UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
      DC 20549





AMENDMENT
      NO. 2 TO


FORM
      10KSB








x  ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      fiscal year ended: December 31, 2004





o  TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      transition period from ______________ to ________________.





Commission
      file number 000-50081.




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  o  No





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of 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  o  No





The
      Issuer’s revenues for its most recent fiscal year were $197,484.





The
      aggregate market value of the Issuer’s voting stock held as of December 31, 2004
      by non-affiliates of the Issuer based upon the closing bid and asked price
      of
      the Issuer’s Common Stock on that date is $4,848,853.80. The Issuer does not
      have any non-voting stock.








**INVISA,
      INC.**





**2004
      FORM 10-KSB ANNUAL REPORT**


**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 Q - 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
                No.****Part
                I**Item
                1
            Description
                of Business
            1Item
                2
            Description
                Properties
            6Item
                3
            Legal
                Proceedings
            6Item
                4
            Submission
                of Matters to Vote of Security Holders
            6**Part
                II**Item
                      5
            Market
                for Common Equity and Related Stockholder Matters
            7Item
                6
            Managements
                Discussion and Analysis or Plan of Operations
            8Item
                7
            Financial
                Statements
            16Item
                8
            Changes
                in and Disagreements with Accountants on Accounting
            17Item
                8a
            Controls
                and Procedures
            17**Part
                III**Item
                9
            Directors
                and Executive Officers of the Registrant
            17Item
                10
            Executive
                Compensation
            22Item
                11
            Security
                Ownership of Certain Beneficial Owners and Management
            25Item
                12
            Certain
                Relationships and Related Transactions
            27Item
                13
            Exhibits
                and Reports on Form 8-K
            28Item
                14
            Auditor
                Fees
            30Signatures
            32











**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
      2002
      we acquired Radio Metrix Inc. (“RMI”), a development stage company. The
      consideration for this acquisition is summarized in Item 12 “Certain
      Relationships and Related Transactions.” 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.





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.


1







**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.





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.


2







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 - 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.





**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.





In
      2005,
      we anticipate greater sales to manufacturers as 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**





In
      2004,
      Magnetic Automation Corp. was our largest customer, comprising approximately
      20%
      of our revenues. We are not dependent upon any single customer, dealer, or
      distributor in the safety market, or otherwise.





During
      each of the last three fiscal years, more than 90% of our revenue was
      attributable to customers in the United States. In sales made to non-U.S.
      customers, the country generating the greatest sales was the United
      Kingdom.





**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.


3







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.


4




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.





*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.


5




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.





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. 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
      eleven employees, of whom one is part time. 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, 2003 and 2004, research and development expenses
      totaled $558,277 and $352,642, respectively.





**Item
      2 - Description of Property**





Through
      January 2005, we leased approximately 15,200 square feet of manufacturing,
      marketing, development and office space in one building located in Northgate
      Business Park, Sarasota, Florida.




As
      of
      February 2005, 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.


6





**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.




**Quarter**
            
            **High
                Bid**
            
            **Low
                Bid**First
                Quarter 2003
            
            4.05
            
            3.05Second
                Quarter 2003
            
            4.00
            
            1.70Third
                Quarter 2003
            
            2.80
            
            1.00Fourth
                Quarter 2003
            
            4.05
            
            1.55First
                Quarter 2004
            
            4.05
            
            2.90Second
                Quarter 2004
            
            2.90
            
            1.60Third
                Quarter 2004
            
            2.25
            
            0.43Fourth
                Quarter 2004
            
            0.34
            
            0.28





On
      February 4, 2005, 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 were
      $0.42 and $0.45 per share, respectively.





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.





As
      of
      December 31, 2004, we had an aggregate of approximately 395 shareholders of
      record as reported by our transfer agent, Liberty Transfer Co. Certain shares
      are held in the “street” names of securities broker dealers and we do not know
      the number of shareholders which may be represented by such securities broker
      dealer accounts.





**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.





**Recent
      Sales of Unregistered Securities**





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 as
      payment for services previously provided to the Company. These shares were
      issued pursuant to an exemption for registration contained in Section 4(2)
      of
      the Securities Act of 1933, as amended.


7




**Securities
      Authorized for Issuance under Equity Compensation Plans as of the End of
      2004**





**Equity
      Compensation Plan Information**





**Number
                of**
              **securities
                to be**
              **issued
                upon**
              **exercise
                of**
              **outstanding**
              **options,
                warrants,**
              **and
                rights**
            
            **Weighted**
              **average
                exercise**
              **price
                of**
              **outstanding**
              **options,**
              **warrants,
                and**
              **rights**
            
            **Number
                of**
              **securities**
              **remaining**
              **available
                for**
              **future
                issuance****Plan
                Category**
            
            **(a)**
            
            **(b)**
            
            **(c)**Equity
                compensation plans approved by security holders
            
            
            1,624,334
            
            $
            3.35
            
            
            4,650,000Equity
                compensation plans not approved by security holders
            
            
            3,886,679
            
            $
            1.26
            
            
            —Total
            
            
            5,511,013
            
            $
            1.88
            
            
            4,650,000





**Individual
      Compensation Arrangements**





In
      March
      1999, SmartGate, L.C. granted the H.R. Williams Family Limited Partnership
      (“HRW
      Partnership”), a shareholder of the Company (see Item 11. “Security Ownership of
      Certain Beneficial Owners and Management” and Item 12. “Certain Relationships
      and Related Transactions”) an option to purchase 446,804 shares at a purchase
      price of $1.07 per share. This Option is fully vested and will remain
      exercisable until April 24, 2005.





The
      following table provides certain summary information concerning compensation
      paid to our executive officers, directors and significant employees for the
      years stated. For all individuals named in the following table, compensation
      reflected is the aggregate of compensation paid by the Company and SmartGate,
      L.C.





**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, 2004,
      we
      had revenue from product sales of $197,484, 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
      license payment we received in connection with the Rytec Corporation Agreement
      (See “Note D, Revenue” to the accompanying Consolidated Financial Statements. 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.


8





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.





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
      has recorded sales of parking automated sensors in 2004 of $ 197,484. In 2003
      we
      also sold 30 security devises 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,
      2003**





*Net
      Sales* -
      During
      the years ended December 31, 2003 and 2004, net sales totaled $212,679 and
      $197,484, respectively. The decrease was due to the decrease in sales of safety
      products for powered parking gates. The Company's sales to date have been
      limited and constrained by lack of capital.





*Cost
      of goods sold -* During
      the years ended December 31, 2003 and 2004, cost of goods sold totaled $128,971
      and $259,653, respectively. The increase in 2004 includes a write-off of
      inventory for $157,331.





*Research
      and Development Expenses* - During
      the years ended December 31, 2003 and 2004, research and development expenses
      totaled $558,277 and $352,642, respectively. The decrease of $205,635 in 2004
      was due principally to a reduction in facility expense, insurance expense and
      work force, resulting in decreases in salaries and wages and payroll taxes.
      Partially offsetting the decreases was increased use of inventory
      items.





*Selling,
      General and Administrative Expenses* -
      During
      the years 2003 and 2004, selling, general and administrative expenses totaled
      $4,005,805 and $2,239,134, respectively. The decrease of $1,766,671 in 2004
      principally resulted from reductions in advertising, marketing and tradeshow
      activities, lower compensation and related payroll expenses, rent, insurance,
      office supplies, and patent amortization expenses. These reductions were offset
      in part by an increase in professional fees.


9




*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% average
      annual 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
      Expense (Income), Net* -
      During
      the year 2003, net interest expense totaled $565,864, and during the year 2004,
      the Company had interest income of $15,360, respectively. The change of $581,224
      in 2004 resulted principally from a reduction of the Radio Metrix, Inc. debt,
      the SDR Metro, Inc. debt, as well as amortization of original issue discounts
      and favorable settlement of accrued interest payable during 2004.





*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 $11,738,105
      and $0.73 in 2003 to $4,363,460 and $0.22 in 2004, respectively, as a result
      of
      the matters described above, and partially offset as a result of the non-cash
      constructive dividend related to the beneficial conversion features of the
      Convertible Preferred Stock in 2004.





10


**Critical
      Accounting Estimates**





*Patents
      and Trademarks* - The
      initial recorded cost of the patent is based on the fair value of consideration
      paid for it. The ultimate purchase consideration was originally based on a
      value
      determined by Management and approved by those Board Members with no affiliation
      with the seller. The patent costs are amortized over the remaining statutory
      life of the patent at the date of its acquisition, which is not in excess of
      the
      remaining estimated useful life. The fair value of the patent is reviewed for
      recoverability whenever events or changes in circumstances indicate that its
      recorded value may not be recoverable, for example, should continuing losses
      associated with the use of the patent demonstrate that the Company’s current
      forecast will not be achieved.





Impairment
      of Patent - at the end 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 in 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. 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 United States. 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 than 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 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
      in value of the patent was appropriate.





**Plan
      of Operation**





We
      raised
      $2.2 million in funding in September 2004. We sought this round of capital
      to
      provide Invisa with funds needed to support our business plan. With funding
      in
      place, the Company now believes it has the ability to focus on implementing
      its
      business plan.





We
      have
      improved our efficiency by lowering our overhead and reducing product costs.
      In
      2004 we signed a lease and, in February, 2005, occupied a new facility with
      an
      interior constructed to our specifications located six miles north of our former
      facility. We believe that we have an efficient work space that also has room
      to
      demonstrate our product line.





To
      further reduce future product costs, we negotiated the termination of two
      royalty obligations (particularly important as we expand into the security
      market), and outsourced the manufacture of our new generation of product. We
      continue to pay close attention to our costs so that we can reach cash flow
      breakeven in a reasonable timeframe.





Today,
      Invisa markets and sells a 4 th generation “digital” SmartGate safety sensor (designated the “PBG-3”) for
      Parking Barrier Gates. Compared to earlier generations of SmartGate sensors,
      the
      PBG-3 is faster and easier to install (it installs in about one-half the time
      of
      earlier units), is more compact (occupies approximately 40% of the volume of
      earlier units), is more reliable, and has lower manufacturing costs. With these
      positive attributes, early demand for the PBG-3 has been encouraging. We believe
      that this product will have a profitable life cycle.





A
      major
      emphasis of our business plan is to gain major manufacturers and distributors
      of
      powered closure devices as our customers. This category of customer requires
      substantially less ongoing support than do small dealers and end-users. Our
      intent is for our sensors to be made available as “factory installed” options
      that eventually will be offered as standard features in much the same way that
      satellite radio has become a desired option in today’s
      automobiles.


11




In
      a
      significant first step toward achieving that objective, during the last four
      months of 2004 we shipped the first 150 units of a 1000 unit order of PBG-3
      units to Magnetic Automation. Magnetic is a major manufacturer and supplier
      of
      parking barrier gates in North America. This blanket purchase order is the
      largest one that the Company has received to date - important not only for
      its
      size, but also because Magnetic is a highly respected manufacturer in the
      powered closure sector.





Following
      the order from Magnetic, in January 2005 we shipped our first order of PBG-3
      units to DC Solutions Inc., recently acquired by the Chamberlain Group. An
      article in the January 2005 issue of *Professional
      Door Dealer* describes Chamberlain as the “world’s largest manufacturer of residential garage
      door openers and accessories, residential and commercial door operators, and
      telephone entry and access systems.” We hope that these recent orders will
      create the momentum needed for other manufacturers of parking barrier gates
      to
      offer the PBG-3 as a factory-installed option or standard feature on their
      gates.





On
      the
      international front, we worked to rebuild distribution in the U.K., distribution
      that had gone dormant for a variety of reasons. While retaining Jackson’s
      Fencing as a distributor of our sensors, we added another distributor, Zeag
      (UK)
      Ltd. Zeag is both a manufacturer and distributor of parking systems. Zeag states
      that it services and supports approximately 5,000 parking system installations
      throughout the United Kingdom.





We
      are
      also well into the development and testing phase of our Commercial (Vertical)
      Door sensor, the “CD-3.” Manufacturers of powered commercial and industrial door
      systems are currently evaluating the CD-3 sensor for incorporation into their
      door systems. We continue to refine the CD-3 and, barring any unforeseen
      difficulties, plan to introduce the product later in 2005.





Rytec
      Corporation of Jackson, Wisconsin, a manufacturer of high performance industrial
      doors, for more than 20 months has been testing our sensors and has shared
      with
      us important operational data on our units. During that time we have progressed
      in bringing the reliability up to the very stringent standards needed to satisfy
      the requirements of specialized industrial applications.





As
      part
      of our efforts in developing security applications of our technology, we
      presented in Boston last September a case study to the International Association
      of Museum Facilities Administrators (IAMFA). We described how InvisaShield
      sensors are used at a New England Museum to solve a specific security challenge,
      namely, that of providing open access to exhibits - while protecting those
      exhibits from vandalism or inadvertent damage. Following the presentation we
      highlighted and demonstrated an actual museum installation of our security
      sensors.





The
      IAMFA
      meeting helped us to establish valuable contacts with museum security
      administrators. During the next 9-12 months, we intend to focus a greater
      portion of our budget towards completing a commercially viable sensor for
      exhibits and display in museums and other related applications.





In
      its
      efforts to continue to refine the InvisaShield technology, the Company is
      developing a 5 th generation sensor. This new sensor design will feature tighter, system-level
      integration, added features, and a lower price point than our 4 th generation system. We believe that this new sensor should increase further
      the
      market acceptance of our proprietary InvisaShield technology.





**Liquidity
      and Capital Resources**





Since
      inception, we have incurred significant net losses and approximately $11,700,000
      of negative operating cash flows which we have financed largely from the sale
      of
      Common and Preferred Stock. From inception through December 31, 2004 we raised
      cash of approximately $12,444,000 net of issuance costs, principally through
      private placements of common and preferred stock financings. At December 31,
      2004, we had cash and cash equivalents totaling $590,588.


12




From
      inception (February 12, 1997) through December 31, 2004, we were largely focused
      on technology and product development. The estimated dollar amount spent during
      this period on company-sponsored research and development was $3,334,554,
      including $510,133 for the year ended December 31, 2004 and $558,277 for the
      year ended December 31, 2003. The Company continues to engage in significant
      product development activities. Because of the Company’s losses (which aggregate
      $23,768,740 from inception through December 31, 2004), limited capital, and
      ongoing product development expenses, Footnote C of the Company’s consolidated
      financial statements and the accompanying Report of Independent Registered
      Public Accountants report that substantial doubt exists regarding the Company’s
      ability to continue as a going concern.




The
      $3.2
      million of direct research and development expenses that we incurred from
      inception through December 31, 2004 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, the Company completed a financing transaction whereby it
      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
      the six months ended June 30, 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.





While
      these events improved the Company’s working capital position (we have $219,815
      of positive working capital at December 31, 2004 versus a working capital
      deficit of $1,962,329 at December 31, 2003), 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.


13





**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, 2004,
      we
      sustained net losses of $4.3 million. From inception through June 30, 2004,
      we
      have sustained aggregate net losses of $23.8 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 2004, to date, will be sufficient to
      satisfy our contemplated cash requirements at least through April of 2005.
      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
      make it more difficult for us to continue operations. Any reduction in our
      operations may result in a lower stock price.





**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.


14




**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.




**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.


15




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.





**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.




**Item
      7 - Financial Statements**





The
      Financial Statements of the Company and the accompanying notes thereto, and
      the
      independent auditors’ reports are included as part of this Form 10-KSB beginning
      on Page F-2.


16




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





On
      October 21, 2004, we filed a Form 8-K reporting the change of accountants from
      Grant Thornton LLP to Aidman, Piser & Company, P.A.





There
      have been no disagreements with our independent accountants over any item
      involving the Company’s financial statements. Our independent accountants are
      Aidman, Piser & Company, P.A., 401 East Jackson Street, Tampa, Florida
      33602.





**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, 2004. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures were effective at the reasonable
      assurance level.




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, 2004
      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 at the reasonable assurance
      level.





**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 or those nominated or chosen to be directors or
      officers of the Company.





17





The
      directors, executive officers, and significant employees of the Company, are
      as
      follows:





**Name**
            
            **Age**
            
            **Positions
                and Offices Presently Held with the Company**Herbert
                M. Lustig
            
            52
            
            Director,
                President & CEODavid
                J. Benedetti
            
            48
            
            Chief
                Financial Officer, Secretary & TreasurerEdmund
                C. King
            
            69
            
            DirectorRobert
                Knight
            
            48
            
            DirectorStephen
                A. Michael
            
            56
            
            Director
                & ChairmanJoseph
                F. Movizzo
            
            61
            
            DirectorGregory
                J. Newell
            
            55
            
            DirectorJohn
                E. Scates
            
            48
            
            Director





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





HERBERT
      M. LUSTIG joined the Company in November of 2003 as Chief Operating Officer.
      In
      December of 2003 he joined the Invisa Board of Directors and on January 1,
      2004,
      he was appointed the Company’s President and CEO. From November 2002 to October
      2003, Mr. Lustig was principal at Techmark Group, a consultancy providing
      technology and market development assistance for corporations. From June 2000
      to
      November 2002 he served as President and CEO of Expanse Networks, an ePrivacy
      software developer. From June 1996 to May 2000, he was Vice President, then
      Sr.
      Vice President of Marketing & Business Development within the Security and
      Fire Solutions manufacturing businesses of Honeywell International. Prior to
      that, Mr. Lustig held executive positions at General Instrument Corporation,
      Booz Allen Hamilton, and Communications Satellite Corporation (COMSAT). Mr.
      Lustig holds an MBA from the Wharton School of the University of Pennsylvania
      and a BS in Biochemistry from the University of Massachusetts at
      Amherst.





DAVID
      J.
      BENEDETTI joined the Company as CFO, Secretary and Treasurer in January 2005.
      From March 1998 until December 2004, he was Chief Financial Officer at The
      Commercial Group, Inc. in Sarasota, Florida, which
      manages companies involved in glass fabrication and manufacturing of specialty
      display systems. **** Throughout
      a career of more than 20 years, Mr. Benedetti has developed a base of experience
      in financial and operational areas, including strategic planning, financial
      reporting, audit coordination, risk management, implementing information systems
      and business administration. He has held senior level positions at The Gallup
      Organization and Johnson Level & Tool Manufacturing Company. Prior to his
      private industry experience, he was an auditor in public accounting with Ernst
      & Young. David earned his Masters of Business Administration, with emphasis
      in Taxation, at the University of Wisconsin - Madison, where he was an
      instructor of undergraduate accounting. He earned his Bachelors of Business
      Administration in Accounting at the University of Wisconsin - Eau Claire. David
      is a Certified Public Accountant, licensed in the state of Wisconsin. Mr.
      Benedetti is a member the Board of Directors of the Sarasota Manatee
      Manufacturers Association (SAMA). On behalf of SAMA, he has made presentations
      to US Congresswoman Katherine Harris and the Florida Department of
      Revenue.




EDMUND
      C.
      KING has been a Director since February 9, 2000 and the CFO of the Company
      until
      January 10, 2005, at which time he resigned as Chief Financial Officer. Mr.
      King
      has had a distinguished career in accounting and financial assistance to various
      industries. 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, resulting
      in
      implementation of successful business strategies; 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 and holds CPA certificates in the states
      of
      California and Utah.


18




ROBERT
      KNIGHT has served as a Director of the Company since July 1998. Mr. Knight
      served as President and Secretary-Treasurer of the Company from 1998 until
      February 2000. Mr. Knight serves as Treasurer and Director of Advertain On-Line
      Inc. a position he has held since March 2000. From September 1998 to June 1999
      he served as President, Secretary - Treasurer and Director of Silverwing Systems
      Corporation. From September 1998 Mr. Knight served as President and Director
      of
      Centaur BioResearch, Inc. Mr. Knight has served as President and Director of
      Peregrine Mineral Resources Group, Inc. and from June 1997 to February 1999,
      he
      was the President and Director of ANM Holdings Corporation. Mr. Knight has
      been
      President and director of AFD Capital Group. Additionally, Mr. Knight has served
      as a Director of FlashPoint International, Inc. since October 2001. Mr. Knight
      has 15 years of experience in the public company arena and corporate finance.
      Mr. Knight completed a Masters in Business Administration at Herriot-Watt
      University in 1998.





STEPHEN
      A. MICHAEL has served as a Director and President from February 9, 2000 through
      November 6, 2003. Since that date, Mr. Michael has served as Director and
      Chairman. 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 Fiber Reinforced Plastic and Composites Engineering. 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.




JOSEPH
      F.
      MOVIZZO joined the Company’s Board of Directors in May 2003. From 1965 to 1998,
      Mr. Movizzo served in various positions at the IBM Corporation. His positions
      included serving as a General Manager of IBM Global Services Consulting Group,
      which he helped form, and creating and managing IBM China/Hong Kong Corporation.
      From March 1998 to the present, Mr. Movizzo has been self-employed primarily
      as
      a business consultant in textiles, financial services, data services and
      government. From May 2000 to the present, Mr. Movizzo has also served as an
      independent Director non-executive Chairman of ManageSoft Corporation
      headquartered in Boston, MA. He was elected non-executive Chairman of that
      entity in November 2002. Mr. Movizzo holds BS and MS degrees in Nuclear
      Engineering from the University of Wisconsin - Madison.





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.





19





**Significant
      Employees**





CARL
      A.
      PARKS has been 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 was 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. Earlier, 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. Mr. Parks
      received an A.S. Business degree in 1983 from Manatee Junior College. He has
      also received 1,600 hours of special instruction in many phases of manufacturing
      technology.





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.





**Compensation
      Committee and Compensation of Directors**





Messrs.
      Knight, Movizzo, 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,
      Scates and Movizzo are 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 are to be paid in Common Stock in either 2005 or 2006, at the election
      of the Company, at the market price on the date of payment. Further, from time
      to time, directors may be granted options under the Company’s various stock
      option plans.





**The
      Audit Committee**





The
      audit
      committee of the board of directors currently consists of four directors,
      Messrs. Knight, Movizzo, 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.
      Knight 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.
      Knight is independent as such term is used in Item 7(d)(3)(iv) of Schedule
      14A
      under the Exchange Act.


20





**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.





**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.





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. 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.





**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.


21




A
      Form 4
      to be filed by Stephen A. Michael, the Company’s Chairman and Director, was due
      September 13, 2004 and was filed on February 4, 2005.





**Item
      10 - Executive Compensation**





**Summary
      Compensation Table**




**Annual
                Compensation**
            ****
            ****
            ****
            **Long
                Term Compensation****Awards****Name
                and**
              **Principal
                Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Other
                Annual Compensation ($)**
            
            **Restricted
                Stock Award(s) ($)**
            
            **Securities
                Underlying Options (#)**
            
            **LTIP
                Payouts ($)**
            
            **All
                Other Compensation ($)**Herbert
                M. Lustig, President & CEO
            
            
            2004
            
            
            195,000
            (1)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —2003
            
            
            32,500
            (1)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Stephen
                A. Michael, Director
            
            
            2004
            
            
            12,500
            (2)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —2003
            
            
            120,000
            (2)
            
            —
            
            
            43,050
            
            
            8,400
            
            
            —
            
            
            —
            
            
            —2002
            
            
            120,000
            (2)
            
            30,000
            
            
            8,400
            
            
            —
            
            
            300,000
            
            
            30,000
            
            
            —William
                W. Dolan
            
            
            2004
            
            
            14,077
            (3)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —2003
            
            
            120,000
            (3)
            
            —
            
            
            4,800
            
            
            —
            
            
            200,000
            
            
            —
            
            
            —2002
            
            
            120,000
            (3)
            
            10,000
            
            
            4,800
            
            
            —
            
            
            39,334
            
            
            —
            
            
            3,200Edmund
                C. King, Director
            
            
            2004
            
            
            120,000
            (4)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —2003
            
            
            120,000
            (4)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —2002
            
            
            120,000
            (4)
            
            —
            
            
            22,500
            
            
            —
            
            
            —
            
            
            —
            
            
            —




(1) Mr.
      Lustig commenced employment in November 2003. Salary paid to him totaled $32,500
      in 2003 and $195,000 in 2004.





(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.




(3) Mr.
      Dolan ceased being employed by the Company in December 2003 and earned a base
      salary of $120,000 during 2003, of which $30,000 was paid and the remainder
      accrued; other annual compensation comprised of a car allowance was paid in
      cash. During 2002, Mr. Dolan was paid the following compensation: (i) $80,000
      of
      Mr. Dolan’s $120,000 base salary was paid in cash and $40,000 was not paid and
      accrues; (ii) the bonus of $10,000 was not paid and accrues; (iii) other annual
      compensation consisted of a car allowance of which $3,200 was paid in cash
      and
      $1,600 was unpaid and accrues; and (iv) all other annual compensation consisted
      of a cash payment of $3,200 in unpaid car allowance which had accrued from
      the
      prior year. In late 2004, it was agreed that $135,500 of accrued compensation
      will be paid with 52,375 shares of unregistered Common Stock to be issued and
      delivered in 2005 or 2006 at the election of the Company.


22





(4) 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.




**Stock
      Compensation Plan - 2000**





Pursuant
      to the Company’s 2000 Plan, the below named directors, officers, and significant
      employees were among the persons (or entities) who received stock options for
      providing services to the Company. Pursuant to the 2000 Plan and the Option
      Agreements, the exercise price is the average market price of our stock during
      the ten-day period prior to the Option grant. All of the below-described options
      with the exception of the options issued to Duffey & Dolan, P.A. and John E.
      Scates are exercisable for a period of seven years from the date of grant;
      provided however, the shares which may be purchased are subject to vesting
      as
      follows: one-third of the shares vests on the grant date; another one-third
      of
      the shares vest one year from the grant date; and the final one-third of the
      shares vests two years from the grant date, provided the consultant or employee
      remains an officer, director, consultant or employee of the Company on the
      vesting dates. The options granted to Duffey & Dolan, P.A. and John E.
      Scates vests as follows: one-third of the shares vest on the first anniversary
      of the grant date; another one-third of the shares vests on the second
      anniversary of the grant date; and the final one-third of the shares vests
      on
      the third anniversary of the grant date, provided the holder remains an officer,
      director, consultant or employee of the Company on the vesting
      dates.





On
      July
      26, 2000, options were granted at an exercise price of $3.00 per share as
      follows:





Stephen
                A. Michael
            300,000
                SharesDuffey
                & Dolan, P.A.
            300,000
                SharesEdmund
                C. King
            200,000
                Shares, all of which were returned to the Company in
                2004Robert
                Knight
            150,000
                Shares, all of which were returned to the Company in
                2004





On
      December 20, 2000, an Option under the 2000 Plan to purchase 20,000 shares
      was
      granted to William W. Dolan at an exercise price of $4.96 per share.





On
      May
      17, 2001, an Option under the 2000 Plan to purchase 10,000 shares was granted
      to
      John E. Scates at an exercise price of $4.27 per share, all of which were
      returned to the Company in 2004.





On
      August
      6, 2001, an Option under the 2000 Plan to purchase 100,000 shares was granted
      to
      Carl Parks at an exercise price of $5.32 per share, all of which were returned
      to the Company in 2004.





The
      total
      number of shares that may be purchased pursuant to options granted under the
      2000 Plan, including those set forth above, is 1,200,000 shares (this includes
      10,000 additional shares which may be issued to a consultant if certain
      performance conditions are met), of which all are vested except for 6,666 which
      are not yet vested.


23





**Stock
      Compensation Plan - 2002**





On
      January 22, 2002, pursuant to the Company’s 2002 Plan, the below named
      directors, officers and significant employees were among the persons who
      received stock options for providing services to the Company. Pursuant to the
      2002 Plan and the Option Agreements, the exercise price was the fair market
      value of the Company’s common stock on the date of grant. The 2002 Plan provided
      for both qualified and non-qualified options. All of the options that were
      issued on January 22, 2002 are exercisable for a period of five years from
      the
      date of grant; provided however, the shares which may be purchased are subject
      to vesting as follows: one-third of the shares vest on the first anniversary
      of
      the grant date; another one-third of the shares vests on the second anniversary
      of the grant date; and the final one-third of the shares vests on the third
      anniversary of the grant date.





The
      options granted on January 22, 2002 were at exercise prices of $3.85 and $3.50
      per share as follows:




Stephen
                A. Michael
            300,000
                shares
            
            $
            3.85Samuel
                S.Duffey
            300,000
                shares
            
            $
            3.85Edmund
                C. King
            125,000
                shares, all of which were returned to the Company in 2004
            
            $
            3.50Robert
                Knight
            75,000
                shares, all of which were returned to the Company in 2004
            
            $
            3.50William
                W. Dolan
            100,000
                shares, of which 60,666 were cancelled in 2003
            
            $
            3.85





On
      June
      13, 2002, an Option under the 2002 Plan to purchase 100,000 shares was granted
      to Gregory J. Newell at an exercise price of $5.10 per share. This Option has
      a
      term of seven years, and beginning September 30, 2002, vests quarterly over
      a
      period of 20 quarters with 5,000 shares vesting at the end of each quarter,
      and,
      in the event Mr. Newell terminates his service to the Company after June 13,
      2005 for the primary purpose of returning to full-time government service,
      the
      balance of the option will continue to vest as provided in the Option Agreement.
      The 100,000 options were returned to the Company in 2004.





On
      June
      27, 2002, Mr. Scates was granted an option under the 2002 Plan to purchase
      20,000 shares at $5.15 per share. This Option has a term of seven years, and
      beginning September 30, 2002, vests quarterly over a period of eight quarters
      with 2,500 shares vesting at the end of each quarter. All of these options
      were
      returned to the Company in 2004.





**Stock
      Compensation Plan - 2003**





The
      Company’s Board of Directors adopted a 2003 Incentive Plan (“2003 Plan”) on
      January 2, 2003 and which was approved by the Company’s shareholders on January
      3, 2003. Under the 2003 Plan, the Company has reserved 1,500,000 shares of
      its
      common stock for awarding to eligible current and prospective employees,
      consultants and directors. The 2003 Plan provides for both qualified and
      non-qualified options. It is anticipated that options which may be granted
      under
      the 2003 Plan will be subject to vesting schedules. The exercise price of
      options granted under the 2003 Plan will be the fair market value of the
      Company’s common stock on the date of grant. The 2003 Plan shall continue until
      the earlier of: (i) its termination by the Company’s Board of Directors; or (ii)
      the date on which all shares of common stock available for issuance under the
      2003 Plan have been issued and all restrictions on such shares under the terms
      of the 2003 Plan and the option agreements have lapsed; or (iii) ten years
      from
      the 2003 Plan s adoption date.





On
      May
      13, 2003, Mr. Movizzo was granted an option under the 2003 Plan to purchase
      80,000 shares of the Company’s common stock at $3.00 per share. The option has a
      term of seven years, and beginning June 30, 2003, vests in equal quarterly
      installments of 5,000 shares each over 16 quarters. On November 6, 2003, Mr.
      Lustig was granted an option under the Plan to purchase 1,400,000 shares of
      the
      Company’s common stock at $3.41 per share, which vests 233,340 shares on June
      30, 2004 and 116,666 shares on September 30, 2004 and on each quarter
      thereafter. This option has a term of ten years and is not forfeitable during
      this term. The terms of Mr. Lustig’s options were negotiated as part of his
      employment contract. During 2004 all of the options were returned to the
      Company, except for 10,000 options belonging to Mr. Movizzo.





**Stock
      Compensation Plan - 2003 - A**





In
      May
      2004, the Company’s shareholders approved the adoption of its 2003-A Employee,
      Director, Consultant and Advisor Stock Compensation Plan. The Company has
      reserved 3,500,000 shares of its Common Stock to issue to eligible employees
      of
      the Company. The Plan also retained all provisions of the 2002 Plan. A total
      of
      2,610,000 options were granted under the Plan at prices ranging from $2.00
      to
      $3.35 per share. The options have a term of ten years and vested fully at
      January 1, 2004. On May 1, 2004 employees were granted options under the Plan
      to
      purchase 1,610,000 shares of the Company’s Common Stock at $2.00 per share. The
      options have a term of ten years and vest fully at May 1, 2014. A total of
      2,270,000 options as indicated below were returned to the Company in November
      and December 2004.


24




**Grant
                Date****Oct.
                15, 2003**
            
            **May
                1, 2004**
            
            **Returned
                in 2004**Edmund
                C. King, Director
            
            
            200,000
            
            
            175,000
            
            
            375,000Robert
                Knight, Director
            
            
            100,000
            
            
            100,000
            
            
            200,000Herbert
                M. Lustig, Director
            
            
            —
            
            
            700,000
            
            
            700,000Joseph
                F. Movizzo, Director
            
            
            75,000
            
            
            100,000
            
            
            75,000Gregory
                J. Newell, Director
            
            
            75,000
            
            
            100,000
            
            
            175,000John
                E. Scates, Director
            
            
            75,000
            
            
            100,000
            
            
            175,000Others
            
            
            475,000
            
            
            335,000
            
            
            570,000Total
            
            
            1,000,000
            
            
            1,610,000
            
            
            2,270,000





**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, except that Messrs. Newell, Scates and Movizzo
      are
      each entitled to be paid an annual director’s fee of $10,000 which has not yet
      been paid and accrues. Further, 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 provides 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 provides 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 is 38 months, which ends 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.





**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, 2004, of (i) each person known by us to beneficially
      own five percent (5%) or more of such shares; (ii) each of our directors,
      executive officers, and significant employees named in the Summary Compensation
      Table; and (iii) all of our current executive officers, directors, and
      significant employees as a group. Except as otherwise indicated, all shares
      are
      beneficially owned, and the persons named as owners hold investment and voting
      power.


25





**Name
                and Address of Beneficial**
              **Owner****(1)**
            
            **Amount
                and Nature of Shares****Beneficially
                Owned****(2)**
            
            **Percentage
                Owned****(2)**Michael
                R. Ries, CPA (Trustee)(3)
            
            
            1,949,656
            
            
            7.2
            %Kenneth
                D. Doerr (Trustee)(3)
            
            
            1,949,656
            
            
            7.2
            %Stephen
                A. Michael(4)
            
            
            4,721,090
            
            
            17.4
            %H.R.
                Williams(5)
            
            
            1,058,407
            
            
            3.9
            %Edmund
                C. King(6)
            
            
            202,040
            
            
            0.7
            %Robert
                Knight
            
            
            10,000
            
            
            0.0
            %Joseph
                F. Movizzo(7)
            
            
            46,666
            
            
            0.2
            %Mercator
                Advisory Group, LLC(8)
            
            
            750,000
            
            
            2.8
            %Mercator
                Momentum Fund, LP(9)
            
            
            1,720,568
            
            
            6.3
            %Mercator
                Pointe Fund, Ltd.(10)
            
            
            3,429,432
            
            
            12.6
            %All
                directors, executive officers and significantemployees
                as a group (ten persons)
            
            
            15,832,515
            
            
            58
            %





(1)
            Unless
                otherwise provided herein all addresses are c/o Invisa, Inc., 6935
                15thStreet East, Suite 120, Sarasota, Florida 34243. The business 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
                Mercator Advisory Group, LC, 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 24,235,832 shares that were
                outstanding as of December 31, 2004 plus the respective beneficial
                shares
                owned by each 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, 2004 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.


(4)
            Includes
                options to purchase 600,000 shares.





(5)
            Includes
                611,603 shares and options to purchase 446,804 shares held by the
                H.R.
                Williams Family Limited Partnership
                (Partnership).





(6)
            197,040
                shares are held in Mr. King’s name; plus 5,000 shares held in the name of
                the King Family Trust.





(7)
            Includes
                10,000 shares and options to purchase 36,666
                shares.





(8)
            Consists
                of 750,000 shares of common stock that may be acquired upon the exercise
                of immediately exercisable warrants at $1.00 per share. The documentation
                governing the terms of the warrants contains provisions prohibiting
                any
                exercise of the warrants that would result in Mercator Advisory Group,
                LLC; Mercator Momentum Fund, LP; or Monarch Pointe Fund, Ltd. collectively
                owning beneficially more than 9.99% of the outstanding shares of
                our
                common stock as determined under Section 13(d) of the Securities
                Exchange
                Act of 1934. As a result of these provisions, such entities disclaim
                beneficial ownership in excess of 9.99% of the outstanding shares
                of our
                Common Stock.





(9)
            Consists
                of 1,470,000 shares of common stock that may be acquired upon the
                conversion of outstanding Series A Preferred Stock (at an assumed
                conversion price of $0.50 per share) and 250,568 shares of common
                stock
                that may be acquired upon the exercise of the immediately exercisable
                warrants at $1.00 per share. The documentation governing the terms
                of the
                Series A Preferred Stock and warrants contains provisions prohibiting
                any
                conversion of the Series A Preferred Stock or exercise of the warrants
                that would result in Mercator Advisory Group, LLC; Mercator Momentum
                Fund,
                LP; or Monarch Pointe Fund, Ltd. collectively owning beneficially
                more
                than 9.99% of the outstanding shares of our common stock as determined
                under Section 13(d) of the Securities Exchange Act of 1934. As a
                result of
                these provisions, such entities disclaim beneficial ownership in
                excess of
                9.99% of the outstanding shares of our Common
                Stock.


26




(10)
            Consists
                of 2,930,000 shares of Common Stock that may be acquired upon the
                conversion of outstanding Series A Preferred Stock (at an assumed
                conversion price of $0.50 per share) and 499,432 shares of common
                stock
                that may be acquired upon the exercise of the immediately exercisable
                warrants at $1.00 per share. The documentation governing the terms
                of the
                Series A Preferred Stock and warrants contains provisions prohibiting
                any
                conversion of the Series A Preferred Stock or exercise of the warrants
                that would result in Mercator Advisory Group, LLC; Mercator Momentum
                Fund,
                LP; or Monarch Pointe Fund, Ltd. collectively owning beneficially
                more
                than 9.99% of the outstanding shares of our common stock as determined
                under Section 13(d) of the Securities Exchange Act of 1934. As a
                result of
                these provisions, such entities disclaim beneficial ownership in
                excess of
                9.99% of the outstanding shares of our Common
                Stock.





**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
      November 2003, the Company and Mr. Samuel S. Duffey and Mr. Stephen A. Michael
      (“Stockholders”) entered into agreements (“Agreements”) to forgive and
      restructure certain notes receivable, certain stock subscriptions and related
      interest receivable, notes and related interest payable, and other amounts
      due
      the Stockholders. Under the Agreements, the following occurred:





Forgiveness
      by the Company of two notes receivable from Stockholders totaling
      $146,310.





Forgiveness
      by the Company of stock subscriptions receivable and accrued interest from
      the
      Stockholders totaling $923,432.





Forgiveness
      by the Stockholders of notes payable of $1,169,131 and accrued interest of
      $130,600 by the Company.





Forgiveness
      by the Stockholders of certain compensation amounts owed to them totaling
      $416,963.





In
      connection with these Agreements, the Company recognized additional paid-in
      capital of approximately $544,000 during the fourth quarter of 2003. In addition
      to the amounts forgiven, the Stockholders agreed to allow approximately $338,000
      of their accrued compensation to be paid on a contingent basis as described
      below.





The
      Company had entered into five-year employment agreements with two Stockholders,
      effective February 2000, which provided for each of them to receive an annual
      salary of $150,000 ($30,000 of which was deferred), an ongoing monthly bonus
      of
      $2,000, an annual car allowance of $8,500, and other fringe benefits. The
      amounts charged to expense for the two Stockholders under these employment
      agreements approximated $286,000 in 2003 and $12,500 for one of the Stockholders
      in 2004. Under the Restructuring Agreements, compensation for one of the
      Stockholders ceased as of September 30, 2003 and, as of January 31, 2004, for
      the other Stockholder. The employment agreements also terminated on those
      respective dates.





At
      December 31, 2003, the Company owed the Stockholders approximately $454,000
      of
      accrued compensation. Approximately $338,000 of this compensation was to be
      paid
      to the Stockholders 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 by the principal
      Stockholder in connection with these transactions. At December 31, 2003,
      included in due to shareholders and officers, is the above $454,000, as well
      as
      approximately $250,000 in accrued payroll. In September 2004, these amounts
      were
      settled in exchange for stock to be issued.




In
        2004,
        the Company cancelled 776,132 of accrued compensations due to certain directors,
        officers, and former employees in exchange for 300,000 shares of Common
        Stock.


27




**Item
      13 - Exhibits List and Reports on Form 8-K**





(a)
            Exhibits




**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
                Company10.172
            
            Consulting
                Agreement - July 2003 between National Financial Communications Corp.
                and
                the Company10.182
            
            Agreement
                - July 2003 between Brooks Houghton & Company, Inc. and the
                Company




28




10.192
            
            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.)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,
                2004




29





141
            
            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.





(b)  8-K
      Reports





On
      April
      19, 2004, the registrant filed a Form 8-K under Item 5 “Other Events and
      Regulation FD Disclosure”, stating that the Company paid its final installment
      to complete the Company’s purchase of U.S. Patent #5,337,039 “Proximity
      detection system with digital frequency variation detection means.”





On
      October 21, 2004, the registrant filed a Form 8-K under Item 4.01 “Change in
      Registrants Certifying Accountant” from Grant Thornton LLP to Aidman, Piser
& Company because Aidman, Piser & Company was more competitively
      priced.





On
      January 10, 2005, the registrant filed a Form 8-K under Item 5.02 “Departure of
      Directors or Principal Officers; Election of Directors; Appointment of Principal
      Officers” stating that effective January 10, 2005 Edmund C. King resigned as the
      Company’s Chief Financial Officer and Mr. David Benedetti was appointed to
      replace Mr. King.





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





Fees
      for
      the Year ended December 31, 2004 were:





Audit
                fees
            
            $
            85,111.00Audit
                related fees
            
            $
            26,893.00Tax
                fees
            
            $
            2,666.87




30





Fees
      for
      the Year ended December 31, 2003 were:





Audit
                fees
            
            $
            122,000.00Audit
                related fees
            
            $
            43,000.00Tax
                fees
            
            $
            8,000.00





The
      audit
      committee has approved 100% of the above services. Pre-approval policies and
      procedures, as well as additional information that is required by Item 14,
      “Principal Accountant Fees and Services”, will be filed by amendment to this
      Form 10-KSB on or before March 31, 2005




31


**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
            
            /s/
              Carl
              A. ParksCarl
                A. Parks
              President
                and Chief Operating Officer Dated:
              August 9, 2006
            
            /s/
              Edmund C KingEdmund
                C King
              Chief
                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.




Date:
                August 9, 2006
            /s/
                Carl A. ParksCarl
                A. Parks, President and Chief Operating OfficerDate:
                August 9, 2006
            /s/
                Edmund C. KingEdmund
                C. King, Chief Financial Officer, DirectorDate:
                August 9, 2006
            /s/
                Stephen MichaelStephen
                Michael, Chairman of the BoardDate
                August 9, 2006
            /s/
                Gregory J. NewellGregory
                J. Newell, DirectorDate:
                August 9, 2006
            /s/
                John E. ScatesJohn
                E. Scates, Director




32





CONTENTS





PageREPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F-2
                & F3CONSOLIDATED
                FINANCIAL STATEMENTSConsolidated
                Balance Sheets
            F-4Consolidated
                Statements of Operations
            F-5Consolidated
                Statement of Stockholders’ Equity
            F-6Consolidated
                Statements of Cash Flows
            F-8Notes
                to Consolidated Financial Statements
            F-10





F-1


**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. (the
“Company”) as of December 31, 2004 and the related consolidated statements of
      operations, stockholders’ equity, and cash flows for the year then ended, and
      for the period from February 12, 1997 (inception) through December 31, 2004.
      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 audit.





We
      conducted our audit 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. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audit provides 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, 2004 and the consolidated results of its operations and its
      cash
      flows for the year then ended, and for the period from February 12, 1997
      (inception) through December 31, 2004, in conformity with accounting principles
      generally accepted in the United States of America.





As
      discussed in Note Q, 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 C to the
      financial statements, the Company incurred significant losses and used cash
      in
      operating activities during the years ended December 31, 2004 and 2003 and
      expects that additional capital will be required in order to continue operations
      in 2005. These factors, among others, as discussed in Note C to the financial
      statements, 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 C. 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, 2005, except for Note Q, which is dated July 12, 2006.


F-2


**Report
      of Independent Registered Public Accounting Firm**








Board
      of
      Directors and Stockholders


Invisa,
      Inc.





We
      have
      audited the consolidated balance sheets of Invisa, Inc. (a development stage
      enterprise) as of December 31, 2003 and the related consolidated statements
      of
      operations, stockholders’ equity, and cash flows for the year then ended. 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 audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Invisa, Inc. as of
      December 31, 2003 and the consolidated results of operations and cash flows
      for
      the year then ended in conformity with accounting principles generally accepted
      in the United States of America.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note C, the Company incurred
      a
      net loss during the year ended December 31, 2003 of $11,738,105 and for the
      period February 12, 1997 (date of inception) through December 31, 2003 of
      $20,701,920. These factors, among others as discussed in Note C to the financial
      statements, 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 C. The financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.





*/s/
      Grant Thornton LLP*





Tampa,
      Florida


April
      9,
      2004




F-3


Invisa,
      Inc.


(A
      Development Stage Enterprise)


CONSOLIDATED
      BALANCE SHEETS








**December
                31,****2003**
            
            **2004**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            260,536
            
            $
            590,588Accounts
                receivable
            
            
            26,906
            
            
            57,506Inventories
            
            
            232,537
            
            
            48,167Refundable
                deposits and other
            
            
            26,846
            
            
            19,731Total
                current assets
            
            
            546,825
            
            
            715,992Note
                receivable - related party
            
            
            555
            
            
            —Furniture,
                fixtures and equipment, net
            
            
            89,480
            
            
            62,331Patent,
                net
            
            
            6,700,000
            
            
            5,911,764Other
                assets
            
            
            —
            
            
            64,000Total
                assets
            
            $
            7,336,860
            
            $
            6,754,087LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Accounts
                payable, trade
            
            $
            259,664
            
            $
            90,215Accrued
                expenses
            
            
            128,032
            
            
            78,962Line
                of credit
            
            
            149,402
            
            
            —Current
                portion of notes payable
            
            
            700,000
            
            
            —Current
                portion of notes payable to related party
            
            
            80,535
            
            
            —Due
                to related party
            
            
            64,960
            
            
            —Due
                to shareholders and officers
            
            
            1,125,561
            
            
            327,000Total
                current liabilities
            
            
            2,508,154
            
            
            496,177Notes
                payable to related parties
            
            
            50,334
            
            
            —Deferred
                revenue
            
            
            300,000
            
            
            300,000Commitments
                and contingencies (Note N)
            
            
            —
            
            
            —Stockholders’
                equitySeries
                A Convertible Preferred Stock, 5,000,000 shares authorized ($.001
                par
                value) 14,500 shares issued and outstanding at December 31,
                2004
            
            
            —
            
            
            1,277,000Common
                Stock; 95,000,000 shares authorized ($.001 par value), 18,767,582
                and
                21,635,832 shares issued and outstanding at December 31, 2003 and
                2004,
                respectively
            
            
            18,768
            
            
            21,636Additional
                paid-in capital
            
            
            25,452,928
            
            
            29,978,558Stock
                subscriptions receivable
            
            
            (291,404
            )
            
            (253,904
            )Deficit
                accumulated during the development stage
            
            
            (20,701,920
            )
            
            (25,065,380
            )Total
                stockholders’ equity
            
            
            4,478,372
            
            
            5,957,910Total
                liabilities and stockholders’ equity
            
            $
            7,336,860
            
            $
            6,754,087





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




F-4


Invisa,
      Inc.


(A
      Development Stage Enterprise)


CONSOLIDATED
      STATEMENTS OF OPERATIONS





**Years
                Ended December 31,**
            
            **February
                12, 1997 (Date of inception)through December
                31,****2003**
            
            **2004**
            
            **2004**(Restated)
            
            (Restated)
            
            (Restated)Net
                sales
            
            $
            212,679
            
            $
            197,484
            
            $
            958,066Costs
                and expenses:Cost
                of goods sold (exclusive of patent amortization shown separately
                below)
            
            
            128,971
            
            
            259,653
            
            
            731,366Research
                and development costs
            
            
            558,277
            
            
            352,642
            
            
            3,177,063Selling,
                general and administrative expenses
            
            
            4,005,805
            
            
            2,239,134
            
            
            12,555,324Patent
                amortization
            
            
            1,174,059
            
            
            788,235
            
            
            2,281,894Impairment
                of patent
            
            
            5,517,808
            
            
            —
            
            
            5,517,808Loss
                from operations
            
            
            (11,172,241
            )
            
            (3,442,180
            )
            
            (23,305,389
            )Other
                income (expense):Interest
                expense, net
            
            
            (565,864
            )
            
            15,360
            
            
            (823,351
            )Debt
                extinguishment gain
            
            
            —
            
            
            360,000
            
            
            360,000(565,864
            )
            
            375,360
            
            
            (463,351
            )Loss
                before income tax
            
            
            (11,738,105
            )
            
            (3,066,820
            )
            
            (23,768,740
            )Income
                tax
            
            
            —
            
            
            —
            
            
            —Net
                loss
            
            
            (11,738,105
            )
            
            (3,066,820
            )
            
            (23,768,740
            )Non-cash
                constructive dividend related to accreted discounts on Convertible
                Preferred Stock
            
            
            —
            
            
            (1,296,640
            )
            
            (1,296,640
            )Net
                loss applicable to Common Stockholders
            
            $
            (11,738,105
            )
            $
            (4,363,460
            )
            $
            (25,065,380
            )Net
                loss per share applicable to Common Stockholders:Basic
                and diluted
            
            $
            (0.73
            )
            $
            (0.22
            )Weighted
                average Common Stock shares outstanding:Basic
                  and diluted
            
            
            16,173,841
            
            
            19,899,052





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


F-5




Invisa,
      Inc.


(A
      Development Stage Enterprise)


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY




**Convertible**
                **Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **Additional
                  Paid-In Capital**
              
              **Stock
                  Subscriptions Receivable**
              
              **Deficit
                  Accumulated During the Development Stage**
              
              **Total****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**FEBRUARY
                  12, 1997 (INCEPTION)
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —
              
              $
              —
              
              $
              —Summary
                  of transactions from February 12, 1997 through December 31,
                  2001:Issuance
                  of Common Stock to founders
              
              
              —
              
              
              —
              
              
              6,105,128
              
              
              5,980
              
              
              (5,980
              )
              
              —
              
              
              —
              
              
              —Issuance
                  of Common Stock for cash
              
              
              —
              
              
              —
              
              
              2,667,439
              
              
              2,667
              
              
              5,273,656
              
              
              —
              
              
              —
              
              
              5,276,323Exercise
                  of stock options
              
              
              —
              
              
              —
              
              
              924,214
              
              
              924
              
              
              984,076
              
              
              (985,000
              )
              
              —
              
              
              —Common
                  Stock issuable for rent
              
              
              —
              
              
              —
              
              
              164,799
              
              
              290
              
              
              88,084
              
              
              —
              
              
              —
              
              
              88,374Issuance
                  of Common Stock for services
              
              
              —
              
              
              —
              
              
              95,000
              
              
              95
              
              
              332,450
              
              
              —
              
              
              —
              
              
              332,545Issuance
                  of Common Stock options for services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              491,337
              
              
              —
              
              
              —
              
              
              491,337Issuance
                  of Common Stock related to reorganization
              
              
              —
              
              
              —
              
              
              2,009,000
              
              
              2,009
              
              
              227,991
              
              
              —
              
              
              —
              
              
              230,000Interest
                  accrued on notes related to stock subscriptions receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              118,200
              
              
              (118,200
              )
              
              —
              
              
              —Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (5,382,629
              )
              
              (5,382,629
              )BALANCE
                  AT DECEMBER 31, 2001
              
              
              —
              
              
              —
              
              
              11,965,580
              
              
              11,965
              
              
              7,509,814
              
              
              (1,103,200
              )
              
              (5,382,629
              )
              
              1,035,950Issuance
                  of Common Stock and units for cash
              
              
              —
              
              
              —
              
              
              589,908
              
              
              590
              
              
              1,746,429
              
              
              —
              
              
              —
              
              
              1,747,019Acquisition
                  of a patent froma
                  related party
              
              
              —
              
              
              —
              
              
              435,000
              
              
              435
              
              
              1,522,065
              
              
              —
              
              
              —
              
              
              1,522,500Interest
                  accrued on notes related to stock subscriptions receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              59,100
              
              
              (59,100
              )
              
              —
              
              
              —Issuance
                  of Common Stock options for services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              25,256
              
              
              —
              
              
              —
              
              
              25,256Original
                  issue discount
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              144,000
              
              
              —
              
              
              —
              
              
              144,000Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (3,581,186
              )
              
              (3,581,186
              )BALANCE
                  AT DECEMBER 31, 2002
              
              
              —
              
              
              —
              
              
              12,990,488
              
              
              12,990
              
              
              11,006,664
              
              
              (1,162,300
              )
              
              (8,963,815
              )
              
              893,539Issuance
                  of Common Stock for cash
              
              
              —
              
              
              —
              
              
              1,000,003
              
              
              1,000
              
              
              2,011,619
              
              
              —
              
              
              —
              
              
              2,012,619Offering
                  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
              
              
              —
              
              
              —
              
              
              201,519Issuance
                  of Common Stock for services
              
              
              —
              
              
              —
              
              
              392,069
              
              
              393
              
              
              802,949
              
              
              —
              
              
              —
              
              
              803,342Issuance
                  of Common Stock related to Radio Metrix merger
              
              
              —
              
              
              —
              
              
              3,250,000
              
              
              3,250
              
              
              9,746,750
              
              
              —
              
              
              —
              
              
              9,750,000Interest
                  accrued on notes related to stock subscriptions receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              52,536
              
              
              (52,536
              )
              
              —
              
              
              —Settlement
                  of accounts in connection with severance agreements
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              544,090
              
              
              923,432
              
              
              —
              
              
              1,467,522Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (11,738,105
              )
              
              (11,738,105
              )BALANCE
                  AT DECEMBER 31, 2003
              
              
              —
              
              
              —
              
              
              18,767,582
              
              
              18,768
              
              
              25,452,928
              
              
              (291,404
              )
              
              (20,701,920
              )
              
              4,478,372
  F-6




Invisa,
      Inc.


(A
      Development Stage Enterprise)


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY - Continued





**Deficit****Accumulated****Convertible**
            
            
            
            **Additional**
            
            **Stock**
            
            **During
                the****Preferred
                Stock**
            
            **Common
                Stock**
            
            **Paid-In**
            
            **Subscriptions**
            
            **Development****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Receivable**
            
            **Stage**
            
            **Total**Exercise
                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 accreted discounts on 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
            )
            $
            5,957,910





The
      accompanying notes are an integral part of this consolidated
      statement.




F-7




Invisa,
      Inc.


(A
      Development Stage Enterprise)


CONSOLIDATED
      STATEMENTS OF CASH FLOWS





**February
                12,****1997
                (Date of****inception)****Through****Years
                Ended December 31,**
            
            **December
                31,****2003**
            
            **2004**
            
            **2004**Cash
                flows from operating activities:Net
                loss
            
            $
            (11,738,105
            )
            $
            (3,066,820
            )
            $
            (23,768,740
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Patent
                impairment
            
            
            5,517,808
            
            
            —
            
            
            5,517,808Depreciation
                and amortization
            
            
            1,498,925
            
            
            861,806
            
            
            2,798,089Common
                Stock and options exchanged for services/settlements
            
            
            1,441,278
            
            
            244,869
            
            
            2,623,140Debt
                extinguishment gain
            
            
            —
            
            
            (360,000
            )
            
            (360,000
            )Changes
                in operating assets and liabilities:Accounts
                and notes receivable
            
            
            60,023
            
            
            (30,045
            )
            
            (204,100
            )Inventories
            
            
            64,071
            
            
            184,370
            
            
            (48,167
            )Refundable
                deposits and other assets
            
            
            47,352
            
            
            (56,885
            )
            
            (83,731
            )Accounts
                payable, trade
            
            
            (34,418
            )
            
            (169,449
            )
            
            90,215Accrued
                expenses
            
            
            42,943
            
            
            (49,070
            )
            
            28,952Deferred
                revenue
            
            
            —
            
            
            —
            
            
            300,000Due
                to shareholders and officers
            
            
            881,600
            
            
            (6,464
            )
            
            1,453,983Net
                cash used in operating activities
            
            
            (2,218,523
            )
            
            (2,447,688
            )
            
            (11,652,551
            )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
            
            
            (7,970
            )
            
            (46,421
            )
            
            (233,499
            )Net
                cash used in investing activities
            
            
            (7,970
            )
            
            (46,421
            )
            
            (904,974
            )Cash
                flows from financing activities:Net
                change in line of credit
            
            
            26,000
            
            
            (149,402
            )
            
            69Proceeds
                from notes payable and redeemable Common Stock, net
            
            
            350,000
            
            
            —
            
            
            908,000Payment
                of notes payable
            
            
            —
            
            
            (470,869
            )
            
            (470,869
            )Collection
                of stock subscriptions
            
            
            —
            
            
            36,500
            
            
            36,500Proceeds
                from sale of convertible Preferred Stock, net
            
            
            —
            
            
            1,937,000
            
            
            1,937,000Proceeds
                from sale of Common Stock, net
            
            
            2,012,619
            
            
            1,470,932
            
            
            10,507,413Cash
                received with combination transaction
            
            
            -
            
            
            —
            
            
            230,000Net
                cash provided by financing activities
            
            
            2,388,619
            
            
            2,824,161
            
            
            13,148,113Net
                increase in cash
            
            
            162,126
            
            
            330,052
            
            
            590,588Cash
                at beginning of period
            
            
            98,410
            
            
            260,536
            
            
            —Cash
                at end of period
            
            $
            260,536
            
            $
            590,588
            
            $
            590,588







F-8




Invisa,
      Inc.


(A
      Development Stage Enterprise)


CONSOLIDATED
      STATEMENTS OF CASH FLOWS - CONTINUED








**February
                12,****1997
                (Date of****inception)****through****Year
                Ended December 31,**
            
            **December
                31,****2003**
            
            **2004**
            
            **2004**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONCash
                paid during the period for interest
            
            $
            55,686
            
            $
            8,875
            
            $
            229,162Notes
                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)
            
            $
            9,750,000
            
            $
            —
            
            $
            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
            
            $
            —
            
            $
            554,000







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




F-9




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      A -
      DESCRIPTION OF ORGANIZATION AND BUSINESS





Invisa,
      Inc., formerly known as “SmartGate, 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 -
      BUSINESS COMBINATIONS





On
      February 9, 2000, we purchased SmartGate, L.C. (“SmartGate”). The total purchase
      price for SmartGate was the issuance of 7,743,558 shares of Invisa, Inc. Common
      Stock to the SmartGate members, which represented approximately 74% of our
      outstanding Common Stock at that date. SmartGate was the acquirer for accounting
      purposes and, as such, our operations reflect the operations of SmartGate since
      its inception.





In
      February of 2002, the Company purchased 100% of the outstanding capital stock
      of
      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. At closing, the Company issued two promissory notes totaling
      $1,300,000 ($500,000 payable in one installment 48 months from the closing
      with
      interest payable monthly, and $800,000 payable in one installment 14 months
      from
      the closing with interest payable monthly) and issued 435,000 shares of Invisa
      common stock. The $800,000 note maturity date was subsequently amended to April
      25, 2004. The Company also agreed to pay royalties of 7% of all revenue
      generated from the RMI technology (exclusive of safety applications), which
      will
      be recognized as expense when incurred. The revenue agreement is effective
      until
      terminated by mutual agreement of the respective parties. Additionally,
      contingent consideration to be paid by the Company was as follows, prior to
      amendment:





·
            Upon
                the emergence from the development stage of the product line incorporating
                RMI security technology,





(a)
            A
                $4,500,000 promissory note payable in one installment due 60 months
                fromthe
                first commercial sale with accrued interest. While outstanding, thepromissory
                note may, at the discretion of the holder, be converted into sharesof
                Invisa, Inc. common stock at the conversion ratio of one share of
                Invisa,Inc.
                common stock for each $5.00 of principal and
                interest.





(b)
            1,125,000
                shares of Invisa common stock, which may be increased by theBoard
                of Directors of Invisa, Inc. in order that the aggregate market valueof
                the shares issued is at least $4,500,000 on the issuance date.





·
            3,750,000
                shares of Invisa, Inc. common stock, upon the first to occur (i)$
                25,000,000 in revenue from RMI technology (security technology),
                (ii)$4,000,000
                in pre-tax profits from RMI technology (security technology)and
                earned royalties, (iii) any 30-day period during which Invisa’s commonstock
                has an average closing price which exceeds $15.00 per share, or (iv)
                achange
                in control.






F-10




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 third party valuation.
      We
      based our valuation on a discounted cash flow model (income approach) over
      the
      remaining statutory life of the patent (which did not exceed its remaining
      useful life) which considered our projected sales of individual safety and
      security products and applicable costs principally in the United States. These
      markets are large and growing, principally as a result of increased concerns
      for
      security, principally as a result of the September
      11, 2001 terrorist event and all that has followed relative to
      terrorism.





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 non related party.





Invisa
      recorded the cost of the patent, which consists of the consideration paid,
      the
      liabilities assumed and at the fair value of the stock issued (based on a $3.50
      per share offering price) as follows:


Promissory
                  notes issued
              
              $
              1,300,000Stock
                  issued (1)
              
              
              1,522,500Net
                  liabilities assumed (2)
              
              
              1,018,257Costs
                  relating to the acquisition
              
              
              120,218$
              3,960,975





(1)
      None
      of those shares contained restrictions other than under Rule 144.





(2)
      Net
      liabilities assumed includes $600,000 note payable to the original owner of
      the patent,
      $550,000 note payable to the Company, $357,000 receivable from the Company,
      $175,000 payable to the shareholders of RMI and $50,257 of other
      liabilities.




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.





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




F-11




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      C -
      OPERATING MATTERS





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. For the year ended December 31, 2004 and
      since
      the date of inception, the Company has had a net loss applicable to Common
      Shareholders of $4,363,460 and $25,065,380, respectively. As of December 31,
      2004, the Company has not emerged from the development stage, but has working
      capital of $219,815. 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 on financing 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. In addition,
      the Company is in licensing fee discussions with potential distributors of
      the
      Company’s future security products. 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
      D -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles
      of Consolidation





The
      consolidated financial statements as of December 31, 2003 and 2004 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 (see Note B).





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-12


Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      D -
      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. For the year ended December 31, 2003, a customer located in the
      United Kingdom accounted for 16% of total Company sales, which represented
      substantially all of the Company’s export sales. For the year ended December 31,
      2004, two domestic customers accounted for 19% and 11% of Company sales (no
      export sales in 2004).





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. Accumulated depreciation and amortization was $97,597 and $67,878
      at
      December 31, 2003 and 2004, respectively. Depreciation expense was $40,137
      and
      $73,570 for 2003 and 2004, 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 approximately
      $5,518,000 that is included in the consolidated statement of operations. See
      “Impairment of Long-lived assets” included in Note D for further
      discussion.





F-13




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      D -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Revenue





Sales
      under fixed price arrangements are recognized as revenue upon shipment of
      product (when title transfers to the purchaser) and collectability is
      assured.





Licensing
      agreement





In
      July
      2002 Invisa entered into an Original and Independent Distribution License
      Agreement with Rytec Corporation (the Agreement). Under the Agreement, Rytec
      became the exclusive licensee in North, Central and South America for certain
      high speed industrial doors for a period of five years. Under the Agreement,
      Rytec paid the Company $300,000 cash representing an advance of the first 3000
      units purchased by Rytec. No items have been shipped under the Agreement and
      development efforts to achieve the necessary product reliability have
      continued.





In
      February 2005, because of the extended development efforts, the Agreement was
      revised to reflect the additional development efforts being expended by Invisa.
      Under this revision, the $300,000 is to be applied in equal quarterly amounts
      of
      $75,000 each over the calendar year 2005. The application schedule is to
      recognize and compensate for engineering expenditures and efforts by Invisa
      during the year 2005. The price reductions reflected in the Agreement are
      discontinued and Rytec now has a “Most Forward Notion” customer status, which
      means that Rytec pricing will be no lower than for products purchased by others
      under similar terms and conditions.





Our
      policy to account for the $300,000 advance under the Agreement was to defer
      any
      recognition in income until such time as shipments of units were made to Rytec
      and then recognize $100 per unit shipped. With the revision of the Agreement,
      the $300,000 advance became directed towards development efforts in 2005. We
      therefore adopted the policy of recognizing the advance over that period as
      specified in the revised Agreement.





Shipping
      costs





Shipping
      and handling costs are included in cost of sales in the accompanying statements
      of operations.





F-14




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS








NOTE
      D -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





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 expenses advertising costs as incurred. During the years ended December
      31, 2003 and 2004, advertising expense was $62,901 and $0,
      respectively.





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, 2004, nor are any
      significant amounts expected to occur subsequently. Accordingly, no warranty
      liability has been recognized for any period presented.





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, line of credit and notes payable. The carrying
      amounts of these financial instruments approximate their fair value, due to
      the
      short-term nature of these items. The carrying amounts of the line of credit
      and
      notes payable approximate their fair value due to the use of market rates of
      interest.





F-15




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      D -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





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 right 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.





F-16




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      D -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





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.





Had
      compensation cost for the Company’s stock option plan 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 M):





**Year
                Ended December 31,****2003**
            
            **2004**Net
                loss applicable to Common Stockholders, as reported
            
            $
            (11,738,105
            )
            $
            (4,363,460
            )Add:
                stock-based employee compensation cost under the fair value based
                method,
                net of related tax effects
            
            
            (1,379,343
            )
            
            (887,595
            )Pro
                forma net loss applicable to Common Stockholders
            
            $
            (13,117,488
            )
            $
            (5,251,055
            )Net
                loss per share-applicable to Common Stockholders basic and
                diluted:as
                reported
            
            $
            (0.73
            )
            $
            (0.22
            )pro
                forma
            
            $
            (0.81
            )
            $
            (0.26
            )








F-17




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      D -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





New
      Accounting Pronouncements





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” The statement
      amends Accounting Research Bulletin (“ARB”) No. 43, “Inventory Pricing” to
      clarify the accounting for abnormal amounts of idle facility expense, freight,
      handling costs, and wasted material. ARB No. 43 previously stated that these
      costs must be “so abnormal as to require treatment as current period charges.”
SFAS No. 151 requires that those items be recognized as current-period charges
      regardless of whether they meet the criterion of “so abnormal.” In addition,
      this statement requires that allocation of fixed production overhead to the
      costs of conversion be based on the normal capacity of the production
      facilities. The statement is effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005, with earlier application permitted
      for fiscal years beginning after the issue date of the statement. The adoption
      of SFAS No. 151 is not expected to have any significant impact on the Company’s
      current financial condition or results of operations.





In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
      An Amendment of APB Opinion No. 29.” APB Opinion No. 29, “Accounting for
      Nonmonetary Transactions,” is based on the opinion that exchanges of Nonmonetary
      assets should be measured based on the fair value of the assets exchanged.
      SFAS
      No. 153 amends Opinion No. 29 to eliminate the exception for Nonmonetary
      exchanges of similar productive assets and replaces it change the future cash
      flows of the entity. The adoption of SFAS No. 153 is not expected to have any
      impact on the Company’s current financial condition or results of
      operations.





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-18




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      E -
      INVENTORIES





Inventories
      consist of the following:





**December
                31,****2003**
            
            **2004**Finished
                goods
            
            $
            12,936
            
            $
            10,506Raw
                materials
            
            
            219,601
            
            
            37,661$
            232,537
            
            $
            48,167





NOTE
      F -
      ACCRUED EXPENSES





Accrued
      expenses consist of the following:





**December
                31,****2003**
            
            **2004**Accrued
                compensation and related taxes
            
            $
            13,933
            
            
            —Accrued
                interest
            
            
            33,141
            
            
            17,607Other
                accrued expenses
            
            
            80,958
            
            
            61,355$
            128,032
            
            $
            78,962





NOTE
      G -
      LINE OF CREDIT





The
      line
      of credit at December 31, 2003, consists of a $150,000 secured working capital
      line of credit with a bank. Interest was payable monthly at prime plus one
      percent, or approximately 5.75% at December 31, 2003. A stockholder guaranteed
      the line of credit. The line of credit matured in July 2004, but was extended
      until August 2004, at which time the balance of $148,611 was paid and the line
      of credit terminated.




F-19




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      H -
      NOTES PAYABLE TO RELATED PARTIES AND NOTES PAYABLE





Notes
      payable consist of the following:





**December
                31,****2003**
            
            **2004**Related
                parties:Notes
                payable to principal shareholders and others in connection with RMI
                acquisition:Due
                February 25, 2006; interest at 10% for first 180 days, 15%thereafter,
                payable monthly
            
            $
            50,3341
            
            $
            —Due
                April 25, 2004, as amended; interest at 15% payable
                monthly
            
            
            80,5351
            
            
            —Other
                Notes Payable:Note
                payable issued in connection with acquisition of patent, due January
                8,
                2004; interest at 8% payable quarterly; secured by underlying
                patent
            
            
            600,0002
            
            
            —Other
                note payable, unsecured, terms to be determined
            
            
            100,0001
            
            
            —830,869
            
            
            —Less
                current maturities
            
            
            (780,535
            )
            
            —$
            50,334
            
            $
            —





1.  During
      2004, $230,869 of these notes were paid.


2.  In
      January 2004 the Company negotiated a reduction in this liability from $600,000
      to $250,000 which amount was paid.





NOTE
      I -
      DUE TO SHAREHOLDERS AND OFFICERS





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





F-20




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      J -
      ACQUIRED INTANGIBLE ASSETS





The
      following summarizes the carrying amounts of acquired intangible assets and
      related amortization.




**Gross****Carrying**
            
            **Accumulated****Amount**
            
            **Amortization**
            
            **Net**Balance,
                December 31, 2002
            
            $
            3,960,975
            
            $
            319,600
            
            $
            3,641,375Additional
                patent costs in April 2003 from issuance of 3,250,000
                shares
            
            
            9,750,492
            
            
            —
            
            
            9,750,492Amortization
                expense for the year ended December 31, 2003
            
            
            —
            
            
            1,174,059
            
            
            (1,174,059
            )Impairment
                charge
            
            
            (5,517,808
            )
            
            —
            
            
            (5,517,808
            )Balance,
                December 31, 2003
            
            
            8,193,659
            
            
            1,493,659
            
            
            6,700,000Amortization
                expense for the year ended December 31, 2004
            
            
            —
            
            
            788,236
            
            
            788,236Balance,
                December 31, 2004
            
            $
            8,193,659
            
            $
            2,281,895
            
            $
            5,911,764





The
      Company is amortizing the cost of the patent over a ten-year period, which
      is
      the remaining statutory life of the patent. Amortization expense for each of
      the
      five years ending December 31, 2009 would be approximately $800,000 annually.
      As
      described in Note D, the Company recorded an impairment charge to the patent
      of
      approximately $5,518,000 in 2003.





NOTE
      K -
      LOSS PER SHARE





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





**December
                31,****2002**
            
            **2003**Numerator:Net
                loss applicable to Common Stockholders
            
            $
            (11,738,105
            )
            $
            (4,363,460
            )Denominator:For
                basic loss per share - weighted average shares
            
            
            16,173,841
            
            
            19,899,052Effect
                of dilutive securities - stock options
            
            
            —
            
            
            —For
                diluted loss per share
            
            
            16,173,841
            
            
            19,899,052Net
                loss per share - applicable to Common Stockholders basic and
                diluted
            
            $
            (0.73
            )
            $
            (0.22
            )





Options
      and warrants to purchase 7,238,931 and 5,511,013 shares of Common Stock as
      of
      December 31, 2003 and 2004 are not considered in the calculation of diluted
      loss
      per share because the effect would be anti-dilutive.




F-21




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      L -
      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. Additional stock transactions are
      discussed below.





In
      September 2004, the Company completed the following financing
      transactions:





·
            Issuance
                of 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 at closing
                and
                $778,800 upon the filing of a Registration Statement for the underlying
                Common Stock into which the Preferred Stock may be converted and
                the
                shares underlying the Warrants described
                below.





·
            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 eighty percent (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.




·
            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 EIFT 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-22




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      L -
      COMMON STOCK - Continued





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.





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
      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.





During
      the year 2003, the Company entered into the following equity related
      transactions:





For
      the
      period January through December 2003, the Company sold 1,000,003 shares of
      Common Stock at prices ranging from $1.07 to $3.00 per share aggregating
      $2,012,619, net of transaction costs. These transactions and other non-cash
      equity transactions are summarized below.





For
      the
      period January through March 2003, the Company issued 68,000 shares of Common
      Stock at prices ranging from $1.07 to $3.00 per share, aggregating $192,086
      in
      cash, net of transaction costs.




F-23




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      L -
      COMMON STOCK - Continued





In
      April
      2003, the Company entered into a twelve-month agreement with an investor,
      whereby the investor would provide the Company $1,200,000 in cash from May
      2003
      to April 2004, in monthly payments ranging from $50,000 to $150,000. The Company
      issued 50,000 shares of Common Stock at $3.00 per share and received $139,940
      (net of costs) on May 1, 2003. In August 2003, this agreement was terminated,
      and the Company issued the investor 50,000 shares of Common Stock at $2.00
      per
      share as part of this termination. The Company has no obligation to repurchase
      any shares issued to the investor as part of this agreement.





In
      April
      2003, the Company approved the issuance of 500,000 shares of Common Stock to
      a
      third party. The shares were granted in recognition of past performance
      associated with Common Stock private placement offerings and in contemplation
      of
      continued involvement by this advisor in future fund raising activities. A
      total
      value of $1,500,000 was recognized as additional paid in capital associated
      with
      this issuance of Common Stock. Based on expected future proceeds from Common
      Stock offerings ($5 million), the Company recorded deferred offering costs
      of
      $937,000, as a reduction to stockholders’ equity associated with these shares.
      The deferred offering costs were being amortized as a reduction to additional
      paid-in capital based on capital raised in respective periods. At December
      31,
      2003, the deferred offering cost balance of $637,936 was written off to expense,
      as the amount of capital raised during 2003 was significantly less than
      anticipated. In August 2003, the Company reduced the exercise price from $3.50
      per share to $2.00 per share for 500,000 options to purchase Common Stock
      granted to the third party. The revaluation of these options had no impact
      on
      the Company’s financial statements, as the options were granted in recognition
      of past performance associated with Common Stock private placement offerings.
      Of
      the $1,500,000, approximately $638,000 is included as expense in 2003. The
      remaining $862,000 is included as offering costs in 2003.





In
      October 2002, the Company borrowed $200,000 from a non-affiliated party. All
      principal and interest were payable on February 28, 2003, subject to extension
      to April 28, 2003, upon the issuance of a four-year option to purchase an
      additional 50,000 shares at $1.00 per share, which was recorded as original
      issue discount in 2002. The extension option was issued and the loan was
      extended to April 2003. The maturity of the loan was extended further and,
      in
      May 2003, the loan was increased by $100,000. In October 2003, the Company
      issued 500,000 shares of Common Stock to Daimler Capital Partners, Ltd.
      (“Daimler”). These shares were collateralizing the note payable to Daimler and
      were issued in repayment of $200,000 of this note. The $100,000 loan portion
      was
      settled in August 2004 for $90,000 cash.





During
      April 2003, through an amendment to the 2002 Radio Metrix, Inc. purchase
      agreement, the Company agreed to issue 3,250,000 shares of its Common Stock
      for
      full satisfaction of future contingent consideration. These shares were recorded
      at the fair value at that date of $3.00 per share and, as a result, patent
      cost
      was increased by $9,750,000 with a corresponding increase in stockholders’
equity during April 2003.





F-24





Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      L -
      COMMON STOCK - Continued





In
      May
      2003, the Company issued 14,285 shares of its authorized but unissued Common
      Stock to Crescent Fund, Inc., pursuant to a Consulting Agreement. These shares
      were recorded at a fair value of $3.00 per share and included in selling,
      general, and administrative expenses. In July 2003, the Company issued an
      additional 14,284 shares of its authorized but unissued Common Stock to Crescent
      Fund, Inc., pursuant to this Consulting Agreement. The Company may issue
      additional shares of its Common Stock to Crescent Fund, Inc. under this
      Consulting Agreement.





In
      May
      2003, the Company entered into an Equity Line of Credit (“ELC”) agreement
      pursuant to which the Company borrowed $250,000. The borrowing was convertible
      into Common Stock at a 25% discount from the then prevailing market price.
      The
      Company had the right, but not the obligation, to sell additional registered
      shares under the Agreement at a 25% discount from the then prevailing market
      price to a maximum of $1,000,000, including the $250,000 amount if converted.
      The agreement required a minimum stock price of $2.50 per share and minimum
      trading volume requirements, both as defined in the agreement. Pursuant to
      the
      Agreement, the Company agreed to issue a Warrant to purchase 75,000 shares
      of
      the Company’s Common Stock at an exercise price of $2.76 per share, of which
      25,000 shares are vested and the balance would vest only in the event the
      Company exercises its right to sell additional shares of registered stock under
      the Agreement. Related to the ELC, in July 2003 the Company issued 91,638 shares
      of Common Stock. In July 2003, the note payable was converted into 135,022
      registered shares of Common Stock. The Company recognized original issue
      discount of approximately $202,000 associated with the value of warrants and
      the
      contingent beneficial conversion feature of the notes payable. The Company
      also
      recognized deferred costs of approximately $66,000. The discount and loan costs
      were amortized over the term of the loan and were subsequently fully expensed
      in
      July 2003 upon the conversion into Common Stock. In November 2003, the Company
      issued an additional 104,167 shares of Common Stock at a price of $2.40 per
      share.





In
      June
      and July 2003, the Company sold 350,500 Units at $2.00 per Unit, each Unit
      consisting of one share of the Company’s Common Stock and one warrant to
      purchase one additional share at an exercise price of $2.00 per share, and
      one
      additional share at an exercise price of $3.00 per share, and one additional
      share at an exercise price of $4.00 per share. The warrants are exercisable
      until June 30, 2005. As payment of the placement fee, the Company issued a
      placement agent 45,500 of its $2.00 Units with each unit containing the same
      number of warrants at exercise prices of $2.00, $3.00 and $4.00 per share,
      respectively. The placement agent was also the purchaser of 50,500 of the $2.00
      Units as part of the 350,500 Units. In August 2003, the Company also granted
      an
      option to purchase 100,000 shares of Common Stock at an exercise price of $3.00
      to the placement agent. The options were granted in recognition of the
      successful fund raising activities and are exercisable until August
      2006.




F-25




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      L -
      COMMON STOCK - Continued





In
      July
      2003, the Company engaged Source Capital Group, Inc., as Invisa’s non-exclusive
      financial advisor, primarily to assist Invisa in raising additional capital.
      Invisa issued 5,000 shares of Common Stock to Source Capital Group, Inc. as
      a
      retainer. The Company also issued 6,000 shares to two other parties in
      connection with assisting the Company in raising additional capital. The Company
      valued the shares at $2.00 and $3.00 per share, respectively, for financial
      reporting purposes.





In
      July
      2003, the Company agreed to issue to Hawk Associates, Inc., the Company’s
      domestic investor relations representative, 37,000 shares of Common Stock in
      payment of $75,000 cash fees, which had accrued under the Company’s agreement
      with Hawk Associates, Inc.





In
      September 2003, the Company issued 20,000 shares of Common Stock to Fusion
      Capital Fund II, LLC (“Fusion”) as compensation for expected future capital
      raising activities. The Company also entered into an agreement with Fusion
      under
      which Fusion would provide an equity line of credit subject to the Company
      filing a registration statement. The agreement also required the Company to
      issue 200,000 shares of the Company’s Common Stock to Fusion as a fee, subject
      to a holding period before Fusion can sell the shares. The Company has recorded
      the issuance of this stock at $2.77 per share and charged the total amount
      to
      expense. In December 2003, the Company terminated this agreement.





During
      2003, the Company issued 327,698 shares of Common Stock at prices ranging from
      $1.07 to $3.00 per share related to the exercise of Common Stock options. The
      Company received cash proceeds of $662,786.





NOTE
      M -
      STOCK OPTIONS





In
      July
      2000, the Company established a stock compensation plan (the “2000 Plan”), which
      provides for the granting of options to purchase the Company’s Common Stock to
      employees, directors, consultants and advisors who have rendered, are rendering,
      or expected to continue to render services to the Company. The options granted
      are subject to a vesting schedule as set forth in each individual option
      agreement. The 2000 Plan provides for a maximum of 1,500,000 shares of Common
      Stock of the Company to be issued. The 2000 Plan shall terminate upon the
      earlier of (i) September 1, 2010, or (ii) the date on which all shares available
      for issuance under the 2000 Plan shall have been issued. Options totaling
      1,200,000 were issued under the Plan ranging in price from $3.00 to $5.32 per
      share; of these 9,998 were cancelled. In December 2001, the Company’s Board
      closed the 2000 Plan. In November and December 2004, unexercised options for
      a
      total of 540,002 shares with prices ranging from $3.00 to $5.32 were returned
      to
      the Company.




F-26




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      M -
      STOCK OPTIONS- Continued





In
      2002,
      the Company adopted a stock compensation plan (the “2002 Plan”). Under the 2002
      Plan, the Company has reserved an additional 1,500,000 shares of Common Stock
      eligible for current and prospective employees, consultants, and directors.
      The
      options granted are subject to a vesting schedule as set forth in each
      individual option agreement. During the year ended December 31, 2002, the
      Company granted 1,130,000 Common Stock options under the 2002 Plan. The 2002
      Plan shall continue until the earlier of (i) its termination by the Board;
      or
      (ii) the date on which all shares of Common Stock available for issuance under
      the 2002 Plan have been issued and all restrictions on such shares under the
      terms of the 2002 Plan and the agreements evidencing options granted under
      the
      2002 Plan have lapsed; or (iii) ten years from its effective date. In January
      2003, the Company’s Board closed the 2002 Plan. In November and December 2004,
      unexercised options for a total of 425,000 shares with prices ranging from
      $3.50
      to $5.15 were returned to the Company.





In
      January 2003, the Company adopted a stock compensation plan (the “2003 Plan”)
      with terms identical of its 2002 Plan, which provides for a maximum of 1,500,000
      shares of Common Stock to be issued. On May 13, 2003, an option for 80,000
      shares was granted under the Plan at $3.00 per share and with a term of seven
      years. Vesting is at 5,000 shares per quarter beginning June 30, 2003. In
      addition, an additional 1,400,000 shares were granted under the Plan. In
      November and December 2004, unexercised options for a total of 1,470,000 shares
      with prices ranging from $3.00 to $3.41 were returned to the
      Company.





In
      connection with the issuance of 396,000 shares in June and July 2003 (see Note
      L), the Company granted warrants to acquire 896,000 common shares at $2.00,
      $3.00 and $4.00 per share, respectively. The warrants are fully vested and
      exercisable until August 2006. In August 2004, as an inducement to encourage
      exercise of these warrants, the exercise price of the warrants was reduced
      to
      $1.00 per share.





In
      July
      2003, the Company entered into a Consultant Agreement with National Financial
      Communications Corporation, also referred to as OTC Financial Network, a
      Massachusetts corporation, to assist the Company in public relations and
      shareholder communications. Under this Consulting Agreement, Invisa granted
      National Financial Consulting Corporation options to purchase 25,000 shares
      of
      Invisa Common Stock at $3.00 per share, 25,000 shares of Invisa Common Stock
      at
      $3.50 per share, 25,000 shares of Invisa Common Stock at $4.00 per share, and
      25,000 shares of Invisa Common Stock at $4.50 per share, all of which are
      vested. The options may be exercised for a period of three years following
      the
      termination of the Agreement. The Agreement has a six-month term, which may
      be
      extended for an additional three months if the Company approves such extension.
      Either party, upon 15 days’ notice, may terminate the Agreement.




F-27




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      M -
      STOCK OPTIONS- Continued





In
      May
      2004, the Company’s shareholders approved the adoption of the 2003-A Employee,
      Director, Consultant and Advisor Stock Compensation Plan which provides for
      the
      reservation of 3,500,000 shares of the Company’s Common Stock. This Plan also
      retained all provisions of the 2002 Plan. A total of 1,610,000 options were
      granted under the 2003-A Plan at exercises prices ranging from $3.00 to $3.35
      per share. In November and December 2004, unexercised options for a total of
      2,270,000 shares were returned to the Company.





In
      August
      2003, the Company granted an option to its placement agent to purchase 100,000
      shares of Common Stock at $3.00 per share (see Note L).





In
      February 2003, the Company granted an option to Daimler to purchase 50,000
      shares of Common Stock at $1.00 per share (see Note L).





In
      May
      2003, the Company granted, under an Equity Line of Credit agreement, an option
      to purchase 75,000 shares of Common Stock at $2.76 per share (see Note
      L).





During
      the year ended December 31, 2003, the Company granted 1,513,000 Common Stock
      options that were outside the January and October 2003 Plans. At the grant
      date,
      the exercise price of the options was equal to the market price.





Activity
      with respect to all stock options is summarized as follows, including 83,750
      warrants associated with the $4.00 unit offering:





**Options
                Outstanding****Shares**
            
            **Range
                of Exercise**
              **Prices**
            
            **Weighted-average
                Option price per share**Balance
                at December 31, 2002
            
            
            3,621,129
            
            $
            1.00-7.25
            
            $
            3.19Options
                granted
            
            
            3,993,000
            
            $
            1.00-4.50
            
            $
            3.22Options
                exercised
            
            
            (327,698
            )
            $
            1.07-3.00
            
            $
            2.07Options
                canceled
            
            
            (47,500
            )
            $
            3.50-7.25
            
            $
            4.49Balance
                at December 31, 2003
            
            
            7,238,931
            
            $
            1.00-7.25
            
            $
            3.14Options
                granted
            
            
            3,698,500
            
            $
            1.00-1.75
            
            $
            1.51Options
                exercised
            
            
            (705,750
            )
            $
            1.00-3.25
            
            $
            1.80Options
                canceled
            
            
            (4,720,668
            )
            $
            2.00-5.32
            
            $
            2.99Balance
                at December 31, 2004
            
            
            5,511,013
            
            $
            1.00-7.25
            
            $
            1.88





F-28




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      M -
      STOCK OPTIONS- Continued





The
      range
      of exercise prices, shares, weighted-average remaining contractual life and
      weighted-average exercise price for the options outstanding at December 31,
      2004
      is presented below:





**Range
                of**
              **Exercise
                prices**
            
            **Shares**
            
            **Weighted-average**
              **Remaining**
              **Contractual
                life**
            
            **Weighted-average
                Exercise price**$
            1.00-2.00
            
            
            3,775,804
            
            
            2.22
                years
            
            $
            1.12$
            2.76-4.00
            
            
            1,634,334
            
            
            3.23
                years
            
            $
            3.40$
            4.27-7.25
            
            
            100,875
            
            
            3.03
                years
            
            $
            5.68





The
      range
      of exercise prices, shares and weighted-average exercise price for the options
      exercisable at December 31, 2004 are presented below:





**Range
                of Exercise prices**
            
            **Shares**
            
            **Weighted
                average Exercise price**$
            1.00-2.00
            
            
            3,704,136
            
            $
            1.10$
            2.76-4.00
            
            
            1,607,668
            
            $
            3.41$
            4.27-7.25
            
            
            75,875
            
            $
            5.16





NOTE
      N -
      COMMITMENTS AND CONTINGENCIES





For
      pro
      forma disclosure purposes (see Note D), the fair value of the options granted
      in
      2003 and 2004 was estimated on the date of grant using the Black-Scholes
      option-pricing model with the following weighted average assumptions for the
      above years:





**2003**
            
            **2004**Dividend
                yield
            
            
            0.00
            %
            
            0.00
            %Expected
                volatility
            
            
            50.00
            %
            
            50.00%
                - 68.00
            %Risk
                free interest rates
            
            
            3.00
            %
            
            3.00
            %Expected
                lives
            
            
            3
                years
            
            
            3
                years





The
      weighted-average grant date fair value for options granted during 2003 and
      2004
      was approximately $1.21 and $1.51.





F-29




Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      N -
      COMMITMENTS AND CONTINGENCIES (continued):





Operating
      Leases





Prior
      to
      June 2002, the Company subleased its manufacturing and office space under an
      operating sublease agreement from a shareholder. In June 2002, the Company
      entered into a new two-year lease for its existing facility at an annual lease
      payment of $103,200 (“New Lease”). This New Lease is with an unrelated party.
      The lease has an option to purchase the premise during the term at $836,000.
      In
      March 2002, the Company entered into a two-year lease for additional facilities
      at an approximate annual lease payment of $97,200. The lease has an option
      to
      purchase the premise at $698,000 during year one and $750,000 during year two.
      During 2003 the Company abandoned this facility and accrued for the remaining
      lease payment at December 31, 2003. In late January 2005, the Company terminated
      the June 2002 lease and moved to a new leased facility. The new lease has a
      five-year term, annual lease payments of approximately $50,000 and two renewal
      options.





Employment
      Agreements





Effective
      November 2003, the Company entered into a three-year employment agreement with
      its President and CEO for an annual salary of $195,000 plus usual and customary
      benefit and severance terms.





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.





NOTE
      O -
      RELATED PARTY TRANSACTIONS





Restructuring





In
      November 2003, the Company and two principal shareholder/officers
      (“shareholders”) entered into agreements (“Agreements”) to forgive and
      restructure certain notes receivable, certain stock subscriptions and related
      interest receivable, notes and related interest payable, and other amounts
      due
      the shareholders. Under the agreements, the following occurred:





Forgiveness
      by the Company of two notes receivable from Shareholders totaling
      $146,310.





Forgiveness
      by the Company of stock subscriptions receivable and accrued interest from
      the
      Shareholders totaling $923,432.





F-30





Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      O -
      RELATED PARTY TRANSACTIONS (continued)





Restructuring
      (continued)





Forgiveness
      by the Shareholders of notes payable of $1,169,131 and accrued interest of
      $130,600 by the Company.





Forgiveness
      by the Shareholders of certain compensation amounts owed to them totaling
      $416,963.





In
      connection with these agreements, the Company recognized additional paid-in
      capital of approximately $544,000 during the fourth quarter of 2003. In addition
      to the amounts forgiven, the shareholders agreed to allow approximately $338,000
      of their accrued compensation to be paid on a contingent basis, as described
      below.





Effective
      February 2000, the Company had entered into five-year employment agreements
      with
      the two Stockholders, which provided for each of them to receive an annual
      salary of $150,000 ($30,000 of which was deferred), an ongoing monthly bonus
      of
      $2,000, an annual car allowance of $8,500, and other fringe benefits. The
      amounts charged to expense for each of the two shareholders under these
      employment agreements approximated $286,000 in 2003 and $12,500 in 2004. Under
      the 2003 Restructuring Agreements, compensation ceased for one of the
      Stockholders as of September 30, 2003 and, as of January 31, 2004 for the other
      Stockholder. The employment agreements also terminated on those respective
      dates.





At
      December 31, 2003, the Company owed the Stockholders approximately $454,000
      of
      accrued compensation. Approximately $338,000 of this compensation was to be
      paid
      to the Stockholders 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 by the principal
      Stockholders in connection with these transactions. At December 31, 2003,
      included in “Due to Shareholders and Officers” is the above $454,000, as well as
      approximately $250,000 in accrued payroll. In September 2004 these amounts
      were
      settled in exchange for stock to be issued (see Note L).





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.





NOTE
      P -
      INCOME TAXES





Deferred
      taxes are recorded for all 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, 2003 or
      2004.





F-31





Invisa,
      Inc.


(A
      Development Stage Enterprise)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      P -
      INCOME TAXES (continued):





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





**Year
                Ended**
            
            **Year
                Ended****December
                31,**
            
            **December
                31,****2003**
            
            **2004**Federal
                statutory income tax rate
            
            
            (34.0
            )%
            
            (34.0
            )%State
                income taxes, net of federal tax benefit
            
            
            (
                .5
            )%
            
            (3.5
            )%Deferred
                tax asset valuation allowance
            
            
            37.5
            %
            
            37.5
            %-0-
            %
            
            -0-
            %





Deferred
      tax asset and liability components were as follows:





**December
                31,**
              **2003**
            
            **December
                31,**
              **2004**Deferred
                tax assets:Compensation
                payable
            
            $
            263,853
            
            $
            —Net
                operating loss
            
            
            4,404,294
            
            
            5,475,407Basis
                difference for CCorporation
                conversion
            
            
            172,794
            
            
            157,429Other
            
            
            129,750
            
            
            156,3084,970,691
            
            
            5,789,144Deferred
                tax liabilities:Patent
            
            
            1,942,875
            
            
            1,647,199Net
                deferred tax assets
            
            
            3,027,816
            
            
            4,141,945Less
                valuation allowance
            
            
            (3,027,816
            )
            $
            (4,141,945
            )Net
                deferred income taxes
            
            $
            —
            
            $
            —





The
      deferred tax valuation allowance was determined based on the development stage
      status of the Company and the historical losses incurred since
      inception.





As
      of
      December 31, 2004, the Company had net operating loss carryforwards for Federal
      and State income tax purposes totaling $14,600,000, which expire beginning
      in
      2020.





Note
      Q -
      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 expense. Additionally, the
      Company expanded its discussion regarding accounting for capitalized patent
      costs and preferred stock.







F-32