UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


_________________





**FORM
10-KSB**





**x**
    **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**
      For
      the fiscal year ended**- December 31, 2004****OR****o**
    **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**
      For
      the transition period from





Commission
file number **0-024828**





**SENSOR
SYSTEM SOLUTIONS, INC.**


(Name of
Small Business Issuer in Its Charter)





**NEVADA**
    **98-0226032**(State
      or Other jurisdiction of Incorporation or Organization)
    (I.R.S.
      Employer Identification No.)





**45
Parker Avenue, Suite A**


**Irvine,
California 92618**


(Address
of Principal Executive Offices, including zip code.)





**(949)
855-6688**


(Issuer’s
Telephone Number, Including Area Code)





Securities
registered pursuant to Section 12(b) of the Act:


**Title
      of each class**
    **Name
      of each exchange on which registered******
    **None**
    **None**





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


**Title
      of each class**
    **Common
      Stock**





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.


Yes xNo o





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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 referenced in Part III of this Form
10-KSB or any amendment to this Form 10-KSB o











State
issuer's revenues for its most fiscal year **December 31, 2004** **:
$661,340.**





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity. **As
of May 5, 2005, the value was $39.3 million.**





State the
number of shares outstanding of each of the issuer's classes of common equity,
as of **May 18, 2005: 59,279,241**




2




**PART
      I**ITEM
      1.
    DESCRIPTION
      OF BUSINESS.ITEM
      2.
    DESCRIPTION
      OF PROPERTY.ITEM
      3.
    LEGAL
      PROCEEDINGS.ITEM
      4.
    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.**PART
      II**ITEM
      5.
    MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS AND SMALL BUSINESS
      ISSUER PURCHASES OF EQUITY SECURITIES.ITEM
      6.
    MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR FINANCIAL PLAN OF OPERATION.ITEM
      7.
    FINANCIAL
      STATEMENTS.ITEM
      8.
    CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.ITEM
      8A.
    CONTROLS
      AND PROCEDURES.ITEM
      8B.
    OTHERINFORMATION.**PART
      III**ITEM
      9.
    DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT.ITEM
      10.
    EXECUTIVE
      COMPENSATION.ITEM
      11.
    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.ITEM
      12.
    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS.ITEM
      13.
    EXHIBITS,
      LIST AND REPORTS ON FORM 8-K.ITEM
      14.
    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.SIGNATURES
  3


****


**PART
I**





**ITEM
1. DESCRIPTION OF BUSINESS**





Sensor
System Solutions, Inc. (the “Company”, “3S” or the “Company”) was incorporated
in Nevada in April 1982 under the name The Enchanted Village, Inc. As the result
of the March 13, 2004 acquisition of Advanced Custom Sensors, Inc., a California
corporation (“ACSI”), the Company is now in the business of design and
manufacturing sensors and signal conditioning modules.





***Acquisition
of Advanced Custom Sensors***





Pursuant
to an Agreement and Plan of Merger (the "Merger Agreement") dated as of March
13, 2004, by and among the Company, Spectre Merger Sub, Inc., a California
corporation and wholly owned subsidiary of the Company ("Merger Sub"), Ian S.
Grant ("Shareholder") and ACSI, on May 24, 2004 (the "Closing Date"), Merger Sub
merged with and into Advanced Custom Sensors, Inc. (“ACSI”) (the "Merger"). As a
result of the Merger, ACSI became a subsidiary of the Company. As consideration
for the Merger, the Company issued 2,584,906 shares of common stock and warrants
to purchase up to 47,802,373 shares of common stock to the shareholders of ACSI.
The terms of the Merger were determined through arms-length negotiations between
the management of the Company and management of ACSI. We changed our company
name to Sensor System Solutions, Inc. (3S) in December 2004 to better represent
our new focus. As such, the following results of operations are those of
ACSI.





Until we
acquired ACSI, we had only nominal assets and liabilities and limited business
operations. Although ACSI became our wholly-owned subsidiary following the
acquisition, because the acquisition resulted in a change of control, the
acquisition was recorded as a "reverse merger" whereby ACSI is considered to be
the accounting acquirer. Also, as a result of the acquisition, we have had a
change of our financial position and our business. 3S is now a holding company
and after the Spin-Off, defined below, will have no significant operations or
assets other than its interest in Advanced Custom Sensors, Inc. (“ACSI”). Since
the acquisition of ACSI, the company has been engaged in the development,
manufacturing, marketing and distribution of high quality sensors and
transducers at an economical price by employing innovative designs and creative
manufacturing methods.




***Spin-Off
of Spectre Holdings***





On
December 15, 2004, in consideration for making and guaranteeing certain
representations, warranties and obligation in connection with the Agreement and
Plan of Merger dated March 13, 2004 by and between the Company and ACSI, the
Company transferred 20,878,081 shares of common stock (the "Shares"), which are
all of the issued and outstanding shares of Spectre Holdings, Inc., our
wholly-owned subsidiary to Ian Grant. After the distribution of the Shares, the
Company no longer owns any stock of Spectre Holdings, Inc. In addition, we will
not have any common board members after the distribution.





***Advanced
Custom Sensors***





ACSI was
founded by an engineering management team with over 50 years of
Micro-electro-mechanical-systems or "MEMS" transducer experience. Its objective
is to provide high quality sensors and transducers at an economical price by
employing innovative designs and creative manufacturing methods. Through ACSI,
3S offers a variety of Digital Pressure Gauges,  Pressure
Transducers, Pressure Sensors, Force Beams, Load Cells, Strain Gauges and Sensor
Kits.




4





3S
produces or supplies a family of nearly thirty (30) distinctive products. 3S has
a volume production line with an ISO 9000 certified partner in Taiwan in 2002.
This allows 3S to penetrate high-volume consumer markets that are very price
sensitive. 3S also signed a letter of intent with China Automotive Systems, Inc.
(CAAS) in 2004 to establish a joint venture in China targeting its automotive
sensor market.




3S is a
supplier of thin-film and micro-machined force and pressure sensors to the
medical, chemical, oil, and gas industries. 3S believes that its technology will
enable it to become a global supplier of advanced MEMS/Microelectronic products
in myriad developing markets. 3S's strategic plan is to focus on developing
custom MEMS pressure sensor devices and forming strategic partnerships where its
strategic partners dominate the sales channels in industries accepting MEMS
sensor applications.




In
addition to its core operational assets dedicated to the MEMS sensor markets, 3S
owns approximately 7.5% of TransOptiX, Inc., ("TransOptiX"), a business
dedicated to the development and production of high performance optical
switches. TransOptiX intends to make significant progress in 2005 and 2006 in
the optical switch segment by offering its switches at prices up to 40% below
its competition and with better performance.




We plan
to grow our business in four areas.




§
    **Increase
      the revenue of our existing sensor component business**.
      Once finalized, the majority of our sensor component manufacturing will be
      moved to our joint venture in China to help reduce the cost of our
      products. We will invest to increase our production capacity and will
      qualify offshore suppliers to meet the increasing demands. Substantial
      efforts will be invested in sales and marketing in order to expand our
      customer base and to secure additional OEM
projects.





§
    **Develop
      sensor solution business.**By
      leveraging the advances in technology and the large industry-wide
      investments in wireless and telecommunication in the last decade, we can
      now offer total sensor solutions at a very affordable price These sensor
      solutions are modules containing sensing elements, signal conditioning
      circuitry, software for calibration and interface, and capability of
      wireless communication and/or networking. These sensor solutions will
      provide information continuously****to
      decision makers in all phases of business
operation.





§
    **Penetrate
      the automotive sensor market in China.**By
      leveraging the marketing channel of our joint venture partner, we will
      have access to the automotive market in China immediately. We plan to use
      the next three years to build up our production capacity, product
      offerings, and technical team there. We will import automotive sensors
      produced by our joint venture to North America and Europe around
      2008.





§
    **Strategic
      acquisition**:
      Being a public company gives us an additional tool to grow our business
      through acquisition besides internal growth. We will actively seek equity
      or debt funding to bring in the necessary resources to execute this
      plan.





***Industry
Overview***





Micro-Electro-Mechanical
Systems, or MEMS, is the integration of mechanical elements, sensors, actuators,
and electronics on a common silicon substrate through the utilization of
microfabrication technology. MEMS is an enabling technology, allowing the
development of smart products by augmenting the computational ability of
microelectronics with the perception and control capabilities of microsensors
and microactuators. MEMS is also an extremely diverse and fertile technology,
both with regard to applications, and the methodology of how electronic devices
are designed and manufactured.





5





Microelectronic
integrated circuits (“IC’s”) can be thought of as the "brains" of systems and
MEMS augments this decision-making capability with "eyes" and "arms", to allow
microsystems to sense and control the environment. In its most basic form, the
sensors gather information from the environment through measuring mechanical,
thermal, biological, chemical, optical, and magnetic phenomena; the electronics
process the information derived from the sensors and through some decision
making capability direct the actuators to respond by moving, positioning,
regulating, pumping, and filtering, thereby, controlling the environment for
some desired outcome or purpose. Since MEMS devices are manufactured using batch
fabrication techniques, similar to ICs, unprecedented levels of functionality,
reliability, and sophistication can be placed on a small silicon chip at a
relatively low cost.





***Market
Size and Viability***





The total
MEMS market size is about $2.7 billion USD with following distribution in 1991,
according to an MIRC market study report. MEMS pressure sensor, currently the
focus of 3S’s operations, owns the largest market share of $6 billion USD in
2000. According to MIRC, MEMS Silicon Pressure Sensors will grow to about 80% of
the total market and become the main stream of this industry. The applications
of MEMS Pressure Sensors can be separated into five categories: Automotive,
Process Control, Medical, Consumer /Appliances and Aerospace. Currently, the
market in Consumer Electronics is enjoying the fast growth. Due to its
versatility, MEMS is taking the lead in the various fast-growing electronic
applications in addition to its excellent performance and price ratio. The total
MEMS sensor market was $800 millions USD in 1990 with an annual growth rate of
20%. It is expected to grow to $1 billion USD by 2005.





***Products***





The
Company’s future technology strategy is to develop and/or acquire core
intellectual property that will place it in a leadership position to manufacture
and market MEMS sensors. 3S has filed two (2) provisional patents with the
United States Patent and Trademark Office (“USPTO”) and TransOptiX has made nine
(9) provisional patent filings with the USPTO to date. In addition, each company
has developed many proprietary techniques/processes. These serve as the
foundation to further develop our MEMS business.





3S
produces or supplies a family of nearly thirty (30) distinctive products. These
products employ or utilize the latest state-of-the-art technologies. The
products are primarily electro-mechanical sensing devices and are identified
under the following categories: Pressure Transducers, Pressure Transmitters,
Pressure Switches, Force Sensors, Load Cells, Strain Gages, and MEMS Sensors. It
is expanding its product offering to include intelligent embedded systems that
combine the attributes of both intelligent sensor and host systems





3S uses
sputtered thin film, bonded foil, semi-conductor gages and piezoresistive strain
gage technologies primarily in the design, development and manufacture of its
general sensor products, although other technology options are also available.
All of 3S’s products employ proven technologies  with
little, or no risk involved with their manufacture. What sets 3S’s products
apart from their competitors is their ability to optimize the performance of
their products by efficient application of their diverse technologies into
unique design concepts and utilizing sophisticated materials in construction and
packaging techniques.




6


******


***Customers***




We supply
our sensors mainly to the medical and automation industries. In general
customers are divided into three groups: original equipment manufacturers
("OEM's"), end users and catalogs. Each one accounted for about one third of our
revenue in 2004.




Our
revenue mainly was from end users before the hiring of our sales manager in
March 2004. We moved our focus to OEM account since then. The success is obvious
since we started 2005 with an OEM backlog of around $600K.




We have
established a wide presence in the catalog houses through our Model 1200 in
2004. This penetration will allow us to increase our revenue by moving other
products through the same channel.




***Sales
and Marketing***




We use
sales representatives to promote our product since sensors are quite complicated
devices. We have a network of 9 sales representatives to cover North America and
6 international representatives. In addition to our sales reps network, we also
have a network of distributors to handle products that do not require much
technical support. Both networks are managed by our Sales Manager.




We are
seeking new distribution channels for our Sensor Modules and we are working to
leverage existing market intelligence. We will hire a Marketing Manager in 2005
to assist us in capturing the market opportunity in our Sensor
Modules.




***Research
and Development***




We hired
two key engineers in October of 2004. Together, they have sixty years of
combined experience in designing creative sensor modules. To date, two series of
sensor modules have been designed, models have been constructed and beta-site
tested. We anticipate beginning production in second quarter of 2005. We project
that the unit price of these modules will be at least ten times higher than our
current sensor component’s sale price. We expect an increase in our sales from
these two product lines.




***Our
Goals***





Our goal
is to become the market leader in innovative sensor system solutions, and a
dominant sensor supplier with a competitive pricing and performance mix. To
accomplish this objective, the Company plans to integrate proprietary techniques
and processes developed by 3S that serve as the foundation to develop the
Company’s MEMS business. These MEMS core competences include MEMS front-end
wafer design and processing, volume assembly and testing, application-specific
environmental protection, and cost modeling. Combined with 3S’s expansion plans
to increase marketing and sales efforts, these technologies present the Company
with opportunities to further grow the business in international markets such as
China. The Company has also partnered on or about November 2001 with an
established production partner, Powertip Technology Corporate, in Taiwan to
address production requirements. 3S also has MEMS wafer fabrication partners in
China and Taiwan, allowing the Company to maintain sensor wafer supplies as well
as to continue MEMS device research.





7





3S
intends to upgrade from sensor component business to system solution business.
It will be focused on providing complete data management solutions that can
accommodate the needs of a wide range of industries and businesses. These
solutions include a comprehensive set of products and services that establish
the infrastructure necessary for manufacturing process partners to proactively
participate in sustaining and optimizing the operation.





The
Company is striving to be the dominant provider of sensor solutions with
built-in network connectivity to supply critical data continuously for
enterprises to monitor and control:





Ø
    Machine
      conditions


Ø
    Manufacturing
      processes


Ø
    Business
      Transactions





The
Company plans to develop and integrate various core intellectual properties in
the areas of MEMS sensors, intelligent sensor interface electronics, intelligent
embedded control systems and meters, wireless communication network interfaces,
data appliances and mobile devices that facilitate machine-to-business data
sharing, software & hardware to support web-based device diagnostics and
data collection/data distribution, and web-based data management.





The
Company is actively seeking funding to expand its design, development and
marketing of MEMS based thin-film and micro-machined force and pressure sensors
to the medical, chemical, oil, and gas industries. The Company believes that
MEMS is an enabling technology allowing the development of smart products by
augmenting the computational ability of microelectronics with the sensing and
control capabilities of microsensors and microactuators.





The
Company’s strategy includes the hiring of world-class engineering and sales and
marketing team coupled with robust off-shore joint ventures such as the one they
recently signed with CAAS. Management expects that the Company’s joint venture
with CAAS will enable the transformation of *3S* into a
global supplier of advanced MEMS/Microelectronic products in the automotive
market.





***Strategy***





The keys
to success for *3S* are as
follows:





Ø
    Penetrate
      automotive and appliance markets thru the Joint Venture with CAAS in
      China;


Ø
    Leverage
      the cost performance of above alliance to penetrate industrial and medical
      markets in N. America and Europe;


Ø
    Complete
      development of sensor-based systems to increase
  revenues;


Ø
    Merger
      and acquisition;




8


******


***Competition***




Our
products and services are affected by varying degrees of competition. We compete
with other companies in most markets we serve, many of which have far greater
sales volumes and financial resources. The principal competitive factors in the
commercial markets in which we participate are product performance, service and
price. Part of product performance requires expenditures in research and
development that lead to product improvement. The market for many of our
products may be affected by rapid and significant technological changes and new
product introduction. Our principal competitors include Honeywell, GE and MSI in
our sensor component segment, and Delphi, Bosch, and Denso in automotive sensor
segment. There is no major competitor in Sensor System Solutions Market at
current time.




***Employees
and employment agreements***





The
Company currently employs 15 persons: There are no employment agreements with
any of the employees.





**ITEM
2. DESCRIPTION OF PROPERTY.**





Our
headquarters are located 45 Parker Avenue, Suite A, Irvine, California 92618.
The facilities include 25,000 square feet of office, production and warehouse,
which we lease from Irvine Company under a five year lease. Annual
rental payments
for this lease are listed in the MD&A Section. The
office and warehouse facility is shared with TransOptix, a related party, who
signed the lease as co-tenant with the Company. The Company and TransOptix have
entered into an agreement stipulating each entities share of the rent, however,
in event of default by TransOptix, the Company could contingently be liable for
the full amount of the rent.




We
believe that these facilities have the capacity to meet its manufacturing and
assembly needs for the foreseeable future.





**ITEM
3. LEGAL PROCEEDINGS.**





We are
not a party to any pending litigation and none is contemplated or
threatened.





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





There
were no matters submitted to the stockholders in the fourth quarter of
2004.







**PART
II**





**ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND SMALL BUSINESS
ISSUERS PURCHASES OF EQUITY SECURITIES.**





Our
shares are quoted on the Over-The-Counter Bulletin Board. Our symbol is “SSYO.”
The table shows the high and low bid price of our stock for 2003 and 2004. These
prices represent prices between dealers; they do not include retail markup,
markdown or commission. These are bid prices only and do not represent actual
transactions and are adjusted for dividends and splits.





**Quarter
      ended**
    
    **High**
    
    **Low****2003**March
      31
    
    $
    2.25
    
    $
    1.35June
      30
    
    $
    1.50
    
    $
    1.05September
      30
    
    $
    1.05
    
    $
    0.30December
      31
    
    $
    0.90
    
    $
    0.60**2004**March
      31
    
    $
    3.15
    
    $
    0.45June
      30
    
    $
    2.40
    
    $
    1.20September
      30
    
    $
    2.40
    
    $
    1.20December
      31
    
    $
    2.75
    
    $
    0.51




9








***Stockholders***





At May 5,
2005, we had approximately 150  registered
stockholders of record of our common stock. This number does not include shares
held by brokerage clearing houses, depositories or otherwise in unregistered
form.





***Dividends***





We have
not declared any cash dividends, nor do we intend to do so. We are not subject
to any legal restrictions respecting the payment of dividends, except that they
may not be paid to render us insolvent.





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





The
following table summarizes the securities authorized for issuance as of December
31, 2004 under our 2004 Stock Compensation Plan, the number of shares of our
common stock issuable upon the exercise of outstanding options, the weighted
average exercise price of such options and the number of additional shares of
our common stock still authorized for issuance under such plan. The 2004 Stock
Compensation Plan has not been approved by our security holders, a description
of which is set forth in Note 13 of the Notes to Consolidated Financial
Statements.





**Plan
      category**
    
    **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 or future issuance under equity
      compensation plans**Equity
      compensation plans approved by security holders
    
    
    —
    
    $
    —
    
    
    —Equity
      compensation plans not approved by security holders
    
    
    96,500
    
    
    .50
    
    
    103,500Total
    
    
    96,500
    
    
    
    
    
    103,500




10


******


***Recent
Sales of Unregistered Securities***





None.





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





The
following is management's discussion and analysis of certain significant factors
that have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as well
as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words "believes,"
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be
place on these forward-looking statements that speak only as of the date hereof.
We undertake no obligation to update these forward-looking
statements.




The
following discussion and analysis should be read in conjunction with and our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-KSB.




***OVERVIEW***




On May
24, 2004, we acquired all of the issued and outstanding equity interests of
Advanced Custom Sensors, Inc ("ACSI"). Until we acquired ACSI, we had only
nominal assets and liabilities and limited business operations. Although ACSI
became our wholly-owned subsidiary following the acquisition, because the
acquisition resulted in a change of control, the acquisition was recorded as a
"reverse merger" whereby ACSI is considered to be the accounting acquirer. We
changed our company name to Sensor System Solutions, Inc. (3S) in December 2004
to better represent our new focus. As such, the following results of operations
are those of ACSI.





3S was
founded by an engineering management team with over 50 years of
Micro-electro-mechanical-systems or "MEMS" transducer experience. Its objective
is to provide high quality sensors and transducers at an economical price by
employing innovative designs and creative manufacturing methods. 3S offers a
variety of Digital Pressure Gauges, Pressure Transducers, Pressure Sensors,
Force Beams, Load Cells, Strain Gauges and Sensor Kits.




3S
commenced operations as a private company in September of 1996. 3S is
headquartered in Irvine, California where 3S occupies a 25,000 square
foot facility fully equipped with fabrication capability.




3S has
fifteen (15) employees in the United States, and utilizes a network of
independent contractors and consultants throughout the United States and Asia.
3S produces or supplies a family of nearly thirty (30) distinctive products. 3S
set up a volume production line with an ISO 9000 partner in Taiwan in 2002. This
allows 3S to penetrate high-volume consumer markets that are very price
sensitive. 3S also signed a letter of intent with China Automotive Systems, Inc.
(NASDAQ: CAAS) in 2004 to establish a joint venture in China targeting its
automotive sensor market.




3S is a
supplier of thin-film and micro-machined force and pressure sensors to the
medical, chemical, oil, and gas industries. 3S believes that its technology will
enable it to become a global supplier of advanced MEMS/Microelectronic products
in myriad developing markets. 3S's strategic plan is to focus on developing
custom MEMS pressure sensor devices and forming strategic
partnerships where its strategic partners dominate the sales channels in
industries accepting MEMS sensor applications.




11





In
addition to its core operational assets dedicated to the MEMS sensor markets, 3S
owns approximately 7.5% of  TransOptiX,
Inc., ("TransOptiX"), a business dedicated to the development and production of
high performance optical switches. TransOptiX intends to make significant
progress in 2005 and 2006 in the optical switch segment by offering its switches
at prices up to 40% below its competition and with better
performance.




***PLAN
OF OPERATION***





We plan
to grow our business in four areas.




§
    **Increase
      the revenue of existing sensor component business**.
      Majority of our sensor component manufacturing will be moved to our joint
      venture in China to help reduce the cost of our products.We
      will invest to increase our production capacity and will qualify offshore
      suppliers to meet the increasing demands. Substantial efforts will be
      invested in sales and marketing in order to expand our customer base and
      to secure more OEM projects.





§
    **Develop
      sensor solution business.**With the rapid advance in technology and huge investment in wireless and
      telecommunication in the last decades, we can now offer total sensor
      solutions at a very affordable price. These sensor solutions are modules
      containing sensing elements, signal conditioning circuitry, software for
      calibration and interface, and capability of wireless and/or networking.
      These sensor solutions will provide information continuously to decision
      makers in all phases of business operation.





§
    **Penetrate
      automotive sensor market through China.**By
      leverage the marketing channel of our joint venture partner, we will have
      access to the automotive market in China immediately. We plan use the next
      three years to build up our production capacity, product offerings, and
      technical team there. We will import automotive sensors produced by our
      joint venture to North America and Europe around
2008.







§
    **Strategic
      acquisition**:
      Being a public company gives us an additional tool to grow our business
      through acquisition besides internal growth. We will actively seek equity
      or debt funding to bring in the necessary resources to execute this
      plan.




***RESULTS
OF OPERATIONS***





***Years
ended December 31, 2004 and 2003***





**Revenues**




We
generated revenues of $661,340 for the year ended December 31, 2004. which was a
$225,269 or a 51.7% increase from $436,071 for the year ended December 31, 2003.
The increase is the result of the hiring of a full-time sales manager, the
addition of new sales representatives and the introduction of new
products.





12


****


**Gross
Profit**





Gross
profit for the twelve months ended December 31, 2004, was $81,550 or 12.3% of
revenues, compared to $34,374 or 7.9% for the year ended December 31, 2003. The
$47,176 increase in gross profit was generated by a decrease in cost of sales
percentage, which was the result of increased productivity and management’s
efforts to reduce operating expense, and production tooling
improvement.





**Total
Operating expenses**





Operating
expense




Operating
expense increased
to $ 1,292,071 for the
year ended December 31, 2004 compared to $ 874,506 for the
year ended December 31, 2003. The expense increased $417,565, or 47.7%, from
2003, primarily as a result of an increase in interest expense and additional
investment in R&D personnel and development.





Amortization
of discount on notes payable




Amortization
of discount on notes payable increased
to $ 651,869 for the
year ended December 31, 2004 compared to $ 121,223 for the
year ended December 31, 2003. The expense increased $530,646, or 437.7%,
primarily due to the convertible loans from Sino-America and Tina
Young.




Non-cash
compensation costs




On May
24, 2004, the Company issued 2,584,905 shares of its common stock and warrants
(the Merger Warrants) to purchase up to 47,802,373 shares of its common stock,
to the shareholders of ACSI in exchange for all the issued and outstanding
shares of ACSI. On May 24, 2004, the OTCBB closing price for the Company’s
common stock was $3.15 per share, resulting in a valuation of $12,527,134 (the
Merger Valuation) for the 3,976,868 shares of common stock outstanding
immediately following the Merger. On December 4, 2004, the Company granted
7,500,000 shares of its common stock to five shareholders in Spectre, including
two individuals who are also Directors of the Company, for providing services to
the Company. The fair
value of the shares granted was determined to be $ 0.24 per share for a total of
$1,800,000 and is recognized as stock-based compensation expense in the
accompanying financial statements.  The fair value was based on the Merger
Valuation and adjusted as if the 3,976,868 shares of common stock  and the
47,802,373 shares of common stock issued upon exercise of the Merger Warrants,
had all been outstanding at the date of the Merger.





**Net
Loss**





Net loss
increased to ($3,662,390) for the year ended December 31, 2004 compared to
($961,355) for the year ended December 31, 2003. The loss increased $2,701,035,
or 281%, from 2003, primarily as a result of $1,800,000 of stock compensation
expense and $651,869 of notes payable - debt discount costs along with increase
in investment in R&D and production capacity, and additional cost for being
a public company.


13





***FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES***





**Going
Concern**





In their
report in connection with our 2004 financial statements, our auditors included
an explanatory paragraph stating that, because we have incurred a net loss of
$ 3,662,390 and a
negative cash flow from operations of $594,293 for the year ended December 31,
2004, and had a working capital deficiency of $1,353,308 and a stockholders’
deficiency of $1,023,191 at December 31, 2004  there is
substantial doubt about our ability to continue as a going concern.





We have
relied primarily on cash flow from operations, bank loans, and advances and
investments from our shareholders for our capital requirements since inception.
The company received a $200K convertible loan from one of its existing
shareholders on February 23, 2005. This allowed the company to pay off some of
the debt and continue its operation. Current cash on hand will allow the company
to continue its operation for one month.





At
December 31, 2004, cash was $17,115 as compared to $10,712 at December 31, 2003.
The increase is due to the net cash from promissory notes. We have a substantial
working capital deficit. We require $3M to continue operations for the next
three years. We are in the process of raising capital in the form of equity
and/or debt. However, there is no guarantee that we will raise sufficient funds
to execute our business plan. To the extent we are unable to raise sufficient
funds, our business plan will be required to be substantially modified, its
operations curtailed or protection under bankruptcy/reorganization laws
sought.





We are
addressing our liquidity requirements by the following actions: Continue our
programs for selling products; continue to seek investment capital through the
public markets. However, there is no guarantee that these strategies will enable
us to meet our obligations for the foreseeable future.





**Commitments
and Contingencies**





We have
the following material contractual obligations and capital expenditure
commitments:





On
February 11, 2004, ACSI signed a promissory note payable with Sino-America. The
promissory note is for $500,000 and due February 11, 2005. After
maturity, the lender agreed to convert the loan into shares of the Company’s
stock. On March 15, 2005, an agreement was made to convert the note payable and
warrant into 500,000 shares of common stock.





The
Company leases certain equipment under two capital leases with monthly payments
of $360 and $701, respectively, including interest at 12.75% per annum.





Future
minimum annual rental payments for capitalized leases are as
follows:





Years
      ending December 31,
    
    Amount2005
    
    $
    12,7322006
    
    
    12,7322007
    
    
    12,7322008
    
    
    12,7322009
    
    
    3,54354,471Amount
      representing interest
    
    
    (12,453
    )Present
      value of minimum lease payments
    
    
    42,018Less:
      Current portion
    
    
    (7,819
    )$
    34,199





14





The
Company leases its office and facility through 2007 under a long term operating
lease agreement. Under terms of the lease, the Company pays the cost of repairs
and maintenance. The office and warehouse facility is shared with TransOptix,
who signed the lease as co-tenant with the Company. The Company and TransOptix
have entered into an agreement stipulating each entities share of the rent,
however, in event of default by TransOptix, the Company could contingently be
liable for the full amount of the rent.





Future
minimum lease commitments for the Company’s share under this lease at
December 31, 2004 are as follows :





Year
      Ended December 31,2005
    
    $
    104,1312006
    
    
    104,9062007
    
    
    91,520$
    300,557





The total
lease commitment as of December 31, 2004 for which the Company could be
contingently liable in the event of default of TransOptix is approximately
$650,000. Rent expense for the years ended December 31, 2004 and 2003 was
$122,905 and $116,588 respectively.





**Inflation
and Changing Prices**





We doe
not foresee any adverse effects on our earnings as a result of inflation or
changing prices.




***CRITICAL
ACCOUNTING POLICIES***





**Revenue
Recognition**





The
Company recognizes revenue when risk of loss and title to the product is
transferred to the customer, which occurs at shipment




**Stock – based compensation**





The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosures” as well as those outlined in SFAS
No. 123, “Accounting for Stock-Based Compensation”. As permitted by SFAS
148 and SFAS 123, the Company continues to apply the provisions of Accounting
Principles Board Opinion (APB) No. 25, “Accounting for Stock issued to
Employees” and related interpretations in accounting for the Company’s stock
option plan. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the estimated fair value of the Company’s stock at the date
of the grant, over the amount an employee must pay to acquire the stock. Stock
based awards for non-employees are accounted for at fair value equal to the
excess of the estimated fair value of the Company’s stock over the option price
using an estimated interest rate to calculate the fair value of the option.
There were no stock based awards to non-employees in 2004 or 2003.





15


****


**Inventories**




Inventories
are stated at the lower of cost (first-in, first-out method) or
market.




***Recent
Accounting Pronouncements***





In
November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, “Inventory Costs”. This Statement amends the guidance in ARB
No. 43 Chapter 4 Inventory Pricing, to require items such as idle
facility costs, excessive spoilage, double freight and rehandling costs to be
expensed in the current period, regardless if they are abnormal amounts or not.
This Statement will become effective for us in the first quarter of 2006. The
adoption of SFAS No. 151 is not expected to have a material impact on our
financial condition, results of operations, or cash flows.





In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” ** (SFAS 123R),
which revises SFAS No. 123. SFAS 123R also supersedes APB No. 25 and amends SFAS
No. 95, “Statement of Cash Flows”. In general, the accounting required by SFAS
123R is similar to that of SFAS No. 123. However, SFAS No. 123 gave
companies a choice to either recognize the fair value of stock options in their
income statements or disclose the pro forma income statement effect of the fair
value of stock options in the notes to the financial statements. SFAS 123R
eliminates that choice and requires the fair value of all share-based payments
to employees, including the fair value of grants of employee stock options, be
recognized in the income statement, generally over the option vesting period.
SFAS 123R must be adopted no later than July 1, 2005. Early adoption is
permitted.





The
Company is currently evaluating the timing and manner in which it will adopt
SFAS 123R. As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25’s intrinsic value method.
Accordingly, adoption of SFAS 123R’s fair value method will have an effect on
results of operations, although it will have no impact on overall financial
position. The impact of adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had SFAS 123R been adopted in prior periods, the effect would have
approximated the SFAS 123 pro forma net loss and loss per share disclosures as
shown above. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as currently required, thereby reducing net
operating cash flows and increasing net financing cash flows in periods after
adoption




***RISKS
RELATED TO OUR BUSINESS***




***We
have had negative cash flows from operations. Our business operations may fail
if our actual cash requirements exceed our estimates, and we are not able to
obtain further financing.***




Our
company has had negative cash flows from operations. To date, we have incurred
significant expenses in product development and administration in order to ready
our products for market. Our business plan calls for additional significant
expenses necessary to bring our products to market. We believe we do not have
sufficient funds to satisfy our short-term cash requirements. There is no
assurance that actual cash requirements will not exceed our estimates, in which
case we will require additional financing to bring our products into commercial
operation, finance working capital and pay for operating expenses and capital
requirements until we achieve a positive cash flow. In particular, additional
capital may be required in the event that:




16




·
    we
      incur unexpected costs in completing the development of our technology or
      encounter any unexpected technical or other
  difficulties;




·
    we
      incur delays and additional expenses as a result of technology
      failure;




·
    we
      are unable to create a substantial market for our product and services;
      or




·
    we
      incur any significant unanticipated
expenses.






We may
not be able to obtain additional equity or debt financing on acceptable terms if
and when we need it. Even if financing is available it may not be available on
terms that are favorable to us or in sufficient amounts to satisfy our
requirements. If we require, but are unable to obtain, additional financing in
the future, we may be unable to implement our business plan and our growth
strategies, respond to changing business or economic conditions, withstand
adverse operating results, and compete effectively. More importantly, if we are
unable to raise further financing when required, our continued operations may
have to be scaled down or even ceased and our ability to generate revenues would
be negatively affected.




***A
decline in the price of our common stock could affect our ability to raise
further working capital and adversely impact our
operations.***




A
prolonged decline in the price of our common stock could result in a reduction
in the liquidity of our common stock and a reduction in our ability to raise
capital. Because our operations have been primarily financed through the sale of
equity securities, a decline in the price of our common stock could be
especially detrimental to our liquidity and our continued operations. Any
reduction in our ability to raise equity capital in the future would force us to
reallocate funds from other planned uses and would have a significant negative
effect on our business plans and operations, including our ability to develop
new products and continue our current operations. If the stock price declines,
there can be no assurance that we can raise additional capital or generate funds
from operations sufficient to meet our obligations.




***If
we issue additional shares in the future this may result in dilution to our
existing stockholders.***




Our
Amended Certificate of Incorporation authorizes the issuance of 200,000,000
shares of common stock. Our board of directors has the authority to issue
additional shares up to the authorized capital stated in the certificate of
incorporation. Our board of directors may choose to issue some or all of such
shares to acquire one or more businesses or to provide additional financing in
the future. The issuance of any such shares may result in a reduction of the
book value or market price of the outstanding shares of our common stock. It
will also cause a reduction in the proportionate ownership and voting power of
all other stockholders. Further, any such issuance may result in a change of
control of our corporation.




17


******


***We
have a history of losses and negative cash flows, which is likely to continue
unless our products gain sufficient market acceptance to generate a commercially
viable level of sales.***




From
inception through December 31, 2004, we have incurred aggregate net losses.
There is no assurance that we will operate profitably or will generate positive
cash flow in the future. In addition, our operating results in the future may be
subject to significant fluctuations due to many factors not within our control,
such as market acceptance of our products, the unpredictability of when
customers will order products, the size of customers' orders, the demand for our
products, and the level of competition and general economic conditions.




Although
we anticipate that we will be able to increase revenues during the next 12
months, we also expect an increase in development and operating costs.
Consequently, we expect to incur operating losses and net cash outflow unless
and until our existing products, and/or any new products that we may develop,
gain market acceptance sufficient to generate a commercially viable and
sustainable level of sales.




***Unless
we can establish significant sales of our current products, our potential
revenues may be significantly reduced.***




We expect
that a substantial portion, if not all, of our future revenue will be derived
from the sale of our sensor products. We expect that these product offerings and
their extensions and derivatives will account for a majority, if not all, of our
revenue for the foreseeable future. The successful introduction and broad market
acceptance of our sensor products - as well as the development, introduction and
market acceptance of any future enhancements - are, therefore, critical to our
future success and our ability to generate revenues. Unfortunately, there can be
no assurance that we will be successful in marketing our current product
offerings, or any new product offerings, applications or enhancements. Failure
to achieve broad market acceptance of our sensor products, as a result of
competition, technological change, or otherwise, would significantly harm our
business.




***We
could lose our competitive advantages if we are not able to protect any
proprietary technology and intellectual property rights against infringement,
and any related litigation could be time-consuming and
costly.***




Our
success and ability to compete depends to a significant degree on our
proprietary technology incorporated in our products. We have taken limited
action to protect our proprietary technology and proprietary computer software.
If any of our competitors copies or otherwise gains access to our proprietary
technology or software or develops similar technologies independently, we would
not be able to compete as effectively.




Further,
the laws of foreign countries may provide inadequate protection of such
intellectual property rights. We may need to bring legal claims to enforce or
protect such intellectual property rights. Any litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources. In
addition, notwithstanding any rights we have secured in our intellectual
property, other persons may bring claims against us that we have infringed on
their intellectual property rights, including claims based upon the content we
license from third parties or claims that our intellectual property right
interests are not valid. Any claims against us, with or without merit, could be
time consuming and costly to defend or litigate, divert our attention and
resources, result in the loss of goodwill associated with our service marks or
require us to make changes to our website or other of our
technologies.




***Our
products may become obsolete and unmarketable if we are unable to respond
adequately to rapidly changing technology and customer
demands.***




Our
industry is characterized by rapid changes in technology and customer demands.
As a result, our products may quickly become obsolete and unmarketable. Our
future success will depend on our ability to adapt to technological advances,
anticipate customer demands, develop new products and enhance our current
products on a timely and cost-effective basis. Further, our products must remain
competitive with those of other companies with substantially greater resources.
We may experience technical or other difficulties that could delay or prevent
the development, introduction or marketing of new products or enhanced versions
of existing products. Also, we may not be able to adapt new or enhanced products
to emerging industry standards, and our new products may not be favorably
received.




18


******


***If
we fail to effectively manage our growth our future business results could be
harmed and our managerial and operational resources may be
strained*** *.*




As we
proceed with the commercialization of our products, we expect to experience
significant and rapid growth in the scope and complexity of our business. We
will need to add staff to market our products, manage operations, handle sales
and marketing efforts and perform finance and accounting functions. We will be
required to hire a broad range of additional personnel in order to successfully
advance our operations. This growth is likely to place a strain on our
management and operational resources. The failure to develop and implement
effective systems, or to hire and retain sufficient personnel for the
performance of all of the functions necessary to effectively service and manage
our potential business, or the failure to manage growth effectively, could have
a materially adverse effect on our business and financial
condition.




***OFF
BALACE SHEET ARRANGEMENTS***





There are
no Off-Balance Sheet Arrangements to report.





**ITEM
7. FINANCIAL STATEMENTS.**





REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    F-1FINANCIAL
      STATEMENTSBalance
      Sheet
    F-2Statements
      of Operations
    F-3Statement
      of Changes in Stockholders' Deficiency
    F-4Statements
      of Cash Flows
    F-5NOTES
      TO THE FINANCIAL STATEMENTS
    F-6





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





None.





**ITEM
8A. CONTROLS AND PROCEDURES**





***Evaluation
of Disclosure Controls and Procedures***





Our
management evaluated, with the participation of our Chief Executive and
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Annual Report on Form 10-KSB. Based
on this evaluation, our Chief Executive and Financial Officer has concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are
inadequate to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms. We are
developing a plan to ensure that all information will be recorded, processed,
summarized and reported on a timely basis. This plan is dependent, in part, upon
reallocation of responsibilities among various personnel, possibly hiring
additional personnel and additional funding. It should also be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.





19


******


***Changes
in Internal Control over Financial Reporting***





There was
no change in our internal control over financial reporting that occurred during
the fourth fiscal quarter of the fiscal year covered by this Annual Report on
Form 10-KSB that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





**ITEM
8B. OTHER INFORMATION.**





None.





**PART
III**




**ITEM
9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**





The name,
age and position held by each of the directors and officers of our company are
as follows:





**Name**
    
    **Position**Michael
      Young
    
    Chief
      Executive Officer and ChairmanHanlin
      Chen
    
    Director





All
directors have a term of office expiring at the next annual general meeting,
unless re-elected or earlier vacated in accordance with the Bylaws. All officers
have a term of office lasting until their removal or replacement by the Board of
Directors.





***Background
of Officers and Directors***





MICHAEL
YOUNG founded and has served for seven years as CEO of 3S. Previously, his
20-year career includes MEMS design, fabrication, packaging and applications
development at Rosemount, Endevco, Hughes Aircraft and other firms. He is
responsible for leading 3S given his technical expertise and a broad range of
business experiences with 3S. He holds a Master of Science degree in Mechanical
Engineering from Stanford University.





HANLIN
CHEN began serving as the Chairman and CEO of China Automotive Systems, Inc. in
2003. Prior to this appointment, Mr. Chen was the general manager of Jiulong
Power Steering Company Limited from 1992 to 1997. Mr. Chen holds a MBA from
Barrington University and serves as a board member of Political Consulting
Committee of Jingzhou city and vice president of Foreign Investors Association.





20


******


***Family
Relationships***





There are
no family relationships on the Board of Directors.





***Involvement
in Certain Legal Proceedings***





To our
knowledge, during the past five years, our officers and directors: have not
filed a petition under the federal bankruptcy laws or any state insolvency law,
nor had a receiver, fiscal agent or similar officer appointed by a court for the
business or present of such a person, or any partnership in which he was a
general partner at or within two years before the time of such filing, or any
corporation or business association of which he was an executive officer within
two years before the time of such filing; were not convicted in a criminal
proceeding or named subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses); were not the subject of any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining him from
or otherwise limiting their respective activities.





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





Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934 during our
most recent fiscal year and Forms 5 and amendments thereto furnished to us with
respect to our most recent fiscal year, all officers, directors and owners of
10% or more of our outstanding shares have filed all Forms 3, 4 and 5 required
by Section 16(a) of the Securities Exchange Act of 1934.





***Audit
Committee and Charter***





Due to
the size of our Board of Directors we do not have an audit committee at this
time.





***Audit
Committee Financial Expert***





We have
no financial expert.





***Code
of Ethics***





We have
adopted a corporate code of ethics. We believe our code of ethics is reasonably
designed to deter wrongdoing and promote honest and ethical conduct; provide
full, fair, accurate, timely and understandable disclosure in public reports;
comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code.




****


**ITEM
10. EXECUTIVE COMPENSATION.**





The
following table sets forth information with respect to compensation paid by us
to the chief executive officer since the Exchange. No other executive officer
received compensation in excess of $100,000 for the fiscal year ended December
31, 2004.





21


**Summary
Compensation Table**


**Long
      Term Compensation****Annual
      Compensation**
    **Awards**
    **Payouts****(a)**
    **(b)**
    **(c)**
    **(d)**
    **(e)**
    **(f)**
    **(g)**
    **(h)**
    **(i)****Other****Annual**
    **Restricted**
    **Securities****Compens**
    **Stock**
    **Underlying**
    **LTIP**
    **All
      Other****Name
      and Principal**
    **Year**
    **Salary**
    **Bonus**
    **ation**
    **Award(s)**
    **Options
      /**
    **Payouts**
    **Compens****Position**
    
    **($)**
    **($)**
    **($)**
    **($)**
    **SARs
      (#)**
    **($)**
    **ation
      ($)**Michael
      Young, CEO
    2004
    75,000
    N/A
    -
    -
    -
    -
    -N/A
    2003
    N/A
    N/A
    -
    -
    -
    -
    -N/A
    2002
    N/A
    N/A
    -
    -
    -
    -
    -





There are
no stock option, retirement, pension, or profit sharing plans for the benefit of
our officers and directors.





***Option/SAR
Grants***





No
individual grants of stock options, whether or not in tandem with stock
appreciation rights ("SARs") and freestanding SARs have been made to any
executive officer or any director since our inception, accordingly, no stock
options have been exercised by any of the officers or directors in fiscal
2004.





***Long-Term
Incentive Plan Awards***





We do not
have any long-term incentive plans that provide compensation intended to serve
as incentive for performance to occur over a period longer than one fiscal year,
whether such performance is measured by reference to our financial performance,
our stock price, or any other measure.





***Compensation
of Directors***





The
directors did not receive any other compensation for serving as members of the
board of directors. The Board has not implemented a plan to award options. There
are no contractual arrangements with any member of the board of
directors.





We do not
intend to pay any additional compensation to our directors. As of the date
hereof, we have not entered into employment contracts with any of our officers
and we do not intend to enter into any employment contracts until such time as
it profitable to do so.





***Indemnification***




Nevada
corporation law provides that:




·
    A
      corporation may indemnify any person who was or is a party or is
      threatened to be made a party to any threatened, pending or completed
      action, suit or proceeding, whether civil, criminal, administrative or
      investigative, except an action by or in the right of the corporation, by
      reason of the fact that he is or was a director, officer, employee or
      agent of the corporation, or is or was serving at the request of the
      corporation as a director, officer, employee or agent of another
      corporation, partnership, joint venture, trust or other enterprise,
      against expenses, including attorneys' fees, judgments, fines and amounts
      paid in settlement actually and reasonably incurred by him in connection
      with the action, suit or proceeding if he acted in good faith and in a
      manner which he reasonably believed to be in or not opposed to the best
      interests of the corporation, and, with respect to any criminal action or
      proceeding, had no reasonable cause to believe his conduct was
      unlawful;




22




·
    A
      corporation may indemnify any person who was or is a party or is
      threatened to be made a party to any threatened, pending or completed
      action or suit by or in the right of the corporation to procure a judgment
      in its favor by reason of the fact that he is or was a director, officer,
      employee or agent of the corporation, or is or was serving at the request
      of the corporation as a director, officer, employee or agent of another
      corporation, partnership, joint venture, trust or other enterprise against
      expenses, including amounts paid in settlement and attorneys' fees
      actually and reasonably incurred by him in connection with the defense or
      settlement of the action or suit if he acted in good faith and in a manner
      which he reasonably believed to be in or not opposed to the best interests
      of the corporation. Indemnification may not be made for any claim, issue
      or matter as to which such a person has been adjudged by a court of
      competent jurisdiction, after exhaustion of all appeals therefrom, to be
      liable to the corporation or for amounts paid in settlement to the
      corporation, unless and only to the extent that the court in which the
      action or suit was brought or other court of competent jurisdiction
      determines upon application that in view of all the circumstances of the
      case, the person is fairly and reasonably entitled to indemnity for such
      expenses as the court deems proper; and




·
    To
      the extent that a director, officer, employee or agent of a corporation
      has been successful on the merits or otherwise in defense of any action,
      suit or proceeding, or in defense of any claim, issue or matter therein,
      the corporation shall indemnify him against expenses, including attorneys'
      fees, actually and reasonably incurred by him in connection with the
      defense.




·
    Our
      bylaws provide that we will advance all expenses incurred to any person
      who was or is a party or is threatened to be made a party to any
      threatened, pending or completed action, suite or proceeding, whether
      civil, criminal, administrative or investigative, by reason of the fact
      that he is or was our director or officer, or is or was serving at our
      request as a director or executive officer of another company,
      partnership, joint venture, trust or other enterprise, prior to the final
      disposition of the proceeding, promptly following request. This advanced
      of expenses is to be made upon receipt of an undertaking by or on behalf
      of such person to repay said amounts should it be ultimately determined
      that the person was not entitled to be indemnified under our bylaws or
      otherwise.




·
    Our
      bylaws also provide that no advance shall be made by us to any officer in
      any action, suit or proceeding, whether civil, criminal, administrative or
      investigative, if a determination is reasonably and promptly made: (a) by
      the board of directors by a majority vote of a quorum consisting of
      directors who were not parties to the proceeding; or (b) if such quorum is
      not obtainable, or, even if obtainable, a quorum of disinterested
      directors so directs, by independent legal counsel in a written opinion,
      that the facts known to the decision-making party at the time such
      determination is made demonstrate clearly and convincingly that such
      person acted in bad faith or in a manner that such person did not believe
      to be in or not opposed to our best
interests.




·
    Insofar
      as indemnification for liabilities arising under the Securities Act may be
      permitted to directors, officers and controlling persons of our company
      under Nevada law or otherwise, we have been advised the opinion of the
      Securities and Exchange Commission is that such indemnification is against
      public policy as expressed in the Securities Act and is, therefore,
      unenforceable. In the event a claim for indemnification against such
      liabilities (other than payment by us for expenses incurred or paid by a
      director, officer or controlling person of our company in successful
      defense of any action, suit, or proceeding) is asserted by a director,
      officer or controlling person in connection with the securities being
      registered, we will, unless in the opinion of its counsel the matter has
      been settled by controlling precedent, submit to a court of appropriate
      jurisdiction, the question of whether such indemnification by it is
      against public policy in said Act and will be governed by the final
      adjudication of such issue.




23




****


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





The
following table sets forth, as of May 5, 2005, the beneficial shareholdings of
persons or entities holding five percent or more of our common stock, each
director individually, each named executive officer and all of our directors and
officers as a group. Each person has sole voting and investment power with
respect to the shares of common stock shown, and all ownership is of record and
beneficial. Unless otherwise disclosed, the address of each person set forth
below is that of the Company.





****
    
    **Amount
      and**
    
    ****
    
    ******Name
      of Beneficial**
    
    **Nature**
    
    ****
    
    **Percent****Owner**
    
    **Beneficial
      Owner**
    
    **Position**
    
    **of
      Class (1)**Michael
      Young
    
    
    10,620,186
    
    
    Chief
      Executive Officer and Chairman
    
    
    18
    %Hanlin
      Chen
    
    
    -
    
    
    Director
    
    
    *Officers
      and Directors as a Group (2 persons)
    
    
    10,620,186
    
    
    
    
    
    18
    %**Principal
      Shareholders**Andy
      Ju (2)
    
    
    3,374,729
    
    
    
    
    
    5.8
    %Jeffrey
      Ju (3)
    
    
    3,374,729
    
    
    
    
    
    5.8
    %


*Less
than 1%





(1)
    Based
      on 59,279,241shares
      outstanding at May 5, 2005




(2)
    Andy
      Ju’s address is No 54, Jiango Rd., Jhongli City,
Taiwan.




(3)
    Jeffrey
      Ju’s address is No 54, Jiango Rd., Jhongli City, Taiwan.




**ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**





Mr.
Hanlin Chen, a Director of the Company is the Chief Executive Officer of China
Automotive Systems, Inc. The Company has signed a letter of intent to form a
Joint Venture with China Automotive Systems, Inc





**ITEM
13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.**





**(a)
Reports on Form 8-K**





There
were no Reports filed on Form 8-K during the fourth quarter of
2004.





24


****


**(b)
Exhibits**





**Exhibit
      No.**
    **Document
      Description**3.1
    Articles
      of Incorporation (1)3.2
    Bylaws
      (1)10.1
    Share
      Exchange Agreement and Plan of Reorganization (2)10.2
    License
      Agreement23.1
    Consent
      of Weinberg & Company, P.A.31.1
    Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and
      Exchange Act of 1934, as amended. (3)32.1
    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
    (3)





(1)  Incorporated
herein by reference from the Company's Form 10-QSB filed with the Securities and
Exchange Commission, File No. 000-11991 on May 28, 2003.





(2)  Incorporated
herein by reference from the Company's Form 8-K Current Report and amendment
thereto as filed with the Securities and Exchange Commission, on May 24, 2004.





(3)  Filed
herewith.





**ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**





Weinberg
& Company, P.A., was the Company's independent registered public accounting
firm engaged to examine the financial statements of the Company for the fiscal
years ended December 31, 2003 and 2004. Weinberg & Company, P.A. performed
the following services and has been paid the following fees.





***Fiscal
Years Ended December 31, 2004 and 2003***





**Audit
Fees**





Weinberg
& Company, P.A. was paid aggregate fees of approximately $54,500 for the
fiscal year ended December 31, 2004 and 2003 for professional services rendered
for the audit of the Company's annual financial statements and for the reviews
of the financial statements included in the Company's interim quarterly
reports.





**Audit-Related
Fees**





Weinberg
& Company, P.A. was not paid additional fees for the fiscal year December
31, 2004 for assurance and related services reasonably related to the
performance of the audit or review of the Company's financial
statements.





**Tax
Fees**





Weinberg
& Company, P.A. was not paid any fees for the fiscal year ended December 31,
2004 for professional services rendered for tax compliance, tax advice and tax
planning. This service was not provided.





25


****


**All
Other Fees**





Weinberg
& Company, P.A. was paid no other fees for professional services during the
fiscal year ended December 31, 2004.




26





**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 18th day of May,
2005.





****SENSOR
      SYSTEM SOLUTIONS, INC.****By:
    /s/
      Michael YoungMichael
      YoungChief
      Executive Officer and Principal Accounting Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following person on behalf of the Company and in the
capacities.





**Signatures**
    
    **Title**
    **Date**/s/Michael
      Young
    
    Chief
      Executive Officer and Principal Accounting Officer
    May
      18, 2005Michael
      Young/s/
      Hanlin Chen
    
    Director
    May
      18, 2005Hanlin
      Chen





27





**SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY**





**FINANCIAL
STATEMENTS**





**YEARS
ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003**











**SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY**





**CONTENTS**








PAGE
    1
    REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMPAGE
    2
    CONSOLIDATED
      BALANCE SHEET AS OF DECEMBER 31, 2004PAGE
    3
    STATEMENTS
      OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
      2003PAGE
    4
    STATEMENT
      OF CHANGES IN STOCKHOLDERS’ DEFICIENCY FOR THE YEAR ENDED DECEMBER 31,
      2004 (CONSOLIDATED) AND 2003PAGE
    5
    STATEMENTS
      OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
      2003PAGES
    6 -
      16
    NOTES
      TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2004 (CONSOLIDATED) AND
      2003











**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To the
Board of Directors of Sensor System Solutions, Inc.:





We have
audited the accompanying consolidated balance sheet of Sensor System Solutions,
Inc. and subsidiary as of December 31, 2004, and the related statements of
operations, changes in stockholders' deficiency, and cash flows for the years
ended December 31, 2004 (consolidated) and 2003. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.





We
conducted our audits in accordance with auditing 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 audits provide 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 Sensor System
Solutions, Inc. and subsidiary as of December 31, 2004, and the results of their
operations and their cash flows for the years ended December 31, 2004
(consolidated) and 2003, in conformity with accounting principles generally
accepted in the United States of America.





The
accompanying consolidated 2004 financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company incurred a net loss of $3,662,390
and a negative cash flow from operations of $594,293 for the year ended December
31, 2004, and had a working capital deficiency of $1,353,308 and a
stockholders’ deficiency of $1,023,191 at
December 31, 2004. These matters raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.





WEINBERG
& COMPANY, P.A.





Boca
Raton, Florida


April 4,
2005





1






**SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
BALANCE SHEET**
 **As
of December 31, 2004**


**ASSETS****CURRENT
      ASSETS**Cash
    
    $
    17,115Accounts
      receivable
    
    
    100,530Inventory
    
    
    220,445Prepaids
      and other current assets
    
    
    24,552Total
      current assets
    
    
    362,642Property
      and equipment**,**net
    
    
    320,717Other
      assets
    
    
    54,112Total
      assets
    
    $
    737,471**LIABILITIES
      AND STOCKHOLDERS' DEFICIENCY****CURRENT
      LIABILITIES**Accounts
      payable and accrued expenses
    
    $
    720,817Notes
      payable
    
    
    692,692Notes
      payable, related parties
    
    
    289,365Current
      portion of capital lease obligations
    
    
    7,819Current
      portion of deferred rent concession
    
    
    5,257Total
      current liabilities
    
    
    1,715,950**LONG-TERM
      LIABILITIES**Capital
      lease obligations, net of current portion
    
    
    34,199Deferred
      rent concession, net of current portion
    
    
    10,51344,712Commitments
      and contingencies
    
    
    -**STOCKHOLDERS'
      DEFICIENCY**Preferred
      stock, $.001 par value, 20,000,000shares
      authorized, none outstanding
    
    
    -Common
      stock, $.001 par value, 180,000,000shares
      authorized, 3,976,868 issued and outstanding
    
    
    3,977Common
      stock to be issued (7,700,000 shares)
    
    
    2,100,000Additional
      paid-in capital
    
    
    4,867,790Deferred
      compensation
    
    
    (186,400
    )Accumulated
      deficit
    
    
    (7,808,558
    )Total
      stockholders' deficiency
    
    
    (1,023,191
    )Total
      liabilities and stockholders’ deficiency
    
    $
    737,471





See accompanying notes to financial
statements.


2


**SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY**
 **STATEMENTS
OF OPERATIONS**
 **For
the years ended December 31, 2004 (Consolidated) and 2003**


2004
    
    2003(Consolidated)Sale,
      net
    
    $
    661,340
    
    $
    436,071Cost
      of goods sold
    
    
    579,790
    
    
    401,697Gross
      profit
    
    
    81,550
    
    
    34,374Operating
      expenses
    
    
    1,292,072
    
    
    874,506Amortization
      of discount on notes payable
    
    
    651,868
    
    
    121,223Stock-based
      compensation costs
    
    
    1,800,000
    
    
    -Total
      operating expenses
    
    
    3,743,940
    
    
    995,729Net
      loss
    
    $
    (3,662,390
    )
    $
    (961,355
    )Loss
      per common share, basic and diluted
    
    $
    (1.12
    )
    $
    (0.39
    )Weighted
      average shares outstanding, basic and diluted
    
    
    3,280,831
    
    
    2,486,539




See accompanying notes to financial
statements.


3




**SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY**
 **STATEMENT
OF CHANGES IN STOCKHOLDERS’ DEFICIENCY**
 **For
the years ended December 31, 2004 (Consolidated) and 2003**


Sensorcommonstock
      shares
    
    Sensorcommonstock
      amount
    
    ACSIcommon
      stock
      shares
    
    ACSIcommonstock
      amount
    
    Common
      stockto
      be issued
    
    Treasurystock
    
    Additional
      paid-in
      capital
    
    Deferredcompensation
    
    Accumulated
      deficit
    
    TotalBalance
      January 1, 2003
    
    
    -
    
    $
    -
    
    
    2,466,868
    
    $
    3,433,679
    
    $
    -
    
    $
    (10,000
    )
    $
    198,000
    
    $
    (198,000
    )
    $
    (3,184,813
    )
    $
    238,866Issuance
      of stock for settlement of amount due to vendor
    
    
    -
    
    
    -
    
    
    82,969
    
    
    160,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    160,000Issuance
      of stock for settlement of accounts payable
    
    
    -
    
    
    -
    
    
    35,058
    
    
    45,834
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    45,834Intrinsic
      value of common stock issued with notes payable
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    315,666
    
    
    -
    
    
    -
    
    
    315,666Issuance
      of stock options
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    72,270
    
    
    (72,270
    )
    
    -
    
    
    -Amortization
      of deferred compensation
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    49,500
    
    
    -
    
    
    49,500Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (961,355
    )
    
    (961,355
    )Balance
      December 31, 2003
    
    
    -
    
    
    -
    
    
    2,584,895
    
    
    3,639,513
    
    
    -
    
    
    (10,000
    )
    
    585,936
    
    
    (220,770
    )
    
    (4,146,168
    )
    
    (151,489
    )Common
      stock of Sensor outstanding when Advanced Custom Sensors, Inc was merged
      into Sensor, Inc.
    
    
    1,391,962
    
    
    1,392
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,392
    )
    
    -
    
    
    -
    
    
    -Exchange
      of Advanced Custom Sensors, Inc. common stock for Sensor, Inc. common
      stock
    
    
    2,584,906
    
    
    2,585
    
    
    (2,584,895
    )
    
    (3,639,513
    )
    
    -
    
    
    10,000
    
    
    3,626,928
    
    
    -
    
    
    -
    
    
    -Stock
      options issued to employees
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    19,800
    
    
    (19,800
    )
    
    -
    
    
    -Common
      stock warrants issued with notes payable
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    636,518
    
    
    
    
    
    -
    
    
    636,518Amortization
      of deferred compensation
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    54,170
    
    
    -
    
    
    54,170Stock
      to be issued (200,000 shares) for settlement of note
    payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    300,000Compensatory
      stock to be issued (7,500,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,800,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,800,000Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    
    
    
    -
    
    
    (3,662,390
    )
    
    (3,662,390
    )Balance
      December 31, 2004
    
    
    3,976,868
    
    $
    3,977
    
    $
    -
    
    $
    -
    
    $
    2,100,000
    
    $
    -
    
    $
    4,867,790
    
    $
    (186,400
    )
    $
    (7,808,558
    )
    $
    (1,023,191
    )







See accompanying notes to financial
statements.




4


**SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY**
 **STATEMENTS
OF CASH FLOWS**
 For the
years ended December 31, 2004 (Consolidated) and 2003


2004
    
    2003(Consolidated)Cash
      flows from operating activities:Net
      loss
    
    $
    (3,662,390
    )
    $
    (961,355
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Stock-based
      compensation costs
    
    
    1,800,000
    
    
    -Costs
      related to settlement of note payable
    
    
    140,000
    
    
    -Depreciation
      and amortization
    
    
    109,954
    
    
    113,927Amortization
      of discount cost on notes payable
    
    
    651,868
    
    
    121,223Amortization
      of deferred compensation
    
    
    54,170
    
    
    49,500Changes
      in operating assets and liabilities:Accounts
      receivable
    
    
    (32,992
    )
    
    (24,059
    )Inventories
    
    
    (20,913
    )
    
    (31,333
    )Prepaids
      and other current assets
    
    
    (20,445
    )
    
    (4,001
    )Accounts
      payable and accrued expenses
    
    
    370,685
    
    
    234,399Deferred
      rent concession
    
    
    15,770
    
    
    -Net
      Cash Used In Operating Activities
    
    
    (594,293
    )
    
    (501,699
    )Cash
      flows from investing activities:Purchase
      of property and equipment
    
    
    (3,957
    )
    
    (1,289
    )Cash
      flows from financing activities:Proceeds
      from notes payable
    
    
    590,000
    
    
    407,984Proceeds
      from notes payable, related parties
    
    
    20,000
    
    
    100,000Principal
      payments on capital leases
    
    
    (5,347
    )
    
    -Net
      Cash Provided By Financing Activities
    
    
    604,653
    
    
    507,984Net
      increase in cash and cash equivalents
    
    
    6,403
    
    
    4,996Cash
      and cash equivalents, beginning of the year
    
    
    10,712
    
    
    5,716Cash
      and cash equivalents, end of the year
    
    $
    17,115
    
    $
    10,712Supplemental
      disclosure of cash flow informationCash
      paid for:Interest
    
    $
    14,458
    
    $
    7,715Taxes
    
    $
    800
    
    $
    800Non-cash
      investing and financing activities:Acquisition
      of equipment through capital lease obligations
    
    $
    47,365
    
    $
    -Issuance
      of stock options
    
    
    19,800
    
    
    72.270Interest
      payable added to principal amount of notes payable
    
    
    12,500
    
    
    -Discount
      related to warrants and convertible notes
    
    
    636,518
    
    
    316,666Issuance
      of stock for settlement of due to vendor
    
    
    -
    
    
    (160,000
    )Issuance
      of stock for settlement of accounts payable
    
    
    -
    
    
    (45,834
    )





See accompanying notes to financial
statements.


5
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





NOTE
1  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Description
of business





The
Company is a manufacturer and assembler of sensors and micro systems, and its
products include thin film sensors, thin film pressure sensors and
micro-machined pressure sensors, and micro systems that may include sensors,
signal conditioning circuits, LCD display, computer interface and molded housing
specifically designed to the customers needs.





Merger





On May
24, 2004, Sensor System Solutions (formerly known as Spectre Industries, Inc.,)
a Nevada corporation, entered into an agreement and plan of merger (the Merger)
with Advanced Custom Sensors, Inc. (ACSI). Sensor issued 2,584,906 shares of its
common stock and warrants (the Merger Warrants) to purchase up to 47,802,373
shares of its common stock to the shareholders of ACSI in exchange for all the
issued and outstanding shares of ACSI. The transaction was
accounted for as a recapitalization with ACSI deemed to be the accounting
acquirer and Spectre the legal acquirer . All financial information included in these financial statements prior to the
Merger is that of ACSI, as if ACSI had been the registrant.  The financial
information since the Merger is that of ACSI and Sensor consolidated.







All
references to “Sensor”, “Spectre” and “ACSI”, mean Spectre or ACSI separately
prior to the Merger and Sensor (the Company) after the Merger.





The
Company agreed that it would “spin-off” certain assets and liabilities included
in Spectre in connection with the Merger on May 24, 2004. These assets and
liabilities were transferred to Spectre Holdings, Inc. (Spectre Holdings), a
wholly-owned subsidiary of the Company. On December 15, 2004, in consideration
for making and guaranteeing certain representations, warranties and obligation
in connection with the Agreement and Plan of Merger dated March 13, 2004 by and
between the Company and ACSI, the Company transferred 20,878,081 shares of
common stock, which are all of the issued and outstanding shares of Spectre
Holdings to Ian Grant, a Director of the Company and shareholder in Spectre. As
the Company never had direct or indirect control of those assets and
liabilities, Spectre Holdings was not considered owned at the date of the
Merger.





Going
concern





The
Company incurred a net loss of $3,662,390 and a negative cash flow from
operations of $594,293 for the year ended December 31, 2004, and had a working
capital deficiency of $1,353,308 and a
stockholders’ deficiency of $1,023,191 at
December 31, 2004. These matters raise substantial doubt about its ability to
continue as a going concern. Without realization of additional capital, it would
be unlikely for the Company to continue as a going concern. Management believes
that actions are presently being taken to revise the Company's operating and
financial requirements in order to improve the Company's financial position and
operating results. However, given the levels of its cash resources and working
capital deficiency at December 31, 2004, management believes cash to be
generated by operations will not be sufficient to meet anticipated cash
requirements for operations, working capital, and capital expenditures during
2005. The Company completed a merger and recapitalization on May 20, 2004, with
Spectre Industries, Inc., a public company, to gain access to the United States
and European capital markets, but there can be no assurances that the Company
will ultimately be successful in this regard. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




6
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**




Principles
of consolidation





The 2004
consolidated financial statements include the accounts and operations of Sensor
System Solutions Inc. and its wholly owned subsidiary. Intercompany accounts and
transactions have been eliminated in consolidation.





Use of
estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.





Accounts
receivable





The
company performs ongoing credit evaluations of its customers and generally does
not require collateral. An appropriate allowance for doubtful accounts is
included in accounts receivable.





Inventory





Inventory
is stated at the lower of cost (first-in, first-out method) or
market.





Property
and equipment





Property
and equipment are stated at cost less accumulated depreciation and amortization. Expenditures
for additions, renewals, and improvements are capitalized. Costs of repairs and
maintenance are expensed when incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, which range
from three to seven years. Leasehold improvements are amortized over the shorter
of the lease term or the asset’s useful life.





Impairment
of long-lived assets





Property
and equipment and other long-lived assets are evaluated for impairment whenever
events or conditions indicate that the carrying value of an asset may not be
recoverable. If the sum of the expected undiscounted cash flows is less than the
carrying value of the related asset or group of assets, a loss is recognized for
the difference between the fair value and carrying value of the asset or group
of assets. Such analyses necessarily involve significant judgment. There were no
impairment losses recorded in 2004 or 2003.





Note
payable-debt discount cost





The
Company has issued warrants to investors and related parties in conjunction with
notes payable. The discounts allocated to the warrants are being treated as
additional consideration for notes payable and are being amortized over the life
of the note as additional interest cost.





Revenue
Recognition





The
Company recognizes revenue when risk of loss and title to the product is
transferred to the customer, which occurs at shipment





Income
taxes





7
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





The
Company accounts for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized and measured
using enacted tax rates at the balance sheet date. Deferred
tax expense or benefit is the result of changes in deferred tax assets and
liabilities. Valuation
allowances are established when necessary to reduce net deferred taxes to
amounts that are more likely than not to be realized.





Stock – based compensation




The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosures” as well as those outlined in SFAS
No. 123, “Accounting for Stock-Based Compensation”. As permitted by SFAS
148 and SFAS 123, the Company continues to apply the provisions of Accounting
Principles Board Opinion (APB) No. 25, “Accounting for Stock issued to
Employees” and related interpretations in accounting for the Company’s stock
option plan. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the estimated fair value of the Company’s stock at the date
of the grant, over the amount an employee must pay to acquire the stock. Stock
based awards for non-employees are accounted for at fair value equal to the
excess of the estimated fair value of the Company’s stock over the option price
using an estimated interest rate to calculate the fair value of the option.
There were no stock based awards to non-employees in 2004 or 2003.






Had
compensation cost for all stock option grants been determined based on their
fair value at the grant dates, consistent with the method prescribed by SFAS 148
and SFAS 123, our net loss and loss per share would have been adjusted to
the pro forma amounts indicated below:







Year
      ended December 31:2004
    
    2003Net
      loss
    
    $
    (3,662,390
    )
    $
    (961,355
    )Add:
      Stock-based expense included in net loss
    
    
    54,170
    
    
    49,500Deduct:
      Fair value based stock-based expense
    
    
    (58,880
    )
    
    (51,750
    )Pro
      forma net loss
    
    $
    (3,667,100
    )
    $
    (963,605
    )Basic
      and diluted earnings per share:As
      reported
    
    $
    (1.12
    )
    $
    (0.39
    )Pro
      forma under SFAS No. 123
    
    $
    (1.12
    )
    $
    (0.39
    )





Earnings
(loss) per share





Basic
earnings (loss) per common share (EPS) are based on the weighted average number
of common shares outstanding during each period. Diluted earnings per common
share are based on shares outstanding (computed as under basic EPS) and
potentially dilutive common shares. As of December 31, 2004 and 2003, the
Company had granted stock options for 96,500 and 136,500 shares of common stock,
respectively, that are potentially dilutive common shares but are not included
in the computation of loss per share because their effect would be
anti-dilutive.





Comprehensive
income (loss)





The
Company has no items of other comprehensive income (loss) for the years ended
December 31, 2004 and 2003.





8
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





Fair
value of financial instruments





The
Company believes that the carrying value of its cash, accounts receivable,
accounts payable, accrued liabilities, notes payable, and notes payable to
related parties as of December 31, 2004 approximates their respective fair
values due to the demand or short-term nature of those instruments.
T he
carrying value of long-term obligations approximates the fair value based on the
effective interest rates compared to current market rates.





Concentration
of Credit Risk





Financial
instruments that are exposed to concentrations of credit risk consist
principally of cash and accounts receivable. The Company places its cash in what
it believes to be credit-worthy financial institutions. However, cash balances
may have exceeded federally insured levels at various times during the year. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risk in cash.





The
Company had four customers that accounted for 29% and 42% of sales in the years
ended December 31, 2004 and 2003, respectively. Approximately 90% and 10% of the
Company’s sales in the years ended December 31, 2004 and 2003 were to
customers in North America and Asia respectively.





Reclassification





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





Recent
Accounting Pronouncements




In
November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, “Inventory Costs”. This Statement amends the guidance in ARB
No. 43 Chapter 4 Inventory Pricing, to require items such as idle
facility costs, excessive spoilage, double freight and rehandling costs to be
expensed in the current period, regardless if they are abnormal amounts or not.
This Statement will become effective for us in the first quarter of 2006. The
adoption of SFAS No. 151 is not expected to have a material impact on our
financial condition, results of operations, or cash flows.





In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” ** (SFAS 123R),
which revises SFAS No. 123. SFAS 123R also supersedes APB No. 25 and amends SFAS
No. 95, “Statement of Cash Flows”. In general, the accounting required by SFAS
123R is similar to that of SFAS No. 123. However, SFAS No. 123 gave
companies a choice to either recognize the fair value of stock options in their
income statements or disclose the pro forma income statement effect of the fair
value of stock options in the notes to the financial statements. SFAS 123R
eliminates that choice and requires the fair value of all share-based payments
to employees, including the fair value of grants of employee stock options, be
recognized in the income statement, generally over the option vesting period.
SFAS 123R must be adopted no later than July 1, 2005. Early adoption is
permitted.




The
Company is currently evaluating the timing and manner in which it will adopt
SFAS 123R. As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25’s intrinsic value method.
Accordingly, adoption of SFAS 123R’s fair value method will have an effect on
results of operations, although it will have no impact on overall financial
position. The impact of adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had SFAS 123R been adopted in prior periods, the effect would have
approximated the SFAS 123 pro forma net loss and loss per share disclosures as
shown above. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as currently required, thereby reducing net
operating cash flows and increasing net financing cash flows in periods after
adoption.




9
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





NOTE
2  INVENTORY





Inventory
consists of the following as of December 31, 2004:





Raw
      materials
    
    $
    149,840Work
      in process
    
    
    1,749Finished
      goods
    
    
    68,856$
    220,445





NOTE
3  PROPERTY
AND EQUIPMENT




Property
and equipment consists of the following as of December 31, 2004:





Machinery
      and equipment
    
    $
    586,812Office
      equipment
    
    
    2,636Furniture
      and fixtures
    
    
    17,398Equipment
      under capital leases
    
    
    47,365Leasehold
      improvements
    
    
    143,637797,848Less
      accumulated depreciation and amortization
    
    
    (477,131
    )$
    320,717





Depreciation
and amortization expense of $109,954 and $113,927 is reflected in the
accompanying Statement of Operations for the years ended December 31, 2004 and
2003, respectively.





As of
December 31, 2004 the Company maintained tooling assets with a net book value of
approximately $160,000 at their main supplier located in Taiwan. Although this
country is considered politically and economically stable, it is possible that
unanticipated events in this foreign country could disrupt the operations of the
Company because their main supplier is located there, has possession of the
tooling assets, and manufactures certain products.





NOTE
4  INVESTMENT
IN AFFILIATED ENTITY





The
Company owns 7.5% of TransOptix, Inc. (TransOptix), a company involved in the
design and manufacturing of optical switches for telecommunication. The
Company’s Chief Executive Officer is also the Chief Executive Officer of
TransOptix and owns 12% of TransOptix. At December 31, 2003, the Company and the
Company’s Chief Executive Officer owned 14.3% and 15%, respectively, in
TransOptix. These percentages were reduced in 2004 when additional investments
were made from its board members. As a result of the combined equity holdings of
TransOptix by the Company and its Chief Executive Officer, the Company accounts
for this investment under the equity method of accounting. The Company
discontinued applying the equity method in 2002 when Company’s share of losses
of TransOptix exceeded its investment in TransOptix. The Company did not record
any income or loss from TransOptix in 2004 or 2003. The Company and TransOptix
share the same office and facility. There were no transactions between the
Company and TransOptix in 2004 or 2003.





10
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





Summarized
unaudited financial information for TransOptix, Inc. is as follows:





December
      31, 2004Current
      assets
    
    $
    363,082Fixed
      assets, net
    
    
    359,011Other
      Assets
    
    
    23,079$
    745,172Current
      liabilities
    
    $
    37,905Note
      payable - stockholder
    
    
    12,488Note
      payable
    
    
    2,249,920Stockholders'
      deficiency
    
    
    (1,555,141
    )$
    745,172





Year
      ended December 31, 2004
    
    Year
      ended December 31, 2003Revenues
    
    $
    674,702
    
    $
    94,099Cost
      of revenues
    
    
    441,861
    
    
    26,893Gross
      profit
    
    
    232,841
    
    
    67,206Operating
      expenses
    
    
    1,399,446
    
    
    1,002,491Net
      loss
    
    $
    (1,166,605
    )
    $
    (935,285
    )





NOTE
5  NOTES
PAYABLE




Notes
payable consist of the following at December 31, 2004:





Two
      lines of credit, unsecured, interest payable monthly at 8.5% and 9.5% per
      annum, due on demand.
    
    $
    92,983Note
      Payable, unsecured, interest payable monthly at Prime + 3% per annum
      (prime rate at December 31, 2004 was 5.25%), due on
demand.
    
    
    40,000Note
      payable, unsecured, interest payable monthly at 10% per annum, payable as
      a percentage of any future private or public stock offerings (see Note 9
      with regard to the September 3, 2004 settlement agreement).
    
    
    90,000Note
      payable, secured by accounts receivable of the Company, interest at 10%,
      due February 11, 2005. In connection with this loan, the Company issued
      warrants to purchase 500,000 shares of ACSI’s common stock at $.50 per
      share. The intrinsic value of the warrants was valued at $500,000 has been
      recorded as loan discount costs and is being amortized over the life of
      the note as additional interest cost. After maturity, the lender agreed to
      convert the loan into shares of the Company’s stock. On March 15, 2005, an
      agreement was made to convert the note payable and warrant into 500,000
      shares of commons stock.
    
    
    500,000Three
      notes payable, secured by all assets of the Company, interest at 8% per
      annum, payable at various maturities through October 18, 2005. At
      maturity, the notes are convertible at the holder’s option at a conversion
      price equal to 70% of the weighted average price of the common stock for
      the 30 trading days immediately preceding the conversion date. In
      addition, each note has warrants attached that, once the note is converted
      into stock, allow the holder to purchase stock at 85% of the weighted
      average price of the common stock for the 30 trading days immediately
      preceding the conversion date. The intrinsic value of the beneficial
      conversion feature of the notes and warrants, valued at $75,536, have been
      recorded as loan discount costs and are being amortized over the life of
      the respective note as additional interest cost.
    
    
    117,500Less
      remaining debt discount
    
    
    (147,791
    )$
    692,692





11
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





NOTE
6  NOTES
PAYABLE, RELATED PARTIES





Notes
payable to related parties consist of the following at December 31,
2004:





Note
      payable to the sister of the Company’s Chief Executive Officer, secured by
      all assets of the Company, interest at 14.25% per annum, due December 31,
      2004. In connection with the note payable, the Company issued warrants to
      purchase 190,665 shares of ACSI’s common stock at $.50 per share and
      110,000 shares of Spectre’s common stock at a price equal to 85% of the
      average trading price of the Company common stock at March 16, 2005. The
      intrinsic value of the warrants, valued at $190,665, has been recorded as
      loan discount costs and are being amortized over the life of the note as
      additional interest cost. The Company is currently negotiating an
      extension of this note.
    
    $
    190,665Note
      payable to the sister of the Company’s Chief Executive Officer, secured by
      all assets of the Company, interest at 10.0% per annum, due March 15,
      2005. At maturity, the note is convertible at the holder’s option at a
      conversion price equal to 80% of the weighted average price of the common
      stock for the 30 trading days immediately preceding the conversion date.
      In addition, the note has warrants attached that, once the note is
      converted into stock, allow the holder to purchase stock at 85% of the
      weighted average price of the common stock for the 30 trading days
      immediately preceding the conversion date. The intrinsic value of the
      beneficial conversion feature of the note and warrants, valued at $48,125,
      has been recorded as loan discount costs and is being amortized over the
      life of the note as additional interest cost. The Company is currently
      negotiating an extension of this note.
    
    
    110,000Note
      payable to an employee of the Company, secured by all assets of the
      Company, interest at 10.0% per annum, due March 15, 2005. At maturity, the
      note is convertible at the holder’s option at a conversion price equal to
      80% of the weighted average price of the common stock for the 30 trading
      days immediately preceding the conversion date. In addition, the note has
      warrants attached that, once the note is converted into stock, allow the
      holder to purchase stock at 85% of the weighted average price of the
      common stock for the 30 trading days immediately preceding the conversion
      date. The intrinsic value of the beneficial conversion feature of the note
      and warrants, valued at $12,857, has been recorded as loan discount costs
      and is being amortized over the life of the note as additional interest
      cost.
    
    
    20,000Less
      remaining debt discount
    
    
    (31,300
    )$
    289,365





12
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





NOTE
7  CAPITAL
LEASE OBLIGATIONS





The
Company leases certain equipment under two capital leases with monthly payments
of $360 and $701, respectively, including interest at 12.75% per annum.





Future
minimum annual rental payments for capitalized leases are as
follows:





Years
      ending December 31,
    
    Amount2005
    
    $
    12,7322006
    
    
    12,7322007
    
    
    12,7322008
    
    
    12,7322009
    
    
    3,54354,471Amount
      representing interest
    
    
    (12,453
    )Present
      value of minimum lease payments
    
    
    42,018Less:
      Current portion
    
    
    (7,819
    )$
    34,199


NOTE
8  INCOME
TAXES





There is
no income tax provision due to continuing tax losses.





Significant
components of the Company’s deferred income tax assets at December 31, 2004 and
2003 are as follows:





2004
    
    2003Deferred
      income tax asset:Net
      operating loss carry forward
    
    $
    1,716,000
    
    $
    850,000Valuation
      allowance
    
    
    (1,716,000
    )
    
    (850,000
    )Net
      deferred income tax asset
    
    $
    -
    
    $
    -





Reconciliation
of the effective income tax rate to the U. S. statutory rate is as
follows:





2004
    
    2003Tax
      expense at the U.S. statutoryincome
      tax rate
    
    
    (34.0
    )%
    
    (34.0
    )%Increase
      in the valuation allowance
    
    
    34.0
    
    
    34.0Effective
      income tax rate
    
    
    -
    %
    
    -
    %





Deferred
taxes are recorded to give recognition to temporary differences between the tax
bases of assets or liabilities and their reported amounts in the financial
statements. Deferred tax assets generally represent items that can be used as a
tax deduction or credit in future years. Deferred tax liabilities generally
represent items that we have taken a tax deduction for, but have not yet
recorded in the Consolidated Statement of Operations.





13
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





Net
operating loss carryforwards totaling approximately $3.5 million federal and $1
million state amounts at December 31, 2004 are being carried forward. The net
operating loss carryforwards expire at various dates through 2024 for federal
purposes and 2015 for state purposes.





A full
valuation allowance has been established due to the lack of earnings as support
for recognition of the deferred tax assets recorded.





NOTE 9
STOCKHOLDERS’ EQUITY





On May
24, 2004 (the date of the Merger, see Note 1), the Company issued 2,584,905
shares of its common stock and warrants (the Merger Warrants) to purchase up to
47,802,373 shares of its common stock, to the shareholders of ACSI in exchange
for all the issued and outstanding shares of ACSI. On May 24, 2004, the OTCBB
closing price for the Company’s common stock was $3.15 per share, resulting in a
valuation of $12,527,134 (the Merger Valuation) for the 3,976,868 shares of
common stock outstanding immediately following the Merger. On December 4, 2004,
the Company granted 7,500,000 shares of its common stock to five shareholders in
Spectre, including two individuals who are also Directors of the Company, for
providing services to the Company. The fair
value of the shares granted was determined to be $ 0.24 per share for a total of
$1,800,000 and is recognized as stock-based compensation expense in the
accompanying financial statements.  The fair value was based on the Merger
Valuation and adjusted as if the 3,976,868 shares of common stock  and the
47,802,373 shares of common stock issued upon exercise of the Merger Warrants
(see Notes 10 and 12), had all been outstanding at the date of the Merger.





Effective
June 8, 2004 the Board of Directors initiated a fifteen for one reverse split of
the common stock. It also increased the authorized number of common stock shares
from 100,000,000 to 180,000,000. All share and per share amounts included herein
have been restated to reflect the effects of the split as if had occurred at the
beginning of the period.





On
September 3, 2004, the Company negotiated a settlement of an unsecured note
payable for $250,000 that was due March 9, 2004. Terms of the settlement require
the Company to pay $90,000 plus interest at 10% per annum, payable from future
stock offerings. In addition, the Company is to issue 200,000 shares of common
stock to the lender. The fair value of the shares to be issued was determined to
be $1.50 per share based on the OTC Bulletin Board (OTCBB) closing price for the
Company’s stock on September 3, 2004, for a total fair value of $300,000. The
Company recorded the difference between the net carrying amount of the
extinguished note ($250,000) and the settlement price ($390,000) as settlement
costs on note payable of $140,000 in the accompanying financial statements.





NOTE 10
STOCK OPTIONS AND WARRANTS





Stock
Option Plan





The
Company has a stock option plan, which provides for the granting of options to
employees, independent representatives and directors of the Company. The Company
is authorized to issue 200,000 shares of common stock. The exercise price is
fixed by the plan administrator. The shares vest over 4 years upon the
optionee’s completion of service. The options expire ten years from the date of
grant.





For the
year ended December 31, 2004, in accordance with APB No. 25, the intrinsic
value of the 10,000 stock options granted under this plan was $19,800 and was
recorded as deferred compensation and additional paid-in capital in the
accompanying financial statements (and is being amortized over the vesting
periods of the options.) Amortization of the deferred compensation related to
these stock options totaled $4,125.





14
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





At
December 31, 2004, options outstanding are as follows:





Shares
    
    Average
      Exercise PriceBalance
      at January 1, 2004
    
    
    136,500
    
    $
    .50Granted
    
    
    10,000
    
    $
    .50Exercised
    
    
    -Cancelled
    
    
    (50,000
    )
    $
    .50Balance
      at December 31, 2004
    
    
    96,500
    
    $
    .50





Additional
information regarding options outstanding as of December 31, 2004 is as
follows:





Options outstanding
    
    Options exercisableExercise
      price
    
    Number
      outstanding
    
    Weighted
      average remaining contractual life (years)
    
    Weighted
      average exercise price
    
    Number
      exercisable
    
    Weighted
      average exercise price$0.50
    
    
    96,500
    
    
    1.5
    
    $
    0.50
    
    
    -
    
    
    -





Warrants





During
2003, in conjunction with the issuance of certain notes payable, the board of
directors approved the issuance of warrants to purchase a total of 315,666
shares of the Company’s common stock. The warrants are exercisable at $.50 per
share, are exercisable upon issuance, and expire in five years from issuance.
The warrants had a total fair value of $315,666, which has been accounted for as
notes payable - debt discount cost and is being amortized over the life of the
related debt.





During
2004, in conjunction with the issuance of a note payable, the board of directors
approved the issuance of warrants to purchase a total of 500,000 shares of the
Company’s common stock. The warrants are exercisable at $.50 per share, are
exercisable upon issuance, and expire in five years from issuance. The warrants
had a total fair value of $500,000, which has been accounted for as note
payable-debt discount cost and is being amortized over the life of the related
debt.





On May
24, 2004, as part of the merger between the Company and ACSI, the Company issued
warrants to purchase up to 47,802,464 shares of its common stock. The warrants
are exercisable at $.0001 per share, are exercisable six months after the merger
closing date, and expire three years from issuance.





At
December 31, 2004, stock purchase warrants outstanding were as
follows:





Shares
    
    Average
      Exercise PriceBalance
      at January 1, 2004
    
    
    315,666
    
    $
    .50Granted
    
    
    48,302,373
    
    $
    .005Exercised
    
    
    -Cancelled
    
    
    -Balance
      at December 31, 2004
    
    
    48,618,039
    
    $
    .008





15
 **SENSOR
SYSTEM SOLUTIONS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND
2003**





Additional
information regarding stock purchase warrants outstanding as of December 31,
2004 is as follows:


Warrants outstanding
    
    Warrants exercisableExercise
      price
    
    Number
      outstanding
    
    Weighted
      average remaining contractual life (years)
    
    Weighted
      average exercise price
    
    Number
      exercisable
    
    Weighted
      average exercise price$0.50
    
    
    815,666
    
    
    4.5
    
    $
    0.50
    
    
    816,666
    
    $
    0.50$.0001
    
    
    47,802,373
      (A
    )
    
    3.0
    
    $
    .0001
    
    
    47,802,373
    
    $
    .0001





(A) See
Note 12 for subsequent exercise of warrants





NOTE 11
COMMITMENT AND CONTINGENCIES





Operating
Leases





The
Company leases its office and facility through 2007 under a long term operating
lease agreement. Under terms of the lease, the Company pays the cost of repairs
and maintenance. The office and warehouse facility is shared with TransOptix,
who signed the lease as co-tenant with the Company. The Company and TransOptix
have entered into an agreement stipulating each entities share of the rent,
however, in event of default by TransOptix, the Company could contingently be
liable for the full amount of the rent.





Future
minimum lease commitments for the Company’s share under this lease at
December 31, 2004 are as follows:





Year
      Ended December 31,2005
    $
    104,1312006
    
    104,9062007
    
    91,520$
    300,557





The total
lease commitment as of December 31, 2004 for which the Company could be
contingently liable in the event of default of TransOptix is approximately
$650,000. Rent expense for the years ended December 31, 2004 and 2003 was
$122,905 and $116,588 respectively.





NOTE 12
SUBSEQUENT EVENTS





On
January 26, 2005, in relation to the Merger, warrants for 47,802,373 shares of
common stock were exercised for .0001 per share.





On
February 3, 2005 and February 22, 2005, two notes payable for $50,000 and
$200,000, respectively, were issued. The notes are secured by all assets of the
Company, interest is payable at 8% per annum, and the notes mature February 3,
2006 and February 22, 2006, respectively. At maturity, the notes are convertible
at the holder’s option at a conversion price equal to 70% of the weighted
average price of the common stock for the 30 trading days immediately preceding
the conversion date. In addition, each note has warrants attached that, once the
note is converted into stock, allow the holder to purchase stock at 85% of the
weighted average price of the common stock for the 30 trading days immediately
preceding the conversion date.


16