), we anticipate that cash to
      be
      used in product development and operations, especially in the marketing,
      production and sale of our products, will increase significantly in the
      future.





To
      finance planned operations through at least the next 12 months we will continue
      to depend upon our existing cash and cash equivalents, together with anticipated
      net proceeds from private placements of equity or debt, potential license fees
      and product sales. We believe that the cash required for product development
      and
      operations, especially for the marketing, production and sale of our products,
      will increase in the future. Our plan is to access this additional cash required
      from a variety of potential sources, including: public equity financing, private
      equity financing, license fees, grants, and public or private debt.





Additional
      capital may not be available when required or it may not be available on
      favorable terms. Without adequate funds, we may need to significantly reduce
      or
      refocus our operations or obtain funds through arrangements that may require
      us
      to relinquish rights to certain or potential markets, either of which could
      have
      a material adverse effect on our business, financial condition and results
      of
      operations. To the extent that additional capital is raised through the sale
      of
      equity or convertible debt securities, the issuance of such securities would
      result in ownership dilution to our existing stockholders.




14




**Risk
      Factors**





You
      should carefully consider the risks and uncertainties described below and the
      other information in this filing before deciding to purchase our common stock.
      If any of these risks or uncertainties occurs, our business, financial condition
      or operating results could be materially harmed. In that case the trading price
      of our common stock could decline and you could lose all or part of your
      investment. The risks and uncertainties described below are not the only ones
      we
      may face. Risks related to our business we have historically incurred losses
      and
      losses are expected to continue in the future, which means that we may not
      be
      able to continue operations unless we obtain additional funding. Our auditors
      have qualified their audit opinion with regard to our ability to continue as
      a
      going concern.





We
      have
      historically incurred losses. In the twelve months ended December 31, 2005,
      we
      sustained net losses of $2.8 million. From inception through December 31, 2005,
      we have sustained aggregate net losses of $25.5 million. Future losses are
      expected to continue. Accordingly, we may experience significant liquidity
      and
      cash flow problems if we are not able to raise additional capital as needed
      and
      on acceptable terms. No assurances can be given that we will be successful
      in
      reaching or maintaining profitable operations. Because we increased our product
      development activities, we anticipate that we will incur substantial operating
      expenses in connection with continued research and development, testing and
      approval of our proposed products, and expect these expenses will result in
      continuing and, perhaps, significant operating losses until such time, if ever,
      that we are able to achieve adequate product sales levels. Our ability to
      generate revenue and achieve profitability depends upon our ability, alone
      or
      with others, to complete the development of our proposed products and
      manufacture, market and sell our products. Because our rate of expenses is
      high,
      and due to our very limited resources, our auditors have included an explanatory
      paragraph in their audit opinion with regard to our ability to continue as
      a
      going concern.





**We
      will need to raise additional capital to continue our operations or we may
      be
      unable to fund our operations, promote our products or develop our
      technology.**





Our
      operations have relied almost entirely on external financing to fund our
      operations. Such financing has historically primarily come from the sale of
      common stock to third parties and to a lesser degree from loans and revenue
      from
      product sales and license fees. We anticipate, based on our current proposed
      plans and assumptions relating to our operations (including the timetable of,
      and costs associated with, new product development), that the proceeds of the
      private placement we completed during 2005, to date, will be sufficient to
      satisfy our contemplated cash requirements at least through June of 2006. We
      will need to raise additional capital to fund our anticipated operating expenses
      and future expansion. Among other things, external financing will be required
      to
      cover our operating costs. We cannot assure you that financing whether from
      external sources or related parties will be available if needed or on favorable
      terms. If additional financing is not available when required or is not
      available on acceptable terms, we may be unable to fund our operations and
      planned growth, develop or enhance our technology, take advantage of business
      opportunities or respond to competitive market pressures, any of which could
      raise doubt as to the Company’s ability to continue as a going concern. Any
      reduction in our operations may result in a lower stock price.




15




**Our
      additional financing requirements could result in dilution to existing
      stockholders.**





The
      additional financings we will require may be obtained through one or more
      transactions which effectively dilute the ownership interests of our
      stockholders. Further, we may not be able to secure such additional financing
      on
      terms acceptable to us, if at all. We have the authority to issue additional
      shares of common stock, as well as additional classes or series of ownership
      interests or debt obligations which may be convertible into any one or more
      classes or series of ownership interests. We are authorized to issue 95,000,000
      shares of common stock and 5,000,000 shares of preferred stock. Such securities
      may be issued without the approval or other consent of our
      stockholders.





**We
      are a development stage company and have a limited operating history upon which
      you can base your investment decision.**





We
      have
      had a limited operating history and have had only limited revenue. We are a
      development stage company, and accordingly, we anticipate that we will encounter
      many difficulties and risks associated with our early stage of development
      which
      includes, but is not limited to, the introduction of new products, the search
      for and hiring of new personnel, access to required capital, management issues,
      ramping up manufacturing capacity, and other important business
      aspects.





**We
      will be required to compete with larger and well-established companies which
      are
      better financed.**





There
      are
      a number of well-established companies which are well known in the manufacture
      and/or distribution of products for the security and life-safety markets. Such
      companies include Honeywell, Tyco, General Electric, Bosch, Siemens and others.
      Accordingly, we are subject to the difficult challenge of introducing and
      commercializing our new technology and products in a market place in a strong
      competitive environment. Additionally, our technology and products based thereon
      will have to compete with other technologies such as passive infrared and
      various types of motion detection which are well known and well
      accepted.





**We
      are commercializing a new technology which will involve uncertainty and risks
      related to market acceptance.**





We
      are
      commercializing a new technology with which we seek to gain market acceptance
      and to demonstrate competitive advantages. Our success is dependent, to a large
      degree, upon our ability to fully develop and commercialize our technology
      and
      gain industry acceptance of our products, based upon this new technology and
      its
      perceived competitive advantages. Accordingly, our prospects must be considered
      in light of the risks, expenses and difficulties frequently encountered in
      connection with the establishment of a new business in a highly competitive
      industry, characterized by frequent new product introductions. We anticipate
      that we will incur substantial operating expenses in connection with the
      development and testing of our proposed products and expect these expenses
      to
      result in continuing and significant operating losses until such time, if ever,
      that we are able to achieve adequate levels of sales or license revenues. We
      may
      not be able to raise additional financing, increase revenues significantly,
      or
      achieve profitable operations.




16




**Management
      and founders of the company control a significant amount of our common stock
      and
      such concentration of ownership may have the effect of delaying or preventing
      a
      change of control of our company.**





As
      a
      result, these management stockholders will have significant influence in matters
      requiring stockholder approval, including the election and removal of directors,
      the approval of significant corporate transactions, such as any merger,
      consolidation or sale of all or substantially all of the our assets, and the
      control of our management and affairs. Accordingly, such concentration of
      ownership may have the effect of delaying, deferring or preventing a change
      in
      our control, impeding a merger, consolidation, takeover or other business
      combination involving us or discouraging a potential acquirer from attempting
      to
      obtain control of our company.





**The
      absence of product liability insurance coverage may affect our
      Business.**





We
      may be
      exposed to potential product liability claims by consumers. Although we maintain
      product liability insurance, there can be no assurance that such insurance
      will
      be sufficient to cover all possible liabilities to which we may be exposed.
      Any
      product liability claim, even one that was not in excess of our insurance
      coverage or one that is meritless and/or unsuccessful, could adversely affect
      our cash available for other purposes, such as research and development. In
      addition, the existence of a product liability claim could affect the market
      price of our common stock. In addition, certain vendors may require minimum
      product liability insurance coverage as a condition precedent to purchasing
      or
      accepting products for retail distribution. Product liability insurance coverage
      includes various deductibles, limitations and exclusions from coverage, and
      in
      any event might not fully cover any potential claims. Failure to satisfy such
      insurance requirements could impede the ability of us or our distributors or
      licensees to achieve broad retail distribution of our proposed products, which
      could have a material adverse effect on us.





**We
      may not be able to effectively protect our intellectual property rights, the
      foundation of our business, which could harm our business by making it easier
      for our competitors to duplicate our services.**





We
      regard
      certain aspects of our products, processes, services and technology as
      proprietary. We have taken steps to protect them with patents, copyrights,
      trademarks, restrictions on disclosure and other methods. Despite these
      precautions, we cannot be certain that third parties will not infringe or
      misappropriate our proprietary rights or that third parties will not
      independently develop similar products, services and technology. Any
      infringement, misappropriation or independent development could cause us to
      cease operations.





We
      have
      two issued patents and have filed five patent applications with respect to
      various aspects of our technology. The pending patent applications may not
      be
      issued to us, and if issued, may not protect our intellectual property from
      competition which could seek to design around or invalidate these patents.
      Our
      failure to adequately protect our proprietary rights in our products, services
      and technology could harm our business by making it easier for our competitors
      to duplicate our services. We may have to resort to litigation to enforce our
      intellectual property rights, protect our trade secrets, determine the validity
      and scope of the proprietary rights of others, or defend ourselves from claims
      of infringement, invalidity or unenforceability. Litigation may be expensive
      and
      divert resources even if we win. This could adversely affect our business,
      financial condition and operating results such that it could cause us to reduce
      or cease operations.




17





**Other
      parties may assert that our technology infringes on their Intellectual property
      rights, which could divert management time and resources and possibly force
      our
      company to redesign our technology.**





Technology-based
      companies, such as ours, have the potential to be involved in litigation related
      to allegations of patent infringement. Although we have no knowledge of any
      such
      claims, from time to time, third parties may assert patent, copyright and other
      intellectual property rights to technologies that are important to us. While
      there currently are no outstanding infringement claims pending by or against
      us,
      we cannot assure you that third parties will not assert infringement claims
      against us in the future, that assertion by such parties will not result in
      costly litigation, or that they will not prevail in any such litigation. In
      addition, we cannot assure you that we will be able to license any valid and
      infringed patents from third parties on commercially reasonable terms or,
      alternatively, be able to redesign products on a cost-effective basis to avoid
      infringement. Any infringement claim or other litigation against or by us could
      have a material adverse effect on us and could cause us to reduce or cease
      operations.





**We
      may not be able to keep up with rapid technological changes, which could render
      our products less competitive or obsolete.**





Changes
      in technology, changes in customer requirements and preferences, introduction
      of
      products and services embodying new or different technologies and the emergence
      of new industry standards and practices could render our existing technology
      and
      products less competitive or obsolete. Our future success will depend on our
      ability to enhance and improve the responsiveness, functionality, accessibility
      and features of our technology and products. We expect that our marketplace
      will
      require extensive technological upgrades and enhancements to accommodate many
      of
      the new products and services that we anticipate will be added to our
      marketplace. We cannot assure you that we will be able to expand and upgrade
      our
      technology and systems, or successfully integrate new technologies or systems
      we
      develop in the future, to accommodate such increases in a timely
      manner.





**We
      may not effectively manage the growth necessary to execute our business plan,
      which could adversely affect the quality of our operations and our
      costs.**





In
      order
      to successfully execute our business plan, we must significantly increase the
      number of strategic partners, manufactures, dealers, distributors and customers
      that use our products. This growth will place significant strain on our
      personnel, systems and resources. We also expect that we will continue to hire
      employees, including technical, management-level employees, and sales staff
      for
      the foreseeable future. This growth will require us to improve management,
      technical, information and accounting systems, controls and procedures. We
      may
      not be able to maintain the quality of our operations, control our costs,
      continue complying with all applicable regulations and expand our internal
      management, technical information and accounting systems in order to support
      our
      desired growth. We cannot be sure that we will manage our growth effectively,
      and our failure to do so could cause us to reduce or cease
      operations.





**We
      are thinly staffed.**





We
      have
      numerous projects, which we attempt to direct and manage with only a few
      employees. Unless and until additional employees are hired, our attempt to
      manage our numerous projects and obligations with such a limited staff could
      have adverse consequences, including without limitation, a possible failure
      to
      meet reporting deadlines, or a possible failure to consummate investment or
      acquisition opportunities.




18


**Item
      7 - Financial Statements**





The
      Financial Statements of the Company and the accompanying notes thereto, and
      the
      Report of Independent Registered Public Accounting Firm is included as part
      of
      this Form 10-KSB beginning on Page F-1.


**Item
      8 - Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure**





None.




**Item
      8a - Controls and Procedures**





Our
      management carried out an evaluation, with the participation of our Chief
      Executive Officer and Chief Financial Officer (our principal executive officer
      and principal financial officer, respectively) of the effectiveness of our
      disclosure controls and procedures as of December 31, 2005. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures were effective to ensure that
      information required to be disclosed by us in the reports that we file or submit
      under the Securities Exchange Act of 1934 is recorded, processed, summarized
      and
      reported, within the time period specified in the rules and forms of the
      Securities and Exchange Commission.





There
      has
      not been any change in our internal control over financial reporting (in
      connection with the evaluation required by Rule 13a-15(d) under the Exchange
      Act) that occurred during the three months ended December 31, 2005 that has
      materially affected, or is reasonably likely to materially affect, our internal
      control over financial reporting.





The
      nature of the business and the size of the Company have prevented the Company
      from being able to employ sufficient resources to enable it to have an adequate
      segregation of duties within its internal control system. This condition is
      considered a reportable condition and has been discussed with the audit
      committee. This lack of adequate segregation of duties notwithstanding, the
      Company currently engages in transactions of such a limited number that our
      Chief Executive Officer and Chief Financial Officer are capable of exercising
      significant managerial oversight in connection with such transactions. Our
      Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures were effective to ensure that information required
      to be
      disclosed by us in reports we file or submit under the Securities Exchange
      Act
      of 1934 is accumulated and communicated to our management, including our Chief
      Executive Officer and Chief Financial Officer, as appropriate to allow timely
      decisions regarding required disclosure.




19




**PART
      III**


**Item
      9 - Directors and Executive Officers of the Registrant**





The
      Company’s Directors are elected at the Annual Meeting of Stockholders and hold
      office until their successors are elected and qualified. The Company’s officers
      are appointed annually by the Board of Directors and serve at the pleasure
      of
      the Board. There are no family relationships between any of the officers or
      directors of the Company.





The
      directors, executive officers, and significant employees of the Company at
      December 31, 2005 are as follows:





Positions
                and Offices PresentlyName
            
            Age
            
            Held
                with the CompanyEdmund
                C. King
            
            70
            
            Director,
                Chief Financial Officer, TreasurerStephen
                A. Michael
            
            57
            
            Director,
                acting President, and ChairmanGregory
                J. Newell
            
            55
            
            DirectorJohn
                E. Scates
            
            48
            
            DirectorCarl
                A. Parks
            
            46
            
            Vice
                President of OperationsRobert
                T. Fergusson
            
            60
            
            Director
                of Engineering




There
      are
      no family relationships among any directors, executive officers or significant
      employees.





EDMUND
      C.
      KING has served as our Chief Financial Officer and Director since February
      9,
      2000. Until October 1, 1991, Mr. King was a partner in Ernst & Young, an
      international accounting and consulting firm. While at Ernst & Young, Mr.
      King was that firm’s Southern California senior healthcare partner and prior to
      that directed the Southern California healthcare practice for Arthur Young
&
Company, one of the predecessor firms of Ernst & Young. During his 30 years
      with Ernst & Young, Mr. King counseled clients in structuring acquisitions
      and divestitures; advised on the development of strategic plans; directed the
      preparation of feasibility studies; assisted with operational and financial
      restructuring; directed and supervised audits of client financial statements;
      and provided expert witness testimony and technical SEC consultation. Commencing
      in 1999, Mr. King became a financial consultant to SmartGate, L.C. that we
      acquired in February 2000. Mr. King has served as Chief Financial Officer and
      Director of SmartPlug, Inc. since November 2000 and Chief Financial Officer
      and
      Director of FlashPoint International, Inc. since October 2001. From January
      1992, Mr. King has been a general partner of Trouver, an investment banking
      and
      financial consulting partnership. Mr. King is also a member of the Board of
      Directors of LTC Properties, Inc., an NYSE listed real estate investment trust.
      Mr. King is a graduate of Brigham Young University, having served on the
      National Advisory Council of that school’s Marriott School of Management, and
      has completed a Harvard University management course sponsored by Ernst &
Young. Mr. King also has served as Chairman of the HFMA’s Long-Term Care
      Committee (Los Angeles Chapter) and is a past member of the National Association
      of Corporate Directors. He holds CPA certificates in the states of California
      and Utah.




20





STEPHEN
      A. MICHAEL has served as a Director since February 9, 2000 and as President
      from
      that date through November 6, 2003. Subsequent to that date, Mr. Michael had
      served as Chairman. In April 2005 he became acting President. Mr. Michael
      attended the School of Engineering at Ohio State University. Upon returning
      from
      military service in Vietnam, he attended the Schools of Business/Marketing
      at
      both Ohio State University and Franklin University. Mr. Michael has also
      attended the University of Wisconsin School of Engineering to acquire
      certification in the area of High Energy Surge Suppression and New York
      University School of Engineering for Advanced Studies in FRP (Fiber Reinforced
      Plastic) and Composites Engineering. Mr. Michael has served as President and
      Director of SmartGate, L.C. since January 1997. SmartGate, L.C. became one
      of
      our subsidiaries in February 2000. Additionally, he has served as President
      and
      Director of SmartPlug, Inc. since January 1997 and President and Director of
      FlashPoint International, Inc. since October 2001. Mr. Michael has devoted
      a
      significant portion of his career to developing functional products, including
      participating in the development and marketing of the Panasonic Auto Sound-Car
      dealer system, the Fuzz Buster and the Sears KingFisher Boat.





Ambassador
      GREGORY J. NEWELL has served as a Director of the Company since June 13, 2002.
      Ambassador Newell is an international business development strategist and
      former: U.S. Ambassador; U. S. Assistant Secretary of State; and White House
      Commissioned Officer, having served under four U.S. Presidents. From 1992 to
      the
      present, Ambassador Newell has served as President of International Commerce
      Development Corporation in Provo, Utah, an international business-consulting
      firm. From 1989 to 1991, Ambassador Newell served as President and International
      Development Strategist of Dow, Lohnes & Albertson International, a
      subsidiary of one of Washington, D.C.’s oldest and largest law firms. Ambassador
      Newell was U.S. Ambassador to Sweden from 1985 to 1989. Prior to that he was
      U.S. Assistant Secretary of State for International Organizational Affairs
      serving as the senior U.S. government official responsible for the formulation
      and execution of U.S. multilateral foreign policy in 96 international
      organizations including the United Nations, where he served as senior advisor
      to
      the 37th, 38th, 39th and 40th United Nations General Assemblies. He served
      as
      Director of Presidential Appointments and Scheduling and Special Assistant
      to
      President Ronald Reagan and Staff Assistant to President Gerald R. Ford.
      Ambassador Newell has also served on the boards of the Landmark Legal
      Foundation, Sutherland Institute and the Swedish-American Chamber of
      Commerce.





JOHN
      E.
      SCATES, a garage door industry engineer and consultant, was appointed to the
      Company’s Board of Directors on June 27, 2002. From June 1997 to the present,
      Mr. Scates has been President and Owner of Scates, Inc., a product design and
      failure analysis consultancy in Carrollton, Texas. From May 1993 to May 1997,
      Mr. Scates served as Manager of Research and Development for Windsor Door,
      Little Rock, Arkansas. From February 1985 to May 1993, Mr. Scates served as
      Manager of Structures at Overhead Door R & D/engineering, Dallas, Texas. Mr.
      Scates earned a BS Degree in Mechanical Engineering, Summa Cum Laude from Texas
      A & M University in 1979. Mr. Scates is licensed as a Professional Engineer
      in Texas, Florida and North Carolina.





**Significant
      Employees**





CARL
      A.
      PARKS has served as the Company’s Vice President of Operations since August
      2001. Mr. Parks has had over 20 years experience in many phases of electronic
      manufacturing including assembly methods, techniques, hiring personnel, defining
      processes and selecting equipment. Prior to joining the Company, in 2000 and
      2001 Mr. Parks served as a Customer Development Manager at ProTek Electronics
      in
      Sarasota, Florida where Mr. Parks had direct responsibility for the location,
      qualification and booking of new business and where he developed and managed
      the
      Quotation procedure and Costing model. In 1999 and part of 2000, Mr. Parks
      served as a Customer Development Manager at MSI of Central Florida in Melbourne,
      Florida. At MSI, Mr. Parks directed all manufacturing operations including
      hiring a core management team and had direct responsibility for new business
      development. From 1994 to part of 1999, Mr. Parks served as a customer service
      engineer at Genesis Manufacturing in Oldsmar, Florida. At Genesis, Mr. Parks
      had
      direct responsibility for the location and qualification of new customers.
      In
      addition, Mr. Parks provided front-end engineering support for all new program
      start-ups and provided component level sourcing support to all new programs.
      Mr.
      Parks received an A.S. Business degree in 1983 from Manatee Junior College.
      He
      has also received 1,600 hours of special instructions in many phases of
      manufacturing technology.




21




ROBERT
      T.
      FERGUSSON joined the Company in November 2001. In his 30-year career, Mr.
      Fergusson has been an electronic engineer with a background in electronics,
      optical and mechanical design, as well as extensive experience in engineering
      management. From 1973 until joining the Company, Mr. Fergusson served in various
      engineering capacities at Barry Wehmiller Electronics f/k/a Inex Vision Systems
      located in Clearwater, Florida and Denver, Colorado. During his career, Mr.
      Fergusson has been involved in the design and development of automatic on-line
      inspection equipment. Many of the pieces of equipment became industry standards
      in the glass container industry. Mr. Fergusson also served as Director of
      Engineering and Vice President of Engineering. Mr. Fergusson is also experienced
      in analog and digital (including PLD) design. He designed signal processing,
      interface and control circuits for various pieces of equipment. In addition,
      Mr.
      Fergusson has a mechanical background and has developed several innovative
      optical designs for improvement of inspection processes. Mr. Fergusson has
      traveled extensively in the U.S., Europe and Latin America to work with field
      service and sales in resolving technical problems and developing new business
      opportunities. In 1971, Mr. Fergusson received a Bachelors of Engineering
      Science in Electrical Engineering from Brigham Young University in Provo, Utah
      and an Associate of Science degree in 1968 at the College of Eastern Utah in
      Price, Utah.





**Terminations/Resignations**





During
      2005 the following Directors and Officers resigned from, or were terminated
      by,
      the Company:





Directors


Herbert
      M. Lustig (effective May 12, 2005)(1)(4)


Joseph
      F.
      Movizzo (effective May 24, 2005)(1)(4)


Robert
      Knight (effective May 31, 2005)(1)(4)





Officers


Herbert
      M. Lustig, as President and Chief Executive Officer (effective April 15,
      2005)(3)


David
      J.
      Benedetti, as Chief Financial Officer (effective April 15, 2005)(3)


Edmund
      C.
      King, as Chief Financial Officer (effective January 10, 2005)(2)





Other
      Key
      Employees


Carl
      A.
      Parks, as Vice President of Operations(3)


Robert
      T.
      Fergusson, as Director of Engineering(3)




22




(1)
            Resigned
                - no reason given.(2)
            Mr.
                King had resigned in order to retire, and was subsequently rehired
                upon
                the departure of Mr. Benedetti.(3)
            Employment
                was terminated in connection with the April 15, 2005 general termination.
                Messrs. Parks and Fergusson were subsequently rehired by the
                Company.(4)
            The
                executive officers of the Company did not know of the reasons for
                such
                resignation.





**Compensation
      Committee and Compensation of Directors**





Messrs.,
      Newell and Scates serve on the Compensation Committee, which determines the
      compensation amounts to be paid to our directors, officers and employees. We
      are
      currently in the process of establishing a formal plan for compensating our
      directors. To date, directors have been reimbursed for actual expenses incurred
      in connection with performing duties as directors and have not received
      compensation for attendance at meetings, except that Messrs. Newell and Scates
      were each entitled to be paid an annual director's fee of $10,000 which has
      not
      yet been paid and accrues. Amounts accrued through July 31, 2004 have been
      satisfied through a deferred stock grant arrangement. Currently, directors
      will
      be compensated by the grant of options from time to time, under the companies
      various compensation plans.





**The
      Audit Committee**





The
      audit
      committee of the Board of Directors currently consists of two directors, Messrs.
      Newell and Scates, each of whom is a non-employee director, and each of whom
      meets the independence and other requirements to serve on our audit committee
      under applicable securities laws and the rules of the SEC and the American
      Stock
      Exchange ("AMEX"). Although we are not listed on the AMEX, we have voluntarily
      chosen to comply with the AMEX audit committee qualification requirements.
      The
      Board of Directors has determined that Mr. Newell qualifies as an audit
      committee financial expert as defined in item 401 of Regulation SB promulgated
      under the Securities Act of 1933, as amended. Mr. Newell is independent as
      such
      term is used in Item 7(d) (3) (IV) of Schedule 14A under the Exchange
      Act.





**Code
      of Ethics**





Our
      board
      of directors has adopted a Code of Business Conduct and Ethics and Compliance
      Program which is applicable to Invisa, Inc. and to all our directors, officers
      and employees, including Invisa, Inc.’s principal executive officer and
      principal financial officer, principal accounting officer or comptroller, or
      other persons performing similar functions.




A
      copy of
      the Company’s Code of Ethics may be obtained free of charge by making the
      request to the Company in writing.





**Advisors**





Set
      forth
      below are Advisors who have been engaged by the Company and a description of
      the
      compensation arrangements with said Advisors.





**Industry
      Advisory Board**





The
      Company has established an Industry Advisory Board to consist of industry
      experts and persons held in high regard within their industry. The Advisory
      Board currently has two members who are available on a limited basis to provide
      industry or market input as requested by the Company’s officers and directors.
      The Industry Advisory Board provides a consultative function and is not part
      of
      the Company’s Board of Directors, which is discussed elsewhere in this
      document.




23




Advisory
      Board Member, Linda Kauffman, the former Chairman of the Board of the
      International Parking Institute, provides the Company with expertise in the
      parking and traffic control industry. Ms. Kauffman provides consulting services
      on an “as available” basis and as compensation, was granted an Option in June
      2001 to purchase 10,000 shares of the Company’s common stock at $4.34 per share.
      The Option vests over a period of three years with one-third of the shares
      becoming eligible to purchase on each anniversary date of the grant, provided
      Ms. Kauffman has remained a consultant with the Company on the anniversary
      date.
      The Option’s term is seven years.





Advisory
      Board Member, Duane Cameron, is a member of the parking industry. Mr. Cameron
      provides consulting services on an “as available” basis and as compensation, was
      granted an option to purchase 10,000 shares of the Company’s common stock at
      $3.00 per share. The Option was granted in July 2000. The Option vested over
      a
      two-year period and is now fully vested. Also in July 2000, Mr. Cameron was
      granted the right to be issued an additional option for the purchase of 10,000
      shares at $3.00 per share if, as a result of the efforts of Mr. Cameron, the
      Company enters into contractual relationships with certain entities in the
      parking industry.





**Other
      Advisors**





In
      May
      2004, the Company entered into a six-month marketing and investor relations
      agreement with Aurelius Consulting Group, Inc. (“Aurelius”). Fees paid to
      Aurelius under that agreement were $8,000 cash and a grant of 30,000 shares
      of
      Invisa Common Stock. On January 7, 2005, the Company entered into a new
      six-month marketing and investor relations agreement with Aurelius. The contract
      was not renewed. Fees to be paid Aurelius are: $6,000 cash per quarter; and
      a
      grant of 100,000 three-year warrants with an exercise price of $0.50. If
      Aurelius introduces a source of funding that provides $1 million or more to
      Invisa, then Aurelius is to be paid a consulting fee of $50,000.




24




**Compliance
      with Section 16(a) of the Exchange Act**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
      directors and executive officers to send reports of their ownership of the
      equity securities of the Company and of changes in such ownership to the SEC.
      SEC regulations also require the Company to identify in this Annual Report
      on
      Form 10-KSB any person subject to this requirement who failed to file any such
      report on a timely basis.


**Item
      10 - Executive Compensation**


**Summary
      Compensation Table**





 
                ;
              Annual
                Compensation
            
            Long
                Term Compensation Awards**Restricted**
            
            **Securities****Other
                Annual**
            
            **Stock**
            
            **Underlying**
            
            **LTIP**
            
            **All
                Other****Name
                and**
            
            
            
            **Salary**
            
            **Bonus**
            
            **Compensation**
            
            **Award(s)**
            
            **Options**
            
            **Payouts**
            
            **Compensation****Principal
                Position**
            
            **Year**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **(#)**
            
            **($)**
            
            **($)**Herbert
                M. Lustig(1)
            
            
            2005
            
            
            67,961
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            169,3642004
            
            
            195,000
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------2003
            
            
            32,500
            
            
            -------
            
            
            -------
            
            
            **------**
            
            
            -------
            
            
            -------
            
            
            -------Stephen
                A. Michael,(2)
              Director
                and Acting President
            
            
            2005
            
            
            ------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            1,130,000
            
            
            -------
            
            
            -------2004
            
            
            12,500
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------2003
            
            
            120,000
            
            
            -------
            
            
            43,050
            
            
            8,400
            
            
            -------
            
            
            -------
            
            
            -------2002
            
            
            120,000
            
            
            30,000
            
            
            8,400
            
            
            **------**
            
            
            300,000
            
            
            30,000
            
            
            -------Edmund
                C. King, Director,(3)
            
            
            2005
            
            
            ------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            1,350,000
            
            
            -------
            
            
            7,500CFO/Treasurer
            
            
            2004
            
            
            120,000
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------
            
            
            -------2003
            
            
            120,000
            
            
            -------
            
            
            -------
            
            
            ------
            
            
            -------
            
            
            -------
            
            
            -------2002
            
            
            120,000
            
            
            -------
            
            
            22,500
            
            
            **------**
            
            
            -------
            
            
            -------
            
            
            -------




(1) Mr.
      Lustig commenced employment in November 2003. Salary paid to him totaled $32,500
      in 2003 and $195,000 in 2004. His employment was terminated in April 2005 and
      he
      received $237,325 (other compensation is severance) cash compensation in 2005.
      An additional $30,636 has been accrued by the Company as an additional severance
      amount. The severance amount properly owed to Mr. Lustig is currently being
      reviewed by the company.





(2) Mr.
      Michael earned a base salary of $12,500 for the month of January 2004 and earned
      a base salary of $120,000 during the year 2003, none of which was paid in cash;
      other annual compensation comprised of a car allowance was paid in cash. During
      2002, Mr. Michael was paid the following compensation: (i) $80,000 of Mr.
      Michael’s $120,000 base salary was paid in cash and $40,000 was not paid and
      accrued; (ii) $16,000 of the bonus was paid in cash and $27,050 was not paid
      and
      accrued; (iii) other annual compensation consisted of a car allowance of which
      $5,600 was paid in cash and $2,800 was not paid and accrues; and (iv) all other
      compensation consisted of a cash payment of $25,000 in previously unpaid bonuses
      that had accrued during prior years, and a cash payment of $30,000 in previously
      unpaid back salary that had accrued during prior years. In late 2004, it was
      agreed that $243,608 of accrued compensation will be paid with 94,162 shares
      of
      unregistered Common Stock to be issued and delivered in 2005 or 2006 at the
      election of the Company. In 2005 Mr. Michael has not received a salary; he
      received options to acquire 1,130,000 share of the company’s common stock at
      market on date of grant.




25




(3) Mr. King
      earned a base salary of $120,000 during 2003 and 2004, of which $30,000 was
      paid
      each year, respectively, in cash in the form of a consulting fee through
      Teasdale Corporation, which is controlled by Mr. King; and the remainder
      accrues. During 2002, Mr. King was paid the following compensation: (i)
      commencing in October 2002, Mr. King went on full-time salary at the annual
      base
      rate of $120,000, of which only $7,500 was paid in cash during the period of
      its
      commencement in October 2002 through December 2002, and $22,500 of the salary
      due during that three-month period was not paid and accrues. From January 2002
      through December 2004, Mr. King’s compensation was not paid in salary, but was
      paid in the form of a monthly consulting fee at $2,500 per month as further
      described in (ii) next: (ii) this represents the compensation that Mr. King
      was
      paid in cash in the form of a monthly consulting fee at $2,500 per month as
      described in (i) above for the months of January 2002 through December 2004.
      An
      additional $30,000 was paid to Mr. King in 2004. This compensation was paid
      to
      Mr. King through Teasdale Corporation, which is controlled by Mr. King and
      which
      provided consulting services to the Company. In late 2004, it was agreed that
      $182,500 of accrued compensation will be paid with 70,542 shares of unregistered
      Common Stock to be issued and delivered in 2005 or 2006 at the election of
      the
      Company. In 2005 Mr. King has not received a salary; however, he received
      options to acquire 1,350,000 shares of the Company’s Common Stock at market on
      date of grant. In 2005 Mr. King was paid in cash in the form of a monthly
      consulting fee at $2,500 per month for the months of January 2005 through March
      2005, for a total of $7,500.





**Dividend
      Policy**





The
      payment by us of dividends, if any, in the future, rests within the sole
      discretion of our board of directors. The payment of dividends will depend
      upon
      our earnings, our capital requirements and our financial condition, as well
      as
      other relevant factors. We have not declared any cash dividends since our
      inception, and have no present intention of paying any cash dividends on our
      common stock in the foreseeable future.





**Compensation
      of Directors**





The
      Company is currently establishing a formal plan for compensating its Board
      of
      Directors. Currently, directors are reimbursed for actual expenses incurred
      in
      connection with performing duties as directors and do not receive compensation
      for attendance at meetings. From time to time, directors are granted options
      under the Company’s various stock option plans, as reflected above in Item
      10.





**Employment
      Contracts and Termination of Employment and Change in Control
      Arrangements**





HERBERT
      M. LUSTIG - Mr. Lustig’s Employment Agreement provided for an annual base salary
      of $195,000 and, within 90 days of executing the Agreement a $15,000 lump sum
      moving allowance. The Agreement also provided for four (4) weeks of paid
      vacation and entitlement to participate in any group plans or programs
      maintained by the Company, such as health insurance, etc. The term of the
      contract was 38 months, ending January 5, 2007. In the event of early
      termination of the Agreement by the Company or at Mr. Lustig’s option in the
      event of a Change in Control, Mr. Lustig would receive a severance consisting
      of
      base salary, bonuses and benefits that otherwise would have been due him during
      the 12 month period following the date of such termination, paid in a lump
      sum.
      As part of the Employment Agreement, Mr. Lustig has entered into a Covenant
      Not
      to Compete and Confidentiality Agreement that are attached to the Employment
      Agreement. Mr. Lustig’s employment was terminated in April 2005 and settlement
      amounts are currently under review by the Company.




26




**Item
      11 - Security Ownership of Certain Beneficial Owners and
      Management**





The
      following table sets forth the beneficial ownership of shares of our common
      stock, as of December 31, 2005 of (i) each person known by us to beneficially
      own five percent (5%) or more of such shares; (ii) each of our directors and
      executive officers; and (iii) all of our current executive officers, directors,
      and five percent (5%) or more beneficial owners as a group. Except as otherwise
      indicated, all shares are beneficially owned, and the persons named as owners
      hold investment and voting power.





**Name
                and Address of**
              **Beneficial
                Owner****(1)**
            
            **Title
                of Class**
            
            **Positions
                Held (Officers & Directors)**
            
            **Amount
                and Nature of Shares Beneficially Owned****(2)**
            
            **Percentage**
              **Owned****(2)**Michael
                R. Ries, CPA (Trustee)(3)
            
            
            Common
                Stock
            
            
            
            
            
            1,864,584
            
            
            7.83
            %Kenneth
                D. Doerr (Trustee)(3)
            
            
            Common
                Stock
            
            
            
            
            
            1,864,584
            
            
            7.83
            %M.A.G.
                Capital, LLC(4)
            
            
            Common
                Stock
            
            
            
            
            
            2,602,322
            
            
            9.99
            %Asset
                Managers International, Ltd.(5)
            
            
            Common
                Stock
            
            
            
            
            
            2,552,372
            
            
            9.99
            %Stephen
                A. Michael(6)
            
            
            Common
                Stock
            
            
            Acting
                President & Chairman
            
            
            5,405,107
            
            
            21.38
            %Edmund
                C. King(7)
            
            
            Common
                Stock
            
            
            CFO,Treasurer
                & Director
            
            
            602,040
            
            
            2.49
            %Gregory
                J. Newell(8)
            
            
            Common
                Stock
            
            
            Director
            
            
            60,000
            
            
            0.25
            %John
                E. Scates(9)
            
            
            Common
                Stock
            
            
            Director
            
            
            60,000
            
            
            0.25
            %All
                directors, executive officers, and 5% beneficial owners as a group
                (4
                persons; 6,127,147 shares, 25.82% (approx.))





(1)
            Unless
                otherwise provided herein all addresses are c/o Invisa, Inc., 6935
                15thStreet East, Suite 120, Sarasota, Florida 34243. The address for
                Mr. Ries
                is 4837 Swift Road, Suite 210, Sarasota, Florida 34231; for Mr. Doerr
                is
                240 South Pineapple Avenue, Sarasota, Florida 34230; for Mr. Williams
                is
                7954 Royal Brikdale Circle, Bradenton, FL 34202 and for M.A.G. Capital,
                LLC, Mercator Momentum Fund, LP and Mercator Pointe Fund, Ltd. is
                555
                South Flower Street, Suite 4500, Los Angeles, California
                90071.





(2)
            The
                percentage calculations are based on 23,799,268 shares that were
                outstanding as of December 31, 2005 plus the respective beneficial
                shares
                owned by each selling stockholder. Beneficial ownership is determined
                in
                accordance with rules of the Securities and Exchange Commission and
                includes voting power and/or investment power with respect to securities.
                Shares of common stock subject to options or warrants currently
                exercisable or exercisable within 60 days of December 31, 2005 are
                deemed
                outstanding for computing the number and the percentage of outstanding
                shares beneficially owned by the person holding such options but
                are not
                deemed outstanding for computing the percentage beneficially owned
                by any
                other person.





(3)
            Includes:
                (i) 1,864,584 shares held by Mr. Doerr as Trustee of the Spencer
                C. Duffey
                Irrevocable Trust, a Trust created by Samuel S. Duffey, for his son;
                and
                (ii) 1,864,584 shares held by Mr. Ries as Trustee of the Elizabeth
                R.
                Duffey Irrevocable Trust, a Trust created by Samuel S. Duffey, for
                his
                daughter. Samuel S. Duffey disclaims beneficial ownership of such
                shares
                in these trusts.




27





(4)
            The
                following table depicts the total number of shares that M.A.G. Capital,
                LLC beneficially owns on behalf of itself and its affiliated funds
                (Mercator Momentum Fund, LP, Monarch Pointe Fund, Ltd., and Mercator
                Momentum Fund III, LP). David F. Firestone is the managing member
                of
                M.A.G. Capital LLC, and as such he has beneficial ownership of shares
                owned by M.A.G. Capital LLC and its affiliated
                funds.





**Name**
            
            **Number
                of Shares of common stock Currently Held**
            
            **Number
                of Shares of common stock Beneficially Owned**
            
            **Number
                of Shares to be Received Upon Conversion of Series A Preferred
                Stock**
              **(*)**
            
            **Number
                of Shares to be Received Upon Conversion of Series B Preferred
                Stock**
              **(*)**
            
            **Number
                of Shares to be Received Upon Exercise of Warrants**
              **(*)**M.A.G.
                Capital, LLC
            
            
            1,245,900
            
            
            2,602,322
            
            
            0
            
            
            0
            
            
            900,000Mercator
                Momentum Fund, LP
            
            
            403,417
            
            
            1,653,264
            
            
            4,238,183
            
            
            0
            
            
            250,568Monarch
                Pointe Fund, Ltd.
            
            
            824,983
            
            
            2,074,830
            
            
            8,550,250
            
            
            1,666,667
            
            
            901,432Mercator
                Momentum Fund III, Ltd.
            
            
            17,500
            
            
            1,048,833
            
            
            0
            
            
            833,333
            
            
            198,000*Total*
            
            
            
            
            
            
            
            
            *12,788,433*
            
            
            *2,500,000*
            
            
            *2,250,000*





(*)Each
                share of Series A Preferred Stock and Series B Preferred Stock may
                be
                converted by the holder into that number of shares of common stock
                as is
                determined by dividing 100 by .12. The documentation governing the
                terms
                of the Series A Preferred Stock, the Series B Preferred Stock and
                the
                warrants contains provisions prohibiting any conversion of the Series
                A
                Preferred Stock or the Series B Preferred Stock or exercise of the
                warrants that would result in M.A.G. Capital, LLC, Mercator Momentum
                Fund,
                LP, Monarch Pointe Fund, Ltd., Mercator Momentum Fund III, LP and
                their
                affiliates, collectively beneficially owning more than 9.99% of the
                outstanding shares of our common stock as determined under Rule 13d-3
                of
                the Securities Exchange Act of 1934. As a result of these provisions,
                none
                of such entities hold beneficial ownership of more than 9.99% of
                the
                outstanding shares of our common stock. However, for purposes of
                clarity,
                the table above shows the conversion and exercise figures in the
                columns
                with an asterisk as if there was no 9.99% limitation in place. The
                total
                number of shares that M.A.G. Capital, LLC and its affiliates could
                receive
                upon exercise of all warrants and conversion of all preferred stock
                (assuming that there was no 9.99% limitation in place) is
                17,538,433.





(5)
            Asset
                Managers International, Ltd. has 5,833,333 shares of common stock
                that may
                be acquired upon the conversion of outstanding Series B Preferred
                Stock
                (at an assumed conversion price of $0.12 per share) and 1,750,000
                shares
                of common stock that may be acquired upon the exercise of the immediately
                exercisable warrants at $0.30 per share. The documentation governing
                the
                terms of the Series B Preferred Stock and warrants contains provisions
                prohibiting any conversion of the Series B Preferred Stock or exercise
                of
                the warrants that would result in Asset Managers International, Ltd.
                and
                its affiliates collectively beneficially owning more than 9.99% of
                the
                outstanding shares of our common stock as determined under Rule 13d-3
                of
                the Securities Exchange Act of 1934. As a result of these provisions,
                none
                of such entities hold beneficial ownership of more than 9.99% of
                the
                outstanding shares of our common stock. The natural persons who
                beneficially own the securities held by Asset Managers International
                Ltd.
                are the directors of Asset Managers International Ltd, which are
                Oskar
                Lewnowski and William Maycock.





28




(6)
            Includes
                3,925,107 shares owned by Mr. Michael and options to purchase 1,480,000
                shares. Of the 1,480,000 currently vested options: 300,000 were granted
                to
                Mr. Michael in 2000 with an exercise price of $3.00 per share and
                an
                expiration date of July 26, 2007; 300,000 were granted in 2002 with
                an
                exercise price of $3.85 per share and an expiration date of January
                21,
                2007; 400,000 were granted to Mr. Michael in 2005 with an exercise
                price
                of $0.09 per share and an expiration date of June 15, 2015; and 480,000
                were granted to Mr. Michael in 2005 with an exercise price of $0.10
                per
                share and an expiration date of August 25, 2015. Mr. Michael also
                has an
                option to purchase an additional 250,000 shares. However, such option
                is
                not yet vested nor will it be vested within 60 days of the date hereof.
                The 1,480,000 vested options and the 250,000 nonvested options were
                granted pursuant to the Company’s option
                plans.





(7)
            Includes
                197,040 shares held in Mr. King’s name, 5,000 shares held in the name of
                the King Family Trust, and Mr. King’s options to purchase 400,000
                shares.





(8)
            Includes
                options to purchase 60,000 shares.





(9)
            Includes
                options to purchase 60,000 shares.





**Item
      12 - Certain Relationships and Related Transactions**





To
      the
      best of our knowledge, other than as set forth below, there were no material
      transactions, or series of similar transactions, or any currently proposed
      transactions, or series of similar transactions, to which we were or are to
      be a
      party, in which the amount involved exceeds $60,000, and in which any director
      or executive officer, or any security holder who is known by us to own of record
      or beneficially more than 5% of any class of our Common Stock, or any member
      of
      the immediate family of any of the foregoing persons, has an
      interest.




In
      2004,
      the Company cancelled accrued compensation due to certain directors, officers,
      and former employees in exchange for shares of Common Stock. The following
      table
      sets forth these amounts:





Accrued
            
            CommonCompensation
            
            StockStephen
                Michael
            
            $
            243,608
            
            
            94,161Samuel
                Duffey
            
            
            149,524
            
            
            57,795William
                Dolan
            
            
            135,500
            
            
            52,374Edmund
                King
            
            
            182,500
            
            
            70,542Robert
                Knight
            
            
            20,000
            
            
            7,732Gregory
                Newell
            
            
            20,000
            
            
            7,732John
                Scates
            
            
            20,000
            
            
            1,932$
            776,132
            
            
            300,000




29




**Item
      13 - Exhibits List**


**INDEX
      TO EXHIBITS**





ITEM
                NO.
            DESCRIPTION2.11
            Agreement
                of Merger and Plan of Reorganization dated 2/25/02 by and among SmartGate
                Inc., SmartGate/RadioMetrix Acquisition Corp. and Radio Metrix Inc.,
                Letter of Clarification, and Amendment dated as of April 24,
                200310.11
            Quarterly
                Revenue Based Payment Agreement by and among the Company and Stephen
                A.
                Michael, Spencer Charles Duffey Irrevocable Trust u/a/ d July 29,
                1998,
                Elizabeth Rosemary Duffey Irrevocable Trust u/a/d July 29, 1998,
                Robert T.
                Roth, William W. Dolan dated as of February 25, 2002; and Amendment
                dated
                as of April 24, 200310.21
            Promissory
                Note, Security Agreement, and Escrow Agreement - Re: Daimler Capital
                Partners, Ltd. - loan and stock options; Stock Option Agreement with
                Daimler Capital Partners, Ltd. - October 28, 2002; Stock Option Agreement
                with Daimler Capital Partners, Ltd. - February 28, 200310.31
            Form
                of Plan 2003 Option Agreement with Joseph F. Movizzo - May 13, 2003
                (including form of Letter of Investment Intent)10.41
            Consulting
                Agreement - March 2003 between Crescent Fund, Inc. and the
                Company10.51
            Agreement
                dated as of April 24, 2003 between Alan A. Feldman and the
                Company10.61
            Financing
                Agreement dated as of May 9, 2003 between BarBell Group, Inc. and
                the
                Company10.71
            Series
                2003A 7% Convertible Note Due June 9, 2004, dated May 9, 2003 from
                the
                Company to BarBell Group, Inc.10.81
            Investment
                Agreement dated as of May 9, 2003 between BarBell Group, Inc. and
                the
                Company10.91
            Warrant
                to Purchase Shares of Common Stock dated as of May 9, 2003, issued
                by the
                Company to BarBell Group, Inc.10.101
            Registration
                Rights Agreement dated as of May 9, 2003 between the Company and
                BarBell
                Group, Inc.10.111
            Broker-Dealer
                Placement Agent Selling Agreement - May 2003 between Capstone Partners
                LC
                and the Company10.122
            Amended
                and Restated Regulation S Subscription Agreement - July 22, 2003
                between
                Capstone Partners LC and the Company10.132
            Amended
                and Restated Regulation S Subscription Agreement - July 22, 2003
                executed
                by Nautilus Technologies, Ltd. - subscribing for 125,000
                Units10.142
            Amended
                and Restated Regulation S Subscription Agreement - July 22, 2003
                executed
                by GM Capital Partners, Ltd. - subscribing for 50,500
                Units10.152
            Amended
                and Restated Regulation S Subscription Agreement - July 22, 2003
                executed
                by Kallur Enterprises, Ltd. - subscribing for 50,000
                Units10.162
            Publicity
                Agreement - July 2003 between Capital Financial Media, Inc. and the
                Company




30




10.172
            Consulting
                Agreement - July 2003 between National Financial Communications Corp.
                and
                the Company10.182
            Agreement
                - July 2003 between Brooks Houghton & Company, Inc. and the
                Company10.192
            Non-Exclusive
                Financial Advisor Agreement - July 2003 between Source Capital Group,
                Inc.
                and the Company10.202
            Consulting
                Agreement - July 2003 between Patrick W.H. Garrard d/b/a The Garrard
                Group
                of West Redding, CT and the Company10.212
            Investment
                Agreement Modification I dated as of July 21, 2003 by and among Invisa,
                Inc. and BarBell Group, Inc.10.222
            Joint
                Development Agreement - July 2003 between Dominator International
                Ltd. And
                SmartGate, L.C.10.233
            Engagement
                Agreement dated September 9, 2003 between G.M. Capital Partners,
                Ltd and
                Invisa, Inc.10.244
            Employment
                Agreement dated November 6, 2003 between Herb Lustig and Invisa,
                Inc.10.254
            Severance
                Agreement dated November 13, 2003 between Samuel S. Duffey and Invisa,
                Inc.10.264
            Agreement
                dated November 13, 2003 between Invisa, Inc. and the Duffey related
                shareholders10.275
            SDR
                Metro Inc. letter extension agreement10.285
            SDR
                Metro Inc. confirmation letter agreement10.295
            Severance
                Agreement dated January 26, 2004 between Stephen A. Michael and Invisa,
                Inc.10.305
            Consulting
                Agreement dated January 26, 2004 between Stephen A. Michael and Invisa,
                Inc.10.315
            Severance
                Agreement dated December 31, 2003 between William W. Dolan and Invisa,
                Inc.10.325
            Agreement
                dated February 11, 2004 between The Video Agency, Inc. and Invisa,
                Inc.10.335
            Employment
                Agreement dated March 2004 between Charles Yanak and Invisa,
                Inc.10.345
            2003-A
                Employee, Director, Consultant and Advisor Stock Compensation
                Plan.10.355
            First
                Amendment to Invisa, Inc., 2003 Incentive Plan Date As of November
                6,
                200310.365
            Stock
                Option Agreement for Herb M. Lustig dated November 6,
                200310.376
            Subscription
                Agreement for issuance of 22,000 shares of Series A Convertible Preferred
                Stock and Common Stock Warrants10.386
            Registration
                Rights Agreement10.396
            Warrants
                to Purchase Common Stock (Mercator Momentum Fund, LP, Mercator Advisory
                Group, LLC, and Monarch Pointe Fund,
                Ltd.)




31





10.406
            Certificate
                of Designations of Preferences and Rights of Series A Convertible
                Preferred Stock.10.417
            Marketing
                Agreement between Aurelius Consulting Group and Invisa,
                Inc.10.427
            Lease
                Agreement among HAR-WAL ASSOCIATES, INC. and WR-I ASSOCIATES, LTD.
                and
                Invisa, Inc. dated September dated September 23, 2004141
            Code
                of Business Conduct and Ethics and Compliance Program31.18
            Chief
                Executive Officer Certification Pursuant to Securities Exchange Act
                Rules
                13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the
                Sarbanes-Oxley Act of 2002.31.28
            Chief
                Financial Officer Certification Pursuant to Securities Exchange Act
                Rules
                13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the
                Sarbanes-Oxley Act of 2002.32.18
            Certification
                Pursuant to 18 U.S.C. Section 1350.32.28
            Certification
                Pursuant to 18 U.S.C. Section 1350.





1
            Previously
                filed on June 23, 2003 with Invisa’s Form 10-KSB for the fiscal year ended
                December 31, 2002 and are incorporated by
                reference.





2
            Previously
                filed on August 1, 2003 with Invisa’s Form 10-QSB for the quarter period
                ended June 30, 2003 and are incorporated by
                reference.





3
            Previously
                filed on September 17, 2003 with Invisa’s Form 8-KA (Amendment No. 1)
                dated September 9, 2003 and is incorporated by
                reference.





4
            Previously
                filed on November 14, 2003 with Invisa’s Form 8-K dated November 6, 2003
                and are incorporated by reference.





5
            Previously
                filed on April 14, 2004 with Invisa Form 10-KSB for the fiscal year
                ended
                December 31, 2003 and incorporated herein by
                reference.





6
            Previously
                filed on August 18, 2004 with Invisa Form 10-QSB and incorporated
                herein
                by reference.





7
            Previously
                filed on February 7, 2005 with Invisa Form 10-KSB for the fiscal
                year
                ended December 31, 2004 and incorporated herein by
                reference.





8
            Filed
                herewith.





32




**Item
      14 - Principal Accountant Fees and Services**


Fees
      for
      the Year ended December 31, 2005 were:




Audit
                fees
            
            $
            99,328Audit
                related fees
            
            $
            -Tax
                fees
            
            $
            -




Fees
      for
      the Year ended December 31, 2004 were:





Audit
                fees
            
            $
            112,004Audit
                related fees
            
            $
            -Tax
                fees
            
            $
            15,000





The
      audit
      committee has approved 100% of the above services.




33




**SIGNATURES**





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








**INVISA,
                INC.**Dated:
                August 9, 2006
            By:
            /s/ Carl
                A. ParksCarl
                A. ParksPresident
                & Chief Operating OfficerDated:
                August 9, 2006
            By:
            /s/ Edmund
                C. KingEdmund
                C KingChief
                Financial Officer





**KNOW
      ALL PERSONS BY THESE PRESENTS** , that
      each of the undersigned hereby constitutes and appoints Edmund C. King as his
      true and lawful attorney-in-fact and agent, with full power of substitution
      and
      resubstitution, for him and on his behalf to sign, execute and file this annual
      report on Form 10-KSB and any or all amendments without limitation to this
      annual report, and to file the same, with all exhibits thereto and any and
      all
      documents required to be filed with respect therewith, with the Securities
      and
      Exchange Commission or any regulatory authority, granting unto such
      attorney-in-fact and agent full power and authority to do and perform each
      and
      every act and thing requisite and necessary to be done in connection therewith
      and about the premises in order to effectuate the same as fully to all intents
      and purposes as he might or could do if personally present, hereby ratifying
      and
      confirming all that such attorney-in-fact and agent, or his substitute or
      substitutes, may lawfully do or cause to be done.








In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.








Date:
                August 9, 2006
            /s/
                Carl A. ParksCarl
                A. Parks, President & Chief Operating OfficerDate:
                August 9, 2006
            /s/
                Edmund C. KingEdmund
                C. King, Chief Financial Officer, DirectorDate:
                August 9, 2006
            /s/
                Gregory J. NewellGregory
                J. Newell, DirectorDate:
                August 9, 2006
            /s/
                John E. ScatesJohn
                E. Scates, Director




34




**Report
      of Independent Registered Public Accounting Firm**








Board
      of
      Directors and Stockholders


Invisa,
      Inc.





We
      have
      audited the accompanying consolidated balance sheet of Invisa, Inc. and
      Subsidiaries (the “Company”) as of December 31, 2005 and the related
      consolidated statements of operations, stockholders’ equity, and cash flows for
      each of the years in the two-year period then ended, and for the period from
      February 12, 1997 (inception) through December 31, 2005. These financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States of America). 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 audit included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements, 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 Invisa, Inc.
      as
      of December 31, 2005 and the consolidated results of its operations and its
      cash
      flows for each of the years in the two-year period then ended, and for the
      period from February 12, 1997 (inception) through December 31, 2005, in
      conformity with accounting principles generally accepted in the United States
      of
      America.





As
      discussed in Note N, the accompanying financial statements have been
      restated.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note B to the
      financial statements, the Company has incurred significant losses and used
      cash
      in operating activities during the years ended December 31, 2005 and 2004 and
      expects that additional capital will be required in order to continue operations
      in 2006. These factors, among others, as discussed in Note B, raise substantial
      doubt about the Company’s ability to continue as a going concern. Management’s
      plans in regard to these matters are also described in Note B. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





*/s/
      Aidman, Piser & Company, P.A.*


Tampa,
      Florida


January
      26, 2006, except for Note N, which is dated July 12, 2006.




F-1




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


CONSOLIDATED
      BALANCE SHEET








**December
                31,****2005**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            585,463Accounts
                receivable
            
            
            27,268Inventories
            
            
            47,475Prepaids
                and other current assets
            
            
            13,360Total
                current assets
            
            
            673,566Furniture,
                fixtures and equipment, net of $89,158 accumulated
                depreciation
            
            
            46,398Patent,
                net of $1,576,470 accumulated amortization
            
            
            5,123,529Total
                assets
            
            $
            5,843,493LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Accounts
                payable, trade
            
            $
            43,550Accrued
                expenses
            
            
            122,951Due
                to stockholders and officers
            
            
            394,000Preferred
                dividends payable
            
            
            18,750Total
                current liabilities
            
            
            579,251Commitment
                and contingencies (Note J)
            
            
            -----Stockholders’
                equityConvertible
                Preferred Stock, 5 million shares authorized ($0.001 par
                value):Series
                A, 14,500 shares issued and outstanding
            
            
            1,277,000Series
                B, 10,000 shares issued and outstanding
            
            
            1,000,000Common
                Stock; 95,000,000 shares authorized ($.001 par value), 23,799,268
                shares
              issued
                and outstanding
            
            
            23,799Additional
                paid-in capital
            
            
            31,087,395Stock
                subscriptions receivable
            
            
            (268,904
            )Deficit
                accumulated during the development stage
            
            
            (27,855,048
            )Total
                stockholders’ equity
            
            
            5,264,242Total
                liabilities and stockholders’ equity
            
            $
            5,843,493







See
      notes
      to consolidated financial statements.




F-2




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


CONSOLIDATED
      STATEMENTS OF OPERATIONS








**February
                12,****1997
                (Date of****inception)****through****Years
                Ended December 31,**
            
            **December
                31,****2004**
            
            **2005**
            
            **2005**(Restated)
            
            (Restated)
            
            (Restated)Net
                sales
            
            $
            197,484
            
            $
            239,285
            
            $
            1,197,351Other
                operating revenues
            
            
            ----
            
            
            300,000
            
            
            300,000Costs
                and expenses:Cost
                of goods sold (exclusive of patent amortization shownseparately
                below)
            
            
            259,653
            
            
            122,761
            
            
            854,127Research
                and development costs
            
            
            352,642
            
            
            174,292
            
            
            3,351,355Selling,
                general and administrative expenses
            
            
            2,239,134
            
            
            1,227,592
            
            
            13,782,916Patent
                amortization
            
            
            788,235
            
            
            788,235
            
            
            3,070,129Impairment
                of patent
            
            
            -----
            
            
            -----
            
            
            5,517,808Loss
                from operations
            
            
            (3,442,180
            )
            
            (1,773,595
            )
            
            (25,078,984
            )Other
                income (expense):Interest
                (expense) income, net
            
            
            15,360
            
            
            2,677
            
            
            (820,554
            )Debt
                extinguishment gain
            
            
            360,000
            
            
            -----
            
            
            360,000375,360
            
            
            2,677
            
            
            (460,554
            )Loss
                before income tax
            
            
            (3,066,820
            )
            
            (1,770,918
            )
            
            (25,539,538
            )Income
                tax
            
            
            -----
            
            
            -----
            
            
            -----Net
                loss
            
            
            (3,066,820
            )
            
            (1,770,918
            )
            
            (25,539,538
            )Non-cash
                constructive dividend related to Convertible Preferred
              Stock
                accretions
            
            
            (1,296,640
            )
            
            (1,000,000
            )
            
            (2,296,640
            )Preferred
                Stock dividends
            
            
            -----
            
            
            (18,750
            )
            
            (18,750
            )Net
                loss applicable to Common Stockholders
            
            $
            (4,363,460
            )
            $
            (2,789,668
            )
            $
            (27,854,928
            )Net
                loss per share applicable to Common Stockholders:Basic
                and diluted
            
            $
            (0.22
            )
            $
            (0.12
            )Weighted
                average Common Stock shares outstanding:
              Basic
                and diluted19,899,052
            
            
            22,742,956








See
      notes
      to consolidated financial statements.




F-3





Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY


**Deficit****Accumulated****Convertible**
            
            
            
            **Additional**
            
            **Stock**
            
            **During
                the****Preferred
                Stock**
            
            **Common
                Stock**
            
            **Paid-In**
            
            **Subscriptions**
            
            **Development****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Receivable**
            
            **Stage**
            
            **Total**FEBRUARY
                12, 1997 (INCEPTION)
            
            
            -----
            
            $
            -----
            
            
            -----
            
            $
            -----
            
            $
            -----
            
            $
            -----
            
            $
            -----
            
            $
            -----Summary
                of transactions from February 12, 1997through
                December 31, 2003:Issuance
                of Common Stock to founders
            
            
            -----
            
            
            -----
            
            
            6,105,128
            
            
            5,980
            
            
            (5,980
            )
            
            -----
            
            
            -----
            
            
            -----Issuance
                of Common Stock for cash
            
            
            -----
            
            
            -----
            
            
            4,257,350
            
            
            4,257
            
            
            9,031,704
            
            
            -----
            
            
            -----
            
            
            9,035,961Exercise
                of stock options
            
            
            -----
            
            
            -----
            
            
            924,214
            
            
            924
            
            
            984,076
            
            
            (985,000
            )
            
            -----
            
            
            -----Offering
                costs
            
            
            -----
            
            
            -----
            
            
            500,000
            
            
            500
            
            
            637,436
            
            
            -----
            
            
            -----
            
            
            637,936Conversion
                of notes payable
            
            
            -----
            
            
            -----
            
            
            635,022
            
            
            635
            
            
            449,365
            
            
            -----
            
            
            -----
            
            
            450,000Original
                issue discount on notes payable
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            201,519
            
            
            -----
            
            
            -----
            
            
            201,519Common
                Stock issuable for rent
            
            
            -----
            
            
            -----
            
            
            164,799
            
            
            290
            
            
            88,084
            
            
            -----
            
            
            -----
            
            
            88,374Issuance
                of Common Stock for services
            
            
            -----
            
            
            -----
            
            
            487,069
            
            
            488
            
            
            1,135,399
            
            
            -----
            
            
            -----
            
            
            1,135,887Issuance
                of Common Stock options for services
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            516,593
            
            
            -----
            
            
            -----
            
            
            516,593Original
                issue discount
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            144,000
            
            
            -----
            
            
            -----
            
            
            144,000Issuance
                of Common Stock related to reorganization
            
            
            -----
            
            
            -----
            
            
            2,009,000
            
            
            2,009
            
            
            227,991
            
            
            -----
            
            
            -----
            
            
            230,000Acquisition
                of a patent from a related party
            
            
            -----
            
            
            -----
            
            
            3,685,000
            
            
            3,685
            
            
            11,268,815
            
            
            -----
            
            
            -----
            
            
            11,272,500Interest
                accrued on notes related to stock subscriptions receivable
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            229,836
            
            
            (229,836
            )
            
            -----
            
            
            -----Settlement
                of accounts in connection with severance agreements
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            544,090
            
            
            923,432
            
            
            -----
            
            
            1,467,522Net
                Loss
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            (20,701,920
            )
            
            (20,701,920
            )BALANCE
                AT DECEMBER 31, 2003
            
            
            -----
            
            
            -----
            
            
            18,767,582
            
            
            18,768
            
            
            25,452,928
            
            
            (291,404
            )
            
            (20,701,920
            )
            
            4,478,372Exercise
                of Stock Warrants
            
            
            -----
            
            
            -----
            
            
            602,000
            
            
            602
            
            
            1,138,143
            
            
            -----
            
            
            -----
            
            
            1,138,745Exercise
                of Stock Options
            
            
            -----
            
            
            -----
            
            
            103,750
            
            
            103
            
            
            332,084
            
            
            -----
            
            
            -----
            
            
            332,187Issuance
                of Convertible Preferred Stock and
              detachable
                Warrants for cash, net of costs paid in the form of common
                stock
            
            
            22,000
            
            
            640,360
            
            
            162,500
            
            
            163
            
            
            1,296,477
            
            
            -----
            
            
            ----
            
            
            1,937,000Non-cash
                constructive dividend related to
              beneficial
                conversion features of Convertible Preferred Stock
            
            
            ----
            
            
            1,296,640
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            (1,296,640
            )
            
            ----Conversion
                of Convertible Preferred Stock
              into
                Common Stock
            
            
            (7,500
            )
            
            (660,000
            )
            
            1,500,000
            
            
            1,500
            
            
            658,500
            
            
            ----
            
            
            ----
            
            
            ----Issuance
                of Common Stock for services
            
            
            ----
            
            
            ----
            
            
            119,075
            
            
            119
            
            
            118,956
            
            
            ----
            
            
            ----
            
            
            119,075Issuance
                of Common Stock for
              settlement
                of cash advances
            
            
            ----
            
            
            ----
            
            
            80,925
            
            
            81
            
            
            80,844
            
            
            ----
            
            
            ----
            
            
            80,925Issuable
                Common Stock for settlement of
              related
                party accrued compensation
            
            
            ----
            
            
            ----
            
            
            300,000
            
            
            300
            
            
            194,700
            
            
            ----
            
            
            ----
            
            
            195,000Gain
                on related party accrued compensation
              extinguishment
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            581,132
            
            
            ----
            
            
            ----
            
            
            581,132Issuance
                of Common Stock options for services
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            34,394
            
            
            ----
            
            
            ----
            
            
            34,394Issuance
                of Common Stock Warrants for
              settlement
                of royalty contract
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            91,400
            
            
            ----
            
            
            ----
            
            
            91,400Interest
                accrued on notes related to stock
              subscriptions
                receivable
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            19,000
            
            
            (19,000
            )
            
            ----
            
            
            ----Collections
                of stock subscriptions receivable
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            36,500
            
            
            ----
            
            
            36,500Adjustment
                of stock subscriptions receivable
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            (20,000
            )
            
            20,000
            
            
            ----
            
            
            ----Net
                loss
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            (3,066,820
            )
            
            (3,066,820
            )BALANCE
                AT DECEMBER 31, 2004
            
            
            14,500
            
            
            1,277,000
            
            
            21,635,832
            
            
            21,636
            
            
            29,978,558
            
            
            (253,904
            )
            
            (
                25,065,380
            )
            
            5,957,910Issuance
                of Convertible Preferred Stock and
              detachable
                Warrants for cash, net of costs paid
            
            
            10,000
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            878,000
            
            
            -----
            
            
            ----
            
            
            878,000Non-cash
                constructive dividend related to
              Convertible
                Preferred Stock accretions
            
            
            ----
            
            
            1,000,000
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            (1,000,000
            )
            
            ----Issuance
                of Common Stock for cash
            
            
            ----
            
            
            ----
            
            
            1,066,662
            
            
            1,066
            
            
            78,934
            
            
            ----
            
            
            ----
            
            
            80,000Issuance
                of Common Stock for services
            
            
            ----
            
            
            ----
            
            
            1,096,774
            
            
            1,097
            
            
            103,903
            
            
            ----
            
            
            ----
            
            
            105,000Issuance
                of Common Stock options for services
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            33,000
            
            
            ----
            
            
            ----
            
            
            33,000Interest
                accrued on notes related to stock
              subscriptions
                receivable
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            15,000
            
            
            (15,000
            )
            
            ----
            
            
            ----Preferred
                Stock Series B dividend
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            (
                18,750
            )
            
            (
                18,750
            )Net
                loss
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            (1,770,918
            )
            
            (1,770,918
            )BALANCE
                AT DECEMBER 31, 2005
            
            
            24,500
            
            $
            2,277,000
            
            
            23,799,268
            
            $
            23,799
            
            $
            31,087,395
            
            $
            (268,904
            )
            $
            (27,855,048
            )
            $
            5,264,242





See
      notes
      to consolidated financial statements.




F-4




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


CONSOLIDATED
      STATEMENTS OF CASH FLOWS





**February
                12,****1997
                (Date of****inception)****Through****Years
                Ended December 31,**
            
            **December
                31,****2004**
            
            **2005**
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (3,066,820
            )
            $
            (1,770,918
            )
            $
            (25,539,538
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Patent
                impairment
            
            
            ----
            
            
            -----
            
            
            5,517,808Depreciation
                and amortization
            
            
            861,806
            
            
            809,515
            
            
            3,607,604Common
                Stock and options exchanged for services/settlements
            
            
            244,869
            
            
            138,000
            
            
            2,761,140Debt
                extinguishment gain
            
            
            (360,000
            )
            
            ----
            
            
            (360,000
            )Changes
                in operating assets and liabilities:Accounts
                and notes receivable
            
            
            (30,045
            )
            
            30,238
            
            
            (173,982
            )Inventories
            
            
            184,370
            
            
            692
            
            
            (47,475
            )Prepaids
                and other assets
            
            
            (56,885
            )
            
            70,371
            
            
            (13,360
            )Accounts
                payable, trade
            
            
            (169,449
            )
            
            (46,665
            )
            
            43,550Accrued
                expenses
            
            
            (49,070
            )
            
            43,989
            
            
            72,941Deferred
                revenue
            
            
            -----
            
            
            (300,000
            )
            
            ----Net
                cash used in operating activities
            
            
            (2,441,224
            )
            
            (1,024,778
            )
            
            (14,131,312
            )Cash
                flows from investing activities:Patent
                acquisition
            
            
            -----
            
            
            ----
            
            
            (550,000
            )Transaction
                costs in connection with RMI business combination
            
            
            -----
            
            
            ----
            
            
            (121,475
            )Purchases
                of furniture, fixtures and equipment
            
            
            (46,421
            )
            
            (5,347
            )
            
            (238,846
            )Net
                cash used in investing activities
            
            
            (46,421
            )
            
            (5,347
            )
            
            (910,321
            )Cash
                flows from financing activities:Net
                change in line of credit
            
            
            (149,402
            )
            
            ----
            
            
            ----Proceeds
                from notes payable
            
            
            ----
            
            
            50,000
            
            
            50,000Proceeds
                from notes payable and redeemable Common Stock, net
            
            
            -----
            
            
            ----
            
            
            908,000Payment
                of notes payable
            
            
            (470,869
            )
            
            (50,000
            )
            
            (520,800
            )Collection
                of stock subscriptions
            
            
            36,500
            
            
            ----
            
            
            36,500Due
                to shareholders and officers
            
            
            (6,464
            )
            
            67,000
            
            
            1,520,983Proceeds
                from sale of convertible Preferred Stock, net
            
            
            1,937,000
            
            
            878,000
            
            
            2,815,000Proceeds
                from sale of Common Stock, net
            
            
            1,470,932
            
            
            80,000
            
            
            10,587,413Cash
                received with combination transaction
            
            
            -----
            
            
            ----
            
            
            230,000Net
                cash provided by financing activities
            
            
            2,817,697
            
            
            1,025,000
            
            
            15,627,096Net
                (decrease) increase in cash
            
            
            330,052
            
            
            (5,125
            )
            
            585,463Cash
                at beginning of period
            
            
            260,536
            
            
            590,588
            
            
            -----Cash
                at end of period
            
            $
            590,588
            
            
            585,463
            
            $
            585,463







See
      notes
      to consolidated financial statements.


(Continues)




F-5




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


CONSOLIDATED
      STATEMENTS OF CASH FLOWS - CONTINUED








**February
                12,****1997
                (Date of****inception)****through****Year
                Ended December 31,**
            
            **December
                31,****2004**
            
            **2005**
            
            **2005**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONCash
                paid during the period for interest
            
            $
            8,875
            
            $
            -----
            
            $
            229,162Non-cash
                financing and investing activities:Notes
                payable incurred in connection with merger
                transactions
            
            $
            -----
            
            $
            -----
            
            $
            1,300,000Notes
                payable canceled in connection with merger transaction
            
            $
            -----
            
            $
            -----
            
            $
            337,489Common
                Stock issued in connection with merger transaction (3,685,000
                shares)
            
            $
            -----
            
            $
            -----
            
            $
            11,272,500Due
                to employees in connection with merger transaction
            
            $
            -----
            
            $
            ----
            
            $
            175,000Accrued
                expenses assumed in connection with merger transaction
            
            $
            -----
            
            $
            ----
            
            $
            50,000Exchange
                of liabilities for Common Stock
            
            $
            857,057
            
            $
            ----
            
            $
            857,057Common
                Stock issued representing stock offering commitment (200,000
                shares)
            
            $
            554,000
            
            $
            -----
            
            $
            554,000Preferred
                dividends accrued as liabilities
            
            $
            -----
            
            $
            18,750
            
            $
            18,750Non-cash
                preferred stock accretions
            
            $
            1,296,640
            
            $
            1,000,000
            
            $
            2,296,640










See
      notes
      to consolidated financial statements.




F-6




NOTE
      A -
      DESCRIPTION OF ORGANIZATION AND BUSINESS





Invisa,
      Inc., (the “Company” or “Invisa”) is a development stage enterprise that
      incorporates safety system technology and products into automated closure
      devices, such as parking gates, sliding gates, overhead garage doors and
      commercial overhead doors. Invisa has also demonstrated production-ready
      prototypes of security products for the museum and other markets. The Company
      has not fully implemented its sales and marketing plan and has, therefore,
      not
      emerged from the development stage. The Company, however, is currently
      manufacturing and selling powered closure safety devices for certain gates.
      The
      Company acquired a license to use the core technology used in the powered
      closure safety devices in 1992.





NOTE
      B -
      LIQUIDITY AND MANAGEMENT’S PLANS





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. For the year ended December 31, 2005 and
      since
      the date of inception, the Company has had net losses applicable to Common
      Shareholders of $2.8 million and $27.8 million, respectively. As of December
      31,
      2005, the Company has not emerged from the development stage and has working
      capital of $0.1 million. Since inception, the Company has financed its
      operations principally from the sale of equity securities, as the Company has
      not generated significant revenues from the sales of its products. Continuation
      of the Company as a going concern is dependent upon additional external funding
      and, ultimately, a substantial increase in sales volume and achievement of
      profitable operations. The Company intends to finance its future development
      activities and its working capital needs largely from the sale of equity
      securities with some additional funding from other traditional financing
      sources, including term notes and proceeds from licensing agreements until
      such
      time that funds provided by operations are sufficient to fund working capital
      requirements. While management believes that such financing and licensing
      sources will be available to the Company, there can be no assurance in that
      regard. The financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.


NOTE
      C -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles
      of Consolidation





The
      consolidated financial statements include the accounts of Invisa and its wholly
      owned subsidiaries, SmartGate, L.C. and RMI. All intercompany balances and
      transactions have been eliminated. Both of the subsidiaries were merged into
      Invisa in December 2004.





Use
      of
      Estimates





In
      preparing the consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America, management makes
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosures of contingent assets and liabilities at the date
      of
      the financial statements, as well as the reported amounts of revenues and
      expense during the reporting period. Actual results could differ from those
      estimates.




F-7




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      C -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Cash
      and
      Cash Equivalents





The
      Company considers all highly liquid investments with a maturity of three months
      or less when purchased to be cash equivalents. The Company maintains its cash
      and cash equivalents at a major commercial bank. Such amounts are in excess
      of
      the maximum federally insured amounts.





Accounts
      Receivable, Major Customer Information and Export Sales





Accounts
      receivable are due primarily from companies in the gate manufacturing industry
      located throughout the United States and the United Kingdom. Credit is extended
      based on an evaluation of the customers’ financial condition and, generally,
      collateral is not required. Account balances are evaluated for collectability
      based on the condition of the customers’ credit including repayment history and
      trends and relative economic and business conditions. Bad debts have not been
      significant. During 2004 and 2005, Magnetic Automation Corp. was our largest
      customer, comprising approximately 20% of our product revenues in both
      years.





Inventories





Inventories
      are stated at the lower of cost or market. Cost is determined using a method
      with approximates the first-in, first-out method.





Furniture,
      Fixtures and Equipment





Furniture,
      fixtures, and equipment are depreciated on a straight-line basis over their
      estimated useful lives, principally five years. Leasehold improvements are
      amortized over the term of the lease or the estimated useful lives, whichever
      is
      shorter. Depreciation expense was $73,570 and $21,280 for 2004 and 2005,
      respectively.





Patent





The
      patent for the Company’s underlying technology is amortized on a straight-line
      method over 10 years, which represents the remaining useful life of the patent.
      At December 31, 2003, the Company recorded an impairment charge of $5,517,808
      that was included in the consolidated statement of operations to reflect the
      fair value as determined by the Company’s management. See “Impairment of
      Long-lived assets” included in Note C for further discussion.




F-8




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS






NOTE
      C -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Revenue





Product
      sales under fixed price arrangements are recognized as revenue upon shipment
      of
      product (when title transfers to the purchaser) and collectability is assured.
      Other operating revenues relate to services and are recorded as
      earned.





Licensing
      agreement





In
      July
      2002 Invisa entered into an Original and Independent Distribution License
      Agreement with Rytec Corporation (the Agreement) and received $300,000 cash
      representing an advance on the first 3000 units purchased by Rytec. In February
      2005, because of extended development efforts by Invisa, the Agreement was
      revised to recharacterize the $300,000 deposit as compensation to the Company
      for engineering expenditures and efforts expected by Invisa during 2005. Price
      reductions reflected in the original Agreement were also
      discontinued.





Shipping
      costs





Shipping
      and handling costs totaling $4,488 and $5,405 for 2004 and 2005, respectively,
      are included in cost of sales in the accompanying statements of
      operations.





Research
      and Development Costs





Research
      and development costs consist of direct and indirect costs that are associated
      with the development of the Company’s technology. These costs are expensed as
      incurred.





Advertising
      Costs





The
      Company’s policy is to expense advertising costs as incurred. The Company had no
      advertising costs during 2004 and 2005.





Warranty
      Costs





The
      Company warrants its products for ninety days. Estimated warranty costs are
      recognized in the period product is shipped. However, there have been no
      significant warranty costs incurred through December 31, 2005, nor are any
      significant amounts expected to occur subsequently. Accordingly, no warranty
      liability has been recognized for any period presented.




F-9




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS








NOTE
      C -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Income
      Taxes





Deferred
      income tax assets and liabilities are computed annually for differences between
      the financial statements and income tax bases of assets and liabilities that
      will result in taxable or deductible amounts in the future, based on enacted
      tax
      laws and rates applicable to the periods in which the differences are expected
      to affect taxable income. Valuation allowances are established when necessary
      to
      reduce deferred tax assets to the amount expected to be realized.





Financial
      Instruments





The
      Company’s financial instruments include cash and cash equivalents, accounts
      receivable, accounts payable and due to stockholders. The carrying amounts
      of
      these financial instruments approximate their fair value, due to the short-term
      nature of these items and the use of market rates of interest.





Impairment
      of Long-Lived Assets





The
      Company evaluates the recoverability of its long-lived assets or asset groups,
      including patents; whenever adverse events or changes in business climate
      indicate that the expected undiscounted future cash flows from the related
      asset
      may be less than previously anticipated. If the net book value of the related
      asset exceeds the undiscounted future cash flows of the asset, the carrying
      amount would be reduced to the present value of its expected future cash flows
      and an impairment loss would be recognized. During the fourth quarter of 2003
      the Company expensed $5,517,808 to reflect an impairment of its patent. Our
      original cost of the patent totaled $13,711,000 which we paid in February 2002
      and April 2003. The patent impairment resulted principally from perceived shifts
      in markets and our approach to such markets thus requiring us to rely more
      on
      our patents subsequently obtained and applied for and less on the original
      patent.





The
      Company’s management performed a valuation of the patent in connection with its
      acquisition in February 2002. In doing this valuation we considered several
      factors, including the size of the total applicable safety and security markets,
      our estimates of penetration into these markets and a valuation. These markets
      are large and growing, principally as a result of increased emphasis on safety
      by governmental agencies and others and increased concerns for security,
      principally as a result of the September 11, 2001 terrorist event and all that
      has followed relative to terrorism.





In
      late
      2003 the Company hired a new CEO who took the lead in changing our approach
      to
      the markets by emphasizing the sale of licenses rather that individual products.
      In light of this change in approach, the Company’s management reviewed the size
      of the market and our estimated penetration. We considered various factors,
      including a valuation, in arriving at the patent’s remaining value. We based our
      valuation on a discounted cash flow model (income approach) which considered
      our
      projected sales of individual safety and security products and applicable costs
      principally in the Untied States. Principal assumptions used included a ten
      year
      revenue stabilization period assuming adequate funding to achieve growth, a
      long-term growth rate of 0% and a discount rate of 30%. We concluded the market
      for the sale of licensing rights was smaller than the market for selling
      individual products. As a result, we determined that a write down in the value
      of the patent was appropriate.





Earnings
      per Common Share





Basic
      and
      diluted earnings per share are computed based on the weighted average number
      of
      Common Stock outstanding during the period. Common Stock equivalents are not
      considered in the calculation of diluted earnings per share for the periods
      presented because their effect would be anti-dilutive.





Stock-Based
      Compensation





The
      Company follows Statement of Financial Accounting Standards (SFAS) No. 123, *Accounting
      for Stock-Based Compensation* (SFAS
      123) for non-employees, which establishes a fair value based method of
      accounting for stock-based compensation plans; however, the Company has elected
      to account for its employee stock compensation plans using the intrinsic value
      method under Accounting Principles Board Opinion No. 25, with pro forma
      disclosures of net earnings and earnings per share as if the fair value based
      method of accounting defined in SFAS 123 had been applied. The Company amortizes
      compensation costs related to the pro forma disclosure using the straight-line
      method over the vesting period of the employees’ Common Stock
      options.




F-10




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS






NOTE
      C -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Had
      compensation cost for the Company’s stock options been determined on the fair
      value at the grant dates for stock-based employee compensation arrangements
      consistent with the method required by SFAS 123, the Company’s net loss and net
      loss per common share would have been the pro forma amounts indicated below
      (see
      also Note I):





**Year
                Ended December 31,****2004**
            
            **2005**Net
                loss applicable to Common Stockholders, as reported
            
            $
            (4,363,460
            )
            $
            (2,789,788
            )Add:
                stock-based employee compensation cost under the fair value based
                method,
                net of related tax effects
            
            
            (887,595
            )
            
            (353,110
            )Pro
                forma net loss applicable to Common Stockholders
            
            $
            (5,251,055
            )
            $
            (3,142,898
            )Net
                loss per share-applicable to Common Stockholders basic and
                diluted:as
                reported
            
            $
            (0.22
            )
            $
            (0.12
            )pro
                forma
            
            $
            (0.26
            )
            $
            (0.14
            )






New
      Accounting Pronouncements





In
      December 2004, the FASB revised its SFAS No. 123 (“SAFS No. 123R”), “Accounting
      for Stock Based Compensation.” The revision establishes standards for the
      accounting of transactions in which an entity exchanges its equity instruments
      for goods or services, particularly transactions in which an entity obtains
      employee services in share-based payment transactions. The revised statement
      requires a public entity to measure the cost of employee services received
      in
      exchange for an award of equity instruments based on the grant-date fair value
      of the award. That cost is to be recognized over the period during which the
      employee is required to provide service in exchange for the award. Changes
      in
      fair value during the requisite service period are to be recognized as
      compensation cost over that period. In addition, the revised statement amends
      SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be
      reported as a financing cash flow rather than as a reduction of taxes paid.
      The
      provisions of the revised statement are effective for financial statements
      issued for the first interim or annual reporting period beginning after December
      15, 2005, with early adoption encouraged. This standard will require the Company
      to change its method of accounting for employee stock-based compensation from
      the intrinsic value method prescribed by APB No. 25 to a fair value method
      in
      the first quarter of 2006. The new standard will apply to all employee stock
      option awards granted on January 1, 2006 and thereafter and will also apply
      to
      the portion of previously issued (prior to January 1, 2006) employee stock
      options that vest on January 1, 2006 and thereafter.




F-11




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      C -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





New
      Accounting Pronouncements (continued):





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Correction
      (“SFAS 154”), which replaces Accounting Principles Board Opinions No. 20
“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim
      Financial Statements - An Amendment of APB Opinion No. 28.” SFAS 154 provides
      guidance on accounting for and reporting of accounting changes and error
      corrections. It establishes retrospective application, or the latest practicable
      date, as the required method for reporting a change in accounting principle
      and
      the reporting of a correction of an error. SFAS 154 is effective for accounting
      changes and corrections of errors made in fiscal years beginning after December
      15, 2005 and is required to be adopted by the Company in the first quarter
      of
      fiscal 2006. The Company is currently evaluating the effect that the adoption
      of
      SFAS 154 will have on its consolidated results of operations and financial
      condition, but does not expect it to have a material impact.





In
      February 2006, the FASB issued Statement of Financial Accounting Standard (SFAS)
      No. 155 (SFAS No. 155), *Accounting
      for Certain Hybrid Financial Instruments - an amendment of FASB Statements
      No. 133 and 140,* to
      simplify and make more consistent the accounting for certain financial
      instruments. Specifically, SFAS No. 155 amends SFAS 133, *Accounting
      for Derivative Instruments and Hedging Activities,* to
      permit fair value remeasurement for any hybrid financial instrument with an
      imbedded derivative that otherwise would require bifurcation, provided that
      the
      whole instrument is accounted for on a fair value basis. Prior to fair value
      measurement, however, interest in securitized financial assets must be evaluated
      to identify interest containing embedded derivatives requiring bifurcation.
      The
      amendments to SFAS 133 also clarify that interest-only and principal-only strips
      are not subject to the requirements of the SFAS, and that concentrations of
      credit risk in the form of subordination are not embedded derivatives. Finally,
      SFAS No. 155 amends SFAS 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets,* to allow
      a qualifying special-purpose entity (SPE) to hold a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. SFAS No. 155 applies to all financial instruments
      acquired or issued after the beginning of an entity’s first fiscal year that
      begins after September 15, 2006, with earlier application allowed. The
      Company does not anticipate that the adoption of this statement to have a
      material impact on its consolidated financial statements.


NOTE
      D -
      INVENTORIES





Inventories
      consist of the following at December 31, 2005:





Finished
                goods
            
            $
            4,371Raw
                materials
            
            
            43,104$
            47,475





F-12




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      E -
      ACCRUED EXPENSES





Accrued
      expenses consist of the following at December 31, 2005:





Accrued
                compensation and related taxes
            
            $
            22,083Severance
            
            
            100,868$
            122,951





NOTE
      F -
      DUE TO STOCKHOLDERS AND OFFICERS





Due
      to
      stockholders and officers consists principally of amounts accrued in connection
      with severance agreements with two principal stockholders. The amounts payable
      are non-interest bearing (see Note K).


NOTE
      G -
      LOSS PER SHARE





The
      following table sets forth the computation of basic and diluted net loss per
      share:





**December
                31,****2004**
            
            **2005**Numerator:Net
                loss applicable to Common Stockholders
            
            $
            (4,363,460
            )
            $
            (2,789,788
            )Denominator:For
                basic loss per share - weighted average shares
            
            
            19,899,052
            
            
            22,742,956Effect
                of dilutive securities - stock options
            
            
            -----
            
            
            -----For
                diluted loss per share
            
            
            19,899,052
            
            
            22,742,956Net
                loss per share - applicable to Common Stockholders basic and
                diluted
            
            $
            (0.22
            )
            $
            (0.12
            )





Options
      and warrants to purchase 5,511,013 and 13,074,546 shares of Common Stock as
      of
      December 31, 2004 and 2005, respectively, are not considered in the calculation
      of diluted loss per share because the effect would be
      anti-dilutive.





NOTE
      H -
      COMMON STOCK





On
      January 3, 2003, the Company’s shareholders approved an increase in the
      Company’s authorized stock to 100,000,000 shares, consisting of 95,000,000
      Common Stock and 5,000,000 Preferred Stock; rights and preferences of the
      Preferred Stock are to be set by the Board of Directors. This authorization
      was
      reflected in the Company’s financial statements at December 31,
      2003.





During
      the year ended December 31, 2004, the Company issued 602,000 and 103,750 shares
      of Common Stock in connection with the exercise of warrants and options for
      cash
      of $1,138,745 and $332,187, respectively.




F-13




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      H -
      COMMON STOCK - Continued





In
      August
      2004, the Company issued options to various consultants to acquire 36,000 shares
      of Common Stock in exchange for cancellation of certain **** royalty
      agreements. The options have an exercise price of $1.00 per share and expire
      after three years. The value of the options (which totaled approximately
      $34,000) was accounted for by a charge to expense and a corresponding credit
      to
      additional paid-in capital.





In
      September 2004, the Company issued 22,000 shares of Series A Convertible
      Preferred Stock in the face amount of $2,200,000 for $1,937,000 (net of $263,000
      transaction expenses) which was paid in the respective amounts of $1,158,200
      and
      $778,800 at closing. Additionally, the transaction included:





·
            Issuance
                of Detachable Warrants to acquire up to 1,500,000 shares of the Company’s
                Common Stock at $1.00 per share. The Warrants expire on August 16,
                2007.





·
            In
                addition to the transaction costs referred to above, the Company
                granted
                162,500 shares of Common Stock and Detachable Warrants to acquire
                up to
                162,500 shares of the Company’s Common Stock at $1.00 per share to a
                broker. The term of the Warrants is three
                years.





·
            The
                Preferred Stock is non-voting, entitled to dividends only when, or
                if,
                declared by the Board of Directors and has preference over the Common
                Stock in the event of the Company’s liquidation. The Preferred Stock is
                convertible into Common Stock at the option of the holder. The conversion
                price is equal to 80% of the market price at the time of conversion,
                subject to a floor of $0.50 per share and a ceiling of $1.17 per
                share.
                During 2005, the floor was modified to $0.12 per share as an inducement
                to
                execute the Series B Convertible Preferred Stock transaction discussed
                below.





We
      accounted for the host instrument as equity under the guidance of SFAS No.
      150, *Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and
      Equity,* and
      under provisions of EITF 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock,* we
      accounted for both the beneficial conversion feature and the warrants as equity
      as well.





The
      Company cancelled $776,132 in accrued compensation to certain directors,
      officers and former employees in exchange for 300,000 shares of Common Stock
      to
      be issued between June 1, 2005 and January 20, 2006, and the cancellation of
      the
      seven percent (7%) royalty agreement in exchange for Warrants to acquire up
      to
      400,000 shares of the Company’s Common Stock at a price of $1.75 per share. The
      Warrants expire in five years. The Company accounted for the value of the
      warrants (which totaled $91,400) by a charge to expense and a corresponding
      credit to additional paid-in capital. The cancellation of the **** $776,132
      accrued compensation resulted in an extinguishment gain of $581,132. As the
      gain
      was with related parties, it was credited to additional paid-in
      capital.




F-14




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




NOTE
      H -
      COMMON STOCK - Continued





In
      September 2004, the Company issued 1,500,000 shares of Common Stock in
      connection with the conversion of $750,000 of the Convertible Preferred Stock
      at
      $0.50 per common share.





In
      September 2004, the Company issued 80,925 shares of Common Stock at $1.00 per
      share for cancellation of cash advances previously made to the Company. In
      addition, 119,075 shares of Common Stock were issued at $1.00 per share in
      connection with settlement for services provided to the Company.





In
      August
      2005, the Company issued 10,000 shares of Series B Convertible Preferred Stock
      in the face amount of $1,000,000 for $878,000 (net of $122,000 transaction
      expenses) which was paid in the respective amounts of $378,000 and $500,000
      at
      closing. Additionally, the transaction included:





·
            Detachable
                warrants to acquire up to 2,500,000 shares of the Company’s Common Stock
                at $0.30 per share. The warrants expire on August 31, 2010 and are
                subject
                to call by the Company upon the Common Stock trading at a price of
                $0.60,
                a minimum trading volume of 60,000 shares for 20 consecutive days
                and the
                registration statement being
                effective.





·
            In
                addition to the transaction costs referred to above, the Company
                granted
                warrants to acquire up to 666,667 shares of the Company’s Common Stock at
                $0.16 per share to a broker. The term of the warrants is three
                years.





·
            The
                Preferred Stock is non-voting and is entitled to receive dividends
                at an
                annual rate equal to the lower of the Prime Rate plus 3.5% or 9%.
                The
                dividend may either be paid in cash or registered shares of the Company’s
                Common Stock, subject to certain limitations. The Preferred Stock
                is
                convertible into Common Stock at the option of the holder. The conversion
                price is equal to 80% of the market price at the time of conversion,
                subject to a floor of $0.12 per share and a ceiling of $0.275 per
                share.





We
      accounted for the host instrument as equity under the guidance of SFAS No.
      150, *Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and
      Equity,* and
      under provisions of EITF 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock,* we
      accounted for both the beneficial conversion feature and the warrants as equity
      as well.





F-15




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS






NOTE
      I-
      STOCK OPTION AND WARRANT ACTIVITY





The
      Company has four stock-based compensation plans which provides for the granting
      of options to purchase the Company’s Common Stock to employees, directors,
      consultants and advisors. The options granted are subject to a vesting schedule
      as set forth in each individual option agreement.







**Maximum
                Shares****of
                Common Stock****Plan**
            
            **which
                can be issued**2000
                Plan
            
            
            1,500,0002002
                Plan
            
            
            1,500,0002003
                Plan
            
            
            1,500,0002003A
                Plan
            
            
            3,500,0008,000,000





Activity
      with respect to the stock-based compensation plans is summarized as
      follows:


**Shares**
            
            **Range
                of Exercise**
              **Prices**
            
            **Weighted-average
                Option price per share**Balance
                at January 1, 2004
            
            
            4,749,336
            
            $
            3.00-5.32
            
            
            
            
            $
            3.14Options
                granted
            
            
            1,600,000
            
            $
            2.00
            
            
            
            
            $
            2.00Options
                exercised
            
            
            (20,000
            )
            $
            3.00
            
            
            
            
            $
            3.00Options
                canceled
            
            
            (4,705,002
            )
            $
            3.00-5.32
            
            
            
            
            $
            1.52Outstanding
                at December 31, 2004
            
            
            1,624,334
            
            
            
            
            
            
            
            $
            3.35Options
                granted
            
            
            5,377,500
            
            $
            0.08-0.16
            
            
            
            
            $
            0.11Options
                canceled
            
            
            (30,000
            )
            $
            2.00-3.50
            
            
            
            
            $
            2.93Outstanding
                at December 31, 2005
            
            
            6,971,834
            
            
            
            
            
            
            
            $
            0.85Options
                exercisable
            
            
            4,841,000
            
            
            
            
            
            
            
            $
            1.18





Activity
      with respect to warrants for common stock is as follows:


**Shares**
            
            **Range
                of Exercise**
              **Prices**
            
            **Weighted-average
                Option price per share**Balance
                at January 1, 2004
            
            
            2,489,595Warrants
                granted
            
            
            2,098,500
            
            $
            1.00-$1.75
            
            
            
            
            $
            1.14Warrants
                exercised
            
            
            (685,750
            )
            $
            1.00-$3.25
            
            
            
            
            $
            1.77Warrants
                canceled
            
            
            (15,666
            )
            $
            1.00
            
            
            
            
            $
            1.00Outstanding
                at December 31, 2004
            
            
            3,886,679Warrants
                granted
            
            
            3,833,333
            
            $
            0.08-$0.30
            
            
            
            
            $
            0.24Warrants
                exercised
            
            
            (399,996
            )
            $
            0.08
            
            
            
            
            $
            0.08Warrants
                canceled
            
            
            (1,217,304
            
            $
            1.00-$1.07
            
            
            
            
            $
            1.03Outstanding
                at December 31, 2005
            
            
            6,102,712
            
            
            
            
            
            
            
            $
            0.74Warrants
                exercisable
            
            
            6,102,712
            
            
            
            
            
            
            
            $
            0.74





F-16





Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      I -
      STOCK OPTION AND WARRANT ACTIVITY (continued)





The
      range
      of exercise prices, shares, weighted-average remaining contractual life and
      weighted-average exercise price for the options and warrants outstanding at
      December 31, 2005 is presented below:




**Range
                  of**
                **Exercise
                  prices**
              **Shares**
              **Weighted-average**
                **Remaining**
                **Contractual
                  life**
              **Weighted-average
                  Exercise price**$0.07-$0.30
              8,810,837
              7.5
                  years
              $0.17$1.00-$1.75
              2,448,500
              1.8
                  years
              $1.12$2.00-$7.25
              1,815,209
              2.5
                  years
              $3.45





The
      range
      of exercise prices, shares and weighted-average exercise price for the options
      and warrants exercisable at December 31, 2005 are presented below:




**Range
                of Exercise prices**
            **Shares**
            **Weighted
                average Exercise price**$0.07-$0.30
            6,743,337
            $0.18$1.00-$1.75
            2,448,500
            $1.12$2.00-$7.25
            1,751,875
            $3.50





For
      pro
      forma disclosure purposes (see Note D), the fair value of the options granted
      in
      2004 and 2005 was estimated on the date of grant using the Black-Scholes
      option-pricing model with the following weighted average assumptions for the
      above years:




**2004**
            **2005**Dividend
                yield
            0.00%
            0.00%Expected
                volatility
            50%
                - 68%
            209%-228%Risk
                free interest rates
            3.00%
            2.00%Expected
                lives
            3
                years
            3
                years





The
      weighted-average grant date fair value for options granted during 2004 and
      2005
      was approximately $1.51 and $0.12.





NOTE
      J -
      COMMITMENT AND CONTINGENCIES





Operating
      Leases





We
      lease
      our office space in one building in Sarasota, Florida. The lease has a five-year
      term, annual lease payments of approximately $50,000 and two renewal
      options.





Legal
      and
      Other Matters





The
      Company is, from time to time, subject to litigation related to claims arising
      out of its operations in the ordinary course of business. The Company believes
      that no such claims should have a material adverse impact on its financial
      condition or results of operations.




F-17




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS







NOTE
      K -
      RELATED PARTY TRANSACTIONS





In
      2004,
      the Company cancelled $776,132 of accrued compensation due to certain directors,
      officers and former employees in exchange for 300,000 shares of common stock.
      The remaining $307,000 of their accrued compensation will be paid depending
      on
      the Company achieving certain equity funding amounts ranging from $500,000
      to
      $4,000,000. The Company has agreed to pay certain tax liabilities, if any,
      which
      may be incurred in connection with these transactions.





During
      2005, a stockholder advanced $67,000 to the Company. The advance can increase
      to
      $150,000 and may be converted into shares of common stock at a conversion price
      of $0.075.





Due
      to
      stockholders and officers also includes $20,000 of accrued director
      fees.





NOTE
      L -
      INCOME TAXES





Deferred
      taxes are recorded for all the tax effects of existing temporary differences
      in
      the Company’s assets and liabilities for income tax and financial reporting
      purposes. Due to the valuation allowance for deferred tax assets, as noted
      below, there was no net deferred tax benefit or expense for the years ended
      December 31, 2004 or 2005.





Reconciliation
      of the federal statutory income tax rate of 34.0% to the effective income tax
      rate is as follows at December 31:




**2004**
            
            **2005**Federal
                statutory income tax rate
            
            
            (34.0
            )%
            
            (34.0
            )%State
                income taxes, net of federal tax benefit
            
            
            (
                3.5
            )%
            
            (
                3.5
            )%Deferred
                tax asset valuation allowance
            
            
            37.5
            %
            
            22.4
            %-0-
            %
            
            -0-
            %





Deferred
      tax asset and liability components were as follows:


**2004**
            
            **2005**Deferred
                tax assets:Compensation
                payable
            
            $
            ----
            
            $
            21,861Net
                operating loss
            
            
            5,475,407
            
            
            5,742,649Basis
                difference in assets
            
            
            157,429
            
            
            ----Other
            
            
            156,308
            
            
            129,7435,789,144
            
            
            5,894,253Deferred
                tax liabilities:Patent
            
            
            1,647,199
            
            
            1,351,626Basis
                difference in assets
            
            
            ----
            
            
            4,183Net
                deferred tax assets
            
            
            4,141,945
            
            
            4,538,444Less
                valuation allowance
            
            
            (4,141,945
            )
            
            (4,538,444
            )Net
                deferred tax asset
            
            $
            -----
            
            $
            -----




F-18




Invisa,
      Inc. and Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS







NOTE
      L -
      INCOME TAXES (continued):





SFAS
      No.
      109 *Accounting
      for Income Taxes* requires
      that a deferred tax asset be reduced by a valuation allowance if, based on
      the
      weight of available evidence it is more likely than not (a likelihood of more
      than 50 percent) that some portion or all of the deferred tax assets will not
      be
      realized. The valuation allowance should be sufficient to reduce the deferred
      tax asset to the amount that is more likely than not to be realized. As a result
      the Company recorded a valuation allowance with respect to all the Company’s
      deferred tax assets.





The
      Company has a federal net operating loss carryforward of approximately $15.3
      million as of December 31, 2005. Under Section 382 and 383 of the Internal
      Revenue Code, if an ownership change occurs with respect to a “loss
      corporation”, as defined, there are annual limitations on the amount of the net
      operating loss and other deductions which are available to the company. The
      Company has not determined the impact of these limitations at this
      time.


NOTE
      M -
      SUBSEQUENT EVENTS





Subsequent
      to December 31, 2005, the Company executed three consulting agreements with
      un-related parties. The agreements include payment in both cash and warrants
      for
      1,500,000 shares at market exercise price when granted and up to 300,000 shares
      of restricted common stock.





Note
      N -
      Restatement of Previously Issued Financial Statements





The
      Consolidated Statements of Operations have been restated to remove the gross
      profit caption and to separately present patent amortization which was formerly
      included with selling, general and administrative costs. Additionally, the
      Company expanded its discussion regarding accounting for capitalized patent
      costs and preferred stock.





F-19