- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 000-52792

SUSPECT DETECTION SYSTEMS INC.

(Exact name of small business issuer as specified in its charter)

Delaware		98-0511645
(State of incorporation)		(IRS Employer ID Number)

150 West 56th Street, Suite 4005, New York, NY 10019

(Address of principal executive offices)

(212) 977-4126

(Issuer's telephone number)

________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 11, 2011, 78,930,892 shares of common stock, par value $0.0001 per share, were issued and outstanding.

TABLE OF CONTENTS

	Page
PART I
Item 1. Financial Statements		F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
Item 3. Quantitative and Qualitative Disclosures About Market Risk		5
Item 4. Controls and Procedures		5
PART II
Item 1. Legal Proceedings		6
Item IA. Risk Factors		6
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		6
Item 3. Defaults Upon Senior Securities		6
Item 4. Removed and Reserved		6
Item 5. Other Information		6
Item 6. Exhibits		6

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

SUSPECT DETECTION SYSTEMS INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)

Consolidated Financial Statements-			F-1

Consolidated Balance Sheets as of September 30, 2011(unaudited), and December 31, 2010			F-2

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)			F-4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (unaudited)			F-5

Notes to Consolidated Financial Statements September 30, 2011 and 2010 (unaudited)			F-6

F-1

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

U.S. dollars

ASSETS	September 30,			December 31,
	2011			2010
	Unaudited
Current Assets:
Cash and cash equivalents	$	595,188		$	803,443
Restricted cash		15,008			115,501
Accounts receivable		22,364			288,037
Inventory		68,594			188,185
Prepaid expenses and other receivables		21,131			253,864
Total current assets		722,284			1,649,030

Property and Equipment:
Computer and other equipment		60,766			56,556
Less - Accumulated depreciation		(34,878	)		(25,687	)
Property and equipment, net		25,888			30,869

Other Assets:
Severance pay fund		33,190			89,684
Long term deposit		5,862			7,300
Goodwill		1,333,214			1,333,214
Total other assets		1,372,266			1,430,198
Total Assets	$	2,120,439		$	3,110,097

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

F-2

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

U.S. dollars

LIABILITIES AND STOCKHOLDERS' EQUITY	September 30,			December 31,
	2011			2010
	Unaudited
Current Liabilities:
Accounts payable – Trade	$	17,463		$	43,174
Accrued liabilities		76,301			227,228
Advances from customers		20,000			1,656,249
Deferred revenues		100,370			112,890
Due to related parties		556,663			283,257
Total current liabilities		770,817			2,322,798

Long-term liabilities:
Convertible note		455,074			-
Accrued severance pay		33,190			88,560
Total long-term liabilities		488,265			88,560

Commitments and Contingencies

Stockholders' Equity:
Common stock, par value $0.0001 per share, 250,000,000 shares authorized; 78,930,892 and 76,555,493 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively.		7,893			7,655
Additional paid-in capital		5,186,553			3,399,961
Accumulated (deficit)		(4,543,059	)		(2,785,098	)
		651,387			622,518
Less - Noncontrolling interest		209,970			76,221
Total stockholders' equity		861,357			698,739

Total Liabilities and Stockholders' Equity	$	2,120,439		$	3,110,097

The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.

F-3

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

U.S. dollars

	For the three months ended September 30,						For the nine months ended September 30,
	2011			2010			2011			2010
				Restated						Restated

Revenues, net	$	174,341		$	259,080		$	1,912,620		$	1,596,682

Cost of Goods Sold		(6,944	)		(72,384	)		(150,092	)		(142,132	)

Gross Profit		167,397			186,696			1,762,528			1,454,550

Operating Expenses:

Research and development		(112,809	)		(107,666	)		(307,920	)		(317,532	)

Selling, general and administrative		(684,936	)		(349,348	)		(2,984,329	)		(1,807,889	)

Total operating expenses		(797,745	)		(457,014	)		(3,292,249	)		(2,125,421	)

Loss from Operations		(630,348	)		(270,318	)		(1,529,721	)		(670,871	)

Interest (expenses) income, net		(25,964	)		(876	)		(16,058	)		(19,216	)

Net income (loss)		(656,312	)		(271,194	)		(1,545,779	)		(690,087	)

Net loss (income) Attributable to Noncontrolling Interest		(35,431	)		44,971			212,181			(61,695	)

Net income (loss) attributable to Suspect Detection Systems Inc.	$	(620,881	)	$	(226,223	)	$	(1,757,961	)	$	(751,782	)

Income (Loss) Per Common Share:
Income (Loss) per common share - Basic and Diluted	$	(0.01	)	$	(0.00	)	$	(0.02	)	$	(0.01	)

Weighted Average Number of Common Shares Outstanding		76,097,293			68,895,810			76,097,293			66,978,382

The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.

F-4

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

U.S. dollars

	For the nine months ended September 30,
	2011			2010
				Restated
Operating Activities:
Net (loss)	$	(1,545,779	)	$	(690,087	)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Common stock compensation		491,699			25,500
Common stock issued for consulting services		-			149,000
Stock options compensation		1,361,184			354,230
Stock warrants issued to a consultant		-			49,888
Interest due to the issuance of convertible note		20,074			-
Depreciation		9,191			6,058
Changes in Assets and Liabilities-
Inventory		119,591			(45,307	)
Prepaid expenses and other receivables		232,733			(139,617	)
Accounts payable - Trade		(25,711	)		82,403
Accrued liabilities		(150,927	)		70,643
Advances from customers		(1,370,576	)		(234,894	)
Deferred revenues		(12,520	)		114,111
Due to related parties		273,426			169,539
Accrued severance pay		1,124			(38,752	)
Net Cash (Used in) Operating Activities		(596,491	)		(127,285	)

Investing Activities:
Decrease (increase) in restricted cash		100,493			(100,000	)
Additional purchase of 10% of subsidiary		(75,040	)		-
Advance payment on account of subsidiary's shares		(69,445	)		-
Increase in severance pay fund		-			(1,000	)
Long term deposit		1,438			(2,524	)
Purchases of Property and Equipment		(4,210	)		(29,012	)
Net Cash Provided by (Used in) Investing Activities		(46,764	)		(132,536	)

Financing Activities:
Issuance of convertible note		435,000			-
Issuance of common stock for cash		-			95,000
Net Cash Provided by Financing Activities		435,000			95,000

Net (decrease) in Cash		(208,255	)		(164,821	)
Cash and Cash Equivalents - Beginning of Period		803,443			701,931
Cash and Cash Equivalents - End of Period	$	595,188		$	537,110


Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	-		$	-
Income taxes	$	-		$	-

The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.

F-5

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

Note 1: General

Suspect Detection Systems Inc. (“SDS Inc.” or the “Company”) is a Delaware corporation that conducts its operations through its 68.6 percent owned subsidiary, Suspect Detection Systems Ltd., an Israeli Corporation (“SDS - Israel”). The Company was incorporated under the laws of the State of Delaware on October 5, 2006, as PCMT Corporation. On December 24, 2008, the Company changed its name from PCMT Corporation to Suspect Detection Systems Inc.

The accompanying consolidated financial statements were prepared from the accounts of the Company and its subsidiary under the accrual basis of accounting.

The Company operates through its Israeli subsidiary, Suspect Detection Systems Ltd, (“SDS – Israel”). SDS Israel was incorporated under the Companies Law, of the State of Israel in 2004. SDS – Israel specializes in the development and application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector. SDS – Israel completed the development of its “Cognito” line of products in 2007, which are based on proprietary software and use commercially available hardware to identify individuals that pose security threats, whether or not they are carrying a weapon on their person or in their belongings. Cognito systems are comprised of a front-end test station and a back office, where multiple-station and multiple-site data is stored, managed, and distributed. The front-end test station serves as the point of contact with the individual being examined. The back-office is designed to manage and control the test stations at a given site and it stores all test histories and traveler profiles and interfaces with external systems and databases. A provisional patent application has been issued for the Cognito line of products in the United States. SDS – Israel is also engaged in the development of behavior based screening technologies for the checkpoint screening market.

On January 20, 2009, SDS Inc. completed a business combination for the purchase of 51 percent of the issued and outstanding shares of SDS – Israel for consideration of $1,100,000. The Company incurred an additional $35,000 in acquisition costs related to legal and accounting fees. The business combination was accounted for by the purchase method and accordingly, the purchase price has been allocated to the estimated fair values of the respective assets acquired and liabilities assumed of SDS – Israel, with the remaining representing goodwill in the amount of $1,333,214. The results of operations of SDS – Israel have been included in the consolidated financial statements of the Company commencing January 20, 2009.

In July 9, 2009, SDS Inc. entered into an Exchange Agreement (the “Exchange Agreement”) with the Northern Group LP ("NG"), pursuant to which NG exchanged 170,295 ordinary shares of SDS – Israel for 3,199,891 of SDS Inc’s common stock. The 170,295 shares of SDS- Israel represented 7 percent of the outstanding shares of SDS-Israel and increased SDS Inc.’s ownership interest in SDS- Israel to 58 percent. The acquisition of the additional equity interest was accounted for by the equity method. The increased percentage of ownership of SDS – Israel, amounting to 58 percent, has been applied to the operations of this subsidiary since July 9, 2009.

On June 16, 2011, SDS Inc. entered into a share purchase agreement with Isahyau (Sigi) Horowitz (“the Seller”), pursuant to which the Company will purchase from the Seller 250,000 ordinary shares of SDS Israel (which represents 10.6% of the outstanding shares of common stock of SDS Israel) in consideration of $75,000.

F-6

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

On June 27, 2011 the Company entered into a Share Purchase Agreement with Shabtai Shoval (“Shoval”), a shareholder of SDS, Ltd. and its former chief executive officer. Pursuant to the Agreement, Shoval will sell and transfer, under certain conditions as described herewith, to the Company all shares of SDS Israel held by him on the date of the Agreement, namely, NIS 0.01 par value 750,000 ordinary shares, which constitute 31.4% of SDS Israel outstanding shares as of the date of the agreement. In consideration for the shares, the Company will pay Shoval $1,174,500 (“Purchase Price”) which shall be paid in 35 installments. Shares shall only be transferred to the Company upon (1) the payment of fifty percent (50%) of the Purchase Price plus any and all accrued and outstanding interest as of the date of payment and/or (2) the passing of five (5) years from the date of closing provided that prior to such time, payment of no less than $225,000 on the account of the purchase price shall have been made to Shoval, plus any and all accrued and outstanding interest. The Company may defer the payment of all or a portion of any of the installments (except for the first installment, which was payable on the day of the closing) if and to the extent: (i) prior to the payment of $225,000 on the account of the aggregate purchase price to Shoval (the “Initial Threshold Amount”) the obtainable cash (cash or cash equivalents less any amounts of signed checks or any other instruments that were issued or wire transfer instructions which were executed as of the payment date of the relevant Installment) is less than the Initial Threshold Amount; or (ii) following payment of the Initial Threshold Amount, if the obtainable cash as of the payment date of the relevant Installment is less than $500,000 as of the relevant payment date. The Company records payments as a Minority Interest balance sheet item until such payments reach the Initial Threshold Amount, at which time the Company will have title of the percentage of shares that would have been paid for.

Note 2: Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying consolidated balance sheet as of September 30, 2011, consolidated statements of operations and cash flows for the three and nine months ended September 30, 2011 and 2010 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of our consolidated financial position as of September 30, 2011, our consolidated results of operations for the three and nine months ended September 30, 2011 and 2010 and cash flows for the nine months ended September 30, 2011 and 2010.

These consolidated financial statements should be read in conjunction with consolidated financial statements and accompanying notes for the year ended December 31, 2010 included in our Annual Report for the year ended December 31, 2010 on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 22, 2011.

Results for the three and nine months ended September 30, 2011 are not necessarily indicative of results that may be expected for the year ending December 31, 2011.

Unless otherwise noted, all references to “dollars” or “$” are to United States dollars.

F-7

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

Use of Estimates

The accompanying consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of consolidated assets, liabilities and equity as of September 30, 2011, and consolidated revenues and expenses for the three and nine months ended September 30, 2011 and 2010. Actual results could differ from those estimates made by management.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its 68.6 percent owned Israeli subsidiary, SDS-Israel. Inter-company transactions and balances, have been eliminated in consolidation.

Fair Value Measurement

The FASB established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires that an entity maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are as follows:

Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis were as follows:

	Fair Value Measurements at September 30, 2011
			Quoted Prices in Active
			Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	595,188	$	595,188	$	-	$	-
Restricted Cash		15,008		15,008		-		-
Total assets at fair value	$	610,196	$	610,196	$	-	$	-

F-8

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

	Fair Value Measurements at December 31, 2010
			Quoted Prices in Active
			Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	803,443	$	803,443	$	-	$	-
Restricted Cash		115,501		115,501		-		-
Total assets at fair value	$	924,944	$	924,944	$	-	$	-

Impact of recently issued and adopted accounting pronouncement

In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04, the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. ASU 2011-03 is effective for public entities during interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company does not believe that the adoption of ASU 2011-04 will have a material impact on the Company's consolidated results of operation and financial condition.

In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income," ("ASU 2011-05") which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after Dec. 15, 2011 with early adoption permitted. The Company does not believe that the adoption of ASU 2011-05 will have a material impact on the Company's consolidated results of operation and financial condition.

There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on the Company's financial position, results of operations or cash flows.

Note 3: Going Concern

The Company’s current activities include sales of its products, marketing, capital formation, research and development, and building infrastructure. The Company has incurred a net loss of $1,720,018 for the nine months ended September 30, 2011 and as of September 30, 2011 the Company had an accumulated deficit of $4,543,059. The Company’s ability to continue as a going concern is uncertain. The revised business plan of the Company is the application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.

F-9

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

While management of the Company believes that the Company will be successful in its current and planned operating activities, there can be no assurance that the Company will be successful in the achievement of sales of its products that will generate sufficient revenues to earn a profit and sustain the operations of the Company.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has not established sufficient sources of revenues to cover its operating costs and expenses. As such, it has incurred significant operating losses since inception. Further, as of September 30, 2011, the cash resources of the Company were insufficient to meet its planned business objectives. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

Note 4: Restatement

The financial statements for September 30, 2010 were restated pursuant to comments received from the Securities and Exchange Commission (the "Commission") to our Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2009 and to include additional changes in presentation of certain accounts in the financial statements.

Effects on previously issued financial statements as of September 30, 2010 as follows:

Statement of operations for the three months ended September 30, 2010:
Decrease in research and development expenses	$	(1,026	)
Increase in general and administrative expenses		123,190
Increase in interest expense, net		18,340
Increase in net loss attributable to Suspect Detection Systems Inc.	$	140,504
Statement of operations for the nine months ended September 30, 2010:
Decrease in research and development expenses	$	(1,021	)
Increase in general and administrative expenses		462,313
Increase in net loss attributable to Suspect Detection Systems Inc.	$	461,292

F-10

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

Statement of Operations for the nine months ended September 30, 2010

	Previously
	reported			Net Change				Restated

Revenues, net	$	1,596,682						$	1,596,682
Cost of Goods Sold		142,132							142,132
Gross Profit		1,454,550							1,454,550
Expenses:
Research and development		318,553			(1,021	)	j		317,532
Selling, general and administrative		1,345,576			462,313		a,b,c,d, e,f,g,h,i,j		1,807,889
Total operating expenses		1,664,129							2,125,421

Loss from Operations		(209,579	)						(670,871	)
Interest expense		(19,216	)						(19,216	)
Net (loss)		(228,795	)						(690,087	)
Net (loss) Attributable to Noncontrolling Interest		(61,695	)						(61,695	)
Net (loss) attributable to Suspect Detection Systems Inc.	$	(290,490	)					$	(751,782	)

(Loss) Per Common Share:
(Loss) per common share - Basic and Diluted	$	(0.00	)					$	(0.01	)

Weighted Average Number of Common Shares Outstanding - Basic and Diluted		73,676,117			(6,697,735	)	k		66,978,382

(a) Correction of error of $24,750 originally included in selling, general and administrative for consultants fees which should have not been expensed

(b) Correction of error in calculation of the severance pay fund in the amount of $1,000.

(c) Correction of error of $26,405 originally not included in selling, general and administrative for consultants fees which should have been expensed.

(d) Reclassification of $8,644 from other accounts payables to due to related parties and correction of error of $39,374 originally not included in selling, general and administrative for general charges from SDS Israel, which should have been expensed.

(e) Correction of error of $18,750 originally not included selling, general and administrative for directorship fees of the Chairman of the Board, and $24,411 originally not included selling, general and administrative for the compensation of the chief executive officer.

(f) Correction of error of $24,000 originally not included in selling, general and administrative for consultants fees which should have been expensed in fiscal year 2009 and $18,000 originally not included in selling, general and administrative for consultants fees which should have been expensed in fiscal year 2010.

(g) Correction of error involving of amortized fair value of 2,000,000 options that were granted to the chairman of the Board and a member of the advisory board in the amount of $104,874.

(h) Correction of error involving of amortized fair value of 1,550,200 options that were granted to nine agents of SDS-Israel in the amount of $194,131. The options are vested within one year of the grant date and they are execrable at $0.15 per share and no later than three years from the grant date.

F-11

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

(i) Correction of error involving of fair value of 450,000 warrants that were granted to a consultant of the Company in the amount of $49,888. The warrants are execrable at $0.15 per share and no later than two years from the grant date.

(j) Reclassification of certain expenses in the amount of $1,021 from research and developments costs to selling, general and administrative expenses.

(k) Correction of error involving the calculation of the basic and diluted weighted average number of Common Shares outstanding.

Statement of Operations for the three months ended September 30, 2010

	Previously
	reported			Net Change				Restated
Revenues, net	$	259,080						$	259,080
Cost of Goods Sold		72,384							72,384
Gross Profit		186,696							186,696
Expenses:
Research and development		108,692			(1,026	)	h		107,666
Selling, general and administrative		226,158			123,190		a,b,c, d,e,f,g,h,		349,348
Total operating expenses		334,859							457,014
(Loss) from Operations		(148,154	)						(270,318	)
Interest expense		(19,216	)		(18,340	)	h		(876	)
Net (loss)		(167,370	)						(271,194	)
Net (loss) Attributable to Noncontrolling Interest		(44,971	)						(44,971	)
Net (loss) attributable to Suspect Detection Systems Inc.	$	(85,080	)					$	(226,223	)

(Loss) Per Common Share:
(Loss) per common share - Basic and Diluted	$	(0.00	)					$	(0.00	)
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted		74,055,493			(5,159,683	)	i		68,895,810

(a) Correction of error of $24,750 originally not included in selling, general and administrative for consultants fees which should have been expensed.

(b) Correction of error of $6,000 originally included in selling, general and administrative for officer’s compensation which should have not been expensed.

(c) Correction of error of $8,466 originally not included in selling, general and administrative for general charges from SDS Israel, which should have been expensed.

(d) Correction of error of $6,250 originally not included selling, general and administrative for directorship fees of the Chairman of the Board, and $8,137 originally not included selling, general and administrative for the compensation of the chief executive officer

F-12

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

(e) Correction of error of $18,000 originally not included in selling, general and administrative for consultants fees which should have been expensed.

(f) Correction of error involving of amortized fair value of 2,000,000 options that were granted to the chairman of the Board and a member of the advisory board in the amount of $20,845

(g) Correction of error involving of amortized fair value of 1,550,200 options that were granted to nine agents of SDS-Israel in the amount of $31,081. The options are vested within one year of the grant date and they are execrable at $0.15 per share and no later than three years from the grant date.

(h) Reclassification of certain expenses in the amount of $1,026 from research and developments costs to selling, general and administrative expenses.

(i) Correction of error involving the calculation of the basic and diluted weighted average number of Common Shares outstanding

Statement of Cash Flows for the nine months ended September 30, 2010

	Previously reported			Net Change			Restated

Operating Activities:
Net (loss)	$	(228,795	)	$	(461,292	)	$	(690,087	)
Adjustments to reconcile net (loss) to net cash
Common stock compensation		167,000			7,500			174,500
Stock options compensation		55,221			299,009			354,230
Stock warrants issued to a consultant		-			49,888			49,888
Depreciation		6,058			-			6,058
Changes in Assets and Liabilities-
Accounts receivable
Inventory		(45,307	)		-			(45,307	)
Prepaid expenses and other receivables		(165,160	)		25,543			(139,617	)
Accounts payable – Trade		80,703			1,700			82,403
Accrued liabilities		81,070			(10,427	)		70,643
Advances from customers, net		(212,530	)		(22,364	)		(234,894	)
Deferred revenues		114,111			-			114,111
Due to related parties		-			169,539			169,539
Accrued severance pay		(2,176	)		36,576			(38,752	)

Net Cash (Used in) Operating Activities		(149,805	)		22,520			(127,285	)

Investing Activities:
Increase in restricted cash		-			(100,000	)		(100,000	)
Prepaid expenses, non-current		-			(2, 524	)		(2, 524	)
Increase in severance pay fund		(36,576	)		35,576			(1,000	)
Purchases of Property and Equipment		(29,012	)		-			(29,012	)

Net Cash Used in Investing Activities		(65,588	)		(66,948	)		(132,536	)

F-13

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

Financing Activities:
Issuance of common stock for cash		95,000		-			95,000
Due to related party		55,572		(55,572	)		-
Net Cash Provided by Financing Activities		150,572		(55,572	)		95,000

Net Increase Decrease in Cash		(64,821	)	-			(164,821	)
Cash and Cash Equivalents - Beginning of Period		717,758					701,931
Cash and Cash Equivalents - End of Period	$	652,937		(15,827	)	$	537,110
Cash and Cash Equivalents - End of Period:
Cash in bank	$	701,931				$	701,931
Restricted cash		15,827		(15,827	)		-
Total	$	717,758				$	701,931
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	-				$	-
Income taxes	$	-				$	-

Note 5 Related parties

As of September 30, 2011 and December 31, 2010 the Company has unpaid sales commissions to a director in SDS Israel in the amounts of $259,708 and $153,448, respectively.

On June 29, 2011 SDS Inc. approved an Amended Consulting Agreement with Mr. Yoav Krill, the Company’s Chairman of the Board. In consideration of the services to be performed under the Amended Consulting Agreement, Mr. Krill shall receive an annual director’s fee of $25,000 for the first twelve-month period. Thereafter, the parties shall agree in writing prior to November 30th of each calendar year as to the amount to be paid as director’s fees, which amount shall not be less than $25,000 and shall be increased, proportionately, with any increase in the Company’s paid-in capital, sales revenues or net profits. In addition, under the Amended Consulting Agreement, Mr. Krill was granted 2,400,000 shares of common stock of the Company valued at $240,000 and 10,500,000 stock options valued at $978,936.

The Options vests as follows: 4,666,660 shares were vested upon execution of the Amended Agreement and the balance of 5,833,340 shares shall vest in equal monthly amounts of 291,667 shares during each and every calendar month during the twenty month period commencing on July 1, 2011. The price of the Company's share at date of grant of shares and options was $0.10, the exercise price of the options $0.10 and the expiration date 10 years from grant.

F-14

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

On June 29, 2011 SDS Inc. approved an Amended Employment Agreement with Mr. Gil Boosidan will serve as the Company’s Chief Executive Officer. In consideration of the services to be performed under the Amended Employment Agreement, Mr. Boosidan shall receive (i) an aggregate of $30,000 in cash in four equal quarterly installments commencing September 30, 2011, and (ii) 1,200,000 shares of common stock of the Company valued at $120,000 and 6,000,000 stock options valued at $559,392.

The Options vests as follows: 2,666,680 shares vested upon the execution of his Amended Employment Agreement and the balance of 3,333,320 shares shall vest in equal monthly amounts of 166,667 shares during each and every calendar month during the twenty month period commencing on July 1, 2011. The price of the Company's share at date of grant of shares and options was $0.10, the exercise price of the options $0.10 and the expiration date 10 years from grant.

On June 1, 2011 SDS Inc signed a consulting agreement with Mr. Daniel Krill, the son of Mr. Yoav Krill, chairman of the board of director. In consideration for services Mr. Daniel Krill was granted 400,000 shares valued at $32,000 and 200,000 stock options valued at $15,032. 5,555 options shall vest each calendar month commencing the date of the execution of the consulting Agreement. The price of the Company's share at date of grant of shares and options was $0.08, the exercise price of the options $0.10 and the expiration date 10 years from grant.

Note 6 Convertible Note

On March 21, 2011, the Company issued a convertible note (the “Note”) to Investor (the “Lender”) whereby the Lender made a loan to the Company in an amount equal to $300,000 and accruing interest at a rate of 10% per annum. Similar notes were issued on May 12, 2011 and August 3, 2011 for an amount equal to $100,000 and $35,000, respectively, (together the loans are referred to as the "loan"). The Loan and the accrued interest will be repayable in one installment on the date that is eighteen months after the date the Loan is made; provided that such date may be extended at the Company’s request by another six months. The Lender shall have the right, at any time, to convert the principal and interest outstanding under the Note into common share issued by the Company at a conversion rate of $0.07 per a common share. In addition, the Lender is entitled to (i) 500 Class C warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.12 per Common Share and (ii) 500 Class D warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.21 per Common Share. The Class C Warrants shall be exercisable at any time from the conversion date to and excluding the first anniversary thereof and the Class D Warrants shall be exercisable at any time from the conversion date to and excluding the third anniversary thereof. There will be no restrictions on shares being registered upon exercise of the loan and the warrants will be registered under the Securities Act, or any state securities laws, and may be offered or sold in the United States upon registration or an applicable exemption from the registration requirements of the Securities Act.

F-15

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

FSP APB 14-1 requires issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to initially record the liability and equity components of the convertible debt separately. The liability component is computed based on the fair value of a similar liability that does not include the conversion option. The equity component is computed based on the total debt proceeds less the fair value of the liability component. The equity component (debt discount) and debt issuance costs are amortized as interest expense over the expected term of the debt facility. The liability component of our convertible notes is classified as long-term debt and presented as a long-term debt and the equity component of our convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our stock price is above the conversion prices of $0.07 at the grant date. We concluded there the liability value is equal to similar liability that does not include a conversion option and therefore the equity component is zero.

We did not calculate a beneficial conversion feature, in determining whether an instrument contains a beneficial conversion option, intrinsic value should be calculated using the effective conversion price, which is based on the proceeds received for the convertible instrument. The Company's shares market price at grant date of the notes was below the conversion price, therefore there was no beneficial conversion feature on the loans.

Note 7 Stock warrants

A summary of the warrants granted is as follows:

	For the nine months ended
	September 30, 2011
	Number of warrants			Weighted Average Exercise Price
Outstanding and exercisable at the beginning of the period		17,170,007		$	0.30
Forfeited		(12,740,005	)		0.31
Outstanding and exercisable at the end of the period		4,430,002		$	0.29

	For the nine months ended
	September 30, 2010
	Number of warrants			Weighted Average Exercise Price
Outstanding and exercisable at the beginning of the period		16,019,667		$	0.32
Granted		2,130,000			0.28
Forfeited		(1,713,334	)		0.25
Outstanding and exercisable at the end of the period		16,436,333		$	0.32

Note 8 Stock options

On December 30, 2009, the Company approved 2009 Global Stock Incentive Plan (the “stock option plan”), under which 35,000,000 shares of common stock are authorized for issuance. As of September 30, 2011 26,650,200 stock options were granted under the Stock Option Plan.

The Company accounts for stock based compensation using the fair value recognition provisions of ASC No. 718 “Compensation – stock compensation”.

F-16

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

The fair value of the stock options is estimated based upon grant date fair value using the Black-Scholes option-pricing model with the following weighted average assumptions used for 2011 grants:

Annual dividends of	$0.00
expected volatility of	151.62%
risk-free interest rate of	1.88%
expected average options expiration	6.50

	For the nine months ended
	September 30, 2011
	Number of options		Weighted Average Exercise Price
Outstanding at the beginning of the period		3,550,200	$	0.15
Granted		23,100,000		0.11
Exercised		-		-
Forfeited		-		-
Outstanding at the end of the period		26,650,200	$	0.12

Exercisable at the end of the period

15,808,539

0.12

On April 18, 2011 the Company granted 5,300,000 stock options under the Company's Global stock incentive plan to 4 employees of Suspect Detection Systems Ltd. Each option exercisable into one share of Common Stock of the Company at the exercise price of $0.15 per share. A total of 3,750,000 stock options were vested at the date of grant, additional 1,550,000 stock options shall vest in equal quarterly amounts over two years. The options will terminate ten years from the date of grant.

On June 21, 2011 the Company granted 6,000,000 stock options under the Company's Global stock incentive plan to Mr. Gil Boosidan, the Chief Executive Officer of Suspect Detection Systems Inc. Each option exercisable into one share of Common Stock of the Company at the exercise price of $0.10 per share. A total of 2,666,680 stock options were vested at the date of grant, additional 3,333,320 stock options shall vest in equal monthly amounts of 166,666 stock options during the twenty (20) months period commencing July 1, 2011. The options shall terminate ten years from the date of grant.

On June 21, 2011 the Company granted 10,500,000 stock options under the Company's Global stock incentive plan to Mr. Yoav Krill, the Chairman of the Board of Directors of the Company. Each option exercisable into one share of Common Stock of the Company, at the exercise price of $0.10 per Share. A total of 4,666,660 stock options were vested at the date of the grant, additional 5,833,340 stock options shall vest in equal monthly amounts of 291,667 stock options during the twenty (20) months period commencing July 1, 2011. The options shall terminate ten years from the date of grant.

F-17

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

On June 1, 2011 the Company granted 200,000 stock options under the Company's Global stock incentive plan to Mr. Daniel Krill, the son of the Chairman of the Board of Directors of the Company. Each option is exercisable into one share of Common Stock of the Company at the exercise price of $0.10 per share. The options shall vest in equal monthly amounts of 5,555 stock options during the thirty six (36) months period commencing June 1, 2011. The options shall terminate ten years from the date of grant.

On June 15, 2011 the Company granted 700,000 stock options under the Company's Global stock incentive plan to Mr. Isahyau (Sigi) Horowitz, a member of the Board of Directors of the Company. Each option is exercisable into one share of common stock of the Company at the exercise price of US$ 0.1 per Share. The options shall vest in equal monthly amounts of 29,167 stock options during the twenty four (24) months period commencing June 16, 2011. The options shall terminate ten years from the date of grant.

On September 1, 2011 the Company granted 400,000 stock options under the Company's Global stock incentive plan to Mr. Alfred McNeil, a Member of the Advisory Board of the Company. Each option exercisable into one share of Common Stock of the Company at the exercise price of $0.10 per Share. A total of 200,000 stock options were vested at the date of grant, additional 200,000 stock options shall vest in equal monthly amounts of 11,111 stock options during the eighteen (18) months period commencing September 1, 2011. The options shall terminate ten years from the date of grant.

	For the nine months ended
	September 30, 2010
	Number of options		Weighted Average Exercise Price
Outstanding at the beginning of the period		1,550,200	$	0.15
Granted		2,000,000		0.15 0.15
Exercised		-		-
Forfeited		-		-
Outstanding at the end of the period		3,550,200	$	0.15

Exercisable at the end of the period

2,425,197

0.15

F-18

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

Note 9 Major Customers

The Company’s revenues from a customer accounted for $1,649,303 or 86% of total revenues for the nine months ended September 30, 2011 and 3 customers accounted for $1,596,682 or 96% of total revenues in the nine months ended September 30, 2010.

	Nine months ended September 30, 2011
	Revenues		% of total revenues			Accounts Receivable
Customer A	$	1,649,303		86	%		-
Customer B		88,329		5			-
Other customers		174,988		9			22,364
Total Revenues	$	1,912,620		100	%		22,364

	Nine months ended September 30, 2010
	Revenues		% of total revenues			Accounts Receivable
Customer A	$	1,052,134		66	%
Customer B		313,624		20
Customer C		163,375		10
Other customers		67,549		4			21,731
Total Revenues	$	1,596,682		100	%		21,731

Note 10: Subsequent events

As defined in FASB ASC 855-10, “Subsequent Events”, subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued.

On October 24, 2011 the Company entered into a non-binding letter of intent (“LOI”) with DVTel, Inc., a Delaware corporation (“DVTel”). If the parties sign a definitive merger agreement incorporating the terms of the LOI and the parties consummate the transactions contemplated by the LOI, a newly-formed wholly-owned subsidiary of the Company will merge with and into DVTel (the “Merger”) with DVTel surviving the Merger as a wholly-owned subsidiary of the Company.

If the transaction contemplated by the LOI is consummated, all currently outstanding shares, options, warrants and other rights to receive shares of the Company will equal 15% of the fully diluted capital stock of the Company post-Merger and the existing security holders of DVTel will have 85% (or such higher percentage reasonably acceptable to DVTel if the Company’s outstanding debt is not converted into equity prior to the execution of the merger agreement). Said percentages are prior to the future security issuances to investors making an investment in the Company, on terms acceptable to DVTel, of not less than $5,000,000; this proposed financing is one of the conditions to closing of the Merger. Some of the other conditions to closing include the Company acquiring the balance of the shares it owns in Suspect Detection Services Ltd., its Israeli subsidiary, the stockholders of the Company approving a reverse split and/or increase in the authorized share capital of the Company, unless the exchange ratio above is adjusted, the holders of the Company's convertible debt converting to equity (prior to the execution of the merger agreement), key employees of the Company being subject to employment agreements acceptable to DVTel and, if required by DVTel, the receipt of a fairness opinion. If the Merger closes, designees of DVTel will be appointed as members of the board and management of the Company.

F-19

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2011 and 2010

The Company has agreed in the LOI to use its commercially reasonable efforts to file a definitive proxy statement within 30 days of the date of the LOI to approve a reverse stock split and/or increase its share capital necessary to effectuate the Merger and related transactions contemplated by the LOI.

Pursuant to the LOI, the Company agreed for a period of 120 days or the earlier written notice from DVTel that it no longer desires to pursue the Merger not to, directly or indirectly, solicit, negotiate with or discuss any proposal to acquire the business, assets or stock of the Company, to issue any equity or debt securities of the Company, to provide non-public information regarding any acquisition proposal, or to enter into any agreement or understanding to abandon, terminate or fail to consummate the Merger with DVTel. The Company is required to immediately notify DVTel regarding any such interests or proposals from third parties.

In the event that an agreement between the parties is not entered into prior to February 27, 2012, the LOI will terminate unless extended by the parties.

F-20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As used in this Form 10-Q (this “Report”), references to “Suspect,” the “Company,” “we,” “our” or “us” refer to Suspect Detection Systems, Inc. unless the context otherwise indicates.

Forward-Looking Statements

The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Report. This Report contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

For a description of such risks and uncertainties refer to our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2011. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Plan of Operation

Through our 68.6% owned subsidiary, Suspect Detection Systems, Ltd., an Israeli company ("SDS"), we specialize in the development and application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector. SDS completed the development of its “Cogito” line of products in 2007, which are based on proprietary software and use commercially available hardware to identify individuals that pose security threats, whether or not they are carrying a weapon on their person or in their belongings. Cogito systems are comprised of a front-end test station and a back office, where multiple-station and multiple-site data is stored, managed and distributed. The front-end test station serves as the point of contact with the individual being examined. The back-office is designed to manage and control the test stations at a given site and it stores all test histories and traveler profiles and interfaces with external systems and databases. A provisional patent application has been issued for the Cogito line of products in the United. SDS is also engaged in the development of behavior based screening technologies for the checkpoint screening market.

As reported on the Current Report on Form 8-K dated October 24, 2011 the Company entered into a non-binding letter of intent (“LOI”) with DVTel, Inc., a Delaware corporation (“DVTel”). If the parties sign a definitive merger agreement incorporating the terms of the LOI and the parties consummate the transactions contemplated by the LOI, a newly-formed wholly-owned subsidiary of the Company will merge with and into DVTel (the “Merger”) with DVTel surviving the Merger as a wholly-owned subsidiary of the Company.

Results of Operations

The following discussion should be read in conjunction with the condensed financial statements and in conjunction with the Company's Form 10-K filed on March 22, 2011. Results for interim periods may not be indicative of results for the full year.

Results of Operations for the three months ended September 30, 2011 compared to the three months ended September 30, 2011

Revenues

The Company generated $174,341 and $259,080 in revenues for the three (3) months ended September 30, 2011 and 2010, respectively, which represents a decrease of $84,739 or 32.71%. The decrease is due to delays in orders expected.

The Company generated revenues from one of its four major customers in the amount of $88,329 or 51% of total revenues for the three months ended September 30, 2011.

Dependence on major customers

A significant portion of SDS’s revenue in the nine months ended September 30 ,2011 was derived from sales of the system and services provided to a customer and a significant portion of SDS’s revenue in 2010 was derived from sales of the system and services provided to four customers. Since the bulk of the Company’s revenues are generated by initial sales of its systems, as opposed ongoing support services, the loss of this customer may have a material adverse impact on the business of SDS.

Cost of Revenue

Cost of revenue primarily consists of purchases and royalties to the Chief Science Office in Israel due to grants that were received in the past. Cost of revenues was $6,944 and $72,384 for the three months ended September 30, 2011 and 2010, respectively. This decrease is primarily attributable to decrease in revenues and decrease in royalties payable to the Israeli Government - Office of Chief Scientist.

Total Operating Expenses

Operating expenses consist primarily of personnel costs and related expenses, professional fees, sales and marketing expenses, including travel, sales commissions, communication expenses, other administrative expenses and amortization of other acquired intangible assets. During the three (3) months ended September 30, 2011 and 2010, total operating expenses were $797,745 and $457,014, respectively. The increase in operating expenses results mainly from an increase in stock based compensation to $391,464 in the three month ended September 30, 2011 compared with $55,325 in the three month ended September 30, 2010.

Results of Operations For the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

Revenues

The Company generated $1,912,620 and $1,596,682 in revenues for the nine (9) months ended September 30, 2011 and 2010. The increase in revenues is a result of the recognition of revenues from one large contract in the first quarter of 2011, the revenues recognized from the contract were $1,649,303.

The Company’s revenues from 1 customer accounted for $1,649,303 or 86% of total revenues for the nine months ended September 30, 2011 and 3 customers accounted for $1,529,133 or 96% of total revenues in the nine months ended September 30, 2010.

	Nine months ended September 30, 2011
	Revenues		% of total revenues			Accounts Receivable
Customer A	$	1,649,303		86	%		-
Customer B		88,329		5			-
Other customers		174,988		9			22,364
Total Revenues	$	1,912,620		100	%		22,364

	Nine months ended September 30, 2010
	Revenues		% of total revenues			Accounts Receivable
Customer A	$	1,052,134		66	%		-
Customer B		313,624		20			-
Customer C		163,375		10			-
Other customers		67,549		4			21,731
Total Revenues	$	1,596,682		100	%		21,731

Cost of Revenue

Cost of revenue primarily consists of purchases and royalties to the Chief Science Office in Israel due to grants that were received in the past. Cost of revenues was $150,092 and $142,132 for the nine months ended September 30, 2011 and 2010, respectively.

Total Operating Expenses

Operating expenses consist primarily of personnel costs and related expenses, professional fees, sales and marketing expenses, including travel, sales commissions, communication expenses, other administrative expenses and amortization of other acquired intangible assets. During the nine (9) months ended September 30, 2011 and 2010, total operating expenses were $3,292,249 and $2,125,421, respectively. The increase in operating expenses resulted mainly from an increase in stock based compensation to $1,852,883 in the nine month ended September 30, 2011 compared with $578,618 in the nine month ended September 30, 2010. Salaries and other operational expenses did not change significantly from the nine month ended September 2011 to the same period in 2010.

Liquidity and Capital Resources

The Company had cash in the amount of $595,188 as of September 30, 2011 and $803,443 as of December 31, 2010.

In addition, the Company had a stockholders' equity of $861,357 at September 30, 2011.

As of September 30, 2011, the Company owed $259,708 for sales commissions, to Mr. Eran Drukman, an officer of SDS – Israel. ..

The Company expects significant capital expenditures during the next 12 months, contingent upon raising capital. We anticipate that we will need approximately $1,000,000 for operations for the next 12 months. These anticipated expenditures are for manufacturing, research and development, marketing, sales channel development, general and administrative expenses and debt financing.

Going Concern Consideration

The Company has not established sufficient sources of revenues to cover its operating costs and expenses. As such, it has incurred significant operating losses since inception. Further, as of September 30, 2011, the cash resources of the Company were insufficient to meet its planned business objectives. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern.

Recent Accounting Pronouncements

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 1934 Act). Based on this evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission rules and forms. Furthermore, our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Controls

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 240.15d-15 that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.

Item 1A. Risk Factors

A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable

Item 4. Removed and Reserved.

Item 5. Other Information.

Not applicable

Item 6. Exhibits

Exhibit No.	Description

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

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

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SUSPECT DETECTION SYSTEMS, INC.
Dated: November 14, 2011
	By:	/s/ Gil Boosidan
		Name: Gil Boosidan
		Title : Chief Executive Officer and Director (Principal Executive and Financial and Accounting Officer)