**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 June 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)
              
              (IRS
                  Employer Identification
                  No.)of
                  incorporation or organization)




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 o No 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 August
      15, 2006 was 36,742,301 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 June 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 six month period ended June 30, 2006 is being filed
      to (i) restate the Company's Balance Sheet and Statements of Operations and
      Cash
      Flows (Unaudited) and (ii) revise related and other disclosures included in
      the
      quarterly report on Form 10-QSB.





The
      restatement as described more fully in Note 4, is being made to correct the
      following:





a)
            to
                account for the beneficial conversion feature on certain convertible
                debentures issued using the effective interest
                method.





b)
            to
                account for the cumulative effect of warrants issued for services
                rendered
                to the Company which was previously discounted in
                2005.





The
      Statement of Cash Flows has been restated to reflect debt discount related
      to
      the debentures. Accordingly, Management's Discussion and Analysis has been
      revised to reflect the changes made.





This
      Amendment No. 1 amends Parts I and II of the Quarterly Report on Form 10-QSB
      for
      the three and six month periods ended June 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


STATSURE
      DIAGNOSTIC SYSTEMS, INC.


FORM
      10-QSB


INDEX


PAGEPART
                  I FINANCIAL INFORMATIONItem
                  1.
              Financial
                  StatementsBalance
                  sheets - June 30, 2006 (unaudited) andDecember
                  31, 2005
              
              4Statements
                  of Operations - Three Months and Six Months EndedJune
                  30, 2006 and 2005 (unaudited)
              
              5Statements
                  of Cash Flows- Six Months EndedJune
                  30, 2006 and 2005 (unaudited)
              
              6Notes
                  to Financial Statements (unaudited)
              
              7Item
                  2.
              Management's
                  Discussion and Analysis of Financial ConditionAnd
                  Plan of Operation
              
              19Item
                  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
              
              32Item
                  5.
              Other
                  Information
              
              32Item
                  6.
              Exhibits
              
              33Signatures
              
              
              34Certifications
              
              35





3


**PART
      I FINANCIAL INFORMATION**


**Item
      1. FINANCIAL STATEMENTS**





**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**CONDENSED
      BALANCE SHEETS**




June
                30, 2006
              (Unaudited)
              RESTATED
            
            December 31, 2005
              RESTATED**ASSETS**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            1,074,554
            
            $
            76,321Accounts
                receivable, net of allowance for doubtful accounts of $107,477 for
                both
                2006 and 2005
            
            
            198,140
            
            
            69,741Inventories
            
            
            55,511
            
            
            56,150Prepaids
            
            
            7,061
            
            
            11,669Due
                from shareholder
            
            
            28,858
            
            
            —Total
                current assets
            
            
            1,364,124
            
            
            213,881Property
                and equipment, net of accumulated depreciation of $570,278 (2006)
                and
                $558,075 (2005)
            
            
            83,105
            
            
            95,308Equipment
                under construction
            
            
            664,401
            
            
            664,401Patents
                and trademarks, net of accumulated amortization of $141,603(2006)and
                $125,876 (2005)
            
            
            108,353
            
            
            73,223Deferred
                costs, less accumulated amortization of $404,879(2006)and
                $260,739(2005)
            
            
            67,121
            
            
            211,261Deposits
            
            
            13,500
            
            
            13,500TOTAL
                ASSETS
            
            $
            2,300,604
            
            $
            1,271,574**LIABILITIES
                AND SHAREHOLDERS’ DEFICIT**CURRENT
                LIABILITIES:Note
                payable - shareholders
            
            $
            350,000
            
            $
            172,055Debentures
                payable-net of discount
            
            
            72,939
            
            
            126,597Accounts
                payable
            
            
            30,228
            
            
            82,080Customer
                advances
            
            
            31,792
            
            
            2,000Accrued
                expenses
            
            
            163,053
            
            
            370,164Accrued
                payroll expense to officers
            
            
            175,799
            
            
            234,750Payroll
                and payroll taxes payable
            
            
            76,513
            
            
            102,441Total
                current liabilities
            
            
            900,324
            
            
            1,090,087LONG-TERM
                LIABILITIESNote
                payable - shareholder
            
            
            1,821,504
            
            
            1,932,099Deferred
                rent payable
            
            
            9,026
            
            
            6,190Derivative
                instruments
            
            
            8,629,488
            
            
            —TOTAL
                LIABILITIES
            
            
            11,360,342
            
            
            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: 36,717,510 (2006) and 31,769,491 (2005)
            
            
            36,717
            
            
            31,769Additional
                paid-in capital
            
            
            45,931,401
            
            
            44,545,318Less:
                deferred compensation
            
            
            —
            
            
            (2,927
            )Accumulated
                deficit
            
            
            (55,027,858
            )
            
            (46,330,962
            )TOTAL
                SHAREHOLDERS’ DEFICIT
            
            
            (9,059,740
            )
            
            (1,756,802
            )TOTAL
                LIABILITIES ANDSHAREHOLDERS’
                DEFICIT
            
            $
            2,300,604
            
            $
            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 June
                30,**
            
            **Six
                Months Ended June
                30,****2006**
              (Restated)
            
            **2005**
              ****(Restated)
            
            **2006**
              (Restated)
            
            **2005**
              (Restated)REVENUES:Product
                Sales
            
            $
            231,007
            
            $
            176,534
            
            $
            444,066
            
            $
            441,007Royalty
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            546231,007
            
            
            176,534
            
            
            444,066
            
            
            441,553COST
                OF PRODUCTS SOLD
            
            
            99,707
            
            
            56,394
            
            
            146,097
            
            
            150,740Gross
                profit
            
            
            131,300
            
            
            120,140
            
            
            297,969
            
            
            290,813OPERATING
                EXPENSES:Research
                and development
            
            
            73,466
            
            
            84,556
            
            
            142,615
            
            
            161,556Selling,
                general and administrative
            
            
            624,317
            
            
            633,070
            
            
            1,285,657
            
            
            1,616,824697,783
            
            
            717,626
            
            
            1,428,272
            
            
            1,778,380Loss
                from operations
            
            
            (566,483
            )
            
            (597,486
            )
            
            (1,130,303
            )
            
            (1,487,567
            )OTHER
              INCOME (EXPENSES):Interest
                income
            
            
            2,365
            
            
            -
            
            
            2,365
            
            
            -Interest
                expense
            
            
            (88,142
            )
            
            (88,272
            )
            
            (190,804
            )
            
            (168,257
            )Interest
                expense on beneficial conversion feature
            
            
            (866,230
            )
            
            (78,762
            )
            
            (983,842
            )
            
            (85,140
            )Financing
                costs
            
            
            (3,622,948
            )
            
            (21,299
            )
            
            (3,644,248
            )
            
            (42,599
            )Derivative
                expense
            
            
            (2,346,192
            )
            
            -
            
            
            (2,346,192
            )
            
            -Debt
                conversion expense
            
            
            (403,872
            )
            
            -
            
            
            (403,872
            )
            
            -Total
                other expenses:
            
            
            (7,325,019
            )
            
            (188,333
            )
            
            (7,566,593
            )
            
            (295,996
            )NET
                LOSS TO COMMON SHAREHOLDERS
            
            $
            (7,891,502
            )
            $
            (785,819
            )
            $
            (8,696,896
            )
            $
            (1,783,563
            )BASIC
                AND DILUTED LOSS PER SHARE
            
            $
            (0.22
            )
            $
            (0.02
            )
            $
            (0.26
            )
            $
            (0.06
            )WEIGHTED
                AVERAGE NUMBER OF SHARES USED IN BASIC AND DILUTED PER SHARE
                CALCULATIONS
            
            
            35,296,871
            
            
            31,709,491
            
            
            33,531,300
            
            
            31,140,430




The
      accompanying notes are an integral part of these statements.


5




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**




**Six Months Ended June
                30,****2006**
              (Restated)
            
            2005
              (Restated)OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (8,696,896
            )
            $
            (1,783,563
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            27,930
            
            
            25,280Bad
                debt expense
            
            
            —
            
            
            51,982Amortization
                of deferred costs
            
            
            144,140
            
            
            57,143Warrants
                issued for recruiting services
            
            
            —
            
            
            399,622Stock
                issued for consulting services
            
            
            175,350
            
            
            —Options
                granted to employees as compensation
            
            
            331,057
            
            
            553,309Options
                granted to non-employee
            
            
            11,621
            
            
            —Beneficial
                conversion feature of convertible debentures
            
            
            983,842
            
            
            85,140Interest
                expense on derivative instruments
            
            
            5,990,440
            
            
            —Induced
                conversion expense on debentures
            
            
            403,872
            
            
            —Changes
                in assets and liabilities:
            
            
            —
            
            
            —Accounts
                receivable
            
            
            (128,399
            )
            
            143,594Inventories
            
            
            639
            
            
            13,060Prepaids
            
            
            4,608
            
            
            (23,426
            )Accounts
                payable, accrued payroll expense to officers and accrued
                expenses
            
            
            49,676
            
            
            29,920Net
                cash used in operating activities
            
            
            (702,120
            )
            
            (447,939
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Acquisitions
                of property and equipment
            
            
            —
            
            
            (122,729
            )Acquisitions
                of patents and trademarks
            
            
            (50,857
            )
            
            (1,600
            )Deferred
                financing cost
            
            
            —
            
            
            (160,000
            )Net
                cash used in investing activities
            
            
            (50,857
            )
            
            (284,329
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Cash
                overdraft
            
            
            —
            
            
            (26,953
            )Proceeds
                from shareholder loans
            
            
            289,722
            
            
            30,000Proceeds
                from issuance of debentures
            
            
            —
            
            
            1,510,000Repayments
                of debentures
            
            
            (37,500
            )
            
            —Repayment
                of shareholder loans
            
            
            (502,512
            )
            
            (623,287
            )Proceeds
                from issuance of common stock
            
            
            32,500
            
            
            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
            
            
            1,751,210
            
            
            891,760NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            998,233
            
            
            159,492CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            76,321
            
            
            148,630CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            1,074,554
            
            $
            308,122SUPPLEMENTAL
                DISCLOSURE OF NON-CASH FLOW FINANCING ACTIVITIES:During
                the six month periods ended June 30, 2006 and 2005,the
                previous years balance ofaccrued interest of $239,404 and $228,773, respectively, for a
                shareholder’s loan was added to the loan balance as principal.
            
            $
            239,404
            
            $
            228,773During
                the six month period ended June 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 stockholder.
            
            
            —
            
            
            10,000Conversion
                of debenture and interest payable into common stock
            
            
            1,109,608
            
            
            —During
                the six month period ended June 30, 2006, 470,312 warrants were issued to
                a placement agent and were recorded as Additional paid in capital
                and
                Warrant liability
            
            
            489,050
            
            
            —During
                the six month period ended June 30, 2005, 1,100,000 options were
                issued to
                employees as compensation
            
            
            —
            
            
            952,500During
                the six month period ended June 30, 2005, debentures in the amount
                of
                $1,510,000 were sold and resulted in beneficial conversion charge
                of
                $1,510,000
            
            
            —
            
            
            1,510,000




The
      accompanying notes are an integral part of these statements.


6


**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


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


**June
      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”).




At
      the
      beginning of business on January 24, 2006, the Company effected a name change
      from Saliva Diagnostic Systems, Inc. to StatSure Diagnostic Systems, Inc. The
      shares of the Company have been trading under the StatSure name, with the new
      symbol SSUR, since March 22, 2006. Coinciding with our corporate name change,
      the Company has changed the name of its Hema-Strip HIV test to StatSureTM
HIV.





In
      May
      2002, the Company received its Investigational Device Exemption (IDE) from
      the
      U.S. Food and Drug Administration (FDA) for its Rapid Stat-SureTM HIV Test [THE
      PRODUCT BRAND NAME WAS FORMERLY KNOWN AS HEMA-STRIP HIV; THIS PRODUCT LINE
      WILL
      HEREAFTER BE REFERRED TO AS THE STATSURETM PRODUCT LINE AND THIS PRODUCT WILL BE
      KNOWN AS STATSURETM HIV]. Upon termination of all business relationships with its
      then contract manufacturer, Chembio Diagnostic Systems, (CEMI.OB) the Company
      signed a Manufacturing / Research & Development Agreement with American Bio
      Medica Corporation, Nasdaq SC (ABMC), of Kinderhook, NY. Responsibilities of
      ABMC include the manufacture of the Company's StatSureTM HIV test and other
      products under appropriate and applicable regulatory, compliance standards.
      The
      Company filed a new IDE with the FDA naming ABMC as its contract manufacturer.
      This IDE submission to the FDA was made in October 2003. Thereafter, the Company
      conducted its clinical trials and submitted the modules of the Pre-Market
      Approval (PMA) to the FDA. In March 2006, the Company received correspondence
      from the FDA stating that our PMA submission is deficient and therefore will
      require additional clinical studies to amend the PMA. In May 2006, the Company
      met with the FDA, and was requested by the FDA to submit additional clinical
      data. The Company feels strongly that its data is compelling and proves the
      sensitivity and specificity of its product.





During
      the past year, the Company has received regulatory approval to market its
      StatSureTM, HIV product in South Africa, Jordan and Guatemala and may receive
      similar approvals in several other countries in 2006. In March 2006, the Company
      received correspondence from the FDA stating that our Pre-Market Approval (PMA)
      for marketing in the United States submission is deficient and therefore will
      require additional clinical studies to amend the PMA.





On
      June
      8, 2006, we 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.





On
      July
      31, 2006, subsequent to the Balance Sheet date, the Company signed a term sheet
      with Inverness Medical Innovations, Inc. (AMEX:IMA) to develop and market the
      Company's consumer diagnostic products for HIV. The parties have contracted
      to
      enter into a definitive agreement to cooperate in the Company's completion
      of
      the clinical studies of its rapid test HIV products, with Inverness Medical
      Innovations being appointed the Company's exclusive, worldwide licensee in
      the
      rapid testing product consumer markets, and appointed a non-exclusive licensee
      to market the Company's HIV barrel product to professional markets.




SDS
      is
      committed to and focused on the completion of the necessary requirements towards
      obtaining U.S. Food and Drug Administration (FDA), and other relevant regulatory
      approvals of our rapid HIV diagnostic tests technology. Although there is no
      assurance that we will receive such approval, we believe that the StatSureTM
format, if approved for detecting antibodies to HIV-1 in fingerstick and
      venipuncture whole blood, serum and plasma samples, will have certain
      competitive advantages in the market for rapid HIV testing both in the United
      States and internationally.


7


**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


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


**JUNE
      30, 2006**




**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 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 $55,027,858 at June 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 effort 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 six
      month periods ended June 30, 2006 and 2005, have been prepared in conformity
      with accounting principles generally accepted in the United States of America.
      The financial information as of December 31, 2005, is derived from StatSure
      Diagnostic Systems, Inc. (the "Company") financial statements included in the
      Company's Annual Report on Form 10-KSB for the year ended December 31, 2005.
      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, as included in the Company's Annual Report on Form
      10-KSB/A for the year ended December 31, 2005. Operating results for the three
      and six month periods ended June 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)**


**JUNE
      30, 2006**




**4.
      Restatement**





Subsequent
      to the filing of form 10-QSB for the three month and six month periods ended
      June 30, 2006, the Company determined that the filing did not reflect a
      beneficial conversion feature on 9% convertible debentures issued in 2005 as
      required under EITF 98-5 “Accounting for Convertible Securities With Beneficial
      Conversion Features or Contingently Adjustable Conversion Ratios”, as amended by
      EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible
      Instruments”.





The
      Company recorded a $1,510,000 debenture debt discount from the beneficial
      conversion feature computation. This amount is limited to the proceeds of the
      convertible debt instrument in accordance with EITF 98-5. The debenture debt
      discount is being amortized over the life of the debentures with the unamortized
      discount of $339,561 being netted with the gross amount of the debenture payable
      of $412,500. The result of this restatement was to reflect the sale of the
      debentures as additional paid-in capital ($1,510,000), to record the cumulative
      effect of the prior year restatements of the beneficial conversion feature
      to
      beginning retained earnings ($186,597), and to amortize the beneficial
      conversion feature for the three and six month periods ended June 30, 2006
      of
      $866,230 and $983,842 respectively.





Further,
      the Company also revalued warrants issued during 2005 as payment for services
      rendered for which the Company had used a 30% discount for various restriction.
      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 June 30, 2006, the Statement of Operations, and the
      Statement of Cash flows for the six month period then ended, are now being
      restated in this Form 10QSB/A filing to give effect to the correction of these
      errors and certain resulting reclassification adjustments. The table below
      details the items affected by the restatement:





June
                30, 2006As
                reported
            
            As
                restatedBALANCE
                SHEET:Debenture
                payable, net of discount
            
            $
            412,500
            
            $
            72,939Total
                current liabilities
            
            
            1,239,885
            
            
            900,324Additional
                paid-in capital
            
            
            46,916,179
            
            
            45,931,401Accumulated
                deficit
            
            
            (56,352,197
            )
            
            (55,027,858
            )




9


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


Three
                months ended June 30, 2006
            
            Six
                months ended June 30, 2006As
                reported
            
            As
                Restated
            
            As
                reported
            
            As
                restatedSTATEMENTS
                OF OPERATIONS:Selling,
                general and administrative
            
            $
            394,524
            
            $
            624,317
            
            $
            767,628
            
            $
            1,285,657Stock
                based compensation andemployment
                recruiting expense-non
                cash
            
            
            229,793
            
            
            -
            
            
            518,029
            
            
            -Interest
                income
            
            
            -
            
            
            2,365
            
            
            -
            
            
            2,365Interest
                expense
            
            
            (6,054,917
            )
            
            (88,142
            )
            
            (6,178,879
            )
            
            (190,804
            )Interest
                expense on beneficial conversion feature
            
            
            -
            
            
            (866,230
            )
            
            -
            
            
            (983,842
            )Financing
                costs
            
            
            -
            
            
            (3,622,948
            )
            
            -
            
            
            (3,644,248
            )Derivative
                expense
            
            
            -
            
            
            (2,346,192
            )
            
            -
            
            
            (2,346,192
            )Debt
                conversion expense
            
            
            -
            
            
            (403,872
            )
            
            -
            
            
            (403,872
            )Other
                expenses
            
            
            (403,872
            )
            
            -
            
            
            (403,872
            )
            
            -Net
                loss to common shareholders
            
            
            (7,025,272
            )
            
            (7,891,502
            )
            
            (7,713,054
            )
            
            (8,696,896
            )Basic
                and diluted net loss per share
            
            
            (0.20
            )
            
            (0.22
            )
            
            (0.23
            )
            
            (0.26
            )




STATEMENTS
                OF CASH FLOWS:
            
            Six
                months ended June 30, 2006As
                reported
            
            As
                restatedNet
                loss
            
            $
            (7,713,054
            )
            $
            (8,696,896
            )Adjustments
                to reconcile net loss to netcash
                used in operating activities:Beneficial
                conversion feature of convertibleDebentures
            
            
            -
            
            
            983,842




The
      restatement had no impact on the net cash used in operating
      activities.





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. Entities electing to
      remain with the accounting as prescribed by APB 25 must make pro forma
      disclosures of net income and, if presented, earnings per share, as if the
      fair
      value based method of accounting defined in SFAS 123 had been
      adopted.




10




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


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


**June
      30, 2006**


The
      Company has elected to account for its stock-based compensation plans using
      APB
      25. The Company has computed, for pro forma disclosure purposes, the value
      of
      options granted for the three and six months period ended June 30, 2005 using
      the Black-Scholes pricing model.





For
              the three months ended
              June
                30, 2005
            
            For
                the six months ended
              June
                30, 2005As
                Reported
            
            As
                Restated
            
            As
                Reported
            
            As
                RestatedNet
                loss to common shareholdersAs
                reported
            
            $
            (502,202
            )
            $
            (785,819
            )
            $
            (1,154,486
            )
            $
            (1,783,563
            )Add:
                Stock-based employee compensation expense included in reported net
                loss,
                net of related tax affects
            
            
            120,084
            
            
            324,938
            
            
            128,994
            
            
            553,309Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                affects(114,326
            )
            
            (522,955
            )
            
            (122,838
            )
            
            (768,053
            )Pro
                forma
            
            $
            (496,444
            )
            $
            (983,836
            )
            $
            (1,148,330
            )
            $
            (1,998,307
            )Basic
                and diluted net loss per shareAs
                reported
            
            $
            (0.02
            )
            $
            (0.02
            )
            $
            (0.04
            )
            $
            (0.06
            )Pro
                forma
            
            
            (0.02
            )
            
            (0.03
            )
            
            (0.04
            )
            
            (0.06
            )




The
      fair
      value of each option grant was estimated on the date of the grant using the
      Black-Scholes option-pricing model with the following weighted-average
      assumptions for 2005: expected volatility of 30%; risk-free interest rate of
      3.87%; and expected lives of 5 years.





The
      effects of applying SFAS 123 (revised 2004) in the above pro forma disclosures
      are not indicative of future amounts as future amounts are likely to be affected
      by the number of grants awarded and since additional awards are generally
      expected to be made at varying prices.





**5.
      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.





**6.
      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 expect to need it
      initially to satisfy the market demand of our first major barrel product—the
      HemaStripTM HIV test upon FDA approval. As of the Balance Sheet date, the
      machinery has not been completed or placed in service.





11


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **June
        30, 2006**
  **7.
        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
                June 30,**
            
            **For
                the six months**
              **ended
                June 30,****2006**
            
            2005
            
            **2006**
            
            2005United
                States
            
            **$**
            **25,350**
            
            $
            **3,890**
            
            **$**
            **76,414**
            
            $
            **151,498**United
                Kingdom
            
            
            **186,202**
            
            
            **148,906**
            
            
            **345,138**
            
            
            **229,404**Africa
            
            
            **-**
            
            
            **22,248**
            
            
            **588**
            
            
            **48,738**Other
            
            
            **19,455**
            
            
            **1,490**
            
            
            **21,926**
            
            
            **11,367****$**
            **231,007**
            
            $
            **176,534**
            
            **$**
            **444,066**
            
            $
            **441,007**





**8.
      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, for the six month periods ended June 30, 2006, the Company
      recognized this beneficial conversion feature by charging an interest expense
      of
      $983,842. 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
      with interest. 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.





As
      of
      June 30, 2006, there are outstanding $412,500 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.





The
      Company is in default on payment of interest on the debentures. As a result,
      in
      accordance with the debenture agreements, these debentures become payable on
      demand unless the default is waived by the investors. The Company has not
      received any notice of default from any of the holders of the outstanding
      debentures.





Debentures
      payable-net of discount in the amount of $72,939 is net of gross amount of
      debenture payables of $412,500 reduced by unamortized debt discount of
      $339,561.





12




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


**9.
      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. If the Company should default in
      these payments, the promissory note reverts to the original maturity date of
      December 31, 2006. As of June 30, 2006, the loan balance to this shareholder
      aggregated $2,171,504, of which $350,000 is reflected as a current liability
      and
      $1,821,504 as long term liability. An additional amount of $129,220 of interest
      on this note has been accrued during 2006 and remains owed as of June 30,
      2006.The lender has filed a Uniform Commercial Code (UCC) Lien on the Company's
      equipment and patents as security for this loan.




**10.
      Shareholders’ Equity Transactions**




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.





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 June 30, 2006, the first four monthly installments totaling 100,000 shares
      had been earned and issued.




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 8).




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 him upon conversion of his 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 an initial exercise price of $1.00 per share, subject to adjustment.




The
      Convertible Preferred Stock is convertible to shares of common stock at a
      conversion price of $0.50 per share, 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. 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.




13


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**
 **June
        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 filed timely. If the
      registration statement is not declared effective by November 6, 2006, the
      Company will be 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. This preferred
      stock is being reflected as temporary equity on the balance sheet as of June
      30,
      2006.


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 is payable at this
        time.


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 condensed balance sheets. As the proceeds from
      the issuance of preferred shares of $2,150,000 are less than the
      combined fair value of the warrants and the conversion option, the difference
      of
      $3,644,248 has been charged to interest expense on derivative
      instruments, a non-operating expense, in the condensed statements of
      operations.




As
      of June 30, 2006, the liability for the value of the warrants and
      conversion option was “marked to market” and the difference of $786,660 and
      $1,375,978 have been accounted for as an increase to the interest expense
      on derivative
      instruments initially recognized in the condensed statement 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 they 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 additional paid in capital.





As
      of June 30, 2006, the liability for the warrants was “marked to market” and
      the difference of $183,554 has been accounted for as an increase 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.





**11.
      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.




14


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





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
      six month periods ended June 30, 2006 include share-based compensation expense
      totaling $166,443 and $331,057, respectively which pertains to selling, general
      and administrative expenses. 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 six months ended June 30, 2005 totaled
      $324,938 and $553,309, 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.





**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”).




15




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


Stock
      compensation expense related to non-employee options was $11,621 and $0 for
      the
      six month periods ended June 30, 2006 and 2005, respectively. These amounts
      are
      included in Statement of Operations within the “Stock based compensation and
      employment recruiting expense-non cash” 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 June 30, 2006. The
      fair
      value for stock awards granted during the six month periods was estimated using
      the Black-Scholes option pricing model with the following weighted average
      assumptions:





Three
                months ended June 30,
            
            Six
                months ended June 30,2006
            
            2005
            
            2006
            
            2005(Pro
                forma)
            
            
            
            (Pro
                forma)Expected
                term (in years)
            
            
            5
            
            
            5
            
            
            5
            
            
            5Expected
                stock price volatility
            
            
            182
            %
            
            188
            %
            
            182
            %
            
            197
            %Risk-free
                interest rate
            
            
            4.35
            %
            
            3.75
            %
            
            4.35
            %
            
            4.01
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %Estimated
                fair value per option granted
            
            
            1.395
            
            
            1.535
            
            
            1.395
            
            
            1.893





16





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


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.





For
                the three months ended
              June
                30, 2005
              (Pro
                forma)
            
            For
                the six months ended
              June
                30, 2005
              (Pro
                forma)As
                Reported
            
            As
                Restated
            
            As
                Reported
            
            As
                RestatedNet
                loss to common shareholdersAs
                reported
            
            $
            (502,202
            )
            $
            (785,819
            )
            $
            (1,154,486
            )
            $
            (1,783,563
            )Add:
                Stock-based employee compensation expense included in reported net
                loss,
                net of related tax affects
            
            
            120,084
            
            
            324,938
            
            
            128,994
            
            
            553,309Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                affects(114,326
            )
            
            (522,955
            )
            
            (122,838
            )
            
            (768,053
            )Pro
                forma
            
            $
            (496,444
            )
            $
            (983,836
            )
            $
            (1,148,330
            )
            $
            (1,998,307
            )Basic
                and diluted net loss per shareAs
                reported
            
            $
            (0.02
            )
            $
            (0.02
            )
            $
            (0.04
            )
            $
            (0.06
            )Pro
                forma
            
            
            (0.02
            )
            
            (0.03
            )
            
            (0.04
            )
            
            (0.06
            )




The
      Company granted 100,000 and 550,000 employee stock options in the six months
      ended June 30, 2006 and 2005, respectively. The following table represents
      our
      stock options granted, exercised, and forfeited during the six month period
      ended June 30, 2006:





Stock
                Options
            
            Number
                of Shares
            
            Weighted
                Average Exercise Price per Share ($)
            
            Weighted
                Average Remaining Contractual Term (years)
            
            Aggregate
                Intrinsic Value ($)Outstanding
                at January 1, 2006
            
            
            1,151,000
            
            $
            1.65
            
            
            8.88
            
            $
            664,000Granted
            
            
            100,000
            
            
            1.00
            
            
            -
            
            
            -.Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -.Forfeited/expired
            
            
            (51,000
            )
            
            19.23
            
            
            -.
            
            
            -.Outstanding
                at June 30, 2006
            
            
            1,200,000
            
            $
            0.85
            
            
            8.68
            
            $
            240,000Exercisable
                at June 30, 2006
            
            
            516,667
            
            
            0.65
            
            
            8.75
            
            
            205,833





As
      of
      June 30, 2006, there was $419,315 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.




17




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


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


**June
      30, 2006**





**12.
      Contingencies** ****





*Legal
      Matters:*




In
      March
      2004, Chembio Diagnostic Systems, Inc. (the Company's former contract
      manufacturer) commenced an action in Federal Court, Eastern District of New
      York, seeking a declaration that the Company's US Patent No. 5,935,864 was
      invalid and that Chembio did not infringe the Company’s Patent. The Company had
      filed counterclaims for patent infringement seeking an injunction and damages.
      Some initial discovery took place, and the remainder of discovery had been
      stayed pending the Court's ruling interpreting the patent claims.




On
      September 27, 2005 the Hon. Joanna Seybert, issued her Claim Construction Ruling
      on the interpretation of the patent claims in the suit. The Court ruled that
      the
      Company's broader interpretation of its patent claims was correct, and rejected
      Chembio's arguments seeking to narrow coverage afforded by the Company's '864
      patent.




With
      the
      broad scope of the '864 patent now established, the Company is seeking to
      recover damages and to enjoin Chembio from selling or offering for sale the
      Chembio Sure Check device.




Other
      than that set forth above, to the best knowledge of the Company, no other
      material legal proceedings are pending.





*Economic
      Dependency:*





For
      the
      six months ended June 30, 2006, sales to two customers were in excess of 10%
      of
      the Company's total sales. Sales to these customers were approximately $344,000
      and $76,000 and accounts receivable from these customers as of June 30, 2006,
      aggregated $185,578 and $0, respectively.





During
      the second quarter of 2006, the Company had two customers that accounted for
      94%
      of product sales ($185,000 and $32,000). The loss of either of these 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
      six months ended June 30, 2006, purchases from five suppliers were in excess
      of
      10% of the Company's total purchases. The purchases from these suppliers for
      the
      six months ended June 30, 2006 ranged from $13,000 to $32,000. The corresponding
      accounts payable at June 30, 2006, to these suppliers, was $1,245.





**13.
      Subsequent Event**





On
      July
      31, 2006, the Company signed a term sheet with Inverness Medical Innovations,
      Inc. (AMEX:IMA) to develop and market the Company's consumer diagnostic products
      for HIV. The parties have contracted to enter into a definitive agreement to
      cooperate in the Company's completion of the clinical studies of its rapid
      test
      HIV products, with Inverness Medical Innovations being appointed the Company's
      exclusive, worldwide licensee in the rapid testing product consumer markets,
      and
      appointed a non-exclusive licensee to market the Company's HIV barrel product
      to
      professional markets.




18


**STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **June
        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 2005 and 2004, the Company's products have been purchased
        by
        foreign governments, distributors, laboratories, as well as the U.S. Center
        for
        Disease Control (CDC), an agency of the United States government.
  In
        July
        of 2003, the Company signed a Manufacturing/Research & Development Agreement
        with American Bio Medica Corporation (ABMC) of Kinderhook, NY. Responsibilities
        of ABMC include manufacturing and regulatory compliance of the Company's
        HIV
        test devices. The Company is seeking a PMA for its HIV rapid test from the
        FDA
        and submitted all modules of the PMA by the end of November 2004. At the
        request
        of the FDA, the Company has completed a small supplemental study of 249 samples
        and its submission to the FDA, in October of 2005. In March 2006, the Company
        received correspondence from the FDA stating that our Pre-Market Approval
        (PMA)
        submission is deficient and therefore will require additional clinical studies
        to amend the PMA. The FDA is requesting additional data.
  In
        addition to the US, the Company intends to submit the appropriate regulatory
        submissions, import/export documentation and any other requirement for a
        number
        of countries, including but not limited to, Russia, Brazil, Canada, Vietnam,
        India, Mexico, Australia, Philippines, Thailand, and a number of African
        countries.
 
 Finally,
        if and when the Company receives a PMA from the FDA for its HIV product,
        the
        Company will file for a waiver of Clinical
        Laboratory Improvement Amendments of 1988 ( CLIA),
        which if received, will allow sales of this product to a large number of
        markets
        (e.g. doctors' offices, public health clinics) that do not operate under
        the
        standards of the CLIA.
  The
        IDE,
        clinical trials, and application modules are only part of a difficult and
        financially costly process to receive U.S. marketing approval. There is no
        assurance that the Company will have the financial resources, expertise,
        or
        ability to complete the approval process.
  A
        Certificate of Exportability was issued by the FDA in October 2003 allowing
        the
        resumption of the Company's HIV diagnostics export sales.
  In
        November 2002, the U.S. Food and Drug Administration approved the sale in
        the
        United States of the Oraquick Rapid HIV test, a competing product to the
        Company's StatSureTM HIV test. Subsequent to receiving FDA approval, Orasure
        received a CLIA waiver for their product. Since then, the U.S. Food and Drug
        Administration has approved for sale in the United States other rapid HIV
        tests.
  19
 **STATSURE
          DIAGNOSTIC SYSTEMS, INC.**
 **June
          30, 2006**
  We
        believe 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. 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.
  We
        are
        committed to and focused on the completion of the necessary requirements
        towards
        obtaining U.S. Food and Drug Administration (FDA) and other relevant regulatory
        approvals for our rapid StatSure(TM) HIV diagnostic technology. Although
        there
        is no assurance that we will receive such approval, we believe that the
        StatSure(TM) HIV device format, if approved for detecting antibodies to HIV-1
        in
        fingerstick, serum and plasma samples, will have a significant competitive
        advantage in the market for rapid HIV testing in the United States and
        internationally. However, there can be no assurance that we will achieve
        or
        sustain significant revenues from sales of HIV diagnostic tests, internationally
        or domestically, 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 has entered into a number
        of
        agreements with distributors who are now in breach of the contractual terms.
        However the Company is continuing to work with certain of these distributors
        who
        commit time and resources towards obtaining regulatory approvals.
  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 become as easy to
        purchase as home pregnancy tests. If this were to occur, we believe the
        Company’s HIV product’s performance, design, and ease of use could have a
        competitive advantage over many of the existing technologies and platforms.
        There can be no assurance that any of the Company's products not yet approved
        or
        cleared, will be approved or cleared for marketing by the FDA or that if
        approved it would be allowed for sale as an OTC product. 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.
  We
        continue to distribute our StatSureTM HIV test and Saliva Sampler® oral fluid
        collection product through our current distribution networks. We will also
        seek
        new distribution relationships for our current and future test products.
  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.
  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.
  20




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      30, 2006**


**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
      June 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.





**Restatement**


Subsequent
      to the filing of form 10-QSB for the three month and six month periods ended
      June 30, 2006, the Company determined that the filing did not reflect a
      beneficial conversion feature on 9% convertible debentures issued in 2005 as
      required under EITF 98-5 “Accounting for Convertible Securities With Beneficial
      Conversion Features or Contingently Adjustable Conversion Ratios”, as amended by
      EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible
      Instruments”.





The
      Company recorded a $1,510,000 debenture debt discount from the beneficial
      conversion feature computation. This amount is limited to the proceeds of the
      convertible debt instrument in accordance with EITF 98-5. The debenture debt
      discount is being amortized over the life of the debentures with the unamortized
      discount of $339,561 being netted with the gross amount of the debenture payable
      of $412,500. The result of this restatement was to reflect the sale of the
      debentures as additional paid-in capital ($1,510,000), to record the cumulative
      effect of the prior year restatements of the beneficial conversion feature
      to
      beginning retained earnings ($186,597), and to amortize the beneficial
      conversion feature for the three and six month periods ended June 30, 2006
      of
      $866,230 and $983,842 respectively.





Further,
      the Company also revalued warrants issued during 2005 as payment for services
      rendered for which the Company had used a 30% discount for various restriction.
      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 June 30, 2006, the Statement of Operations, and the
      Statement of Cash flows for the six month period then ended, are now being
      restated in this Form 10QSB/A filing to give effect to the correction of these
      errors and certain resulting reclassification adjustments. The table below
      details the items affected by the restatement:





21


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


June
                30, 2006As
                reported
            
            As
                restatedBALANCE
                SHEET:Debenture
                payable, net of discount
            
            $
            412,500
            
            $
            72,939Total
                current liabilities
            
            
            1,239,885
            
            
            900,324Additional
                paid-in capital
            
            
            46,916,179
            
            
            45,931,401Accumulated
                deficit
            
            
            (56,352,197
            )
            
            (55,027,858
            )





Three
                months ended June 30, 2006
            
            Six
                months ended June 30, 2006As
                reported
            
            As
                Restated
            
            As
                reported
            
            As
                restatedSTATEMENTS
                OF OPERATIONS:Selling,
                general and administrative
            
            $
            394,524
            
            $
            624,317
            
            $
            767,628
            
            $
            1,285,657Stock
                based compensation andemployment
                recruiting expense-non
                cash
            
            
            229,793
            
            
            -
            
            
            518,029
            
            
            -Interest
                income
            
            
            -
            
            
            2,365
            
            
            -
            
            
            2,365Interest
                expense
            
            
            (6,054,917
            )
            
            (88,142
            )
            
            (6,178,879
            )
            
            (190,804
            )Interest
                expense on beneficial conversion feature
            
            
            -
            
            
            (866,230
            )
            
            -
            
            
            (983,842
            )Financing
                costs
            
            
            -
            
            
            (3,622,948
            )
            
            -
            
            
            (3,644,248
            )Derivative
                expense
            
            
            -
            
            
            (2,346,192
            )
            
            -
            
            
            (2,346,192
            )Debt
                conversion expense
            
            
            -
            
            
            (403,872
            )
            
            -
            
            
            (403,872
            )Other
                expenses
            
            
            (403,872
            )
            
            -
            
            
            (403,872
            )
            
            -Net
                loss to common shareholders
            
            
            (7,025,272
            )
            
            (7,891,502
            )
            
            (7,713,054
            )
            
            (8,696,896
            )Basic
                and diluted net loss per share
            
            
            (0.20
            )
            
            (0.22
            )
            
            (0.23
            )
            
            (0.26
            )




STATEMENTS
                OF CASH FLOWS:
            
            Six
                months ended June 30, 2006As
                reported
            
            As
                restatedNet
                loss
            
            $
            (7,713,054
            )
            $
            (8,696,896
            )Adjustments
                to reconcile net loss to netcash
                used in operating activities:Beneficial
                conversion feature of convertibleDebentures
            
            
            -
            
            
            983,842




The
      restatement had no impact on the net cash used in operating
      activities.





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. Entities electing to
      remain with the accounting as prescribed by APB 25 must make pro forma
      disclosures of net income and, if presented, earnings per share, as if the
      fair
      value based method of accounting defined in SFAS 123 had been
      adopted.


22




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      30, 2006**


The
      Company has elected to account for its stock-based compensation plans using
      APB
      25. The Company has computed, for pro forma disclosure purposes, the value
      of
      options granted for the three and six months period ended June 30, 2005 using
      the Black-Scholes pricing model.





For
                the three months ended
              June
                30, 2005
            
            For
                the six months ended
              June
                30, 2005As
                Reported
            
            As
                Restated
            
            As
                Reported
            
            As
                RestatedNet
                loss to common shareholdersAs
                reported
            
            $
            (502,202
            )
            $
            (785,819
            )
            $
            (1,154,486
            )
            $
            (1,783,563
            )Add:
                Stock-based employee compensation expense included in reported net
                loss,
                net of related tax affects
            
            
            120,084
            
            
            324,938
            
            
            128,994
            
            
            553,309Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                affects(114,326
            )
            
            (522,955
            )
            
            (122,838
            )
            
            (768,053
            )Pro
                forma
            
            $
            (496,444
            )
            $
            (983,836
            )
            $
            (1,148,330
            )
            $
            (1,998,307
            )Basic
                and diluted net loss per shareAs
                reported
            
            $
            (0.02
            )
            $
            (0.02
            )
            $
            (0.04
            )
            $
            (0.06
            )Pro
                forma
            
            
            (0.02
            )
            
            (0.03
            )
            
            (0.04
            )
            
            (0.06
            )








The
      fair
      value of each option grant was estimated on the date of the grant using the
      Black-Scholes option-pricing model with the following weighted-average
      assumptions for 2005: expected volatility of 30%; risk-free interest rate of
      3.87%; and expected lives of 5 years.





The
      effects of applying SFAS 123 (revised 2004) in the above pro forma disclosures
      are not indicative of future amounts as future amounts are likely to be affected
      by the number of grants awarded and since additional awards are generally
      expected to be made at varying prices.




23


**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      30, 2006**





**RESULTS
      OF OPERATIONS**





Second
      Quarter and First Six Months of 2006 Compared to Second Quarter and First six
      Months of 2005





**Revenues.** The
      Company's revenues consist of product sales and royalties. Revenues increased
      31% to $231,007 in the second quarter of 2006 yielding a gross margin of
      $131,300 or 57% from revenues of $176,534 in the second quarter of 2005,
      yielding a gross margin of $120,140 or 67%. Revenues increased 1% to
      $ 444,066 in
      the
      first six months of 2006 yielding a gross margin of $297,969 or 67% from
      $ 441,553 in
      the
      first six months of 2005 yielding a gross margin of $290,813 or 66%. Factors
      leading to the revenue increase in the second quarter was the completion and
      shipment of special packaged products by our largest customer. The Company
      is
      continuing to seek new markets and sales opportunities for its
      products.




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 six months ended June 30, 2006, sales to
      two
      customers were in excess of 10% of the Company's total sales. Sales to these
      customers were approximately $344,000 and $76,000.





**Cost
      of products sold** :
      Costs
      of products sold increased to $99,707 (43% of product sales) in the second
      quarter of 2006 from $56,394 (33% of product sales) in the second quarter of
      2005, and decreased to $146,097 (33% of product sales) in the first six months
      of 2006 from $150,740 (34% of product sales) in the first six months of 2005.
      The decrease in gross margins in the second quarter was due to greater packaging
      cost incurred completing rush orders.





**Research
      and development expenses:** Research
      and development expenses decreased to $73,466 **** in
      the
      second quarter of 2006 from $84,556 **** in
      the
      second quarter of 2005 and decreased to $142,615 in the first six months of
      2006
      from $161,556 in the first six months of 2005. The decrease is due to fewer
      consulting expenses incurred with our HIV test. R&D costs for our HIV test
      are expected to continue in 2006 until such time that we receive FDA approval
      to
      market the test in the U.S.





**Selling,
      general and administrative expenses** :
      Selling, general and administrative expenses decreased 2% to $624,317 in the
      second quarter of 2006 from $633,070 in the second quarter of 2005 and decreased
      20% to $1,285,657 in the first six months of 2006 from $1,616,824 in the first
      six months of 2005. This decrease is due to greater expenses for consulting,
      and
      recruitment expenses incurred in 2005 offset partially by greater amortization
      expenses, and payroll expenses in 2006.





**Loss
      from operations:** The loss
      from operations for the second quarter of 2006 of $566,483 reflects a 5%
      decrease in loss from the $597,486 loss reported for the second quarter of
      2005;
      and the loss from operations for the first six months of 2006 of $1,130,303
      reflects a 24% decrease from the $1,487,567 loss reported for the first six
      months of 2005. Decreased expenses for stock based compensation in 2006
      contributed to the Company’s decreased loss.








**Interest
      expense:** Interest
      expense decreased to $88,142 in the second quarter of 2006 from $88,272 in
      the
      second quarter of 2005 and increased to $190,804 in the first six months of
      2006
      from $168,257 in the first six months of 2005. Interest expense on beneficial
      conversion feature increased to $866,230 in the second quarter of 2006 from
      $78,762 in the second quarter of 2005 and increased to $983,842 in the first
      six
      months of 2006 from $85,140 in the first six months of 2005. The increase in
      non-cash interest expense was due to the write down of debt discount resulting
      from debenture conversions during the quarter.




Financing
      costs increased to $3,644,248 in the first six months of 2006 from $42,599
      in
      the first six months of 2005. All of the increase was due to the series 2006-A
      convertible preferred stock financing and the application of derivative
      accounting.




24
 
  **STATSURE
        DIAGNOSTIC SYSTEMS, INC.**
 **June
        30, 2006**


Derivative
      expense of $2,346,192 for the three months ended June 30, 2006 was due to the
      mark to market adjustment on embedded derivatives principally driven by the
      increase in our common stock from $1.10 to $1.50. The Company did not have
      derivative instruments in the same period 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 $55 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.





**June
                30, 2006**
            
            December
                31, 2005Cash
                and cash equivalents
            
            **$**
            **1,074,554**
            
            $
            76,321Working
                capital (deficit)
            
            
            **463,800**
            
            
            (876,206
            )





Net
      cash
      used in operating activities in the first six months of 2006 was $702,120.
      Net
      cash used in the first six months of 2005 was $447,939. In 2006, the increase
      in
      cash used by operations was primarily due to the increase of the net loss of
      $8,696,896 (2006) from $1,783,563 (2005). The following expenses showed
      significant changes between the first six months of 2006 when compared to the
      first six months of 2006:





·
            Legal
                and accounting costs (increased in
                2006)


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


·
            Insurance
                (increased in 2006)


·
            Director
                fees (increased in 2006)





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





Cash
      used
      in investing activities in the first six months of 2006 was $50,857 as compared
      to $284,329 in the first six months of 2005. The 2005 amount includes equipment
      costs and deferred finance costs. The Company did not incur similar costs in
      2006





Cash
      provided by financing activities in the first six months of 2006 was $1,751,210,
      and in the first six 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 $212,790
      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.





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.




25




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      30, 2006**





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.





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, for the six month period ended June 30, 2006, the Company
      recognized this beneficial conversion feature by charging an interest expense
      of
      $983,842. 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
      with interest. 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.





As
      of
      June 30, 2006, there are outstanding $412,500 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.





The
      Company is in default on payment of interest on the debentures. As a result,
      in
      accordance with the debenture agreements, these debentures become payable on
      demand unless the default is waived by the investors. The Company has not
      received any notice of default from any of the holders of the outstanding
      debentures.





Debentures
      payable-net of discount in the amount of $72,939 is net of gross amount of
      debenture payables of $412,500 reduced by unamortized debt discount of
      $339,561.




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. If the Company should default in
      these payments, the promissory note reverts to the original maturity date of
      December 31, 2006. As of June 30, 2006, the loan balance to this shareholder
      aggregated $2,171,504, of which $350,000 is reflected as a current liability
      and
      $1,821,504 as long term liability. An additional amount of $129,220 of interest
      on this note has been accrued during 2006 and remains owed as of June 30,
      2006.The lender has filed a Uniform Commercial Code (UCC) Lien on the Company's
      equipment and patents as security for this loan.





26




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      30, 2006**




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.





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 June 30, 2006, the first four monthly installments totaling 100,000 shares
      had been earned and issued.




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 8).




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 him upon conversion of his 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 an initial exercise price of $1.00 per share, subject to adjustment.




The
      Convertible Preferred Stock is convertible to shares of common stock at a
      conversion price of $0.50 per share, 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. 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 filed timely. If the
      registration statement is not declared effective by November 6, 2006, the
      Company will be 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. This preferred
      stock is being reflected as temporary equity on the balance sheet as of June
      30,
      2006.





27




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      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 condensed
      balance sheets. As the proceeds from the issuance of preferred
      shares of $2,150,000 are less than the combined fair value of the warrants
      and the conversion option, the difference of $3,644,248 has been charged to
      interest expense on derivative instruments, a non-operating expense, in
      the condensed statements of operations.




As
      of June 30, 2006, the liability for the value of the warrants and
      conversion option was “marked to market” and the difference of $786,660 and
      $1,375,978 have been accounted for as an increase to the interest expense
      on derivative instruments initially recognized in the condensed statement 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 they
      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 additional paid in capital.





As
      of June 30, 2006, the liability for the warrants was “marked to market” and
      the difference of $183,554 has been accounted for as an increase 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.




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 June 30, 2006.





Obligations
            
            **Total**
            
            Less
                than 1 year
            
            1-3
                yearsLong-term
                debt
            
            **$**
            **2,584,004**
            
            $
            762,500
            
            $
            1,821,504Operating
                leases
            
            
            **108,000**
            
            
            56,000
            
            
            52,000





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.





28




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      30, 2006**





**SUBSEQUENT
      EVENT**





On
      July
      31, 2006, subsequent to the balance sheet date, the Company signed a term sheet
      with Inverness Medical Innovations, Inc. (AMEX:IMA) to develop and market the
      Company's consumer diagnostic products for HIV. The parties have contracted
      to
      enter into a definitive agreement to cooperate in the Company's completion
      of
      the clinical studies of its rapid test HIV products, with Inverness Medical
      Innovations being appointed the Company's exclusive, worldwide licensee in
      the
      rapid testing product consumer markets, and appointed a non-exclusive licensee
      to market the Company's HIV barrel product to professional markets.





29




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      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.**


**June
      30, 2006**


**PART
      II. OTHER INFORMATION**





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




In
      March
      2004, Chembio Diagnostic Systems, Inc. (the Company's former contract
      manufacturer) commenced an action in Federal Court, Eastern District of New
      York, seeking a declaration that the Company's US Patent No. 5,935,864 was
      invalid and that Chembio did not infringe the Company’s Patent. The Company had
      filed counterclaims for patent infringement seeking an injunction and damages.
      Some initial discovery took place, and the remainder of discovery had been
      stayed pending the Court's ruling interpreting the patent claims.




On
      September 27, 2005 the Hon. Joanna Seybert, issued her Claim Construction Ruling
      on the interpretation of the patent claims in the suit. The Court ruled that
      the
      Company's broader interpretation of its patent claims was correct, and rejected
      Chembio's arguments seeking to narrow coverage afforded by the Company's '864
      patent.




With
      the
      broad scope of the '864 patent now established, the Company is seeking to
      recover damages and to enjoin Chembio from selling or offering for sale the
      Chembio Sure Check device.





Other
      than that set forth above, to the best knowledge of the Company, no other
      material legal proceedings are pending.





**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 him upon conversion of his 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 an initial exercise price of $1.00 per share, subject to adjustment.




The
      Convertible Preferred Stock is convertible to shares of common stock at a
      conversion price of $0.50 per share, 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. 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 filed timely. If the
      registration statement is not declared effective by November 6, 2006, the
      Company will be 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. This preferred
      stock is being reflected as temporary equity on the balance sheet as of June
      30,
      2006.





31




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      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 condensed
      balance sheets. As the proceeds from the issuance of preferred
      shares of $2,150,000 are less than the combined fair value of the warrants
      and the conversion option, the difference of $3,644,248 has been charged to
      interest expense on derivative instruments, a non-operating expense, in
      the condensed statements of operations.




As
      of June 30, 2006, the liability for the value of the warrants and
      conversion option was “marked to market” and the difference of $786,660 and
      $1,375,978 have been accounted for as an increase to the interest expense
      on derivative instruments initially recognized in the condensed statement 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 they
      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.





**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, six month periods ended June 30, 2006, the Company recognized
      this beneficial conversion feature by charging an interest expense of $983,842.
      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 with interest.
      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.





The
      Company is in default on payment of interest on the debentures. 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 June 30, 2006 of $412,500 plus accrued interest of $3,671 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.





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





None





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





None


32




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      30, 2006**


**ITEM
      6. EXHIBITS**





(a) **** Exhibit
      index




**Exhibit**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.




33




**STATSURE
      DIAGNOSTIC SYSTEMS, INC.**


**June
      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






34