UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2012

OR

[   ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT

For the transition period from          to         

Commission file number 1-17378

VITRO DIAGNOSTICS, INC.

(Exact Name of Small Business Issuer as Specified in its Charter)

4621 Technology Drive, Golden, CO  80403
(Address of Principal Executive Offices)

Issuer's telephone number:     (303) 999-2130

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes  [ X ]    No [    ]

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

Large accelerated filer [    ] Accelerated filer [    ]   Non-accelerated filer [    ]

Smaller Reporting Company [  X  ]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ]  No  [ X ].

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

As of March 15, 2012, the Registrant had 18,871,217 shares of its Common Stock outstanding.

INDEX

PART I -- FINANCIAL INFORMATION

PART 1.  FINANCIAL INFORMATION

Item 1.

   Financial Statements

The financial statements included herein have been prepared by Vitro Diagnostics, Inc. (the Company), pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such SEC rules and regulations.  In the opinion of management of the Company the accompanying statements contain all adjustments necessary to present fairly the financial position of the Company as of January 31, 2012 and October 31, 2011, and its results of operations for the three month periods ended January 31, 2012 and 2011, its statement of changes of shareholders’ deficit for the period November 1, 2010 through January 31, 2012, and its cash flows for the three month periods ended January 31, 2012 and 2011.  The results for these interim periods are not necessarily indicative of the results for the entire year.  The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto filed as a part of the Company's annual report on Form 10-K.    

1

See accompanying notes to these financial statements

2

See accompanying notes to these financial statements

3

See accompanying notes to these financial statements

4

See accompanying notes to these financial statements

5

VITRO DIAGNOSTICS, INC.

Notes to Unaudited Financial Statements

NOTE A: NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Organization

The Company was incorporated under the laws of Nevada on February 3, 1986.  From November of 1990 through July 31, 2000, the Company was engaged in the development, manufacturing and distribution of purified human antigens (“Diagnostics”) that were derived primarily from human tissues.  The Company also developed cell technology including immortalization of certain cells that allowed entry into other markets besides diagnostics.  However, during the 1990’s, the Company’s sales were solely attributable to the sales of purified human antigens for diagnostic applications.   

Following the sale of its Diagnostics operations in August of 2000, the Company began devoting all efforts to its cellular generation technology which evolved from a focus on induction of cellular immortalization to technology related to stem cells.  Stem cell technology has potentially broad application to many medical areas, including drug discovery and development together with numerous therapeutic applications to diseases involving cellular degeneration, injury or to the treatment of cancer.  The Company launched a series of products targeting basic research in stem cell technology in 2009.  These “Tools for Stem Cell and Drug Discovery™” offer researchers basic tools needed to advance stem cell technology including stem cells and their derivatives, media for growth and differentiation of stem cells and advanced tools for measurement of stem cell quality, potency and response to toxic agents.  The Company has been granted patents for its proprietary technology related to the immortalization of human cells and subsequently expanded this technology to include patented and patent-pending technology involving generation of stem cells with potential application to a variety of commercial opportunities including the treatment of degenerative diseases and drug discovery.

The Company also owns patented technology related to treatment of human infertility.  The Company has been granted a US patent for its process to manufacture VITROPIN™.  VITROPIN™ is a highly purified urinary follicle-stimulating hormone (“FSH”) preparation produced according to the Company’s patented purification process.

The Company also owns patented technology that provides protection to a specific cell line derived from human pancreatic tissues that gives rise to structures comparable to the Islets of Langerhans (beta islets).  These islets also synthesize and secrete insulin in response to elevated glucose levels, as do beta islets contained within pancreatic tissue.  Vitro has also developed a process for the commercial production its cell line-derived islets.  Furthermore, the Company previously obtained regulatory approval for an animal protocol to determine reversal of Type I diabetes, a critical step in the demonstration of efficacy.  This patent affords an exclusive proprietary position to the Company for a new cellular therapy to treat Type I diabetes.

6

Basis of Presentation – Going Concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has suffered significant losses since inception and has working capital and shareholders’ deficits at January 31, 2012, that raise substantial doubt about its ability to continue as a going concern. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and generate revenues and profits from operations.

The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company has financed its operations primarily through cash advances from the Company’s president, as well as through various private placements of equity securities.  Since the year ended October 31, 2010, the president has advanced the Company a total of $237,500 for working capital on an “as needed” basis, including $58,000 during the first quarter ended January 31, 2012.  There is no assurance that these advances will continue in the future.

The Company has formed strategic alliances and is presently engaged in discussions with other companies that have expressed interest in the commercialization of the Company’s stem cell and fertility drug technology. Management intends to pursue these and other opportunities with the objective of establishing strategic alliances to enhance its revenue generation and to fund further development and commercialization of its key technologies.  Initial revenues from stem cell products previously launched have been established and management is pursuing additional revenue generation from this product line, as well as the development of other related products to the fullest extent possible given its resources.  A current focus is expanding distribution of the Company’s advanced stem cell media, MSCGro™, since management believes that these products show performance advantages over the current leaders in this market sector.  There is no assurance that any of these initiatives will yield sufficient capital to maintain the Company’s operations. In such an event, management intends to pursue various strategic alternatives.

In March 2011, the Company formed a license agreement with a third party for its patented technology related to treatment of infertility.  The terms of this agreement included a license fee and royalties on any future sales derived from the patent license by the licensee.  The transaction resulted in a significant reduction of the Company’s accrued payroll obligation to a former employee.  See Note I for further discussion regarding this transaction.

7

Summary of Significant Accounting Policies

Use of estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash equivalents

For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Accounts receivable

Accounts receivable consists of amounts due from customers.  The Company considers accounts more than 30 days old to be past due. The Company uses the allowance method for recognizing bad debts. When an account is deemed uncollectible, it is written off against the allowance. The Company generally does not require collateral for its accounts receivable.  At January 31, 2012 and October 31, 2011, no allowances were recorded and all amounts due from customers were considered collectible.

Inventory

Inventories, consisting of raw materials and finished goods, are stated at the lower of cost (using the specific identification method) or market.  Finished goods inventories include certain allocations of labor and overhead.  At January 31, 2012 and October 31, 2011, finished goods included approximately $5,500 and $10,100, respectively, of labor and overhead allocations.  Inventories consisted of the following:

8

Research and development

The Company’s operations are predominantly in research and development (“R&D”).  These costs are expensed as incurred and are primarily comprised of costs for: salaries, overhead and occupancy, contract services and other outside costs, quality assurance and analytical testing. As the Company has also expanded its operations to include manufacturing and R&D, we report cost of goods sold, including estimates of labor, materials and overhead allocations to the production of specific products. 

Property, equipment and depreciation

Property and equipment, generally consisting of laboratory equipment and office equipment and furniture, are stated at cost and are depreciated over the assets’ estimated useful lives ranging from three to seven years using the straight-line method.  Depreciation expense totaled $4,422 and $4,297 for the three months ended January 31, 2012 and 2011, respectively.

Upon retirement or disposition of equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.  Repairs and maintenance are charged to expense as incurred and expenditures for additions and improvements are capitalized.

Patents, deferred costs and amortization

Patents consist of costs incurred to acquire issued patents.  Amortization commences once a patent is granted.  Costs incurred to acquire patents that have not been issued are reported as deferred costs.  If a patent application is denied or expires, the costs incurred are charged to operations in the year the application is denied or expires.

The Company amortizes its patents over a period of ten years.  Amortization expense totaled $785 for each of the three months ended January 31, 2012 and 2011, respectively.  Estimated aggregate amortization expense for each of the next five fiscal years is as follows:

9

The Company’s patents consisted of the following at January 31, 2012:

The Company has incurred costs relating to the filing of a new United States patent application entitled “POU5-F1 Expression in Human Mesenchymal Stem Cells” and the development of new technology related to generation of human induced pluripotent stem cells (iPS).  These costs totaled $5,595 at both January 31, 2012 and October 31, 2011, and are included as deferred patent costs in the accompanying balance sheets.

Impairment and Disposal of Long-Lived Assets

The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable.  If such assets are considered impaired, the impairment to be recognized is determined as the amount by which the carrying value exceeds the fair value of the assets.

The Company periodically reviews the carrying amount of it long-lived assets for possible impairment.  The Company recorded no asset impairment charges during either of the three months ended January 31, 2012 or 2011.  A contingency exists with respect to these matters, the ultimate resolution of which cannot presently be determined.

Income taxes

The Company uses the liability method of accounting for income taxes.  Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

10

Revenue recognition and concentration of revenues

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred (or service has been performed), the sales price is fixed and determinable, and collectability is reasonably assured.

For the three months ended January 31, 2012 and 2011, 92% and 89% of the Company’s sales, respectively, were made to the Company’s top two customers.

Advertising Costs

The Company expenses all advertising costs as they are incurred.  Advertising costs were $867 and $345 for the three months ended January 31, 2012 and 2011, respectively.

Consulting Expenses

From time-to-time the Company engages consultants to perform various professional and administrative functions including public relations and corporate marketing.  Expenses for consulting services are generally recognized when services are performed and billable by the consultant.  In the event an agreement requires payments in which the timing of the payments is not consistent with the performance of services, expense is recognized as either service events occur, or recognized evenly over the period of the consulting agreement where specific services performed under the agreement are not readily identifiable.  Consulting agreements in which compensation is contingent upon the successful occurrence of one or more events are only expensed when the contingency has been, or is reasonably assured, to be met.

Fair value of financial instruments

The carrying amounts of cash, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to the short-term maturity of the instruments. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term obligations consisting of various capital lease obligations approximates its carrying value.

Concentrations of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and cash equivalents, and trade accounts receivable.  As of January 31, 2012 and October 31, 2011, the Company had no amounts of cash or cash equivalents in financial institutions in excess of amounts insured by agencies of the U.S. Government.

11

Net loss per share

The Company reports net loss per share using a dual presentation of basic and diluted loss per share. Basic net loss per share excludes the impact of common stock equivalents.  Diluted net loss per share utilizes the average market price per share when applying the treasury stock method in determining common stock equivalents.  For the three months ended January 31, 2011, common stock equivalents of 324,000 representing outstanding options, were not included in the diluted per share calculation as all potentially dilutive securities were anti-dilutive due to the net loss in the period.  For the three months ended January 31, 2011, common stock equivalents of 543,500 representing outstanding common stock purchase warrants and options, were not included in the diluted per share calculation as all potentially dilutive securities were anti-dilutive due to the net loss in the period.

Stock-based compensation

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”) Topic 718, “Stock Compensation,” establishes fair value as the measurement objective in accounting for share based payment arrangements, and requires all entities to apply a fair value based measurement method in accounting for share based payment transactions with employees.  Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the period during which the holder is required to provide services in exchange for the award, i.e., the vesting period.

Recent accounting standards

There were various accounting standards and interpretations issued during 2012 and 2011, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows.

NOTE B: RELATED PARTY TRANSACTIONS

Advances and accrued interest payable to officer

Through January 31, 2012, the Company’s President had advanced the Company a total of $377,182 used for working capital including $58,000 during the three months ended January 31, 2012.  The advances are uncollateralized, due on demand and accrue interest on the unpaid principal at a rate of 10% per annum.  Accrued interest payable on the advances totaled $49,057 and $19,810 at January 31, 2012 and 2011, respectively.  The total advances plus accrued interest totaling $426,239 and $359,809 at January 31, 2012 and 2011, respectively, are included as “Advances and accrued interest payable to officer” in the accompanying financial statements.

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Employment agreements and accrued compensation

Effective May 1, 2008, the Company entered into a new Executive Employment Agreement with its President.  The Agreement established annual base salaries of $80,000, $85,000, and $90,000 over the three years of the Agreement, which was to expire on April 30, 2011.  On April 27, 2011 the Company’s board of directors ratified a modification to the original agreement establishing an annual base salary of $12,000 per year, effective February 1, 2011 and continuing for three years.  The Agreement also provides for incentive compensation based on the achievement of minimum annual product sales and an option to purchase one million shares of the Company’s common stock that includes contingent vesting requirements. The employment agreement includes changes in control accelerating vesting for exercise of underlying stock options and also includes severance provisions.

As a result of the patent licenses agreement on March 29, 2011, a contingency was met and as a result, 100,000 common stock options became vested.  These options are exercisable at $.19 per share and expire in July 2018.  As a result, $18,900 of stock based compensation was recorded at March 29, 2011.  These options are further discussed in Note E under the “Stock options granted to officer” caption.

The Company accrued the salaries of its President through April 30, 2008 under an old agreement due to a lack of working capital.  Total accrued salaries and payroll taxes were $1,180,758 and $1,177,618 at January 31, 2012 and October 31, 2011, respectively.  His accrued salaries totaled $1,134,422 and $1,131,432 as of January 31, 2012 and October 31, 2011, respectively.  His salary is allocated as follows: 70% to research and development and 30% to administration.

On March 30, 2011 the Company licensed two of its existing patents to a former executive officer.  The transaction included license fees totaling $10,000, and a forgiveness of previously accrued payroll amounts due the former officer of $190,000.  This transaction is further discussed in Note I.

His accrued salaries totaled $833 at both January 31, 2012 and October 31, 2011.

Total accrued payroll taxes on the above salaries totaled $45,503 and $45,353 at January 31, 2012 and October 31, 2011, respectively.

Office lease

On July 1, 2008, the Company entered into a five-year non-cancelable operating lease for a facility located in Golden, Colorado.  The facility has been leased from a company that is owned by the President’s wife.

Future minimum rental payments for the fiscal years ending are as follows:

13

The total rental expense was $6,562 and $6,828 for the three months ended January 31, 2012 and 2011, respectively.

At January 31, 2012 and October 31, 2011 and 2010, $6,591 and $30,344 were unpaid and are included in accounts payable related parties in the accompanying balance sheets.

Other

The President has personally guaranteed all debt instruments of the Company including all credit card debt.

NOTE C: INCOME TAXES

A reconciliation of the U.S. statutory federal income tax rate to the effective rate is as follows for the years ended:

The primary components of temporary differences that give rise to the Company’s net deferred tax assets are as follows:

At October 31, 2011, deferred taxes consisted of a net tax asset of $1,966,304, due to operating loss carry forwards and other temporary differences of $8,062,760, which was fully allowed for in the valuation allowance of $1,966,304.  The valuation allowance offsets the net deferred tax asset for

14

which there is no assurance of recovery.  The changes in the valuation allowance for the years ended October 31, 2011 and 2010 totaled $56,886 and $111,599, respectively.  Net operating loss carry forwards will expire in various years through 2031.

The Company is delinquent on filing its federal and state tax returns and may be subject to penalties and interest.  A contingency exists with respect to this matter, the ultimate resolution of which may not be presently determined.

The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the asset will be realized.  At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax asset is no longer impaired and the allowance is no longer required.

Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company’s tax net operating loss carry forwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these losses.

NOTE D: LINES OF CREDIT

The Company has a $12,500 line of credit of which $1,060 was unused at January 31, 2012.  The interest rate on the credit line was 21.90% at October 31, 2011.  The credit line is collateralized by the Company’s checking account.  Principal and interest payments are due monthly.

At October 31, 2011 the Company also had three credit cards with a combined credit limit of $26,700, of which $2,878 was unused.  The interest rates on the credit cards range from 10.24% to 29.4%.  All other credit cards previously used by the Company have been paid off and closed.

NOTE E: CAPITAL LEASE OBLIGATIONS

In July 2007, the Company entered into a capital lease agreement to acquire laboratory equipment.  The Company is obligated to make 3 monthly payments of $25 and monthly payments of $382 through August 2012.  

In June 2008, the Company entered into a capital lease agreement, also for the acquisition of laboratory equipment.  The Company is obligated to make monthly payments of $830 through May 2012.

In July 2009, the Company entered into a capital lease agreement, also for the acquisition of laboratory equipment.  The Company was obligated to make monthly payments of $570 through June 2011.  This obligation was fully paid at July 31, 2011.

Future maturities of the Company’s capital lease obligations are as follows:

15

The Company’s President has personally guaranteed the lease obligations.

NOTE F: SHAREHOLDERS’ DEFICIT

Preferred Stock

The Company has authorized 5,000,000 shares of $.001 par value preferred stock, of which none were issued and outstanding at October 31, 2011.  These shares may be issued in series with such rights and preferences as may be determined by the Board of Directors.

Sale of Common Stock and Warrants

On December 29, 2009 the Company sold an aggregate of 500,000 shares of common stock together with an aggregate of 500,000 warrants for $87,500 to three investors.  The warrants were exercisable for a period of twelve months from the date of issuance to purchase an additional 500,000 shares of common stock at an exercise price of $0.175 per share.

The Company applied the provisions of ASC Topic 815, “Derivatives and Hedging” and related standards for the accounting of the valuation of the common stock warrants issued as part of the private placement of common stock completed on December 29, 2009. Accordingly, the Company recorded a warrant liability upon the issuance of its common stock, equal to the estimated fair market value of the various features of the warrants.  The initial warrant liability of $75,000 represented a non-cash adjustment to the carrying value of the related financial instruments.  The warrants were exercisable upon issuance, and expired unexercised on December 29, 2010.  The liability was adjusted quarterly to the estimated fair market value based upon then current market conditions, and any change in the estimated fair market value was charged to the Company’s operating results.

The following assumptions were utilized to determine the estimated fair value of the warrants upon issue:

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Common stock issued for services

On February 7, 2012, the Company’s board of directors ratified the issue of 222,222 shares of the Company’s common stock to Mr. Erik Van Horn, Director as compensation earned to date, and to be earned during his service in fiscal year ending October 31, 2012.  The transaction was valued at $10,000, or $.045 per share, which was the weighted average closing price of the Company’s common stock for the last twenty days preceding the date of the transaction.  Since the shares represent services performed in part for the three months ended January 31, 2012, at total of $2,500 was expensed for the three months ended January 31, 2012, and is reflected in “Services paid with common stock” in the accompanying balance sheet.

Also on February 7, 2012, the Company’s board of directors ratified the terms of a consulting agreement dated January 24, 2012 with a marketing entity which included the issuance of 120,000 shares of the Company’s common stock as partial payment for certain services being provided by the consultant.  The shares were valued at a total of $4,800, or $.04 per share, the closing price of the Company’s common stock on January 24, 2012.  The initial services relating to this issuance are considered to be substantially completed, and as such the total of $4,800 was charged to operations for the three months ended January 31, 2012.  This agreement is discussed further below in Note G.

On May 18, 2011, the Company appointed Mr. Duane Knight, CPA, to its Scientific Advisory Board (“SAB”).  Concurrently, the Company issued 50,000 shares of the Company’s common stock to him as compensation to be earned during his two years of service on the SAB.  The transaction was valued at $5,000, or $.10 per share, which approximated the market value of the stock on the date of the transaction.  As of January 31, 2012, $1,667 had been expensed, and is reflected in “Services paid with common stock” in the accompanying balance sheet.

On April 27, 2011, the Company issued 99,010 shares of the Company’s common stock to Mr. Erik Van Horn, Director as compensation to be earned during his service in 2011.  The transaction was valued at $10,000, or $.101 per share, which approximated the market value of the stock on the date of the transaction.  As of January 31, 2012, the entire $10,000 had been expensed, and is reflected in “Services paid with common stock” in the accompanying balance sheet.

Stock options granted to officer

On May 1, 2008, the Company granted a non-qualified stock option to its President to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $0.19 per share, and expire in 2018.  On the grant date, the traded market value of the stock was $0.19 per share.  The options vest upon the achievement of certain contingencies.  As a result of the patent license agreements of March 29, 2011 as discussed in Note I, a contingency was met resulting in the vesting of 100,000 of these options.  As such, the Company recorded $18,900 in stock based compensation on March 29, 2011.  None of the other contingencies have been met as of January 31, 2012, and as of that date $170,100 of unamortized stock compensation expense remains for the unvested portion of these options. The weighted average exercise price and weighted average fair value of these options on the grant date were $0.19 and $0.189, respectively.  

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The fair value of the options was determined to be $189,000, and was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Incentive plans

Effective December 2, 2000, the Company’s Board of Directors adopted an Equity Incentive Plan (the “Plan”), which replaced the Company’s 1992 Stock Option Plan.  The purpose of the Plan is to attract and retain qualified personnel, to provide additional incentives to employees, officers, consultants and directors, and to promote the Company’s business.  The Plan authorizes total awards of up to 1,000,000 shares of the Company's common stock. Awards may take the form of incentive stock options, non-qualified stock options, restricted stock awards, stock bonuses and other stock grants. If an award made under the Plan expires, terminates, is canceled or settled in cash without the issuance of all shares of common stock covered by the award, those shares will be available for future awards under the Plan.  Awards may not be transferred, except by will or the laws of descent and distribution.  No awards may be granted under the Plan after September 30, 2010.

The Plan is administered by the Company's Board of Directors, which may delegate its authority to a committee of the Board of Directors. The Board of Directors has the authority to select individuals to receive awards, to determine the time and type of awards, the number of shares covered by the awards, and the terms and conditions of such awards in accordance with the terms of the Plan. In making such determinations, the Board of Directors may take into account the recipient's current and potential contributions and any other factors the Board of Directors considers relevant. The recipient of an award has no choice regarding the form of a stock award. The Board of Directors is authorized to establish rules and regulations and make all other determinations that may be necessary or advisable for the administration of the Plan. All options granted pursuant to the Plan shall be exercisable at a price not less than the fair market value of the common stock on the date of grant. Unless otherwise specified, the options expire ten years from the date of grant.

At January 31, 2012 a total of 543,500 options had been issued under the Plan, of which 19,500 have expired.  224,000 options outstanding and vested under the Plan have exercise prices ranging from $0.08 to $0.18 per share, a weighted average exercise price of $0.08 per share, and a weighted average remaining contractual life of 3.63 years at January 31, 2012.  300,000 outstanding options not yet vested have an exercise price of $0.17 per share, and expire in April 2015.  For the three months ended January 31, 2012 and the year ended October 31, 2011, no compensation expense was recognized for options under the Plan. No additional options may be issued under the Plan.

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The following schedule summarizes the changes in the Company’s stock options including non-qualified options and options issued under the 2000 Plan:

NOTE G: CONSULTING AGREEMENTS

On February 7, 2012, the Company’s board of directors ratified the terms of a consulting agreement dated January 24, 2012 with a marketing firm to provide certain public and investor relations services.  The agreement has an initial six-month term and may be terminated by either party upon a material breech of the agreement.  It includes several phases for which the consultant shall be compensated upon completion.  The initial phase includes the completion of various strategies for which the consultant received cash compensation of $5,000 and 120,000 of the Company’s common stock, which was valued at $4,800 as discussed above.  Phases II & III includes certain services regarding the Company’s online efforts, including the design and implementation of a more robust Company website, and positioning the Company as a potential investment and supplier of stem cell products within select social media.  The consultant will be entitled to additional compensation for completion of Phases II & III of approximately $12,000 payable in cash or a combination of cash and common stock to be determined by the Company upon completion.  For the three months ended January 31, 2012 a total of $9,800 consisting of the initial cash payment and common stock issued was charged to operations.

On May 13, 2011 the Company entered into a consulting agreement with a former member of the Company’s Scientific Advisory Board.  The agreement provides for the consultant’s assistance in molecular biology and related areas needed for commercialization of the Company’s stem cell product lines, as requested by management, at a compensation rate of $50 per hour.  For the year

19

ended October 31, 2011, the consultant had billed the Company a total of $500 in connection with this agreement.  No amounts have been billed by the consultant for the three months ended January 31, 2012.

On June 3, 2009 the Company entered into a business development consulting agreement with Seraphim Life Sciences Consulting LLC, to provide services primarily designed to identify and bring to Vitro potential industrial partners that could benefit from Vitro’s technologies.  The agreement entitles the consultant to performance based compensation in the amount of 8% of all consideration received by the Company resulting from the consultant’s services.  The agreement also provides for compensation at hourly rates for services not considered project specific as may be requested by Vitro.  Either party may terminate the agreement at any time with thirty days written notice.  As of January 31, 2012 no services have been performed and no compensation has been paid under the agreement.

On August 20, 2007, the Company entered into a Consulting Agreement with Mr. Joe Nieusma of Superior Toxicology & Wellness (“Superior”).  This agreement was initially extended without modification through August 20, 2010, although no further extension has been made as of the date of this report.  Under the terms of the original agreement, Superior will provide services including, but not limited to:

·

The development and funding of the Company’s current business plan;

·

The launch of products targeting applications in the development and discovery of new drug and biological products; and

·

The marketing and sales of all existing and proposed products and technology that are now available, or will be available for commercial distribution during the term of the agreement.

In exchange for the above services, the Company will pay Superior $50 per hour capped at a maximum of 240 hours for the term of the agreement.  In addition, the Company has agreed to issue Mr. Nieusma the following stock bonuses to be paid in shares of the Company’s common stock:

a.

100,000 shares upon the sale of stem-derived human beta islets as evidenced by issuance of a commercial invoice;

b.

100,000 shares upon the submission of a validation package to the United States Food and Drug Administration requesting approval of the use of Vitro’s stem cell-derived human beta islets for safety and efficacy testing and the use of this data within applications submitted for marketing approval of new drugs and biological products; and

c.

100,000 shares upon the receipt of $100,000 or more in capital funding of the Company based upon Vitro’s current business plan or subsequent versions thereof.  This event occurred during fiscal year ending October 31, 2008 and the Company issued 100,000 shares to its consultant on March 27, 2008.

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Compensation for the successful sale of Vitro’s products, patent licenses or other revenue-generating event shall be based on industry standards and include a gross sales commission of 15% in addition to the compensation described above.

NOTE H: JOINT PRODUCT DEVELOPMENT, MANUFACTURE AND DISTRIBUTION AGREEMENTS

On May 29, 2010 the Company executed an Agreement with Mokshagundam Biotechnologies for the development of a medium formulation for growth of marine invertebrates as a potential food source.  Initially, a basal medium formulation consisting of macro nutritional substances is to be developed and this will be supplemented with growth factors commonly used in stem cell media formulations.  The Agreement provides for the Company to provide a pilot batch of medium for testing consisting of macro-nutritional support plus a mixture of common growth factors necessary for in-vitro support of self-renewal in stem cells of higher organisms.  This medium was delivered to Mokshagundam during fiscal year 2010.  The Agreement provided for a payment of $5,000 to the Company upon execution of the Agreement as an advance for the product development, and was received during the third quarter of fiscal year ended October 31, 2010.

On April 27, 2010 the Company executed an Agreement for Joint Product Development, Manufacture and Distribution (“Agreement”) with HemoGenix, Inc., a privately held biotechnology firm located in Colorado Springs, Colorado.  The Agreement provides for the joint manufacture and distribution of stem cell analysis tools.  The agreement provides for the expansion of assay platforms from HemoGenix, in particular, LUMENESC for mesenchymal stem cells (MSC) and LumiSTEM for induced pluripotent stem cells (iPS).  Also, this original agreement between the Company and HemoGenix® was expanded during the latter portions of 2010 to include joint development of cell-specific toxicity assays including those targeting liver cells, heart, kidney and neuronal cells.  Furthermore, the strategic partners intend to jointly develop additional stem cell media products and align their respective quality programs to ensure consistency.

NOTE I: PATENT LICENSE AGREEMENT

Effective March 30, 2011, the Company entered into a Technology License, License Option and Technical Assistance Agreement with a former officer of the Company, granting him an exclusive license covering two of the Company’s patents: United States Patent Number 5,990,288, Method for Purifying FSH and United States Patent Number 6,458,593 B1, Immortalized Cell Lines and Methods of Making The Same.  The patents are related to treatment of infertility and know-how relating to the commercial production and cellular generation of the hormone, follicle-stimulating hormone and related gonadotropin hormones for use in the treatment of infertility in both humans and animals.  In addition, the License grants the exclusive option to license a pending patent application for the commercial production of clinical grade gonadotropin hormones and, in addition, the Company’s intellectual property related to generation of crude materials containing gonadotropin hormones from certain cellular sources. The License has an initial term of five years and shall be automatically renewed for additional two year periods until terminated by either party; however, the

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license can be terminated after two and one-half years if there have been no sales of licensed products.

The licensee was previously an executive officer of the Company, and the Company had carried a $200,833 liability for unpaid compensation.  The terms of the license agreement required payment of a non-refundable license fee of $10,000, which was paid by a reduction of the unpaid compensation liability.  In addition, the license agreement also required the licensee forgive an additional $190,000 of the unpaid compensation liability.  In addition to the license fee and the forgiveness of the unpaid compensation liability, there shall be royalty payments of 3% and 4% of the gross sales of all licensed products sold by or on behalf of Licensee during the first and second years, respectively.  Such royalty payment shall be 4.5 % of the gross sales of all licensed products during the third year of product sales and shall remain at that level throughout the remaining term of the agreement.  As of January 31, 2012, no sales have been made under this agreement.

NOTE J: SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date that the financial statements were available to be issued.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Introduction

This section discusses the financial condition of Vitro Diagnostics, Inc. (the “Company”) at January 31, 2012 and compares it to the Company’s financial condition at October 31, 2011.  It also discusses the Company’s results of operations for the three-month period ending January 31, 2012 and compares those results to the results of the three months ended January 31, 2011.  This information should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2011, including the audited financial statements and notes contained therein.

Certain statements contained herein and subsequent oral statements made by or on behalf of the Company may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements include, without limitation, statements regarding the Company’s plan of business operations, potential contractual arrangements, and receipt of working capital, anticipated revenues and related expenditures.  Factors that could cause actual results to differ materially include, among others, acceptability of the Company’s products in the market place, general economic conditions, receipt of additional working capital, the overall state of the biotechnology industry and other factors set forth in the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended October 31, 2011 under the caption, “Risk Factors.”  Most of these factors are outside the control of the Company.  Investors are cautioned not to put undue reliance on forward-looking statements.  Except as otherwise required by applicable securities statutes or regulations, the Company disclaims any intent or obligation to update publicly these forward looking statements, whether as a result of new information, future events or otherwise.

Liquidity and Capital Resources

At January 31, 2012, the Company had a working capital deficit of $1,679,434, consisting of current assets of $22,492 and current liabilities of $1,701,926.  This represents a decrease in working capital of $50,589 from fiscal year end October 31, 2011.  The decrease in working capital was mainly due to $49,291 in increased current liabilities due to operating expenses in excess of revenue from product sales.

Current assets decreased by $1,298 and current liabilities increased by $49,291 during the quarter ended January 31, 2012.  The decrease in current assets was due to decreased accounts receivable, while liabilities increased due to operating expenses in excess of revenues.  The Company reported a $1,620,762 deficit in shareholders’ equity at January 31, 2011, which was $54,501 more than the deficit reported at October 31, 2011.  The majority of the working capital deficit is due to accrued salaries and notes due to the president and CEO.  

During the three months ended January 31, 2011, the Company’s financing activities provided $56,946 in cash to support our operating activities.  During that time, the Company’s operations used $55,699 in

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cash compared to $54,569 of cash used by operations during the three months ended January 31, 2011.  The Company reported an overall increase in cash for the first three months of 2012 of $2,975 that was $8,454 less than the increase in cash for the first three months of 2011.  Cash raised from financing activities was derived through loans from the Company’s president and CEO.   Cash usage reflects a minimum cash requirement of about $18,500 per month for operations. Cash requirements for operations have been cut to a minimum level by previous cost reduction measures and are unlikely to be further reduced without additional curtailment or suspension of operations.  

The Company had lines of credit totaling $35,254  with $3,938 available in credit at January 31, 2012.  The Company must continue to service debt and the Chairman personally guarantees most of the Company debt.  Management is actively pursuing measures to reduce corporate debt while at the same time implementing various measures to increase revenues.

The Company continues to pursue various activities to obtain additional capitalization, as described in the Company’s Annual Report on Form 10-K for the fiscal year ended 2011.  A current focus is product sales derived from launch of its “Tools of Stem Cell and Drug Development™” product line during 2009.   Management has continued its program to expand sales of its products including the MSC-Gro™ Media product line optimized for the cell culture of mesenchymal stem cells. Our MSC-Gro™ media is being evaluated by key accounts that are perceived by Management to represent substantial sales opportunities for the Company.  The Company now has out-licensed two of its patents covering technology for the generation and purification of FSH, a hormone used to treat infertility.  Management of the Company maintains close association with the licensee and is assisting the licensee to develop this business through establishment of distribution channels and related activities.  The Company is also pursuing other approaches to increase its capital resources such as combination with revenue-generating private entities, out-licensing of its intellectual property, sale of assets or other transactions that may be appropriate.  

Results of Operations

During the three months ended January 31, 2012, the Company realized a net loss of $62,426 or $0.00 per share on $4,182 in revenue.  The net loss was $22,319 more than the net loss for the first quarter ended January 31, 2011.  The increased net loss in the first quarter of 2012 compared to the same quarter in 2011 was primarily due to lack of other income derived from the fair value of stock purchase warrants that expired during the first quarter of 2011.  Total operating expenses were $8,089 less in the first quarter 2012 than the comparable period in 2011.  Research and development expenses decreased by $12,598 and selling, general and administrative expenses increased by $4,509.

Current activities of the Company have shifted to manufacturing and sales of its stem cell based product line, while R&D efforts are directed towards development of new products to add to the commercial products presently available. During the first quarter 2012, the Company entered into a consulting agreement that management negotiated in order to increase awareness of the Company’s stem cell products to its customer base and also to heighten awareness of the Company as an investment opportunity.  Part of this agreement involves the generation of an expanded and improved website that is predominantly focused on the Company’s products to support stem cell research and clinical development.  Management has added several new products to its cell lines & derivatives, new media products are being added to the MSC-Gro™ cell culture media product line and the Company now offers an expanded line of stem cell measurement tools in conjunction with its manufacturing partner, HemoGenix, Inc.  These new products will be added to the new website that is currently under

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construction.  In addition, our consulting agreement includes additional procedures to utilize social media communications to promote the Company’s stem cell products to its targeted markets.  The Company also submitted an abstract to the International Society for Stem Cell Therapy for presentation at its annual meeting scheduled in early June, 2012.  This abstract provides detail regarding the Company’s MSC-Gro™ Media for use in clinical studies. The Company has also been involved in discussions with a business group to enhance the distribution of its products into Asian markets.

Research and development expenses (R&D) were $29,584 during the first quarter of 2012, which was a decrease of $12,598 over the comparable period in 2011.  While the R&D necessary for launch of its initial products was completed in 2009, the Company continues enhancement and improvement of its existing products together with the development of new products to add to its product line. The Company is now developing additional products for use in animal studies of the therapeutic benefit of mesenchymal stem cells.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short term money market investments. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates.

ITEM  4.

CONTROLS AND PROCEDURES

a.  Disclosure Controls and Procedures

The Company's Principal Executive Officer and Principal Financial Officer, has established and is currently maintaining disclosure controls and procedures for the Company.  The disclosure controls and procedures have been designed to provide reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.

The Principal Executive Officer and Principal Financial Officer has conducted a review and evaluation of the effectiveness of the Company's disclosure controls and procedures and has concluded, based on his evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures are not effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that the information required to be disclosed by the Company is accumulated

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and communicated to management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.     

Additionally, management identified the following internal control deficiencies.  (1) The Company has not properly segregated duties as its President initiates, authorizes, and completes all transactions.  The Company has not implemented measures that would prevent the President from overriding the internal control system.  The Company does not believe that this control deficiency has resulted in deficient financial reporting because the President is aware of his responsibilities under the SEC’s reporting requirements and personally certifies the financial reports.  In addition, the Company engaged a financial consultant to review all financial transactions to determine that they have been properly recorded in the financial statements. (2) The Company has installed accounting software that does not prevent erroneous or unauthorized changes to previous reporting periods and does not provide an adequate audit trail of entries made in the accounting software.  The Company does not think that this control deficiency has resulted in deficient financial reporting because the Company has implemented a series of manual checks and balances to verify that previous reporting periods have not been improperly modified and that no unauthorized entries have been made in the current reporting period.

Accordingly, while the Company has identified certain material weaknesses in its system of internal control over financial reporting, it believes that it has taken reasonable steps to ascertain that the financial information contained in this report is in accordance with generally accepted accounting principles.  Management has determined that current resources would be appropriately applied elsewhere and when resources permit, they will alleviate material weaknesses through various steps.

b.  Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended January 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

c. Limitations of any Internal Control Design

Our principal executive and financial officer does not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive and financial officer has determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

None, except as previously disclosed.

Item 1A.

Risk Factors

None, except as previously disclosed.

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

None, except as previously disclosed.

Item 3.

Defaults Upon Senior Securities

None, except as previously disclosed.

Item 4.

Submission of Matters to a Vote of Security Holders

None, except as previously disclosed.

Item 5.

Other Information

None, except as previously disclosed.

Item 6.

Exhibits

Certification

Certification pursuant to 18 U.S.C. Section 1350

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SIGNATURES

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

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