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, manufacturing and selling sensor technology and products featuring our 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 and improved 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 as it is required for manufacturing automotive and related parts. This qualification will increase the marketability of our products to automotive Tier 1 and parts suppliers.

We are finally maturing from a research and development only company into a manufacturing and production company. During 2007 and through 2008 we further developed and enhanced the design of products for several Tier 1 automotive customers. We have completed advanced testing and have signed a Joint Development Agreement with Auto Electronic Corporation "AEC" of Korea, a provider of automobile related components for the past 26 years to various manufactures. AEC has a strong relationship with Hyundai - Kia Motors, as well as other manufacturers and Tier 1 suppliers. As part of the agreement AEC intends to introduce and promote new and existing applications using our Bend Sensor® technology to automobile manufactures and parts suppliers including Hyundai - Kia, the world's sixth largest automobile manufacturer. Other potential automotive applications using our Bend Sensor® technology have been developed and negotiations are in process with other Tier 1 suppliers.

On September 11, 2008 the Company entered into a long-term joint manufacturing agreement with R&D Products, LLC and its Licensee under a licensing agreement for R&D's bed technology and related products. The agreement provides the Licensee with the exclusive world-wide rights to R&D's patented bed technology for medical applications. The manufacturing agreement allows for the Company to manufacture sensors for the bed technology and related products through 2018 with an option to renew each successive year thereafter. Ramp up and production schedules with specific quantities dead lines and resource requirements are still being outlined. We anticipate that some production will be achieved in 2009, but we don't anticipate significant revenue from this agreement until 2011 and beyond when we should be in full production.

We are also continuing to develop new products that we may sell or license to an industrial control company.

Finalizing additional long-term, revenue generating, production contracts with other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our ability to attract significant long-term production contracts. We must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor®and Bend Sensor® related technologies and products to the market. Management believes that even though we are making positive strides forward with our business plan we will still need to raise additional operating capital in 2009. Accordingly, we cannot guarantee that we will realize significant revenues or that we will become profitable during 2009 or 2010.

Because the Company has concentrated most of its marketing efforts on the automotive industry the downturn in this industry and the economy as whole might further delay our efforts in securing a long-term production contract. The economic down turn might also be to our advantage. Our Bend Sensor® is lighter in weight, has fewer moving parts than conventional sensing devices, is more versatile and due to its unique design is more cost effective. Product and design changes in the automotive industry are slow, averaging two to three years before actually being incorporated into a commercially viable automotive platform. Because we are not currently under production in an auto application, we believe we are poised to provide the next generation of sensing devises to the industry. With the cost of fuel the auto industry will be looking to develop more fuel-efficient and alternative-fuel type (green) vehicles that will need to be lighter in weight, less complicated in design, and more cost effective to run and build. Due to the advanced technology of the Bend Sensor® and its versatility of applications we believe we can be a part of the changes needed in the automotive industry

LIQUIDITY AND CAPITAL RESOURCES

Our revenue is primarily from design contract, testing and limited production services for prototypes and samples, 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 placements we completed in March 2005 and June and September 2007 to satisfy our cash requirements. In the 2005 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. In the 2007 private placements we issued an aggregate of 1,500,000 shares of common stock at a price of $1.00 per share. Net proceeds of $1,500,000 were realized from the private placements.
In November 2008 we secured $300,000 of short-term financing from related parties. The notes are due and payable on May 31, 2009 with an annual interest rate of 10% they also have a conversion option for restricted common shares at $.25 per share. The same related parties have agreed to fund up to an additional $300,000 if needed under similar terms. To date we have used the funds generated from these private placements and notes to fund continuing operations and business development.

Management believes that our current cash burn rate is approximately $85,000 per month and that the remaining proceeds from the private placement, notes and accounts receivable will fund our operations for at least the next three months.
Our auditors have expressed doubt about our ability to continue as going concern and that we may not realize significant revenue or become profitable within the next twelve to eighteen months. We will require additional financing to fund our long-term cash needs. We may rely on debt financing, additional 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 have also issued shares of our common stock to pay for services rather than use our limited cash. We expect that we will continue to use our common stock to pay for services and agreements. Any issuance of common stock will likely be pursuant to exemptions provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions. We also note that if we issue more shares of our common stock our shareholders may experience dilution in the value per share of their common stock.

We also may receive additional funds in the future from warrants outstanding. As of December 31, 2008 we have outstanding warrants to purchase an aggregate of 350,000 shares that expire September 1, 2009. If exercised we may receive an additional $280,000 for those warrants. 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.

We believe that there will be some revenues from R&D Products, LLC and their Licensee on the medical bed project during pre-production and development for engineering, electrical design and prototypes. However we don't believe that the fees generated during this period will sufficiently cover all of our operating needs during 2009.

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

COMMITMENTS AND CONTINGENCIES

Our principal commitments at December 31, 2008 consist of our operating lease and total current liabilities of $443,268 which includes short-term notes payable of $300,000. The operating lease has average monthly payments of $8,979, including common area maintenance and a 2% annual increase and expires September 30, 2009. The total future minimum payments under this lease as of December 31, 2008 were $80,894. Due to the current economic conditions we are in the process of negotiating with the existing landlord for a lower lease rate and possibly less square footage. Should we be unsuccessful in our negotiations we are also exploring the option of moving to a different location.

Our total current liabilities include accounts payable of $34,072 related to normal operating expenses, including health insurance, utilities, production supplies and travel expense. Accrued liabilities at December 31, 2008, were $159,196 and were related to payroll tax liabilities, accrued legal, audit and tax expenses, investor relations consulting, accrued lease expense and accrued Paid Time Off, a combination vacation-sick leave policy. Of the $159,196 accrued liabilities, $100,000 is due to related parties who have agreed to accept stock in lieu of cash for services rendered.

In January 2006 we initiated a legal action for patent encroachment and at that time 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 $270,000. Management is in negotiations with the defendant of this litigation in an attempt to settle the dispute without incurring additional legal expenses. However, management believes it is critical to resolve this issue to protect our patents and will divert a portion of our financial resources to continue pursuing this matter legally or through a negotiated settlement.

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 long-lived assets 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 long-lived assets. This test requires various judgments and estimates. The fair value of the company is determined using the present value of expected future revenues. That fair value is compared against the value of long-lived assets carried on the financial records. An impairment of long-lived assets is measured as the excess of the carrying amount of long-lived assets over the determined fair value. Our impairment test at September 30, 2008 projected that long-lived assets were carried on the books at a greater value than their fair value, indicating an impairment of $246,764 compared to the $299,798 charged at December 31, 2007. We have therefore written down our long-lived assets by the indicated amount for 2008 and 2007 respectively, and will continue to test for impairment on a regular basis. In the future, should the test indicate carrying values in excess of fair value, additional charges will be required.

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 years ended December 31, 2008 and 2007 we recognized

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. During 2007, based on further analysis of forfeitures, the estimate for potential forfeitures was increased to 15% for grants awarded in August 2005, 10% for grants awarded in February 2006, and 30% for awards made during 2007.

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 audited financial statements for the years ended December 31, 2008 and 2007.
These financial statements are included in this report at Part II, Item 8, below.

                                  SUMMARY OF OPERATING RESULTS
                                                 Dec. 31, 2008                      Dec. 31, 2007
Design, contract and testing     $                    175,858      $                      31,495
revenue
Total operating costs and                          (2,173,225)                        (2,515,837)
expenses
Net other income (expense)                            (3,595)                             25,873
Net loss                         $                 (2,000,962)      $                 (2,458,469)
Basic and diluted loss per        $                     (0.08)      $                      (0.10)
common share

Our revenue for the 2008 and 2007 years was primarily from design & development engineering, prototype products, sample products and testing services. Revenue from research and development engineering and prototype product 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 anticipates that revenue will increase as we fulfill our obligations under the R&D manufacturing agreement and finalize additional production contracts.

Total operating costs and expenses decreased for 2008 when compared to 2007.
Included in 2008 and 2007 operating costs and expenses were charges of $246,764 and $299,798, respectively taken for the impairment of long-lived assets.
Administrative and marketing expenses decreased to $1,275,820 for 2008 compared to $1,566,991 for 2007 primarily due to reductions in 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 2008 and 2007.

Total net other expense in 2008 includes a $10,000 non-cash interest expense associated with the beneficial conversion feature of the notes payable to related parties, and interest earned on cash deposits primarily from private placement offerings. In 2007 the Company recognized total net other income of $25,873 which was primarily the result of interest income from the proceeds of the private placement offering, which were deposited in a savings account and sublease, rental income from Handstands, Inc. during 2007. The decrease in interest income in 2008 was due to the usage of cash from savings to fund operations.

As we continued to mature from a research and development company into an engineering design and production company revenues in 2008 increased as development and engineering work were accelerated. While it is expected the additional investment made in 2009 for product and system development will result in further generation of revenues, there is no guarantee that operating losses will reduce in the short term.

[Table follows]

The chart below presents a summary of our consolidated balance sheets at December 31, 2008 and 2007.

                                  SUMMARY OF BALANCE SHEET INFORMATION
                                          Year ended                Year ended
                                         Dec. 31, 2008             Dec. 31, 2007
Cash and cash equivalents             $          178,157       $          1,058,135
Total current assets                             251,442                  1,092,292
Total assets                                   7,103,754                  8,463,974
Total current liabilities                        443,268                     99,825
Deficit accumulated during the               (13,253,013)               (11,252,051)
development stage
Total stockholders equity             $        6,660,486        $         8,364,149

Cash and cash equivalents decreased in 2008 compared to 2007. The decrease is the net result of cash used to fund operations. Until our revenue increases, our cash and assets will decrease as we fund our operations. We will need to raise additional operating capital during the first half of 2009. This will be done by issuing stock, securing additional loans from related parties, or through the licensing of our technology. We anticipate needing to raise an additional $1.0 to $1.5 million in funding.

Our non-current assets decreased at December 31, 2008 compared to 2007 due to the charges taken for impairment of our long-lived assets of $246,764 and $299,798 respectively, and the corresponding adjustments to depreciation and amortization. These assets include, after adjustments, property and equipment valued at $560,161, patents and proprietary technology of $929,237, goodwill of $5,356,414, and deposits of $6,500 for the leased facility.

Total current liabilities increased at December 31, 2008, as a result of $300,000 in short-tem notes payable to related parties and accrued liabilities of $159,196 , which was partially offset by the recognition of the $50,000 of deferred revenue deposits at the end of 2007 for services performed during 2008.