UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-QSB  [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934  For quarterly period ended March 31, 2007  [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   Commission file number: No. 0-24368  FLEXPOINT SENSOR SYSTEMS, INC. (Exact name of small business issuer in its charter)  Delaware87-0620425(State of incorporation)(I.R.S.  Employer Identification No.)  106 West Business Park Drive, Draper, Utah  84020 (Address of principal executive offices)  801-568-5111 (Issuers telephone number)  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  [  ]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  [   ]  No [X]  As of April 26, 2007 Flexpoint Sensor Systems, Inc. had a total of 23,292,887 shares of common stock issued and outstanding.  Transitional small business disclosure format:  Yes [  ]  No [X]  1       TABLE OF CONTENTS  PART I: FINANCIAL INFORMATION  Item 1.  Financial Statements 3  Item 2.



 Managements Discussion and Analysis or Plan of Operation 12  Item 3.

 

Controls and Procedures 18  PART II: OTHER INFORMATION  Item 6.  Exhibits 18  Signatures 20  2          PART I - FINANCIAL INFORMATION  ITEM 1.  FINANCIAL STATEMENTS  The financial information set forth below with respect to our condensed consolidated financial position as of March 31, 2007 and December 31, 2006, the condensed consolidated statements of operations for the three months ended March 31, 2007 and 2006 and for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through March 31, 2007, the condensed consolidated statement of stockholders equity for the three months ended March 31, 2007, and the condensed consolidated statements of cash flows for the three months ended March 31, 2007 and 2006 and for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through March 31, 2007 is unaudited.  This financial information, in the opinion of management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data.  The results of operations for the three month period ended March 31, 2007, are not necessarily indicative of results to be expected for any subsequent period.      FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company)  Index to Financial Statements   Page Condensed Consolidated Balance Sheets (Unaudited)  March 31, 2007 and December 31, 2006 4  Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2007 and 2006 and for the Cumulative Period from February 24, 2004 (Date of Emergence from Bankruptcy) through March 31, 2007 5  Condensed Consolidated Statement of Stockholders Equity (Unaudited) for the Three Months Ended March 31, 2007 6  Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2007 and 2006 and for the Cumulative period from February 24, 2004 (Date of Emergence from Bankruptcy) through March 31, 2007 7  Notes to Condensed Consolidated Financial Statements (Unaudited) 8     .  3       FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)  March 31,December 31,20072006ASSETSCurrent AssetsCash and cash equivalents$    477,445$    768,220Accounts receivable3,7871,263Deposits and prepaid expenses25,66332,808Total Current Assets506,895802,291Long-Term Deposits6,5006,500Property and Equipment,net of accumulated depreciationof $411,021 and $369,9231,035,2861,076,383Patents and Proprietary Technology,net of accumulatedamortization of $455,876 and $417,6341,512,4741,550,716Goodwill5,356,4145,356,414Total Assets$  8,417,569$ 8,792,304LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable$       22,968$      23,348Accrued liabilities85,37124,987Total Current Liabilities108,33948,335Stockholders' EquityPreferred stock  $0.001 par value; 1,000,000 shares authorized;no shares issued or outstanding--Common stock  $0.001 par value; 100,000,000 shares authorized;23,292,887 shares and 23,292,887 shares issued and outstanding23,29223,292Additional paid-in capital14,324,75614,324,756Warrants and options outstanding3,365,6843,189,503Deficit accumulated during the development stage(9,404,502)(8,793,582)Total Stockholders' Equity8,309,2308,743,969Total Liabilities and Stockholders' Equity$  8,417,569$  8,792,304  The accompanying notes are an integral part of these condensed consolidated financial statements   4       FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)  For the CumulativePeriod fromFebruary 24, 2004(Date of Emergence)For the Three Months Endedfrom Bankruptcy)March 31,through20072006March 31, 2007Design, Contract and Testing Revenue$       10,374$            742$        470,183Operating Costs and ExpensesAmortization of patents and proprietary technology(38,242)(38,242)(455,876)Cost of revenue(3,412)(433)(105,663)Administrative and marketing expense(471,402)(423,410)(6,836,807)Research and development expense(112,766)(106,981)(1,083,735)Total Operating Costs and Expenses(625,822)(569,066)(8,482,081)Other Income and ExpensesInterest expense--(1,576,054)Interest income3,55611,256103,434Sublease rent income9729728,748Gain on forgiveness of debt--71,268Net Other Income (Expense)4,52812,228(1,392,604)Net Loss$    (610,920)$     (556,096)$    (9,404,502)Basic and Diluted Loss Per Share$          (0.03)$           (0.02)Basic and Diluted Weighted-AverageCommon Shares Outstanding23,292,88722,992,887   The accompanying notes are an integral part of these condensed consolidated financial statements       5





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2007 (UNAUDITED)  DeficitAccumulatedAdditionalWarrants andDuring theTotalCommon StockPaid-inOptionsDevelopmentStockholders'SharesAmountCapitalOutstandingStageEquityBalance - December 31, 200623,292,887$        23,292$    14,324,756$       3,189,503$     (8,793,582)$       8,743,969Employee compensation fromstock options---176,181-176,181Net loss----(610,920)(610,920)Balance - March 31, 200723,292,887$        23,292$    14,324,756$        3,365,684$     (9,404,502)$       8,309,230   The accompanying notes are an integral part of these condensed consolidated financial statements


6


FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the CumulativePeriod fromFebruary 24, 2004(Date of EmergenceFor the Three Months Endedfrom Bankruptcy)March 31,through20072006March 31, 2007Cash Flows from Operating Activities:Net loss$     (610,920)$    (556,096)$    (9,404,502)Adjustments to reconcile net loss to net cash used inoperating activities:Depreciation41,09740,992411,020Amortization of patents and proprietary technology38,24238,242455,876Issuance of common stock and warrants for services--2,695,053Expenses paid by increase in convertible note payable--60,000Amortization of discount on note payable--1,556,666Stock-based compensation to employees176,18153,2531,003,899Changes in operating assets and liabilities:Accounts receivable(2,524)-(3,787)Accounts payable(380)4,792(185,138)Accrued liabilities60,38411,51482,879Deferred revenue--(343,750)Prepaid expenses7,1459,605(25,663)Deposits--(6,500)Net Cash Used in Operating Activities(290,775)(397,698)(3,703,947)Cash Flows from Investing Activities:Payments for the purchase of equipment-(2,262)(197,574)Payments for patents--(43,626)Payment for acquisition of equipment and proprietarytechnology from Flexpoint Holdings, LLC--(265,000)Net Cash Used in Investing Activities-(2,262)(506,200)Cash Flows from Financing Activities:Net proceeds from issuance of common stock and warrants--4,117,207Principal payments on notes payable - related parties--(460,300)Proceeds from notes payable - related parties--445,300Proceeds from borrowings under convertible note payable--583,334Net Cash Provided By Financing Activities--4,685,541Net Change in Cash and Cash Equivalents(290,775)(399,960)475,394Cash and Cash Equivalents at Beginning of Period768,2201,964,4872,051Cash and Cash Equivalents at End of Period$       477,445$    1,564,527$          477,445Supplemental Cash flow Information:Cash paid for interest$                  -$                  -$            16,888 The accompanying notes are an integral part of these condensed consolidated financial statements  7    FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (UNAUDITED)    NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Condensed Interim Financial Statements The accompanying unaudited condensed consolidated financial statements include the accounts of Flexpoint Sensor Systems, Inc. and its subsidiaries (the Company).  These financial statements are condensed and, therefore, do not include all disclosures normally required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the most recent annual consolidated financial statements of Flexpoint Sensor Systems, Inc. and subsidiaries for the year ended December 31, 2006, included in the Companys Form 10-KSB filed with the Securities and Exchange Commission on March 14, 2007. In particular, The Companys significant accounting principles were presented as Note 1 to the consolidated financial statements in that report.  In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements and consist of only normal recurring adjustments. The results of operations presented in the accompanying condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007.  Nature of Operations The Company is located in Salt Lake City, Utah and is a development stage company engaged principally in designing, engineering, and manufacturing sensor technology and equipment using flexible potentiometer technology. The Company is in the development stage as planned operations have not commenced. Development stage activities primarily include acquiring equipment and technology, organizing activities, obtaining financing and seeking manufacturing contracts. At March 31, 2007, the Company had not entered into any manufacturing agreements except as discussed in Note 4.  Even though the Company is making strides forward with its business plan, it is likely that significant progress may not occur within the next four to six months.  Accordingly, the Company may not realize significant revenues or become profitable within the next twelve months, which would require additional financing to fund its long-term cash needs.  The Company may be required to rely on debt financing, loans from related parties, and private placements of common stock for additional funding.  These sources of financing may only be available on terms not acceptable 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.  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, at March 31, 2007, no impairment loss was identified or recognized through that date.  Research and Development  Research and development costs are recognized as expense during the period incurred until the conceptual formulation, design, and testing of a process is completed and the process has been determined to be commercially viable.   8    FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (UNAUDITED)   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.  Stock-Based Compensation  The Company records stock-based compensation according to the provisions of FASB Statement No. 123 (Revised 2004), Share-Based Payment. As such, the Company recognizes expense for employee compensation from stock options and awards equal to the grant-date fair value over the vesting period.  Basic and Diluted Loss Per Share Basic 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 dilutive potential common shares outstanding during the period.  At March 31, 2007, there were outstanding options and warrants to purchase 4,878,335 shares of common stock.  At March 31, 2006, there were outstanding options and warrants to purchase 4,306,335 shares of common stock.  These options and 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.  NOTE 2  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 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.  On February 8, 2007, the Company granted employee options to purchase an aggregate 382,000 shares of common stock at an exercise price of $1.18 per share. The options vest on the anniversary of the grant date and expire in August 2015.  The Company used the following assumptions in estimating the fair value of the options granted on February 8, 2007: market value at time of issuance - $1.45 per share; expected holding period  6 years; risk-free interest rate  4.86%; dividend yield  0%; and expected volatility  200%. Using these assumptions, the options grantedhave a weighted-average fair value of $1.43 per share.  During the three month period ended March 31, 2007 and 2006, the Company recognized $176,181 and $53,253 of stock-based compensation expense. There were 1,532,000 employee stock options outstanding at March 31, 2007.  A summary of all employee options outstanding and exercisable under the plan as of March 31, 2007, and changes during the three months then ended are set forth below:  9    FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (UNAUDITED)    Weighted-AverageWeighted-RemainingAggregateAverageContractualIntrinsicOptionsSharesExercise PriceLife (Years)ValueOutstanding at beginning of period1,150,000$           1.92Granted382,0001.18Expired--Forfeited--Outstanding at end of period1,532,000$           1.748.44$   72,580Exercisable at end of period636,000$           1.928.43$            -   As of March 31, 2007, there was approximately $709,327 of unrecognized compensation cost related to employee stock options that will be recognized over a weighted average period of approximately 1.0 years.  NOTE 4  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 5  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 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 March 31, 2007, 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  10    FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (UNAUDITED)   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.   11       In this report references to Flexpoint Sensor, we, us, and our refer to Flexpoint Sensor Systems, Inc. and its subsidiary.  SPECIAL NOTE REGARDING 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.  ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS  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 during 2007.  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.   12      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 three 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.  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.  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 March 31, 2007 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.  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 March 31, 2007 consist of our operating lease and total current liabilities of $108,339.  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 March 31, 2007 were $266,357.  Our total current liabilities include accounts payable of $22,968 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 March 31, 2007, were $85,371 and were related to payroll, 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.  13        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.  Impairment is indicated if undiscounted cash flows are less than the carrying value of the assets.  The amount of impairment is measured using a discounted-cash-flows model considering future revenues, operating costs and risk-adjusted discount rate and other factors.  We performed a goodwill impairment test and at March 31, 2007; 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 three month period ended March  31, 2007 (the 2007 three- month period) we recognized $176,181 of stock-based compensation expense for our stock options and there was approximately $709,327 of unrecognized compensation cost related to employee stock options that will be recognized over approximately 1 year.  RESULTS OF OPERATIONS  The following discussions are based on the consolidated operations of Flexpoint Sensor and its subsidiary, Sensitron, and should be read in conjunction with our unaudited financial statements for the three month periods ended March 31, 2007 and 2006.  These financial statements are included in this report at Part I, Item 1, above.  Three month period ended
March 31, 2007     March 31, 2006Design, contract and testing revenue$        10,734$            742Total operating costs and expenses(625,822)(569,066)Net other income (expense)4,52812,228Net loss(610,920)(556,096)Basic and diluted loss per common share$          (0.03)$           (0.02)   14      Our revenue for the 2007 and 2006 interim periods 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.  The increase in revenue for the three month period ended March 31, 2007 (the 2007 first quarter) compared to the three month period ended March 31, 2006 (the 2006 first quarter) was the result of increases in revenue from design engineering work.  Management does not anticipate that revenues will increase until we finalize a major contract.  Total operating costs and expenses increased for the 2007 three month period when compared to the 2006 three month period.  The increase is the result of higher administrative and marketing expense resulting from $122,928 in additional stock-based compensation to employees.  General and administrative expenses for the 2007 first quarter were $471,402, an increase of $47,992 over the $423,410 for the 2006 first quarter.  It is expected that general and administrative expenses will continue to increase due to additional travel and legal expenses related to the pursuit of technology and license agreements.  Research and development expenses remained relatively flat, increasing only $5,785.  Total other income for the 2007 and 2006 periods was primarily the result of interest income from the proceeds of the private placement offering, which were deposited in a savings account.  Due to minimal revenues and increased operating costs and expenses, we recorded a net loss and loss per share for both the 2007 and 2006 periods.  Management expects losses to continue in the short term.  The chart below presents a summary of our consolidated balance sheets at March 31, 2007, and December 31, 2006.  SUMMARY OF BALANCE SHEET INFORMATIONThree month
period ended
March 31, 2007Year ended
December 31, 2006Cash and cash equivalents$      477,445$   768,220Total current assets506,895802,291Total assets8,417,5698,792,304Total current liabilities108,33948,335Deficit accumulated during
the development stage(9,404,502)(8,793,582)Total stockholders equity$    8,309,230$ 8,743,969  Cash and cash equivalents decreased $290,775 at March 31, 2007 compared to December 31, 2006 because we had minimal revenue in the 2007 three month period to provide cash.  The entire decrease in cash resulted from funds used for operating activities.  Until our revenue increases, our cash will continue to decrease.   15      Our non-current assets decreased at March 31, 2007 due to adjustments for depreciation and amortization.  These assets include property and equipment valued at $1,035,286 net of depreciation, patents and proprietary technology of $1,512,474 net of amortization, goodwill of $5,356,414, and long-term deposits of $6,500.  Total current liabilities increased at March 31, 2007, primarily as a result of increases in 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.  For the 2007 three month period we had negative cash flows from operating activities of $290,775.  We will require additional financing to fund our long-term cash needs and we may be required to rely on debt financing, loans from related parties, and private placements of our common stock for that 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:  · 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.  16      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.  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  17      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, 2008, 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.  ITEM 3. 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 and communicated to our executive officers to allow timely decisions regarding required disclosure.  Our Chief Executive Officer and our 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 first quarter of 2007 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.  PART II - OTHER INFORMATION  ITEM 6. EXHIBITS  Part I Exhibits No. Description 31.1 Chief Executive Officer Certification 31.2 Principal Financial Officer Certification 32.1 Section 1350 Certification  18         Part II 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) 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) 10.4 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)   19      SIGNATURES  In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, who are duly authorized.  FLEXPOINT SENSOR SYSTEMS, INC.  Date: May 10, 2006  /s/ Clark M. Mower Clark M. Mower President, Chief Executive Officer and Director  Date: November 8, 2006 /s/ John A. Sindt John A. Sindt Chairman of the Board Principal Financial and Accounting Officer   20