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, 2006  [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934  Commission file number: No. 0-24368  FLEXPOINT SENSOR SYSTEMS, INC. (Name of small business issuer in its charter)  Delaware
(State of incorporation)87-0620425
(I.R.S.  Employer Identification No.)106 West Business Park Drive, Draper, Utah
(Address of principal executive offices)84020
(Zip Code)Issuers telephone number:  801-568-5111  Securities registered under Section 12(b) of the Exchange Act:  None Securities registered under Section 12(g) of the Exchange Act:  Common Stock  Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [   ]  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 [X]  No [  ]  Check if disclosure of delinquent filers in response to item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [  ]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]   No [X]  State issuers revenue for its most recent fiscal year: $ 101,781  As of February 22, 2007, Flexpoint Sensor Systems, Inc. had 23,292,887 shares of common stock outstanding.  The market value of the shares of voting common stock held by non-affiliates on that date was approximately $21,227,481.  Check if the issuer has filed all documents and reports required to be filed by Section 12, 13, 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.  Yes [X]  No [  ]  Documents incorporated by reference: None.  Transitional Small Business Disclosure Format: Yes [   ] No [X]  1   TABLE OF CONTENTS  PART I Item 1.  Description of Business 3 Item 2.  Description of Property 10 Item 3.  Legal Proceedings 10 Item 4.  Submission of Matters to a Vote of Security Holders 11  PART II  Item 5.  Market for Common Equity and Related Stockholder Matters 11 Item 6.  Managements Discussion and Analysis or Plan of Operation 12 Item 7.  Financial Statements 18 Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34 Item 8A.  Controls and Procedures 34 Item 8B.  Other Information 34  PART III  Item 9.  Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act 34 Item 10.  Executive Compensation 36 Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 37 Item 12.  Certain Relationships and Related Transactions, and Director Independence 39 Item 13.  Exhibits 40 Item 14.  Principal Accountant Fees and Services 40 Signatures   In this annual report references to Flexpoint Sensor, we, us, and our refer to Flexpoint Sensor Systems, Inc. and its subsidiaries.  FORWARD LOOKING STATEMENTS  The Securities and Exchange Commission (SEC) encourages companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions.  This report contains these types of statements.  Words such as may, will, expect, believe, anticipate, estimate, project, or continue or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements.  You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report.  All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.   2   PART I  ITEM 1.  DESCRIPTION OF BUSINESS  HISTORICAL DEVELOPMENT  Flexpoint Sensor Systems, Inc. was incorporated in the state of Delaware in June 1992 as Nanotech Corporation.  In April 1998, Nanotech acquired Sensitron, Inc., a Utah corporation (Sensitron), as a wholly-owned subsidiary through a reverse triangular merger.  Nanotech also acquired Sensitrons wholly-owned subsidiary, Flexpoint, Inc.   As part of this acquisition, Nanotech changed the company name to Micropoint, Inc.  In July 1999 Micropoint changed its name to Flexpoint Sensor Systems, Inc.  Flexpoint Sensor was forced to seek bankruptcy protection on July 3, 2001, and we filed a voluntary petition for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code.  (See Part I, Item 4 Legal Proceedings, below).  On February 24, 2004, the bankruptcy court confirmed our Plan of Reorganization.  As a result of our reorganization, we are now a development stage company with a date of emergence from bankruptcy of February 24, 2004.  We used fresh-start reporting and all assets of Flexpoint Sensor Systems, Inc. were restated to reflect their reorganization value, which approximated the fair value at the date of reorganization.  The bankruptcy reorganization plan resulted in a 7-to-1 reverse stock split that was effected March 5, 2004.  All share and per share amounts presented in this report reflect the reverse split.  The reorganization plan resulted in discharged debt of $7,123,213, which included the issuance of 13,822,331 shares of stock for creditor claims and conversion of $1,500,000 of notes payable and the cancellation of 828,571 shares of common stock issued or issuable to an officer during 2001.  Options, warrants or executory contracts for acquisition of any common shares entered into prior to our petition for bankruptcy protection were canceled upon confirmation of the reorganization plan. Outstanding preferred stock and super-voting preferred stock were also canceled upon confirmation.  BUSINESS OVERVIEW  We are a development stage company principally engaged in designing, engineering, and manufacturing sensors technology and equipment using flexible potentiometer technology.  We are actively seeking financing and manufacturing contracts for the use of design and engineering of Bend Sensor® technology and equipment using a flexible potentiometer technology.  Since confirmation of our bankruptcy reorganization plan in March 2004 we have been negotiating contracts, manufacturing Bend Sensor® technology devices and have further developed our technologies.  During 2005 we raised funding through sales of our common stock and during 2006 we have completed installation of our first production line and began testing of our products.  PRODUCTS  Bend Sensor® Technology  Sensitron owns the rights to our Bend Sensor® technology, which is a flexible potentiometer bend sensor product consisting of a coated substrate, such as plastic, that changes electrical conductivity as it is bent.  Electronic systems can connect to this sensor and measure with fine detail the amount of bending or movement that occurs.  Certain applications of the Bend Sensor® potentiometer have been patented (See Patents and Intellectual Property, below).  A typical potentiometer functions through the means of metal contacts swiping or rubbing across a resistive element. Our Bend Sensor® potentiometer is a single layer with no mechanical assembly that makes it more reliable and significantly smaller and lighter in weight than mechanical potentiometers.  Management believes many sensor applications can be improved using our technology and the use of our technology will result in new products and new sensor applications.  We have developed the following applications for the Bend Sensor® technology:    3    Pedestrian Detection Sensor  In 2003, the European Parliament and the Council of the European Union published a Directive on pedestrian protection to reduce the number of pedestrian deaths and injuries.  All new 2005 vehicles must comply with special tests demonstrating they meet standards protecting pedestrians against head and leg injuries in accidents.  In 2010, two additional stringent tests will be imposed.  We have developed a Pedestrian Impact Detection system that we believe will meet the requirements for cars in Europe.  In October 2005 we completed the initial stage of testing for the Pedestrian Impact Detection system with Tier One suppliers and confirmed the systems ability to distinguish within milliseconds between a human leg and an inanimate object.  During 2006 four separate automotive suppliers/original equipment manufacturers are testing the Bend Sensor® device for use in pedestrian impact detection.  Thus far, testing has shown that the Bend Sensor® device is able to detect impact with a human leg and in the event of an accident, trigger a safety response.  The device is also capable of determining the difference between a human leg and a steel post and can therefore alter the automobiles response based on the appropriate safety response. The automobile response can include raising the hood or deploying an external air bag.  We believe the Bend Sensor® devices advantages over the competition include reliability, accuracy, and lower costs.  Our sensors have gone through several years of testing for this application.  Starting in 2006 we have focused our efforts on third party testing of our technology as required in our protocol for Stage II development of our technology.  In June 2006 we announced our Pedestrian Impact Detection System was tested by MGA Research and this research confirmed results of our internal testing.  This system is placed in the vehicles front bumper to detect crash impact.  Within milliseconds of contact, the system can differentiate between a human leg and an inanimate object and trigger a safety response in accordance with the manufacturers specifications.  In June 2006 we also announced that we had entered into a cooperative testing agreement with Faurecia Automotive (Faurecia).  Faurecia is the second largest automotive supplier in Europe and it supplies components to large automotive manufacturers, such as BMW, Toyota, Ford, Daimler-Chrysler and others.  This agreement will allow both companies to use their resources, knowledge and capabilities to develop a working prototype of the Pedestrian Impact Detection System.  Medical Bed  We currently have working prototypes of beds for use in medical applications.  The electronics of the bed are able to record, based on our Bend Sensor® technology input, the position of the person on the bed and how they are moved.  The bed has the ability to roll a patient left or right to remove pressure areas as well as facilitate dressing changes.  Using our sensor technology on each of the individual chambers of the bed allows an accurate automatic profile mapping of the position of the person and immediately identifies the high pressure zones.  This allows needed adjustments to be made to meet the required standards of care and comfort.  Adjustments are also programmable for customized patient care and may be recorded for administrative use at later dates.  Our Bend Sensor® Technology allows the medical bed to record all information by measuring minute changes in surface deflection.  These measurements are correlated and calibrated with intra-compartmental air pressure changes to determine variances in surface pressure where the patients body is in contact with the mattress.  Competitors products use random adjustments and blindly move pressure zones.  Management believes this application of our technology is sufficiently unique to provide a major source of revenue.  On September 28, 2005, Flexpoint Sensor Systems, Inc. entered into a manufacturing agreement with R&D Products, LLC, a Utah limited liability company, doing business in Midvale, Utah.  For the purpose of this contract, management considers R&D Products to be a related party because a controlling member of R&D products, LLC is also a non-controlling interest shareholder of Flexpoint Sensor.  R&D Products has developed a mattress with multiple air chambers that use Bend Sensors® and we agreed to manufacture the Bend Sensors® for the mattresses.  The initial term of the agreement is for a period of five years and the term will renew automatically for one or more successive one-year terms, unless either party provides written notice of non-renewal.  The unit prices will be  4   adjusted on an annual basis to reflect industry standard price changes. The initial order was for 30,000 Bend Sensors® to be used to begin manufacture of 1,000 mattresses.  The realization of the manufacturing and sales of the Bend Sensors® is dependent upon R&D Products selling either their bed directly to customers or licensing their technology to a third party.  There are no guarantees the R&D Products will complete sales in such quantities to meet the demands of this contract.  R&D Products will deliver purchase orders for the Bend Sensors® to us and may inspect the production of the Bend Sensors®.  In addition, both parties have agreed to maintain the confidentiality of proprietary information obtained from each other.  The agreement may be terminated by either party for breach of the agreement by the other party or dissolution of the other entity.  The rights under the agreement cannot be assigned without prior written consent from the other party.  In December 2005 R&D Products reached a manufacturing agreement with Powin Corporation to mass produce the medical SmartBed.  Powin Corporation dedicated an 80,000 square foot manufacturing facility to manufacture the SmartBed.  The SmartBed is a pressure neutralizing bed using our Bend Sensor® Technology to precisely identify areas of the body where high pressure skin contact is most vulnerable and redistributing pressure when and where needed.  Our Bend Sensor® Technology allows the SmartBed to read all information by measuring minute change in surface deflection.  These measurements are correlated and calibrated with intra-compartmental air pressure changes to calculate variances in surface pressure where the patients body is in contact with the mattress.  Our production of the medical bed has been delayed as a result of waiting for a final design and configuration of the medical bed from R&D Products.  Flexpoint is prepared to produce the sensors under the terms of the agreement as soon as R&D Products determines the final design and configuration of the bed.  Seat Belt Reminder  As a result of our testing in the pedestrian impact detection market, we have starting testing a seat belt reminder sensor that alerts the occupant of an automobile to fasten his/her seatbelt.  We are currently working with multiple manufacturers to potentially replace existing devices in the marketplace with a system superior in performance and at a lower price point.  Air Bag Applications  Automakers and regulators agree that smart air bag systems are the solution to the rising concerns over the deaths of children and small adults by air bags. Smart air bag systems are those that can detect not only the presence of a seat occupant, but also the size and positioning of the seat occupant.  This data is used to tailor the speed and force of the air bag deployment to the seat occupancy conditions at the time of impact.  Reliable analog seat sensors such as our Bend Sensor® technology are a key component of a smart air bag system.  We have developed an Occupant Classification System that uses a series of sensors in an automobile seat to sense whether an object on a seat is a human being and whether it is a child or an adult.  By automatically sensing and correctly categorizing a car's passengers, our sensors can distinguish between an object, an infant car seat, a child or an adult passenger.  This classification system is capable of deactivating an air bag when a person under 60 pounds or a car seat is in the seat.  This allows the air bag to deploy in a fashion so as to improve the safety of the passenger.  Managements informal survey of this market has found that the market opportunity for these applications is substantial considering an annual market of 19,000,000 vehicles in North America and 50,000,000 worldwide.  We are in discussions with a Tier 1 supplier for implementation of this device.  We will continue to work with this Tier 1 supplier to make sure that we meet all requirements set forth by the government for the device.  The Passenger Presence Detection system is used to detect if there is any object in the front passenger seat.  This device could be used widely in the European market because there are specific requirements for this type of device in Europe.  We are currently working with three Tier 1 suppliers on this application.  This device could also be used as a seat belt reminder with a potential market of 17,000,000 vehicles per year.   5   We have developed a crash sensor, which is a series of sensors mounted in strategic places on the side and door panels to detect an impact, as well as the speed, direction and force of the impact.  This allows an onboard computer to deploy side air bags where needed.  Seat Heater and Seat Belt Reminder  In an effort to add more value to the Flexpoint Bend Sensor® and capitalize on Flexpoints manufacturing expertise, we have been developing a seat heater that would heat to the appropriate temperatures utilizing the power levels available in an automobile.  We have developed a prototype that has yielded good results.  The advantage to a printable heater is that we can also include, on the same sheet of material, the Flexpoint Bend Sensor® as a Seat Belt Reminder.  To our knowledge, this is a unique combination.  Flow Control Applications  Our flexible sensor has proven to be an extremely robust and durable flow control switch.  The Bend Sensor® product allows for the measurement of liquid and air flow, and has been tested to over 35 million cycles without failure.  When the Bend Sensor® device is placed in a flow stream, it can measure if flow is occurring, or it can measure the amount of flow that is occurring.  The fact that our design incorporates a single layer design allows for it to operate in many harsh environments. While other technologies are affected by dirt, dust, and liquids, the Bend Sensor® product is able to operate under these conditions.  We are currently working with a number of customers on various flow type applications.  Flexpoint announced on November 28, 2006, a Joint Development Agreement with Precision Pumping, to produce a production model flow meter.  The production ready meter includes several features that are only found on high-end systems, including a large digital display that shows and collects real time data as well as a removable memory card to record all measurements.  This card can be removed to download data providing portability for analysis.  Humidity Sensor  We have developed a new version of our patented Bend Sensor® technology.  This sensor has proven to function as a very accurate and low cost humidity sensor.  Environmental chamber testing has been performed from 0% relative humidity to 100% relative humidity at a wide range of temperatures.  Throughout all of the environmental conditions that the sensors have been exposed to, they have continued to correlate very accurately to humidity levels.  The resistance value of the Bend Sensor® changes in direct response to changes in humidity.  We expect to begin marketing this new product upon completion of qualification testing.  Other Applications  Management believes the potential market for our technology includes using the technology to replace or upgrade devices used in industrial control systems, medical equipment and instrumentation, computer peripherals, automotive transmission equipment, commercial vending equipment and other devices.  We have developed, or are developing: $ a vibration sensor, $ a steering wheel position device that communicates to an automobile onboard computer the amount of rotation of the steering wheel to assist the computer in stabilizing control over the vehicle, and $ sensing devices for medical equipment.  We intend to further identify applications of our technology in numerous fields and industries.  A core sales strategy is to seek applications of our technology for products used by customers that emphasize functionality, reliability, quality, and user convenience.  BUSINESS STRATEGY  Management believes that our future success will depend upon our ability to coordinate our product design, manufacturing, distribution and service strategies in a long-term business model.  One sales strategy is to offer a line of standard sensor products with corresponding hardware and software to facilitate ease of implementation of our  6   technology into a customer's system.  The standard product line is expected to be sold directly to the customer and through manufacturer's representatives and distributors.  We will seek to expand our product offering to include substantially complete value-added assemblies.  We will also continue to consider licensing or partnership arrangements. We anticipate selling primarily to original equipment manufacturers initially in the United States and eventually worldwide.  For the international customers, we plan to contract, sell and distribute our products through various manufacturer representatives and distributors.  Since our intended customers are typically technology companies, the design phase of the sales cycle is extremely important.  We anticipate that the original equipment manufacturers will typically approach us with a conceptual product and request that we produce a prototype.  The prototype will then be tested in the environment in which the ultimate product will be placed.  During this process, customer contact with our application engineers and internal sales support individuals will be critical for a successful design to result.  In the long term, we will attempt to add value by expanding our sensor product line through licensing, strategic agreements, and/or acquisition of other entities. It is anticipated that such diversification of sensor products will enhance our ability to offer sensor "system" solutions to our customer.  Eventually, by adding circuit boards, enclosures, etc., management expects to move toward a more extensive product line.  These product lines, when combined, could create a much larger value added profit margin.  There is, however, no assurance that such profit margins will be achieved.  MARKETING AND SALES  We intend to market our products primarily to original equipment manufacturers (OEMs), either directly or through Tier 1 suppliers.  Our primary marketing objectives are to generate demand for our products, enhance name recognition and support OEMs.  We believe that the successful use of our products by OEMs and Tier 1 suppliers will create additional demand for a higher quantity of existing products.  We also anticipate that the success of our existing products will allow us to successfully introduce new products to the market.  We intend to support OEMs and Tier 1 suppliers through our network of sales representatives and our in-house sales force.  We have one in-house sales representative and intend to develop sales representative networks in the Midwest where the major industrial controls manufacturers are located.  We will also seek to generate interests and explore additional applications to our technology through attendance and participation at trade shows and publicity in trade magazines.  We believe that our relationship with OEMs and Tier 1 suppliers will be an important part of our overall sales strategy.  We believe that the OEMs and Tier 1 suppliers will initiate purchase orders for our products.  In the early stage of this strategy, we likely will be dependent on a few OEMs and if we lose their business it will have a significant adverse effect on our results of operations until alternative distribution channels can be established.  We may consider contractual commitments to OEMs and Tier 1 suppliers in exchange for fees and royalties.  In addition, because we do not sell directly to end users, we are dependent, in part, on the OEMs for information about retail product sales.  Accordingly, any rapid cessation of purchases or a switch to other companies' products by end users may not be immediately evident to us, and could result in increased product returns.  We intend to develop a field sales force including direct marketing employees in strategic areas and manufacturers representatives nationwide to generate OEM and Tier 1 supplier customers.  As our market grows in the United States, we anticipate expanding our distribution network throughout the world.  There can be no assurance that we will be successful in developing such a sales force or in expanding our distribution network.  License and supply arrangements, such as those discussed above, create certain risks for us, including: $ Reliance for sales of products on other parties, and, therefore, reliance on the other parties' marketing ability, marketing plans and credit-worthiness; $ If our products are marketed under other parties' labels, goodwill associated with use of the products may inure to the benefit of the other parties rather than Flexpoint Sensor and its subsidiaries;     7   $ We may have only limited protection from changes in manufacturing costs and raw materials costs; and $ If we are reliant on other parties for all or substantially all of our sales, we may be limited in our ability to negotiate with such other parties upon any renewals of their agreements.  MANUFACTURING AND DISTRIBUTION  Automobile manufacturers and Tier 1 suppliers require all manufactured parts to be used in their automobiles to be manufactured in ISO/TS-16949 certified facilities.  IS0/TS-16949 is a Quality Management System that contains the particular requirements for the application of ISO 9001:2000 for automotive production and relevant service part organization.  TS-16949 is based on ISO requirements 9001:2000, but it contains additional requirements that are particular to the automotive industry.  These additions are considered automotive interpretations by the ISO community of accreditation bodies and registrars.  TS-16949 is a common supplier quality standard for DaimlerChyrsler Corporation, Ford Motor Company and General Motors Corporation.  TS-16949 applies to suppliers of production materials, production and service parts, heat treating, painting and plating and other finishing services.  It does not, therefore, apply to all suppliers of the big three automotive companies.  TS-16949 certification is necessary to assure potential customers that we have the ability and resources to meet the quantities demanded in a purchase agreement and that we are able to uphold the quality standards required for consideration as an automotive supplier.  We are in the process of qualifying our own manufacturing facility for TS-16949, but we determined that it was necessary that we had the required manufacturing capabilities now.  As a result, in February 2005 we entered into a Cooperative Agreement with The Bergquist Company, a Minnesota corporation that is a qualified automotive manufacturer.  The agreement provides that the companies will cooperate with one another to produce Bend Sensor® technology applications for the automotive industry.  This cooperative agreement provides us with the means to deliver a finished product to market.  Under the terms of the Bergquist agreement neither company will grant licenses to the other for their own intellectual property, nor is either company obligated to rely on the other for production or technology.  Flexpoint Sensor may produce any production contract or may give Bergquist a reasonable opportunity to provide a bid for the production contract.  Bergquist may offer Flexpoint a reasonable opportunity to provide a bid for technology for one of its production contracts.  The cooperative agreement has a two year term, but may be extended for a successive one year period at Flexpoint Sensors option.  COMPETITION  The sensor business is highly competitive and competition is expected to continue to increase.  We will compete directly with firms that have longer operating histories, more experience, substantially greater financial resources, greater size, more substantial research and development and marketing organizations, established distribution channels and are better situated in the market.  We do not have an established customer base and are likely to encounter a high degree of competition in developing a customer base.  To management's knowledge, technology similar to our technology is currently in production by other competitors. Management believes that our products will be sufficiently distinguishable from the existing products so that it will not compete directly with existing sensor products.  Certain force transducer sensors and fiber optic sensors are comparable to our Bend Sensors® technology; however, management believes that the force transducer sensor is not as reliable as our Bend Sensor® technology and that the fiber optic sensors are not as cost effective as our Bend Sensor® technology.  As this new area grows, additional manufacturers may attempt to introduce similar products and competition could intensify.  In the medical electronics field, our competitors are the numerous potentiometer manufacturers.  In the auto seat field our competitors are the numerous capacitive, piezo, infrared, fsr and ultrasonic sensor manufacturers.  Such competitors may use their economic strength and relationships to influence the market to continue to buy their existing products.  One or more of these competitors could use their resources to improve their current products or develop new products that may compete more effectively with our products.  New competitors may emerge and may develop products and capabilities which compete directly with our products.  No assurance can be given that we will be successful in competing in this industry.   8   We intend to compete by offering products that have enhanced features, ease of use, compatibility, reliability, comparable price, quality and support.  Management also believes our intellectual property provides an advantage over our competitors.  Although management believes that our products will be well received in our markets because of innovative features, performance characteristics and cost-effective pricing, there can be no assurance that comparable or superior products incorporating more advanced technology or other features or having better price or performance characteristics will not be introduced by competitors.  PATENTS AND INTELLECTUAL PROPERTY  We regard certain of our designs as proprietary and attempt to protect them with patents and by restricting disclosure of the designs as trade secrets.  We have nine issued patents for our Bend Sensor® technology and have filed five additional patent applications, and are in the process of preparing two additional patents for new types of sensors using our technology.  Sensitron owns seven United States patents and two foreign patents related to the Bend Sensor® technology.  Patents do expire and it will be necessary for us to file patents for each application we develop so that it is protected from competition.  The earliest patent will expire in October 2009; however, we have improved these technologies and expect to file new patents based on the enhancements.  We must file patents on any technology for which we develop enhancements which contain material improvements to the original technology.  We are aware of three potentially conflicting patents which we believe will not affect our current or planned use of our technology.  There can be no assurance that the protection provided by patents and patent applications, if issued, will be broad enough to prevent competitors from introducing similar products or that such patents, if challenged, will be upheld by the courts of any jurisdiction.  Patent infringement litigation, either to enforce our patents or defend us from infringement suits, are expensive and could divert resources from other planned uses.  For example, we determined that it was necessary to file a patent encroachment action in January 2006 (See Legal Proceedings, below).  Patent applications filed in foreign countries and patents in those countries are subject to laws and procedures that differ from those in the United States.  Patent protection in foreign countries may be different from patent protection under United States laws and may not be as favorable to us.  We also attempt to protect our proprietary information through the use of confidentiality agreements and by limiting access to our facilities.  There can be no assurance that our program of patents, confidentiality agreements and restricted access to our facilities will be sufficient to protect our proprietary technology.  Management believes that because of the rapid pace of technological change in our markets, legal protection of our proprietary information is less significant to our competitive position than factors such as continuing product innovation in response to evolving industry standards, technical and cost-effective manufacturing expertise, effective product marketing strategies and customer service.  Without legal protection; however, it may be possible for third parties to commercially exploit the proprietary aspects of our products.  RESEARCH AND DEVELOPMENT  Although we hold the patent to the basic Bend Sensor® technology, as well as other applications, there will be other competitors working to develop competing technologies.  To stay on the forefront of the technology, and to serve the needs of the customer, we will need to aggressively pursue improvements to existing systems and develop new systems as well.  For the year ended December 31, 2006 we spent $491,554 for testing of our Bend Sensor® technology applications.  We spent $479,415 on research and development for the year ended December 31, 2005 related to development engineering for the medical bed technology, new product development resulting in new patents and testing of products for marketable applications.  Also, we believe that the coatings for the Bend Sensor® products are difficult to duplicate.  We must develop new coatings to fit emerging customer needs and to stay ahead of the competition.  There can be no assurance that we will be successful in developing new coatings.  While we expect that future research and development efforts, if any, will lead to the filing of additional patent applications, there can be no assurance that any additional patent filings will be forthcoming.    9    GOVERNMENTAL REGULATION  During the past several years, the automotive industry has been subject to increased government safety regulation. Among other things, regulations from the National Highway Transportation and Safety Administration required automakers to incorporate advanced air bag technology into vehicles beginning in 2005 with the phase in to be completed by 2008.  These proposals call for upgraded air bag system performance tests for passenger cars and light trucks. The new testing requirements are intended to improve the safety of infants, children and out-of-position adults, and maximize the protection of properly seated adults.  The National Highway Transportation and Safety Administration tests are similar to conditions that we have already been using to test our Seat Mat System and we believe that our Seat Mat System will meet the standards as proposed.  EMPLOYEES  As of the date of this filing we have 11 full time employees and employ two sub-contractors.  Our employees are not presently covered by any collective bargaining agreement.  We have not experienced any work stoppages and believe that our relations with our employees are good.   ITEM 2.  DESCRIPTION OF PROPERTY  We lease approximately 11,639 square feet of office and manufacturing space from F.G.B.P., L.L.C.   The lease term is for five years, commencing on October 1, 2004 and terminating on September 30, 2009.  This facility has executive offices and space for research and development, manufacturing and fulfillment.  The average monthly payments over the term of the lease are $8,718, including common area maintenance and a 2% annual increase.  Management is working toward qualifying this manufacturing facility for TS-16949 certification.  The building is located in a business park in Draper, Utah consisting primarily of high tech manufacturing firms and it is located adjacent to Utahs main interstate.   ITEM 3.  LEGAL PROCEEDINGS  On January 20, 2006, Sensitron, Inc. filed a complaint in the United States District Court for the District of Utah, Central Division, against Michael W. Wallace, d/b/a Pure Imagination, seeking patent rights for a patent and patent application that Mr. Wallace filed with the United State Trademark and Patent Office.  Mr. Wallace assisted Sensitron with the development of certain software to be used in combination with our Bend Sensor® technology related to the SEAT MATTM system.  Mr. Wallace failed to deliver the source code to Sensitron and failed to list our employees and previous employees as co-inventors on the patent he obtained and for his pending application for a patent.  Sensitron is seeking a copy of the source code and ownership of the patent and/or correction of the patent and patent application to add the appropriate co-inventors.  Sensitron is also seeking unspecified damages along with its costs and attorneys fees.  As of December 31, 2006, this action is pending in the United States District Court.  On July 3, 2001, Flexpoint Sensor Systems, Inc. filed a voluntary petition for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code.  The petition was filed in the United States Bankruptcy Court for the District of Utah, File No. 01-29577JAB.  On February 24, 2004 the bankruptcy court confirmed our Plan of Reorganization. In our bankruptcy proceeding we objected to the $1,700,000 claim made by Delco Electronics, Inc. (Delphi).  We believe that Delphi is precluded by the terms of the agreement from any financial recovery due to its breach of the sponsorship agreement.  Other potential claims are breach of contract, breach of fiduciary duties owed to Flexpoint, Inc. pursuant to the contract, and intentional and negligent interference with Flexpoint, Inc.s contractual and business relationship with General Motors.  We are currently attempting to negotiate a settlement to this controversy.       10    ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  We have not submitted a matter to a vote of our security holders during the fourth quarter of 2006.   PART II  ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS  MARKET INFORMATION  Our common stock is listed on the National Association of Securities Dealers (NASD) OTC Bulletin Board under the symbol FLXT.  The following table lists the range for the high and low bid prices of our common stock for each quarter for the years ended December 31, 2005 and 2006 as reported by the OTC Bulletin Board.  Over-the-counter market bid quotations reflect inter-dealer prices, without retail mark-up, mark-downs or commissions, and may not necessarily represent actual transactions.  20052006Fiscal Quarter EndedHighLowHighLowMarch 31
June 30
September 30
December 31$ 2.09
1.92
2.52
2.67$ 1.50
1.40
1.45
1.60$ 2.22
2.31
1.75
1.43$ 1.54
1.56
1.15
.95  Our shares are subject to Section 15(g) and Rule 15g-9 of the Securities and Exchange Act, commonly referred to as the penny stock rule.  The rule defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions.  The rule provides that any equity security is considered to be a penny stock unless that security is: $ Registered and traded on a national securities exchange meeting specified criteria set by the SEC; $ Issued by a registered investment company; or $ Excluded from the definition on the basis of share price or the issuers net tangible assets.  These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock and may affect the ability of shareholders to sell their shares.  Broker-dealers who sell penny stocks to persons other than established customers and accredited investors must make a special suitability determination for the purchase of the security.  Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse, and certain institutional investors.  The rules require the broker-dealer to receive the purchasers written consent to the transaction prior to the purchase and require the broker-dealer to deliver a risk disclosure document relating to the penny stock prior to the first transaction.  A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security.  Finally, monthly statements must be sent to customers disclosing recent price information for the penny stocks.  HOLDERS  As of February 22, 2007, we had approximately 465 stockholders of record of our common stock, which does not include street accounts of securities brokers.  DIVIDENDS  We have not paid cash or stock dividends and have no present plan to pay any dividends.  We intend to retain any earnings to finance the operation and expansion of our business and the payment of any cash dividends on our  11   common stock is unlikely.  However, our board of directors may revisit this matter from time to time and may determine our earnings, financial condition, capital requirements and other factors allow the payment of dividends.  RECENT SALES OF UNREGISTERED SECURITIES  None.  ISSUER PURCHASE OF SECURITIES  None.   ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  EXECUTIVE OVERVIEW  Flexpoint Sensor Systems, Inc. is a development stage company engaged principally in acquiring equipment and technology, obtaining financing and seeking manufacturing contracts.  Our planned operations have not commenced to a commercial level and include designing, engineering and manufacturing and selling sensor technology and equipment featuring Bend Sensor® technology and equipment. We emerged from Chapter 11 bankruptcy on February 24, 2004 and since that time we have leased a manufacturing facility, purchased necessary equipment to establish a production line, negotiated contracts, manufactured Bend Sensor® technology devices and conducted testing on those devices.  Our goal is to qualify our production line and facility as an ISO/TS 16949 production line and facility by the end of 2007.  This qualification will increase the marketability of our products to automotive parts suppliers.  During 2005 development and research on products for several automotive customers was approved to be advanced to the next stage of testing.  Negotiations for potential automotive applications using our Bend Sensor® technology are in process, but we have not yet entered into a major contract for the sale of our automotive products.  We are also continuing to develop new products that we may sell or license to an industrial control company.  Finalizing a major contract with a customer remains our greatest challenge.  We must continue to obtain funding to operate and expand our operations so that we can deliver our products to the market.  Management believes that even though we are making positive strides forward with our business plan, it is likely that significant progress may not occur for the next four to six months.  Accordingly, we cannot guarantee that we will realize significant revenues or that we will become profitable within the next twelve months.  LIQUIDITY AND CAPITAL RESOURCES  Our revenue is primarily from design, contract and testing services and is not to a level to support our operations.  Management anticipates that we may not realize significant revenue within the next twelve months.  For the past twelve months we have relied on proceeds from the private placement we completed in March 2005 to satisfy our cash requirements.  In this private placement we issued an aggregate of 2,836,335 units to purchasers and 140,000 units were issued to the placement agent.  Each unit consisted of one share and one warrant to purchase one share at an exercise price of $3.00.  We realized net proceeds of $3,907,207 from this private placement that we have used to fund continuing operations and business development.  Management believes that our current cash burn rate is approximately $140,000 per month and that the remaining proceeds from the private placement will fund our operations for at least the next five months.  Our auditors have expressed doubt that we may realize significant revenue or become profitable within the next twelve months.  We will require additional financing to fund our long-term cash needs.  We may rely on debt financing, loans from related parties and private placements of common stock for additional funding.  However, we cannot assure you that we will be able to obtain financing, or that sources of financing, if any, will continue to be available, and if available, that they will be on terms favorable to us.   12   We also may receive additional funds in the future from warrants issued in the private placement.  If all 2,976,335 of the warrants issued in the private placement are exercised, then we may realize an additional $8,929,005, based on an exercise price of $3.00 per warrant.  Except for a call provision, the warrant holders of the private placement have total discretion as to when or if the warrants are exercised.  The call provision of the warrant states that if the closing bid price of our common stock is greater than $4.00 per share for five consecutive trading days after October 1, 2005 through September 1, 2007 (the exercise term of the warrant), then we have the right to call the warrant in whole or in part, forcing the investor to exercise the warrant within fifteen trading days or the warrant is forfeited.  We cannot guarantee that the price of our common stock will reach $4.00 and, if it does not reach that amount then the warrant holders will determine when and if the warrants are exercised.  In addition to the warrants issued in the private placement, as of December 31, 2006 we have outstanding warrants to purchase an aggregate of 380,000 shares and we may receive an additional $340,000 if those warrants are exercised.  For example, on June 27, 2006 warrants to purchase 300,000 shares were exercised and we received $210,000 in proceeds from that transaction.  Again, the warrant holders have total discretion as to if the warrants are exercised.  As we enter into new technology agreements in the future, we must ensure that those agreements provide adequate funding for any pre-production research and development and manufacturing costs.  If we are successful in establishing agreements with adequate initial funding, management believes that our operations for the long term will be funded by revenues, licensing fees and royalties related to these agreements.  However, we have formalized only a few additional agreements during the past year and there can be no assurance that agreements will come to fruition in the future or that a desired technological application can be brought to market.  COMMITMENTS AND CONTINGENCIES  Our principal commitments at December 31, 2006 consist of our operating lease and total current liabilities of $48,335.  The operating lease has average monthly payments of $8,718, including common area maintenance and a 2% annual increase.  The total future minimum payments under this lease as of December 31, 2006 were $292,511.  Our total current liabilities include accounts payable of $23,348 related to normal operating expenses, including health insurance, utilities, production supplies and travel expense, expenses for professional fees regarding audit fees and legal fees related to the defense of patent rights.  Accrued liabilities at December 31, 2006, were $24,987 and were related to payroll tax liabilities, accrued audit and tax expenses, accrued lease expense and accrued Paid Time  Off, a combination vacation-sick leave policy.  In January 2006 we initiated a legal action for patent encroachment and we anticipated that this legal action would result in legal costs of approximately $100,000; however, the cost of this action has been higher than anticipated and we now estimate that this legal action will result in legal costs of approximately $200,000.  Management believes it is critical to protect our patents and will divert a portion of our financial resources to continue this legal matter.  OFF-BALANCE SHEET ARRANGEMENTS  None.  CRITICAL ACCOUNTING 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 amounts reported in the consolidated financial statements and accompanying notes.  Estimates of particular significance in our financial statements include goodwill and the annual tests for impairment of goodwill and valuing stock option compensation.  We annually test goodwill for impairment or when a triggering event occurs.  We use a fair-value-based test that is applied at the overall company level.  The test compares the fair value of the company to the carrying value of its net assets. This test requires various judgments and estimates. The fair value of the company is determined using the market value of our common stock. That fair value is allocated to our assets and liabilities based upon their fair values with the excess fair value allocated to goodwill.  An impairment of goodwill is measured as the excess of the  13   carrying amount of goodwill over the determined fair value.  We performed a goodwill impairment test at December 31, 2006 and no impairment was identified or recognized.  We account for stock options under Statement of Financial Accounting Standards No. 123(R), effective January 1, 2006.  Statement 123(R) requires that recognition of the cost of employee services received in exchange for stock options and awards of equity instruments be based on the grant-date fair value of such options and awards and is recognized as an expense in operations over the period they vest.  The fair value of the options we have granted is estimated at the date of grant using the Black-Scholes American option-pricing model.  Option pricing models require the input of highly sensitive assumptions, including expected stock volatility.  Also, our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable.  For the year ended December 31, 2006 we recognized $827,718 of stock-based compensation expense for our stock options and there was approximately $392,535 of unrecognized compensation cost related to employee stock options that will be recognized over approximately 1.2 years.  During September 2006, we changed accounting estimates related to potential forfeitures of options granted under our 2005 Stock Incentive Plan from 0% to 7% in order to more closely reflect actual forfeitures to date.  The effect of this change was a reduction in net loss of $78,572 for the 2006 year.  RESULTS OF OPERATIONS  The following discussions are based on the consolidated operations of Flexpoint Sensor and its subsidiary, Sensitron,  and should be read in conjunction with our unaudited financial statements for the years ended December 31, 2006 and 2005.  These financial statements are included in this report at Part II, Item 7, below.   SUMMARY OF OPERATING RESULTSYear endedDec. 31, 2006Dec. 31, 2005Design, contract and testing revenue$                  101,781$                   12,595Total operating costs and expenses(2,658,839)(1,834,816)Net other income (expense)44,22252,201Net loss$            (2,512,836)$            (1,770,020)Basic and diluted loss per common share$                     (0.11)$                     (0.08)  Our revenue for the 2006 and 2005 years was from design, contract and testing services.  Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the customer.  Revenue from contracts to license technology to others is deferred until all conditions under the contract are met and then the sale is recognized as licensing royalty revenue over the remaining term of the contract.  Revenue from the sale of a product is recorded at the time of shipment to the customer.   Management does not anticipate that revenue will increase until we finalize a major contract.  Total operating costs and expenses increased for 2006 when compared to 2005.  Administrative and marketing expenses increased to $2,006,364 for 2006 compared to $1,195,744 for 2005 primarily due to litigation fees and compensation expense recognized according to SFAS No. 123(R) for share-based option compensation.  Research and development expense, cost of revenue and amortization of patents and proprietary technology expenses remained relatively the same for 2006 and 2005.     14    Total other net income for 2006 and 2005 was primarily the result of interest income from the proceeds of the private placement offering, which were deposited in a savings account, and sublease rent income from Handstands, Inc.  Interest expense for 2005 was primarily the result of interest expense related to loans.  We also recognized a loss of $4,000 on forgiveness of debt related to settlement of a dispute with a shareholder.  Due to minimal revenue and increased operating costs and expenses, we recorded a greater net loss and net loss per share for 2006 when compared to 2005.  Management expects losses to continue in the short term.  The chart below presents a summary of our consolidated balance sheets at December 31, 2006 and 2005.   SUMMARY OF BALANCE SHEET INFORMATIONYear ended
Dec. 31, 2006Year ended
Dec. 31, 2005Cash and cash equivalents$      768,220$     1,964,487Total current assets802,2911,999,148Total assets8,792,30410,304,149Total current liabilities48,33585,062Deficit accumulated during
the development stage(8,793,582)(6,280,746)Total stockholders equity$   8,743,969$   10,219,087  Cash and cash equivalents decreased in 2006 compared to 2005 because we relied on our cash to fund operations.  Until our revenue increases, our cash and assets will continue to decrease.  Our non-current assets decreased at December 31, 2006 compared to 2005 due to adjustments for depreciation and amortization.  These assets include property and equipment valued at $1,076,383, patents and proprietary technology of $1,550,716, goodwill of $5,356,414, and long-term deposits of $6,500.  Total current liabilities decreased at December 31, 2006, primarily as a result of decreases in accounts payable and accrued liabilities.  Factors Affecting Future Performance  We have a history of losses and may never become profitable.  We are unable to fund our day-to-day operations from revenues and the lack of revenues for continued growth may cause us to delay our business development.  We anticipate proceeds from our private placement completed in March 2005 will fund our operations for at least the next five months; however, we expect that revenue will not increase until mid 2007.  In addition, if we decide to expand our business activities outside the automotive market in the next twelve months, we anticipate needing more than approximately $1,000,000 in additional funding.  We may not have adequate experience to successfully manage anticipated growth.  In January 2005 we restructured our management team and brought in an experienced group of executive level management personnel to direct the growth of our business operations.  However, we may not be equipped to successfully manage any possible future periods of rapid growth or expansion, which could be expected to place a significant strain on our managerial, operating, financial and other resources.  Our future performance will depend, in part, on our ability to manage growth effectively, which will require us to:  15   $ improve existing, and implement new, financial controls and systems, management information systems, operating, administrative, financial and accounting systems and controls, $ maintain close coordination between engineering,  programming, accounting, finance, marketing, sales and operations, and $ attract and retain additional qualified technical and marketing personnel. There is intense competition for management, technical and marketing personnel in our business.  The loss of the services of any of our key employees or our failure to attract and retain additional key employees could have a material adverse effect on our ability to continue as a going concern.  We may not have adequate manufacturing capacity to meet anticipated manufacturing contracts.  Based on projected business development, we will need to complete a second production line and have it installed and approved in 2008.  The second manufacturing line is expected to result in increased manufacturing capacity and manufacturing efficiencies.  We have completed installation of our first production line and are in the process of qualifying our own manufacturing facility for ISO/TS-16949 certification.  However, we cannot assure you that we will satisfy ISO/TS-16949 qualification or that the production lines will produce product in the volumes required or that the production lines will satisfy the requirements of our customers.  Our success is dependent on our intellectual property rights which are difficult to protect.  Our future success depends on our ability to protect our intellectual property.  We use a combination of patents and other intellectual property arrangements to protect our intellectual property.  There can be no assurance that the protection provided by our patents will be broad enough to prevent competitors from introducing similar products or that our patents, if challenged, will be upheld by courts of any jurisdiction.  Patent infringement litigation, either to enforce our patents or defend ourselves from infringement suits, will be expensive and could divert our resources from other planned uses.  Patent applications filed in foreign countries and patents in these countries are subject to laws and procedures that differ from those in the U.S. and may not be as favorable to us.  We also attempt to protect our confidential information through the use of confidentiality agreements and by limiting access to our facilities.  There can be no assurance that our program of patents, confidentiality agreements and restricted access to our facilities will be sufficient to protect our confidential information from competitors.  Research and development may result in problems which may become insurmountable to full implementation of production.  Customers request that we create prototypes and perform pre-production research and development. As a result, we are exposed to the risk that we may find problems in our designs that are insurmountable to fulfill production.  In that event, we will be unable to recover the costs of the pre-production research and development.  However, we are currently unaware of any insurmountable problems with ongoing research and development that may prevent further development of an application.  Our products must satisfy governmental regulations in order to be marketable  During the past several years, the automotive industry has been subject to increased government safety regulation. Among other things, proposed regulations from the National Highway Transportation and Safety Administration required automakers to incorporate advanced air bag technology into vehicles beginning in 2005 with the phase-in to be completed by 2008.  Our products may not meet the proposed National Highway Transportation and Safety Administration standards or the standards may be modified.  These proposals call for upgraded air bag system performance tests for passenger cars and light trucks.  The new testing requirements are intended to improve the safety of infants, children and out-of-position adults, and maximize the protection of properly seated adults.  The National Highway Transportation and Safety Administration tests are similar to conditions that we have already been using to test our Seat Mat System and we believe that our Seat Mat System will meet the standards as proposed.  In addition, automakers may react to these proposals and the uncertainty surrounding these proposals by curtailing or deferring investments in new technology, including our Bend Sensor® technology, until final regulatory action is taken.  We cannot predict what impact, if any, these proposals or reforms might have on our financial condition and results of operations.   16   Because we are significantly smaller than the majority of our competitors, we may lack the financial resources needed to capture increased market share.  The market for sensor devices is extremely competitive, and we expect that competition will intensify in the future. There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures we face will not materially adversely affect our business, operating results or financial condition.  Our primary competitors in the air bag market are International Electronics and Engineering, Siemens, Robert Bosch GmbH, Denso, Inc., Breed Technologies, TRW Automotive, Delphi Corporation, Autoliv Inc., Takata and Temic.  We believe that none of our competitors have a product that is superior to our Bend Sensor® technology at this time.  However, many of our competitors and potential competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships than we do.  These competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote substantially more resources to developing new products and markets than we can.  Ongoing industry consolidation among worldwide automotive parts suppliers and financial difficulties of U.S. auto makers may limit the market potential for our products.  In the automotive parts industry, there is a trend of consolidation through business combinations and acquisitions of complementary technologies among worldwide suppliers as these suppliers seek to build stronger customer relationships with automobile manufacturers.  Automobile manufacturers look to Tier 1 suppliers (major suppliers) to provide fully engineered systems and pre-assembled combinations of components rather than individual components.  This trend of consolidation of suppliers may result in fewer Tier 1 suppliers and thus limit the marketing opportunities for our Bend Sensor® technology.  In addition, in recent months large U.S. auto makers have announced plans to close plants and reduce their work force, some Tier 1 suppliers are in bankruptcy or in financial difficulty, and two automobile manufacturers have reported increased financial difficulties.  These industry trends may limit the market for our products.  Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could lead to loss of investor confidence in our reported financial information.  Pursuant to proposals related to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-KSB for the fiscal year ending December 31, 2007, we will be required to furnish a report by our management on our internal control over financial reporting.  If we cannot provide reliable financial reports or prevent fraud, then our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.  In order to achieve compliance with Section 404 of the Act within the prescribed period, we will need to engage in a process to document and evaluate our internal control over financial reporting, which will be both costly and challenging.  In this regard, management will need to dedicate internal resources, engage outside consultants and adopt a detailed work plan.  During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404.  In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.  Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud.         17      ITEM 7.  FINANCIAL STATEMENTS   FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company)  INDEX TO FINANCIAL STATEMENTS  Page  Report of Independent Registered Public Accounting Firm F-1  Consolidated Balance Sheets  December 31, 2006 and 2005 F-2  Consolidated Statements of Operations for the Years Ended December 31, 2006 and 2005 and for the Cumulative Period from February 24, 2004 (Date of Emergence from Bankruptcy) through December 31, 2006 F-3  Consolidated Statements of Stockholders Equity for the Period from February 24, 2004 (Date of Emergence from Bankruptcy) through December 31, 2004 and for the Years Ended December 31, 2005 and 2006 F-4  Consolidated Statements of Cash Flows for the Years Ended December 31, 2006 and 2005 and for the Cumulative Period from February 24, 2004 (Date of Emergence from Bankruptcy) through December 31, 2006 F-5  Notes to Consolidated Financial Statements F-6     18


HANSEN, BARNETT& MAXWELL, P.C. A Professional Corporation CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS 5 Triad Center, Suite 750 Salt Lake City, UT 84180-1128 Phone: (801) 532-2200 Fax: (801) 532-7944 www.hbmcpas.com   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Stockholders and the Board of Directors Flexpoint Sensor Systems, Inc.  We have audited the accompanying consolidated balance sheets of Flexpoint Sensor Systems, Inc. and subsidiaries (a development stage company) (the Company) as of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders equity, and cash flows for the years then ended and for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2006.  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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 Flexpoint Sensor Systems, Inc. and subsidiaries as of December 31, 2006 and 2005 and the results of their operations and their cash flows for the years then ended and for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2006 in conformity with U.S. generally accepted accounting principles.  The accompanying consolidated 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 is in the development stage, has not earned any appreciable revenue has suffered net losses and has had negative cash flows from operating activities during the years ended December 31, 2006 and 2005 and for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2006. These matters raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.   /s/ Hansen, Barnett & Maxwell, P.C. HANSEN, BARNETT & MAXWELL, P.C. Salt Lake City, Utah March 7, 2007    F-1


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED BALANCE SHEETS    December 31,20062005ASSETSCurrent AssetsCash and cash equivalents$      768,220$       1,964,487Accounts receivable1,263-Deposits and prepaid expenses32,80834,661Total Current Assets802,2911,999,148Long-Term deposits6,5006,500Property and Equipment,net of accumulated depreciationof $369,923 and $205,6401,076,3831,238,404Patents and Proprietary Technology,net of accumulatedamortization of $417,634 and $264,6671,550,7161,703,683Goodwill5,356,4145,356,414Total Assets$   8,792,304$     10,304,149LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable$        23,348$           41,737Accrued liabilities24,98743,325Total Current Liabilities48,33585,062Stockholders' EquityPreferred stock  $0.001 par value; 1,000,000 shares authorized;no shares issued or outstanding--Common stock  $0.001 par value; 100,000,000 shares authorized;23,292,887 shares and 22,992,887 shares issued and outstanding23,29222,992Additional paid-in capital14,324,75613,777,276Warrants and options outstanding3,189,5032,699,565Deficit accumulated during the development stage(8,793,582)(6,280,746)Total Stockholders' Equity8,743,96910,219,087Total Liabilities and Stockholders' Equity$   8,792,304$     10,304,149The accompanying notes are an integral part of these financial statements.


F-2


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS  For the CumulativePeriod fromFebruary 24, 2004(Date of EmergenceFor the Yearfrom Bankruptcy)Ended December 31,through20062005December 31, 2006Design, Contract and Testing Revenue$    101,781$         12,595$         459,809Operating Costs and ExpensesAmortization of patents and proprietary technology152,967151,965417,634Cost of revenue7,9547,692102,251Administrative and marketing expense2,006,3641,195,7446,365,405Research and development expense491,554479,415970,969Total Operating Costs and Expenses2,658,8391,834,8167,856,259Other Income and (Expenses)Interest expense-(7,231)(1,576,054)Interest income40,33459,54499,878Sublease rent income3,8883,8887,776Gain (loss) on forgiveness of debt-(4,000)71,268Net Other Income (Expense)44,22252,201(1,397,132)Net Loss$(2,512,836)$  (1,770,020)$    (8,793,582)Basic and Diluted Loss Per Common Share$         (0.11)$           (0.08)Basic and Diluted Weighted-AverageCommon Shares Outstanding23,147,00822,596,558          The accompanying notes are an integral part of these financial statements


F-3


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY For the Period from February 24, 2004 (Date of Emergence from Bankruptcy) through December 31, 2004 and for the Years Ended December 31, 2005 and 2006 DeficitAccumulatedAdditionalWarrants andDuring theTotalCommon StockPaid-inOptionsDevelopmentStockholders'SharesAmountCapitalOutstandingStageEquityBalance-February 24, 2004 (Date of Emergence from Bankruptcy)14,098,202$     14,098$  4,952,166$                 -$                  -$      4,966,264Beneficial debt conversion option--1,500,000--1,500,000Conversion of note payable, March 31 and May 19, 2004, $.50 per share3,000,0003,0001,497,000--1,500,000Issuance for consulting services, March 3 2004, $1.15 per share100,000100114,580--114,680Stock based compensation from 650,000 warrants issuedon March 3, 2004 for consulting services---731,328-731,328Issuance for acquisition of equipment and proprietarytechnology from Flexpoint Holdings, LLC, A companycontrolled by  a stockholder, March 31, 2004, $ 1.21 per share1,600,0001,6001,929,709--1,931,309Issuance for compensation, November 24, 2004, $1.48 per share1,200,0001,2001,774,800--1,776,000Net loss----(4,510,726)(4,510,726)Balance-December 31, 200419,998,20219,99811,768,255731,328(4,510,726)8,008,855Issuance of common stock at $ .77 per shareand 2,836,335 warrants at $0.61 per warrant for cashnet of $347,294 cash offering costs and 140,000 commonshares and 140,000 warrants, January through March 20052,976,3352,9761,977,2941,926,937-3,907,207Issuance of 30,000 warrants at $1.38 per warrant forservices rendered, July 2005---41,300-41,300Issuance of common stock at $ 1.73 per share, ascompensation to director of company forservices rendered, August 200518,3501831,727--31,745Net loss----(1,770,020)(1,770,020)Balance - December 31, 200522,992,88722,99213,777,2762,699,565(6,280,746)10,219,087Employee compensation from stock options---827,718-827,718Exercise of warrants, $0.70 per share, for cash, June 2006300,000300547,480(337,780)-210,000Net loss----(2,512,836)(2,512,836)Balance - December 31, 200623,292,887$    23,292$14,324,756$    3,189,503$   (8,793,582)$      8,743,969            The accompanying notes are an integral part of these financial statements


F-4


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS For the CumulativePeriod fromFebruary 24, 2004(Date of EmergenceFor the Yearfrom Bankruptcy)Ended December 31,through20062005December 31, 2006Cash Flows from Operating Activities:Net loss$ (2,512,836)$ (1,770,020)$(8,793,582)Adjustments to reconcile net loss to net cash used inoperating activities:Depreciation164,283157,945369,923Amortization of patents and proprietary technology152,967151,965417,634Issuance of common stock and warrants for services-73,0452,695,053Expenses paid by increase in convertible note payable--60,000Amortization of discount on note payable--1,556,666Stock-based compensation expense for employees827,718-827,718Changes in operating assets and liabilities:Accounts receivable(1,263)749(1,263)Accounts payable(18,389)(74,641)(184,758)Accrued liabilities(18,338)21,85522,495Deferred revenue--(343,750)Prepaid expenses1,853(34,661)(32,808)Deposits--(6,500)Net Cash Used in Operating Activities(1,404,005)(1,473,763)(3,413,172)Cash Flows from Investing Activities:Payments for the purchase of equipment(2,262)(85,210)(197,574)Payments for patents-(28,147)(43,626)Payment for acquisition of equipment and proprietarytechnology from Flexpoint Holdings, LLC--(265,000)Net Cash Used in Investing Activities(2,262)(113,357)(506,200)Cash Flows from Financing Activities:Net proceeds from issuance of common stock and warrants210,0003,907,2074,117,207Principal payments on notes payable - related parties-(409,958)(460,300)Proceeds from notes payable - related parties--445,300Proceeds from borrowings under convertible note payable--583,334Net Cash Provided By Financing Activities210,0003,497,2494,685,541Net Change in Cash and Cash Equivalents(1,196,267)1,910,129766,169Cash and Cash Equivalents at Beginning of Period1,964,48754,3582,051Cash and Cash Equivalents at End of Period$      768,220$   1,964,487$     768,220Supplemental Cash flow Information:Cash paid for interest$                -$          7,231$       16,888      The accompanying notes are an integral part of these financial statements


F-5


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    NOTE 1 NATURE OF BUSINESS  Nature of Operations  Flexpoint Sensor Systems, Inc. (the Company) is located in Salt Lake City, Utah and is a development stage company. The Companys development stage activities to date have included acquiring equipment and technology, obtaining financing and seeking manufacturing contracts. The Companys planned operations, which have not yet commenced at a commercial level, are in designing, engineering and manufacturing and selling sensor technology and equipment using flexible potentiometer technology. Through December 31, 2006, the Company had not begun any commercial manufacturing.  Principles of Consolidation The accompanying consolidated financial statements include the accounts of Flexpoint Sensor Systems, Inc. and its wholly owned subsidiaries, Sensitron, Inc., Flexpoint, Inc. and Flexpoint International, LLC.  During 2005, a minority interest holder in the subsidiaries relinquished his interest for no consideration. Prior to the minority interests being relinquished, the minority interests were carried at no value based on their historical cost. Intercompany transactions and accounts have been eliminated in consolidation.  Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.  Actual results could differ from those estimates.  Business Condition  The Company suffered losses of $2,512,836 and $1,770,020 and used cash in operating activities of $1,404,005 and $1,473,763 during the years ended December 31, 2006 and 2005, respectively.  At December 31, 2006, the Company had accumulated a deficit of $8,793,582. The Company is in the development stage, has not earned any appreciable revenue during the period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2006. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.  The Company may not make significant progress towards obtaining manufacturing contracts for its sensor technology within the next six months and the Company may not realize significant revenues or become profitable within the next twelve months. Reaching profitable operations may require the Company to obtain additional financing. Through December 31, 2006, the Company met its short-term cash needs through proceeds from issued common stock and warrants in a $3,980,207private placement offering during 2005. The Company may be required to rely on debt financing, loans from related parties, and private placements of common stock. However, there can be no assurance that plans to obtain financing will be completed, or that such sources of financing, if any, will continue to be available, and if available, that they will be on terms favorable to the Company.  Property and Equipment  Property and equipment are stated at cost.  Additions and major improvements are capitalized while maintenance and repairs are charged to operations.  Upon trade-in, sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized.  On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) Statement No. 153, Exchanges of Non-monetary Assetsan amendment of APB Opinion No. 29.Beginning on January 1, 2006, the Company recognizes gains or losses upon the trade-in of property and


F-6


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   equipment based upon the difference between the fair value and the depreciated cost of the assets on the dates exchanged for those transactions with commercial substance. Commercial substance is defined as a transaction in which the future cash flows of the Company are expected to change significantly as a result of the exchange. Through December 31, 2005 and before the adoption of SFAS Statement No. 153, no gain or loss was recognized upon the trade-in of property or equipment. As there were no trade-ins of property or equipment during the year ended December 31, 2006, there were no effects on the financial statements as a result of adoption of SFAS Statement No. 153.  Valuation of Long-lived Assets  The carrying values of the Companys long-lived assets are reviewed for impairment annually and whenever events or changes in circumstances indicate that they may not be recoverable.  When projections indicate that the carrying value of the long-lived asset is not recoverable, the carrying value is reduced by the estimated excess of the carrying value over the projected discounted cash flows.  As a result of managements assessment of the recoverability of long-lived assets, including property and equipment, patents and proprietary technology, and goodwill, no impairment loss was identified or recognized through December 31, 2006.  Intangible Assets  Costs to obtain or develop patents are capitalized and amortized over the remaining life of the patents, technology rights are amortized over their estimated useful lives. The Company currently has the right to several patents and proprietary technology.  Patents and technology are amortized from the date the Company acquires or is awarded the patent or technology right, over their estimated useful lives.  An impairment charge is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible assets as determined by projected discounted net future cash flows.  Research and Development  Research and development costs are recognized as expense during the period incurred, which is until the conceptual formulation, design, and testing of a process is completed and the process has been determined to be commercially viable.  Goodwill  Goodwill represents the excess of the Companys reorganization value over the fair value of net assets of the Company upon emergence from bankruptcy. Goodwill is not amortized, but is tested for impairment annually or when a triggering event occurs using a fair value approach. A fair-value-based test is applied at the overall company level. The test compares the fair value of the company to the carrying value of its net assets. This test requires various judgments and estimates. The fair value the Company is determined using the market value of the Companys common stock. The fair value of the Company is allocated to the Companys assets and liabilities based upon their fair values with the excess fair value allocated to goodwill. An impairment of goodwill is measured as the excess of the carrying amount of goodwill over the determined fair value.  Revenue Recognition Revenue is recognized when persuasive evidence of an arrangement exists, services have been provided or goods delivered, the price to the buyer is fixed or determinable and collectibility is reasonably assured. Revenue from the sale of products is recorded at the time of shipment to the customers.  Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the customer.  Revenue from contracts to license technology to others is deferred until all conditions under the contracts are met and then recognized as licensing royalty revenue over the remaining term of the contracts.  Stock-Based Compensation  In December 2004, the FASB issued Statement No. 123 (Revised 2004), Share-Based Payment (SFAS No.123R).  SFAS No. 123R supersedes APB 25 and requires the recognition of the cost of employee services received in exchange for stock options and awards of equity instruments based on the grant-date fair value of such options and awards, over the period they vest.  Under APB 25, no compensation was recorded in earnings for the Companys stock-based options


F-7


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   granted under the 2005 Stock Incentive Plan (the Plan).  Under SFAS No. 123R, all share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense in operations over the requisite service period.  On January 1, 2006, the Company adopted the provisions of SFAS No. 123R, for its share-based compensations plans and began recognizing the unvested portion of employee compensation from stock options and awards equal to the unamortized grant-date fair value over the remaining vesting period.  Furthermore, compensation costs will also be recognized for any awards issued, modified, repurchased, or canceled after January 1, 2006.  Prior to January 1, 2006, the Company determined the value of stock-based compensation arrangements under the provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees" and made pro forma disclosures required under SFAS No. 123, "Accounting for Stock-Based Compensation.  During 2005, the Company granted stock options to purchase 1,159,000 common shares with an exercise price of $1.91 per share, under the newly-adopted 2005 Stock Plan.  Because the options granted had no intrinsic value, no compensation expense was recognized for the grants.  Had compensation expense for stock option grants been determined based on the fair value at the grant dates consistent with the method prescribed in SFAS No. 123, the Company's net loss and net loss per share would have been adjusted to the pro forma amounts below for the year ended December 31, 2005:  For the YearEndedDecember 31, 2005Net loss, as reported$           (1,770,020)Add back: total stock-based compensation-Deduct: total stock-based employeecompensation determined under fairvalue based method for all awards(774,419)Proforma net loss$           (2,544,439)Basic and diluted loss per common shareAs reported$                   (0.08)Proforma$                   (0.11)   For the year ended December 31, 2006, the Company recognized expense for stock-based compensation under SFAS No. 123 of $827,718.  Basic and Diluted Loss Per Share Basic and diluted loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period.  Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares and common equivalents outstanding during the period.  At December 31, 2006 and 2005, there were warrants outstanding to purchase 3,346,335 shares of common stock. These warrants were not included in the computation of diluted loss per share as their effect would have been anti-dilutive, thereby decreasing loss per common share.  Reclassification  Certain 2005 balances have been reclassified to conform to the 2006 financial statement presentation.  These reclassifications had no effect on net loss.


F-8


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 2  PROPERTY AND EQUIPMENT  Depreciation is computed using the straight-line method and is recognized over the estimated useful lives of the property and equipment, which range from three to ten years.  Depreciation expense was $164,283 and $157,945 for the years ended December 31, 2006 and 2005, respectively.  Property and equipment consists of the following: December 31,20062005Machinery and equipment$1,250,406$1,250,406Office equipment141,659139,397Furniture and fixtures42,71242,712Software11,52911,529Total Property and Equipment1,446,3061,444,044Less: Accumulated depreciation(369,923)(205,640)Net Property and Equipment$1,076,383$1,238,404  NOTE 2  GOODWILL AND INTANGIBLE ASSETS  Intangible Assets  The components of intangible assets at December 31, 2006 and 2005 were as follows:  Gross CarryingAccumulatedNet CarryingDecember 31, 2006AmountAmortizationAmountPatents$        322,773$        (65,334)$        257,439Proprietary technology1,645,577(352,300)1,293,277Total Amortizing Intangible Assets$     1,968,350$      (417,634)$     1,550,716Gross CarryingAccumulatedNet CarryingDecember 31, 2005AmountAmortizationAmountPatents$        322,773$        (40,476)$        282,297Proprietary technology1,645,577(224,191)1,421,386Total Amortizing Intangible Assets$     1,968,350$      (264,667)$     1,703,683  Patent amortization was $24,858 and $23,856 for the year ended December 31, 2006 and for year ended December 31, 2005, and amortization related to proprietary technology was $128,109 and $128,109 for the same periods respectively.  Patent and proprietary technology amortization is charged to operations.  Estimated aggregate amortization expense for each of the next five years is $151,991 each year.  Goodwill  Intangible assets not subject to amortization as of December 31, 2006 and 2005 consisted of goodwill with a net carrying value of $5,356,414.  During 2004, the Company engaged Houlihan Valuation Advisors, an independent valuation firm, to assess the value of the Companys goodwill and patents at the date of emergence from bankruptcy and the fair value of the proprietary technology at its purchase date.  The appraisal was completed during 2005.


F-9


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 3  NOTES PAYABLE  RELATED PARTIES  The Company had unsecured notes payable to shareholders with interest stated at 12% and repayment terms that required payment of the principal and interest by December 31, 2004.  Under amended terms, payment of the entire principal and interest was due to the shareholders by the extended due date of March 31, 2005.  Principal balance of the note was $16,000 upon emergence from bankruptcy; The Company borrowed an additional $445,300 and repaid $50,342 on the notes leaving an aggregate remaining balance of $ 410,958 as of December 31, 2004.  During the year ended December 31, 2005, the company repaid the balance of $410,958 plus interest of $7,231.  As of December 31, 2006 and 2005, there were no outstanding balances on any notes to related parties.  NOTE 4 INCOME TAXES  There was no provision for, or benefit from, income tax during the period.  The components of the net deferred tax asset as of December 31, 2006 and for the year ended December 31, 2005, including temporary differences and operating loss carry forwards that arose prior to reorganization from bankruptcy, are as follows:  December 31,20062005Operating loss carry forwards$   10,726,118$     9,981,842Goodwill1,997,9421,997,942Property and equipment401,491461,925Patents and proprietary technology635,474692,157Total Deferred Tax Assets$   13,761,025$   13,133,866Valuation allowance(13,761,025)(13,133,866)Net Deferred Tax Asset$                    -$                    -  As a result of the confirmation of the bankruptcy plan, $7,813,915 in debt was discharged. For tax reporting purposes, net operating loss carry forwards were reduced to $24,750,611 at December 31, 2004. Net operating loss carryforwards at December 31, 2006 and 2005 were $28,756,317 and $26,760,970, respectively.  Although net operating losses begin to expire in the year 2012, those carry forwards will be limited or unavailable, under the tax laws, due to a change of greater than 50% in ownership of the Company upon emergence from bankruptcy.  The following is a reconciliation of the amount of benefit that would result from applying the federal statutory rate to pretax loss with the provision for income taxes for the year ended December 31, 2006 and for the year ended December 31, 2005:  For the Periods Ended December 31,20062005Tax at statutory rate (34%)$      (854,364)$      (601,807)Non-deductible expenses310,129(1,199)Change in valuation allowance627,159661,417State tax benefit, net of federal tax effect(82,924)(54,411)Provision for Income Taxes$                   -$                   -


F-10


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 5 COMMON STOCK  Private Placement of Common Stock and Warrants  From January 25, 2005 through March 31, 2005, the Company issued 2,836,335 shares of common stock and warrants to purchase 2,836,335 shares of common stock at $3.00 per share from October 1, 2005 through September 30, 2007 in a private placement offering. The Company realized proceeds of $3,907,207, net of $347,294 of cash offering costs. As part of this private placement, the Company also issued the placement agent 140,000 shares of common stock and 140,000 warrants exercisable at $3.00 per share for the agents services in connection with the offering. The fair value of the warrants issued was $4,047,816 as estimated by the Company using the Black-Scholes pricing model with the following assumptions: risk free interest rate of 4.58%; volatility of 200%; estimated life of two years; and dividend yield of 0%. The net proceeds were allocated to the shares of common stock and the warrants based upon their relative fair values and resulted in allocating $1,980,271 to the shares of common stock and $1,926,937 to the warrants. An investor may not exercise their warrants if the exercise of the warrant would cause the investor to own more than 4.99% of the then issued and outstanding common stock of the Company. If the closing bid price of the Companys common stock is greater than $4.00 per share for five consecutive trading days after October 1, 2005, the Company may call the warrants, in whole or in part, for no consideration, which would require the investor to either exercise the warrants within fifteen trading days or forfeit the warrants. SB-2 Registration  On August 4, 2005, the Company registered 8,932,670 shares of common stock, including 3,656,335 warrants to purchase common stock at some future date.  The Company registered 5,952,670 shares related to the private placement in March 2005, 30,000 warrants to purchase common stock held by Investors Stock Daily, Inc., 650,00 warrants to purchase common stock held by Summit Resource  Group, and an additional 2,300,000 shares held by certain investors.  The Company filed a post effective amendment extending this registration on October 10, 2006. Compensation to Board Members  On August 25, 2005, the Company issued 18,350 shares of common stock to a director for services.  The shares were valued at $31,745 or $1.73 per share, the quoted market value of the stock on the day of this transaction. Exercise of Warrants On June 27, 2006, the Company issued 300,000 shares of common stock upon the exercise of warrants at $0.70 per share by Summit Resource Group. The Company received $210,000 from the exercise of the warrants.  The following table summarizes the activity of warrants outstanding for the years ended December 31, 2006 and 2005: WarrantsSharesOutstanding at January 1, 2005650,000Granted2,996,335Outstanding at December 31, 20053,646,335Exercised(300,000)Outstanding at December 31, 20063,346,335  NOTE 6  STOCK OPTION PLANS  On August 25, 2005, the Board of Directors of the Company approved and adopted the 2005 Stock Incentive Plan (the Plan).  The Plan became effective upon its adoption by the Board and will continue in effect for ten years, unless terminated.  This plan was approved by the stockholders of the Company on November 22, 2005. Under the Plan, the exercise price for all options issued will not be less than the


F-11


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    average quoted closing market price of the Companys trading common stock for the thirty day period immediately preceding the grant date plus a premium of ten percent.  The maximum aggregate number of shares that may be awarded under the plan is 2,500,000 shares. The Company utilized the Black-Scholes option-pricing model for calculating the fair value for pro forma disclosure purposes under SFAS No. 123 and has continued to use this model, which is an acceptable valuation approach under SFAS No. 123R.  This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock.  Projected data related to the expected volatility and expected life of stock options is based upon historical and other information, and notably, the Companys common stock has limited trading history.  Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore, the existing valuation models do not provide a precise measure of the fair value of the Companys employee stock options. On August 25, 2005 the Company granted options to employees to purchase an aggregate 1,159,000 shares of common stock at an exercise price of $1.91 per share. These options vest over three years on either the employees employment anniversary date or on the anniversary date specified in the grant, and expire 10 years from date of grant.  The Company used the following assumptions in estimating the fair value of the options granted on August 25, 2005: market value at time of issuance - $1.73; expected holding period  8 years; risk-free interest rate  4.18%; dividend yield  0%; and expected volatility  200%.  Using these assumptions, the options grantedhave a weighted-average fair value of $1.72 per share. On February 27, 2006, the Company granted employee options to purchase an aggregate 75,000 shares of common stock at an exercise price of $2.07 per share. The options vest over three years on the employees employment anniversary and expire 10 years from date of grant.  The Company used the following assumptions in estimating the fair value of the options granted on February 27, 2006: market value at time of issuance - $2.00; expected holding period  7 years; risk-free interest rate  4.26%; dividend yield  0%; and expected volatility  200%. Using these assumptions, the options grantedhave a weighted-average fair value of $1.99 per share. During September 2006, the Company changed accounting estimates related to potential forfeitures of options under the Plan from 0% to 7% in order to more closely reflect actual forfeitures to date.  The average forfeiture rate used in this estimation is an overall average of seven percent During the year ended December 31, 2006, the Company recognized $827,718 of stock-based compensation expense. The transitional effects of adoption of SFAS 123R was an increase in net loss and basic and diluted loss per share for the year ended December 31, 2006 of $827,718 and $0.04 per share, respectively.  There were no effects on cash flows from operating activities or financing activities from the adoption.  There were 1,150,000 employee stock options outstanding at December 31, 2006.  A summary of all employee options outstanding and exercisable under the plan as of December 31, 2006, and changes during the year then ended is set forth below:


F-12


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Weighted-AverageWeighted-RemainingAggregateAverageContractualIntrinsicOptionsSharesExercise PriceLife (Years)ValueOutstanding at beginning of period1,159,000$               1.91Granted75,0002.07Expired(28,000)1.91Forfeited(56,000)1.91Outstanding at end of period1,150,000$               1.928.69$                 -Exercisable at end of period551,000$               1.918.65$                 -   A summary of all employee options outstanding and exercisable under the plan as of December 31, 2005, and changes during the year then ended is set forth below: Weighted-AverageWeighted-RemainingAggregateAverageContractualIntrinsicOptionsSharesExercise PriceLife (Years)ValueOutstanding at beginning of period-$                    -Granted1,159,0001.91Outstanding at end of period1,159,000$              1.919.65$                  -Exercisable at end of period214,000$              1.919.65$                  -  As of December 31, 2006, there was approximately $392,535 of unrecognized compensation cost related to employee stock options that will be recognized over a weighted average period of approximately 1.2 years.  NOTE 7  LEASE COMMITMENT  Effective March 31, 2004, the Company agreed to sub-lease offices and a manufacturing facility in which the Companys acquired equipment is located, with monthly lease payments of $5,500 plus common area maintenance fees.  The lease expired in September 2004.  During July 2004, the Company entered into a new five-year lease agreement with average monthly payments including prescribed common area fees of $8,718, with a 2% annual increase in lease payments.  Rent expense over the term of the lease is recognized on a straight-line basis over the term of the lease.  Rent expense of $104,616 and $101,821 was charged to operations for the year ended December 31, 2006, and for the year ended December 31, 2005, respectively.  Total future annual minimum rent payments as of December 31, 2006 are as follows:  Year Ending December 31:2007$                104,9982008106,619200980,894$                292,511


F-13


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 8  CONSULTING AGREEMENTS  On March 3, 2004, the Company entered into a twelve-month consulting agreement with Summit Resource Group (Summit) whereby Summit agreed to provide consulting services for the Company related to investor relations, including dealing with direct investor relations, broker/dealer relations and with the investing public.  A 45-day written notice from either party is required to terminate the agreement.  In consideration for the consulting services, the Company issued Summit 100,000 common shares and warrants to purchase an additional 650,000 common shares.  The warrants are exercisable for five years from the date awarded at the following exercise prices: warrants to purchase 300,000 shares are exercisable at $0.70 per share and warrants to purchase 350,000 shares are exercisable at $0.80 per share.  In August 2005, the Company fulfilled its obligation for registration rights with respect to the 650,000 common shares and underlying warrants by including the respective common shares and warrants in the Companys SB-2 registration (See Note 8).  The Company valued the issuance of 100,000 common shares to Summit at $114,680, or $1.15 per share, based on the quoted market value of the stock on the date of the agreement.  The Company valued the warrants at $731,328, estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rate of 3.06%; expected dividend yield of 0.0%; expected life of 5 years and estimated volatility of 200%.  Consulting expense was charged to operations recognized during the period from March 2004 through September 2004, the period over which the warrants vested.  On July 20, 2005, the Company issued warrants to purchase 30,000 common shares at $2.00 per share to an investor relations firm for services. The warrants issued were valued at $41,300, or $1.38 per warrant. The Company estimated the fair value of the warrants using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 4.40%; volatility of 200%; estimated life of two years; and dividend yield of 0%. These warrants were issued with a callable feature in which the Company has the right to call the warrants at $2.00 per share if at any time after six months from the date of issue; the closing price of the common stock is greater than $5.00 per share for five consecutive trading days.  In July 2005, the Company fulfilled its obligation for registration rights with respect to the 30,000 common shares and underlying warrants by including the respective common shares and warrants in the Companys SB-2 registration.  NOTE 9  RELATED PARTY MANUFACTURING CONTRACT  In September 2005 the Company entered into a manufacturing agreement with R&D Products, LLC, a Utah limited liability company, doing business in Midvale, Utah.  For the purpose of this contract, management considers R&D Products to be a Related Party because a controlling member of R&D Products, LLC is also a non-controlling interest shareholder of Flexpoint Sensor Systems, Inc.  R&D Products has developed a mattress with multiple air chambers that uses the Companys Bend Sensors® and the Company has agreed to manufacture the Bend Sensors® for the mattresses.  The initial order is for 30,000 Bend Sensors® to be used to begin manufacture of 1,000 mattresses.  The realization of the manufacturing and sales of the Bend Sensors® is dependent upon R&D Products selling either their bed technology directly or licensing their technology to a third party.  There are no guarantees that R&D will make such sales in such quantities to meet the demands of this contract.  NOTE 10  LEGAL PROCEEDINGS On January 20, 2006, Sensitron, Inc., the Companys wholly owned subsidiary, filed a complaint in the United States District Court for the District of Utah, Central Division, against Michael W. Wallace, d/b/a Pure Imagination, seeking patent rights for a patent and patent application that Mr. Wallace filed with the United States Trademark and Patent Office.  Mr. Wallace assisted Sensitron with the development of


F-14


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  certain software to be used in combination with our Bend Sensor® technology related to the SEAT MATTM system.  Mr. Wallace failed to deliver the source code to Sensitron and failed to list our employees and previous employees as co-inventors on the patent he obtained and for his pending application for a patent.  Sensitron is seeking a copy of the source code and ownership of the patent or correction of the patent and patent application to add the appropriate co-inventors.  Sensitron is also seeking unspecified damages along with its costs and attorneys fees.  As of December 31, 2006, this action was still pending in the United States District Court.  On July 3, 2001, Flexpoint Sensor Systems, Inc. filed a voluntary petition for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code.  The petition was filed in the United States Bankruptcy Court for the District of Utah, File No. 01-29577JAB.  On February 24, 2004, the bankruptcy court confirmed the plan of reorganization. In the bankruptcy proceeding, the Company objected to the $1,700,000 claim made by Delco Electronics, Inc (Delphi) and asserted that Delphi is precluded by the terms of the agreement from any financial recovery due to its breach of the sponsorship agreement.  Other potential claims are breach of contract, breach of fiduciary duties owed to Flexpoint, Inc. pursuant to the contract, and intentional and negligent interference with Flexpoint, Inc.s contractual and business relationship with General Motors.  The Company is currently attempting to negotiate a settlement to this controversy.


F-15


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  We have not had a change in or disagreement with our independent accountant during the last two fiscal years.  ITEM 8A.  CONTROLS AND PROCEDURES  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC.  This information is accumulated to allow timely decisions regarding required disclosure.  Our Chief Executive Officer and the Chairman of the Board, who acts in the capacity of our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, they concluded that our disclosure controls and procedures were effective.  Also, these executive officers determined that there were no changes made in our internal controls over financial reporting during the fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.  ITEM 8B.  OTHER INFORMATION  None.  PART III  ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT  DIRECTORS AND EXECUTIVE OFFICERS  Our directors and executive officers are listed below, with their respective ages, positions and biographical information.  Our bylaws provide that the directors shall be divided into three classes.  A class of directors shall be elected for a one-year term, a class of directors for a two-year term and a class of directors for a three-year term.  In November 2005 our stockholders elected our current board of directors.  At each succeeding annual meeting of stockholders, successors to the class of directors whose term expires at that meeting shall be elected for a three-year term.  Our executive officers are chosen by our board of directors and serve at its discretion.  There are no family relationships between or among any of our directors and executive officers.  NameAgePosition HeldDirector Term of OfficeClark M. Mower60President, CEO and DirectorUntil next annual meetingJohn A. Sindt62Chairman of the Board and Principal Finance and Accounting OfficerTwo year term until Nov. 2007Ruland J. Gill, Jr.61DirectorThree year term until Nov. 2008B. Fred Atkinson, Jr.58Secretary/Treasurer and Comptroller  Clark M. Mower   Mr. Mower was appointed our President and CEO in January 2005.  He was appointed as Director, President and CEO of Sensitron in February 2005.  In November 2005 he was elected to serve a one year term as director.  He formerly served as Senior Vice President - Mergers and Acquisitions - Merchant Energy Group for El Paso Energy Corporation (NYSE: EP).  From August 2002 through 2004 he was the managing member of Polaris Energy, LLC, a non-affiliated consulting company to energy related mergers and acquisition.  From August  34     2002 to July 2004 he was a management committee member for Saguaro Power Company, a non-affiliated company operating a 100 megawatts power plant in Henderson, Nevada.   Prior to that he served as President and Chief Executive Officer of Bonneville Pacific Corporation (a public company) for eight years until El Paso Corporation acquired Bonneville Pacific Corporation in October 1999.  He is a director on the board of GeNOsys, Inc., a public reporting company.  John A. Sindt  Mr. Sindt has served as a director of the company since 1999 and served as President and Chief Executive and Financial Officer from 2001 to 2004.  He served as Secretary/Treasurer from January 2005 through July 2005.  In November 2005 he was elected to serve a two year term as director.   Mr. Sindt is also the Chairman of the Board of Sensitron, our subsidiary.  He has been employed since 1965 as a Salt Lake County, Utah Constable and he currently heads that department.  He has also served as President, Corporate Secretary and Director for the National Constables Association.  He has owned and operated a successful chain of retail jewelry stores in Utah.  Ruland J. Gill, Jr.    Mr. Gill is Vice President of Government Affairs and Senior Attorney for Questar Corporation (NYSE: STR), where he has worked since 1973.  He was appointed as a Director of Sensitron in February 2005.  In November 2005 he was elected to serve a three year term as director.  In addition to his professional career, Mr. Gill has held several important positions including President of the Utah Petroleum Association, and Trustee of the Rocky Mountain Mineral Law Foundation.  B. Fred Atkinson, Jr.  Mr. Atkinson joined the company in June of 2005 as Comptroller and was appointed Secretary/Treasurer of the company on July 12, 2005.  He has extensive experience in financial, accounting and operational management for general corporate, retail and ISO 9000 and FDA manufacturing entities.  From 2004 through 2005, he was employed as Corporate Controller for Wasatch Product Development.  From 2001 to 2003 he was Controller and Finance Manager for RP Sherrer West, Inc.  And from 1998 to 2001 he was Controller and Chief Financial Officer for Sorensen Medical, Inc.  He received a Masters of Business Administration in Finance from Concordia University.  AUDIT COMMITTEE  Our audit committee consists of Messrs. Atkinson and Gill, with Mr. Gill serving as Chairman.  Our audit committee  has a charter and management believes Mr. Atkinson qualifies as an audit committee financial expert because of his extensive experience in finance.   Based upon the definition of independent director under NASD Rule 4200(a)(15), Mr. Gill is independent of management.  However, Mr. Atkinson is not independent of management.  CODE OF ETHICS  We adopted a Business Ethics and Code of Conduct in November 2000.  Upon written request we will provide a copy of the Business Ethics and Code of Conduct to any person without charge.  Address your request to:  Shareholder Communications Flexpoint Sensor Systems, Inc. 106 West Business Park Drive Draper, Utah 84020  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT  Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons who own more than five percent of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock.  Officers, directors and ten-percent or more beneficial owners of our common stock are required by SEC regulations to furnish Flexpoint Sensor with copies of all Section 16(a) reports they file and provide written representation that no Form 5  35     is required.  Based upon a review of these forms furnished to us during the fiscal year ended December 31, 2006, we believe Mr. Gill filed late one Form 4 related to two transactions  ITEM 10.  EXECUTIVE COMPENSATION  COMPENSATION  The following table shows the compensation paid to our principal executive officer and our two most highly compensated executive officers for the fiscal year ended December 31, 2006.  SUMMARY COMPENSATION TABLEName and Principal PositionYearSalaryTotalClark M. Mower
President, CEO and Director2006$  146,214$ 146,214John A. Sindt
Chairman, Principal Finance and Accounting Officer2006117,832117,832B. Fred Atkinson, Jr.
Secretary/Treasurer2006$   82,170$    82,170  We have not entered into employment contracts with our executive officers and their compensation is determined at the discretion of our board of directors.  OUTSTANDING EQUITY AWARDS  The following table shows outstanding equity awards granted to the above named executive officers for the fiscal year ended December 31, 2006.   We have not made any stock awards to our named executive officers.  OUTSTANDING EQUITY AWARDS AT FISCAL YEAR ENDOption AwardsNameNumber of Securities Underlying Unexercised Options ExercisableNumber of Securities Underlying Unexercised Options
UnexercisableEquity Incentive Plan Awards:
Number of Securities Underlying Unexercised
Unearned OptionsOption Exercise PriceOption
Expiration  DateClark M. Mower200,000100,000 (1)0$1.9112/31/2015John A. Sindt120,00060,000 (2)01.9112/31/2015B. Fred Atkinson, Jr.30,00070,000 (3)01.911/6/2015  (1) options for 100,000 shares vest on December 31, 2007. (2) options for 60,000 shares vest December 31, 2007. (3) options for 35,000 shares vest June 1, 2007 and options for 35,000 shares vest June 1, 2008.  RETIREMENT OR CHANGE OF CONTROL ARRANGEMENTS  We do not offer retirement benefit plans to our executive officers, nor have we entered into any contract, agreement, plan or arrangement, whether written or unwritten, that provides for payments to a named executive officer at or in  36     connection with the resignation, retirement or other termination of a named executive officer, or a change in control of the company or a change in the named executive officers responsibilities following a change in control.  DIRECTOR COMPENSATION  We have not paid any compensation to our directors during the fiscal year ended December 31, 2006.  We do not have any standard arrangement for compensation of our directors for any services provided as a director, including services for committee participation or for special assignments.  ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  SECURITIES UNDER EQUITY COMPENSATION PLANS  The following table lists the securities authorized for issuance under any equity compensation plans approved by our shareholders and any equity compensation plans not approved by our shareholders as of December 31, 2006.  This chart also includes individual compensation arrangements described below.  EQUITY COMPENSATION PLAN INFORMATIONPlan categoryNumber of securities to be issued upon exercise of outstanding options, warrants and rights
(a)Weighted-average exercise price ofoutstanding options,
warrants and rights
(b)Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)Equity compensation plans  approved by security holders1,150,000$ 1.921,350,000Equity compensation plans
not approved by security holders380,000$ 0.900Total1,530,000$ 1.671,350,000  2005 Stock Incentive Plan  On August 25, 2005, our Board adopted the Flexpoint Sensor Systems, Inc. 2005 Stock Incentive Plan (the Plan).  The purposes of the Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants, and to promote the success of our business.  The Plan became effective upon its adoption by the Board and shall continue in effect for a term of ten (10) years, unless terminated.  The maximum aggregate number of shares of common stock that may be sold under the Plan is 2,500,000 shares.  The term of each option and its exercise price shall be stated in an option agreement; provided that the term does not exceed ten (10) years from the date of grant.  The plan provides that a grant of a stock option to an employee shall have an exercise price of no less than 110% of the fair market value per share on the date of grant.  As a condition of the grant, vesting or exercise of an option granted under the Plan, the participant shall be required to satisfy any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the grant, vesting or exercise of the option or the issuance of shares.   37     The Plan is administered by our Compensation Committee and the Board may from time to time increase the size of any Compensation Committee and appoint additional members, remove members (with or without cause) and appoint new members in substitution, fill vacancies and/or remove all members of the committee.  The Compensation Committee may be composed of employee/director(s), non-employee/director(s) and/or major stockholder(s) of the company who are not a director.  Non-statutory stock options may be granted to employees, directors and consultants who have the capacity to contribute to the success of the company.  Incentive stock options may be granted only to employees, provided that employees of affiliates shall not be eligible to receive incentive stock options.  Consulting Agreement  On March 3, 2004, Flexpoint Sensor entered into a consulting agreement with Summit Resource Group.   Summit Resource Group agreed to provide consulting services related to investor relations, including dealing with direct investor relations and broker/dealer relations and the investing public.  The term of the agreement was for a twelve month period.  We paid Summit Resource Group 100,000 restricted common shares, valued at $114,680, and granted warrants to purchase 650,000 common shares, valued at $731,328.  Warrants to purchase 150,000 shares at $0.70 vested at the execution of the agreement, warrants to purchase 150,000 shares at $0.70 per share vested on May 1, 2004, and warrants to purchase 350,000 shares at $0.80 per share vested on September 1, 2004.  The warrants expire five years after the vesting date and have demand registrations rights.  We registered the underlying common shares of the warrants in August 2005.  On June 27, 2006 warrants to purchase 300,000 shares were exercised by Summit Resource Group.  Investors Stock Daily, Inc.  On July 21, 2005, we granted warrants to purchase 30,000 shares of common stock to Investors Stock Daily, Inc. in consideration for investor relations services.  The warrants had a fair value of $1.38 per warrant and had an exercise price of $2.00 with a call feature.  The warrants expire July 20, 2007.  The exercise price and number of shares for these warrants are subject to change of control and price-based anti-dilution protection.  The call feature requires that if the closing price of our common stock is greater than $5.00 per share for five consecutive trading days, then we have the right to call the warrants, forcing the investor to exercise the warrant.  We granted registration rights for these warrants and registered the 30,000 shares underlying the warrants in August 2005.  BENEFICIAL OWNERSHIP  The following table lists the beneficial ownership of our outstanding common stock by our management and each person or group known to us to own beneficially more than 5% of our outstanding common stock.  Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Based on these rules, two or more persons may be deemed to be the beneficial owners of the same securities.  Except as indicated by footnote, the persons named in the table below have sole voting power and investment power with respect to the shares of common stock shown as beneficially owned by them.  The percentage of beneficial ownership is based on 23,292,887 shares of common stock outstanding as of February 22, 2007, plus any shares which each of the following persons may acquire within 60 days by the exercise of rights, warrants and/or options.  CERTAIN BENEFICIAL OWNERSName and address of beneficial ownersAmount and nature of beneficial ownerPercent of classFirst Equity Holdings Corp.

2157 S. Lincoln Street
Salt Lake City, Utah 841065,742,858 (1)24.7 (1) Includes 600,000 shares held by an officer of First Equity Holdings Corp.  38      MANAGEMENTName and address of beneficial ownersAmount and nature of beneficial ownerPercent of classClark M. Mower
106 West Business Park Drive
Draper, Utah 84020905,000 (1)3.8John A. Sindt
106 West Business Park Drive
Draper, Utah 840201,551,326 (2)6.6Ruland J. Gill, Jr.
106 West Business Park Drive
Draper, Utah 84020235,017 (3)1.0B. Fred Atkinson, Jr.
106 West Business Park Drive
Draper, Utah 8402030,000 (4)Less than 1%Directors and officers as a group2,721,34311.7 (1) Represents 555,000 shares, warrants to purchase 150,000 shares and vested options to purchase 200,000 shares. (2) Represents 1,233,338 held by Mr. Sindt, 120,000 vested options and he has investment power with respect to 197,988 shares. (3) Represents 18,350 shares, 163,120 shares held in a family trust and warrants to purchase 216,667 shares. (4) Represents vested options to purchase 30,000 shares.  ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE  TRANSACTIONS WITH RELATED PARTIES  The following information summarizes transactions we have either engaged in during the last two years, or propose to engage in, involving our executive officers, directors, more than 5% stockholders, or immediate family members of these persons.  During the period from February 24, 2004 through December 31, 2004, we have relied on loans from First Equity Holdings Corp., a more than 10% shareholder, to fund our operations.  At December 31, 2004 the balance due under the note was $410,958.  During the year ended December 31, 2005 we repaid the balance of $410,958, plus interest of $7,231.  DIRECTOR INDEPENDENCE  We believe Ruland J. Gill, Jr. is an independent director as defined under NASD Rule 4200(a)(15).  ITEM 13.  EXHIBITS No. Description 2.1 Order Confirming Plan, dated February 24, 2004 (Incorporated by reference to exhibit 2.1 for Form 8-K filed March 5, 2004) 2.2 Debtors Plan of Reorganization, dated January 14, 2004 (Incorporated by reference to exhibit 2.2 for Form 8-K filed March 5, 2004) 3.1 Certificate of Incorporation of Flexpoint Sensor, as amended (Incorporated by reference to exhibit 3.1 for Form 10-QSB, filed August 4, 2006)  39     3.2 Bylaws of Flexpoint Sensor, as amended (Incorporated by reference to exhibit 3.4 of Form 10-QSB, filed May 3, 2004) 4.1 Common stock purchase warrant of Investors Stock Daily, Inc., dated July 26, 2005 (Incorporated by reference to exhibit 4.1 to Form 10-KSB filed March 15, 2006) 10.1 Lease Agreement between Flexpoint Sensor and F.G.B.P., L.L.C., dated July 12, 2004 (Incorporated by reference to exhibit 10.2 of Form 10-QSB, filed November 15, 2004, as amended) 10.2 Consulting Agreement between Flexpoint Sensor and Summit Resource Group, dated March 3, 2004 (Incorporated by reference to exhibit 10.3 of Form 10-QSB, filed May 3, 2004) 10.3 Manufacturing Agreement between Flexpoint Sensor and R&D Products, Inc., dated September 28, 2005 (Incorporated by reference to exhibit 10.1 of Form 8-K, filed October 3, 2005) 10.1 Flexpoint Sensor Systems, Inc. 2005 Stock Incentive Plan (Incorporated by reference to Schedule 14A, filed October 27, 2005) 20.2 Audit Committee Charter (Incorporated by reference to Schedule 14A, filed October 27, 2005) 21.1 Subsidiaries of Flexpoint Sensor Systems, Inc. (Incorporated by reference to exhibit 21.1 to Form 10-KSB filed March 15, 2006) 31.1 Chief Executive Officer Certification 31.2 Principal Financial Officer Certification 32.1 Section 1350 Certification  ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES  ACCOUNTANT FEES  The following table presents the aggregate fees billed for each of the last two fiscal years by our principal accountant, Hansen Barnett & Maxwell, Certified Public Accountants, in connection with the audit of our financial statements and other professional services rendered by that firm.  20062005Audit fees$ 51,933$ 100,789Audit-related fees00Tax fees00All other fees00  Audit fees represent the professional services rendered for the audit of our annual financial statements and the review of our financial statements included in quarterly reports, along with services normally provided by the accountant in connection with statutory and regulatory filings or engagements.  Audit-related fees represent professional services rendered for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of our financial statements that are not reported under audit fees.  Tax fees represent professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.  All other fees represent fees billed for products and services provided by the principal accountant, other than the services reported for the other categories.  PRE-APPROVAL POLICIES  Our audit committee makes recommendations to our board of directors regarding the engagement of an auditor.  Before the auditor renders audit and non-audit services our board of directors approves the engagement.  Our audit committee does not rely on pre-approval policies and procedures.    40     SIGNATURES  In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  FLEXPOINT SENSOR SYSTEMS, INC.    Date: March 12, 2007 By: /s/ Clark M. Mower Clark M. Mower, President  In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.    Date: March 12, 2007 /s/ Clark M. Mower Clark M. Mower President, Chief Executive Officer and Director   Date: March 12, 2007  /s/ John A. Sindt John A. Sindt Chairman of the Board, and Principal Finance and Accounting Officer   Date: March 12, 2007 /s/  B. Fred Atkinson, Jr. B. Fred Atkinson, Jr. Secretary/Treasurer and Comptroller      41