UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 x        QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended March 31, 2011
 
 o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from _____ to _____
 
 Commission File Number: 000-52792
 
 SUSPECT DETECTION SYSTEMS INC.
 (Exact name of small business issuer as specified in its charter)
 
 Delaware

98-0511645(State of incorporation)

(IRS Employer ID Number)
 
 150 West 56th Street, Suite 4005,  New York, NY 10019
 (Address of principal executive offices)
 
 (212) 977-4126
 (Issuer's telephone number)
 
 ________________________________________________________________
 (Former name, former address and former fiscal year, if changed since last report)
 
 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 o
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated filer
o

Accelerated filer
oNon-accelerated filer
o

Smaller reporting company
x(Do not check if a smaller reporting company)
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
  As of May 13, 2010, 76,555,493 shares of common stock, par value $0.0001 per share, were issued and outstanding.
 
 
 
 TABLE OF CONTENTS
 
 PagePART IItem 1. Financial Statements
F-1Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
3Item 3. Quantitative and Qualitative Disclosures About Market Risk
10Item 4(T). Controls and Procedures
10PART IIItem 1. Legal Proceedings
11Item IA. Risk Factors
11Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
11Item 3. Defaults Upon Senior Securities
11Item 4. Removed and Reserved
11Item 5. Other Information
11Item 6. Exhibits
11
 
 
 
 
 PART I
 FINANCIAL INFORMATION
 
 Item 1.    Financial Statements.
 
 SUSPECT DETECTION SYSTEMS INC.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 
 Consolidated Financial Statements-Consolidated Balance Sheets as of March 31, 2011(unaudited), and December 31, 2010
F-2Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (unaudited)
F-3Consolidated Statements of Cash Flows for Three Months Ended March 31, 2011 and 2010
F-4Notes to Consolidated Financial Statements March 31, 2011 and 2010
F-7
 
 F-1
  SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS
 U.S. dollars
  ASSETS

March 31,


December 31,2011


2010Unaudited


AuditedCurrent Assets:Cash and cash equivalents

$
1,037,374


$
803,443Restricted cash


115,804



115,501Accounts receivable


22,422



288,037Inventory


76,217



188,185Prepaid expenses and other receivables


76,063



253,864Total current assets


1,327,880



1,649,030Property and Equipment:Computer and other equipment


58,946



56,556Less - Accumulated depreciation


(29,088
)


(25,687
)Property and equipment, net


29,858



30,869Other Assets:Severance pay fund


35,393



89,684Long term deposit


7,463



7,300Goodwill


1,333,214



1,333,214Total other assets


1,376,070



1,430,198Total Assets

$
2,733,808


$
3,110,097
  The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
  F-2
  SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 U.S. dollars
  LIABILITIES AND STOCKHOLDERS' EQUITY

March 31,


December 31,2011


2010Unaudited


AuditedCurrent Liabilities:Accounts payable - Trade

$
35,793


$
43,174Accrued liabilities


230,944



227,228Advances from customers


42,995



1,656,249Deferred revenues


264,577



112,890Due to related parties


466,414



283,257Total current liabilities


1,040,723



2,322,798Long-term Debt:Convertible note


300,905



-Accrued severance pay


35,393



88,560Total liabilities


336,298



2,411,358Commitments and ContingenciesStockholders' Equity:Common stock, par value $0.0001 per share, 250,000,000 shares authorized; 76,555,493 shares issued and outstanding at March 31, 2011 and December 31, 2010.


7,655



7,655Additional paid-in capital


3,448,726



3,399,961Common stock subscribed






-Accumulated (deficit)


(2,472,628
)


(2,785,098
)Total incorporated stockholders' equity, Net


983,753



622,518Less - Noncontrolling interest


(373,034
)


(76,221
)Total stockholders' equity


1,356,787



698,739Total Liabilities and Stockholders' Equity

$
2,733,808


$
3,110,097
 
 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
  F-3
  SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 U.S. dollars
  Three months ended

March 31,2011


2010RestatedRevenues, net

$
1,608,418


$
620,199Cost of Goods Sold


163,754



38,339Gross Profit


1,444,664



581,860Expenses:Research and development


146,694



32,185Selling, general and administrative


702,493



725,130Total operating expenses


849,187



757,315Income (Loss) from Operations


595,477



(175,455
)Interest income (expense), net


13,806



(3,098
)Net income (loss)


609,283



(178,553
)Net loss (income) Attributable to Noncontrolling Interest


(296,813
)


(85,747
)Net income (loss) attributable to Suspect Detection Systems Inc.

$
312,470


$
(264,300
)Income (Loss) Per Common Share:Income (Loss) per common share - Basic and Diluted

$
(0.00
)

$
(0.00
)Weighted Average Number of Common Shares  Outstanding - Basic and Diluted


74,055,493



65,729,668
  The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
  F-4
  SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 U.S. dollars
  Three months ended

March 31,2011


2010RestatedOperating Activities:Net (loss)

$
609,283


$
(178,553
)Adjustments to reconcile net (loss) to net cash(used in) operating activities:Common stock issued for officers' compensation


21,000



-Stock options issued to directors


22,265



105,203Stock options issued to sales agents


-



81,527Stock warrants issued to a consultant


-



49,888Common stock issued for consulting services


5,500



99,000Interest due to the issuance of convertible note


905



-Depreciation


3,401



1,281Changes in Assets and Liabilities-Inventory


111,968



7,870Prepaid expenses and other receivables


177,801



(68,970
)Accounts payable - Trade


(7,381
)


63,004Accrued liabilities


3,716



15,795Advances from customers, net


(1,347,639
)


(469,400
)Deferred revenues


151,687



87,350Due to related parties


183,157



83,389Accrued severance pay


1,124



647Net Cash (Used in) Operating Activities


(63,213
)


(121,969
)Investing Activities:Increase in restricted cash


(303
)


(100,000
)Long term deposit


(163
)


(177
)Purchases of Property and Equipment


(2,390
)


(2,789
)Net Cash Provided by (Used in) Investing Activities


(2,856
)


(102,966
)Financing Activities:Issuance of convertible note


300,000



-Issuance of common stock for cash


-



95,000Net Cash Provided by Financing Activities


300,000



95,000
 
  F-5
 
 SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 U.S. dollars
  Three months ended

March 31,2011


2010RestatedNet Increase (Decrease) in Cash


233,931



(129,935
)Cash and Cash Equivalents - Beginning of Period


803,443



701,931Cash and Cash Equivalents - End of Period


1,037,374


$
571,996
  Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest

$
-


$
-Income taxes

$
-


$
-
 
 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
  F-6
  Note 1: General
  Basis of Presentation and Organization
 
 Suspect Detection Systems Inc. (“SDS Inc.” or the “Company”) is a Delaware corporation that conducts its operations through its 58 percent owned subsidiary, Suspect Detection Systems Ltd., an Israeli Corporation (“SDS - Israel”).  The Company was incorporated under the laws of the State of Delaware on October 5, 2006, as PCMT Corporation.  On December 24, 2008, the Company’s stockholders resolved to change its name from PCMT Corporation to Suspect Detection Systems Inc.  On January 27, 2009, the Company filed an amendment to its Certificate of Incorporation with the Secretary of State of Delaware to reflect this change.  The Company was in the development stage during the year ended December 31, 2008.  The revised business plan of the Company is the application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.  The accompanying consolidated financial statements were prepared from the accounts of the Company and its subsidiary under the accrual basis of accounting.
 
 The Israeli subsidiary, Suspect Detection Systems Ltd, (“SDS – Israel”) was incorporated under the Companies Law, of the State of Israel in 2004. SDS – Israel specializes in the development and application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.  SDS – Israel completed the development of its “Cognito” line of products in 2007, which are based on proprietary software and use commercially available hardware to identify individuals that pose security threats, whether or not they are carrying a weapon on their person or in their belongings.  Cognito systems are comprised of a front-end test station and a back office, where multiple-station and multiple-site data is stored, managed, and distributed.  The front-end test station serves as the point of contact with the individual being examined.  The back-office is designed to manage and control the test stations at a given site and it stores all test histories and traveler profiles and interfaces with external systems and databases.  A provisional patent application has been issued for the Cognito line of products in the United States.  SDS – Israel is also engaged in the development of behavior based screening technologies for the checkpoint screening market.
  On January 20, 2009, SDS Inc. completed a business combination for the purchase of 51 percent of the issued and outstanding shares of SDS – Israel for consideration of $1,100,000.  The Company incurred an additional $35,000 in acquisition costs related to legal and accounting fees.  The business combination was accounted for by the purchase method and accordingly, the purchase price has been allocated to the estimated fair values of the respective assets acquired and liabilities assumed of SDS – Israel, with the remaining representing goodwill in the amount of $1,333,214.  The results of operations of SDS – Israel have been included in the consolidated financial statements of the Company commencing January 20, 2009.
 
 In July 9, 2009, SDS Inc. entered into an Exchange Agreement (the “Exchange Agreement”) with the Northern Group LP ("NG"), pursuant to which NG exchanged 170,295 ordinary shares of SDS – Israel for 3,199,891 of SDS Inc’s common stock.  The 170,295 shares of SDS- Israel represented 7 percent of the outstanding shares of SDS-Israel and increased SDS Inc.’s ownership interest in SDS- Israel to 58 percent.  The acquisition of the additional equity interest was accounted for by the equity method.  The increased percentage of ownership of SDS – Israel, amounting to 58 percent, has been applied to the operations of this subsidiary from July 9, 2009.
  F-7
  Note 2: Summary of Significant Accounting Policies
  Unaudited Interim Financial Information
 
 The accompanying consolidated balance sheet as of March 31, 2011, consolidated statements of income and cash flows for the three months ended March 31, 2011 and 2010 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of our consolidated financial position as of March 31, 2011, our consolidated results of operations and cash flows for the three months ended March 31, 2011 and 2010.
 
 These consolidated financial statements should be read in conjunction with consolidated financial statements and accompanying notes for the year ended December 31, 2010 included in our Annual Report for our year ended December 31, 2010 on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 22, 2011.
 
 Results for the three months ended March 31, 2011 are not necessarily indicative of results that may be expected for the year ending December 31, 2011.
 
 Unless otherwise noted, all references to “dollars” or “$” are to United States dollars.
  Use of Estimates
 
 The accompanying consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States of America.  The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of consolidated assets, liabilities and equity as of March 31, 2011, and consolidated revenues and expenses for the three months ended March 31, 2011 and 2010.  Actual results could differ from those estimates made by management.
  Principles of Consolidation
 
 The consolidated financial statements include the accounts of the Company and its 58 percent owned Israeli subsidiary, SDS-Israel. Inter-company transactions and balances, have been eliminated in consolidation.
 
 Fair Value Measurement
 
 As defined in ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820-10 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
  Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
 Level 2: Other inputs those are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.
 Level 3: Unobservable inputs are used when little or no market data is available, which requires the Company to develop its own assumptions about how market participants would value the assets or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.
 
 
 F-8
 
 In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible in its assessment of fair value.
 The following table presents the Company’s financial assets and liabilities that are carried at fair value, classified according to the three categories described above:
 
 Fair Value Measurements at March 31, 2011Quoted Prices in Active


Significant Other


SignificantMarkets for Identical Assets


Observable Inputs


Unobservable InputsTotal


(Level 1)


(Level 2)


(Level 3)Cash and cash equivalents

$
1,037,374


$
1,037,374


$
-


$
-Restricted Cash


115,804



115,804



-



-Total assets at fair value

$
1,153,178


$
1,153,178


$
-


$
-
 
 Fair Value Measurements at December 31, 2010Quoted Prices in Active


Significant Other


SignificantMarkets for Identical Assets


Observable Inputs


Unobservable InputsTotal


(Level 1)


(Level 2)


(Level 3)Cash and cash equivalents

$
803,443


$
803,443


$
-


$
-Restricted Cash


115,501



115,501



-



-Total assets at fair value

$
918,944


$
918,944


$
-


$
-
  Impact of recently issued and adopted accounting pronouncements
  In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The amendments in this update require additional disclosure about the credit quality of financing receivables, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. This update is effective for interim periods and fiscal years ending after December 15, 2010. The adoption of these requirements did not have an impact on the Company's consolidated financial position or results of operations.
   F-9
  In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The amendments in this update require new disclosures and clarifications of existing disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements, further disaggregation of fair value measurement disclosures for each class of assets and liabilities and additional details of valuation techniques and inputs utilized. This update is consistent with the Company's current accounting application for fair value measurements and disclosures.
  Note 3: Going Concern
  The Company’s current activities include sales of its products, marketing, capital formation, research and development, and building infrastructure.  The Company has incurred a net income of $312,470 for the three months ended March 31, 2011  and, as of March 31, 2011, and December 31, 2010, the Company had an accumulated deficit of approximately $2,472,628 (2010 - $ 2,785,098).  The Company’s ability to continue as a going concern is uncertain.  The revised business plan of the Company is the application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.
 While management of the Company believes that the Company will be successful in its current and planned operating activities, there can be no assurance that the Company will be successful in the achievement of sales of its products that will generate sufficient revenues to earn a profit and sustain the operations of the Company.  The Company also intends to conduct additional capital formation activities through the issuance of its common stock and loans from related parties.
 
 The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  The Company has not established sufficient sources of revenues to cover its operating costs and expenses.  As such, it has incurred significant operating losses since inception.  Further, as of March 31, 2011, the cash resources of the Company were insufficient to meet its planned business objectives.  These and other factors raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
  Note 4: Restatement
  The financial statements for the period ended March 31, 2010 were restated pursuant to comments received from the Securities and Exchange Commission (the "Commission") to our Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2009 and to include additional changes in presentation of certain accounts in the financial statements.
   F-10
  Effects on previously issued financial statements for the period ended March 31, 2010 as follows:
  Increase in general and administrative expenses

$
181,412Increase in 2009 net loss attributable to Suspect Detection Systems Inc.

$
181,412
  The accompanying financial statements for the year ended December 31, 2009 and for the three months ended at March 31, 2010 have been restated to reflect the corrections in accordance with FASB ASC 250-10-50-7, “Accounting Change and Error Corrections Disclosure”. This restatement is due to corrections of errors in previously reported financial statements. The effect on the Company's previously issued financial statements is summarized as follows:
  Statement of Operations for the three months ended March 31, 2010
  Previously


Net Change





RestatedreportedRevenues, net

$
620,199










$
620,199Cost of Goods Sold


38,339











38,339Gross Profit


581,860











581,860Expenses:Research and development


32,185











32,185Selling, general and administrative


543,718



181,412



A,b,c,d,e,f,g,h



725,130Total operating expenses


575,903











757,315Income (loss) from Operations


5,957











(175,455
)Interest expense


(3,098
)










(3,098
)Net (loss)


2,859











(178,553
)Net (loss) Attributable to Noncontrolling Interest


(85,747
)










(85,747
)Net (loss) attributable to Suspect Detection Systems Inc.

$
(82,888
)









$
(264,300
)
   Previously


Net Change





Restatedreported(Loss) Per Common Share:(Loss) per common share - Basic and Diluted

$
(0.00
)









$
(0.00
)Weighted Average Number of Common SharesOutstanding - Basic and Diluted


72,984,053



(7,254,385
)


i



65,729,668
 
 F-11
 
 (a) Correction of error involving of fair value of 450,000 warrants that were granted to a consultant of the Company in the amount of $49,888. The warrants are execrable at $0.15 per share and no later than two years from the grant date.
 
 (b) Correction of error involving of amortized fair value of 2,000,000 options that were granted to the chairman of the Board and a member of the advisory board in the amount of $105,203.
  (c) Correction of error involving of amortized fair value of 1,550,200 options that were granted to nine sales agents of SDS-Israel in the amount of $81,527. The options are vested within one year of the grant date and they are execrable at $0.15 per share and no later than three years from the grant date.
 
 (d) Correction of error of $7,000 originally included in selling, general and administrative for insurance premium for calendar year 2010, which should have been recorded as prepaid expenses.
 
 (e) Correction of error of $74,250 originally included in selling, general and administrative for consultants fees which should have not been expensed.
 
 (f) Correction of error of $6,250 originally not included selling, general and administrative for directorship fees of the Chairman of the Board, and $8,137 originally not included selling, general and administrative for the compensation of the chief executive officer
 
 (g) Correction of error of $18,058 originally not included in selling, general and administrative for general charges from SDS Israel, which should have been expensed.
 
 (h) Correction of error of $6,402 originally not included in selling, general and administrative
 
 (i) Correction of error involving the calculation of the basic and diluted weighted average number of Common Shares outstanding
   F-12
  Statement of Cash Flows for the three months ended March 31, 2010
 
 Previouslyreported


Net Change


RestatedOperating Activities:Net income (loss)

$
2,859


$
(348,285
)

$
(178,553
)Adjustments to reconcile net (loss) to net cashOptions issued to director


-



105,203



105,203Options issued to agents


-



81,527



81,527Warrants issued to a consultant


-



49,888



49,888Common stock issued for consulting services


99,000



-



99,000Depreciation


1,281



-



1,281Changes in Assets and Liabilities-Inventory


7,870



-



7,870Prepaid expenses and other receivables


12,103



(81,703
)


(68,970
)Accounts payable - Trade


63,004



-



63,004Accrued liabilities


31,148



(15,353
)


15,795Advances from customers, net


(469,400
)


-



(469,400
)Deferred revenues


87,350



-



87,350Due to related party


-



83,389



83,389Accrued severance pay


647



-



647Net Cash (Used in) Operating Activities


(164,137
)


42,168



(121,969
)Investing Activities:Increase in restricted cash


-



(100,000
)


(100,000
)Prepaid expenses, non-current


-



(177
)


(177
)Purchases of Property and Equipment


(2,789
)


-



(2,789
)Net Cash Provided by (Used in) Investing Activities


(2,789
)


(100,177
)


(102,966
)
 
 Statement of Cash Flows for the three months ended March 31, 2010
  Previously


Net Change


RestatedreportedFinancing Activities:Issuance of common stock for cash


95,000



-



95,000Due to related party


41,991



(41,991
)


-Net Cash Provided by Financing Activities


136,991



(41,991
)


95,000Net Increase (Decrease) in Cash


(29,935
)


-



(129,935
)Cash and Cash Equivalents - Beginning of Period


701,931







701,931Cash and Cash Equivalents - End of Period

$
677,996






$
571,996Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest

$
-






$
-Income taxes

$
-






$
-
   F-13
  Note 5 Common Stock
 
 As of March 31, 2011 the Company is committed to issue shares of common stock of the Company, valued at $2,500 to the Chief Executive Officer of the Company for services rendered during the three months ended March 31, 2011.
 
 As of March 31, 2011 the Company is committed to issue shares of common stock of the Company, valued at $4,500 to the Chief Financial Officer of the Company for services rendered by the officer rendered during the three months ended March 31, 2011.
 
 As of March 31, 2011 the Company is committed to issue 90,000 shares of common stock of the Company, to two consultants and shareholders of the Company for services rendered by the consultants during the three months ended March 31, 2011.
  Note 6 Convertible Note
  On March 21, 2011, the Company issued a convertible note (the “Note”) to Tamar Shefet (the “Lender”) whereby the Lender made a loan (the “Loan”) to the Company in an amount equal to $300,000 and accruing interest at a rate of 10% per annum. The Loan and the accrued interest will be repayable in one installment on the date that is eighteen months after the date the Loan is made; provided that such date may be extended at the Company’s request by another six months. The Lender shall have the right, at any time, to convert the principal and interest outstanding under the Note into common share issued by the Company at a conversion rate of $0.07 per a common share. In addition, the Lender is entitled to (i) 500 Class C warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.12 per Common Share and (ii) 500 Class D warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.21 per Common Share.  The Class C Warrants shall be exercisable at any time from the conversion date to and excluding the first anniversary thereof and the Class D Warrants shall be exercisable at any time from the conversion date to and excluding the third anniversary thereof. There will be no restrictions on shares being registered upon exercise of the loan and the warrants will be registered under the Securities Act, or any state securities laws, and may be offered or sold in the United States upon registration or an applicable exemption from the registration requirements of the Securities Act.
 
 FSP APB 14-1 requires issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to initially record the liability and equity components of the convertible debt separately.  The liability component is computed based on the fair value of a similar liability that does not include the conversion option.  The equity component is computed based on the total debt proceeds less the fair value of the liability component.  The equity component (debt discount) and debt issuance costs are amortized as interest expense over the expected term of the debt facility. The liability component of our convertible notes is classified as long-term debt and presented as a long-term debt and the equity component of our convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our stock price is above the conversion prices of $0.07 at the balance sheet date. We concluded that the liability value is equal to similar liability that does not include a conversion option and therefore the equity component is zero.  At March 31, 2011 our stock price closed at $0.06.  Therefore, our convertible note is presented as a long term debt.
   F-14
  Note 7 Stock warrants
 
 A summary of the warrants granted is as follows:
  For the period endedMarch 31, 2011Number

of warrants


Weighted Average Exercise PriceOutstanding and exercisable at the beginning of the period


21,003,339


$
0.268Granted


3,783,336



0.349Exercised


-



-Forfeited


-



-Outstanding and exercisable at the end of the period


17,220,003


$
0.25
  For the year periodMarch 31, 2010Number

of warrants


Weighted Average Exercise PriceOutstanding and exercisable at the beginning of the period


16,699,667


$
0.317Granted


2,050,000



0.277Exercised


-



-Forfeited


-



-Outstanding and exercisable at the end of the period


18,749,667


$
0.313
 
  F-15
 
 Note 8 Stock options
 
 On December 30, 2009, the Company approved 2009 Global Stock Incentive Plan (the “stock option plan”), under which 35,000,000 shares of common stock are authorized for issuance. As of march 31, 2011 2,000,000 stock options were granted under the Stock Option Plan.
  On December 30, 2009  the Company authorized 35,000,000 shares of Common Stock for issuance under the SDSS Inc., 2009 the stock option plan, of which as of December 31, 2010 1,500,000 options were granted to Mr. Yoav krill, the Chairman of the Board of Directors and 500,000 to a member of the Advisory Board. The Options granted were valued at $ 236,970. The options were granted to Mr. Yoav Krill on January 13, 2010, under the consultancy agreement with Mr., Krill and they are exercisable at $0.15 per share. A total of 250,000 options were vested at the date of the grant, while the remaining options will vest at a rate of 104,167 options each calendar quarter over three years. The options terminate forty-eight (48) months from the date of vesting. The options were granted to the member of the Advisory Board on January 14, 2010, under the consultancy agreement and they are exercisable at $0.15 per share. A total of 250,000 options were vested at the date of the grant, while the remaining options will vest at a rate of 20,833 options each calendar quarter over three years. The options terminate forty-eight (48) months from the date of vesting. The number of the options exercisable at December 31, 2010 was 1,000,000 options. As of the date of the grant, the average expected term of the options was 5.32 years, expected volatility was 147.51 percent, expected dividend rate was 0 percent, and the risk free rate of return was 2.77 percent.
  The Company accounts for stock based compensation using the fair value recognition provisions of ASC No. 718 “Compensation – stock compensation”.
  The fair value of the stock options is estimated based upon grant date fair value using the Black-Scholes option-pricing model with the following weighted average assumptions used:
  Options granted under 2009 Global Stock Incentive Planannual dividends of

$
0.00expected volatility of


114.78-158.87
%risk-free interest rate of


2.3-2.77
%expected average options expiration


3-5.32
   F-16
  For the three months endedMarch 31, 2011Number

of options


Weighted Average Exercise PriceOutstanding and exercisable at the beginning of the period


3,550,200


$
0.15Granted


-



-Exercised


-



-Forfeited


-



-Outstanding and exercisable at the end of the period


3,550,200


$
0.15
  For the three months endedMarch 31, 2010Number

of options


Weighted Average Exercise PriceOutstanding and exercisable at the beginning of the period


1,550,200


$
0.15Granted


2,000,000



0.15Exercised


-



-Forfeited


-



-Outstanding and exercisable at the end of the period


3,550,200


$
0.15
  Note 9   Major Customers
 
 The Company’s revenues from a customer accounted for $1,590,110 or 99% of total revenues for the three months ended March 31, 2011 and 3 customers accounted for $859,990 or 97% of total revenues in the nine months ended March 31, 2010.
  Three months ended March 31, 2011Revenues


% of total revenuesCustomer A

$
1,590,110



99
%Other customers


18,308



1Total Revenues

$
1,608,418



100
%
 
 F-17
 
 
 Three months ended March 31, 2010Revenues


% of total revenuesCustomer B

$
610,000



69
%Customer C


165,000



19Customer D


84,990



10Other customers


28,645



3Total Revenues

$
888,635



100
%
  Note 10: Subsequent events
 
 At April 18, 2011, the Company granted 5,300,000 options to four employees of SDS- Ltd. A total of 3,750,000 options were vested at the date of the grant, while the remaining options will vest each calendar quarter over two years. The options terminate at the 31st of December of the fifth year following the calendar Gregorian year in which the option became exercisable.
 
 
 F-18
 
 Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
 As used in this Form 10-Q (this “Report”), references to “Suspect,” the “Company,” “we,” “our” or “us” refer to Suspect Detection Systems, Inc. unless the context otherwise indicates.
 
 Forward-Looking Statements
 
 The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Report. This Report contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
 
 For a description of such risks and uncertainties refer to our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2011. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
 
 Corporate Background
  The Company was incorporated under the General Corporation Law of the State of Delaware on October 5, 2006.  Initially the Company focused on the business of offering computer hardware and software products to religious consumers, with an emphasis on ultra-orthodox Jewish communities in Israel.  On January 23, 2009, the Company amended its Certificate of Incorporation for the purpose of changing its name from “PCMT Corporation” to “Suspect Detection Systems Inc.”  Such amendment was approved at a special meeting of the Company’s shareholders held on the same date.  Also, on December 3, 2009, the Company further amended its Certificate of Incorporation for the purpose of increasing its authorized capital stock from 100,000,000 to 250,000,000 shares.  Such amendment was approved at a special meeting of the Company’s shareholders held on the same date.
 
 On December 18, 2008, the Company and Suspect Detection Systems, Ltd., an Israeli limited company(“SDS”), executed and delivered an investment agreement (the “Investment Agreement”).  Pursuant to the Investment Agreement, at closing on January 20, 2009, SDS issued 1,218,062 ordinary shares, par value NIS 0.01 per share, to the Company, representing 51% of the issued and outstanding share capital of SDS, in consideration for (a) the sum of $1,135,000. The Company closed the investment at January 20, 2009. The Investment Agreement also provides for good faith negotiations of a second agreement (the “Second Agreement”), following the closing of the Investment Agreement, pursuant to which: (i) the Company will grant options to the shareholders of SDS to exchange their SDS ordinary shares into shares of the Company’s common stock; (ii) the Company will grant options to the holders of options to purchase SDS ordinary shares to exchange such options into options to purchase shares of the Company’s common stock; (iii) SDS will grant additional options, to Mr. Shoval and certain SDS employees or consultants, to purchase new SDS ordinary shares; and (iv) the Company will grant rights to Mr. Shoval and said SDS employees or consultants to exchange all or any part of the additional SDS options into options to purchase shares of the Company’s common stock.
 
 
 3
 
 In accordance with the terms of the Investment Agreement, the Company entered into an Exchange Agreement, dated July 9, 2009, with NG-The Northern Group LP ("NG"), pursuant to which NG exchanged all the SDS ordinary shares for 3,199,891 shares of the Company’s common stock, and the issuance of warrants to purchase additional shares of common stock of the Company, on the terms and provisions provided for in the Exchange Agreement. In accordance with the terms of the Exchange Agreement, on July 9, 2009, NG exchanged all the SDS ordinary shares for 3,199,891 shares of the Company’s common stock.  The Company also issued Two Million Two Hundred Fifty Thousand (2,250,000) stock purchase warrants to NG, which grants NG the right to purchase one (1) share of the Company’s common stock, commencing on July 9, 2009 and terminating on July 8, 2011, at an exercise price of $0.15 per Warrant Share.  The securities were offered and exchanged in reliance on an exemption from the registration requirements of United States federal and state securities laws under Regulation S promulgated under the Securities Act of 1933, as amended. Under the Exchange Agreement, NG agreed not to sell any shares of our common stock prior to the one (1) year anniversary of the Lock-Up Agreement.
 
 Business and History of SDS
 
 SDS specializes in the development and application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.  SDS completed the development of its “Cogito” line of products in 2007, which are based on proprietary software and use commercially available hardware to identify individuals that pose security threats, whether or not they are carrying a weapon on their person or in their belongings.  Cogito systems are comprised of a front-end test station and a back office, where multiple-station and multiple-site data is stored, managed and distributed.  The front-end test station serves as the point of contact with the individual being examined.  The back-office is designed to manage and control the test stations at a given site and it stores all test histories and traveler profiles and interfaces with external systems and databases.  A provisional patent application has been issued for the Cogito line of products in the United States.  SDS is also engaged in the development of behavior based screening technologies for the checkpoint screening market.
 
 SDS was incorporated under the Companies Law, 5759-1999, of the State of Israel in 2004.  In order to finance its research and development activities, SDS sought public funding and in 2005, the Transportation Security Administration of the US Department of Homeland Security (the “TSA”) awarded a grant to SDS to support the development of behavior pattern recognition technology.  Additional funding was obtained from the Israeli government and US and Israeli governmental security authorities performed evaluations and testing of SDS’s products in 2005.  In 2006, SDS obtained private financing, issuing shares of preferred stock and warrants to the NG – The Northern Group LP.  Additional US government funding was obtained in 2006 from the TSA.
 
 On January 13, 2010, the Company appointed Yoav Krill as Chairman of the Board of Directors, effective as of said date, to serve until the next annual meeting of the Company’s stockholders and until his successor is duly appointed and qualified. In connection with Mr. Krill’s appointment, the Company entered into an Agreement (the “Consulting Agreement”) to perform such duties as will be required of him as the Chairman of the Board. In consideration of the services to be performed under the Consulting Agreement, Mr. Krill shall receive an annual director’s fee of $25,000 per annum for the first twelve (12) month period and thereafter, the parties shall agree in writing, prior to November 30th of each calendar year as to the amount to be paid as director’s fees, but such amount shall not be less than $25,000 and shall be increased, proportionately, with any increase in the Company’s paid in capital, sales revenues or net profits. Mr. Krill was also granted 1,500,000 options of common stock of the Company, exercisable at $0.15 per share, from the Global Incentive Stock Option Plan adopted by the Company at December 30, 2009.  250,000 options vested simultaneously with the execution and delivery of the Consulting Agreement, and the balance shall vest at the rate of 104,166 options each calendar quarter for the next three years, commencing on March 31, 2010. The options shall terminate forty-eight (48) months from the date of vesting. The terms of the Consulting Agreement continue until either party provides the other with no less than 90 days prior written notice.  The failure of the Company to maintain directors’ and officers’ liability insurance covering Mr. Krill shall be deemed a material breach of the agreement and shall automatically terminate the Agreement.
 
 4
  On January 13, 2010, the Company appointed Gil Boosidan as its Chief Executive Officer and executed an employment agreement with Mr. Boosidan as of January 14, 2010 (the “Employment Agreement”).  In consideration of the services to be performed under the Employment Agreement, Mr. Boosidan shall receive an aggregate of $30,000 - $20,000 in cash over four equal quarterly installments commencing March 31, 2010, and $10,000 in shares of commons stock of the Company, the number to be determined by the market value of the shares of the date of issuance. The terms of the Employment Agreement shall be for one year, and the Company has the right to terminate such agreement for cause in the event of a material breach by Mr. Boosidan which is not cured after notice of such breach.
 
 On January 13, 2010, the board of directors of the Company appointed Dr. Kevin Schatzle to the Board of Advisors. The advisory agreement calls for 500,000 options of common stock of the Company, exercisable at $0.15 per share, from the Global Incentive Stock Option Plan adopted by the Company at December 30, 2009. The agreement calls for 250,000 options vested simultaneously with the execution and delivery of the agreement, and the balance shall vest at the rate of 20,833 options each calendar quarter for the next three years, commencing on March 31, 2010. The options shall terminate forty-eight (48) months from the date of vesting.
 
 During January 2010, SDS Ltd. executed an Indemnification and Exemption Agreement with Mr. Shabtai Shoval, the CEO of SDS Ltd. The agreement calls for the indemnification of Mr. Shoval and advance of expenses for any personal liability that may be imposed on Mr. Shoval in his capacity as an officer of SDS Ltd. Per the agreement, the maximum amount payable by SDS Ltd. to Mr. Shoval shall be the higher of $1,000,000 or 80% of SDS Ltd.’s cash reserves, measured promptly after receipt by SDS Ltd. of notice from Mr. Shoval of the commencement of any action, suit or proceeding regarding which Mr. Shoval may seek indemnification thereafter. SDS Ltd, agreed to reserve $100,000 from its cash and cash equivalents in order to assure the fulfillment the Company’s indemnification obligation under the agreement until such time as determined by the Board of Directors of SDS Ltd.
  Marketing
 
 SDS markets its products to local and national law enforcement and homeland security authorities in Israel, the US, Mexico, Europe and Asia, as well as operators of critical infrastructure in the private sector such as oil and gas companies, the diamond industry and financial enterprises.  SDS has executed agreements with several companies and individuals all in the framework of its ordinary course of business, providing for assistance in the marketing of its products and endorsements.
  5
  Competition
 
 SDS has identified a number of potential competitors, including developers of voice stress analysis equipment designed to remotely detect a person trying to lie during an interview, and developers of equipment designed to generate stimuli from a remotely location that will generate enough data about an individual to enable detection of hostile intent.  WeCU Technologies and Nemesysco are just two of our competitors.
 
 Dependence on major customers
 
 A significant portion of SDS’s revenue in the three months ended at March 31,2011 was derived from sales of the system and services provided to a customer and a significant portion of SDS’s revenue in 2010 was derived from sales of the system and services provided to four customers.  Since the bulk of the Company’s revenues are generated by initial sales of its systems, as opposed ongoing support services, the loss of this customer may have a material adverse impact on the business of SDS.
 
 Intellectual Property
 
 The Intellectual Property was developed, invented, discovered, derived, programmed and/or designed with the assistance of various Persons, including former employees and consultants, none of which entered into an agreement that any rights that they have or may have in the Intellectual Property are assigned to the Company or that they waive any such rights and such Persons were not given consideration for their efforts.
 
 The Company has agreed in principle and orally with an employee of the Company, that certain intellectual property developed by him prior to the time he was employed by the Company is owned by him. Such intellectual property has been integrated into the Products, whilst no formal license arrangement between the Company and the employee has been entered into.
 
 A provisional patent application was filed on behalf of the Company with the US Patent and Trademark Office and the details of which were provided to the Purchaser. The Company has not decided whether or not it will renew said application or whether it will proceed to attempt to register any patent. There can be no assurance that the provisional application will be accepted.
 
 The United States Transportation Security Administration of the US Department of Homeland Security has certain rights in the technology developed by SDS, pursuant to a Cooperative Agreement between SDS and the TSA dated June 22, 2005.  The Cooperative Agreement relates to a $200,000 grant provided to SDS by the TSA in 2005 for the development and adaptation for use in the US of a prototype application designed to detect suspicious behavior.  Pursuant to the agreement, SDS granted an irrevocable, non-exclusive, paid-up license for US Government use of the technology development using the grant funds.  The license requires prior approval from SDS for any commercial use of the technology, with the exception of use by US Government contractors under procurement contracts, grants, cooperative agreements and other transactions awarded or entered into for US government purposes.
 
 The Science and Technology Directorate of the US Department of Homeland Security has certain rights in the technology developed by SDS, pursuant to a Cooperative Agreement between SDS and the STD dated September 29, 2006.  The Cooperative Agreement relates to a $260,000 grant provided to SDS by the STD on June 7, 2005 pursuant to a proposal entitled Automated Internal Threat Detection.  In the agreement, SDS granted (i) a royalty free, nonexclusive, irrevocable license to the US Government to use and authorize other to use scientific, technical or other works based on or containing data first produced under the grant, and (ii) an irrevocable, non-exclusive, paid-up license to the US government to use registered patents development with grant funds for or on behalf of the US government.
   6
  Plan of Operation
 
 As a result of the acquisition of 51% of Suspect Detection Systems Ltd. in the beginning of the first quarter of 2009, we are currently pursuing the development and marketing of SDS’s products.  At the beginning of the third quarter of 2009, we increased the ownership percentage of Suspect Detection Systems Ltd. from 51% to 58%.
 
 Results of Operations
 
 The following discussion should be read in conjunction with the condensed financial statements and in conjunction with the Company's Form 10-K filed on March 22, 2011.  Results for interim periods may not be indicative of results for the full year.
 
 Results of Operations For the three months ended March 31, 2011 compared to the three months ended March 31, 2011
 
 Revenues
 
 The Company generated $1,608,418 and $620,199 in revenues for the three (3) months ended March 31, 2011 and 2010, respectively, which represents an increase of $988,219 or 259.33%.  The increase in revenues is a result of increased marketing activities.
 
 The Company generated revenues from one of its four major customers in the amount of $1,590,110 or 99% of total revenues for the three months ended March 31, 2011. During the three months ended March 31, 2010 the purchases of 3 customers in the aggregate amount of $859,990 accounted for  97% of the Company’s total revenues.
 7
  Three months ended March 31, 2011Revenues


% of total revenuesCustomer A

$
1,590,110



99
%Other customers


18,308



1Total Revenues

$
1,608,418



100
%
  Three months ended March 31, 2010Revenues


% of total revenuesCustomer B

$
610,000



69
%Customer C


165,000



19Customer D


84,990



10Other customers


28,645



3Total Revenues

$
888,635



100
%
  Total Operating Expenses
 
 During the three (3) months ended March 31, 2011 and 2010, total operating expenses were $843,687 and $757,315, respectively.  The increase in operating expenses results from an increase in research and development expenses which increased from $32,185 for the three months ended March 31, 2010 to $146,964 for the three months ended March 31, 2011 and represents an increase of 456.62%. Selling, general and administrative expenses decreased during the three (3) months ended March 31, 2011 to $702,493 from $725,130, a difference of $22,637 or 3.12%.
 
 Net Income (loss)
 
 During the three (3) months ended March 31, 2011 the net income was $312,470 as oppose to a loss of $264,300, during the three (3) months ended March 31, 2010
 
 Liquidity and Capital Resources
 
 The Company had cash in the amount of $1,037,374 as of March 31, 2011 and $803,443 as of December 31, 2010.  Cash and cash equivalents from inception to date have been sufficient to provide the operating capital necessary to operate to date.
 
 As of March 31, 2011, the Company owed $293,162 to Mr. Eran Drukman, an officer of SDS – Israel.  The loan was provided for working capital purposes, and is unsecured, non-interest bearing, and has no terms for repayment.
 
 The Company expects significant capital expenditures during the next 12 months, contingent upon raising capital.  We anticipate that we will need approximately $1,000,000 for operations for the next 12 months.  These anticipated expenditures are for manufacturing, research and development, marketing, sales channel development, general and administrative expenses and debt financing.
 
 8
  Going Concern Consideration
 
 The Company’s current activities include sales of its products, marketing, capital formation, research and development, and building infrastructure.  The Company has incurred a net income of $317,970 for the three month periods ending March 31, 2011. The Company had an accumulated deficit of approximately $2,472,628 (December 31, 2010 - $2,785,098).  The Company’s ability to continue as a going concern is uncertain.  The revised business plan of the Company is the application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.
 
 While management of the Company believes that the Company will be successful in its current and planned operating activities, there can be no assurance that the Company will be successful in the achievement of sales of its products that will generate sufficient revenues to earn a profit and sustain the operations of the Company.  The Company also intends to conduct additional capital formation activities through the issuance of its common stock and loans from related parties.
 
 The Company has not established sufficient sources of revenues to cover its operating costs and expenses.  As such, it has incurred significant operating losses since inception.    These and other factors raise substantial doubt about the Company’s ability to continue as a going concern.
  Recent Accounting Pronouncements
 
 In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The amendments in this update require additional disclosure about the credit quality of financing receivables, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. This update is effective for interim periods and fiscal years ending after December 15, 2010. The adoption of these requirements did not have an impact on the Company's consolidated financial position or results of operations.
  In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The amendments in this update require new disclosures and clarifications of existing disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements, further disaggregation of fair value measurement disclosures for each class of assets and liabilities and additional details of valuation techniques and inputs utilized. This update is consistent with the Company's current accounting application for fair value measurements and disclosures.
 
 Off Balance Sheet Arrangements
 
 We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
   9
  Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
 A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.
 
 Item 4(T). Controls and Procedures
 
 As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and  15d-15(e) under the 1934 Act).  Based on this evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission rules and forms. Furthermore, our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
 A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
 Changes in Internal Controls
 
 There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule  240.15d-15  that occurred during the Company’s last fiscal quarter that has  materially  affected,  or is reasonable  likely to materially  affect,  the Company internal control over financial reporting.
 
 10
 
 
 PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 
 There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.
 
 Item 1A. Risk Factors
 
 A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.
 
 Item 2. Unregistered Sales of Equity Securities, Convertible Note and Use of Proceeds.
  On March 21, 2011, the Company issued a convertible note (the “Note”) to Tamar Shefet (the “Lender”) whereby the Lender made a loan (the “Loan”) to the Company in an amount equal to $300,000 and accruing interest at a rate of 10% per annum. The Loan and the accrued interest will be repayable in one installment on the date that is eighteen months after the date the Loan is made; provided that such date may be extended at the Company’s request by another six months. The Lender shall have the right, at any time, to convert the principal and interest outstanding under the Note into common share issued by the Company at a conversion rate of $0.07 per a common share. In addition, the Lender is entitled to (i) 500 Class C warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.12 per Common Share and (ii) 500 Class D warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.21 per Common Share.  The Class C Warrants shall be exercisable at any time from the conversion date to and excluding the first anniversary thereof and the Class D Warrants shall be exercisable at any time from the conversion date to and excluding the third anniversary thereof.
 
 As of March 31, 2011 the Company is committed to issue shares of common stock of the Company, valued at $2,500 to the Chief Executive Officer of the Company for services rendered during the three months ended March 31, 2011.
 
 As of March 31, 2011 the Company is committed to issue shares of common stock of the Company, valued at $4,500 to the Chief Financial Officer of the Company for services rendered by the officer rendered during the three months ended March 31, 2011.
 
 As of March 31, 2011 the Company is committed to issue 90,000 shares of common stock of the Company, to two consultants and shareholders of the Company for services rendered by the consultants during the three months ended March 31, 2011.
 
 The shares will be issued pursuant to an exemption from the registration requirements provided under Section 4(2) of the Securities Act of 1933, as amended and by Regulation S.
 
 Use of Proceeds
 
 The proceeds from the sale of the Company’s securities were be used for working capital purposes.
 
 Item 3. Defaults Upon Senior Securities.
 
 Not applicable
 
 Item 4. Removed and Reserved.
 
 Item 5. Other Information.
 
 Not applicable
 
 Item 6. Exhibits
 
 Exhibit No.

Description31.1

Rule 13a-14(a)/15d14(a) Certification of Principal Executive Officer (attached hereto)31.2

Rule 13a-14(a)/15d14(a) Certification of Principal Financial and Accounting Officer (attached hereto)32.1

Section 1350 Certification of Principal Executive Officer (attached hereto)32.1

Section 1350 Certification of Principal Financial and Accounting Officer (attached hereto)
 
 
 11
 
 
 SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 SUSPECT DETECTION SYSTEMS, INC.Dated: May 13, 2011By:
/s/ Gil BoosidanName: Gil BoosidanTitle :  Chief Executive Officer and Director (Principal Executive Officer)
 
 Dated: May 13, 2011
By:
/s/ Ran DanielName: Ran DanielTitle:  Chief Financial Officer (Principal Financial and Accounting Officer)
 
 12