Quantum MRI, Inc. (A Development Stage Company) September 30, 2007 Index Consolidated Balance Sheets................................................F-1 Consolidated Statements of Operations......................................F-2 Consolidated Statements of Cash Flows......................................F-3 Notes to the Consolidated Financial Statements.............................F-4 Quantum MRI, Inc. (A Development Stage Company) Consolidated Balance Sheets (Expressed in US dollars) September 30, March 31, 2007 2007 $ $ (unaudited) ASSETS Current Assets Cash 12,764 142 ---------- ------ Total Current Assets 12,764 142 Property and Equipment (Note 3) 588 1,527 ---------- ------ Total Assets 13,352 1,669 ========== ====== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable 206,419 151,838 Accrued liabilities 141,078 96,385 Due to related parties (Notes 4(b) and (d)) 1,286,739 1,189,931 Loans payable (Note 5) 160,700 160,700 Convertible notes payable (Note 6) 303,055 303,055 ---------- ------ Total Liabilities 2,097,991 1,901,909 ---------- ------ Commitments and Contingencies (Notes 1 and 8) Stockholders' Deficit Common Stock Authorized: 50,000,000 shares, par value $0.001 Issued: 14,071,391 shares 14,071 14,071 Additional Paid-in Capital 5,490,700 5,365,240 Common Stock Subscribed (Note 7) 125,550 125,550 Deficit Accumulated During the Development Stage (7,714,960) (7,405,101) ---------- ---------- Total Stockholders' Deficit (2,084,639) (1,900,240) ---------- ---------- Total Liabilities and Stockholders' Deficit 13,352 1,669 ========== ========== The accompanying notes are an integral part of these financial statements. F-1 Quantum MRI, Inc (A Development Stage Company) Consolidated Statement of Operations (Expressed in US dollars) (unaudited) <TABLE> <S> <C> <C> <C> <C> <C> Accumulated From June 7, 1989 For the For the (Date of Three Month Six Month Inception) Period Ended Period Ended to September 30, September 30, September 30, 2007 2007 2006 2007 2006 $ $ $ $ $ Revenue 2,731 - - - - --------------------------------------------------------------------------------------- Expenses Consulting 1,319,821 11,053 9,370 21,247 896,136 Donated rent (Note 4(c)) 114,446 7,330 6,668 14,381 13,460 Donated services 28,070 - - - - General and administrative 839,206 20,862 20,940 48,434 65,578 Impairment loss on intangible asset 252,819 - - - - Management fees (Notes 4(a)) 3,077,000 42,000 42,000 84,000 84,000 Product development 92,402 - - - - Professional fees 465,695 10,718 11,555 30,718 59,634 ----------------------------------------------------------------------------------------- Total Expenses 6,189,459 91,963 90,533 198,780 1,118,808 ----------------------------------------------------------------------------------------- Other Expense Beneficial conversion feature of convertible notes 66,537 - 7,851 - 26,034 Imputed interest (Notes 4(b) and 6) 571,479 56,101 50,221 111,079 97,830 Loss on settlement of debt 230,000 - - - - ----------------------------------------------------------------------------------------- Net Loss (7,054,744) (148,064) (148,605) (309,859) (1,242,672) ========================================================================================= Net Loss Per Share - Basic and Diluted (0.01) (0.01) (0.02) (0.09) ========================================================================================= Weighted Average Shares 4,071,000 4,071,000 Outstanding 1 14,071,000 1 14,017,000 ========================================================================================= </TABLE> The accompanying notes are an integral part of these financial statements. F-2 Quantum MRI, Inc. (A Development Stage Company) Consolidated Statement of Cash Flows (Expressed in US dollars) (unaudited) For the Six For the Six Months Ended Months Ended September 30, September 30, 2007 2006 $ $ Operating Activities Net loss for the period (309,859) (1,242,672) Adjustment to reconcile net loss to net cash used in operating activities: Beneficial conversion feature of convertible notes - 26,034 Depreciation and amortization 939 939 Donated services and rent 14,381 13,461 Imputed interest 111,079 97,830 Stock-based compensation - 896,774 Changes in operating assets and liabilities: Accounts payable and accrued liabilities 99,274 77,249 Due from related parties 91,458 54,517 ----------- ---------- Net Cash Provided by (Used in) Operating Activities 7,272 (75,868) ----------- ---------- Financing Activities Repayment of notes payable - (25,000) Proceeds from notes payable - 25,000 Advances from related parties 5,350 - ----------- ---------- Net Cash Flows Provided By Financing Activities 5,350 - ----------- ---------- Decrease In Cash 12,622 (75,868) Cash - Beginning of Period 142 75,897 ----------- ---------- Cash - End of Period 12,764 29 =========== ========== Non-cash Investing and Financing Activities Shares issued on conversion of notes payable - 896,000 =========== ========== Supplemental Disclosures Interest paid - - Income taxes paid - - The accompanying notes are an integral part of these financial statements. F-3 Quantum MRI, Inc. (A Development Stage Company) Notes to the Consolidated Financial Statements September 30, 2007 (Expressed in US dollars) (unaudited) 1. Nature of Operations and Continuance of Business Quantum MRI Inc. (the "Company") was incorporated in Washington on June 7, 1989 under the name P.L.D.F.E.T., Inc. On March 17, 2000, the Company changed its name to Travelshorts.com, Inc. On May 5, 2005, the Company changed its name to Sharps Elimination Technologies, Inc. On August 25, 2005, the Company changed its name to Quantum MRI, Inc. The Company is in the development stage as defined by the Statement of Financial Accounting Standard ("SFAS") No. 7 "Accounting and Reporting by Development Stage Enterprises". The Company's principal business is the constructing and operating MRI testing centers in the United States and Canada. Each center will exclusively provide MRI tests on an outpatient basis for patients. On December 3, 2002, the Company acquired all of the issued and outstanding shares of SETI Corp. ("SETI") in exchange for 111,275 newly issued split-adjusted shares of the Company's common stock. Prior to the acquisition, the Company had no operations and was considered a public shell. SETI was also a development stage company with no operations, however had a licensing agreement for certain patented technology (see Note 5). Accordingly, since SETI was not considered a business, the transaction was accounted for as a recapitalization of the public shell and the issuance of stock by the Company for the assets and liabilities of SETI. The value of the net assets of SETI is the same as their historical book value, which included the licensing agreement of $274,964 and liabilities assumed of $918,490. In addition, as part of the transaction, the former president returned 50,000 split-adjusted common shares to the Company for cancellation. The accompanying consolidated financial statements include the historical accounts of SETI since December 3, 2002. All significant intercompany balances and transactions have been eliminated in consolidation. At September 30, 2007, the Company had a working capital deficit of $2,085,227 and accumulated losses of $7,714,960 since inception. The ability of the Company to continue as a going concern is dependent on its ability to emerge from the development stage with respect to its planned principal business activity, attaining profitable operations and raising additional debt and/or equity financing to fund its operations. Management's plan in this regard is to raise additional funding through private offerings and to operate MRI testing centers. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustment relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company discontinue operations. 2. Significant Accounting Policies (a) Basis of Presentation These financial statements are prepared in conformity with accounting principles generally accepted in the United States and are expressed in US dollars. These financial statements include accounts of the Company and its wholly-owned subsidiary, SETI Corp. All significant intercompany transactions and balances have been eliminated. The Company's fiscal year end is March 31. (b) Interim Financial Statements The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Securities and Exchange Commission ("SEC") Form 10-QSB. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended March 31, 2007, included in the Company's Annual Report on Form 10-KSB filed with the SEC. The consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company's consolidated financial position at September 30, 2007, and the results of its operations and cash flows for the six months ended September 30, 2007. The results of operations for the six months ended September 30, 2007 are not necessarily indicative of the results to be expected for future quarters or the full year. F-4 Quantum MRI, Inc. (A Development Stage Company) Notes to the Consolidated Financial Statements September 30, 2007 (Expressed in US dollars) (unaudited) 2. Significant Accounting Policies (continued) (c) Use of Estimates The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to stock-based compensation expense, deferred income tax asset valuations and loss contingencies. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. (d) Cash Equivalents The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. (e) Property and Equipment Property and equipment are stated at cost less accumulated depreciation and consist of computer hardware and office furniture. These assets are depreciated on a straight-line basis using an estimated useful life of five years. (f) Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As at September 30, 2007 and 2006, the Company has no items that represent comprehensive income and, therefore, has not included a schedule of comprehensive income in the financial statements. (g) Product Development Costs Product development costs related to the Needle-Ease(TM) technology are expensed as incurred. (h) Long-lived Assets In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. F-5 Quantum MRI, Inc. (A Development Stage Company) Notes to the Consolidated Financial Statements September 30, 2007 (Expressed in US dollars) (unaudited) 2. Significant Accounting Policies (continued) (i) Foreign Currency Translation The Company's functional and reporting currency is the United States dollar. The financial statements of the Company are translated to United States dollars in accordance with SFAS No. 52 "Foreign Currency Translation". Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in Canadian dollars. The Company has not, to the date of these financials statements, entered into derivative instruments to offset the impact of foreign currency fluctuations. (j) Income Taxes Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted SFAS No. 109 "Accounting for Income Taxes" as of its inception. Pursuant to SFAS No. 109, the Company is required to compute tax asset benefits for net operating losses carried forward. Potential benefit of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years. (k) Stock-based Compensation Prior to January 1, 2006, the Company accounted for stock-based awards under the recognition and measurement provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" using the intrinsic value method of accounting, under which compensation expense was only recognized if the exercise price of the Company's employee stock options was less than the market price of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R "Share Based Payments", using the modified prospective transition method. The Company has not issued any stock options since its inception. Accordingly, there was no effect on the Company's reported loss from operations, cash flows or loss per share, as a result of adopting SFAS No. 123R. (l) Financial Instruments The fair values of cash, accounts payable, accrued liabilities, amounts due to related parties, loans payable, and convertible notes payable approximate their fair value due to the relatively short maturity of these instruments. (m) Revenue Recognition The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104 when there is persuasive evidence of an arrangement, delivery of products has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectibility is reasonably assured. (n) Basic and Diluted Net Income (Loss) per Share The Company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings per Share", which requires presentation of both basic and diluted earnings per shares (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. F-6 Quantum MRI, Inc. (A Development Stage Company) Notes to the Consolidated Financial Statements September 30, 2007 (Expressed in US dollars) (unaudited) 2. Significant Accounting Policies (continued) (o) Reclassification Certain reclassifications have been made to the prior year's financial statements to conform to the current period's presentation. (p) Recently Issued Accounting Pronouncements In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115". This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157, "Fair Value Measurements". The adoption of this statement is not expected to have a material effect on the Company's financial statements. (p) Recently Issued Accounting Pronouncements (continued) In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). The objective of SFAS 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material effect on the Company's future reported financial position or results of operations. (q) Recently Adopted Accounting Pronouncements In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140", to simplify and make more consistent the accounting for certain financial instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", to permit fair value re-measurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the Impairment or Disposal of Long-Lived Assets", to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 applies to all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006, with earlier application allowed. The adoption of this statement did not have a material effect on the Company's financial statements. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits for subsequent measurement using either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement No. 140. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. SFAS No. 156 is effective for an entity's first fiscal year beginning after September 15, 2006. The adoption of this statement did not have a material effect on the Company's financial statements. F-7 Quantum MRI, Inc. (A Development Stage Company) Notes to the Consolidated Financial Statements September 30, 2007 (Expressed in US dollars) (unaudited) 2. Significant Accounting Policies (continued) In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). This statement requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The provisions of SFAS 158 are effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. The adoption of this statement did not have a material effect on the Company's financial statements. In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative an qualitative factors. SAB No. 108 is effective for periods ending after November 15, 2006. The adoption of this statement did not have a material effect on the Company's financial statements. (q) Recently Adopted Accounting Pronouncements (continued) In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statements No. 109". FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a two-step method of first evaluating whether a tax position has met a more likely than not recognition threshold and second, measuring that tax position to determine the amount of benefit to be recognized in the financial statements. FIN 48 provides guidance on the presentation of such positions within a classified statement of financial position as well as on derecognition, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this statement did not have a material effect on the Company's financial statements. 3. Property and Equipment September 30, March 31, 2007 Net 2007 Net Accumulated Carrying Carrying Cost Depreciation Value Value $ $ $ $ Office furniture and computer hardware 9,391 8,803 588 1,527 ---------------------------------------------------------------------------- 4. Related Party Transactions (a) During the six month period ended September 30, 2007, management fees of $84,000 (2006 - $84,000) were charged to operations pursuant to executive services agreements with the President of the Company and the Vice-President of Finance. (b) As of September 30, 2007, the Company's President, and a company controlled by the President are owed $1,261,252 (March 31, 2007 - $1,178,520) relating to amounts assumed by the Company at the acquisition of SETI and subsequent advances made to the Company. These amounts have no due date and are non-interest bearing. During the six month period ended September 30, 2007, interest of $102,447 (2006 - $89,141) has been imputed at twice prime rate and charged to operations with a corresponding credit to additional paid-in capital. F-8 Quantum MRI, Inc. (A Development Stage Company) Notes to the Consolidated Financial Statements September 30, 2007 (Expressed in US dollars) (unaudited) 4. Related Party Transactions (continued) (c) During the six month period ended September 30, 2007, the Company recognized a total of $14,381 (2006 - $13,460) for donated rent provided by the President of the Company. (d) As of September 30, 2007, the Company is indebted to a Director of the Company for $25,487 (March 31, 2007 - $11,411), representing expenses paid on behalf of the Company. These amounts have no due date and are non-interest bearing. 5. Loans Payable (a) On March 31, 2007, the Company entered into an investment agreement with an investor and received $10,700 as a loan repayable on September 1, 2007. Pursuant to the agreement, the Company will pay interest of 15% per annum. During the six month period ended September 30, 2007, the Company accrued interest of $805. (b) On November 17, 2006, the Company entered into an unsecured investment agreement with an investor and received $50,000 as a loan repayable on or before January 20, 2007. Pursuant to the agreement, the Company will pay interest of 12% per annum and issue the investor 2,000,000 shares of the Company's common stock. The issuance of the 2,000,000 shares of common stock was valued at $100,000 and recorded as stock-based compensation and common stock subscribed. During the six month period ended September 30, 2007, the Company accrued interest of $3,008. At September 30, 2007, the loan remains unpaid and the 2,000,000 shares have not been issued. Refer to Note 7(a). (c) On May 22, 2006, the Company entered into an unsecured investment agreement with an investor and received $25,000 as a loan repayable on July 22, 2006. Pursuant to the agreement, the Company will pay interest of 15% per annum and issue the investor 35,000 restricted shares of the Company's common stock and a warrant to purchase 35,000 restricted shares of the Company's common stock at a price of $0.30 per share until May 22, 2008. During the six month period ended September 30, 2007, the Company accrued interest of $1,880 and no warrants were exercised. The loan was not repaid on July 22, 2006 and remains outstanding. Refer to Note 7(b). (d) On March 6, 2006, the Company entered into three unsecured investment agreements with investors to receive loans totalling $75,000, repayable on May 6, 2006. Pursuant to the agreements, the Company will pay interest of $15,000 and issue the investors 180,000 shares of the Company's common stock and warrants to purchase 180,000 restricted shares of the Company's common stock at a price of $0.30 per share until May 6, 2007. At September 30, 2007, the Company accrued interest of $15,000 and no warrants were exercised. The loans were not repaid on May 6, 2006, and remain outstanding. Under the terms of the notes, additional interest of $2,500 is charged for each 30 day period or fraction of 30 day period where the repayment of the principal amounts are past due. At September 30, 2007, the Company had accrued additional interest penalties of $42,500 based on non-payment of the principal portions of the notes payable. Refer to Note 7(c). 6. Convertible Notes Payable On November 16, 2005, the Company entered into an Exchange Agreement with the holder of all of the Company's outstanding notes payable (the "Creditor"). Under the terms of the agreement, the Creditor agreed to return for cancellation the 64,950 shares of common stock previously received on settlement of promissory notes in exchange for three new convertible notes in the aggregate principal amount of $292,275. The notes matured on December 17, 2005 ($100,000), January 15, 2006 ($100,000) and March 15, 2006 ($92,275). The Creditor also agreed to cancel the prior outstanding promissory notes totalling $85,780 in exchange for a new convertible note for $85,780 that matured on June 15, 2006. The Company also issued a new convertible note for cash proceeds of $35,000 that matures on August 15, 2006. All notes bear interest at 5.5% per annum. The principal and accrued interest on the promissory notes may be converted into shares of the Company's common stock at the Conversion Price at the option of the holder. The Conversion Price is 90% of average closing bid price of the Company's common stock for the 30 trading days preceding the conversion. During the year ended March 31, 2006, the creditor agreed to waive interest on all outstanding notes. F-9 Quantum MRI, Inc. (A Development Stage Company) Notes to the Consolidated Financial Statements September 30, 2007 (Expressed in US dollars) (unaudited) 6. Convertible Notes Payable (continued) In accordance with EITF 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", the Company recognized the value of the embedded beneficial conversion feature of $45,895 as additional paid-in capital as the debt was issued with an intrinsic value conversion feature. At March 31, 2006, the Company recognized $40,503 as interest expense which increased the carrying value of the promissory notes to $121,883. The Company recognized $5,392 as interest expense during the fiscal year ending March 31, 2007 and repaid $10,000 of principal payments, decreasing the carrying value of the promissory notes to the face value of $117,275. During the six months ended September 30, 2007, interest of $8,633 (2006 - $8,689) was treated as imputed at 5.5% per annum. On January 26, 2006, the Company entered into a Note Conversion Agreement ("the Agreement") with the holder of the convertible promissory notes (the "Creditor"). Under the terms of the agreement, the Creditor agreed to convert the promissory note with a principal of $100,000 and a maturity date of December 17, 2005 into 1,000,000 shares of common stock. The Creditor will dispose of the shares in the market up to a maximum of 50,000 shares per week and, prior to March 31, 2006, at no less than $0.40 per share without the consent of the Company. All proceeds received by the Creditor to March 31, 2006 will reduce the amounts owed by the Company under the promissory notes. Any shares remaining at March 31, 2006 can be returned to the Company or retained by the Creditor. If shares are returned to the Company, a new promissory note will be issued for the balance of principal remaining after any reduction applied for proceeds from the sale of common stock. If shares are retained by the Creditor, the shares will be valued at 90% of the average closing price of the Company's common stock for the 30 trading days preceding March 31, 2006 (the "Calculated Value"). The Calculated Value will then be applied against amounts owing under any of the notes unpaid at March 31, 2006. If the Calculated Value of the shares exceeds $100,000 plus the aggregate amounts payable under the remaining unpaid notes (the "Remaining Value"), then the Creditor will return to the Company that number of shares determined by dividing the Remaining Value by the average closing price of the Company's common stock for the 30 trading days preceding March 31, 2006. During the period six month ended September 30, 2007, the Agreement was amended to extend the deadline to March 31, 2008. On April 7, 2006, the Company entered into a Note Conversion Agreement ("the Agreement") with the holder of the convertible promissory notes (the "Creditor"). Under the terms of the agreement, the Creditor agreed to convert the promissory note with a principal of $100,000 and a maturity date of January 15, 2006 and a note in the principal amount of $85,780 with a maturity date of June 15, 2006 into 1,280,000 shares of common stock. The shares were issued to eight individuals including 300,000 shares to the President of the Company in consideration for services provided to the Company. The fair value of the common stock issued exceeded the value of the promissory notes by $710,220. This amount has been recognized as the cost of the past services provided. In consideration for the transfer of the shares described above, the Company agreed to issue a promissory note in the amount of $185,780. In accordance with EITF 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", the Company recognized the value of the embedded beneficial conversion feature of $20,642 as additional paid-in capital as the debt was issued with an intrinsic value conversion feature. The Company recognized $20,642 as interest expense during the year ended March 31, 2007, increasing the carrying value of the promissory notes to the face value of $185,780. 7. Common Stock (a) On November 17, 2006, pursuant to an investment agreement (refer to Note 5(b)) the Company agreed to issue 2,000,000 shares of the Company's common stock with a fair value of $100,000. During the period ended March 31, 2007, the total fair value of $100,000 was charged to interest expense with a corresponding credit of $100,000 to common stock subscribed. (b) On May 22, 2006, pursuant to an investment agreement (refer to Note 5(c)) the Company agreed to issue 35,000 shares of the Company's common stock with a fair value of $14,000 and warrants to purchase 35,000 shares at $0.30 per share with a fair value of $6,775 pursuant to an investment agreement. During the period ended March 31, 2007, the total fair value of $20,775 was charged to interest expense with a corresponding credit of $6,775 to additional paid in capital and $14,000 to common stock subscribed. F-10 Quantum MRI, Inc. (A Development Stage Company) Notes to the Consolidated Financial Statements September 30, 2007 (Expressed in US dollars) (unaudited) 7. Common Stock (continued) (c) On March 6, 2006, the Company agreed to issue 180,000 shares of the Company's common stock with a fair value of $90,000 and warrants to purchase 180,000 shares at $0.30 per share with a fair value of $63,294 pursuant to three investment agreements. During the year ended March 31, 2006, the total fair value of $153,294 was charged to interest expense with a corresponding credit of $63,294 to additional paid-in capital and $90,000 to common stock subscribed. During the year ended March 31, 2007, a shareholder transferred the 180,000 shares of the Company's common stock on behalf of the Company in consideration for a convertible note. Refer to Note 5(d). The following table summarizes the continuity of the Company's warrants: Weighted average Number of exercise split-adjusted price shares $ Balance, March 31, 2007 285,000 0.32 Expired (180,000) 0.30 ------------ ---------- Balance, September 30, 2007 105,000 0.37 ============ ========== At September 30, 2007, the following share purchase warrants were outstanding: Number of Shares Exercise Price Expiry Date ------------------------------------------------------------ 35,000 $0.50 January 8, 2008 35,000 $0.30 April 10, 2008 35,000 $0.30 May 22, 2008 8. Commitments and Contingencies (a) On April 4, 2006, the Company entered into a Standby Equity Distribution Agreement with a venture capital company (the "Purchaser"). Under the terms of the Agreement, the Purchaser will purchase up to $5,000,000 of the Company's common stock over a period of 24 months at 95% of the Market Price subsequent to effective registration of the Company's common stock. The Market Price is the lowest daily closing bid price of the Company's common stock for a minimum of five trading days between advances. The amount of the advances will be at the discretion of the Company up to $100,000 per advance, with a minimum of five trading days between advances. Upon closing of the transaction, the Company will issue $200,000 worth of common stock or cash, issue a warrant to purchase 350,000 shares of common stock at an exercise price of $0.01 per share for a period of five years, and a warrant to purchase 1,500,000 shares of common stock at an exercise price of $0.25 per share for a period of five years. At September 30, 2007, no shares or warrants had been issued. (b) On March 1, 2006, the Company entered into an employment agreement with the Company's Vice-President of Finance. Under the terms of the employment agreement, the Company must pay $4,000 per month for an initial term of eight months, and grant options to acquire 300,000 shares of common stock. During the three month period ended September 30, 2007, $12,000 was charged to operations. At September 30, 2007, the Company had not granted any options. (c) On November 1, 2005, the Company entered into an employment agreement with the Company's Chief Executive Officer. Under the terms of the employment agreement, the Company must pay $120,000 per annum for the period from April 1, 2006 to March 31, 2008. This employment agreement extends the terms of the previous employment agreement, which expires on March 31, 2008. During the six month period ended September 30, 2007, $60,000 was charged to operations. F-11 Quantum MRI, Inc. (A Development Stage Company) Notes to the Consolidated Financial Statements September 30, 2007 (Expressed in US dollars) (unaudited) 8. Commitments and Contingencies (continued) (d) A claim has been asserted against the Company, its subsidiary and President alleging that the Company and/or its President are liable to for a loan in the amount of approximately $250,000, and that there was a failure to deliver approximately 53,333 split-adjusted shares of the Company's common stock which were to be held as security for the loan. The Company intends to vigorously defend itself in this matter and management feels it has meritorious defenses. This action is in a very preliminary stage and it is not possible to determine the probable outcome. The accompanying financial statements do not include any provision for possible loss. F-12 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION The Company has been inactive since 2005. As of November 15, 2007 the Company did not have any full time employees. The Company's officers devote only a minimal amount of time to the Company business. During the twelve months ended March 31, 2007 and the six months ended September 30, 2007 the Company did not have any revenues. An investment in the Company's securities should only be considered by persons who can afford a complete loss of their investment. The Company has been inactive since 2005. As of September 30, 2007, the Company had assets of $13,352 liabilities of $2,097,991, a working capital deficit of $(2,085,227) and an accumulated deficit of $(7,714,960). There has been virtually no trading activity in the Company's common stock. The Company's auditors have issued a going concern opinion for the year ended March 31, 2007. This means that there is substantial doubt that the Company can continue as an ongoing business for the next twelve months. The financial statements do not contain any adjustments that might result from the uncertainty about the Company's ability to continue its business. As such, the Company may have to cease operations and you could lose your investment. The Company's common stock currently trades on the OTC Bulletin Board. The rules applicable to securities traded on the OTC Bulletin Board provide that if an issuer is delinquent in filing its 10-KSB or 10-QSB reports on three occasions in any twenty-four month period the issuer's securities will be delisted from the OTC Bulletin Board and will not be eligible for relisting until the issuer has timely filed all of its required annual and quarterly reports for twelve months. The Company was delinquent in filing its 10-QSB report in February 2006 and was delinquent in filing this 10-KSB report in July 2007. If the Company is delinquent in filing any other 1934 reports prior to February 2008, the Company's securities will be delisted from the OTC Bulletin Board. The Company does not have any bank lines of credit, or any other traditional financing arrangements. The Company will attempt to obtain the capital it may require through the private sale of its common stock or from borrowings from private lenders. There can be no assurance that the Company will be successful in obtaining the capital which it may need. An investment in the Company's securities should only be considered by persons who can afford a complete loss of their investment. ITEM 3. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of members of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15(b) of the U.S. Securities Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2007, the Company's disclosure controls and procedures, related to internal control over financial reporting and the recording of certain equity transactions, were not effective in light of the material weaknesses described below. The Company was advised by Manning Elliott LLP, its independent auditors, that during their review of the Company's financial statements for the fiscal period ended September 30, 2007, they identified "material weaknesses" in the Company's internal controls as defined in Statement on Auditing Standards No. 112, "Communicating Internal Control Related Matters Identified in an Audit" ("SAS 112"). The material weaknesses are described below: Inadequate controls over equity transactions. The Company does not have adequate review and supervision controls or sufficient supporting documentation of certain equity-related transactions to ensure that equity transactions are properly valued and recorded on a timely basis. As a result, adjustments in the equity accounts and financial statements could occur. If the Company is not, or is not in future periods, successful in identifying these adjustments, its quarterly or annual financial statements could be materially misstated, which could require a restatement. Inadequate entity level controls. The Company does not have effective entity level controls. These weaknesses include: (i) weaknesses in the risk assessment controls, including the lack of adequate mechanisms for anticipating and identifying financial reporting risks; and for reacting to changes in the operating environment that could have a potential effect on financial reporting; (ii) weaknesses in monitoring controls, including the lack of adequate staffing and procedures to ensure periodic evaluations of internal controls to ensure that appropriate personnel regularly obtain evidence that controls are functioning effectively and that identified control deficiencies are timely remedied. If the Company is not, or is not in future periods, successful in identifying these control weaknesses, its quarterly or annual financial statements could be materially misstated, which could require a restatement. The Company's disclosure controls and procedures are designed to ensure that the information required to be disclosed in its reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's (the "SEC") rules and forms, and to reasonably assure that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief 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 under all potential conditions, regardless of how remote, and may not prevent or detect all error and all fraud. 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 prevented or detected. 2 The Company continues to improve and refine its internal controls as an ongoing process. Other than as summarized above, there have been no changes in the Company's internal controls over financial reporting or other factors that have materially affected, or are reasonably likely to materially affect, its internal controls. The certifications of the Company's principal executive officer and principal financial officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Annual Report on Form 10-KSB. The disclosures set forth in this Item 8A contain information concerning (i) the evaluation of the Company's disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications, and (ii) material weaknesses in the design or operation of the Company's internal control over financial reporting, referred to in paragraph 5 of the certifications. Those certifications should be read in conjunction with this Item 8A for a more complete understanding of the matters covered by the certification. 3 PART II OTHER INFORMATION Item 6. Exhibits (a) Exhibits Number Exhibit ------ ------- 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 19, 2007. QUANTUM MRI, INC. By: /s/ Kelly Fielder ------------------------------ Kelly Fielder, President and Principal Financial and Accounting Officer </TEXT> </DOCUMENT>