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)

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]

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TABLE OF CONTENTS

PART I

Item 1.  Description of Business

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Item 2.  Description of Property

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Item 3.  Legal Proceedings

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Item 4.  Submission of Matters to a Vote of Security Holders

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PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

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Item 6.  Management’s Discussion and Analysis or Plan of Operation

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Item 7.  Financial Statements

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

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Item 8A.  Controls and Procedures

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Item 8B.  Other Information

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PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons, Compliance with

              Section 16(a) of the Exchange Act

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Item 10.  Executive Compensation

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Item 11.  Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

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Item 12.  Certain Relationships and Related Transactions, and Director Independence

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Item 13.  Exhibits

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Item 14.  Principal Accountant Fees and Services

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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.

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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:

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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

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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.

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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:

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a vibration sensor,

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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

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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

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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:

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Reliance for sales of products on other parties, and, therefore, reliance on the other parties' marketing ability, marketing plans and credit-worthiness;

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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;

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We may have only limited protection from changes in manufacturing costs and raw materials costs; and

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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.

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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.

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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 MAT™ 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.

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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.

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:

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Registered and traded on a national securities exchange meeting specified criteria set by the SEC;

$

Issued by a registered investment company; or

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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

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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.

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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

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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.

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.

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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.

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:

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$

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.

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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.

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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

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HANSEN, BARNETT & MAXWELL, P.C.

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

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