**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10 - QSB/A**


**Amendment
      No. 1**










**QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934.**




**For
      the quarterly period ended September 30, 2006**




*Commission
      File Number: 0-21284*




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


*(Exact
      name of registrant as specified in its charter)*




DELAWARE
            91-1549305(State
                or other jurisdiction) of
                incorporation or organization)
            (IRS
                Employer Identification
                No.)





1
      Clarks Hill Rd. Framingham, MA. 01702


(Address
      of principal executive offices and zip code) ****


(508)
      872-2625


( *Registrant’s
      telephone number, including area code)*




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
       o No  x




Transitional
      Small Business Disclosure Format (check one): Yes  oNo  x




Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).


Yes
       o No  x




The
      number of shares outstanding of the Registrant's Common Stock as of October
      30, 2006 was 37,138,151 shares.









**Explanatory
      Note**





As
      indicated in the Registrant’s Current Report on Form 8-K/A filed with the
      Securities and Exchange Commission on October 23, 2006, this amendment is being
      filed to correct errors to the financial statements contained in the
      Registrant’s Form 10QSB for the period ending September 30, 2006.





This
      Amendment No. 1 on Form 10-QSB/A to the Quarterly Report on Form 10-QSB of
      StatSure Diagnostic Systems, Inc. Formerly Saliva Diagnostic Systems Inc. (the
      Company) for the three and nine month period ended September 30, 2006 is being
      filed to restate the Company's Balance Sheet (Unaudited) included in the
      quarterly report on Form 10-QSB.





The
      restatement as described more fully in Note 4, is being made to adjust the
      beginning retained earnings account for the cumulative effect of warrants issued
      for services rendered to the Company which was previously discounted in
      2005.




This
      Amendment No. 1 amends Parts I and II of the Quarterly Report on Form 10-QSB
      for
      the three and nine month periods ended September 30, 2006. This Amendment No.
      1
      continues to reflect circumstances as of the date of the original filing of
      the
      Quarterly Report on Form 10-QSB and the Company has not updated the disclosures
      contained therein to reflect events that occurred at a later date, except for
      items relating to the restatement.





See
      Note
      4 to the Financial Statements regarding the restatement
      adjustments.




2





SALIVA
      DIAGNOSTIC SYSTEMS, INC.


FORM
      10-QSB


INDEX






PAGEPART
                  I FINANCIAL INFORMATIONItem
                  1.
              
              Financial
                  StatementsBalance
                  sheets - September 30, 2006 (unaudited) and December
                  31, 2005
              
              4Statements
                  of Operations - Three Months and Nine Months EndedSeptember
                  30, 2006 and 2005 (unaudited)
              
              5Statements
                  of Cash Flows- Nine Months EndedSeptember
                  30, 2006 and 2005 (unaudited)
              
              6Notes
                  to Financial Statements (unaudited)
              
              7Item
                  2.
              
              Management's
                  Discussion and Analysis of Financial ConditionAnd
                  Plan of Operation
              
              20Item
                  3.
              
              Controls
                  and Procedures
              
              30PART
                  II OTHER INFORMATIONItem
                  1.
              
              Legal
                  Proceedings
              
              31Item
                  2.
              
              Changes
                  in Securities
              
              31Item
                  3.
              
              Defaults
                  Upon Senior Securities
              
              32Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              33Item
                  5.
              
              Other
                  Information
              
              33Item
                  6.
              
              Exhibits
              
              34Signatures
              
              
              
              35Certifications
              
              
              
              36




3


**PART
      I FINANCIAL INFORMATION**


**Item
      1. FINANCIAL STATEMENTS**





**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**CONDENSED
      BALANCE SHEETS**




September
                30, 2006
              (Unaudited)
              (restated)
            
            December 31, 2005
              (restated)**ASSETS**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            260,865
            
            $
            76,321Accounts
                receivable, net of allowance for doubtful accounts of $107,477 for
                both
                2006 and 2005
            
            
            129,404
            
            
            69,741Inventories
            
            
            75,571
            
            
            56,150Prepaids
            
            
            —
            
            
            11,669Total
                current assets
            
            
            465,840
            
            
            213,881Property
                and equipment, net of accumulated depreciation of $576,387 (2006)
                and
                $558,075 (2005)
            
            
            78,317
            
            
            95,308Equipment
                under construction
            
            
            664,401
            
            
            664,401Patents
                and trademarks, net of accumulated amortization of $145,111(2006)
                and $125,876 (2005)
            
            
            104,845
            
            
            73,223Deferred
                costs, less accumulated amortization of $430,369(2006)and
                $260,739(2005)
            
            
            41,631
            
            
            211,261Deposits
            
            
            14,350
            
            
            13,500TOTAL
                ASSETS
            
            $
            1,369,384
            
            $
            1,271,574**LIABILITIES
                AND SHAREHOLDERS’ DEFICIT**CURRENT
                LIABILITIES:Note
                payable - shareholders
            
            $
            240,000
            
            $
            172,055Debentures
                payable-net of discount
            
            
            34,287
            
            
            126,597Accounts
                payable
            
            
            55,514
            
            
            82,080Customer
                advances
            
            
            31,792
            
            
            2,000Accrued
                expenses
            
            
            207,272
            
            
            370,164Accrued
                payroll expense to officers
            
            
            130,799
            
            
            234,750Payroll
                and payroll taxes payable
            
            
            21,625
            
            
            102,441Dividends
                payable in stock to preferred shareholders
            
            
            53,750
            
            
            —Total
                current liabilities
            
            
            775,039
            
            
            1,090,087LONG-TERM
                LIABILITIESNote
                payable - shareholder
            
            
            1,354,146
            
            
            1,932,099Deferred
                rent payable
            
            
            10,129
            
            
            6,190Derivative
                instruments
            
            
            7,238,442
            
            
            —TOTAL
                LIABILITIES
            
            
            9,377,756
            
            
            3,028,376COMMITMENTS
                AND CONTINGENCIESSeries
                2006-A Convertible Preferred Stock: 2,500 shares authorized, 2,150
                issued
                and outstanding
            
            
            2
            
            
            —SHAREHOLDERS’
                DEFICIT:Series
                1998-B Convertible Preferred Stock: 1,645 shares authorized, none
                issued
                and outstanding
            
            
            —
            
            
            —Common
                stock, $.001 par value, 50,000,000 shares authorized, issued and
                outstanding: 36,792,510 (2006) and 31,769,491 (2005)
            
            
            36,793
            
            
            31,769Additional
                paid-in capital
            
            
            45,987,683
            
            
            44,545,318Less:
                deferred compensation
            
            
            -
            
            
            (2,927
            )Accumulated
                deficit
            
            
            (54,032,850
            )
            
            (46,330,962
            )TOTAL
                SHAREHOLDERS’ DEFICIT
            
            
            (8,008,374
            )
            
            (1,756,802
            )TOTAL
                LIABILITIES ANDSHAREHOLDERS’
                DEFICIT
            
            $
            1,369,384
            
            $
            1,271,574




The
      accompanying notes are an integral part of these statements.




4





**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**CONDENSED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Restated)
            
            
            
            (Restated)REVENUES:Product
                Sales
            
            $
            225,411
            
            $
            204,846
            
            $
            669,477
            
            $
            645,853Royalty
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            546225,411
            
            
            204,846
            
            
            669,477
            
            
            646,399COST
                OF PRODUCTS SOLD
            
            
            80,430
            
            
            75,500
            
            
            226,527
            
            
            226,240Gross
                profit
            
            
            144,981
            
            
            129,346
            
            
            442,950
            
            
            420,159OPERATING
                EXPENSES:Research
                and development
            
            
            6,273
            
            
            102,449
            
            
            148,888
            
            
            264,005Selling,
                general and administrative
            
            
            523,350
            
            
            227,300
            
            
            1,809,007
            
            
            1,844,124529,623
            
            
            329,749
            
            
            1,957,895
            
            
            2,108,129Loss
                from operations
            
            
            (384,642
            )
            
            (200,403
            )
            
            (1,514,945
            )
            
            (1,687,970
            )OTHER
                INCOME (EXPENSES):Interest
                expense-net
            
            
            (110,578
            )
            
            (92,559
            )
            
            (256,420
            )
            
            (260.816
            )Interest
                expense on beneficial conversion feature
            
            
            (36,347
            )
            
            (36,309
            )
            
            (1,020,189
            )
            
            (121,449
            )Financing
                costs
            
            
            (21,300
            )
            
            (21,300
            )
            
            (3,708,146
            )
            
            (63,899
            )Derivative
                income (expense)
            
            
            1,547,877
            
            
            -
            
            
            (798,315
            )
            
            -Debt
                conversion expense
            
            
            -
            
            
            -
            
            
            (403,872
            )
            
            -Total
                other income (expenses):
            
            
            1,379,652
            
            
            (150,168
            )
            
            (6,186,942
            )
            
            (446,164
            )Net
                income (loss)
            
            
            995,010
            
            
            (350,571
            )
            
            (7,701,887
            )
            
            (2,134,134
            )Dividends-
                Preferred stock series 2006 A
            
            
            53,750
            
            
            -
            
            
            53,750
            
            
            -NET
                INCOME (LOSS) TO COMMON SHAREHOLDERS
            
            $
            941,260
            
            $
            (350,571
            )
            $
            (7,755,637
            )
            $
            (2,134,134
            )BASIC
                AND DILUTED INCOME(LOSS) PER SHARE
            
            $
            0.03
            
            $
            (0.01
            )
            $
            (0.22
            )
            $
            (0.07
            )WEIGHTED
                AVERAGE NUMBER OF SHARES USED IN BASIC AND DILUTED PER SHARE
                CALCULATIONS
            
            
            36,783,334
            
            
            31,720,578
            
            
            34,518,741
            
            
            31,335,938




The
      accompanying notes are an integral part of these statements.




5


**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**




**Nine
                Months Ended September 30,****2006**
            
            2005(Restated)OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (7,701,887
            )
            $
            (2,134,134
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            37,547
            
            
            38,252Bad
                debt expense
            
            
            —
            
            
            51,982Amortization
                of deferred costs
            
            
            169,630
            
            
            88,144Warrants
                issued for recruiting services
            
            
            —
            
            
            399,622Stock
                issued for consulting services
            
            
            250,775
            
            
            —Options
                granted to employees
            
            
            499,329
            
            
            533,551Options
                granted to non-employee
            
            
            34,863
            
            
            —Beneficial
                conversion feature of convertible debentures
            
            
            1,020,189
            
            
            121,449Financing
                costs on derivative instruments
            
            
            3,644,248
            
            
            —Mark-to-market
                loss on derivative instruments
            
            
            798,315
            
            
            —Induced
                conversion expense on debentures
            
            
            403,872
            
            
            —Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (59,664
            )
            
            75,944Inventories
            
            
            (19,421
            )
            
            31,714Prepaids
            
            
            (850
            )
            
            (12,700
            )Deposits
            
            
            11,669
            
            
            —Accounts
                payable, accrued payroll expense to officers and accrued
                expenses
            
            
            20,397
            
            
            70,976Net
                cash used in operating activities
            
            
            (890,988
            )
            
            (735,200
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Acquisitions
                of property and equipment
            
            
            (1,321
            )
            
            (122,729
            )Acquisitions
                of patents and trademarks
            
            
            (50,857
            )
            
            (1,600
            )Deferred
                finance cost
            
            
            —
            
            
            (160,000
            )Net
                cash used in investing activities
            
            
            (52,178
            )
            
            (284,329
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Cash
                overdraft
            
            
            —
            
            
            (26,953
            )Proceeds
                from shareholder loans
            
            
            634,722
            
            
            30,000Proceeds
                from issuance of debentures
            
            
            —
            
            
            1,510,000Repayments
                of debentures
            
            
            (112,500
            )
            
            —Repayment
                of shareholder loans
            
            
            (1,381,012
            )
            
            (623,287
            )Proceeds
                from issuance of common stock
            
            
            17,500
            
            
            2,000Gross
                proceeds from issuance of Series 2006-A preferred shares
            
            
            2,150,000
            
            
            —Payment
                for financing cost
            
            
            (181,000
            )
            
            —Net
                cash provided by financing activities
            
            
            1,127,710
            
            
            891,760NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            184,544
            
            
            (127,769
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            76,321
            
            
            148,630CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            260,865
            
            $
            20,861Cash
                paid during the period for:Interest
            
            $
            35,250
            
            $
            —Income
                taxes
            
            $
            1,739
            
            $
            830SUPPLEMENTAL
                DISCLOSURE OF NON-CASH FLOW FINANCING ACTIVITIES:During
                the nine month periods ended September 30, 2006 and 2005,the
                previous year’s balance ofaccrued interest of $251,282 and $228,773, respectively, for a
                shareholder’s loan was added to the loan balance as principal.
            
            $
            251,282
            
            $
            228,773During
                the nine month period ended September 30, 2005, 1,000,000 shares
                of common
                stock were issued for a warrant conversion at $.01 per share. Payment
                due
                of $10,000 was offset to a note payable to this shareholder.
            
            $
            —
            
            $
            10,000Conversion
                of debenture and interest payable into common stock
            
            $
            1,109,608
            
            $
            60,000During
                the nine month period ended September 30, 2006, 470,312 warrants
                were
                issued to a placement agent and were recorded as Additional paid
                in
                capital and Warrant liability
            
            $
            645,881
            
            $
            —Discount
                related to beneficial conversion feature of convertible
                debt
            
            $
            —
            
            $
            1,510,000Dividends
                on preferred stock payable in shares
            
            $
            53,750
            
            $
            —During
                the nine month period ended September 30, 2005, 1,100,000 options
                were
                issued to employees as compensation
            
            $
            —
            
            $
            668,300During
                the nine month period ended September 30, 2006, 1,500,000 shares
                of common
                stock were issued for a warrant conversion at $.01 per share. Payment
                due
                of $15,000 was offset to a note payable to this
                stockholder.
            
            $
            15,000
            
            $
            —




The
      accompanying notes are an integral part of these statements.





6


**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**


**SEPTEMBER
      30, 2006**





**1.
      Description of Business**





StatSure
      Diagnostic Systems, Inc., (SDS), a Delaware corporation (the “Company”), is
      primarily engaged in the development and marketing of oral fluid collection
      devices for the drugs of abuse market, and rapid immunoassays for use in the
      detection of infectious diseases. The Company believes that its patented
      platform for rapid testing of infectious diseases offers significant advantages
      over the competition, including ease-of-use, lower costs, and significantly
      reduced risk of infection from collecting and handling specimens. In the oral
      fluid collection market, the Company’s platform has a patented internal quality
      control that indicates sufficient volume of the oral fluid (“volume adequacy
      indicator”).




On
      January 24, 2006, the Company effected a name change from Saliva Diagnostic
      Systems, Inc. to StatSure Diagnostic Systems, Inc. Since March 22, 2006, the
      shares of the Company have traded under the StatSure name, with the symbol
      SSUR.
      Coinciding with the corporate name change, the Company changed the name of
      its
      Hema-Strip HIV test to StatSureTM HIV.





On
      September 29, 2006, SSUR .OB
      announced it had signed several agreements relating to its patented barrel
      technology for use in screening antibodies to HIV (AIDS). As part of a three-way
      alliance with Inverness Medical Innovations (AMEX:IMA) and Chembio Diagnostics
      (CEMI.OB), StatSure signed a worldwide, exclusive distribution deal for a rapid,
      point-of-care (POC) HIV test with Inverness (a leading marketing and
      distribution organization for many POC products). In a two-way deal with
      Chembio, StatSure settled their multi-year patent litigation with StatSure
      granting Chembio an exclusive manufacturing license for its recently FDA cleared
      HIV barrel product. This product will be marketed under the IMA brand. An
      additional 2- way agreement with CEMI.OB, a “Joint HIV Barrel Commercialization
      Agreement” was finalized that establishes a long- term strategic “partnership”,
      wherein both companies equally split their margin dollars of the HIV barrel
      product once the actual cost of manufacturing is reimbursed.





On
      October 24, 2006, the Company notified the U.S. Food and Drug Administration
      ("FDA) that it was withdrawing its pending Pre-Market Approval application
      for a
      rapid HIV diagnostic screening product employing the Company's patented "barrel"
      technology. The Company determined there is no need to obtain Pre-Market
      Approval for its own HIV Barrel Product as commercialization of its barrel
      technology will be undertaken by means of the aforementioned
      arrangement.





On
      June
      8, 2006, we completed a private placement of $2,150,000 in Preferred Stock
      with
      10 institutional and accredited investors pursuant to a 2006 Series A
      Convertible Preferred Stock Agreement dated June 7, 2006. Net proceeds from
      the
      placement were approximately $1,969,000.





In
      the
      course of a routine SEC review of the Company’s periodic filings, the SEC issued
      a comment letter dated October 4, 2006, alerting the Company to a possible
      incorrect application of certain accounting principles. On October 12, 2006,
      the
      Audit Committee of the Company's Board of Directors concluded based upon the
      recommendation of the Company's management and independent auditors, that the
      Company will restate its previously issued financial statements for the quarters
      ended March 31, 2005, June 30, 2005, and September 30, 2005, and for the year
      ended December 31, 2005, included in the Company's Annual Report on Form 10-KSB,
      and for the quarters ended March 31 and June 30, 2006. The Company filed an
      8-K
      on October 13, 2006 stating that its previously issued financial statements
      for
      these periods should therefore no longer be relied upon.




The
      need
      to restate the Company's financial statements arises from the incorrect
      application of generally accepted accounting principles related to two non-cash
      transactions, the beneficial conversion feature on the issuance of the
      convertible debt by the Company, and revised calculations of the Employee Stock
      Options pursuant to FIN 28: Accounting for Stock Appreciation Rights and Other
      Variable Stock Options or Award Plans, an Interpretation of APB Opinions Number
      15 and 25 (FASB Interpretations). The restatement is not expected to have any
      impact on the Company's statements of cash flows. Once the Company’s review and
      restatement of the financial statements for these periods is complete, the
      Company will file amendments to these reports with the Securities and Exchange
      Commission as soon as practicable.




7




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**


In
      this
      Form 10-QSB, the Company has restated the prior comparative periods for the
      three and nine months ended September 30, 2005 for the above stated incorrect
      application of accounting principles. See Note 4 for further details on the
      restated amounts for 2005.





**2.** **Substantial
        Doubt Regarding Ability To Continue As A Going
        Concern**





Significant
      operating losses - accumulated deficit:


Since
      July 1990, the Company has been engaged almost exclusively in research and
      development activities focused on developing proprietary saliva based collection
      devices and rapid assays for infectious diseases. Other than revenues derived
      from private label and OEM sales of the Company’s oral fluid collection devices,
      the Company has not yet commenced any significant product commercialization.
      The
      Company has incurred significant operating losses since its inception, resulting
      in an accumulated deficit of $53,913,228 at September 30, 2006. Such losses
      are
      expected to continue for the foreseeable future and until such time, if ever,
      as
      the Company is able to attain revenue levels sufficient to support its
      operations. There can be no assurance that the Company will achieve or maintain
      profitability in the future. Substantial additional financing will be required
      in future periods.





The
      Company’s capital requirements have been and will continue to be significant.
      The Company’s capital base is smaller than that of many of its competitors, and
      there can be no assurance that the Company’s cash resources will be able to
      sustain its business. The Company is dependent upon its efforts to raise capital
      to finance its future operations, including the cost of development,
      manufacturing and marketing of its products, to conduct clinical trials and
      submissions for FDA approval of its products and to continue the design and
      development of its new products. Marketing, manufacturing and clinical testing
      may require capital resources substantially greater than the resources available
      to the Company. The Company will continue to seek public or private placement
      of
      its equity securities as well as corporate partnerships to develop products.
      The
      Company’s future capital needs will depend upon numerous factors, including the
      progress of the approval for sale of the Company’s products in various
      countries, including the United States, the extent and timing of the acceptance
      of the Company’s products, the cost of marketing and manufacturing activities
      and the amount of revenues generated from operations, none of which can be
      predicted with much certainty. The accompanying financial statements have been
      prepared assuming that the Company will continue as a going concern. The
      Company’s significant operating losses and significant capital requirements,
      however, raise substantial doubt about the Company’s ability to continue as a
      going concern. The financial statements do not include any adjustments that
      might result from the outcome of this uncertainty.





**3.
      Summary of Significant Accounting Policies**




***Basis
      of Presentation:***




The
      accompanying unaudited financial statements as of, and for the three and nine
      month periods ended September 30, 2006 and 2005, have been prepared in
      conformity with accounting principles generally accepted in the United States
      of
      America. Certain information or footnote disclosures in this filing that are
      normally included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America have been
      condensed or omitted, pursuant to the rules and regulations of the Securities
      and Exchange Commission for interim filings. In the opinion of management,
      the
      accompanying financial statements include all adjustments necessary (which
      are
      of a normal and recurring nature) for a fair presentation of the results of
      the
      interim periods presented. The accompanying financial statements should be
      read
      in conjunction with the Company's audited financial statements for the year
      ended December 31, 2005, which will be restated as mentioned in Notes 1 and
      4.
      Operating results for the three and nine month periods ended September 30,
      2006
      are not necessarily indicative of the results that may be expected for the
      entire year ending December 31, 2006, or any other portion thereof.


***Derivative
          Instruments:***
  Our
        accounting policy for liquidated damages is to account for the liability
        in
        accordance with the provision of SFAS 5 (SFAS 5: Accounting for Contingencies).
        Accordingly, we will record liquidated damages if they are probable and are
        determinable. In accordance with the provisions of EITF 00-19, we assess
        potential liquidated damages of any financing transaction at inception and
        if
        these are considered significant enough to be greater than the difference
        between fair value of registered shares and unregistered shares, we will
        account
        for the underlying financial instruments, such as conversion option, warrants,
        etc affected as a liability. At each reporting period thereafter, we will
        reassess the liquidated damages to determine if they continue to be significant
        enough to be greater than the difference between fair value of registered
        shares
        and unregistered shares or represent a reasonable discount to fair value
        of
        registered shares. In the latter case, we will modify the accounting for
        the
        outstanding underlying financial instruments and classify them as equity.




8


**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**


**SEPTEMBER
      30, 2006**




***Recent
        Accounting Pronouncements:***





SEC
      Staff Accounting Bulletin 108 (“SAB 108”), Considering the Effects of Prior Year
      Misstatements when Qualifying Misstatements in Current Year Financial
      Statements:





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
      "Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements." SAB 108 was issued in
      order
      to eliminate the diversity of practice surrounding how public companies quantify
      financial statement misstatements.





Traditionally,
      there have been two widely-recognized methods for quantifying the effects of
      financial statement misstatements: the “roll-over” method and the “iron curtain”
method. The roll-over method focuses primarily on the impact of a misstatement
      on the income statement—including the reversing effect of prior year
      misstatements—but its use can lead to the accumulation of misstatements in the
      balance sheet. The iron-curtain method, on the other hand, focuses primarily
      on
      the effect of correcting the period-end balance sheet with less emphasis on
      the
      reversing effects of prior year errors on the income statement.





In
      SAB
      108, the SEC staff established an approach that requires quantification of
      financial statement misstatements based on the effects of the misstatements
      on
      each of the company's financial statements and the related financial statement
      disclosures. This model is commonly referred to as a "dual approach" because
      it
      requires quantification of errors under both the iron curtain and the roll-over
      methods.





SAB
      108
      permits existing public companies to initially apply its provisions either
      by
      (i) restating prior financial statements as if the "dual approach" had always
      been used or (ii) recording the cumulative effect of initially applying the
      "dual approach" as adjustments to the carrying values of assets and liabilities
      as of January 1, 2006 with an offsetting adjustment recorded to the opening
      balance of retained earnings.





We
      will
      adopt the provisions of SAB 108 in connection with the preparation of our annual
      financial statements for the year ending December 31, 2006. We are in the
      process of evaluating the impact, if any, on our financial statements of
      initially applying the provisions of SAB 108. .





Statement
      of Financial Accounting Standard 157, Fair Value Measurements (“SFAS
      157”):




On
      September 15, 2006, the Financial Accounting Standard Board issued a standard
      that provides enhanced guidance for using fair value to measure assets and
      liabilities. The standard applies whenever other standards require (or permit)
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value in any new circumstances. This
      Statement is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years. Earlier application is encouraged, provided that the reporting entity
      has
      not yet issued financial statements for that fiscal year, including financial
      statements for an interim period within that fiscal year. The Company will
      adopt
      this pronouncement effective January
      1, 2008. We are currently evaluating the impact of adopting this pronouncement
      on our financial statements.





FSP
      FAS 123(R )-5, Amendment of FASB Staff Position FAS 123(R)-1:





FSP
      FAS
      123(R )-5 was issued on October 10, 2006 . The FSP provides that instruments
      that were originally issued as employee compensation and then modified, and
      that
      modification is made to the terms of the instrument solely to reflect an equity
      restructuring that occurs when the holders are no longer employees, no change
      in
      the recognition or the measurement (due to a change in classification) of those
      instruments will result if both of the following conditions are met: (a). There
      is no increase in fair value of the award (or the ratio of intrinsic value
      to
      the exercise price of the award is preserved, that is, the holder is made
      whole), or the antidilution provision is not added to the terms of the award
      in
      contemplation of an equity restructuring; and (b). All holders of the same
      class
      of equity instruments (for example, stock options) are treated in the same
      manner. The provisions in this FSP shall be applied in the first reporting
      period beginning after the date the FSP is posted to the FASB website. We will
      adopt this FSP from its effective date. We currently do not believe that its
      adoption will have any impact on our financial statements.




9




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**


**4.
      Restatement**




Subsequent
      to the filing of form 10-QSB for the three month and nine month periods ended
      September 30, 2006, the Company revalued warrants issued during 2005 as payment
      for services rendered for which the Company had used a 30% discount for various
      restrictions. This revaluation increased related expense to $399,622 from
      $280,000. The Company accounts for warrants granted to its non-employee
      consultants using the fair value cost in accordance with SFAS 123 and EITF
      No.
      96-18, “Accounting for Equity Instruments That Are Issued to Other Than
      Employees”. The fair value of warrants granted was estimated on the date of
      grant using the Black-Scholes option-pricing model with the following
      weighted-average assumptions: expected volatility of 200.4%, risk-free interest
      rate of 3.71% and expected life of 4.93 years for the year ended December 31,
      2005. The effect of this prior year restatement was to adjust beginning retained
      earnings and additional paid-in capital of $119,622.





The
      Balance Sheet as of September 30, 2006 is now being restated in this Form
      10QSB/A filing to give effect to the correction of this error. The table below
      details the items affected by the restatement:




**BALANCE
                SHEET**
              **September 30, 2006**As
                reported
            
            As
                restated**SHAREHOLDERS’
                DEFICIT:**Additional
                paid in capital
            
            
            45,868,061
            
            
            45,987,683Accumulated
                deficit
            
            
            (53,913,228
            )
            
            (54,032,850
            )




10




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**
  **5.
          Diluted earning (loss) Per Common Share**





Basic
      and
      diluted earnings (loss) per common share was calculated for all periods in
      accordance with the requirements of Statement of Financial Accounting Standards
      No. 128, “Earnings per Share”. The following table sets forth the computation of
      the diluted loss per share for the three and nine months ended September 30,
      2006 and 2005, respectively:




Three
                Months Ended
              September
                30
            
            Nine
                Months Ended
              September
                302006
            
            2005
            
            2006
            
            2005As
                restated
            
            
            
            As
                restatedNumerator:Net
                income (loss) to commonshareholders
            
            $
            941,260
            
            $
            (350,571
            )
            $
            (7,755,637
            )
            $
            (2,134,134
            )(Deduct)/Add:Mark-to-market
                gain (loss)-derivative liability
            
            
            (1,547,877
            )
            
            -
            
            
            798,315
            
            
            -Interest
                on convertible debt
            
            
            6,982
            
            
            -
            
            
            27,121
            
            
            -Dividends
                on preferredstock
                payable in shares
            
            
            53,750
            
            
            -
            
            
            53,750
            
            
            -Net
                loss to common shareholders and assumed conversion
            
            $
            (545,885
            )
            $
            (350,571
            )
            $
            (6,876,451
            )
            $
            (2,134,134
            )Denominator:Share
                reconciliation:Shares
                used for basic income (loss) per share
            
            
            36,783,334
            
            
            31,720,578
            
            
            34,518,741
            
            
            31,335,938Effect
                of dilutive items:Stock
                options
            
            
            -
            
            
            -
            
            
            -
            
            
            -Convertible
                securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -Shares
                used for diluted income (loss) per share
            
            
            36,783,334
            
            
            31,720,578
            
            
            34,518,741
            
            
            31,335,938Income
                (loss) per share:Basic
                and diluted:
            
            $
            0.03
            
            $
            (0.01
            )
            $
            (0.22
            )
            $
            (0.06
            )





The
      numerator has been adjusted for the change in fair value of derivative liability
      related to the convertible notes and warrants. The diluted income(loss) per
      share for the three and nine months ended September 30, 2006 excludes from
      the
      calculation 3,847,188 shares issuable upon the exercise of stock options and
      warrants, 4,871,594 shares issuable upon the conversion of convertible
      securities and 55,850 shares issuable on payment of dividend on preferred
      shares. These shares are excluded due to their anti-dilutive effect as a result
      of the Company’s net loss after adjusting for the change in fair value of
      derivative income effect during these periods. The calculation for the three
      and
      nine months ended September 30, 2005 excludes 4,463,000 shares issuable upon
      exercise of stock options and warrants and 1,450,000 shares issuable upon
      conversion of convertible securities due to net loss for these periods. For
      all
      periods presented diluted income (loss) per share is the same as basic
      income(loss) per share.




11


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**




**6.
      Geographic Area Information**




Under
      the
      disclosure requirements of SFAS No. 131, “Segment Disclosures and Related
      Information,” we operate within one segment. Our products are sold principally
      in the United States and Europe. Segmentation of operating income and
      identifiable assets is not applicable.




The
      following table represents total product sales revenue by geographic
      area:




**For the three
                 months ended September 30,**
            
            **For
                the nine months ended September 30,******
            **2006**
            
            2005
            
            **2006**
            
            2005United
                States
            ****
            **$**
            **58,604**
            
            $
            600
            ****
            **$**
            **135,018**
            
            $
            152,098United
                Kingdom
            ****
            
            **117,290**
            
            
            147,373
            ****
            
            **462,428**
            
            
            376,777Africa
            
            
            **38,500**
            
            
            12,932
            ****
            
            **39,088**
            
            
            61,670Other
            ****
            
            **11,017**
            
            
            43,941
            
            
            **32,943**
            
            
            55,308**$**
            **225,411**
            
            $
            204,846
            ****
            **$**
            **669,477**
            
            $
            645,853





**7.
      Accounts Receivable**





In
      2005,
      the Company recorded a 100% allowance of $102,477 against a receivable of
      $102,477 from one customer. We have given this account over to attorneys for
      collection and at this time are uncertain if this will result in the collection
      of this outstanding account.





**8.
      Equipment Under Construction**





In
      2004,
      the Company entered into agreements with vendors to have custom assembly
      machinery built to assemble the Company’s Statsure HIV test. We purchased this
      equipment to produce production quantities of our “barrel” technology based
      products in an automated and cost effective manner and had expected to need
      it
      initially to satisfy the market demand of our first major barrel product—the
      StatSureTM HIV test upon FDA approval. On September 29, 2006 the Company settled
      patent infringement litigation with Chembio Diagnostic Systems, Inc., for which
      Chembio had obtained FDA approval. Under the terms of the settlement, the HIV
      Barrel product will be manufactured by Chembio. The Company is exploring
      alternate uses of this equipment. The equipment will be depreciated commencing
      in the Fourth Quarter 2006.




**9.
      Debenture Payable**





On
      January 19, 2005, the Company's board of directors authorized the issuance
      and
      sale of up to three million dollars of convertible debentures. These debentures
      mature March 31, 2009 and carry an interest rate of 9% per year and are
      convertible into common stock at the lower of 66.6% of the valuation of the
      Company's next raise of equity or $1 per share. In accordance with EITF Issue
      98-5 "Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratios", the Company had evaluated that
      the convertible debt had a beneficial conversion feature as the conversion
      price
      was less than the fair value of the Company's common stock on the measurement
      date. Accordingly, the Company recognized this beneficial conversion feature
      by
      charging an interest expense of $186,598 for the year ended December 31, 2005.
      The Company had sold an aggregate of $1,510,000 of these convertible debentures.
      In September 2005, a debenture in the amount of $60,000 was converted into
      60,000 shares of common stock. In May 2006, the Company issued 796,056 and
      701,754 shares of common stock at $0.90 and $0.57 per share, respectively,
      for
      the induced conversion of $1,109,608 in convertible debentures including
      interest of $109,608. The debenture holders accepted these shares as full
      consideration for the outstanding convertible debentures. The Company recognized
      an additional expense of $403,872 because of the induced conversion to the
      debenture holders pursuant to the accounting requirements of SFAS No. 84,
      Induced Conversions of Convertible Debt. The original terms of the debentures
      called for them to be converted at $1.00 per share. The Company induced the
      debenture holders to convert at $0.90 and $0.57 per share.




12




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**


As
      of
      September 30, 2006, there are outstanding $337,500 of 9% Convertible Debentures
      due in January 2009. Holders of the 9% Convertible Debentures are entitled
      to
      convert principal amounts into shares of common stock at a conversion price
      of
      $1.00.





Debentures
      payable-net of discount in the amount of $34,287, is net of gross amount of
      debenture payables of $337,500 reduced by unamortized debt discount of
      $303,213.




Although
      the Company is current in its interest payments to the debenture holders, it
      previously was in default for not making payments on a timely basis. As a
      result, in accordance with the debenture agreements, these debentures become
      payable on demand unless the default is waived by the investors. The amount
      of
      debentures at September 30, 2006 of $337,500 plus accrued interest of $10,653
      has therefore been reflected as a current liability. The Company has not
      received any notice of default from any of the holders of the outstanding
      debentures.




**10.
      Financing from Shareholder**




Per
      a
      promissory note dated February 2003, Jules Nordlicht, a shareholder, agreed
      to
      advance in total or in installments, up to the amount of $1,000,000 to the
      Company. In November 2003 and August 2004, agreements were executed with this
      shareholder to cause additional advances in total or in installments up to
      the
      amount of $2,500,000 to advance the process of the FDA approval. In
      consideration for the financing, the Company agreed to repay such borrowed
      funds
      with accrued interest at 12% per annum and the shareholder reserved the right
      to
      demand payment in full or in part at anytime after December 31, 2006. On May
      8,
      2006 the shareholder agreed to extend the maturity date to December 31, 2008
      provided that (i) a partial payment of $350,000 will be made by the Company
      on
      or prior to July 31, 2006 and (ii) accrued interest will be paid quarterly
      thereafter, commencing September 30, 2006. The agreement was amended on
      September 4, 2006 so that the Company need no longer pay the quarterly accrued
      interest but an amount of $60,000 quarterly as a principal reduction. If the
      Company should default in these payments, the promissory note reverts to the
      original maturity date of December 31, 2006. As of September 30, 2006, the
      loan
      balance to this shareholder aggregated $1,594,146. An additional amount of
      $185,460 of interest on this note has been accrued during 2006 and remains
      owed
      as of September 30, 2006. The lender has filed a Uniform Commercial Code (UCC)
      Lien on the Company's equipment and patents as security for this
      loan.





**11.
      Shareholders’ Equity Transactions**





In
      February 2006, the Company engaged Chardan Capital Markets LLC. as its
      investment bankers. The agreement is for a period of 12 months. For the advisory
      services, the Company has agreed to issue a total of 300,000 shares of its
      common stock of which 100,000 shares were issued on signing of the agreement
      and
      the remaining 200,000 shares are to be issued in eight equal installments of
      25,000 shares on the 1st day of each month following the date of the agreement.




13




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**


As
      of
      September 30, 2006, monthly installments totaling 175,000 shares had been
      earned. The Company has accounted for this issuance as per provisions FAS 123R
      and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than
      Employees” (“EITF 96-18”). Expense of $75,425 and $250,775 has been recorded in
      the three and nine months ended September 30, 2006, respectively, in the
      statements of operations.




In
      March
      2006, previously issued warrants, exercisable into 1,500,000 shares at $.01
      per
      share for total proceeds of $15,000 were converted into common stock, resulting
      in the issuance of 1,500,000 common shares.




In
      May
      2006, previously issued warrants, exercisable into 1,750,000 shares at $.01
      per
      share for total proceeds of $17,500 were converted into common stock, resulting
      in the issuance of 1,750,000 common shares.





During
      May 2006, convertible debentures in the principal amount of $1,000,000 and
      accrued interest of $109,608 were converted into common stock, resulting in
      the
      issuance of 1,497,810 common shares. (See Note 9).




On
      June
      8, 2006, the Company completed a private placement of $2,150,000 with 10
      institutional and accredited investors pursuant to the 2006 Series A Convertible
      Preferred Stock Agreement dated June 7, 2006. Net proceeds from the placement
      were approximately $1,969,000. The Company issued 2,150 shares of Series 2006-A
      Convertible Preferred Stock, par value $0.001 per share (the “Convertible
      Preferred Stock”), at a purchase price of $1,000 per share. Each investor also
      received a Series A Warrant (a “Warrant”) to purchase up to 75% of the number of
      shares of common stock issuable to the investors upon conversion of their
      Convertible Preferred Stock. If all of the Warrants are exercised, the Company
      will issue a total of 2,015,625 shares of common stock. The warrants have a
      term
      of 5 years and the initial exercise price of $1.50 per share has been adjusted
      to $1.00 per share as the contingent event stated in the agreement failed to
      materialize. This $1.00 exercise price is subject to adjustments for certain
      corporate events such as merger, reorganization or future sale of securities
      at
      a price below the exercise price.




The
      Convertible Preferred Stock is convertible to shares of common stock at an
      initial conversion price of $0.80 per share, which has been since adjusted
      to
      $0.50 per share, as the contingent event stated in the agreement failed to
      materialize. The conversion price of $0.50 per share is subject to adjustment
      in
      the event of certain corporate events such as merger, reorganization or future
      sale of securities at a price below the conversion rate. Cash dividends accrue
      on the Convertible Preferred Stock at the rate of 8% per annum, payable
      quarterly beginning in October 2006; or, at the Company's option, dividends
      are
      payable in shares of the Company’s common stock, accruing at the rate of 10% per
      annum based on the volume-weighted average market price for shares of common
      stock for the 10 trading days preceding payment. As of September 30, 2006,
      the
      Company has accrued $53,750 in dividends at the rate of 10% per
      annum.




The
      Company may mandate conversion of the Convertible Preferred Stock if the closing
      bid price of the common stock exceeds $2.50 for twenty (20) consecutive trading
      days. In the event of a merger or sale of more than 50% of the assets of the
      Company, or in the event shares of common stock issuable upon the conversion
      of
      Convertible Preferred Stock or exercise of warrants fail or cease to be
      registered as contemplated by the terms of the Certificate of Designation of
      the
      Relative Rights and Preferences of Series 2006 A Convertible Preferred Stock
      ,
      the Convertible Preferred Stock is redeemable at a price of $1,000 per share,
      plus any accrued and unpaid dividends payable thereon, payable at the option
      of
      the Company in cash or in shares of the Company’s common stock.




In
      connection with the issuance of the Preferred Stock and Warrants pursuant to
      the
      June 8, 2006 private placement described above, we agreed to file a registration
      statement with the Securities and Exchange Commission to register for sale
      the
      shares of common stock issuable upon conversion of Convertible Preferred Stock
      and the exercise of Warrants. The Company was required to file a registration
      statement on or before August 4, 2006, which was timely filed. If the
      registration statement is not timely declared effective or is suspended for
      a
      certain length of time, the Company is required to pay 1% of the purchase price
      of the Convertible Preferred Stock for each 30 day period or portion thereof
      after such effective date until the registration statement is declared effective
      or reinstated.





There
      is
      no stated limit on the maximum penalty that could be incurred. However, the
      maximum penalty is effectively capped as the period or periods for which
      payments are due for events of default and limited under the registration rights
      agreement to 24 months. Accordingly, the penalty is capped at 24%.




14




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**





The
      Company is required to keep the Registration Statement continuously effective
      until such date as is the earlier of (x) the date when all Registrable Shares
      covered by the registration statement have been sold or (y) the date on which
      the Registrable Shares may be sold without any restriction pursuant to Rule
      144
      as determined by Counsel to the Company. The registration statement was timely
      filed and declared effective, and no penalty was payable at September 30, 2006.
      (SEE SUBSEQUENT EVENTS)




This
      preferred stock is being reflected as temporary equity on the balance sheet
      as
      it has redemption features. However, the initial discount on issue of preferred
      shares of $2,149,998 is not being accreted as currently there is no probability
      of redemption of the preferred stock.





The
      Company has accounted for the conversion option in the preferred
      stock as an embedded derivative under the provisions of FAS 133: Accounting
      for Derivative Instruments and Hedging Activities. Pursuant to the provisions
      of
      Statement of Financial Accounting Standards No. 133, and EITF 00-19: “Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock” (“EITF 00-19”), the Company has recorded initially the
      value of the warrants and conversion option at $2,095,930 and $3,698,316,
      respectively which are reflected as derivative instruments on the balance sheet.
      As the proceeds from the issuance of preferred shares of $2,150,000
      were less than the combined fair value of the warrants and the conversion
      option, the difference of $3,644,248 was charged to derivative expense, a
      non-operating expense, in the statements of operations.




As
      of September 30, 2006, the liability for the value of the warrants and
      conversion option was “marked to market” and the difference of $815,330 and
      $550,852 been accounted for as a decrease to the derivative expense
      initially recognized in the statements of operations. The liability for the
      value of the conversion option and warrants will be “marked to market” in future
      accounting periods until such time as the preferred shares are converted and
      the
      warrants are exercised or they meet the criteria for equity classification.




In
      connection with the June 8, 2006 private placement and pursuant to the advisory
      agreement between Chardan and the Company, the Company paid Chardan a placement
      fee of (i) $181,000 in cash and (ii) consultant warrants to purchase a total
      of
      470,313 shares of the Company’s common stock exercisable for ten years,
      consisting of 268,750 shares at an exercise price of $1.00 per share and 201,563
      shares at an exercise price of $1.00 per share. The cash paid of $181,000 and
      the value of the warrants of $489,050 issued to the private agent have been
      accounted as a charge to additional paid in capital.




In
      August
      2006, the agreement with the agent was modified. As a result, the Company agreed
      to issue additional warrants to purchase 161,250 shares of Common Stock as
      an
      advisory fee to Chardan. The warrants were assigned an initial value of $156,831
      and have been accounted for as a charge to additional paid in capital.
      These warrants have an exercise price of $1.00 per share and a ten year
      life.





As
      of September 30, 2006, the liability for the agent warrants was “marked to
      market” and the difference of $181,694 has been accounted for as a
      decrease to the derivative expense in the condensed statement of
      operations. The liability for the value of the warrants will be “marked to
      market”in future accounting periods until such time as they are exercised or
      they meet the criteria for equity classification.




15




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**


**12.
      Stock Options**





**Accounting
      for Employee Awards:**





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"), which
      replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes
      Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
      to Employees, and related interpretations. FAS 123 (R) requires compensation
      costs related to share-based payment transactions, including employee stock
      options, to be recognized in the financial statements. In addition, the Company
      adheres to the guidance set forth within Securities and Exchange Commission
      ("SEC") Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's
      views regarding the interaction between FAS No. 123(R) and certain SEC rules
      and
      regulations and provides interpretations with respect to the valuation of
      share-based payments for public companies.





Prior
      to
      January 1, 2006, the Company accounted for similar transactions in accordance
      with APB No. 25 which employed the intrinsic value method of measuring
      compensation cost. Accordingly, compensation expense was not recognized for
      fixed stock options if the exercise price of the option equaled or exceeded
      the
      fair value of the underlying stock at the grant date.





While
      FAS
      No. 123 encouraged recognition of the fair value of all stock-based awards
      on
      the date of grant as expense over the vesting period, companies were permitted
      to continue to apply the intrinsic value-based method of accounting prescribed
      by APB No. 25 and disclose certain pro-forma amounts as if the fair value
      approach of SFAS No. 123 had been applied. In December 2002, FAS No. 148,
      Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
      of FAS No. 123, was issued, which, in addition to providing alternative methods
      of transition for a voluntary change to the fair value method of accounting
      for
      stock-based employee compensation, required more prominent pro-forma disclosures
      in both the annual and interim financial statements. The Company complied with
      these disclosure requirements for all applicable periods prior to January 1,
      2006.





In
      adopting FAS 123(R), the Company applied the modified prospective approach
      to
      transition. Under the modified prospective approach, the provisions of FAS
      123
      (R) are to be applied to new awards and to awards modified, repurchased, or
      cancelled after the required effective date. Additionally, compensation cost
      for
      the portion of awards for which the requisite service has not been rendered
      that
      are outstanding as of the required effective date shall be recognized as the
      requisite service is rendered on or after the required effective date. The
      compensation cost for that portion of awards shall be based on the grant-date
      fair value of those awards as calculated for either recognition or pro-forma
      disclosures under FAS 123.





As
      a
      result of the adoption of FAS 123 (R), the Company's results for the three
      and
      nine month periods ended September 30, 2006 include share-based compensation
      expense totaling $168,272 and $499,329, respectively. This expense pertains
      to
      selling, general and administrative expenses and has been included in the
      relevant line item in the Statement of Operations. No income tax benefit has
      been recognized in the income statement for share-based compensation
      arrangements as the Company has provided a 100% valuation allowance on its
      net
      deferred tax asset. Stock compensation expense for employee options recorded
      under APB No. 25 in the statement of operations for the three and nine months
      ended September 30, 2005 totaled $(19,756) and $533,553,
      respectively.





Stock
      option compensation expense in fiscal 2006 is the estimated fair value of
      options granted amortized on a straight-line basis over the requisite service
      period for the entire portion of the award. The Company has not adjusted the
      expense by estimated forfeitures, as required by FAS 123(R) for employee
      options, since the forfeiture rate based upon historical data was determined
      to
      be immaterial.




16




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**




**Accounting
      for Non-employee Awards:**





The
      Company previously accounted for options granted to its non-employee consultants
      using the fair value cost in accordance with FAS 123 and EITF No. 96-18. The
      adoption of FAS 123(R) and SAB 107 as of January 1, 2006, had no material impact
      on the accounting for non-employee awards. The Company continues to consider
      the
      additional guidance set forth in EITF Issue No. 96-18, “Accounting for Equity
      Instruments That Are Issued to Other Than Employees” (“EITF 96-18”).





Stock
      compensation expense related to non-employee options was $34,863 and $0 for
      the
      nine month periods ended September 30, 2006 and 2005, respectively. These
      amounts are included in Statement of Operations within Selling, general and
      administrative line item.




**Pro
      Forma Information under SFAS No. 123 for Periods Prior to Adoption of FAS 123
      (
      R):**





There
      were no stock options granted in the three months ended September 30, 2006.
      The
      fair value for stock awards granted during the other periods was estimated
      using
      the Black-Scholes option pricing model with the following weighted average
      assumptions:





Three
                months ended
              September
                30,
            
            Nine
                months ended
              September
                30,2006
            
            2005
            
            2006
            
            2005(Pro
                forma)
            
            
            
            (Pro
                forma)Expected
                term (in years)
            
            
            
            
            
            5
            
            
            5
            
            
            5Expected
                stock price volatility
            
            
            
            
            
            188
            %
            
            182
            %
            
            191
            %Risk-free
                interest rate
            
            
            
            
            
            4.18
            %
            
            4.35
            %
            
            4.13
            %Expected
                dividend yield
            
            
            
            
            
            0
            %
            
            0
            %
            
            0
            %Estimated
                fair value per option granted
            
            
            
            
            
            1.265
            
            
            1.395
            
            
            1.412





The
      following table illustrates the effect on net income and earnings per share
      as
      if the fair value recognition provisions of FAS No. 123 had been applied to
      all
      outstanding and unvested awards in the prior year comparable period.





Three
                Month Period Ended September 30, 2005
              (Pro
                forma Restated)
            
            Nine
                Month Period Ended September 30, 2005
              (Pro
                forma Restated)Net
                loss as restated
            
            $
            (350,571
            )
            $
            (2,134,134
            )Add:
                Stock-based employeecompensation
                expenseincluded
                in reported net loss, net of related taxaffects
                (restated)
            
            
            (19,758
            )
            
            533,551Deduct:
                Total stock-based employee compensationexpensedetermined
                under fair value based method forall
                awards, net of related tax affects
            
            
            (253,938
            )
            
            (1,021,991
            )Pro
                forma net loss restated
            
            $
            (624,267
            )
            $
            (2,622,574
            )Basic
                and diluted net loss per share:As
                restated
            
            $
            (0.01
            )
            $
            (0.07
            )Pro
                forma Restated
            
            
            (0.02
            )
            
            (0.08
            )




17




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
        30, 2006**




The
      Company granted 100,000 and 550,000 employee stock options in the nine months
      ended September 30, 2006 and 2005, respectively. In January 2006, the Company
      granted options to its two outside directors, Richard Woodrich and Joseph Levi,
      to purchase in the aggregate 100,000 shares of the Company's common stock.
      The
      options vest quarterly in equal amounts over a period of three years, and are
      exercisable for seven years from the vesting date at an exercise price of $1.00.




The
      following table represents our stock options granted, exercised, and forfeited
      during the nine month period ended September 30, 2006:





Stock
                Options
            
            Number
                of Shares
            
            Weighted
                Average Exercise Price per Share ($)
            
            Weighted
                Average Remaining Contractual Term (years)
            
            Aggregate
                Intrinsic Value ($)Outstanding
                atJanuary
                1, 2006
            
            
            1,151,000
            
            $
            1.65Granted
            
            
            100,000
            
            
            1.00Exercised
            
            
            —
            
            
            —Forfeited/expired
            
            
            (51,000
            )
            
            19.23Outstanding
                atSeptember
                30, 2006
            
            
            1,200,000
            
            $
            0.85
            
            
            8.68
            
            $
            312,000Exercisable
                atSeptember
                30, 2006
            
            
            525,000
            
            $
            0.66
            
            
            8.73
            
            $
            237,750





As
      of
      September 30, 2006, there was $251,043 of unrecognized compensation cost related
      to non-vested awards granted under the option plans, which is expected to be
      recognized over a weighted-average period of less than 1 year.




**13.
      Contingencies** ****





*Legal
      Matters:*





On
      September 29, 2006, the Company and Chembio Diagnostic Systems, Inc. (“Chembio)
      entered into a Settlement Agreement pursuant to which all matters in their
      litigation regarding the Company’s’ barrel patent and other matters were
      settled. In addition the parties entered into the Joint HIV Barrel Product
      Commercialization Agreement, which provides that the parties will equally share
      in the profits relating to all HIV Barrel Products including Chembio’s SURE
      CHECK® HIV 1/2 after reimbursement to Chembio of its manufacturing and related
      costs, as defined, and that they will act jointly in the HIV barrel field.
      The
      settlement combines each company’s HIV barrel intellectual property, including
      an exclusive manufacturing license to Chembio of its barrel patent for all
      HIV
      applications.





To
      the
      best knowledge of the Company, no other material legal proceedings are
      pending.





*Economic
      Dependency:*





For
      the
      nine months ended September 30, 2006, sales to two customers were in excess
      of
      10% of the Company's total sales. Sales to these customers were approximately
      $462,000 and $131,000 and accounts receivable from these customers as of
      September 30, 2006, aggregated $65,400 and $55,400, respectively.




18




**STATSURE
          DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
          TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **SEPTEMBER
          30, 2006**


During
      the third quarter of 2006, the Company had three customers that accounted for
      94% of product sales ($117,000, $55,000, and $39,000). The loss of either of
      our
      two largest customers could have a material adverse effect on the Company.
      The
      Company is continuing to seek new markets and sales opportunities for its
      products.





For
      the
      nine months ended September 30, 2006, purchases from six suppliers were in
      excess of 10% of the Company's total purchases. The purchases from these
      suppliers for the nine months ended September 30, 2006 ranged from $24,000
      to
      $44,000. The corresponding accounts payable at September 30, 2006, to these
      suppliers, was $8,356.





**14.
      Subsequent Events**





In
      October 2006, 170
      shares of
      the
      Company’s 2006
      Series A Convertible Preferred Stock were converted into
      340,000 shares of the Company’s common stock.





In
      October 2006, a dividend was paid on the Company’s 2006
      Series A Convertible Preferred Stock with 55,850 shares of the Company’s common
      stock.





On
      October 13, 2006, the Company announced its intention to restate financial
      statements, and suspended use of its Registration Statement declared effective
      by the SEC October 4, 2006. For such time as the Registration Statement is
      not
      effective, the Company is obligated, purusant to Company’s Registration Rights
      Agreement with holders of the Company’s Convertible Preferred Stock, to pay such
      holders an amount equal to one percent per month of the original purchase price
      of the Convertible Preferred Stock until the earlier of the date the
      Registration Statement is again declared effective by the SEC, or June 2008.




19


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





The
      following discussion of the Company's financial condition and the results of
      operations should be read in conjunction with the Financial Statements and
      Notes
      thereto appearing elsewhere in this document.





The
      Private Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements. In order to comply with the terms of the safe
      harbor, the Company notes that in addition to the description of historical
      facts contained herein, this report contains certain forward-looking statements
      that involve risks and uncertainties as detailed herein and from time to time
      in
      the Company's other filings with the Securities and Exchange Commission and
      elsewhere. Such statements are based on management's current expectations and
      are subject to a number of factors and uncertainties, which could cause actual
      results to differ materially from those, described in the forward-looking
      statements. These factors include, among others: (a) the Company's fluctuations
      in sales and operating results; (b) risks associated with international
      operations; (c) regulatory, competitive and contractual risks; (d) product
      development risks; (e) the ability to achieve strategic initiatives, including
      but not limited to the ability to achieve sales growth across the business
      segments through a combination of enhanced sales force, new products, and
      customer service; and (f) pending litigation.





GENERAL





Since
      July 1990, the Company has been engaged almost exclusively in research and
      development activities focused on developing proprietary rapid assays for
      infectious diseases and to a lesser degree saliva based collection devices.
      During the years 2006 and 2005, the Company's products have been purchased
      by
      foreign governments, distributors, and laboratories.





On
      September 29, 2006, SSUR .OB
      announced it had signed several agreements relating to its patented barrel
      technology for use in screening antibodies to HIV (AIDS). As part of a three-way
      alliance with Inverness Medical Innovations (AMEX:IMA) and Chembio Diagnostics
      (CEMI.OB), StatSure signed a worldwide, exclusive distribution deal for a rapid,
      point-of-care (POC) HIV test with Inverness (a leading marketing and
      distribution organization for many POC products). In a two-way deal with
      Chembio, StatSure settled their multi-year patent litigation with StatSure
      granting Chembio an exclusive manufacturing license for its recently FDA cleared
      HIV Barrel Product. This product will be marketed under the IMA brand. An
      additional 2- way agreement with CEMI.OB, a “Joint HIV Barrel Commercialization
      Agreement” was finalized that establishes a long- term strategic “partnership”,
      wherein both companies equally split their margin dollars of the HIV Barrel
      Products once the actual cost of manufacturing is reimbursed.





Some
      terms of the agreement are:




·
            Inverness
                will market the “Barrel” HIV test under Inverness brands globally [subject
                only to certain existing international agreements that the Company
                and
                StatSure may keep in place for up to one
                year];




·
            Inverness
                will be the exclusive distributor/marketor of the “Barrel” HIV test under
                the agreement as well as any new HIV products in the “barrel field” that
                are developed, and may not compete with any products in this field
                worldwide as defined;




·
            The
                Company granted Inverness exclusive marketing and distribution rights
                to
                their intellectual property in the HIV barrel field; and Inverness
                also
                granted the Company a license to its lateral flow technology for
                an HIV
                cassette product as well as for certain other
                products.




The
      Company believes that the potential market for rapid tests in the United States
      and foreign countries will continue to grow as the benefits of rapid testing
      are
      better understood by the appropriate government agencies, by practitioners,
      and
by
      the general population. The need for and availability of rapid tests to screen
      large populations for HIV has been the subject of the medical, scientific and
      lay press, including the New York Times and the New England Journal of
      Medicine's Editorial pages. The U.S. Centers for Disease Control and Prevention
      (CDC) published on Sept 26, 2006; new recommendations for health care providers
      that are designed to make voluntary HIV screening a routine part of medical
      care
      for all patients aged 13 to 64. Highlights of the new recommendations for health
      care settings from the CDC (Center for Disease Control and Prevention):**http://www.cdc.gov/od/oc/media/pressrel/r060921.htm**




20




**STATSURE
            DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
            30, 2006**




Recently,
      the FDA has decided to conduct hearings to discuss the potential need,
      requirements, and issues of Over The Counter (OTC) marketing of HIV tests.
      The
      first of these hearings was held in November 2005 and the second was held in
      March 2006. Concerning long-term growth of the StatSureTM HIV test, industry
      observers believe that sales of HIV rapid tests will eventually be approved
      in
      certain markets for over-the-counter (OTC) sales, and that self-testing will
      emerge as a new market. The Company believes that the two- and three-way
      strategic relationships that were signed on September 29, 2006, will accelerate
      the commercialization of this technology and decrease certain risks the Company
      had relating to costs and timing of obtaining FDA clearance for its HIV barrel
      technology. However, there can be no assurance that we will receive significant
      revenues from the three-way licensing, marketing and distribution arrangement
      (among the Company, Inverness Medical Innovations and Chembio Diagnostics,
      Inc.), or from other new products we may develop or introduce.




The
      Company has limited marketing, sales and distribution resources. Achieving
      market acceptance will require substantial efforts and capabilities in these
      areas. The Company relies in large part on forming partnerships for marketing,
      sales and distribution of its products. The Company had entered into a number
      of
      agreements with distributors who are now in breach of the contractual terms.
      The
      relationship with each of these distributors is under review as a result of
      our
      signing the three-way strategic alliance with IMA.




We
      continue to distribute our StatSureTM HIV test (on a very limited basis) and
      Saliva Sampler® oral fluid collection product through our current distribution
      networks. We believe growth of revenues from our Saliva Sampler®oral fluid
      collectors could result from our two major customers who have both indicated
      a
      positive outlook for 2006. In addition, the company is beginning to explore
      new
      commercial applications of these collectors.





The
      Company has discontinued selling its FDA approved Stat-SimpleTM H. pylori test
      since 2000 but may elect to resume sales if market conditions so
      warrant.





On
      On
      June 8, 2006, the Company completed a 2006 Series A Convertible Preferred Stock
      Offering for $2,150,000.





In
      the
      course of a routine SEC review of the Company’s periodic filings, the SEC issued
      a comment letter dated October 4, 2006, alerting the Company to a possible
      incorrect application of certain accounting principles. On October 12, 2006,
      the
      Audit Committee of the Company's Board of Directors concluded based upon the
      recommendation of the Company's management and independent auditors, that the
      Company will restate its previously issued financial statements for the quarters
      ended March 31, 2005, June 30, 2005, and September 30, 2005, and for the year
      ended December 31, 2005, included in the Company's Annual Report on Form 10-KSB,
      and for the quarters ended March 31 and June 30, 2006. The Company filed an
      8-K
      on October 13, 2006 stating inform that its previously issued financial
      statements for these periods should therefore no longer be relied
      upon.




The
      need
      to restate the Company's financial statements arises from the incorrect
      application of generally accepted accounting principles related to two non-cash
      transactions, the beneficial conversion feature on the issuance of the
      convertible debt by the Company, and revised calculations of the Employee Stock
      Options pursuant to FIN 28: Accounting for Stock Appreciation Rights and Other
      Variable Stock Options or Award Plans, an Interpretation of APB Opinions Number
      15 and 25 (FASB Interpretations). The restatement is not expected to have any
      impact on the Company's statements of cash flows. The Company has filed its
      response to the SEC and it is estimated that the Company will file an amended
      Form 10-KSB and Forms 10-QSB for the relevant periods with the SEC as soon
      as
      the SEC’s comments are resolved. In this Form 10-QSB, the Company has restated
      the prior comparative periods for the three and nine months ended September
      30,
      2005 for the above stated incorrect application of accounting principles. For
      more information on the restatement, see “Restatement of 2005 periods” below.




21


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**




On
      October 24, 2006, the Company notified the U.S. Food and Drug Administration
      ("FDA) that it was withdrawing its pending Pre-Market Approval application
      for a
      rapid HIV diagnostic screening product employing the Company's patented "barrel"
      technology. The Company determined there is no need to obtain Pre-Market
      Approval for its own HIV Barrel Product as commercialization of its barrel
      technology will be undertaken by means of the aforementioned
      arrangement.





The
      Company believes that its current cash position will not be sufficient to
      maintain the Company's operations through 2006. The Company will need to raise
      additional capital to fund its aggressive growth and marketing efforts and
      to
      capitalize on its Intellectual Property (IP) portfolio to design, develop,
      test,
      gain regulatory approval and launch new products as well as to meet its debt
      obligations. Development, marketing, manufacturing and clinical testing may
      require capital resources substantially greater than the resources, which may
      be
      available to the Company. The Company is reviewing its options, including the
      selling of common stock or considering other strategic alternatives, as a means
      to fund the Company's future growth plans. There can be no assurance that the
      Company will be able to obtain the additional capital resources necessary to
      fund its growth plans, or that such financing will be available on commercially
      reasonable terms.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





The
      preparation of financial statements and related disclosures in conformity with
      accounting principles generally accepted in the United States requires
      management to make estimates and assumptions that affect the amounts reported
      in
      the unaudited Financial Statements and accompanying notes. Estimates are used
      for, but not limited to, the accounting for the allowance for doubtful accounts,
      inventories, income taxes and loss contingencies. Management bases its estimates
      on historical experience and on various other assumptions that are believed
      to
      be reasonable under the circumstances. Actual results could differ from these
      estimates under different assumptions or conditions.





The
      Company has adopted Statement of Financial Accounting Standards (“FAS”) No. 123
      (Revised 2004), Share-Based Payment [“FAS 123(R)], effective January 1, 2006, to
      account for its employee options. Other than this adoption, the Company believes
      there have been no other significant changes, during the quarterly period ended
      September 30, 2006, to the items disclosed as critical accounting policies
      and
      estimates in Management's Discussion and Analysis of Financial Condition and
      Results of Operations in the Company's Annual Report on Form 10-KSB for the
      year
      ended December 31, 2005.




22




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**SEPTEMBER
      30, 2006**




**RESTATEMENT**





Subsequent
      to the filing of form 10-QSB for the three month and nine month periods ended
      September 30, 2006, the Company revalued warrants issued during 2005 as payment
      for services rendered for which the Company had used a 30% discount for various
      restrictions. This revaluation increased related expense to $399,622 from
      $280,000. The Company accounts for warrants granted to its non-employee
      consultants using the fair value cost in accordance with SFAS 123 and EITF
      No.
      96-18, “Accounting for Equity Instruments That Are Issued to Other Than
      Employees”. The fair value of warrants granted was estimated on the date of
      grant using the Black-Scholes option-pricing model with the following
      weighted-average assumptions: expected volatility of 200.4%, risk-free interest
      rate of 3.71% and expected life of 4.93 years for the year ended December 31,
      2005.





The
      Balance Sheet as of September 30, 2006 is now being restated in this Form
      10QSB/A filing to give effect to the correction of this error. The table below
      details the items affected by the restatement:




**BALANCE
                SHEET**
              **September 30, 2006**As
                reported
            
            As
                restated**SHAREHOLDERS’
                DEFICIT:**Additional
                paid in capital
            
            
            45,868,061
            
            
            45,987,683Accumulated
                deficit
            
            
            (53,913,228
            )
            
            (54,032,850
            )


23


**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**SEPTEMBER
      30, 2006**




**Results
      of Operations**





Third
      Quarter and First Nine Months of 2006 Compared to Third Quarter and First Nine
      Months of 2005





**Revenues.** The
      Company's revenues consist of product sales and royalties. Revenues increased
      10% to $225,411 in the third quarter of 2006 yielding a gross margin of $144,981
      or 64% from revenues of $204,846 in the third quarter of 2005, yielding a gross
      margin of $129,346 or 63%. Revenues increased 4% to $ 669,477 in
      the
      first nine months of 2006 yielding a gross margin of $442,950 or 66% from
      $ 646,399 in
      the
      first nine months of 2005 yielding a gross margin of $420,159 or 65%. The
      Company's revenues are primarily generated from sales of its patented saliva
      collection devices. Specimens collected with the device are sent to and
      processed at laboratories. For the nine months ended September 30, 2006, sales
      to two customers were in excess of 10% of the Company's total sales. Sales
      to
      these customers were approximately $462,000 and $131,000.





**Cost
      of products sold** :
      Costs
      of products sold increased to $80,430 (36% of product sales) in the third
      quarter of 2006 from $75,500 (37% of product sales) in the third quarter of
      2005, and increased to $226,527 (34% of product sales) in the first nine months
      of 2006 from $226,240 (35% of product sales) in the first nine months of 2005.
      Gross margins for the periods were stable and the Company did not have any
      unanticipated events.





**Research
      and development expenses:** Research
      and development expenses decreased to $6,273 **** in
      the
      third quarter of 2006 from $102,449 **** in
      the
      third quarter of 2005 and decreased to $148,888 in the first nine months of
      2006
      from $264,005 in the first nine months of 2005. The decrease is due to fewer
      consulting expenses incurred with our HIV test. R&D costs are expected to
      decrease from previous year’s levels as the Company will no longer be applying
      for FDA PMA approval for its “barrel” format HIV test, due to an agreement
      signed with Inverness Medical and Chembio Diagnostics.





**Selling,
      general and administrative expenses** :
      Selling, general and administrative expenses increased 130% to $523,350 in
      the
      third quarter of 2006 from $227,302 in the third quarter of 2005 and increased
      5% to $1,809,007 in the first nine months of 2006 from $1,724,504 in the first
      nine months of 2005. This increase is due to significantly greater expenses
      for
      consulting, professional fees, amortization expense, and payroll. Of these
      amounts stock based compensation and employment recruiting expenses- non cash,
      decreased 35% to $ 266,939 from
      $408,994 in the third quarter of 2006, versus the third quarter of 2005 and
      decreased 1% to $808,209 from $813,553 in the first nine months of 2006 versus
      the same period in 2005. The amount for the third quarter of 2005 has been
      restated from $92,586 to $(19,756) to account for variable options granted
      to an
      employee in accordance with FIN 28. The stock based compensation for third
      quarter of 2006 comprises amortization charges for employee and director options
      accounted under FAS 123(R) of $168,272 and for non-employee options of $11,621
      accounted under FAS 123 (R) and EITF 96-18.





**Loss
      from operations:** The loss
      from operations for the third quarter of 2006 of $384,642 reflects a 92%
      increase in loss from the $200,405 loss reported for the third quarter of 2005;
      and the loss from operations for the first nine months of 2006 of $1,514,945
      reflects a 3% decrease from the $1,568,350 loss reported for the first nine
      months of 2005. Decreased expenses for stock based compensation in 2006
      contributed to the Company’s decreased loss.





**Interest
      expense:** Interest
      expense increased to $110,578 in the third quarter of 2006 from $92,560 in
      the
      third quarter of 2005 and decreased to $256,420 in the first nine months of
      2006
      from $260,816 in the first nine months of 2005. Interest expense on beneficial
      conversion feature increased slightly to $36,347 in the third quarter of 2006
      from $36,310 in the third quarter of 2005 and increased to $1,020,189 in the
      first nine months of 2006 from $121,449 in the first nine months of 2005. The
      increase of non-cash interest expense was due to amortization of beneficial
      conversion feature of debentures.





**Derivative
      income (expense):** Non-cash
      derivative income of $1,547,877 and derivative expense of $798,315 for the
      three
      and nine months ended September 30, 2006 was due to the mark-to market
      adjustment on embedded derivatives principally driven by the decrease in our
      common stock price from $1.50 to $1.11. The Company did not have derivative
      instruments in the same periods of 2005.




24


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**




**Financing
      costs:** Financing
      costs increased to $3,708,146 in the first nine months of 2006 from $63,899
      in
      the first nine months of 2005. All of the increase was due to the Series 2006-A
      convertible preferred stock financing and the application of derivative
      accounting.





**Debt
      conversion expense:** Other
      expense consists of an induced conversion expense of $403,872 incurred to
      convert the 9% convertible debentures as
      required under SFAS 84. The
      Company did not incur similar expenses in the third quarter of
      2005.





**LIQUIDITY
      AND CAPITAL RESOURCES**





**Income
      Taxes:** The
      Company is in a net deferred tax asset position and has generated net operating
      losses to date. No provision for or benefit from income taxes has been recorded
      in the accompanying statements of operations. The Company will continue to
      provide a valuation allowance for its deferred tax assets until it becomes
      more
      likely than not, in management’s assessment, that the Company’s deferred tax
      assets will be realized. The Company has a net operating loss carryforward
      of
      approximately $56 million, which is available to offset future taxable income,
      if any, expiring in various years through the year 2025. The Internal Revenue
      Code rules under Section 382 could limit the future use of these losses based
      on
      ownership changes and the value of the Company’s stock.





**September
                30, 2006**
            
            December
                31, 2005Cash
                and cash equivalents
            
            **$**
            **260,865**
            
            $
            76,321Working
                capital (deficit)
            
            
            **(309,199**
            **)**
            
            (876,207
            )





Net
      cash
      used in operating activities in the first nine months of 2006 was $890,988.
      Net
      cash used in the first nine months of 2005 was $735,200. In 2006, the increase
      in cash used by operations was primarily due to the increase of the net loss
      of
      $7,701,887 (2006) and $2,014,514 (2005). The following expenses showed
      significant changes between the first nine months of 2006 when compared to
      the
      first nine months of 2005:




·
            Legal
                and accounting costs (increased in
                2006)




·
            Non-cash
                expenses recorded for beneficial conversion features of convertible
                debt,
                and stock and warrant issuance costs(increased in 2006)




·
            Non-cash
                financing costs incurred in the issuance of the Series 2006-A Convertible
                Preferred Stock (increased in 2006)




·
            Non-cash
                induced conversion expense (increased in
                2006)




·
            Consulting
                expenses (increased in 2006)




·
            Insurance
                (increased in 2006)




·
            Recruiting
                expense (decreased in 2006)




·
            Director
                fees (increased in 2006)




Net
      cash
      used in operating activities for 2005 was not impacted by the aforementioned
      restatement.





Cash
      used
      in investing activities in the first nine months of 2006 was $52,178 as compared
      to $284,329 in the first nine months of 2005. The significant changes were
      equipment costs $1,321 in 2006 and $122,729 in 2005. Deferred finance costs
      in
      2005 were $160,000; the Company did not incur similar costs in 2006





Cash
      provided by financing activities in the first nine months of 2006 was
      $1,127,710, and in the first nine months of 2005 was $891,760. The following
      lists the significant changes. During 2006 the Company netted $1,969,000 from
      the sale of Series 2006-A Convertible Preferred Stock offset by net repayments
      of $761,290 of shareholder loans. During 2005 the Company received $1,510,000
      from the sale of debentures. This amount was offset by $593,287 in net
      repayments of shareholder loans. Proceeds from issuance of common stock in
      2006
      were $32,500 and in 2005 was $2,000.




25




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**


Our
      cash
      requirements depend on numerous factors, including product development
      activities, penetration of the direct sales market, market acceptance of our
      products, and effective management of accounts receivable. We expect to devote
      capital resources to improve our sales and marketing efforts, continue our
      product development, expand manufacturing capacity and continue research and
      development activities. We will examine other growth opportunities, including
      strategic alliances, and we expect any such activities will be funded from
      funds
      provided by debenture offerings and or stock subscription sales in 2006. There
      can be no assurance that we will be successful in raising such
      funds.





Since
      inception, the Company has financed its capital requirements through the
      proceeds from its public offering of common stock in March 1993 and the exercise
      of common stock purchase warrants pursuant to such offering, proceeds from
      sales
      of convertible debentures, proceeds from private placements of common stock
      and
      preferred stock, the exercise of common stock purchase warrants and stock
      options and loans.




Per
      a
      promissory note dated February 2003, Jules Nordlicht, a shareholder, agreed
      to
      advance in total or in installments, up to the amount of $1,000,000 to the
      Company. In November 2003 and August 2004, agreements were executed with this
      shareholder to cause additional advances in total or in installments up to
      the
      amount of $2,500,000 to advance the process of the FDA approval. In
      consideration for the financing, the Company agreed to repay such borrowed
      funds
      with accrued interest at 12% per annum and the shareholder reserved the right
      to
      demand payment in full or in part at anytime after December 31, 2006. On May
      8,
      2006 the shareholder agreed to extend the maturity date to December 31, 2008
      provided that (i) a partial payment of $350,000 will be made by the Company
      on
      or prior to July 31, 2006 and (ii) accrued interest will be paid quarterly
      thereafter, commencing September 30, 2006. The agreement was amended on
      September 4, 2006 that the Company need no longer pay the quarterly accrued
      interest but an amount of $60,000 quarterly as a principal reduction. If the
      Company should default in these payments, the promissory note reverts to the
      original maturity date of December 31, 2006. As of September 30, 2006, the
      loan
      balance to this shareholder aggregated $1,594,146. An additional amount of
      $185,460 of interest on this note has been accrued during 2006 and remains
      owed
      as of September 30, 2006. The lender has filed a Uniform Commercial Code (UCC)
      Lien on the Company's equipment and patents as security for this
      loan.





On
      January 19, 2005, the Company's board of directors authorized the issuance
      and
      sale of up to three million dollars of convertible debentures. These debentures
      mature March 31, 2009 and carry an interest rate of 9% per year and are
      convertible into common stock at the lower of 66.6% of the valuation of the
      Company's next raise of equity or $1 per share. In accordance with EITF Issue
      98-5 "Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratios", the Company had evaluated that
      the convertible debt had a beneficial conversion feature as the conversion
      price
      was less than the fair value of the Company's common stock on the measurement
      date. Accordingly, the Company recognized this beneficial conversion feature
      by
      charging an interest expense of $186,598 for the year ended December 31, 2005.
      The Company had sold an aggregate of $1,510,000 of these convertible debentures.
      In September 2005, a debenture in the amount of $60,000 was converted into
      60,000 shares of common stock. In May 2006, the Company issued 796,056 and
      701,754 shares of common stock at $0.90 and $0.57 per share, respectively,
      for
      the induced conversion of $1,109,608 in convertible debentures including
      interest of $109,608. The debenture holders accepted these shares as full
      consideration for the outstanding convertible debentures. The Company recognized
      an additional expense of $403,872 because of the induced conversion to the
      debenture holders pursuant to the accounting requirements of SFAS No. 84,
      Induced Conversions of Convertible Debt. The original terms of the debentures
      called for them to be converted at $1.00 per share. The Company induced the
      debenture holders to convert at $0.90 and $0.57 per share.




26


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**


As
      of
      September 30, 2006, there are outstanding $337,500 of 9% Convertible Debentures
      due in January 2009. Holders of the 9% Convertible Debentures are entitled
      to
      convert principal amounts into shares of common stock at a conversion price
      of
      $1.00.





Debentures
      payable-net of discount in the amount of $34,287, is net of gross amount of
      debenture payables of $337,500 reduced by unamortized debt discount of
      $303,213.




Although
      the Company is current in its interest payments to the debenture holders, it
      previously was in default for not making payments on a timely basis. As a
      result, in accordance with the debenture agreements, these debentures become
      payable on demand unless the default is waived by the investors. The amount
      of
      debentures at September 30, 2006 of $337,500 reduced by unamortized debt
      discount of $303,213 plus accrued interest of $10,653 has therefore been
      reflected as a current liability. The Company has not received any notice of
      default from any of the holders of the outstanding debentures.




In
      January 2006, the Company granted options to its two outside directors, Richard
      Woodrich and Joseph Levi, to purchase in the aggregate 100,000 shares of the
      Company's common stock. The options vest quarterly in equal amounts over a
      period of three years, and are exercisable for seven years from the vesting
      date
      at an exercise price equal to the lower of $1.00 or two-thirds of the price
      of
      common stock established in any offering and sale occurring prior to April
      30,
      2006. As of September 30, 2006, the Company recorded director fees of $34,863.





In
      February 2006, the Company engaged Chardan Capital Markets LLC. as its
      investment bankers. The agreement is for a period of 12 months. For the advisory
      services, the Company has agreed to issue a total of 300,000 shares of its
      common stock of which 100,000 shares were issued on signing of the agreement
      and
      the remaining 200,000 shares are to be issued in eight equal installments of
      25,000 shares on the 1st day of each month following the date of the agreement.
      As of September 30, 2006, monthly installments totaling 175,000 shares had
      been
      earned. The Company has accounted for this issuance as per provisions FAS 123R
      and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than
      Employees” (“EITF 96-18”). Expense of $75,425 and $250,775 has been recorded in
      the three and nine months ended September 30, 2006, respectively, in the
      statements of operations.





In
      March
      2006, previously issued warrants, exercisable into 1,500,000 shares at $.01
      per
      share for total proceeds of $15,000 were converted into common stock, resulting
      in the issuance of 1,500,000 common shares.




In
      May
      2006, previously issued warrants, exercisable into 1,750,000 shares at $.01
      per
      share for total proceeds of $17,500 were converted into common stock, resulting
      in the issuance of 1,750,000 common shares.





During
      May 2006, convertible debentures in the principal amount of $1,000,000 and
      accrued interest of $109,608 were converted into common stock, resulting in
      the
      issuance of 1,497,810 common shares.




On
      June
      8, 2006, the Company completed a private placement of $2,150,000 with 10
      institutional and accredited investors pursuant to the 2006 Series A Convertible
      Preferred Stock Agreement dated June 7, 2006. Net proceeds from the placement
      were approximately $1,969,000. The Company issued 2,150 shares of Series 2006-A
      Convertible Preferred Stock, par value $0.001 per share (the “Convertible
      Preferred Stock”), at a purchase price of $1,000 per share. Each investor also
      received a Series A Warrant (a “Warrant”) to purchase up to 75% of the number of
      shares of common stock issuable to the investors upon conversion of their
      Convertible Preferred Stock. If all of the Warrants are exercised, the Company
      will issue a total of 2,015,625 shares of common stock. The warrants have a
      term
      of 5 years and the initial exercise price of $1.50 per share has been adjusted
      to $1.00 per share as the contingent event stated in the agreement failed to
      materialize. This $1.00 exercise price is subject to adjustments for certain
      corporate events such as merger, reorganization or future sale of securities
      at
      a price below the exercise price.




The
      Convertible Preferred Stock is convertible to shares of common stock at an
      initial conversion price of $0.80 per share, which has been since adjusted
      to
      $0.50 per share, as the contingent event stated in the agreement failed to
      materialize. The conversion price of $0.50 per share is subject to adjustment
      in
      the event of certain corporate events such as merger, reorganization or future
      sale of securities at a price below the conversion rate. Cash dividends accrue
      on the Convertible Preferred Stock at the rate of 8% per annum, payable
      quarterly beginning in October 2006; or, at the Company's option, dividends
      are
      payable in shares of the Company’s common stock, accruing at the rate of 10% per
      annum based on the volume-weighted average market price for shares of common
      stock for the 10 trading days preceding payment. As of September 30, 2006,
      the
      Company has accrued $53,750 in dividends at the rate of 10% per
      annum.




27


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**




In
      connection with the issuance of the Preferred Stock and Warrants pursuant to
      the
      June 8, 2006 private placement described above, we agreed to file a registration
      statement with the Securities and Exchange Commission to register for sale
      the
      shares of common stock issuable upon conversion of Convertible Preferred Stock
      and the exercise of Warrants. The Company was required to file a registration
      statement on or before August 4, 2006, which was timely filed. If the
      registration statement is not timely declared effective or is suspended for
      a
      certain length of time, the Company is required to pay 1% of the purchase price
      of the Convertible Preferred Stock for each 30 day period or portion thereof
      after such effective date until the registration statement is declared effective
      or reinstated.





There
      is
      no stated limit on the maximum penalty that could be incurred. However, the
      maximum penalty is effectively capped as the period or periods for which
      payments are due for events of default and limited under the registration rights
      agreement to 24 months. Accordingly, the penalty is capped at 24%.





The
      Company is required to keep the Registration Statement continuously effective
      until such date as is the earlier of (x) the date when all Registrable Shares
      covered by the registration statement have been sold or (y) the date on which
      the Registrable Shares may be sold without any restriction pursuant to Rule
      144
      as determined by Counsel to the Company. The registration statement was timely
      filed and declared effective, and no penalty was payable at September 30, 2006.
      (SEE SUBSEQUENT EVENTS BELOW)




This
      preferred stock is being reflected as temporary equity on the balance sheet
      as
      it has redemption features. However, the initial discount on issue of preferred
      shares of $2,149,998 is not being accreted as currently there is no probability
      of redemption of the preferred stock.





The
      Company has accounted for the conversion option in the preferred
      stock as an embedded derivative under the provisions of FAS 133: Accounting
      for Derivative Instruments and Hedging Activities. Pursuant to the provisions
      of
      Statement of Financial Accounting Standards No. 133, and EITF 00-19: “Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock” (“EITF 00-19”), the Company has recorded initially the
      value of the warrants and conversion option at $2,095,930 and $3,698,316,
      respectively which are reflected as derivative instruments on the balance sheet.
      As the proceeds from the issuance of preferred shares of $2,150,000
      were less than the combined fair value of the warrants and the conversion
      option, the difference of $3,644,248 was charged to financing costs, a
      non-operating expense, in the statements of operations.




As
      of September 30, 2006, the liability for the value of the warrants and
      conversion option was “marked to market” and the difference of $815,330 and
      $550,852 been accounted for as a decrease to the derivative expense
      initially recognized in the statements of operations. The liability for the
      value of the conversion option and warrants will be “marked to market” in future
      accounting periods until such time as the preferred shares are converted and
      the
      warrants are exercised or they meet the criteria for equity classification.




In
      connection with the June 8, 2006 private placement and pursuant to the advisory
      agreement between Chardan and the Company, the Company paid Chardan a placement
      fee of (i) $181,000 in cash and (ii) consultant warrants to purchase a total
      of
      470,313 shares of the Company’s common stock exercisable for ten years,
      consisting of 268,750 shares at an exercise price of $1.00 per share and 201,563
      shares at an exercise price of $1.00 per share. The cash paid of $181,000 and
      the value of the warrants of $489,050 issued to the private agent have been
      accounted as a charge to additional paid in capital.




28


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**




In
      August
      2006, the agreement with the agent was modified. As a result, the Company agreed
      to issue additional warrants to purchase 161,250 shares of Common Stock as
      an
      advisory fee to Chardan. The warrants were assigned an initial value of $156,831
      and have been accounted for as a charge to additional paid in capital.
      These warrants have an exercise price of $1.00 per share and a ten year
      life.





As
      of September 30, 2006, the liability for the agent warrants was “marked to
      market” and the decrease of $181,694 for the three and nine months ended
      September 30, 2006, has been accounted for as derivative income in the condensed
      statement of operations. The liability for the value of the warrants will be
      “marked to market”in future accounting periods until such time as they are
      exercised or they meet the criteria for equity classification.




The
      Company occupies premises in Framingham, MA. The lease has a three-year initial
      term ending March 31, 2008 and a base annual rental rate starting at
      approximately $26,350 and increasing to approximately $40,500 per year over
      that
      initial term. The lease also has a one-year renewal option at an annual base
      rental rate of approximately $40,500. The Company also occupies premises in
      Brooklyn, New York. This lease has a three-year term ending August 30, 2008
      and
      a base annual rental rate starting at $15,000 and increasing to $15,913 per
      year.




The
      following table lists the future payments required on debt and any other
      contractual obligations of the Company as of September 30, 2006.




Obligations
            
            **Total**
            
            Less
                than 1 year
            
            1-3
                yearsLong-term
                debt
            
            **$**
            **1,931,646**
            
            $
            577,500
            
            $
            1,354,146Operating
                leases
            
            
            **83,000**
            
            
            61,000
            
            
            22,000





There
      can
      be no assurance that the Company will be able to obtain the additional capital
      resources necessary to implement or continue its programs, or that such
      financing will be available on commercially reasonable terms or at all. The
      Company will continue to seek public or private placement of its equity
      securities and corporate partners to develop products. There can be no assurance
      that the Company will be able to sell its securities on commercially reasonable
      terms or to enter into agreements with corporate partners on favorable terms
      or
      at all. The Company’s future capital needs will depend upon numerous factors,
      including the progress of the approval for sale of the Company’s products in
      various countries, including the U.S., the extent and timing of the acceptance
      of the Company’s products, the cost of marketing and manufacturing activities
      and the amount of revenues generated from operations, none of which can be
      predicted with certainty.




**SUBSEQUENT
      EVENT**





In
      October 2006, 170
      shares of
      the
      Company’s 2006
      Series A Convertible Preferred Stock were converted into
      340,000 shares of the Company’s common stock.





In
      October 2006, a dividend was paid on the Company’s 2006
      Series A Convertible Preferred Stock with 55,850 shares of the Company’s common
      stock.





On
      October 13, 2006, the Company announced its intention to restate financial
      statements, and suspended use of its Registration Statement declared effective
      by the SEC October 4, 2006. For such time as the Registration Statement is
      not
      effective, the Company is obligated, purusant to Company’s Registration Rights
      Agreement with holders of the Company’s Convertible Preferred Stock, to pay such
      holders an amount equal to one percent per month of the original purchase price
      of the Convertible Preferred Stock until the earlier of the date the
      Registration Statement is again declared effective by the SEC, or June 2008.





29




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**


**ITEM
      3. CONTROLS AND PROCEDURES**





**EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES**





As
      of the
      end of the period covered by this report, we evaluated, under the supervision
      and with the participation of our management, including our chief executive
      officer and chief financial officer, the effectiveness of the design and
      operation of our "disclosure controls and procedures" [as defined in the
      Securities Exchange Act of 1934, Rules 13a - 15(e) and 15d - 15(e)]. It is
      noted
      that the Company has amended its original Form 10-QSB filing with the SEC.
      The
      reason for this amended filing is due to complex financial transactions which
      resulted in accounting restatements in response to a recent SEC routine inquiry.
      As a result, our chief executive officer and chief financial officer have
      concluded that as of the date of the evaluation our disclosure controls and
      procedures were not effective to ensure that all material information required
      to be filed in this report has been made known to them. Accordingly, we have
      engaged an accounting firm other than our auditors to assist in the accounting
      for these complex transactions. Management believes that these measures will
      ensure the proper recording of all transactions in future periods.





**CHANGE
      IN INTERNAL CONTROLS**





There
      have been no changes in internal controls over financial reporting that occurred
      during the most recent fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our internal controls over financial
      reporting.





30




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**SEPTEMBER
      30, 2006**




**PART
      II. OTHER INFORMATION**





**Item
      1** **.
      LEGAL PROCEEDINGS**





None





**Item
      2.** **CHANGES
      IN SECURITIES**




On
      June
      8, 2006, the Company completed a private placement of $2,150,000 with 10
      institutional and accredited investors pursuant to the 2006 Series A Convertible
      Preferred Stock Agreement dated June 7, 2006. Net proceeds from the placement
      were approximately $1,969,000. The Company issued 2,150 shares of Series 2006-A
      Convertible Preferred Stock, par value $0.001 per share (the “Convertible
      Preferred Stock”), at a purchase price of $1,000 per share. Each investor also
      received a Series A Warrant (a “Warrant”) to purchase up to 75% of the number of
      shares of common stock issuable to the investors upon conversion of their
      Convertible Preferred Stock. If all of the Warrants are exercised, the Company
      will issue a total of 2,015,625 shares of common stock. The warrants have a
      term
      of 5 years and the initial exercise price of $1.50 per share has been adjusted
      to $1.00 per share as the contingent event stated in the agreement failed to
      materialize. This $1.00 exercise price is subject to adjustments for certain
      corporate events such as merger, reorganization or future sale of securities
      at
      a price below the exercise price.




The
      Convertible Preferred Stock is convertible to shares of common stock at an
      initial conversion price of $0.80 per share, which has been since adjusted
      to
      $0.50 per share, as the contingent event stated in the agreement failed to
      materialize. The conversion price of $0.50 per share is subject to adjustment
      in
      the event of certain corporate events such as merger, reorganization or future
      sale of securities at a price below the conversion rate. Cash dividends accrue
      on the Convertible Preferred Stock at the rate of 8% per annum, payable
      quarterly beginning in October 2006; or, at the Company's option, dividends
      are
      payable in shares of the Company’s common stock, accruing at the rate of 10% per
      annum based on the volume-weighted average market price for shares of common
      stock for the 10 trading days preceding payment. As of September 30, 2006,
      the
      Company has accrued $53,750 in dividends at the rate of 10% per
      annum.




In
      connection with the issuance of the Preferred Stock and Warrants pursuant to
      the
      June 8, 2006 private placement described above, we agreed to file a registration
      statement with the Securities and Exchange Commission to register for sale
      the
      shares of common stock issuable upon conversion of Convertible Preferred Stock
      and the exercise of Warrants. The Company was required to file a registration
      statement on or before August 4, 2006, which was timely filed. If the
      registration statement is not timely declared effective or is suspended for
      a
      certain length of time, the Company is required to pay 1% of the purchase price
      of the Convertible Preferred Stock for each 30 day period or portion thereof
      after such effective date until the registration statement is declared effective
      or reinstated.





There
      is
      no stated limit on the maximum penalty that could be incurred. However, the
      maximum penalty is effectively capped as the period or periods for which
      payments are due for events of default and limited under the registration rights
      agreement to 24 months. Accordingly, the penalty is capped at 24%.





The
      Company is required to keep the Registration Statement continuously effective
      until such date as is the earlier of (x) the date when all Registrable Shares
      covered by the registration statement have been sold or (y) the date on which
      the Registrable Shares may be sold without any restriction pursuant to Rule
      144
      as determined by Counsel to the Company. The registration statement was timely
      filed and declared effective, and no penalty was payable at September 30, 2006.
      (SEE SUBSEQUENT EVENTS)




This
      preferred stock is being reflected as temporary equity on the balance sheet
      as
      it has redemption features. However, the initial discount on issue of preferred
      shares of $2,149,998 is not being accreted as currently there is no probability
      of redemption of the preferred stock.




31




**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**


The
      Company has accounted for the conversion option in the preferred
      stock as an embedded derivative under the provisions of FAS 133: Accounting
      for Derivative Instruments and Hedging Activities. Pursuant to the provisions
      of
      Statement of Financial Accounting Standards No. 133, and EITF 00-19: “Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock” (“EITF 00-19”), the Company has recorded initially the
      value of the warrants and conversion option at $2,095,930 and $3,698,316,
      respectively which are reflected as derivative instruments on the balance sheet.
      As the proceeds from the issuance of preferred shares of $2,150,000
      were less than the combined fair value of the warrants and the conversion
      option, the difference of $3,644,248 was charged to derivative expense, a
      non-operating expense, in the statements of operations.




As
      of September 30, 2006, the liability for the value of the warrants and
      conversion option was “marked to market” and the difference of $815,330 and
      $550,852 been accounted for as a decrease to the derivative expense
      initially recognized in the statements of operations. The liability for the
      value of the conversion option and warrants will be “marked to market” in future
      accounting periods until such time as the preferred shares are converted and
      the
      warrants are exercised or they meet the criteria for equity classification.




In
      connection with the June 8, 2006 private placement and pursuant to the advisory
      agreement between Chardan and the Company, the Company paid Chardan a placement
      fee of (i) $181,000 in cash and (ii) consultant warrants to purchase a total
      of
      470,313 shares of the Company’s common stock exercisable for ten years,
      consisting of 268,750 shares at an exercise price of $0.50 per share and 201,563
      shares at an exercise price of $1.00 per share. The cash paid of $181,000 and
      the value of the warrants of $489,050 issued to the private agent have been
      accounted as a charge to additional paid in capital.





In
      August
      2006, the agreement with the agent was modified. As a result, the Company agreed
      to issue additional warrants to purchase 161,250 shares of Common Stock as
      an
      advisory fee to Chardan. The warrants were assigned an initial value of $156,831
      and have been accounted for as a charge to additional paid in capital.
      These warrants have an exercise price of $0.50 per share and a ten year
      life.





As
      of September 30, 2006, the liability for the agent warrants was “marked to
      market” and the difference of $181,694 has been accounted for as a
      decrease to the interest expense in the condensed statement of operations.
      The liability for the value of the warrants will be “marked to market”in future
      accounting periods until such time as they are exercised or they meet the
      criteria for equity classification.




**ITEM
      3.** **DEFAULTS
      UPON SENIOR SECURITIES**





On
      January 19, 2005, the Company's board of directors authorized the issuance
      and
      sale of up to three million dollars of convertible debentures. These debentures
      mature March 31, 2009 and carry an interest rate of 9% per year and are
      convertible into common stock at the lower of 66.6% of the valuation of the
      Company's next raise of equity or $1 per share. In accordance with EITF Issue
      98-5 "Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratios", the Company had evaluated that
      the convertible debt had a beneficial conversion feature as the conversion
      price
      was less than the fair value of the Company's common stock on the measurement
      date. Accordingly, the Company recognized this beneficial conversion feature
      by
      charging an interest expense of $186,598 for the year ended December 31, 2005.
      The Company had sold an aggregate of $1,510,000 of these convertible debentures.
      In September 2005, a debenture in the amount of $60,000 was converted into
      60,000 shares of common stock. In May 2006, the Company issued 796,056 and
      701,754 shares of common stock at $0.90 and $0.57 per share, respectively,
      for
      the induced conversion of $1,109,608 in convertible debentures including
      interest of $109,608. The debenture holders accepted these shares as full
      consideration for the outstanding convertible debentures. The Company recognized
      an additional expense of $403,872 because of the induced conversion to the
      debenture holders pursuant to the accounting requirements of SFAS No. 84,
      Induced Conversions of Convertible Debt. The original terms of the debentures
      called for them to be converted at $1.00 per share. The Company induced the
      debenture holders to convert at $0.90 and $0.57 per share.




32


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **SEPTEMBER
        30, 2006**




As
      of
      September 30, 2006, there are outstanding $337,500 of 9% Convertible Debentures
      due in January 2009. Holders of the 9% Convertible Debentures are entitled
      to
      convert principal amounts into shares of common stock at a conversion price
      of
      $1.00.





Debentures
      payable-net of discount in the amount of $34,287, is net of gross amount of
      debenture payables of $337,500 reduced by unamortized debt discount of
      $303,213.




Although
      the Company is current in its interest payments to the debenture holders, it
      previously was in default for not making payments on a timely basis. As a
      result, in accordance with the debenture agreements, these debentures become
      payable on demand unless the default is waived by the investors. The amount
      of
      debentures at September 30, 2006 of $337,500 plus accrued interest of $10,653
      has therefore been reflected as a current liability. The Company has not
      received any notice of default from any of the holders of the outstanding
      debentures.





On
      October 13, 2006, the Company announced its intention to restate financial
      statements, and suspended use of its Registration Statement declared effective
      by the SEC October 4, 2006. For such time as the Registration Statement is
      not
      effective, the Company is obligated, pursuant to Company’s Registration Rights
      Agreement with holders of the Company’s Convertible Preferred Stock, to pay such
      holders an amount equal to one percent per month of the original purchase price
      of the Convertible Preferred Stock until the earlier of the date the
      Registration Statement is again declared effective by the SEC, or June 2008.




**ITEM
      4.** **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None





**ITEM
      5.** **OTHER
      INFORMATION**





None




33


**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**SEPTEMBER
      30, 2006**





**ITEM
      6. EXHIBITS**





(a) **** Exhibit
      index




**Exhibit**4.18
            
            Certificate
                of Designation of the Relative Rights and Preferences of the Series
                2006 A
                Convertible Preferred Stock (1)10.18
            
            Series
                A Convertible Preferred Stock Purchase Agreement, dated as of June
                8,
                2006, among the Company and certain investors (1)10.19
            
            Form
                of common stock purchase warrant issued by the Company on June 8,
                2006
                (1)10.20
            
            HIV
                Barrel License, Marketing and Distribution Agreement, dated as of
                September 29, 2006, by and among the Company, Inverness and
                Chembio(2)10.21
            
            Joint
                HIV Barrel Product Commercialization Agreement, dated as of September
                29,
                2006, between the Company and Chembio(2)10.22
            
            Settlement
                Agreement, dated September 29, 2006, between the Company and
                Chembio(2)11
            
            Earnings
                per share31.1
            
            Certification
                ofChief
                Executive Officerrequired by Rule 13a-14(a) or Rule 15d-14(a) under the Securities
                Exchange
                Act of 1934, as amended.31.2
            
            Certification
                ofChief
                Financial Officerrequired by Rule 13a-14(a) or Rule 15d-14(a) under the Securities
                Exchange
                Act of 1934, as amended.32.1
            
            Certification
                ofChief
                Executive Officerrequired by Rule 13a-14(b) or Rule 15d-14(b) under the Securities
                Exchange
                Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
            
            Certification
                ofChief
                Financial Officerrequired by Rule 13a-14(b) or Rule 15d-14(b) under the Securities
                Exchange
                Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002.





**(1)**
            **Incorporated
                by reference to the Registrant’s registration statement on Form SB-2 filed
                with the Commission on August 04,
                2006.**




**(2)**
            **Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed with the
                Commission on October 06,
                2006**





34




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**SEPTEMBER
      30, 2006**




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) 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.




Dated:
      March 6, 2007




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**




/s/
                Steve M. PeltzmanSteve
                M. Peltzman
              Chief
                Executive Officer
              (principal
                executive officer)




/s/
                Leo EhrlichLeo
                Ehrlich
              Chief
                Financial Officer
              (principal
                financial officer)




35