In Veritas Medical Diagnostics 10QSB 2007 Q2 Quarterly report (small business)

Consolidated Statements of Operation

Consolidated Balance Sheet

January 31, 2007

(unaudited)

Assets
Current assets:
Cash	$	11,343
Prepaid expenses and other		53,993
Total current assets		65,336
Property and equipment, net (Note 3)		7,002
Intangible assets:
Patent costs (note 4)		157,911

	$	230,249

Liabilities and Shareholders’ Deficit

Current liabilities:
Accounts payable	$	988,850
Accrued interest payable		357,317
Accrued liabilities		500,038
Indebtedness to related parties (Note 2)		197,337
Current portion of Long Term Notes Payable (Note 9)		829,430
Short term advance from Related Party (Note 9)		91,903
Short term advance		80,000
Total current liabilities		3,044,875

Long-term debt:
Convertible Loan Notes, net of unamortized discount of $233,519 (Note 9)		216,481
Royalty Participation Agreement advances (Note 9)		571,705
Notes payable, related party (Note 9)		1,800,000
Total liabilities		5,633,061

Shareholders’ deficit:
Preferred stock, $.001 par value, 50,000,000 shares authorized (aggregate
liquidation preference of $8 million)
Series A Preferred stock, 34,343,662 shares issued and outstanding (Note 6)		34,344
Common stock, $.001 par value, 500,000,000 shares authorized,
86,058,457 shares issued, 25,685,000 held in escrow, and
60,373,457 shares outstanding		86,103
Prepaid element of expenses settled in stock		(73,789	)
Stock issued as security for convertible debentues (Note 9)		(3,339,050	)
Additional paid-in capital		8,896,496
Accumulated other comprehensive loss- foreign currency adjustment		(432,105	)
Deficit accumulated during the development stage		(10,574,811	)

Total shareholders' deficit		(5,402,812	)

	$	230,249

See accompanying notes to condensed consolidated financial statements.

F-2

In Veritas Medical Diagnostics, Inc.

(A Development Stage Company)

(unaudited)

													March 26, 1997
													(Inception)
	Six Months Ended January 31,						Three Months Ended January 31,						Through January 31,
		2007			2006			2007			2006			2007

Net sales and gross revenues:
Net sales	$	—		$	766,432		$	—		$	413,439		$	3,571,807
Cost of sales		—			—			—			—			242,097

Gross profit		—			766,432			—			413,439			3,329,710

Operating expenses:
Research and development		330,606			586,670			147,348			321,461			5,320,327
Legal & Professional		207,544			—			180,365			—			1,192,604
Stock options expense		404,455			11,742			180,612			5,871			519,532
Selling and marketing		142,461			—			80,808			—			485,015
General and administrative		275,693			565,978			106,802			305,579			5,134,556

Total operating expenses		1,360,759			1,164,390			695,935			632,911			12,652,034

Loss before other income		(1,360,759	)		(397,958	)		(695,935	)		(219,472	)		(9,322,324	)

Nonoperating income (expense):
UK government grant (Note 1)		—			94,458			—			94,458			291,398
Interest expense		(458,681	)		(136,748	)		(257,109	)		(92,057	)		(1,117,438	)
Loan Finance issue costs		—			(154,180	)		—			(76,419	)		(708,279	)
Costs of aborted financing		—			—			—			—			(113,400	)
Compensation payment to former director		—			—			—			—			(135,000	)
Gain (loss) on foreign exchange		—			8,202			—			(11,496	)		(132,378	)
Gain (loss) from extinguishments of debt		—			—			—			—			662,610


Loss before income taxes		(1,819,440	)		(586,226	)		(953,044	)		(304,986	)		(10,574,811	)

Income tax provision		—			—			—			—			—

Net loss	$	(1,819,440	)	$	(586,226	)	$	(953,044	)	$	(304,986	)	$	(10,574,811	)

Preferred stock dividend requirements		(22,757	)		(21,384	)		(22,757	)		(21,384	)

Loss applicable to common stock	$	(1,842,197	)	$	(607,610	)	$	(975,801	)	$	(326,370	)

Basic and diluted loss per share	$	(0.03	)	$	(0.01	)	$	(0.02	)	$	(0.01	)

Weighted average number of common shares
outstanding		57,553,457			54,826,668			58,678,457			55,105,123

See accompanying notes to condensed consolidated financial statements.

F-3

Consolidated Statements of Accumulated Other Comprehensive Loss

(unaudited)

						March 26, 1997
						(Inception)
	Six Months Ended January 31,					Through January 31,
	2007		2006			2007

Net loss	$	(1,819,440)	$	(586,226	)	$	(10,574,811	)

Other comprehensive loss, net of tax:
Cumulative translation adjustment		16,873		(20,903	)		(432,105	)

Comprehensive loss	$	(1,802,567)	$	(607,129	)	$	(11,006,916	)

See accompanying notes to condensed consolidated financial statements.

F-4

Consolidated Statements of Changes in Shareholders' Deficit

(unaudited)


	Preferred Stock Outstanding												Common Stock				Additional					Prepaid element of expenses		Accumulated Deficit During			Accumulated Other
	Series A						Series B						Shares				paid-in			Stock issued		settled in		Development			Comprehensive
	Shares			Par Value			Shares		Par Value		Issued		Outstanding		Par Value		capital			as security		stock		Stage			Loss			Total

Balance, March 26, 1997		—		$	—			—	$	—		—		—	$	—	$	—		$	—	$	—	$	—		$	—		$	—
October 2000, sale of stock, ($0.0035/share)		4,366,377			4,366			—		—		—		—		—		10,874			—		—		—			—			15,240
December 2001, sale of stock, ($0.0035/share)		6,545,703			6,546			—		—		—		—		—		16,301			—		—		—			—			22,847
October 2001, sale of stock, ($0.0202/share)		23,431,582			23,432			—		—		—		—		—		448,906			—		—		—			—			472,338
Foreign currency translation adjustment		—			—			—		—		—		—		—		—			—		—		—			21,203			21,203
Net loss		—			—			—		—		—		—		—		—			—		—		(1,350,829	)		—			(1,350,829	)
Balance, July 31, 2001		34,343,662			34,344			—		—		—		—		—		476,081			—		—		(1,350,829	)		21,203			(819,201	)

Foreign currency translation adjustment		—			—			—		—		—		—		—		—			—		—		—			(140,377	)		(140,377	)
Net loss		—			—			—		—		—		—		—		—			—		—		(1,007,362	)		—			(1,007,362	)
Balance, July 31, 2002		34,343,662			34,344			—		—		—		—		—		476,081			—		—		(2,358,191	)		(119,174	)		(1,966,940	)

Foreign currency translation adjustment		—			—			—		—		—		—		—		—			—		—		—			(185,391	)		(185,391	)
Net loss		—			—			—		—		—		—		—		—			—		—		(1,080,619	)		—			(1,080,619	)
Balance, July 31, 2003		34,343,662			34,344			—		—		—		—		—		476,081			—		—		(3,438,810	)		(304,565	)		(3,232,950	)
Merger with HEMP (Note 8)		—			—			—		—		38,397,164		38,397,164		38,397		(29,397	)		—		—		—			—			9,000
July 2004, merger with SIPC		—			—			—		—		10,550,000		10,550,000		10,550		(10,688	)		—		—		—			—			(138	)
July 2004, issuance of common
stock for bridge loans, ($0.2750/share)		—			—			—		—		1,636,233		1,636,233		1,636		448,364			—		—		—			—			450,000
July 2004, issuance of common
stock for services, ($0.4093/share)		—			—			—		—		239,289		239,289		239		97,702			—		—		—			—			97,941
Foreign currency
translation adjustment		—			—			—		—		—		—		—		—			—		—		—			(339,570	)		(339,570	)
Reclassification of debt forgiveness
by Westek (Notes 2 and 9)		—			—			—		—		—		—		—		2,030,298			—		—		—			—			2,030,298
Net loss		—			—			—		—		—		—		—		—			—		—		(1,016,972	)		—			(1,016,972	)
Balance, July 31, 2004		34,343,662			34,344			—		—		50,822,686		50,822,686		50,822		3,012,360			—		—		(4,455,782	)		(644,135	)		(2,002,391	)

August 2004, additional paid in capital from bridge
loans exchanged for shares		—			—			—		—		—		—		—		17,495			—		—		—			—			17,495
—																—		(6,000	)		—		—		—			—			(6,000	)
Conversion of Preferred Stock into Debenture		—			—			—		—		694,550		694,550		695		427,695			—		—		—			—			428,390
December 2004, issuance of stock for interest on		—			—			—		—		60,096		60,096		60		76,100			—		—		—			—			76,160
bridge loan
March 2005, issuance of stock for services		—			—			—		—		100,000		100,000		100		62,880			—		—		—			—			62,980
April 2005, issuance of stock warrants for
services		—			—			—		—		—		—		—		17,295			—		—		—			—			17,295
April 2005, sale of preferred Series B stock
net of $97,995 offering costs ($.001 par),		—			—			—		—		—		—		—		—			—		—		—			—			—
($0.65/share)		—			—			617,692		618		—		—		—		302,887			—		—		—			—			303,505
April 2005, issuance of stock for
debt forgiveness		—			—			246,152		246		—		—		—		159,754			—		—		—			—			160,000

June 2005, issuance of stock Options for services		—			—			—		—		—		—		—		35,403			—		—		—			—			35,403
Reversal of conversion of												—
convertible preferred shares		(1,301,178	)		(1,301	)		—		—		1,301,178		1,301,178		1,301		—			—		—		—			—			—
July 2005, issuance of stock for services		—			—			—		—		120,000		120,000		120		35,288			—		—		—			—			35,408
July 2005, issuance of stock for conversion
of debt		—			—			—		—		1,162,791		1,162,791		1,163		278,047			—		—		—			—			279,210
Foreign currency translation adjustment		—			—			—		—		—		—		—		—			—		—		—			274,643			274,643
Net loss		—			—			—		—		—		—		—		—			—		—		(2,450,792	)		—			(2,450,792	)
Balance July 31, 2005		33,042,484			33,043			863,844		864		54,261,301		54,261,301		54,261		4,419,204			—		—		(6,906,574	)		(369,492	)		(2,768,694	)

F-5


Conversion of common stock into debentures	—		—	(863,844	)		(864	)	—		—			—			(555,636	)		—			—			—			—			(556,500	)
(Note 10)
Conversion of preferred stock into common stock	1,301,178		1,301	—			—		(1,301,178	)	(1,301,178	)		(1,301	)		—			—			—			—			—			—
Shares issued as security for convertible debtures	—		—	—			—		25,685,000		—			25,685			3,313,365			(3,339,050	)		—			—			—			—
(Notes 5 and 10)
Stock Issued for services (August 2005)	—		—	—			—		28,000		28,000			28			3,612			—			—			—			—			3,640
Stock Issued for services (August 2005)	—		—	—			—		427,000		427,000			427			60,888			—			—			—			—			61,360
Stock Issued for services (September 2005)	—		—	—			—		805,000		805,000			805			132,020			—			—			—			—			132,825
Stock Issued for services (September, 2005)	—		—	—			—		750,000		750,000			750			254,250			—			—			—			—			255,000
Stock Issued for services (May 2006)	—		—	—			—		875,000		875,000			875			86,625			—			—			—			—			87,500
Stock Issued for services (June 2006)	—		—	—			—		83,334		83,334			83			8,251			—			—			—			—			8,334
Foreign currency translation adjustment	—		—	—			—		—		—			—			—			—			—			—			(79,486	)		(79,486	)
January, 2006, Issuance of stock options for
services	—		—	—			—		—		—			—			62,379			—			—			—			—			62,379
September 2006 issuance of stock warrants
in connection with financing	—		—	—			—		—		—			—			45,164			—			—			—			—			45,164
Net loss	—		—	—			—		—		—			—			—			—			—			(1,848,797	)		—			(1,848,797	)
Balance July 31, 2006	34,343,662		34,344	—			—		81,613,457		55,928,457			81,658			7,830,122			(3,339,050	)		—			(8,755,371	)		(448,978	)		(4,597,275	)

Discount on issue of loan note (Note 10)	—		—	—			—		—		—			—			62,640			—			—			—			—			62,640
Issuance of stock for services (October, 2006)	—		—	—			—		1,000,000		1,000,000			1,000			67,000			—			—			—			—			68,000
Issuance of stock for services (October, 2006)	—		—	—			—		1,250,000		1,250,000			1,250			148,749			—			—			—			—			149,999
October, 2006 issuance of stock options for services	—		—	—			—		—		—			—			223,844			—			—			—			—			223,844
Foreign currency translation adjustment	—		—	—			—		—		—			—			—			—			—			—			16,873			16,873
Net Loss	—		—	—			—		—		—			—			—			—			—			(1,819,440	)		—			(1,819,440	)
Partial conversion of Convertible Loan Note into Common Stock (Dec. 2006) (Note 6)	—		—	—			—		1,000,000		1,000,000			1,000			49,000			—			—			—			—			50,000
Stock Option Expense	—		—	—			—		—		—			—			180,612			—			—			—			—			180,612
Beneficial conversion discount underlying Convertible Loan Notes (Notes 2 & 9)	—		—	—			—		—		—			—			283,874			—			—			—			—			283,874
Stock issued for services (December 2006)	—		—	—			—		850,000		850,000			850			51,000			—			—			—			—			51,850
Cashless conversion - Montgomery	—		—	—			—		345,000		345,000			345			(345	)		—			—			—			—			—
Prepaid element of expenses settled in stock	—		—	—			—		—		—			—			—			—			(73,789	)		—			—			(73,789	)
Balance January 31, 2007	34,343,662	$	34,344	—		$	—		86,058,457		60,373,457		$	86,103		$	8,896,496		$	(3,339,050	)	$	(73,789	)	$	(10,574,811	)	$	(432,105	)	$	(5,402,812	)

See accompanying notes to condensed consolidated financial statements.

F-6

In Veritas Medical Diagnostics, Inc.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(unaudited)

							March 26, 1997
							(Inception)
	Six Months Ended January 31,						Through January 31,
	2007			2006			2007

Cash flows from operating activities:
Net loss	$	(1,819,440	)	$	(586,226	)	$	(10,522,961	)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization		6,567			16,186			158,100
Intercompany interest income		—			—			242,382
Interest imputed (non cash)		411,410			—			347,940
Prepaid element of expenses and beneficial
discounts on loan note conversions		(307,308	)		—			(307,308	)
Stock issued for compensation and services		674,304			391,465			1,858,132
Stock issued for interest		—			61,360			86,160
Gain (loss) on debt forgiveness		—			—			(662,610	)
Changes in operating assets and liabilities:
Receivables		195,192			(98,873	)		(25,246	)
Prepaid expenses and other current assets		(14,275	)		47,681			(31,743	)
Deferred debt issue costs		—			(130,242	)		—
Accounts payable		153,048			(176,662	)		1,115,841
Accrued expenses		66,068			233,065			757,264
Accrued interest payable		86,982			—			86,982
Accounts payable (related party)		(194,479	)		—			(72,745	)
Other		50,554			(28,403	)		188,328
Net cash used in
operating activities		(691,377	)		(270,649	)		(6,781,484	)

Cash flows from investing activities:
Acquisition of patents		(58,834	)		(11,620	)		(157,912	)
Acquisition of equipment		—			(3,481	)		(151,209	)
Net cash used in
investing activities		(58,834	)		(15,101	)		(309,121	)

Cash flows from financing activities:
Advances from affiliates		—			—			4,378,963
Proceeds from debenture issue		—			300,000			—
Repayment of advances from affiliates		—			—			(728,426	)
Advances from related parties		91,903			—			174,953
Proceeds from issuance of preferred stock		—			—			813,930
Discount on notes payable		—			50,913			144,382
Proceeds from Royalty Participation Agreement		—			—			450,000
Proceeds from issue of Loan Notes		335,000			—			1,597,495
Short term advances		80,000			—			80,000
Interest payable reclassified as Loan Notes		192,300			—			182,300
Net cash provided by
financing activities		699,203			350,913			7,093,597

Effect on cash from foreign currency translation		1,111			15,505			8,351

Net change in cash and
cash equivalents		(51,008	)		80,668			2,992

Cash and cash equivalents:
Beginning of period		61,240			2,015			—

End of period	$	11,343		$	82,683		$	11,343

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes	$	—		$	—		$	—
Interest	$	—		$	—		$	—

Non-cash financing activities:
Conversion of note payable to common stock	$	—		$	—		$	700,000
Conversion of preferred stock into debentures		—			556,500			86,160
Stock-based compensation		674,304			—			1,234,567
	$	674,304		$	556,500		$	2,020,727

See accompanying notes to condensed consolidated financial statements.

F-7

Note 1: ORGANIZATION AND BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly our financial position as of January 31, 2007 and our results of operations and cash flows for the three and six month periods ended January 31, 2007 and 2006 and the period from March 26, 1997 (date of inception) to January 31, 2007. The results of operations for the three and six month periods ended January 31, 2007 are not necessarily indicative of the results to be expected for the full year. The condensed balance sheet presented herein has been derived from the audited financial statements included in the Form 10-KSB for the fiscal year ended July 31, 2006, filed with the Securities and Exchange Commission. Interim financial data presented herein are unaudited.

Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the published rules and regulations of the Securities and Exchange Commission. The condensed financial statements in this report should be read in conjunction with the financial statements and notes thereto included in the Form 10-K for the year ended July 31, 2006.

We are a development stage company as defined in Statement of Financial Accounting Standards No. 7. We are devoting substantially all of its present efforts to developing new products. Our planned principal operations have not commenced and, accordingly, no significant revenue has been derived therefrom.

We have reported net losses of $1,848,797, $2,450,792 and $8,755,370 for the fiscal years ended July 31, 2006, 2005 and for the period from the date of inception, March 26, 1997 to July 31, 2006, respectively. The loss from date of inception, March 26, 1997 to January 31, 2007 amounts to $10,574,811. We had substantial net current liabilities at January 31, 2007 of $2,979,539 and cash balances of $ 11,343. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

As explained in Note 9 we were in default on several of our Loan Notes at July 31, 2006. Our major creditors and Loan Note holders have continued to work with us to restructure our obligations to enable us to match future payments with our future working capital plans and several Loan Note holders formally restructured their advances to us in the six month period ended January 31, 2007 and all major trade creditors have informally agreed to accept a phased payment plan to address overdue payables. This restructuring includes restructuring a major loan note from Westek Limited, a related party, as further described in Note 2.

However as further explained in Note 9, we have not been able to make repayments required under our Loan Notes (including those restructured since July 31, 2006) and therefore we are in default under the terms of several of those Loan Notes, Therefore, although we are in continued discussions with those Loan Note holders and creditors, their continued forbearance can not be assured with certainty. Our ability to continue normal operations will depend on (i) the continued forbearance of our Loan Note holders and creditors; (ii) our continued ability to raise additional funds through various potential sources such as equity and debt financing and government grants, which is a continuous part of our business process; (iii) our ability to develop new products and obtain new revenue generating contracts; and(iv) the market success of our first product to market, described below. Such sources of finance and credit may not become available as needed or be available on acceptable terms or be maintained, as appropriate. Through January 31, 2007, a significant portion of our financing has been through the sale of equity securities and convertible notes in private placements and the exercise of stock options. Until and unless our operations generate significant revenues, we expect to continue to need to fund our operations from the issuance and sale of equity and debt security. There can be no assurance that we will be able to raise the capital for our operations on acceptable terms, if at all.

In the three month period ended January 31 2007 we did not engage in any third party financing and have relied on short term advances from Westek Ltd. (“Westek”) (a related party - see Note 2) and from Triumph Small Cap Fund LP (“Triumph”). Both transactions are described in Note 9. During the six month period ended January 31, 2007 Westek made aggregate advances of $91,903 and Triumph made aggregate advances of $80,000. The was advances from Westek to the Company are intended to enable us to maintain a basic level of operations in our main trading subsidiary (IVMD UK Ltd) and to maintain compliance at IVMD Inc. Westek continues to make limited funding available to us pending the outcome of various commercial discussions which we are engaging in, which management believes may result in new commercial contracts which could result in new sources of revenue, in the form of sales or license contracts). The advances from Westek and Triumph are interest free and are payable on demand.

Westek is not obligated, but has indicated its willingness to continue to make advances available to fund these essential costs provided that (a) commercial discussions continue which in Westek’s judgment, indicates a reasonable expectation of us securing further streams of revenue; and (b) our various creditors and Loan Note holders continue forbear on the Loan Notes.

F-8

In addition, all of our directors, management team and key contractors have deferred payment of compensation due to them since October 2006 (and in certain cases previously) and many key suppliers are providing us with valued and ongoing support and forbearance With respect to our payment obligations.

Prior to July 31, 2006 we recorded revenues from billings made under a Research and Development Contract with Inverness Medical Innovations (IMI), dated November 2002. Under the terms of this contract (and a related Patent License Agreement, both subsequently amended throughout the contract field work) we jointly developed, with IMI, the technology underlying a new product (a prothrombin measurement device which is used for the measurement of coagulation of blood in patients at risk of heart disease and stroke) ("The PT Product"). In July 31, 2006 our involvement in the development of this product ended and we anticipate that the product will be launched into the global markets in 2007/2008. The product is to be sold by IMI and we have no influence over the marketing and sales process. Under the terms of our agreements with IMI we are entitled to participate in the following revenue streams: (a) billings to IMI for our development work during the product development phase ("Development Revenues") and (b) the receipt of 2% of all future net sales proceeds arising from the sale of The PT Product ("Royalty Income"). Development Revenues ceased with the completion of the development of the PT Product in July, 2006. We will begin to earn Royalty Income simultaneously with the commencement of sales of the PT Product. The commencement of the sale of this product will result in a change of our status from a "Development-stage Enterprise". We are currently developing other hand held and portable products which are focused on (a) the measurement and detection of pregnancy and labor and (b) the detection of diseases and medical conditions using magnetic detection techniques applied to tissue and blood. We intend to engage in discussions with several parties which may result in commercial, revenue earning contracts.

Note 2: Related Party Transactions

As of January 31, 2007, $197,337 was due to related parties and we purchased services from related parties during the three and six month period ended January 31, 2007 amounting to $8,052 and $121,051 respectively. There were no transactions with related parties during the three and six month period ended January 31, 2006.

In July 2004, Westek, a related party, agreed to release us from $2,030,298 of previously accumulated advances in exchange for a non interest-bearing promissory note totaling $1,800,000. We reflected a capital contribution totaling $2,030,298 in our financial statements at that time. The promissory note was payable in full by September 30, 2006.

On November 13, 2006 we reached and agreement with Westek to amend the terms of the Promissory Note to extend the maturity date until March 31, 2008. The amended Promissory note carries interest at a rate of 10% per annum from October 1, 2006 which is payable quarterly in arrears. Unpaid interest may, at the option of Westek, be converted into shares of the Company’s common Stock at a price of $ 0.05 per share. The market value of the common stock at the date of the amendment was $0.072 and therefore there is a beneficial discount underlying the conversion option. We have valued that discount at $113,400, (using the Black Scholes method). The inherent discount has been charged to Additional Paid in Capital within shareholders funds in the balance sheet and is being charged in the profit and loss account as interest expense on a straight line basis across the life of the amended Promissory Note.

During the six month period ended January 31, 2007 Westek advanced $91,903 to the Company. These advances are interest free and are payable on demand. The advances are intended to enable us to maintain a basic level of operation ahead of securing new commercial contracts. These short term advances are described more fully in Note 9.

Note 3: Property and Equipment

Major classes of property and equipment as of January 31, 2007 are listed below:

Furniture and Fixtures	$	16,523
Office Equipment		89,814
Plant and Equipment		20,939
		127,276
Less: accumulated depreciation		120,274
	$	7,002

F-9

Note 4: Intangible Assets - Patent Costs

(Formerly In Vivo Medical Diagnostics, Inc.)

(A Development Stage Company)

Notes to Consolidated Financial Statements

Depreciation expense was $2,867 and $7,997 for the three month periods ended January 31 2007 and 2006 (and $6,567 and $16,186 for the six month periods ended January 31, 2007 and 2006), respectively.

Changes in Intangible assets - Patent Costs for the six month period ended January 31, 2007 were as follows:

Cost - start of year	$	99,007

Costs incurred during the period		58,904
Amortization		-
Retirements		-
Cost - end of year	$	157,911

No amortization is recorded because the economic life of the underlying patents is expected to be less than their legal life and the company has yet to derive revenue from the commercial applications of the underlying patents. When such revenue starts to be earned the cost of the underlying patents will be amortized over their estimated economic life.

Note 5: Preferred Stock

We are authorized to issue 50,000,000 shares of preferred stock.

4% Convertible Preferred Stock

As of January 31, 2007, the Company had 34,343,662 shares of Series A 4% voting redeemable convertible preferred stock outstanding. Such shares pay an annual dividend of 4% and are convertible at any time at the option of the holder into Common Stock at the rate of one share Common Stock for each outstanding share of Series A Preferred Stock. Holders of Series A Preferred Stock have priority over all of the shares of In Veritas Medical Diagnostics, Inc. on liquidation or sale at the rate of $0.233 per share. Holders are entitled to vote on all matters as to which Common Stock shareholders are entitled to vote.

The aggregate of arrearages in cumulative preferred dividends on the Series A Preferred Shares through January 31, 2007, are $22,757.

Note 6: Common Stock

We are authorized to issue 500,000,000 shares of common stock.

We issued the following shares of common stock for services during the six month periods ended January 31, 2007 and 2006, respectively

F-10

We value the shares of common stock issued for services at the quoted market price of the stock at the issue date or at the contracted value of the services where this is clearly defined in the underlying contract. During the six month period ended January 31, 2007 we issued:

	31-Jan-07				31-Jan-06
Shareholder	Number of Shares Issued		Fair Value of Shares Issued		Number of Shares Issued		Fair Value of Shares Issued
CLX & Associates Inc					$	750,000	$	255,000
Sichenzia Ross Friedman Ference LLP						805,000		132,825
Cornell Capital Partners LP						472,000		61,360
Monitor Capital Inc						28,000		3,640
Crown Capital Group Ltd		1,000,000		68,000
UTEK Corporation		1,250,000		150,000
Sichenzia Ross Friedman Ference LLP		850,000		51,850
	$	3,100,000		269,850	$	2,055,000	$	452,825

(a) 1,000,000 shares to Crown Capital Group Ltd as consideration for market information and promotional services to be provided over a twelve month period. The shares were valued at the mid-market quoted share price on the day of issue; and

(b) 1,250,000 shares to UTEK Corporation for technology search services as consideration under the terms of a contract entered into in May 2006 and covering services to be provided over 15 months. This consideration was valued at the contract price, which was approximately equal to the market price of the companies stock in May, 2006 and, at the Companies option could have been settled in cash rather than stock.

The cost of the stock issues described in (a) and (b) above is spread over the periods over which the service is to be provided and a prepayment established accordingly. This prepayment is shown as a deduction in shareholders funds on the face of the balance sheet on the line “Prepaid element of expenses settled in stock”.

On December 11, 2006 one of our Loan Note holders, Triumph Small Cap Fund Inc converted $50,000 of the principal value of their Loan Note into 1,000,0000 shares of Common Stock in accordance with their conversion rights (see Note 9)

On October 27, 2006 we issued to Montgomery Equity Partners Ltd 345,000 shares of common stock upon its exercise of warrants which were issued to Montgomery Equity Partners as part of a prior financing, as more fully described in Note 7

No other shares of common stock, other than those described above, were issued during the six month periods ended January 31, 2007 and 2006.

Note 7: Stock Options and Warrants

Stock Options - Employees and contractors (`staff')

Since inception stock options have been granted to staff members under the Company's 2005 Stock Incentive Plan as follows:

During May 2004, the Company granted 9,659,000 common stock options to two officers with an exercise price of $1.00 per share. The Company's common stock had no traded market value on the date of grant. The market value of the stock was determined to be $1.00 per share based on estimates made by the directors at that time. In March 2006 one of the officers resigned and his options (4,829,500) lapsed. Under the terms of the option award the remaining 4,829,500 options vest in three equal installments of 1,609,834 each in May 2006, 2007 and 2008, subject to certain operating performance criteria having been met. The performance criteria were not met by the first vesting date and therefore 1,609,834 of these options have lapsed. Management is of the view that the performance criteria are unlikely to be met by each of the future vesting periods.

F-11

Options that vested on the day of grant were granted primarily (2,000,000 of the total options which vest on the grant date of October 10, 2006) to Martin Thorp, the Company’s CFO, to provide Mr. Thorp with a significant equity interest in the Company in line with the other members of the Company’s Board of Directors, in order to provide mutuality of interest going forward and to reward him for past performance.

·	On June 1, 2005, the Company issued 650,000 options to its staff under the plan, with an exercise price of $0.55 per share. The market price on June 1, 2005 was also $0.55 per share.

·	On January 3, 2006, the Company issued 725,000 options to its staff under the plan, with an exercise price of $0.10 per share. The market price on January 3, 2006 was also $0.10 per share.

·	On October 10, 2006, the Company issued 16,015,000 options to its staff under the plan, with an exercise price of $0.065 per share. The market price on October 10, 2006 was also $0.065 per share. The vesting date of these options varies as set out in the table below:

Vesting Date	No of options
October 10, 2006		2,500,000
November 30, 2006		500,000
December 31, 2006		150,000
September 30, 2007		5,515,000
September 30, 2008		3,750,000
September 30, 2009		3,600,000
Total		16,015,000

The fair value for the options granted is estimated at the date of grant using the Black-Scholes option-pricing model with the assumptions set out in the table below.

			Grant Date
	May, 2004			June, 2005			January, 2006			October, 2006
Risk Free Interest Rate		2.3	%		4.4	%		4.4	%		4.7	%
Dividend Yield		0	%		0	%		0	%		0	%
Volatility Factor		0	%		55	%		88	%		314	%
Weighted Average Expected Life (yrs)		5			5			5			5
No of options expected to vest on vesting date		0			650,000			725,000			16,015,000
Value of one option (Black Scholes)	$	0.000		$	0.289		$	0.070		$	0.065
Value of option grant (aggregate)	$	0		$	187,850		$	50,750		$	1,040,975

From August 1, 2006 we were required to adopt SFAS No. 123(R) whereby we account for stock option expense for employees and contractors by charging the fair value of options granted and expected to vest equally over the vesting period. In the case of options that vest on grant the fair value of the option is expensed immediately. The expense is shown as stock option expense in the

F-12

In Veritas Medical Diagnostics, Inc.

(Formerly In Vivo Medical Diagnostics, Inc.)

(A Development Stage Company)

Notes to Consolidated Financial Statements

consolidated statement of operations with the credit posted to Additional Paid In Capital. Prior to August 1, 2006 we were not required to treat employee stock options in accordance with SFAS No. 123 (R) , and we disclosed the impact on pre-tax results had we valued employee stock options on a proforma basis in the footnotes to our Annual Financial Statements. In the three month period (six month period) ended January 31, 2006 the stock option charge would have increased by approximately $37,500 ($75,000)) has we adopted SFAS No. 123(R) in that period.

In determining which options are expected to vest we have taken account of the fact that options have only been granted to relatively few key members of staff and in the opinion of management all of those people are likely to stay with the Company through the vesting period of their options and beyond. Therefore it is assumed that all options granted are likely to vest, except those that are not expected to vest by virtue of underlying performance conditions (described above).

The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

Stock Warrants

On September 9, 2005, as part of the consideration for arranging a financing for the Company, we issued to Montgomery Equity Partners Ltd (“Montgomery”), three-year warrants to purchase 350,000 shares of Common Stock at an exercise price of $0.001 per share. The market value of the Company's common stock on the date of the negotiation of this transaction was $0.13. The weighted average exercise price and fair value of the warrants at the date of their grant were $0.001 and $0.076, respectively. On October 27, 2006 Montgomery exercised these warrants by way of cashless conversion into 345,000 shares of Common stock.

The fair value for these warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate	4.18%
Dividend yield	0.00%
Volatility factor	88.40%
Weighted average expected life	3 years

Summary of options and warrants outstanding

The following schedule summarizes the changes in the Company's outstanding stock awards since July 31, 2006

F-13

The following schedule summarizes the non-vested stock awards for the year ended January 31, 2007.


	Options Outstanding
	Number of Shares			Exercise Price Per Share		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value

Balance at July 31, 2006		4,996,436		$	0.001-$1.50	$	0.750
Awards Granted to Staff		16,015,000		$	0.065	$	0.065
Awards exercised						$	0.000
Warrants exercised		(350,000	)	$	0.001	$	0.001
Balance at January 31, 2007		20,661,436		$$	$0.065-1.50	$	0.685		13.95 years		$1,341,388

Awards exercisable at January 31, 2007		3,201,769		$	0.065-$1.50	$	0.685		7.27 years	$	184,960

	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Grant Date Fair Value

Balance at July 31, 2006	4,996,436	$	0.001-$1.50	$	0.750
Awards Granted	12,463,231	$	0.065	$	0.065
Awards exercised	-		N/A		N/A
Awards cancelled/expired	-		N/A		N/A
Balance at January 31, 2007	17,459,667	$	0.065-1.50	$	0.685

Note 8: Income Taxes

We record our income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". We had tax losses available to carry forward in our UK operating subsidiaries of $5.6 million at July 31, 2006 and we continued to incur tax losses in the six month period ended January 31, 2007. We have therefore not recorded any tax charge of liability in the three month period ended January 31, 2007 or in any previous period.

Note 9: Financings

The Company has substantial obligations under various financial instruments arising from the following financing agreements:

A. September 2005 Financing and subsequent and ongoing restructurings

In a linked series of transactions dated September 7, 2005, the Company entered into:

1. A Standby Equity Distribution Agreement (the "Distribution Agreement") with Cornell Capital Partners LP ("Cornell") providing for the sale and issuance to Cornell of up to $10,000,000 of Common Stock over a period of up to 24 months.

2. A Securities Purchase Agreement (the "Purchase Agreement") with Montgomery Equity Partners Ltd. ("Montgomery"), an affiliated fund of Cornell, providing for the sale by the Company to Montgomery of its 18% secured convertible debentures in the aggregate principal amount of $750,000 (the "Debentures") of which $300,000 was funded on September 7, 2005; $200,000 was to have been funded two business days prior to the Company's completion of its audited financial statements for the fiscal year ended July 31, 2005, and; $250,000 was to have been funded within five business days of the date the Registration Statement is declared effective by the SEC. Under the Purchase Agreement, the Company also issued to Montgomery three-year warrants (the "Warrants") to purchase 350,000 shares of Common Stock at $0.001 per share, which have subsequently been exercised. The Debentures matured on September 7, 2006 and bear interest at the annual rate of 18%. Holders have the right to convert, at any time, the principal amount outstanding under the Debentures into shares of Common Stock, at a conversion price per share equal to $0.144, subject to adjustment. Upon three-business day advance written notice, the Company may redeem the Debentures, in whole or in part. In the event that the closing bid price of the Common Stock on the date that the Company provides advance written notice of redemption or on the date redemption is made exceeds the conversion price then in effect. Redemption of Debentures is to be calculated at 112% of the Debentures' face value.

F-14

3. A Securities Purchase Agreement (the "Accredited Investor Purchase Agreement") with the investors in a previous financing dated April 2005, pursuant to which these investors agreed to exchange the securities that they purchased in the earlier financing for an aggregate of $556,500 principal amount of Debentures.

As further security for its obligations under the above mentioned facilities, the Company has deposited into escrow 25,685,000 shares of common stock, these shares are deemed issued but not outstanding.

Pursuant to these agreements, the Company filed a registration statement on Form SB-2 with the Securities and Exchange Commission for the purpose of registering the securities underlying the transactions. In connection therewith, the Company has received comments from the Commission indicating that, in the Commission's view, based upon the structure of the transactions, the Company may not register the securities sold in the financing transactions. On March 6, 2006, we withdrew the registration statement on Form SB-2 (File No. 333-128321) by filing a Form R-W with the Commission. As a result, the Company has not been able to draw down any further amounts under the Debenture (other than the initial $300,000) or the related Distribution Agreement and was unable to pay interest and principal payments on the debentures drawn down under this financing, as a consequence it became in default under the terms of the Debentures.

We have held discussions with several of the Debenture Holders to restructure our obligations to rectify the defaults and the following agreements have been entered into:

1. On October 19, 2006, the Company entered into a Termination, Settlement, and Forbearance Agreement effective as of October 16 (the "Settlement Agreement"), with Cornell and Montgomery. The Settlement Agreement relates to the Distribution Agreement and the Purchase Agreement and included the following principal terms:

The Company shall pay Montgomery an aggregate of $348,000 (the "Funds") which represents the agreed amounts owed by the Company to Montgomery under the Debenture as of October 19, 2006 including outstanding principal and interest. The Company shall pay the Funds to Montgomery monthly at the rate of $29,000 ("Monthly Payment") per calendar month, with the first payment being due and payable on November 15, 2006 and each subsequent payment being due and payable on the first business day of each subsequent month until the Funds are repaid in full.

·	Montgomery shall continue to have valid, enforceable and perfected first-priority liens upon and security interests in the Pledged Property and the Pledged Shares (each as defined in the Purchase Agreement transaction documents).

·	The Company and Montgomery agree that during the term of the Settlement Agreement, the Debenture shall not bear any interest and no liquidated damages shall accrue under any of the financing documents.

·	The Conversion Price (as set forth in the Debenture) in effect on any Conversion Date (as set forth in the Debenture) from and after the date hereof shall be adjusted to equal $0.05, which may be subsequently adjusted pursuant to the other terms of the Debenture.

·	Montgomery shall retain the Warrants issued in accordance with the Securities Purchase Agreement.

·	The Company and Cornell agree to terminate the Distribution Agreement and related transaction documents.

·	In the event that the Company defaults under the terms of this agreement penalties and redemption premiums payable under the original agreement shall be reinstated.

F-15

2. On November 29, 2006, the Company issued a secured subordinated convertible note to Triumph Small Cap Fund Inc. ("Triumph"), (one of the investors in the Accredited Investor Purchase Agreement referred to above) in the principal amount of $165,000 in exchange for the interest and principal outstanding under the Debenture previously issued to Triumph under the terms of the Accredited Investor Purchase Agreement. The note (a) matures on April 30, 2008; (b) bears interest at the rate of 8% per annum, which is payable on maturity of the note and (c) is convertible, at Triumph's option, into shares of the Company's common stock at a conversion price of $0.05 per share, subject to a 9.99% conversion restriction.. On December 11, 2006 Triumph converted $50,000 of the principal amount outstanding under their note into 1,000,000 shares of the Company’s common stock in accordance with these conversion rights.

3. On January 9, 2007, the Company issued two secured convertible notes to Longview Fund L.P. (“Longview”) (one of the investors in the Accredited Investor Purchase Agreement referred to above) in the aggregate principal amount of $309,300 as follows:.

Secured convertible note in the principal amount of $261,300 issued in exchange for the interest and principal outstanding under the Debenture previously issued to Longview under the terms of the Accredited Investor Purchase Agreement. The note (a) matures on April 30, 2008; (b) bears interest at the rate of 18% per annum, which is payable in accordance with the repayment provisions described in the Note and (c) is convertible at Longview’s option, into shares of the Company’s common stock at a conversion price of $0.05 per share. Minimum repayments are due under the note as follows: (i) two installments of $12,500 each were due to be paid on or before February 28, 2007 and March 30, 2007; (ii) monthly installments of $15,000 commencing on November 30, 2007; and (iii) the remaining principal balance plus unpaid interest on the maturity date.

Secured convertible note in the principal amount of $48,000 was issued in exchange for liquidated damages payable as a result of the default on the Debenture previously issued to Longview under the terms of the Accredited Investor Purchase Agreement. This note has the same interest and conversion terms as described above, but is repayable on maturity (principal and interest).

Subsequent to the restructuring of the Loan Notes with Longview and Cornell / Montgomery, both described above, the Company has been unable to comply with the payment installments due under the terms of the restructured loan notes and is therefore in default under these new Loan Notes.

The Company is currently in discussions with the all of holders of Loan Notes and Debentures which are in default with a view to restructuring those debentures on terms to be agreed.

The conversion terms of the restructured loan notes from Longview and Cornell / Montgomery enable the Loan Note holder to convert the amount outstanding under the Notes into shares in the Company’s common stock at a price of $0.05 cents per share. The market price of the common stock at the dates that the restructured loan notes were issued was, in the case of Cornell / Montgomery, $0.072 and in the case of Longview $0.055 and therefore there is a beneficial discount underlying these conversion options. We have valued that discount at $170,474, using the Black Scholes method. The inherent discount has been charged to Additional Paid in Capital within shareholders funds in the balance sheet and is being charged in the profit and loss account as interest expense on a straight line basis across the life of the amended Loan Note.

The beneficial discount has been reported as a reduction to the related debt balance in the balance sheet i.e. net of unamortized discount. It is expected that amounts of $46,703 per annum will be amortized over the next five years.

The table below details the unamortized discount figure shown in the balance sheet:

	Beneficial Discount		Q2 charge		Unamortized Amount
Westek	$	113,400	$	18,900	$	94,500
Triumph	$	0	$	0	$	0
Cornell	$	146,160	$	30,240	$	115,920
Longview	$	24,314	$	1,216	$	23,098
	$	283,874	$	50,356	$	233,519

F-16

B. Royalty Participation Agreement (May to November, 2006)

On May 5, 2006, we completed the sale of a percentage of future royalties pursuant to a Royalty Participation Agreement (the "Agreement") with The Rubin Family Irrevocable Stock Trust. The royalties to be paid pursuant to the Agreement are derived from the Patent License Agreement with Inverness Medical Innovations, Inc. (the "IMI Agreement") pursuant to which the Company will receive royalties from the sale of a Prothrombin blood clotting measuring device (the "IMI Royalties). The IMI Agreement is further described in the "Organization and Basis of Presentation" section of these financial statements. Subsequently, in November 2006, the Company entered into a similar agreement with Triumph in respect of further advances made to us during June and October 2006.

Pursuant to these royalty participation agreements, the Company received the aggregate sum of $450,000 in exchange for 10% of the future IMI Royalties received by the Company, subject to the terms and conditions set forth in the Agreement (the "Royalty Payments"). The Royalty Payments shall be paid to The Rubin Family Irrevocable Stock Trust and Triumph Research Partners LLP ("The Investors") within 15 days of the end of the month in which the Company receives future IMI Royalties. The Company has the option to terminate the Agreement at any time, without penalty, by making a lump sum payment to the Investors equal to 300% of the funds received from the Investors pursuant to the Agreement, being $1,350,000. If no Royalty payments are made to the Investors by December 31, 2007, or if $450,000 of Royalty payments are not made by December 31, 2008, the Investors shall have the right to convert the advances made into a three year note with a face value of $1,350,000 accruing interest at 4% above prime and repayable in one bullet at the end of the term. In addition, if the aggregate payments made to the Investors under Agreements prior to December 31, 2007 are less than $450,000 and provided that the Company has raised at least $3,000,000 in the form of new equity finance, we are obliged to make an advance payment to the Investors (on account of future amounts payable to them) equal to the difference between $450,000 and the aggregate payments made prior to December 31, 2007 (capped at the amount by which the equity funding exceeds $3,000,000).

On November 8, 2006 The Rubin Family Irrevocable Stock Trust assigned its rights under the Agreement to Harbor View Fund Inc, an entity which is unrelated to the Company.

C. Secured Subordinated Convertible Loan Notes (November 2006)

On November 29, 2006, the Company issued a secured subordinated convertible note to Triumph, in the principal amount of $335,000 in consideration of new cash advances made to the Company by Triumph subsequent to July 31, 2006. This note (a) matures on April 30, 2008; (b) bears interest at the rate of 8% per annum which is payable on maturity of the notes; and (c) is convertible, at Triumph's option, into shares of the Company's common stock at a conversion price of $0.05 per share (approximately the share price on the date of issue), subject to a 9.99% conversion restriction.

As more fully discussed in Note 2, on November 14, 2006 the terms of our $1,800,000 Promissory Note with Westek Ltd were amended to address default conditions that had arisen. Under the amended terms the Loan Note maturity has been extended until March 31, 2008 (from September 30, 2006) and interest will now be charged at 10% p.a. from October 1, 2006 which is payable quarterly in arrears. Unpaid interest may, at the option of Westek, be converted into shares of the Companies common Stock at a price of $ 0.05 per share.

In addition during the six month period ended January 31, 2007 Westek advanced $91,903 to the Company. The intention of Westek in making such limited advances is to permit the Company to maintain a basic level of operations in our main trading subsidiary (IVMD UK Ltd) and to maintain compliance at IVMD Inc. Westek continues to make limited funding available to us pending the outcome of various commercial discussions which we are engaging in which management believes may result in new commercial contracts which could result in new sources of revenue in the form of sales or license contracts. These advances are interest free and are payable on demand. Westek is not obligated, but has indicated its willingness to continue to make advances available to fund these essential costs provided that (a) commercial discussions continue which in Westek’s judgement, indicates a reasonable expectation of us securing further streams of revenue; and (b) our various creditors and Loan Note holders continue to forbear on the Loan Notes.

As of January 31, 2007, Westek has made aggregate advances of $91,903 to us and as of April 17, 2007 has made a total aggregate advance of $145,290 to the Company.

F-17

In Veritas Medical Diagnostics, Inc.

(Formerly In Vivo Medical Diagnostics, Inc.)

(A Development Stage Company)

Notes to Consolidated Financial Statements

E. Short Term Advance from Loan Note Holder

During the six month period ended January 31, 2007, Triumph advanced a sum of $80,000 to the Company. Triumph has subsequently indicated that it will not demand repayment of this loan, but no formal arrangements have been entered into. Therefore, this loan is treated as repayable on demand. The note does not bear interest and is not convertible.

Presentation of Financings in the Financial Statements

Accounting for the Royalty Participation Agreement (May - July, 2006 Financings)

We have accounted for these transactions in accordance with EITF 1988 Issue 88-18 as debt and have classified them as Long Term Debt on the balance sheet. We have calculated the maximum effective rate of interest underlying the Agreement at 37% per annum by taking what we consider to be the most prudent view of the possible cash payments required to relinquish our obligations under the Agreement (and therefore effectively repay the advances) and computing the inherent interest rate within that future cash payment stream. Interest on the amount advanced is included in interest expense and added to the amount of the debt shown in the balance sheet. As payments are made to the Investors the debt will be reduced accordingly and the estimated underlying interest rate may in the future be amended.

The following table shows the treatment of the Royalty Participation Agreement Advances in the Financial Statements at October 31, 2006.

F-18

In Veritas Medical Diagnostics, Inc.

(Formerly In Vivo Medical Diagnostics, Inc.)

(A Development Stage Company)