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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   ----------

                                   Form 10-KSB

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934

      For the fiscal year ended December 31, 2004

                                       OR

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

      For the transition period from               to
                                      ------------    --------------

                          Commission file number 0-935

                                   ----------

                           Molecular Diagnostics, Inc.
                 (Name of small business issuer in its charter)

                 Delaware                                    36-4296006
      (State or other jurisdiction of                     (I.R.S. Employer
      incorporation or organization)                     Identification No.)

414 N. Orleans St., Suite 502, Chicago, IL                      60610
 (Address of principal executive offices)                    (Zip Code)

                                 (312) 222-9550
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

Title of each class                   Name of each exchange on which registered
-------------------                   -----------------------------------------
       None                                        Not Applicable

         Securities registered under Section 12(g) of the Exchange Act:

                         Common Stock, $0.001 par value
                                (Title of class)

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

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B contained in this report,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|

         The Company's revenues for the fiscal year ended December 31, 2004 were
$243,000.

         The aggregate  market value of the common stock held by  non-affiliates
of the Company as of March 31, 2005 was $8,190,640, based upon the closing price
of shares of the Company's  common stock,  $0.001 par value per share, of $0.075
as reported on the Over-the-Counter Bulletin Board on such date.

         The number of shares of common stock  outstanding  as of March 31, 2005
was 109,208,538.

                       Documents Incorporated By Reference

Portions of the  Registrant's  Definitive  Proxy  Statement to be filed no later
than 120 days  after the end of the  fiscal  year  ended  December  31,  2004 in
connection  with the  Registrant's  2005  Annual  Meeting  of  Stockholders  are
incorporated by reference into Part III of this Form 10-KSB.

<PAGE>

                           MOLECULAR DIAGNOSTICS, INC.
                          Annual Report on Form 10-KSB
                                December 31, 2004

                                TABLE OF CONTENTS

PART I

<TABLE>
<CAPTION>
                                                                                                                      Page
                                                                                                                      ----
<S>                                                                                                                    <C>
Item 1.      Description of Business
             Overview ........................................................................................          1
             Recent Developments..............................................................................          1
                  Common Stock Financing......................................................................          2
                  Resignation of Director and Officer.........................................................          2
                  Litigation Settlements......................................................................          2
                  Satisfaction of Delinquent Payroll Tax Liabilities..........................................          2
                  Short-term Liquidity Problems...............................................................          2
                  Plan to Restructure Outstanding Liabilities.................................................          2
                  Authorized Shares of Common Stock...........................................................          2
                  Insurance...................................................................................          3
             Information About Industry Segments..............................................................          3
             Description of Business..........................................................................          3
                  Products....................................................................................          3
                      InPath System...........................................................................          3
                      Samba Software Products and Services....................................................          4
                      Automated Microscopy Instruments........................................................          4
                           AcCell.............................................................................          4
                           AIPS...............................................................................          4
                  Markets and Distribution....................................................................          5
                  Government Regulation, Clinical Studies and Regulatory Strategy.............................          5
                  Competition.................................................................................          8
                  Operations..................................................................................          9
                  Intellectual Property.......................................................................          9
                  Research and Development....................................................................         11
                  Component and Raw Materials.................................................................         11
                  Working Capital Practices...................................................................         11
                  Employees...................................................................................         12
             Financial Information About Foreign and Domestic Operations and Export Sales.....................         12
             Risk Factors.....................................................................................         12
Item 2.      Description of Property..........................................................................         16
Item 3.      Legal Proceedings................................................................................         16
Item 4.      Submission of Matters to a Vote of Security Holders..............................................         19

PART II

Item 5.      Market for Common Equity and Related Stockholder Matters; Purchases of Equity Securities
             by the Small Business Issuer and Affiliated Purchasers...........................................         20
             Market Information...............................................................................         20
             Holders  ........................................................................................         20
             Dividends........................................................................................         20
             Stock Transfer Agent.............................................................................         21
             Securities Authorized for Issuance under Equity Compensation Plans...............................         21
             Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities...........         22
Item 6.      Management's Discussion and Analysis or Plan of Operations.......................................         26
</TABLE>

<PAGE>

<TABLE>
<S>                                                                                                                   <C>
             Forward-Looking Statements.......................................................................         26
             Overview ........................................................................................         26
             Critical Accounting Policies and Significant Judgments and Estimates.............................         27
             Results of Operations............................................................................         27
                  Revenue.....................................................................................         27
                  Costs and Expenses..........................................................................         28
                      Cost of Goods Sold......................................................................         28
                      Research and Development................................................................         28
                      Selling, General and Administrative.....................................................         28
                      Impairment Loss.........................................................................         29
                      Other Income and Expense................................................................         29
                           Interest Income....................................................................         29
                           Interest Expense...................................................................         29
                           Restructuring Settlements..........................................................         30
                           Loss on Litigation Settlements.....................................................         30
                           Other Income and Expense, Net......................................................         30
                  Discontinued Operations.....................................................................         30
                  Net Loss....................................................................................         30
             Liquidity and Capital Resources..................................................................         31
             Off-Balance Sheets Arrangements..................................................................         31
Item 7.      Financial Statements.............................................................................         31
Item 8.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............         32
             Resignation of Auditors..........................................................................         32
             Engagement of New Auditors.......................................................................         32
Item 8A.     Controls and Procedures..........................................................................         32
Item 8B.     Other Information................................................................................         33

PART III
Item 9.      Directors and Executive Officers of the Registrant...............................................         33
Item 10.     Executive Compensation...........................................................................         34
Item 11.     Security Ownership of Certain Beneficial Owners and Management
             and Related Stockholder Matters..................................................................         34
Item 12.     Certain Relationships and Related Transactions...................................................         34
Item 13.     Exhibits ........................................................................................         34
Item 14.     Principal Accountant Fees and Services...........................................................         41

Signatures            ........................................................................................         42

Index to Financial Statements
Reports of Independent Registered Public Accounting Firm......................................................        F-1
Consolidated Balance Sheets at December 31, 2004 and 2003.....................................................        F-3
Consolidated Statements of Operations for the two years ended December 31, 2004 and 2003......................        F-4
Consolidated Statements of Cash Flows for the two years ended December 31, 2004 and 2003......................        F-5
Consolidated Statement of Stockholder's Equity (Deficit) for the two years ended December 31, 2004 and 2003...        F-6

Notes to Consolidated Financial Statements....................................................................        F-8
</TABLE>

<PAGE>

                                     PART I

Item 1.           Description of Business

Overview

         Molecular Diagnostics,  Inc. ("MDI" or the "Company") is a biomolecular
diagnostics company engaged in the design,  development and commercialization of
cost-effective screening systems to assist in the early detection of cancer. MDI
is  currently  focused  on the  design  and  development  of a  fully-automated,
objective  analysis and diagnostic system for cervical cancer screening that can
be used at the point of service.

         MDI was  incorporated  in Delaware in December 1998 as the successor to
Bell  National  Corporation,  a company  incorporated  in California in 1958. In
December 1998,  Bell National,  which was then a shell  corporation  without any
business activity,  acquired InPath, LLC, a development stage company engaged in
the design and  development of products used in screening for cervical and other
types of cancer.  For accounting  purposes,  the  acquisition  was treated as if
InPath had acquired Bell National. However, Bell National continued as the legal
entity  and  the  registrant  for  Securities  and  Exchange  Commission  filing
purposes.

         Bell National merged into Ampersand Medical Corporation  ("Ampersand"),
its  wholly-owned  subsidiary,  in May  1999 in  order to  change  the  state of
incorporation  of the company to Delaware.  In January 1999, we purchased all of
the assets of Samba Technologies,  SARL ("Samba"),  based in France, from Unilog
Regions, S.A. On December 20, 2002, Samba was placed under the protection of the
French  Commercial  Court in a  bankruptcy  proceeding.  On December  19,  2003,
Samba's  assets  were  sold  by the  French  Commercial  Court  in a  bankruptcy
liquidation sale. As a result of this sale, MDI lost all rights and title to the
assets  of  Samba,  including  Samba's  software.  We  have  classified  Samba's
operations as discontinued in our financial statements for the fiscal year ended
December 31, 2003.

         In September 2001, we acquired 100% of the outstanding stock of AccuMed
International,  Inc.  ("AccuMed")  by  means  of a merger  of  AccuMed  into our
wholly-owned  subsidiary.  Shortly  after  the  AccuMed  merger we  changed  our
corporate  name to Molecular  Diagnostics,  Inc. The name change was effected by
the merger of our wholly-owned subsidiary, Molecular Diagnostics, Inc., with and
into  Ampersand.  In October 2001, we became a minority owner of Cell Solutions,
LLC, a Virginia limited liability company, although we surrendered all ownership
interest  in that  company  based  on a  settlement  agreement  entered  into in
February  2004.  Except  where  the  context  otherwise  requires,   "MDI,"  the
"Company,"  "we"  and  "our"  refers  to  Molecular  Diagnostics,  Inc.  and our
subsidiaries and predecessors.

         MDI is currently  focused on the design,  development  and marketing of
its InPath(TM) System and related image analysis systems. The component products
of the InPath System are intended to screen for, at the earliest possible stage,
cancer and  cancer-related  diseases and may be used in a laboratory,  clinic or
doctor's office. We have designed and manufactured the AcCell(TM) computer-aided
automated  microscopy  instrument and the AcCell Savant(TM),  an instrument that
includes an AcCell  instrument  and  software  and which  collects  quantitative
cellular information used in support of a diagnostic process.  These instruments
have been sold to laboratories and medical  diagnostic  companies for use in the
customers' proprietary applications, although based on a settlement entered into
with MonoGen, Inc. in 2004, we have transferred certain patents and intellectual
property rights for the AcCell instrument to MonoGen. MDI also entered into to a
settlement  agreement  with Dr. Bruce  Patterson  and  Invirion,  Inc.  over the
validity of a certain  technology  license.  MDI agreed to the  termination  and
return of the license to Dr. Patterson and Invirion.

         The  Company  now is  focused  on  marketing  a  new,  fully-integrated
workstation  - the  Automated  Image  Proteomic  System or "AIPS(TM)" - based on
updated  technology.  We expect that the new platform will be marketed through a
distribution  partner and, in certain instances,  will be placed in a customers'
facility on a fee-for-use basis.  Nearly all of our reported revenue to date has
been from the sale of AcCell products and services and from Samba's discontinued
operations.

Recent Developments

         Common Stock Financing


                                       1
<PAGE>

         Beginning in December  2004, MDI began an offering of our common stock,
$.001 par value,  to  accredited  investors in exchange for cash.  In connection
with that offering,  MDI granted each investor the right to receive a warrant to
purchase  our common  stock at an  exercise  price of $0.10 per share,  with the
first $250,000 of investment in the offering to receive 50% warrant coverage and
subsequent  investors  to receive 25%  coverage.  Through  March 31,  2005,  the
Company  had  raised an  aggregate  $826,500  and  issued  13,775,001  shares of
restricted  common  stock and  warrants to purchase  4,485,418  shares of common
stock in such offering.

         Resignation of Director and Officer

         On March 4, 2005,  Peter M. Gombrich  resigned as Chairman of the Board
and as a director of the Company.  On March 16, 2005, Mr. Gombrich also resigned
his position as Executive Vice President with the Company.

         Litigation Settlements

         During the first  quarter of 2005,  we  successfully  resolved  several
pending  claims  against the Company.  In March,  the Company and The  Cleveland
Clinic  Foundation  agreed in  principle  to terms of  settlement  relating to a
lawsuit the Foundation had brought  against MDI seeking  approximately  $315,000
for  certain  clinical  trial  work  conducted  on MDI's  behalf in the  Peoples
Republic of China. A default judgment in the amount of $260,000 had been entered
against MDI. Per the agreed settlement terms,  MDI's last settlement  payment is
expected to be made in July 2005, at which point it is expected that the default
judgment will be deemed fully satisfied.

         In  January,  MDI  settled  wage and  related  claims  by three  former
employees,  securing dismissal of the employees' lawsuit. Also in January, after
a $195,500  judgment had been entered  against MDI in a claim by former law firm
Ungaretti & Harris LLP for unpaid  fees,  the parties  entered into a settlement
agreement  to satisfy  the  judgment.  Under the  agreement,  MDI's  payments to
Ungaretti & Harris are expected to conclude in 2006.

         For more  information  on these legal  settlements  and the  underlying
suits, see Item 3 - Legal Proceedings in this Annual Report on Form 10-KSB.

         Satisfaction of Delinquent Payroll Tax Liabilities

         MDI was  delinquent  in  paying a  portion  of its  federal  and  state
employee and employer  payroll taxes for 2003,  2002,  and 2001.  The delinquent
federal payroll taxes relating to 2003 and 2002 were paid in full in April 2004.
The  delinquent  federal  payroll  taxes  relating  to 2001 were paid in full in
January 2005.

         MDI is also  delinquent in filing certain  federal and state income tax
returns for 2003 and 2002 and is working to complete and file such returns.  The
Company's delinquent federal and state income tax returns for 2001 were filed in
March 2005.

         Short-term Liquidity Problems

         During the first  quarter of fiscal 2005,  MDI  continued to experience
severe  liquidity  problems  and had  insufficient  cash on hand to  effectively
manage its business.  During such period,  the Company raised  $576,500 from the
issuance of common stock to  accredited  investors.  MDI has  continued to raise
operating  cash  pursuant to the  issuance of  additional  shares of  restricted
common stock,  and our  management is in the process of  negotiating  additional
financing.

         Plan to Restructure Outstanding Liabilities

         The  Company's  management  team is working to develop a  restructuring
proposal  to  provide  our  unsecured  creditors  a  settlement  plan,  which is
contingent on our ability to raise sufficient new capital.

         Authorized Shares of Common Stock

           Our Board of Directors  has  considered  an increase in the number of
authorized  shares of our common stock from  300,000,000  shares to  375,000,000
shares in  anticipation  of raising  capital through the issuance of new Company
securities.   Any  ultimate   Board-approved  action  requires  a  vote  of  our
stockholders.  The Board  intends  to place this issue on the agenda at the next
annual meeting of our stockholders or at a special meeting to be called for this
purpose.  The failure to have a sufficient number of authorized shares available
may limit the Company's  ability to raise capital and/or  constitute a breach of
one or more of our agreements governing the issuance of such securities.


                                       2
<PAGE>

         Insurance

         Due to MDI's liquidity  problems during 2004, the Company was unable to
pay insurance premiums for policies covering directors' and officers' liability,
public  liability  and  property  damage.  These  policies  were  all  cancelled
retroactive to October 29, 2002. MDI was issued workers employment  compensation
insurance coverage in 2004 for the policy year July 2004 through July 2005.

Information About Industry Segments

         We operate in one industry segment involving medical screening devices,
diagnostics,  and supplies.  All of our operations  during the reporting  period
were conducted and managed within this segment,  with a single  management  team
that reports directly to our President and Chief Executive Officer.

Description of Business

         MDI is a  biomolecular  diagnostics  company  engaged  in  the  design,
development and commercialization of cost-effective  screening systems to assist
in the early  detection  of cancer.  MDI is  currently  focused  on the  design,
development  and  marketing  of its InPath  System and  related  image  analysis
systems.  The InPath  System and related  products are intended to detect cancer
and cancer-related diseases, and may be used in a laboratory, clinic or doctor's
office.

         The science of medical  diagnostics has advanced  significantly  during
the past decade.  Much of this advance has come as a result of new  knowledge of
the human genome and related proteins, which form the foundation of cell biology
and the functioning of the human body. Our goal is to utilize this research as a
base to  develop  screening  and  diagnostic  testing  products  for  cancer and
cancer-related  diseases.  We believe  that the success of these  products  will
improve  patient care through more  accurate  test  performance,  wider  product
availability  and more  cost-effective  service  delivery.  We have developed an
FDA-approved   sample  collection  device,  and  are  developing   chemical  and
biological tests and analysis instruments and related software.

         Our  strategy  is to  develop  products  through  internal  development
processes, strategic partnerships,  licenses and acquisitions of companies. This
strategy  has  required  and will  continue  to require  significant  additional
capital.  As a result, we will incur  substantial  operating losses until we are
able to successfully market some, or all, of our products.

         Products

         The InPath(TM) System

         We are currently developing and testing a family of products for use in
cancer  screening  and  diagnosis.  We call this family of  products  the InPath
System.  The core of the InPath System is a combination  of protein  antibodies-
the  Cocktail-CVX(TM)  - that allows the system to detect and highlight abnormal
cervical cells in a rapid and objective fashion. In the future, we intend to use
different antibody combinations to detect and diagnose different types of cancer
and other cancer-related diseases.

         The initial application of the InPath System is designed to enhance the
current cervical cancer screening  process  performed in laboratories,  commonly
referred to as the Pap test. Our ultimate goal is to perform this screening test
in less time,  possibly  at the point of service,  either in a doctor's  office,
clinic or mobile  medical  vehicle.  The InPath  System  includes the  following
components:

         o        MDI's FDA-approved  unique sample collection device,  referred
                  to as the e2  Collector(TM),  consisting of a small disposable
                  balloon,  shaped to fit the cervix.  The device is intended to
                  replace  the  spatula  and  brush  currently  used to  collect
                  patient cytology samples.


                                       3
<PAGE>

         o        The Cocktail-CVX(TM), a fully-automated biochemical assay that
                  is applied to a sample to identify abnormal cells.

                      o    In  the  laboratory  version  of  the  InPath  System
                           slide-based  test, this biochemical  assay is applied
                           to sample cells  released  from a  collection  device
                           into a liquid  preservative  and deposited on a glass
                           slide.

         o        An instrument that performs an automated  analysis of a sample
                  by means of an  optical  scan that  detects  the  presence  of
                  multiple  wavelengths  of  fluorescent  light.  This  light is
                  produced by fluorescent  reporter tags,  which are attached to
                  certain components used in the Cocktail-CVX biochemical assay.

                      o    In the laboratory  version of the InPath System,  our
                           new  fully-integrated  workstation  -  the  Automated
                           Image Proteomic System or "AIPS" workstation - uses a
                           camera to read the various  wavelengths of light from
                           the sample.

         o        Custom-designed  image  analysis  software  that  controls the
                  automated instruments and analyzes the captured wavelengths of
                  light.

         Samba Software Products and Services

         Samba,  our former  wholly-owned  subsidiary,  was  operated  under the
control of the French  Commercial  Court  beginning  December 20, 2002.  We were
unable to raise  sufficient  capital  during  2003 to provide  funds to Samba to
satisfy its obligations.  On December 19, 2003,  Samba's assets were sold by the
French  Commercial Court in a bankruptcy  liquidation  sale. As a result of this
sale,  MDI lost all  rights  and title to Samba's  assets,  including  the Samba
software. We have classified Samba's operations as discontinued in our financial
statements for the fiscal year ended December 31, 2003.

         Automated Microscopy Instruments

                  AcCell(TM)

         In November 2001, Ventana Medical Systems,  Inc.  ("Ventana") agreed to
purchase and distribute AcCell  instruments with their image analysis  software.
The AcCell product is a computer-aided  automated microscopy instrument designed
to help  medical  specialists  examine and  diagnose  specimens  of human cells.
During  2002,   we  agreed  that  Ventana   would  assume   responsibility   for
manufacturing the AcCell 2500 instruments directly,  rather than purchasing them
from us. MDI subsequently elected not to develop the 2500 model and, in November
2003,  MDI and Ventana  entered  into a  settlement  agreement  providing  for a
non-exclusive,  royalty-free  license from MDI to Ventana to the source code for
the AcCell 2500 for Ventana's internal use or in the creation of executable code
for its customers. In addition, as part of the settlement, MDI agreed to provide
two   workstations   valued  at  $49,500  and  issued  a  promissory   note  for
approximately  $63,000 in return for  forgiveness of  approximately  $375,000 of
advances against future sales.

         In  October  2004,  MDI  agreed  to settle  an  arbitration  proceeding
instituted by MonoGen, Inc. ("MonoGen") against the Company through the transfer
to  MonoGen of  certain  patents,  patent  applications  and other  intellectual
property  rights  relating to the AcCell  technology  as well as inventory and a
unsecured  installment  note for $305,000.  MonoGen  granted MDI a non-exclusive
license agreement for the use of the patent rights and technology as they relate
to cervical and ovarian  cancer in exchange for a three  percent  royalty on all
gross sales of licensed products.

                  AIPS(TM)

         MDI  has  elected  to  proceed  with  the   development   of  its  new,
fully-integrated AIPS workstation . This product may be delivered with a variety
of features including:

         o        Robotic  slide-feeding  systems  to load and  unload  multiple
                  cassettes and slides to the image system;


                                       4
<PAGE>

         o        Bar code readers to ensure  proper  identification  of samples
                  being analyzed;

         o        Unique image analysis software;

         o        Electro-mechanical  scanning  stages  to  facilitate  accurate
                  slide screening;

         o        Automated cellular focusing on slides; and

         o        Data  management  software to facilitate  primary or secondary
                  review of  samples  and  report  results  into  record-keeping
                  systems.

         This  workstation  is a key  tool  of our  research  process,  clinical
trials, and the InPath System laboratory-based test.

         On November  1, 2004,  the Company  entered  into a strategic  alliance
agreement with the biotechnology  division of a Fortune 500 healthcare  company.
The  alliance  calls  for  the  manufacture  and   distribution  of  MDI's  AIPS
workstation.  In  addition,  the two  companies  will  collaborate  and  develop
proprietary antibodies to be used in the MDI proteomic cell-based assay systems,
the first of which is the CVX cervical screening system.

         Under  terms  of the  five-year  agreement,  MDI's  strategic  alliance
partner will  manufacture  the  MDI-designed  AIPS hardware and then  distribute
these systems through its  international  sales  organization.  The terms of the
agreement  provide an exclusive  right to market and  distribute the AIPS system
into the histology and immunohistochemistry  markets and a co-exclusive right to
market the products into markets other than MDI's exclusive  market of cytology.
The complementary  image analysis  software,  running on the AIPS platform,  was
developed by MDI for the CVX system.

         MDI plans to sell and market  these  instruments  exclusively  into the
cytology  market  to  potential  customers,   original  equipment   manufacturer
laboratories  and  into  the  diagnostics  marketplace.  The  AIPS  platform  is
currently a development stage product with design requirements  complete and the
prototype and software development in process.

         Markets and Distribution

         We do not plan to  develop  and  train a large  direct  sales  force to
distribute  and sell the InPath  System.  Our initial  strategy is to market the
laboratory  version of the InPath System to participants in the principal market
for the system - namely,  major  laboratory  organizations in the United States.
Once the  InPath  System has been  successfully  established  in the  laboratory
market,  our strategy is to form  alliances  with these  laboratories  and other
medical  products  distribution  companies  and utilize  their  sales  forces to
broaden  sales of the  InPath  System  to other  markets,  including  hospitals,
clinics, managed care organizations and office-based physician groups.

         The cost of the Pap test  outside of the United  States  varies  widely
from country to country.  Outside of the United States, most healthcare services
are  provided  by  governmental  organizations.  Healthcare  in  many  of  these
countries is managed by governmental agencies,  often at the local level, making
the precise  number of tests  performed  difficult  to validate.  In  developing
countries  where  healthcare,  especially  cancer  screening,  may  be  minimal,
non-profit  organizations often supplement government health programs. We intend
to distribute the InPath System worldwide  pursuant to any statutory  regulatory
approvals we receive.

         Government Regulation, Clinical Studies and Regulatory Strategy

         The  development,  manufacture,  sale, and  distribution of some of our
products  is  regulated  by the U.S.  Food and Drug  Administration  ("FDA") and
comparable  authorities in certain states and foreign  countries.  In the United
States, the Food, Drug and Cosmetic Act (the "FD&C Act") and related regulations
apply to some of our products.  These  products  cannot be shipped in interstate
commerce without prior authorization from the FDA.

         Medical  devices  may be  authorized  by the FDA for  marketing  in the
United States either pursuant to a pre-market  notification under Section 510(k)
of  the  FD&C  Act,  commonly  referred  to  as a  "510(k)  notification,"  or a
pre-market approval application or "PMA". The process of obtaining FDA marketing
clearance and approval from other  applicable  regulatory  authorities is costly
and there can be no guarantee  that the process will be  successful.  The 510(k)
notifications and PMAs typically  require  preliminary  internal studies,  field
studies,  and/or clinical trials,  in addition to submission of other design and
manufacturing documentation. We manage the regulatory process through the use of
consultants and clinical research organizations.


                                       5
<PAGE>

         A 510(k)  notification,  among other  things,  requires an applicant to
show that its products  are  "substantially  equivalent"  in terms of safety and
effectiveness to an existing  FDA-cleared  predicate  product.  An applicant may
only market a product submitted through a 510(k)  notification after the FDA has
issued a written  notification  determining  the  product  has been  found to be
substantially equivalent.  The Company's e2 Collector was approved for marketing
by the FDA on May 31, 2002 under the 510(k) notification process.

         To obtain PMA approval for a device,  an  applicant  must  demonstrate,
independent  of other similar  devices,  that the device in question is safe and
effective  for its intended  uses.  A PMA must be  supported by extensive  data,
including  pre-clinical and clinical trial data, as well as extensive literature
and design and manufacturing documentation to prove the safety and effectiveness
of the  device.  The  PMA  process  is  substantially  longer  than  the  510(k)
notification  process.  During the review period,  the FDA may conduct  in-depth
reviews  of our  clinical  trial  center  documentation  and  our  manufacturing
facilities and processes or those of our strategic  partners.  In addition,  the
FDA may request additional  information and clarifications and convene a medical
advisory panel to assist in its determination.

         The FD&C Act generally bars advertising,  promoting, or other marketing
of medical  devices  that the FDA has not  approved  or cleared.  Moreover,  FDA
enforcement policy strictly prohibits the promotion of known or approved medical
devices for non-approved or "off-label" uses. In addition,  the FDA may withdraw
product clearances or approvals for failure to comply with regulatory standards.

         Our  prospective  foreign  operations  are also  subject to  government
regulation,  which varies from country to country.  Many countries,  directly or
indirectly  through  reimbursement  limitations,   control  the  price  of  most
healthcare products. Developing countries put restrictions on the importation of
finished  products,  which  may  delay  such  importation.  European  directives
establish  the  requirements  for medical  devices in the  European  Union.  The
specific  directives  are the Medical Device  Directive (MDD  93/42/EEC) and the
In-Vitro  Diagnostics  Device  Directive  (IVDD/98/79/EEC).   The  International
Organization for Standardization  ("ISO")  establishes  standards for compliance
with these directives, particularly for quality system requirements.

         The FDA has adopted regulations governing the design and manufacture of
medical  devices  that  are,  for  the  most  part,  harmonized  with  the  good
manufacturing  practices and ISO quality system  standards for medical  devices.
The FDA's  adoption of the ISO's approach to regulation and other changes to the
manner in which the FDA  regulates  medical  devices  will  increase the cost of
compliance with those regulations.

         We will also be  subject to certain  registration,  record-keeping  and
medical device reporting requirements of the FDA. Our manufacturing  facilities,
or those of our  strategic  partners,  will be  obligated  to  follow  the FDA's
Quality  System  Regulation  and be subject to  periodic  FDA  inspections.  Any
failure to comply with the FDA's Quality  System  Regulation or any other FDA or
other government  regulations could have a material adverse effect on our future
operations.

         The Cocktail-CVX, as part of the InPath System, will need to be cleared
for marketing under a PMA by the FDA, as described above,  prior to its sale and
use in the U.S.  clinical market. We cannot be sure whether or when the FDA will
clear  this or other  components  of the  InPath  System or the  system  itself.
Internationally,  the  InPath  System  may  be  subject  to  various  government
regulations,  which may delay the  introduction of new products and services and
adversely affect our business.

         The  InPath  System  also may be subject  to  regulation  in the United
States under the Clinical Laboratory Improvement Act ("CLIA").  CLIA establishes
quality  standards for laboratories  conducting  testing to ensure the accuracy,
reliability and timeliness of patient test results, regardless of where the test
is performed. The requirements for laboratories vary depending on the complexity
of the tests performed.  Thus, the more complicated the test, the more stringent
the requirement.  Tests are categorized as high complexity,  moderate complexity
(including the category of provider-performed microscopy) and waived tests. CLIA
specifies quality  standards for laboratory  proficiency  testing,  patient test
management,  quality control, personnel qualifications and quality assurance, as
applicable.


                                       6
<PAGE>

         The FDA is  responsible  for  categorization  of  commercially-marketed
laboratory  tests.  The Centers for Disease  Control  ("CDC") is responsible for
categorization of laboratory procedures such as  provider-performed  microscopy.
For  commercially-marketed   tests,  the  FDA  now  determines  the  appropriate
complexity category as it reviews pre-market submissions for clinical laboratory
devices.  Manufacturers are asked to include an extra copy of the package insert
identified  as  "FOR  CLIA   CLASSIFICATION"   in  the  submission  for  product
commercialization  (i.e.,  510(k) or PMA).  Manufacturers  are  notified  of the
assigned complexity through routine FDA correspondence (that is, as an enclosure
with a clearance or approval letter or as a separate letter in response to other
submissions).  Categorization  is  effective  as of  the  date  of  the  written
notification to the manufacturer.

         We are  developing  the  InPath  System  to be  user-friendly,  require
minimum operator  training,  and have safety and operating checks built into the
functionality  of the  instruments.  We believe  that our  efforts may result in
receiving the lowest possible classification for the InPath System. If, however,
these products are classified into a higher category,  it may have a significant
impact on our ability to market the products in the United States.

         We continue to conduct clinical studies and trials on our InPath System
during its  development.  These  studies  and trials  vary in terms of number of
patient  samples,   individual  product   components,   specific  processes  and
conditions, purpose, and other factors, which may affect the results.

         We have  publicly  reported  the  results of some of the studies of the
InPath System and Cocktail-CVX at various medical meetings,  in publications and
in public  announcements.  Such studies  demonstrate the system's  capability to
detect  cervical  cellular  abnormalities.  The sensitivity  factor,  the test's
performance in detecting  versus missing actual disease - commonly  called false
negatives - is critical in terms of patient health.

         In  each  of  the  reported  studies  and  trials,  the  InPath  System
demonstrated over 98% sensitivity in detecting  high-grade  cervical disease and
cancer.  In addition,  the results  demonstrate  that the InPath System produces
more  accurate  results  than the  current  PAP  test.  A  statistical  analysis
conducted  in 2000 on the PAP test,  which  reviewed  the results of 94 previous
studies, showed an average sensitivity of 74% and an average specificity of 68%.

         In a presentation  of early results of the clinical trial of the InPath
System's  e2  Collector,  data  showed  that the  cytology  reports  on  samples
collected  with the e2  Collector  were at least as accurate as those  collected
with the conventional brush/spatula method. The collector also proved to be more
comfortable  for the patient,  provided less blood and mucus,  and required only
one device to collect both  endocervical and ectocervical  cells. The results of
the additional clinical tests were submitted in January 2002 and we received FDA
clearance to market the collector on May 31, 2002.

         We  believe  the  results  of  these  studies   support  the  continued
development of the InPath  System.  We moved ahead with  additional  studies and
clinical  trials  in  late  2001  and  others  began  in  2002.  Due to  capital
limitations we were forced to suspend all of our ongoing studies during the last
half of 2002.  During 2003 and 2004, MDI continued to refine and reformulate the
Cocktail-CVX as well as develop the AIPS platform.

         We completed the initial  phase of our clinical  studies for the InPath
System during 2002 and we hope to begin the last phase during the second half of
2005,  contingent on our securing adequate financing for our operations.  At the
conclusion  of the  studies,  the data will be submitted to the FDA as a PMA and
will form the basis of our  substantiation of the clinical and economic value of
the  InPath  System.  The  product  may also be  offered  for sale as an Analyte
Specific Reagent ("ASR"),  which is defined as the specific  ingredient required
for a laboratory to create its own screening  test, in the United States and for
full-scale commercial and clinical use in selected  international markets, where
import and regulatory  approvals  allow.  We are not permitted to market non-ASR
products in the United States with  clinical or diagnostic  claims until we have
received  clearance  from the FDA.  ASR tests make no medical  claims but may be
used by  laboratories  that are qualified to perform highly  complex tests,  and
physicians as  components of ASR  procedures.  In other  countries,  we may need
regulatory and importation approval; however, such approvals are generally based
on the data submitted to the FDA.

         We are  pursuing  regulatory  approval  of the InPath  System  products
through a series of  submissions  and, in some  cases,  using data from a single
clinical  study.  This  tiered  approach  is  designed  to  accelerate   revenue
opportunities  for the InPath System in the short term and to drive  adoption of
our  innovative  products over the long term,  while  minimizing the expense and
time involved in undertaking the appropriate study.


                                       7
<PAGE>

         The first stage of the overall strategy  involved the submission of our
e2 Collector for approval as a substantially  equivalent device to the brush and
spatula  method of gathering  samples used in the current Pap tests.  The 510(k)
notification was completed and filed in late September 2001. Additional data was
furnished  to the FDA in the  first  quarter  of  2002  and  subsequent  to that
submission we received  approval to market the  collector in the United  States.
MDI must now initiate the  full-scale  manufacturing  process  through  contract
manufacturing,  and intends to introduce  the e2 Collector  into the  commercial
market in the second half of 2005.

         The second stage of our overall strategy  involves the continuing study
of the InPath System and  Cocktail-CVX,  as described above.  This research will
determine  whether  the  InPath  System is a means to  eliminate  true  negative
samples from further  review.  We  anticipate  completion of this portion of the
study and  submission  of the data to the FDA  during  2006,  contingent  on our
securing adequate financing for our operations.  We will also submit the data to
foreign  regulatory  authorities  that have  jurisdiction  over these  products.
Subsequently,  we will continue to collect and submit data for the InPath System
point of service test.

         If the  submissions  for the various InPath System products are cleared
by the  FDA for  sale  in the  U.S.  market  or  approved  for  sale by  foreign
regulatory agencies,  we intend to sell the cleared products in their respective
clinical markets.

                  InPath System Product Introduction Timelines

<TABLE>
<CAPTION>
         Product                                       Process                            Timeline
         -------                                       -------                            --------
<S>                                     <C>                                     <C>
         e2 Collector...............    Clinical trials                         Completed
                                        Regulatory submission & review          September 2001
                                        Regulatory clearance received           May 2002
                                        Sales (1)                               2005/2006
         Cocktail-CVX...............    Clinical trials (1)                     2005/2006
                                        Regulatory submission & review (1)      2006
                                        Regulatory clearance projected (1)      2006
                                        U.S. sales (1) 2006/2007
                                        International sales (1)                 2006/2007

         Cocktail-CVX ASRs .........    U.S. sales (1)                          2006/2007
</TABLE>

         (1)      All of the above target dates are  contingent  on our securing
                  adequate financing for our operations.

         We  currently   distribute   automated   microscopy   instruments  into
commercial  markets  that do not  require  regulatory  clearance.  In  order  to
distribute  products  not yet  approved  by the FDA for use in certain  clinical
applications,  we  will be  required  to  conduct  clinical  trials  and to make
submissions to applicable regulatory agencies for clearance.  We do not have any
current plans to make any submissions to the FDA or foreign regulatory  agencies
covering these products.  In the future, some of our customers may include these
products in submissions to the FDA or foreign regulatory agencies covering their
use in a customer's proprietary diagnostic or clinical process.

         Competition

         Historically,   competition  in  the   healthcare   industry  has  been
characterized by the search for technological  innovations and efforts to market
such innovations.  The cost of healthcare delivery has always been a significant
factor in markets outside of the United States. In recent years, the U.S. market
has also become much more cost conscious.  We believe technological  innovations
incorporated  into certain of our products  offer  cost-effective  benefits that
address this particular market opportunity.

         Competitors may introduce new products that compete with ours, or those
which we are developing.  We believe the portion of our research and development
efforts devoted to continued  refinement and cost reduction of our products will
permit us to remain or become  competitive  in the markets in which we presently
distribute or intend to distribute our products.


                                       8
<PAGE>

         The market for our cancer  screening  and  diagnostic  product  line is
significant, but highly competitive. We are unaware of any other company that is
duplicating  our efforts to develop a  fully-automated,  objective  analysis and
diagnostic system for cervical cancer screening that can be used at the point of
service. Our competition includes many companies with financial,  marketing, and
research and development resources substantially greater than ours. There can be
no  assurance  that  our  technological  innovations  will  provide  us  with  a
competitive advantage.

         There are several U.S. and foreign companies that produce automated and
quantitative  microscopy  instruments.   In  the  past,  the  market  for  these
instruments has been primarily limited to research  applications.  However, as a
result of recent advances in the area of molecular  diagnostics,  we believe the
market for such instruments and applications will increase over the next several
years.  We  believe  our  instruments  are  the  most  versatile  cost-effective
platforms  available in the current market whether as an outright  purchase or a
fee-for-use application.

         In general,  we believe that our products must compete primarily on the
basis of accuracy,  functionality,  product  features and  effectiveness  of the
product in standard medical applications.  We also believe that cost control and
cost  effectiveness  are  additional  key factors in achieving or  maintaining a
competitive  advantage.  We focus a  significant  amount of product  development
effort on  producing  systems and tests that will not add to overall  healthcare
cost. Specifically,  there are several companies whose technologies are similar,
adjunctive to, or may overlap with that of MDI. These include Cytyc Corporation,
Tripath  Imaging  Inc.,  Digene  Corporation,  Ventana  Medical  Systems,  Inc.,
Clarient,  Inc. (formerly ChromaVision Systems, Inc.), and Applied Imaging Corp.
However,   we  do  not  believe  any  of  these  companies  have  developed  the
fully-integrated    solution    necessary   to   deliver   a    fully-automated,
proteomic-based solution. To develop fully-automated  solutions,  companies must
have technologies that fully integrate microscopy instruments,  imaging software
and cancer-detecting biochemistry.

         Operations

         We conduct  research and development work for the InPath System using a
combination  of our  employees  and contract  workers in our  Chicago,  Illinois
laboratory.

         We do not intend to invest capital to develop our own  distribution and
sales organizations,  or construct and maintain a medical-products manufacturing
facility and all its related  quality systems  requirements.  Our strategy is to
utilize  the   operations,   quality   systems  and  facilities  of  a  contract
manufacturer  specializing in medical products manufacturing to meet our current
and future needs in the United States and international  markets.  This strategy
covers  manufacturing  requirements  related  to the  InPath  System's  chemical
components,  plastic and  silicone  parts for the e2  Collector,  InPath  System
instruments and the AIPS instruments.

         To this  end,  we are  negotiating  agreements,  including  design  and
development work, with  manufacturers of medical-grade  components to supply the
silicone balloon and other components of the sample  collection  device.  We are
negotiating  additional  agreements  with  manufacturers  to supply  much higher
volumes that will be needed once we begin to sell the sample collection  device.
These  manufacturers  have the capacity to handle high volume production through
facilities in both the United States and several foreign countries.

         We currently  have a sufficient  supply of workstation  platforms.  The
computers,  cameras,  automated slide staining  equipment and slide  preparation
equipment,  which make up the remainder of the laboratory  version of the InPath
System, are available from several manufacturers.  These instruments are used in
a sequential process.  The platform on which the actual sample screening is done
is computer-controlled by our proprietary software.

         As  previously  discussed,  MDI  currently  has  a  strategic  alliance
agreement with a biotechnology  division of a Fortune 500 healthcare company and
the agreement calls for the manufacture and distribution of MDI's AIPS platform.

         Intellectual Property

         We rely on a combination of patents, licenses, trade names, trademarks,
know-how,  proprietary  technology  and policies and  procedures  to protect our
intellectual property. We consider such security and protection a very important
aspect of the successful  development  and marketing of our products in the U.S.
and foreign markets.


                                       9
<PAGE>

         In the United  States we follow the  practice  of filing a  provisional
patent application for each invention as soon as it has been determined that the
invention  meets the minimum  standards for  patentability.  While a provisional
patent  application  does not provide any formal rights or protections,  it does
establish an official  priority date for the invention  that carries over to any
utility patent  applications  that are derived from the provisional  application
within the next 12 months. A utility patent  application begins the process that
can  culminate in the  issuance of a U.S.  patent.  We convert each  outstanding
provisional patent  application into some number of utility patent  applications
within this 12-month period. In most cases each provisional  application results
in one utility filing.  However, in some cases a single provisional  application
has  generated  two  independent  utility  filings,  or  multiple  (up to  five)
provisional   applications   have  been   consolidated  into  a  single  utility
application.  During the examination of a utility  application,  the U.S. Patent
and Trademark  Office may require us to divide the application  into two or more
separate applications or we may file a  continuation-in-part  patent application
that expands upon the technology claimed in another patent application and which
has the potential of  superseding  the earlier  application.  For these reasons,
estimating  the  number of patents  that are likely to be issued  based upon the
numbers of provisional and utility applications filed is difficult.

         Prior to filing a utility  application in the United States,  we review
the application to determine whether obtaining patent coverage for the invention
outside of the United  States is  necessary or desirable to support our business
model. If so, a patent  application is filed under the Patent Cooperation Treaty
("PCT") at the same time that the U.S. filing is made. Depending upon the nature
of the invention and business  considerations,  we typically  specify the patent
offices  in  three  to six  countries  to  which  the PCT  application  is to be
submitted after the initial examination is completed.

         As of March 2005, we had filed five U.S.  utility patent  applications.
Three of the U.S. utility applications have issued as U.S. patents. Two U.S. and
five foreign patent  applications are filed and pending.  In order to reduce the
expenses  related  to  patent  prosecution,  we  are  currently  treating  these
applications  as inactive and taking only those  actions  needed to keep them in
effect.  This group of patents and patent applications covers all aspects of the
InPath System  including,  but not limited to, the point of service  instrument,
the personal and physicians'  collectors,  and the slide-based test. As a result
of the  acquisition  of AccuMed,  we acquired 33 issued U.S.  patents,  one U.S.
patent  application,  and nine foreign patents,  of which a combined total of 17
were  transferred  to a third  party  under  a  license  agreement.  Twenty-four
additional foreign patent applications  primarily covering the AcCell and AcCell
Savant  technology  and related  software  were also  acquired.  We also held an
exclusive license from Invirion,  Inc. and Dr. Bruce Patterson covering a patent
and certain medical  technology for detection of certain genes in cancer-causing
types of Human Papilloma Virus ("HPV") virus. We purchased the license for cash,
future royalties,  and other considerations.  Pursuant to a settlement agreement
entered  into with Dr.  Patterson  and  Invirion in the fourth  quarter of 2004,
however,  the  Company  agreed to the  termination  of such  license and related
agreements,  the  transfer  and  assignment  back to Invirion of such patent and
medical  technology  and all of MDI's  right,  title and  interest  therein  and
intellectual property rights associated therewith,  and to cease the development
or sale of any such technology.

         We intend to prepare  additional patent  applications for processes and
inventions  arising from our research and development  process.  The protections
provided by a patent are determined by the claims that are allowed by the patent
office that is processing the application. During the patent prosecution process
it is not unusual for the claims made in the initial  application to be modified
or deleted or for new claims to be added to the application. For this reason, it
is not  possible  to know the exact  extent of  protection  provided by a patent
until it issues.

         Patent  applications  filed  prior to  November  29, 2000 in the United
States are maintained in secrecy until any resulting patent is issued.  As there
have  been  examples  of  U.S.  patent   applications  that  have  remained  "in
prosecution" and, therefore, secret for decades, it is not possible to know with
certainty  that any U.S.  patent that we may own,  file for or have issued to us
will not be  pre-empted  or  impaired  by  patents  filed  before  ours and that
subsequently  are issued to others.  Utility  patent  applications  filed in the
United States after November 29, 2000 are published 18 months after the earliest
applicable filing date. As this revised standard takes full effect,  the chances
that such a "submarine"  patent will impair our intellectual  property portfolio
are  significantly  reduced.   Foreign  patent  applications  are  automatically
published 18 months after  filing.  As the time  required to prosecute a foreign
utility patent  application  generally exceeds 18 months and the foreign patents
use a "first  to file"  rather  than a "first  to  invent"  standard,  we do not
consider  submarine  patents  to be a  significant  consideration  in our patent
protection outside of the United States.


                                       10
<PAGE>

         Our  products are or may be sold  worldwide  under  trademarks  that we
consider to be  important to our  business.  We own the trade names of "InPath,"
"e2  Collector,"  and  "Cocktail-CVX."  We may file  additional U.S. and foreign
trademark applications in the future.

         Our future technology  acquisition efforts will be focused toward those
technologies that have strong patent or trade secret protection.

         We cannot be sure that  patents  or  trademarks  issued or which may be
issued  in  the  future  will  provide  us  with  any  significant   competitive
advantages.  We cannot be sure any of our patent applications will be granted or
that validity or enforceability will not be successfully challenged. The cost of
any  patent-related  litigation could be substantial even if we were to prevail.
In  addition,  we cannot be sure that  someone  will not  independently  develop
similar technologies or products,  duplicate our technology or design around the
patented  aspects of our products.  The protection  provided by patents  depends
upon a variety  of  factors,  which may  severely  limit the value of the patent
protection,  particularly in foreign countries. We intend to protect much of our
core  technology  as trade  secrets,  either  because  patent  protection is not
possible or, in our opinion,  would be less effective than maintaining  secrecy.
However,  we  cannot  be sure  that our  efforts  to  maintain  secrecy  will be
successful  or that third  parties  will not be able to develop  the  technology
independently.

         Research and Development

         Our research and  development  efforts are focused on  introducing  new
products  as well as  enhancing  our  existing  product  line.  We utilize  both
in-house and contracted  research and development  efforts.  We believe research
and development is critical to the success of our business strategy.  During the
years  2004  and  2003,   our  research  and   development   expenditures   were
approximately  $834,000 and $580,000,  respectively,  all of which were borne by
MDI.

         The  design  and  validation  of the  laboratory  version of the InPath
System,  including image analysis software, is currently in process. We examined
samples  from  patients  with  normal and  abnormal  (those  with  cancer or its
precursors) pathology reports in our studies.

         Our  research  work in the area of chemical and  biological  components
will  continue  for the  foreseeable  future  as we seek to refine  the  current
process and add additional capabilities to our analysis procedure, including the
detection of other forms of cancer and precursors to cancer.

         We have  established a relationship  with a strategic  alliance partner
and have developed the next generation automated microscopy  instrument platform
known as the Automated Image Proteomic  System or AIPS. The design  requirements
are complete and the prototypes and software development are in process.

         We anticipate the need to invest a substantial amount of capital in the
research  and  development  process,  including  the  cost of  clinical  trials,
required to complete the  development  and use of the InPath System and bring it
to market.

         Components and Raw Materials

         Low-cost  products are a key  component of our  business  strategy.  We
designed the e2 Collector  sample  collection  device using widely available and
inexpensive  silicone and plastic materials.  These materials are available from
numerous  sources and can be fabricated  into  finished  devices by a variety of
worldwide manufacturers based on our proprietary designs.

         The  instrument  components  of the  laboratory  version  of the InPath
System  are  also  available  from a  number  of  sources.  Computers,  cameras,
automated slide-staining instruments and automated slide-preparation instruments
are currently available from several large  manufacturers.  We currently have an
adequate  supply of  workstations  used in the InPath System and have contracted
for the  design  and  manufacture  of the  next  generation  of the  workstation
platform.

         Working Capital Practices

         During the fiscal year ended  December  31,  2004,  we did not sell any
InPath System products.  During 2004 and 2003, we sold several AcCell instrument
platforms  and billed and received  fees under an AcCell  fee-for-use  contract.
Based on certain settlement agreements,  we have given up all our rights to sell
the AcCell  instrument  platforms.  MDI has instead  elected to proceed with the
development of its new fully-integrated AIPS workstation, and with our strategic
alliance partner we intend to distribute this new platform. We have financed our
U.S.  operations and research and  development by raising funds through the sale
of debt or equity securities.  We will continue to use these methods to fund our
operations  until such time as we are able to  generate  adequate  revenues  and
profits from the sale of some or all of our products.


                                       11
<PAGE>

         We believe  that future  sales of the InPath  System or other  products
into foreign  markets may result in  collection  periods that may be longer than
those expected for domestic sales of these products. Our strategy will be to use
letters of credit or other secured forms of payment, whenever possible, in sales
of products in foreign markets.

         Employees

         As of March 31, 2005, we employed a total of four  full-time  employees
supplemented  by  additional   consultants  in  the  United  States.  The  staff
reductions  from prior years were  undertaken  in order to conserve  our limited
operating funds.

Financial Information About Foreign and Domestic Operations and Export Sales

         Markets  outside  of  North  America  are an  important  factor  in our
business strategy.  Any business that operates on a worldwide basis and conducts
its  business  in one or  more  local  currencies  is  subject  to the  risk  of
fluctuations  in  the  value  of  those  currencies  against  the  dollar.  Such
businesses  are also  subject to changing  political  climates,  differences  in
culture and the local practices of doing business, as well as North American and
foreign  government  actions such as export and import rules,  tariffs,  duties,
embargoes  and trade  sanctions.  We do not regard  these risks,  however,  as a
significant  deterrent to our strategy to introduce our InPath System to foreign
markets in the future. As we begin to market and sell our InPath System, we will
closely  review our  foreign  operational  practices.  We will  attempt to adopt
strategies  to minimize  risks of changing  economic  and  political  conditions
within foreign countries.

         During the fiscal year ended  December  31,  2004,  the Company did not
have any foreign  operations  and was not  conducting  any foreign  sales of its
products.  Revenue from foreign  operations in prior periods related to the sale
of products by Samba, our former wholly-owned subsidiary.

<TABLE>
<CAPTION>
                                                                                       2004           2003
                                                                                       ----           ----
<S>                                                                                 <C>           <C>
         North America:
         Revenue................................................................    $      243    $     379
         Profit (loss)..........................................................    $  (13,567)   $  (9,804)
         Total Assets...........................................................    $      529    $   7,715

         France:
         Discontinued operations................................................    $       --    $     (75)
         Gain from Involuntary conversion.......................................    $       --    $     292
         Total Assets...........................................................    $       --    $      --
</TABLE>

Risk Factors

         The risks  described  below  are not the only ones we face.  Additional
risks are described  elsewhere in this report under the Recent  Developments and
Legal Proceedings sections,  among others. There may also be risks not presently
known to us or that we  currently  deem  immaterial  that may  also  impair  our
business operations. Our business,  financial condition or results of operations
could be  materially  and  adversely  affected  by any of these  risks,  and the
trading price of our common stock could decline.

         There is a limited market for "penny stocks" such as our common stock.

         Our common stock is  considered a "penny  stock"  because,  among other
things,  our price is below $5 per  share,  it  trades  on the  Over-the-Counter
Bulletin  Board and we have net tangible  assets of less than  $2,000,000.  As a
result,  there may be little or no coverage by  security  analysts,  the trading
price may be lower, and it may be more difficult for our stockholders to dispose
of, or to obtain  accurate  quotations  as to the  market  value of,  the common
stock. Being a penny stock also could limit the liquidity of our common stock.


                                       12
<PAGE>

         The  historically  volatile market price of our common stock may affect
         the value of our stockholders' investments.

         The market price of our common  stock,  like that of many other medical
products and biotechnology companies, has in the past been highly volatile. This
volatility is likely to continue for the foreseeable  future.  Factors affecting
potential volatility include:

         o        general economic and other external market factors;

         o        announcements of mergers, acquisitions, licenses and strategic
                  agreements;

         o        announcements of private or public sales of securities;

         o        announcements  of  new  products  or  technology  by us or our
                  competitors;

         o        ability to finance our operations;

         o        fluctuations in operating results; and

         o        announcements of the FDA relating to products.

         Our  common  stock is  unlikely  to  produce  dividend  income  for the
         foreseeable future.

         We have never paid a cash  dividend  on our common  stock and we do not
anticipate  paying cash  dividends for the  foreseeable  future;  our ability to
declare dividends on our common stock is further limited by the terms of certain
of the Company's  other  securities,  including  several series of its preferred
stock. We intend to reinvest any funds that might otherwise be available for the
payment of dividends in further development of our business.

         Our common stock is subject to dilution,  and an  investor's  ownership
         interest and related value may decline.

         We are authorized to issue up to 10,000,000  shares of preferred stock.
As of December 31, 2004, we had 82,655 shares of Series A convertible  preferred
stock outstanding,  which convert into approximately 36,102 shares of our common
stock; 365,106 shares of Series B convertible preferred stock outstanding, which
convert into approximately  1,460,424 shares of our common stock; 262,833 shares
of  Series  C  convertible  preferred  stock  outstanding,  which  convert  into
approximately  1,314,165 shares of our common stock;  175,000 shares of Series D
convertible  preferred  stock  outstanding,  which  convert  into  approximately
1,750,000 shares of our common stock; and 233,598 shares of Series E convertible
preferred stock outstanding,  which convert into approximately  6,423,938 shares
of our common stock. There are cumulative  dividends due on the Series B, Series
C, Series D, and Series E convertible preferred stock, which may be paid in kind
in shares of our common stock. Our Certificate of  Incorporation  (as amended to
date) gives our board of directors authority to issue the remaining undesignated
shares of preferred stock with such voting rights, if any, designations, rights,
preferences and limitations as the Board may determine.

         At  December  31,  2004,  we had  outstanding  warrants  to purchase an
aggregate 24,810,329 shares of our common stock, outstanding options to purchase
approximately   4,947,727   shares  of  our  common  stock,  and  450,000  stock
appreciation rights, which are convertible into approximately  289,286 shares of
common stock.

         At December 31, 2004,  outstanding  convertible  promissory  notes were
convertible into approximately  56,026,667 shares of our common stock. Under the
provisions of certain outstanding convertible promissory notes, the holders have
the right to receive a warrant to  purchase  additional  shares of common  stock
upon  exercise of the  conversion  right.  We are unable to determine  the exact
number of additional  warrants to purchase  shares of our common stock that will
be issuable  upon  conversion of the notes,  although it could be  approximately
13,778,000 shares.

         At December 31, 2004,  we had  approximately  14,179,606  shares of our
common stock  reserved for future stock options and 160,000 shares of our common
stock reserved for future sale to employees.


                                       13
<PAGE>

         The issuance of shares of our common stock upon the  conversion  of our
preferred stock or notes, or upon exercise of outstanding  options and warrants,
would cause  dilution  of existing  stockholders'  percentage  ownership  of the
Company. Holders of our common stock do not have preemptive rights, meaning that
current  stockholders  do not have the right to purchase any new shares in order
to maintain their proportionate  ownership in the Company.  Such stock issuances
and the resulting  dilution could also adversely  affect the price of our common
stock.

         We have a limited  operating  history  and  there are  doubts as to our
         being a going concern.

         We have a limited operating  history.  Our revenues,  from inception in
March 1998 through 2003, were derived almost  entirely from sales by Samba,  our
former wholly-owned  subsidiary.  The assets of Samba were sold in December 2003
as part of the French  Commercial  Court  ordered  liquidation  and MDI lost all
rights and title to the assets,  including Samba's software. MDI has sold only a
very limited amount of our InPath System  products to date and cannot be certain
as to when sales of the Company's products might occur in the future.

         We  will   continue  to  devote   substantial   resources   to  product
development.  We anticipate  that we will continue to incur  significant  losses
unless and until some or all of our products have been successfully  introduced,
if ever, into the marketplace.

         We  have  incurred   substantial  losses  and  have  limited  financial
resources.   Consequently,  our  independent  auditors  have  noted  that  these
conditions  raise  substantial  doubt as to our  ability to  continue as a going
concern. Our financial statements do not include any adjustments relating to the
recoverability  and  classification  of asset carrying amounts or the amount and
classification  of  liabilities  that  may  result  from  the  outcome  of  this
uncertainty.   Moreover,  the  going  concern  explanatory  paragraph  may  make
obtaining additional financing more difficult or costly.

         We continue to have severe liquidity problems.

         We have a history of losses and continue to experience severe liquidity
problems,  which affect our overall  ability to operate our business,  including
the ability to employ  adequate staff and conduct  ongoing  studies and clinical
trials of our products. Failure to raise adequate financing to meet our business
needs could materially jeopardize MDI and its ability to conduct business. There
can be no assurance that we will be able to secure necessary funds.

         We may not be able to meet our short-term capital requirements.

         We believe that our existing  capital  resources are not  sufficient to
meet the short-term  requirements of the Company. These short-term  requirements
include a significant amount of liabilities and promissory notes in arrears.  In
addition, in January 2005 we used a large portion of our limited available funds
to satisfy  federal  payroll tax liabilities  from 2001.  Therefore,  we need to
raise additional  capital to support our operations.  We do not have any current
commitments for additional  funds, and our management  cannot be certain that we
will be able to raise such funds.

         It is  unlikely  that we will be able to meet  our  short-term  funding
requirements  through the sale of our products and services.  We anticipate that
these  short-term  funding needs will require the sale or issuance of additional
shares of common stock or instruments  convertible into common stock. Such sales
or  issuances,  if any,  would have a  dilutive  effect on the  holdings  of our
stockholders  and the value of our common stock. We cannot be certain what level
of dilution,  if any, may occur or if we will be able to complete any such sales
of common stock or other securities in the future.

         Our operating  business plan for 2004 anticipated that we would need to
raise new equity.  We were not able to raise the  necessary  level of new equity
and had to reduce our  operations  significantly  during  the year.  The lack of
sufficient new equity continued through the first quarter of 2005.

         A failure to raise  sufficient  additional funds would adversely affect
our ability to meet our  short-term  capital  requirements,  resume our clinical
tests and meet our product timelines, and/or continue as a going concern.

         We may not be able to meet our long-term capital requirements.

                                       14
<PAGE>

         We do not know if we will be able to sustain our  long-term  operations
through  future  revenues.  Whether  we will need to raise  additional  funds to
support our long-term  operations  is influenced by many factors,  including the
costs,  timing and success of efforts to develop products and market  acceptance
of our products.

         Our  products  are subject to  government  regulation  and they may not
         receive necessary government approvals.

         The sale and use of our  products in the United  States is regulated by
the FDA. We must meet significant FDA requirements  before we receive  clearance
to market our  products.  Included in these FDA  requirements  is the conduct of
lengthy and  expensive  clinical  trials to prove the safety and efficacy of the
products.  Until we complete such clinical trials, our products may be used only
for research purposes or to provide supplemental  diagnostic  information in the
United States.  We have FDA approval for one of our products,  the e2 Collector.
We plan to start  clinical  trials for the  Cocktail-CVX  in 2005 (although such
trials are contingent on the receipt of adequate capital).  We cannot be certain
that our  product  development  plans  will  allow  these  additional  trials to
commence or be completed  according to plan or that the results of these trials,
or any future trials,  when  submitted to the FDA along with other  information,
will result in FDA clearance to market our products in the United States.

         Sales of medical devices and diagnostic tests outside the United States
are  subject  to  foreign  regulatory  requirements  that vary from  country  to
country.  The time required to obtain regulatory  clearance in a foreign country
may be longer or shorter than that required for FDA marketing clearance.  Export
sales of certain  devices that have not received FDA marketing  clearance may be
subject to regulations and permits, which may restrict our ability to export the
products to foreign  markets.  If we are unable to obtain FDA  clearance for our
products,  we may need to seek foreign  manufacturing  agreements  to be able to
produce and deliver our products to foreign  markets.  We cannot be certain that
we will be able to secure such foreign  manufacturing  agreements  on acceptable
terms, if at all.

         We may not be able to compete with  companies  that are larger and have
         more resources.

         We  compete in the  medical  device and  diagnostics  marketplace  with
companies  that are much larger and have greater  financial  resources  than the
Company.  We may not succeed in  developing  technologies  and products that are
more effective than those being developed by our  competitors.  Our technologies
and products may be rendered  obsolete or noncompetitive as a result of products
introduced  by our  competitors.  Most  of our  competitors  have  substantially
greater   financial   and   technical   resources,   production   and  marketing
capabilities,  and  related  experience,  which  may  enable  them  to  develop,
manufacture and market their products more  successfully and at a lower cost. In
addition,  many of our  competitors  have  significantly  greater  experience in
conducting  preclinical  testing and clinical  trials of products and  obtaining
regulatory approvals to market such products.  Accordingly,  our competitors may
succeed in obtaining FDA approval for products more rapidly, which may give them
an advantage in achieving market acceptance of their products.

         We may not be able to market our products.

         We do not intend to  maintain a direct  sales  force to market and sell
our products.  Therefore, in order to successfully market and sell our products,
we must be able to negotiate  profitable  marketing  and sales  agreements  with
organizations  that have direct  sales  forces  calling on domestic  and foreign
market  participants  that  may  use  our  products.  If  we  are  not  able  to
successfully negotiate such agreements,  we may be forced to market our products
through our own sales force.  We cannot be certain that we will be successful in
developing and training such a sales force,  should one be required,  or that we
will have the financial resources to carry out such development and training.

         We may not be able to adequately protect our intellectual property.

         We hold a variety of patents  and  trademarks  and have  applied  for a
significant number of additional patents and trademarks with the U.S. Patent and
Trademark  Office and foreign patent  authorities.  We intend to file additional
patent and trademark  applications  as dictated by our research and  development
projects and business interests.  We cannot be certain that any of the currently
pending patent or trademark applications,  or any of those which may be filed in
the future, will be granted or that they will provide any meaningful  protection
for our products or technologies.


                                       15
<PAGE>

         We protect much of our core  technology  as trade  secrets  because our
management  believes  that patent  protection  would not be possible or would be
less effective than  maintaining  secrecy.  We cannot be certain that we will be
able to  maintain  secrecy  or that a  third-party  will not be able to  develop
technology independently.

         The cost of  litigation  to uphold the  validity  of a patent or patent
application,  prevent  infringement or protect trade secrets can be substantial,
even if we are  successful.  Furthermore,  we cannot be certain that others will
not develop similar technology independently or design around the patent aspects
of our products.

         The loss of key personnel could cause our business to suffer.

         The success of our  current and future  operations  will  depend,  to a
significant  extent, upon the experience,  abilities,  and continued services of
key  personnel,  and a loss of the  services of any of our current  executive or
research  staff  could  cause  our  business  to  suffer.  MDI  has  experienced
significant  turnover in its senior  management  in the past and there can be no
assurance that we will be able to attract and retain key personnel.

Item 2.           Description of Property

         We occupy  approximately  2,540  square feet of leased  space at 414 N.
Orleans St.,  Suites 502 and 503,  Chicago,  Illinois  60610,  under a five-year
lease that expires in October  2008.  This space houses our  executive  offices,
research laboratory,  and engineering  development  facilities.  We consider our
facilities  to  be  well  utilized,  well  maintained,  and  in  good  operating
condition. Further, we consider the facilities to be suitable for their intended
purposes and to have capacities adequate to meet current and projected needs for
our  operations.  MDI does not have any  policies  regarding  investing  in real
estate,  and has not had in the past and does not expect in the future to invest
in real estate.

Item 3.           Legal Proceedings

Settled in 2004

         Garrett Realty. Prior to MDI's acquisition of AccuMed,  Garrett Realty,
Inc.  filed suit against  AccuMed for unpaid rent and related  expenses  under a
lease for office  space  located in  Chicago,  Illinois  (Circuit  Court of Cook
County,  Illinois (Case No. 01 M1 725821)).  Garrett  originally claimed amounts
due of  approximately  $50,000.  Following  completion of MDI's  acquisition  of
AccuMed,  management  vacated  AccuMed's  leased facility and  consolidated  its
operations into MDI's facility. However, Garrett continued to claim ongoing rent
and amended its complaint in 2002 claiming approximately $148,000 in unpaid rent
and related  legal costs  through  July 2002.  On July 18,  2002,  judgment  was
entered in favor of Garrett in the amount of approximately $157,000. On December
20, 2002, pursuant to a court order, Garrett seized  approximately  $12,500 from
an MDI bank  account as a partial  payment  against  the  judgment  amount.  MDI
recorded a $290,000 lease  obligation in accounting for the AccuMed merger based
on the present value of the future payments,  but contested the right of Garrett
to pursue collection of the judgment against the assets of MDI. During the first
quarter  of 2004,  MDI  reached  a  preliminary  settlement  on the  outstanding
judgment amounting to approximately $157,000 (plus interest) at that time, which
required  six monthly  payments.  MDI has made the first four  required  monthly
payments. MDI also agreed to issue 275,000 shares of its common stock as part of
the final  settlement.  The parties are  currently  at an impasse  concerning  a
dispute  over the  transfer of the MDI shares,  but MDI expects that this matter
will be resolved amicably.  Management believes that it has accrued a sufficient
amount as of December  31,  2004  relating  to this  obligation.  In March 2005,
Garrett  assigned  its right,  title and  interest in the judgment to The Lumber
Company.

         Bowne of Chicago, Inc. On January 2, 2003, Bowne of Chicago, Inc. filed
suit against MDI (Circuit Court of Cook County, Illinois (Case No. 03 L 000009))
claiming  approximately  $342,000,  plus  interest and attorney  fees and costs,
related to financial  printing  service fees  provided to MDI. In May 2004,  the
parties entered into a settlement  agreement whereby the court entered an agreed
judgment in the amount of $342,061  in favor of Bowne.  The parties  agreed that
Bowne  would  stay  enforcement  of the  judgment  so  long as MDI  honored  its
agreed-to monthly settlement payments, which are expected to conclude in 2006.

         MonoGen.  In  July  2002,   MonoGen,   Inc.  initiated  an  arbitration
proceeding  against the Company and its  subsidiaries,  AccuMed and  Oncometrics
Imaging Corp.  (collectively,  the "MDI Group"), alleging that the MDI Group had
violated  MonoGen's  rights  under  certain  license  agreements  (the  "License
Agreements")  separately  entered into by the subsidiaries with MonoGen prior to
the Company's acquisition of the subsidiaries.  In December 2002, the parties to
the  arbitration  entered into an agreement (the  "Technology  Agreement")  that
purported  to  settle  the  issues  that  had  been  raised  in the  arbitration
complaint.  However, the Technology Agreement did not have the desired effect of
ending the  dispute,  and in May 2003 the MDI Group  filed  suit in the  Circuit
Court of Cook County,  Illinois (the "State Court Case") against MonoGen and two
individuals  affiliated  with  MonoGen  in  an  attempt  to  obtain  a  judicial
resolution  of the issues  that had been  raised in the  arbitration.  The State
Court Case also sought to resolve  certain  allegations  of breach of  fiduciary
duties made by the Company  against the President of MonoGen,  Norman  Pressman,
who had been the  President  of both  AccuMed  and  Oncometrics  at the time the
License Agreements had been entered into by the parties.


                                       16
<PAGE>

         MonoGen resisted the State Court Case by, among other things, insisting
that the  dispute  could only be  settled in  arbitration,  as  required  in the
License Agreements. The claim as to MonoGen was dismissed on that basis. MonoGen
subsequently  filed  amended  demands  against the MDI Group in the  arbitration
proceeding,  which  had  never  been  dismissed.  In order to avoid  unnecessary
litigation  expenses,  in February  2004, the MDI Group agreed to a dismissal of
the State Court Case, leaving the arbitration  proceeding as the principal venue
for a resolution of the dispute over the license rights obtained by MonoGen from
the Company's subsidiaries.

         In October  2004,  the parties to the  arbitration  attempted to settle
most of the claims brought in that proceeding by virtue of a proposed Settlement
Agreement  that  provided  for the Company and AccuMed to,  among other  things,
transfer certain patents,  patent  applications and other intellectual  property
rights, as well as certain  identified AcCell units and spare parts, to MonoGen,
and to simultaneously issue to MonoGen a joint unsecured installment  promissory
note in the principal amount of $305,000. The note called for an initial payment
of $25,000 to be made by the Company and AccuMed to MonoGen on November 1, 2004,
with  subsequent  monthly  payments  of  $10,000  each to be made until the full
principal balance has been paid. The Settlement  Agreement also provided for the
termination of the License Agreements and the Technology Agreement, but reserved
all  rights of the  parties in regard to any  matters  that may  continue  to be
disputed  among them and the British  Columbia  Cancer Agency arising out of, or
related to, the License Agreement between Oncometrics and MonoGen.

         Inasmuch as the AcCell  units and spare parts were not  transferred  to
MonoGen  within the time period  prescribed  in the  Settlement  Agreement,  and
because  the initial  $25,000  payment to be made under the note was not paid by
its due date,  MonoGen  delivered a notice of default to the Company and AccuMed
in November 2004. If the default asserted in the notice is not cured,  there are
a number of remedies  that may be available to MonoGen  under the  provisions of
the Settlement  Agreement and the note, one of which is the possibility that the
full principal  amount of the note may be accelerated  and declared  immediately
due and payable. To date, no member of the MDI Group has received further notice
in regard to the asserted default,  although not all of the remedies that may be
available  to MonoGen  in regard to such  default  would  require  that  further
notices be given.

         British  Columbia  Cancer Agency.  In December 2004,  British  Columbia
Cancer  Agency  settled its dispute  with MDI,  AccuMed and  Oncometrics,  which
dispute  concerned certain  technology and patent rights.  The BCCA claimed that
our  subsidiary,  Oncometrics,  breached a 1989 master  agreement  that had been
transferred to Oncometrics (which master agreement transferred certain rights to
technology  and patents) by licensing  certain of the  transferred  intellectual
property to a third party.  As part of the  settlement  agreement  resolving the
arbitration  dispute,  the BCCA agreed to restore  Oncometrics  and pay all fees
associated therewith. The parties also agreed that the master agreement would be
formally  terminated,  and MDI  and  its  subsidiaries  would  transfer  certain
intellectual  property  assets and rights to the BCCA. MDI and its  subsidiaries
also had to agree to  provide  notice  of  termination  of the  license  between
Oncometrics and the third party that  precipitated  the dispute.  The settlement
agreement also included mutual covenants not to sue, provided certain conditions
were met,  and an  acknowledgment  from the BCCA that it would  discontinue  its
arbitration  case  against  the  Company  and its  subsidiaries,  provided  such
companies  were  not in  breach  of the  settlement  agreement.  The  settlement
agreement  with the BCCA was made as of  December  31,  2004,  with an  expected
closing date for the transactions contemplated thereby of January 28, 2005.

         Bruce Patterson, M.D./Invirion, Inc. On July 2, 2003, Dr. Patterson and
his company  Invirion,  Inc. filed suit against MDI in the Circuit Court of Cook
County,  Illinois  (03 L  7995).  Dr.  Patterson  sought  approximately  $86,000
pursuant to an agreement for his scientific consulting services.  Invirion, in a
separate claim, sought  approximately  $57,500 for certain HPV test kits that it
claims were sold to MDI. In December 2004, the parties agreed to settle the case
and the lawsuit  was  dismissed  in January  2005.  MDI has no further  monetary
obligations under the settlement.

Pending as of December 31, 2004 and Settled in 2005


                                       17
<PAGE>

         The  Cleveland  Clinic  Foundation.  On March 28, 2003,  The  Cleveland
Clinic  Foundation filed suit against MDI (U.S.  District Court for the Northern
District of Ohio, Eastern Division (Case No. 1:03CV0561)) seeking  approximately
$315,000 for certain  clinical  trial work  conducted by the  Foundation  in the
Peoples  Republic  of China on behalf of MDI.  On  December  8, 2003,  a default
judgment in the amount of $260,000 was entered  against MDI. In March 2005,  the
parties agreed in principle to terms of settlement and are currently  working on
a definitive settlement agreement.  MDI's last settlement payment is expected to
be in July 2005, at which point it is expected that the default judgment will be
deemed fully satisfied.

         Daniel Kussworm,  Jennifer Kawaguchi, and Susan Keesee. On February 18,
2004, former MDI employees Daniel Kussworm, Jennifer Kawaguchi, and Susan Keesee
filed suit against MDI and former Chairman Peter Gombrich,  in the Circuit Court
of Cook  County,  Illinois (04 L 1941) to recover  wages and other  compensation
allegedly  due them.  These claims were  settled and fully  satisfied in January
2005, and the lawsuit has been dismissed.

         Ungaretti & Harris.  On May 31, 2004,  the law firm  Ungaretti & Harris
LLP filed an amended  complaint against MDI in the Circuit Court of Cook County,
Illinois (04 L 1101),  to collect unpaid fees for legal services  rendered prior
to December 31, 2003. In January 2005,  the court  entered  summary  judgment in
favor of Ungaretti & Harris LLP and against MDI in the amount of $195,500,  plus
costs of suit. The parties  subsequently  entered into a settlement agreement to
satisfy the judgment. Under the agreement,  MDI's payments to Ungaretti & Harris
are expected to conclude in 2006.

Pending as of December 31, 2004 and March 31, 2005

         Hill & Barlow LLP. In February  2003,  Hill & Barlow LLP, a now defunct
law firm,  filed a complaint  against MDI in the Trial Court of the Commonwealth
of Massachusetts (000740), seeking the collection of unpaid legal fees. Judgment
was entered  against MDI in the amount of $16,842,  plus costs and interest.  In
April 2004,  the  parties  entered  into a  settlement  agreement.  The terms of
settlement  have not been fully  satisfied by the parties  because a dispute has
arisen  concerning  the  return  of  MDI's  files.  Given  that the law firm has
dissolved, management does not expect a final resolution of this matter.

         Monsun.  On January  9,  2003,  Monsun,  AS filed  suit  against  Peter
Gombrich,  our former  Chairman  and CEO (U.S.  District  Court for the Northern
District of Illinois,  Eastern Division (Case No. 03 C 0184)), claiming $500,000
plus  consequential  damages for failure to make payment in compliance  with the
terms of a personal  guaranty signed by Mr. Gombrich.  The guaranty was executed
in  connection  with  Monsun's  grant of an extension in the maturity  date of a
convertible promissory note issued by MDI on November 1, 2000 in favor of Monsun
in the principal amount of $500,000.  The note had an original  maturity date of
November 1, 2001.  The maturity  date of the note was initially  extended  until
January 31, 2002 and subsequently to April 1, 2002 and finally to July 31, 2002.
Monsun  granted the final  maturity date  extension in exchange for the guaranty
and various  warrants  issued by MDI entitling the holder to purchase  shares of
its common stock at various prices.

         In November  2002,  the Board of  Directors  approved  the  issuance of
200,000 shares of common stock to Monsun to satisfy a default  penalty clause in
the guaranty.  The terms of the guaranty required that Monsun receive registered
shares of our common stock;  however,  in order to comply with securities  laws,
MDI issued the shares of common stock to Monsun with a restrictive  legend.  MDI
recorded the  principal  amount of the note plus accrued and unpaid  interest to
December  31,  2003 as a note  payable on its  records.  In March  2004,  Monsun
obtained a judgment  against  Mr.  Gombrich in the amount of  $675,199.  In July
2004,  Monsun obtained a second  judgment  against Mr. Gombrich in the amount of
$438,419  for  attorney  fees and  costs  incurred  in  enforcing  the  guaranty
agreement.  This award for legal fees has been recorded as an accrued expense on
MDI's financial statements.  Those judgments remain unsatisfied.  Monsun has not
filed suit  directly  against  MDI to recover  any amounts due under the note or
otherwise.

         The  Lash  Group,  Inc.  On June 10,  2004,  The Lash  Group,  Inc.,  a
healthcare  consulting  firm, filed a lawsuit against the Company in the General
Court of Justice, Superior Court Division, in Mecklenburg County, North Carolina
(04 CVS  10367).  The Lash Group seeks  approximately  $94,000,  plus  interest,
attorney  fees and court costs,  for the alleged  breach of an  agreement,  with
respect to which Peter Gombrich, our former Chairman and CEO, and MDI are sought
to be held  primarily  liable.  This action  remains  unresolved and the Company
intends to contest the claims.


                                       18
<PAGE>

         Medical  College of Georgia  Research  Institute,  Inc. On November 18,
2003, the Medical College of Georgia Research Institute, Inc. filed suit against
MDI in the Superior Court of Richmond County,  Georgia (Case No. 2003-RCCV-1211)
to collect amounts  allegedly due pursuant to an agreement to provide a clinical
study for MDI. Georgia Research  Institute  claimed that the principal amount of
the obligation  due from MDI was  approximately  $86,700,  but sought to collect
approximately  $315,300  pursuant to an interest  provision of 10% per month. On
October  27,  2004,  the court  entered  summary  judgment  in favor of  Georgia
Research  Institute  and against  MDI in the amount of  $68,404.  MDI expects to
propose terms of  settlement  to satisfy this judgment in the second  quarter of
fiscal 2005.

         Eric  Gombrich.  On May 19, 2004,  former  employee Eric Gombrich filed
suit against MDI in the Circuit Court of Cook County,  Illinois (04 L 5661). Mr.
Gombrich claims that MDI breached a written employment contract and that it owes
him $631,258 (plus  interest) and 300,000 shares of MDI stock.  MDI made initial
attempts to resolve this dispute,  and is currently  contesting  Mr.  Gombrich's
action.

         The Regents of the  University  of  California.  On May 28,  2004,  The
Regents of the  University of California  filed suit against MDI in the Superior
Court of California, County of San Francisco (CGC-04-431944).  The University of
California  claims that MDI breached an agreement to sponsor a research  project
for a period of one year. The complaint seeks compensatory damages in the amount
of $57,530 and additional lost opportunity  damages in the amount of $75,220. In
January 2005,  the  University of  California  requested  that the court enter a
default  judgment  against MDI in the amount of $132,827,  which  includes court
costs.  The  parties are  currently  involved in  settlement  negotiations  with
respect to this matter.

         Arthur  Lipper III. On July 8, 2004,  Arthur Lipper III filed a lawsuit
against MDI in the  Circuit  Court of Cook  County,  Illinois  (04 L 7671).  Mr.
Lipper  claims  that MDI  breached a  consulting  services  agreement  and seeks
$60,000, plus interest and court costs. MDI is contesting this claim.

         Kanan,  Corbin,  Schupak & Aronow,  Inc.  On August  12,  2004,  Kanan,
Corbin,  Schupak & Aronow, Inc. filed suit against AccuMed  International,  Inc.
f/d/b/a  Molecular  Diagnostics,  Inc.  in the  Circuit  Court  of Cook  County,
Illinois (04 L 9109),  seeking  $59,678,  plus  interest  and court  costs,  for
services  provided.  MDI has not yet been  formally  served with the summons and
complaint in this case.

         Reid Jilek. On October 20, 2004, Reid Jilek filed a lawsuit against MDI
in the Circuit  Court of Cook County,  Illinois (04 CH 17375).  Mr. Jilek claims
that MDI breached a 2003 services agreement and that MDI subsequently breached a
2004  settlement  agreement.  Mr. Jilek seeks $180,000  pursuant to the services
agreement or, alternatively,  $114,000 pursuant to the settlement agreement. Mr.
Jilek also seeks a court order that MDI issue him 1,500,000 warrants to purchase
MDI stock at $0.17 per share pursuant to the services agreement.  MDI previously
issued to Mr. Jilek  warrants to purchase an  aggregate 1 million  shares of its
common stock, and intends to contest Mr. Jilek's claims.

New Proceedings 2005

         Esoterix,  Inc.  Esoterix,  Inc.  made a claim against MDI for $19,725,
arising from a laboratory services agreement that it maintains MDI breached.  In
March 2005,  Esoterix,  Inc.  filed suit against MDI to pursue this claim in the
Circuit Court of Cook County,  Illinois (05 M1 116482). MDI is currently engaged
in settlement discussions with Esoterix.

Miscellaneous

         Other Creditors; Wage and Related Claims. MDI is a defendant in several
lawsuits  brought by current or former  unsecured  creditors to collect past due
amounts for goods and services.  MDI has recorded the amounts due in its records
and is  attempting  to  settle  these  suits  and  unfiled  claims.  MDI is also
currently  negotiating the settlement of wage claims brought by former employees
seeking to collect for unpaid wages and severance benefits. MDI has recorded the
amounts due in its records and is attempting  to settle these  claims.  MDI does
not consider any of these claims to be material.

         Ketchum  Public  Relations.  In June 2004,  MDI settled a $72,000 claim
made by Ketchum Public Relations. No litigation was ever filed by Ketchum. It is
expected  that MDI's  monthly  settlement  payments to Ketchum will  conclude in
2005.

Item 4.        Submission of Matters to a Vote of Security Holders


                                       19
<PAGE>

         There were no matters  submitted to a vote of  stockholders  during the
fourth quarter of 2004.

                                     PART II

Item 5.      Market for Common Equity and Related Stockholder Matters; Purchases
of Equity Securities by the Small Business Issuer and Affiliated Purchasers

Market Information

         Our common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol "MCDG.OB." Prior to September 25, 2001, our common stock traded under
the symbol "AMPM" and between May 27, 2003 and October 6, 2003, our common stock
traded on the Over-the-Counter Pink Sheets under the symbol "MCDG."

         The  following  table  lists the high and low bid  information  for our
common  stock for the periods  indicated,  as  reported on the  Over-the-Counter
Bulletin  Board.  These  quotations  reflect  inter-dealer  prices,  and may not
include retail mark-ups,  mark-downs, or commissions, and may not reflect actual
transactions.

<TABLE>
<CAPTION>
                                                                                                        Range of Common
                                                                                                             Stock
                                                                                                             -----
                                                                                                       High         Low
                                                                                                       ----         ---
<S>                                                                                                <C>          <C>
         Year Ended December 31, 2004
         1st Quarter..........................................................................     $     0.37   $    0.11
         2nd Quarter..........................................................................     $     0.26   $    0.10
         3rd Quarter..........................................................................     $     0.16   $    0.09
         4th Quarter..........................................................................     $     0.12   $    0.05

         Year Ended December 31, 2003
         1st Quarter..........................................................................     $     0.21   $    0.08
         2nd Quarter..........................................................................     $     0.42   $    0.20
         3rd Quarter..........................................................................     $     0.37   $    0.21
         4th Quarter..........................................................................     $     0.25   $    0.15
</TABLE>

Holders

         As of March 31, 2005, we had approximately  1,406 record holders of our
shares of common stock.  This number does not include other persons who may hold
only a beneficial interest, and not an interest of record, in our common stock.

Dividends

         We have not paid a cash dividend on shares of our common stock, and the
Board of  Directors  is not  contemplating  paying  dividends at any time in the
foreseeable future. The terms of certain of the Company's securities,  including
its Series B, C, D and E preferred stock,  provide that so long as such security
is  outstanding  the Company shall not declare any dividends on its common stock
(or any other stock junior to such  security)  except for  dividends  payable in
shares of stock of the Company of any class junior to such  security,  or redeem
or purchase or permit any  subsidiary  to purchase any shares of common stock or
such junior  stock,  or make any  distributions  of cash or  property  among the
holders of the  common  stock or any junior  stock by the  reduction  of capital
stock or otherwise, if any dividends on the security are then in arrears.

         We paid non-cash  dividends,  in the form of newly issued shares of our
common  stock,  amounting  to  $1,324,818  and  $444,297  during  2004 and 2003,
respectively, to holders of shares of our preferred stock who elected to convert
their preferred stock and cumulative dividends thereon into shares of our common
stock.  We have a contingent  obligation to pay cumulative  dividends on various
series  of  our  convertible   preferred  stock  in  the  aggregate   amount  of
approximately $2,927,000,  which we intend to pay through the issuance of shares
of our common stock,  if and when the holders of the  preferred  shares elect to
convert their shares into common stock.  Cumulative and deemed dividends for the
various series of convertible  preferred stock were approximately  $3,570,000 at
December 31, 2004, including $643,000 in deemed dividends arising as a result of
beneficial  conversion  features on Series B and Series C convertible  preferred
stock sold during 2001.


                                       20
<PAGE>

Stock Transfer Agent

         Our stock transfer agent is LaSalle Bank NA, 135 South LaSalle  Street,
Chicago, IL 60603, and its telephone number is (312) 904-2000.

Securities Authorized for Issuance under Equity Compensation Plans

         The following table presents  information about the equity compensation
plans of the Company as of fiscal-year  end December 31, 2004. See also Note 8 -
Stockholders'  Equity and Note 11 - Equity  Incentive  Plan and  Employee  Stock
Purchase Plan in the Notes to our Consolidated  Financial Statements for further
information.

                      Equity Compensation Plan Information

<TABLE>
<CAPTION>
                                                                                                     Number of securities
                                                   Number of securities                             remaining available for
                                                    to be issued upon       Weighted-average     future issuance under equity
                                                      exercise of          exercise price of          compensation plans
                                                   outstanding options,   outstanding options,      (excluding securities
                 Plan category                     warrants and rights    warrants, and rights     reflected in column (a))
                                                           (a)                     (b)                        (c)
<S>                                                     <C>                      <C>                      <C>
Equity Compensation Plans Approved by Security
Holders
  1999 Equity Incentive Plan (as amended)-
20,000,000 shares                                        4,947,728               $0.6891                  14,179,606
  1999 Employee Stock Purchase Plan-
200,000 shares                                                  --                    --                     160,415
Equity Compensation Plans Not Approved by
Security Holders
  Warrants issued with debt (1)                         11,369,945               $0.3852                           0
  Warrants issued for financial services (2)             7,361,317               $0.3265                           0
  Warrants issued for IR services (3)                    1,180,000               $0.5636                           0
  Warrants issued of other services (4)                  1,076,493               $0.0887                           0
  Warrants issued for asset acquisitions (5)               172,120               $0.8200                           0
  Warrants from AccuMed acquisition (6)                  1,074,056               $7.1769                           0
  Warrants issued in settlement of debt (7)                503,984               $0.1644                           0
                                                  ----------------------- ---------------------- ------------------------------
Total                                                   27,685,643               $0.6821                  18,885,571
                                                  ======================= ====================== ==============================
</TABLE>

1)       MDI has and will most likely  continue to attach  warrants to issuances
         of debt as an  additional  consideration  to  debt  holders  in lieu of
         payment of higher interest rates that likely would be required based on
         market  interest  rates  prevalent at the time of the debt issuance and
         the significant level of risk involved based on the financial condition
         of MDI.

2)       MDI has and will most likely  continue to issue  warrants to  financial
         advisors  who  assist  with  the  placement  of  MDI's  debt or  equity
         instruments.  The issuance of warrants to these advisors  significantly
         reduces the cash costs that would  otherwise be associated with raising
         capital.

3)       MDI has generally  included  warrants in  compensation  agreements  for
         providers of investor relations and/or public relations services.  This
         practice  significantly  reduces the cash costs to MDI to obtain  these
         services.

4)       From time to time,  MDI has issued  warrants to  providers of legal and
         consulting services in lieu of cash payments for those services.


                                       21
<PAGE>

5)       During 2001, MDI issued warrants under an agreement to acquire a thirty
         percent  interest in Cell  Solutions,  LLC, a company  assisting in the
         development of MDI's products.

6)       In September  2001, MDI completed the acquisition of AccuMed by merging
         it into a  wholly-owned  subsidiary  of MDI.  As a result,  MDI assumed
         stock options and warrants outstanding on the records of AccuMed at the
         time of the acquisition. The remainder of the options that were assumed
         in the acquisition are included in total options  outstanding under the
         Company's 1999 Equity Incentive Plan.

7)       During  2004,  MDI issued  warrants in the  settlement  of  outstanding
         accounts payable vendor amounts.

Recent  Sales  of  Unregistered  Securities;  Use of  Proceeds  from  Registered
Securities

         Charter Amendment

         At the Company's 2004 Annual Meeting of  Stockholders  held on July 29,
2004,  stockholders  approved  an  amendment  to the  Company's  Certificate  of
Incorporation  (as amended to date) to increase the number of authorized  shares
of common stock of the Company  from  100,000,000  to  300,000,000  shares.  The
Company filed a Certificate  of Amendment to its charter to effect such increase
with the Delaware Secretary of State on August 6, 2004.

         Issuance of Securities

         Bridge III  Convertible  Promissory  Notes.  Beginning in January 2004,
Bathgate  Capital  Partners,  LLC  began  an  issue of  Bridge  III  Convertible
Promissory  Notes to  accredited  investors on behalf of the Company.  The notes
bear interest at 10% per annum payable,  on a semi-annual  basis, in kind in the
form of shares of common  stock for the first two years and then in cash for the
remaining three years until due December 31, 2008. The note conversion price and
the value of common  shares  paid in kind as  interest  is $0.10 per share.  The
notes are  convertible  at any time into the common  stock of MDI,  although the
notes will  automatically  convert if the last sales price of the stock is $0.30
or higher for twenty consecutive  trading days, the daily average trading volume
is at least 250,000 shares,  and the underlying  shares are registered for sale.
The  holders  were also  granted a  security  position  in all of the  Company's
assets.  MDI granted each note holder the right to receive 25% warrant  coverage
on all money invested;  therefore, for every $100,000 invested, an investor will
receive  warrants to purchase 25,000 shares of common stock at an exercise price
of $0.15 per share.  The warrants  expire on December  31, 2008.  The Bridge III
offering  closed in May 2004 after the Company had issued  $1,662,500  in Bridge
III convertible promissory notes.

         Bridge IV Convertible Promissory Notes. Beginning in February 2004, MDI
began  a  separate  offering  of  Bridge  IV  Convertible  Promissory  Notes  to
accredited  investors.  The notes bear interest at 10% per annum  payable,  on a
semi-annual  basis,  in kind in the form of shares of common stock for the first
two years and then in cash for the remaining  three years until the December 31,
2008 maturity  date.  The note  conversion  price and the value of common shares
paid in kind as interest is $0.10 per share.  The notes are  convertible  at any
time into the common stock of MDI, although the notes will automatically convert
if the last sales  price of the stock is $0.30 or higher for twenty  consecutive
trading days, the daily average trading volume is at least 250,000  shares,  and
the  underlying  shares are registered for sale. The holders were also granted a
security position in all of the Company's  assets.  MDI granted each note holder
the right to receive 25% warrant coverage on all money invested;  therefore, for
every $100,000  invested,  an investor will receive  warrants to purchase 25,000
shares of common  stock at an exercise  price of $0.15 per share.  The  warrants
expire on December  31, 2008.  The Bridge IV offering  closed in June 2004 after
the Company had issued $2,573,500 in Bridge IV convertible promissory notes.

         Please refer to Note 7 - Notes Payable in the Notes to our Consolidated
Financial  Statements  for more  information  on the  Bridge  III and  Bridge IV
promissory notes.

         Common Stock.  In August 2004,  MDI offered  common stock to accredited
investors  in  exchange  for cash.  The  Company  received  $275,000  and issued
2,750,000 shares of restricted common stock.

         In August 2004,  MDI issued  924,333 shares of common stock in exchange
for services to a non-employee professional services firm for past services. MDI
calculated  a fair value of $92,433 for these  shares  based on the value of the
shares on the date of issuance and recorded  the amount as  satisfaction  of the
vendor's accounts payable balance as of September 30, 2004.


                                       22
<PAGE>

         In August 2004, MDI issued 1,200,000 shares of common stock in exchange
for services to a non-employee  financial  consultant for future  services.  MDI
calculated  a fair value of $120,000  for these shares based on the value of the
shares on the date of issuance and is  amortizing  the amount over the remainder
of the service contract.

         In  September  2004,  MDI issued  572,748  shares of common  stock to a
non-employee  service  vendor  in lieu  of  payment  for  unpaid  invoices.  MDI
calculated a fair value of $57,275 for these shares based on the market value of
the shares on the date of issuance and recorded  the amount as  satisfaction  of
the  vendor's  accounts  payable  balance as of  September  30,  2004 based on a
settlement agreement.

         In  September  2004,  MDI issued  275,000  shares of common  stock to a
non-employee  financial consultant for past financial services. MDI calculated a
fair value of $27,500 for these  shares  based on the value of the shares on the
date of issuance  and  recorded  the amount as an  administrative  expense as of
September 30, 2004.

         In  September  2004,  MDI issued  250,000  shares of common  stock to a
non-employee  professional  services firm for past investor relations  services.
MDI  calculated  a fair value of $25,000 for these  shares based on the value of
the  shares  on  the  date  of  the  issuance  and  recorded  the  amount  as an
administrative expense as of September 30, 2004.

         In October 2004,  MDI offered  common stock to accredited  investors in
exchange for cash. The Company received  $285,000 and issued 4,071,429 shares of
restricted common stock.

         In  October  2004,  MDI  issued  485,000  shares of  common  stock to a
non-employee  financial consultant for past financial services. MDI calculated a
fair value of $33,950 for these  shares  based on the value of the shares on the
date of issuance  and  recorded  the amount as an  administrative  expense as of
December 31, 2004.

         In  November  2004,  MDI  issued  450,000  shares of common  stock to a
non-employee  professional  services firm for past investor relations  services.
MDI  calculated  a fair value of $36,000 for these  shares based on the value of
the shares on the date of issuance and recorded the amount as an  administrative
expense as of December 31, 2004.

         In  December  2004,  MDI  issued  175,000  shares of common  stock to a
non-employee  service  vendor  in lieu  of  payment  for  unpaid  invoices.  MDI
calculated a fair value of $21,000 for these shares based on the market value of
the shares on the date of issuance and recorded  the amount as  satisfaction  of
the  vendor's  accounts  payable  balance  as of  December  31,  2004 based on a
settlement agreement.

         In  December  2004,  MDI  issued  16,666  shares of  common  stock to a
former-employee  as part of a settlement.  MDI calculated a fair value of $1,333
for these shares based on the market value of the shares on the date of issuance
and  recorded  the amount as  satisfaction  of the  accrued  wage  balance as of
December 31, 2004 based on a settlement agreement.

         Beginning  in December  2004,  MDI began an offering of common stock to
accredited  investors  in exchange for cash.  MDI also  granted each  investor a
warrant to purchase  common stock at an exercise price of $0.10 per share,  with
the first $250,000 of investment to receive 50% warrant  coverage and subsequent
investors to receive 25% coverage.  Through  December 31, 2004,  the Company had
received an  aggregate  $250,000  and issued an  aggregate  4,166,667  shares of
restricted  common  stock and  warrants to purchase  2,083,334  shares of common
stock.  MDI valued the warrants at $208,333  using the  Black-Scholes  valuation
model and recorded the amount as an  administrative  expense for the 2004 fiscal
year.

         Warrants.  Between January 2004 and March 2004, MDI issued an aggregate
2,252,581  warrants  with an  exercise  price of  $0.20  per  share to  Bridge I
investors upon conversion of their notes per the indenture agreement. MDI valued
the warrants at $369,066 using the  Black-Scholes  valuation  model and recorded
the amount as an administrative expense in the first quarter of fiscal 2004.

         In March 2004,  MDI issued 67,000  warrants  with an exercise  price of
$0.17  per  share to a  non-employee  financial  consultant  for past  financial
services.  MDI valued the warrants at $13,400 using the Black-Scholes  valuation
model and recorded the amount as an administrative  expense in the first quarter
of fiscal 2004.


                                       23
<PAGE>

         In March 2004,  MDI issued  500,000  warrants with an exercise price of
$0.17  per  share to a  non-employee  financial  consultant  for past  financial
services.  MDI valued the warrants at $95,000 using the Black-Scholes  valuation
model and recorded the amount as an administrative  expense in the first quarter
of fiscal 2004.

         In April 2004,  MDI issued 47,230  warrants  with an exercise  price of
$0.20 per share to Bridge I  investors  upon  conversion  of their notes per the
indenture  agreement.  MDI valued the warrants at $9,474 using the Black-Scholes
valuation  model and  recorded the amount as an  administrative  expense for the
2004 fiscal year.

         In May 2004,  MDI issued  warrants  to purchase  an  aggregate  119,042
shares of common stock of the Company with exercise prices ranging from $0.15 to
$0.16 per share to  non-employee  service  vendors in lieu of payment for unpaid
service  invoices.  MDI valued the warrants at $18,181  using the  Black-Scholes
valuation model and recorded the amount as a reduction of the outstanding amount
due.

         In May 2004, MDI issued  warrants to purchase  500,000 shares of common
stock of the Company with an exercise price of $0.17 per share to a non-employee
financial  consultant  for past financial  services.  MDI valued the warrants at
$76,200 using the  Black-Scholes  valuation  model and recorded the amount as an
administrative expense in the second quarter of fiscal 2004.

         In June 2004,  MDI issued  warrants to purchase  an  aggregate  364,942
shares of common stock of the Company with exercise prices ranging from $0.16 to
$0.17 per share to  non-employee  service  vendors in lieu of payment for unpaid
service  invoices.  MDI valued the warrants at $42,368  using the  Black-Scholes
valuation model and recorded the amount as a reduction of the outstanding amount
due.

         In June 2004, MDI issued warrants to purchase  780,000 shares of common
stock of the Company with an exercise price of $0.17 per share to a non-employee
financial  consultant  for past financial  services.  MDI valued the warrants at
$73,320 using the  Black-Scholes  valuation  model and recorded the amount as an
administrative expense in the second quarter of fiscal 2004.

         In June 2004, MDI issued warrants to purchase  681,625 shares of common
stock of the Company with an exercise price of $0.18 per share to a non-employee
broker-dealer  for past financial  services.  MDI valued the warrants at $62,914
using  the  Black-Scholes   valuation  model  and  recorded  the  amount  as  an
administrative expense in the second quarter of fiscal 2004.

         In August  2004,  MDI issued  warrants  to purchase  500,000  shares of
common  stock of the  Company  with an  exercise  price of $0.17  per share to a
non-employee  consultant for past  services.  MDI valued the warrants at $45,000
using  the  Black-Scholes   valuation  model  and  recorded  the  amount  as  an
administrative expense in the third quarter of fiscal 2004.

         In September 2004, MDI issued warrants to purchase an aggregate 200,000
shares of common stock of the Company with an exercise  price of $0.10 per share
to a  non-employee  professional  services  firm  for  past  investor  relations
services.  MDI valued the warrants at $18,400 using the Black-Scholes  valuation
model and recorded the amount as an administrative expenses in the third quarter
of fiscal 2004.

         In September  2004,  MDI issued  warrants to purchase  20,000 shares of
common  stock of the  Company  with an  exercise  price of $0.20  per share to a
non-employee  consultant  for past  services.  MDI valued the warrants at $1,780
using  the  Black-Scholes   valuation  model  and  recorded  the  amount  as  an
administrative expense in the third quarter of fiscal 2004.

         In September  2004,  MDI issued  warrants to purchase  25,000 shares of
common  stock of the  Company  with an  exercise  price of $0.20  per share to a
non-employee  service vendor in lieu of payment for unpaid services.  MDI valued
the warrants at $2,225 using the Black-Scholes  valuation model and recorded the
amount as a reduction of the outstanding amount due.

         In November  2004,  MDI issued  warrants to purchase  300,000 shares of
common  stock of the  Company  with an  exercise  price of $0.20  per share to a
professional services firm for past investor relations services.  MDI valued the
warrants at $18,000  using the  Black-Scholes  valuation  model and recorded the
amount as an administrative expense in the fourth quarter of fiscal 2004.


                                       24
<PAGE>

         In December 2004, MDI issued 196,489 warrants with an exercise price of
$0.20 per share to Bridge I  investors  upon  conversion  of their notes per the
indenture agreement.  MDI valued the warrants at $19,649 using the Black-Scholes
valuation  model and  recorded the amount as an  administrative  expense for the
2004 fiscal year.

         In general, each of the above warrants expires five years from the date
of issuance and is exercisable  immediately upon issuance.  None of the warrants
are subject to any vesting  schedules or conditions  other than those imposed by
applicable  securities  laws. The exercise  price and number of shares  issuable
upon  exercise of the warrants are subject to  anti-dilution  protection  in the
event the Company  effects a subdivision  or  combination of its common stock or
declares or pays a dividend or distribution  in common stock;  the warrants also
provide for adjustments in the event the Company  declares or pays a dividend or
other  distribution in other securities or property of the Company or is a party
to a reorganization, reclassification, merger or similar event.

         Repayment of Note

         Suzanne  Gombrich Note. On April 2, 2004,  the  $1,000,000  Convertible
Promissory  Note due to  Suzanne  M.  Gombrich  was  paid in full and her  first
priority security interest in all the Company's assets was released. As of April
2, 2004,  the Company  repaid  $936,114  of  principal  and accrued  interest of
$126,114  on such  note.  In  addition,  Mrs.  Gombrich  agreed to  convert  the
remaining  $190,000 into 1,900,000 shares of common stock of the Company,  which
shares were issued on August 31, 2004  subsequent to stockholder  approval of an
increase in the number of authorized shares of common stock of the Company.

         Conversions
         .........
         Bridge I. During the fiscal year ended December 31, 2004, holders of an
aggregate $1,325,000  principal amount of Bridge I Convertible  Promissory Notes
elected to convert  their notes and related  accrued  interest of  approximately
$173,000 into 9,985,182 shares of unregistered common stock of the Company.

         Bridge II. During the fiscal year ended  December 31, 2004,  holders of
an aggregate  $2,146,000  principal  amount of Bridge II Convertible  Promissory
Notes  elected  to  convert  their  notes  and  related   accrued   interest  of
approximately  $251,000 into 17,619,242  shares of unregistered  common stock of
the Company.  Included in the such  conversion  amounts are amounts due Peter P.
Gombrich,  the Company's former Chairman, of $305,667 in Bridge II principal and
$11,431 in accrued  interest  thereon,  which converted into 2,113,987 shares of
unregistered common stock.

         Preferred  Stock.  During the fiscal year ended 2004,  several  holders
converted an aggregate  434,750 shares of Series B convertible  preferred stock,
including   cumulative   dividends  due  thereon,   into  2,280,798   shares  of
unregistered common stock.

         During the  fiscal  year  ended  2004,  several  holders  converted  an
aggregate  930,000  shares of Series C convertible  preferred  stock,  including
cumulative  dividends due thereon,  into 5,703,816 shares of unregistered common
stock.

         During the  fiscal  year  ended  2004,  several  holders  converted  an
aggregate  27,166  shares of Series E  convertible  preferred  stock,  including
cumulative  dividends due thereon,  into 935,483 shares of  unregistered  common
stock.

         Please  refer  to Note 7 - Notes  Payable  and  Note 8 -  Stockholders'
Equity  in  the  Notes  to  our  Consolidated   Financial  Statements  for  more
information  on the Bridge I and Bridge II  promissory  notes and the  Company's
preferred stock.

         MDI issues  securities  in reliance  on the safe harbor and  exemptions
from registration provided under Rule 506 of Regulation D and/or Section 4(2) of
the Securities Act of 1933, as amended.  No advertising or general  solicitation
was employed in offering the  securities.  The  offerings and sales or issuances
were made to a limited number of persons, all of whom were accredited investors,
and transfer was restricted by the Company in accordance  with the  requirements
of  applicable  law.  In  addition to  representations  by the  above-referenced
persons, the Company has made independent determinations such that it reasonably
believes that all of the investors were accredited or  sophisticated  investors,
and  that  they  were  capable  of  analyzing  the  merits  and  risks  of their
investment, and that they understood the speculative nature of their investment.
Furthermore, these investors were provided with access to MDI's filings with the
Securities and Exchange Commission.


                                       25
<PAGE>

Purchases  of Equity  Securities  by the Small  Business  Issuer and  Affiliated
Purchasers

         During the fourth quarter of fiscal year 2004,  neither the Company nor
any affiliated purchaser of the Company purchased equity securities of MDI.

Item 6.  Management's Discussion and Analysis or Plan of Operation

Forward-Looking Statements

         Certain  statements  contained in this discussion and analysis that are
not related to historical  results are  "forward-looking  statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements that
are  predictive,  that depend upon or refer to future events or  conditions,  or
that  include  words  such  as  "expects,"  "anticipates,"  "intends,"  "plans,"
"believes,"    "estimates,"   "hopes,"   or   similar   expressions   constitute
forward-looking  statements.  In  addition,  any  statements  concerning  future
financial  performance  (including  future revenues,  earnings or growth rates),
ongoing business  strategies or prospects,  or possible future actions by us are
also forward-looking statements.

         These forward-looking statements are based on beliefs of our management
as well as current expectations, projections and assumptions currently available
to the  Company and are subject to certain  risks and  uncertainties  that could
cause  actual  results to differ  materially  from  historical  results or those
anticipated  or  implied by such  forward-looking  statements.  These  risks are
described  more fully under the caption  "Risk  Factors"  herein and include our
ability to raise  capital;  our  ability to settle  litigation;  our  ability to
retain key employees; economic conditions; technological advances in the medical
field;  demand  and  market  acceptance  risks  for new and  existing  products,
technologies,  and healthcare  services;  the impact of competitive products and
pricing;  manufacturing  capacity;  new plant start-ups;  U.S. and international
regulatory,  trade,  and tax  policies;  product  development  risks,  including
technological  difficulties;  ability to enforce  patents;  and  foreseeable and
unforeseeable foreign regulatory and commercialization factors.

         Should one or more of such risks or uncertainties materialize or should
underlying  expectations,  projections or assumptions  prove  incorrect,  actual
results may vary materially from those described. Those events and uncertainties
are difficult to predict accurately and many are beyond our control.  We believe
that our expectations with regard to  forward-looking  statements are based upon
reasonable assumptions within the bounds of our current business and operational
knowledge,  but we cannot be sure that our actual  results or  performance  will
conform  to any  future  results  or  performance  expressed  or  implied by any
forward-looking   statements.   We  assume  no   obligation   to  update   these
forward-looking  statements to reflect events or circumstances  that occur after
the  date  of  these  statements   except  as  specifically   required  by  law.
Accordingly,  past results and trends  should not be used to  anticipate  future
results or trends.

Overview

         Molecular Diagnostics, Inc., formerly Ampersand Medical Corporation and
successor to Bell National  Corporation,  is a biomolecular  diagnostics company
engaged in the  design,  development  and  commercialization  of  cost-effective
screening  systems to assist in the early detection of cancer.  MDI is currently
focused on the design,  development  and marketing of its InPath(TM)  System and
related  image  analysis  systems.  The InPath  System and related  products are
intended  to detect  cancer and  cancer-related  diseases,  and may be used in a
laboratory, clinic or doctor's office.

         The science of medical  diagnostics has advanced  significantly  during
the past decade.  Much of this advance has come as a result of new  knowledge of
the human genome and related proteins, which form the foundation of cell biology
and the human body.  Our goal is to utilize  this  research as a base to develop
screening  and  diagnostic   testing  products  for  cancer  and  cancer-related
diseases.  We believe that the success of these  products  will improve  patient
care through more accurate test performance, wider product availability and more
cost-effective  service  delivery.  We are  developing  a series of  products to
address  these  criteria  including  sample  collection  devices,  chemical  and
biological tests, and analysis instruments and related software.


                                       26
<PAGE>

         Our  strategy  is to  develop  products  through  internal  development
processes, strategic partnerships,  licenses and acquisitions of companies. This
strategy  has  required  and will  continue  to require  significant  additional
capital.  As a result, we will incur  substantial  operating losses until we are
able to successfully market some, or all, of our products.

         The  Company  has  incurred  significant  operating  losses  since  its
inception.  The Company has raised  approximately  $35,000,000 since March 1998.
Management  expects that significant  on-going  operating  expenditures  will be
necessary  to   successfully   implement  its  business  plan  and  to  develop,
manufacture and market its products. These circumstances raise substantial doubt
about the Company's  ability to continue as a going concern.  Implementation  of
the Company's  plans and its ability to continue as a going concern  depend upon
it securing substantial  additional financing.  During 2004 and 2003, MDI raised
approximately $4,236,000 and $2,980,000,  respectively,  through the issuance of
convertible  debt.  In  addition,  during 2004 MDI raised  $810,000  through the
issuance of common  stock.  From  January 1, 2005 through  March 31,  2005,  MDI
raised an additional $576,500 through the issuance of common stock. Management's
plans include  substantial  efforts to obtain additional capital. If the Company
is unable to obtain  additional  capital or generate  profitable sales revenues,
however,  it may be  required  to  curtail  its  product  development  and other
activities and may be forced to cease operations.

Critical Accounting Policies and Significant Judgments and Estimates

         Revenue  Recognition.  The Company  recognizes revenue upon shipment of
product and invoicing.  Revenue from training services and professional services
is recognized when the service is completed.

         Licenses,  Patents,  and Technology.  Licenses,  patents, and purchased
technology  are  recorded at their  acquisition  cost.  Costs to prepare  patent
filings are  capitalized  when  incurred.  Costs  related to abandoned or denied
patent  applications  are  written  off at the time of  abandonment  or  denial.
Amortization  is begun as of the date of  acquisition  or upon the  grant of the
final patent.  Costs are amortized over the asset's useful life, which can range
from two to 17 years.  The Company  assesses  licenses,  patents,  &  technology
periodically for impairment.

         Stock  Compensation.   As  permitted  by  the  Statement  of  Financial
Accounting  Standards No. 123,  "Accounting for Stock-Based  Compensation,"  MDI
uses the  intrinsic  value  method to account for stock  options as set forth in
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees

         Share-Based Payment.  The "Share-Based  Payment" Statement of Financial
Accounting   Standards  No.   123(R)   establishes   accounting   standards  for
transactions  in which a company  exchanges its equity  instruments for goods or
services.  In  particular,  this  Statement  will  require  companies  to record
compensation  expense  for all  share-based  payments,  such as  employee  stock
options,  at fair market value.  This statement is effective as of the beginning
of the first interim or annual  reporting  period that begins after December 15,
2005.  Adoption of this  financial  statement is not expected to have a material
impact  on  the  Company's   consolidated   financial  position  or  results  of
operations.

         Application  of   Black-Scholes   Valuation   Model.  In  applying  the
Black-Scholes  valuation model, the Company has used an expected  dividend yield
of zero,  a  risk-free  interest  rate of 4.85%  and 5.00% for the 2004 and 2003
periods, respectively, a volatility factor of 131% and 208%, respectively, and a
fair value of the  underlying  common shares of closing market price on the date
of the  grant  for both  periods.  The  expected  life  equaled  the term of the
warrants, options, or restricted shares.

         For a more  detailed  discussion,  see Note 2 - Summary of  Significant
Accounting  Policies  in the  Notes  to our  Consolidated  Financial  Statements
included herewith.

Results of Operations

         Fiscal Year Ended December 31, 2004 as compared to Fiscal Year
                             Ended December 31, 2003

         Revenue

         Revenues  of  $243,000  for the fiscal  year ended  December  31,  2004
represented  a decrease of  $136,000,  or 35.9%,  over  revenues of $379,000 for
2003.  The 2004  revenue  decrease  was the result of  decreases in the sales of
AccuMed-related products and services. Based on a settlement with MonoGen at the
end of fiscal 2004, MDI will no longer sell AccuMed and AcCell systems, but will
sell its new fully integrated AIPS workstation through a distribution partner.


                                       27
<PAGE>

         Revenues for the year 2003 were  $379,000,  a decrease of $338,000,  or
47%, over revenues for the year 2002.  The 2003 revenue  decrease was the result
of decreases in the sales of AccuMed-related products and services. Revenues and
related costs and expenses were adjusted in 2003 to reflect the  liquidation  of
MDI's French  subsidiary,  Samba,  and its  reclassification  as a  discontinued
operation.

         Costs and Expenses

         Cost of Goods Sold

         Cost of goods sold for the fiscal year ended December 31, 2004 amounted
to  $24,000,  a decrease  of  $119,000  or 83.2% over 2003 cost of goods sold of
$143,000.  The cost of goods sold amount for the fiscal year ended  December 31,
2004 is related to the shipment of the two automated  microscopy  systems during
the year. The overall  decrease was due to the reduction in the number of AcCell
instruments  sold and the  receipt of  royalty-related  income only for the year
based on the two AccuMed systems under a license agreement.

         Cost of  goods  sold for 2003  amounted  to  $143,000,  a  decrease  of
$103,000,  or 42%, over 2002 cost of goods sold.  The decrease was primarily the
result of a reduction in the number of AcCell instruments sold during the year.

         Research and Development

         We  devote a  substantial  amount  of our  resources  to  research  and
development related to our products,  including markers, tests,  instruments and
software applications.

         In 2004,  our research  and  development  expenses  were  $834,000,  an
increase  of  $254,000,  or 43.8%  over  2003.  The  increase  was the result of
preliminary  preparation  activities for the clinical trial process during 2004,
which  accounted for a $211,000  increase in trial costs and related  payroll of
$135,000.  These  increases  were  offset  by a  decrease  in  medical  advisory
consulting fees of $92,000.

         In 2003,  our  research  and  development  expenses  were  $580,000,  a
decrease of $2,672,000,  or 82.2%, over 2002 research and development  expenses.
The  decrease was the result of not having a clinical  trial in progress  during
2003,  which  provided  a  $1,585,000  reduction  in  trial  costs  and  related
reductions in payroll of $305,000 and consulting fees of $699,000..........

         Research and development  expenses consist of costs related to specific
development  programs  with  scientists  and  researchers  at  universities  and
hospitals;  full scale  device  development  contracts  begun  during  1999 with
industrial  design and  manufacturing  companies  covering  the  disposable  and
instrument components of the InPath System;  payments to medical and engineering
consultants for advice related to the design and development of our products and
their potential uses in the medical technology marketplace;  and payroll-related
costs for in-house engineering,  scientific,  laboratory,  software development,
and research management staff.

         In order to reduce  the cash  impact of our  research  and  development
expenses,  a portion of the compensation  paid to consultants may be in the form
of awards of our common stock (with restrictions  attached) or grants of options
to purchase our common  stock.  Since these awards  and/or  option  grants cover
services to be performed over a future time period, we are required to calculate
their  market  value  at the end of each  reporting  period  until  the  work is
complete. Included in the above research and development expense amount for 2003
are non-cash  expenses of $12,000 related to the calculated cost of share awards
and options that were  charged to expense in the period.  There were no non-cash
transactions related to share awards and options in 2004.

         Selling, General and Administrative

         Significant components of selling,  general and administrative expenses
are  compensation  costs  for  executive,  sales and  administrative  personnel;
professional  fees primarily  related to legal and accounting  services;  travel
costs; fees for public and/or investor relations  services;  insurance premiums;
recruitment fees; marketing-related costs; and amortization and depreciation.


                                       28
<PAGE>

         In 2004, selling,  general and administrative expenses were $5,216,000,
a decrease of  $1,014,000  or 16.3% over the year ended  December 31, 2003.  The
decrease includes reductions amounting to $763,000 in financing costs,  $269,000
in investor  relations  costs,  $250,000 in depreciation  and  amortization  and
$300,000 in professional and other general and administrative costs generated by
the Company's overall expense reduction plan. These reductions were offset by an
increase in legal costs of $130,000  related to the negotiation and execution of
various  legal  settlements  the Company  entered  into during 2004 and $438,000
relating to a legal  judgment  awarded to Monsun in a case against Mr.  Gombrich
with respect to his personal  guaranty of a Company  note.  (See Note 13 - Legal
Proceedings  in  the  Notes  to  our  Consolidated  Financial  Statements  for a
discussion of this case.)

         In 2003, selling,  general and administrative expenses were $6,230,000,
a decrease of $1,490,000,  or 19.3% over similar  expenses of 2002. The decrease
included reductions amounting to $964,000 in legal expenses, $921,000 in payroll
related to the staffing  reductions  and  $1,384,000 in  professional  and other
general and  administrative  costs  generated by the Company's  overall  expense
reduction plan.  These  reductions were offset by an increase in financing costs
of $1,969,000 related to the Bridge II convertible note offering costs.

         In order  to  reduce  our  cash  selling,  general  and  administrative
expenses,  we may issue shares of our common stock (with restrictions  attached)
or grant options or warrants to purchase  shares of our common stock, in lieu of
compensation or payments for financial  advisory work,  including advice on deal
structure,  fees,  investor  relations and  introductory  services,  and general
financial and investment  advice.  If the services are  completed,  we record an
expense based on the value of the services.  If the services are to be completed
over a future  period of time,  we are  required to calculate a market value for
the shares,  options,  or warrants at the end of each reporting period until the
services   are   completed.   Included  in  the  above   selling,   general  and
administrative  expense  amounts  for 2004 and 2003  are  non-cash  expenses  of
$1,455,000 and $1,615,000, respectively, related to the calculated cost of these
share awards, options and warrants, charged to expense in each period.

         Impairment Loss

         In 2003,  MDI recorded an  impairment  loss of $283,000  related to the
write-off of the full amount of MDI's  goodwill  recorded on the  acquisition of
AccuMed.   At  December  31,  2003,   management   determined  several  factors,
principally  that contracts and sales relating to the AccuMed products failed to
materialize,  indicating  that the carrying  value of goodwill  from the AccuMed
acquisition was impaired. No impairment loss was recorded in 2004.

         Other Income and Expense

         Interest Income

         We had no interest income during 2004 or 2003.

         Interest Expense

         Interest  expense,  including  interest  expense  to  related  parties,
decreased  $1,252,000 for the fiscal year ended December 31, 2004 to $2,003,000,
a decrease  of 38.5% over the same period of 2003.  Bridge I, II,  III,  IV, and
related  party  convertible   promissory  notes  in  principal  amounts  totaled
$6,341,000 and $6,208,000 for the fiscal years ended December 31, 2004 and 2003,
respectively.  The change  included an increase in interest  expense of $228,000
related to the increase in the notes and a decrease of $1,423,000 related to the
amortization of debt discount arising from the beneficial  conversion feature of
certain of the notes.  The amortized  debt discount  amount  decreased due to an
increase in the  duration of the new Bridge III and IV notes  issued  during the
period ended  December 31, 2004 in relation to the shorter  maturity  periods of
the Bridge I and II notes issued during 2001 through 2003.

         In 2003, our interest  expense  amounted to $3,255,000,  an increase of
$1,668,000  or 105.1% over 2002  interest  expense.  The increase  related to an
increase  of  $1,236,000  in  amortization  of debt  discount  arising  from the
beneficial  conversion  feature of Bridge II  convertible  promissory  notes and
$1,500,000 in Bridge II interest expense on such promissory notes. The increases
were offset by a  reduction  in interest  expense of  $1,050,000  related to the
return  shares and warrants  related to the payoff of the Round Valley  Capital,
LLC loan in 2003.


                                       29
<PAGE>

         Restructuring Settlements

For the fiscal year ended December 31, 2004,  MDI recorded  $1,008,000 as a gain
from the settlement of various  litigation and credit payment  matters.  For the
fiscal  year  ended  December  31,  2003,  the  Company  included   $525,000  of
restructuring settlements in the "Other Income and Expense, Net" line item.

         Loss on Litigation Settlements

         During  2004,  the  Company  was party to legal  settlements  involving
intangible assets of the Company and as part of the agreement terms,  recorded a
loss as described in the following table:

<TABLE>
<S>                                                                                                       <C>
         Issuance of Promissory Note to MonoGen, Inc.                                                     $  305,000
         Inventory given in settlement to MonoGen, Inc.                                                       57,000
         Net book value of AccuMed intangible assets given in settlement to MonoGen                        5,919,000
         Net book value of HPV technology license agreement cancelled in settlement with Invirion, Inc.      569,000
                                                                                                          ----------
                                           Total Loss on Litigation Settlements                           $6,850,000
                                                                                                          ==========
</TABLE>

         (See  Note 13 - Legal  Proceedings  in the  Notes  to our  Consolidated
Financial  Statements  for a  discussion  of these cases and related  settlement
agreements.)

         Other Income and Expense, Net

         In 2004,  MDI had $10,000 in Other Income related to a gain on currency
conversions  and other  matters.  In 2003,  MDI recorded  $308,000 in the "Other
Income and Expense,  Net" line item,  which included  $525,000 in  restructuring
income due to the settlement of outstanding  accounts payable. In addition,  the
Company  recorded the  realization  of a currency  translation  loss of $220,000
related to Samba's operations.

         Discontinued Operations

         The  Company's  subsidiary  Samba,  which  had  maintained  its  normal
operations under the protection of the French  Commercial Court during 2003, was
liquidated by a  court-appointed  administrator  on December 19, 2003.  Upon the
December 2003 bankruptcy  liquidation  sale, we lost all rights and title to the
Samba's assets and reflected a loss from discontinued  operations of $75,000 and
a gain from  involuntary  conversion  of $292,000  in 2003.  The Company did not
record any loss from discontinued  operations for the fiscal year ended December
31, 2004.

         Net Loss

         The net loss  for the  fiscal  year  ended  December  31,  2004  before
preferred  dividends totaled  $13,567,000  compared with $9,804,000 for the same
period in 2003,  a increase  of  $3,763,000  or 38.4%.  The  increase  primarily
resulted  from a one-time  write-off of  approximately  $6,850,000 in connection
with legal  settlements  entered  into by the  Company in the fourth  quarter of
2004.  This charge  consisted  primarily of a non-cash  write-off of  intangible
assets. In addition, cumulative dividends on the outstanding Series B, Series C,
Series D and Series E convertible  preferred  stock totaled  $1,034,000  for the
fiscal year ended  December  31, 2004,  compared  with  $1,473,000  for the same
period in 2003. The combined net loss applicable to common  stockholders for the
fiscal year ended  December  31, 2004 was  $14,601,000,  or $0.19 per share,  on
76,964,553  weighted  average common shares  outstanding,  compared with the net
loss and net loss  available  to common  stockholders  for the fiscal year ended
December 31, 2003 of  $11,060,000,  or $0.27 per share,  on 40,695,186  weighted
average common shares outstanding.


                                       30
<PAGE>

         The weighted  average shares  outstanding  during the fiscal year ended
December  31, 2004  include the shares  issued or issuable  upon  conversion  of
Series B, Series C, and Series E convertible  preferred stock during the period,
and the conversion of Bridge I and Bridge II convertible  promissory  notes. The
Bridge  I and II note  conversions  resulted  in the  issuance  of an  aggregate
27,604,424  shares of common stock; the Series B, C and E convertible  preferred
stock conversions  resulted in the issuance of an aggregate  8,920,097 shares of
common stock.

Liquidity and Capital Resources

         Research  and  development,  clinical  trials and other  studies of the
components of our InPath System,  conversions  from designs and prototypes  into
product manufacturing,  initial sales and marketing efforts, medical consultants
and advisors, and research, administrative, and executive personnel are and will
continue to be the principal basis for our cash  requirements.  We have provided
operating funds for the business since its inception  through private  offerings
of debt and equity securities to limited numbers of U.S. and foreign  accredited
investors.  We will be required to make  additional  offerings  in the future to
support the  operations  of the  business  until some or all of our products are
introduced into the market.  We used  $3,962,000 and $2,560,000  during 2004 and
2003, respectively, to fund our operating activities.

         We  experienced  severe  liquidity  problems  during the second half of
2004.  As a result,  we were forced to cut staff and reduce our  operations to a
minimum level.  Officers  refrained from drawing salaries during portions of the
third and fourth quarters of 2004 in order to reduce demands on our limited cash
position.  We were  able to raise  funds  under  the  Bridge  III and  Bridge IV
convertible  promissory  notes as well as the sale of common  stock during 2004,
although  the  proceeds of these note and common  stock  offerings  were used to
satisfy certain  obligations  coming due at that time as well as for the payment
of a limited amount of current operational expenses.

         At  December  31,  2004,  we had $11,000  cash on hand,  an increase of
$11,000  over cash on hand at  December  31,  2003 of zero.  This cash  position
results from our loss from operations and our inability to raise  sufficient new
capital due to very unfavorable conditions in financing markets, both public and
private,  for  companies  in general,  and  especially  for small life  sciences
companies such as ours. We were unable to raise sufficient funds during the year
to maintain adequate cash reserves and to meet the ongoing  operational needs of
the business.

         We incurred  approximately $187,000 and $18,000 in capital expenditures
for  the  years  ended  December  31,  2004  and  2003,  respectively.   Capital
expenditures are defined as disbursements  for laboratory  equipment,  leasehold
improvements,  software, and furniture/fixtures  with a purchase price in excess
of $1,000 per item and a useful life in excess of one year. The increase in 2004
capital  expenditures  resulted  from an increase in design and tooling costs of
approximately  $159,000  related to the re-design of the e2 Collector handle and
new AIPS integrated workstation.  To the extent available, we intend to use some
proceeds  from our  financing in the fiscal year 2005 for  completion  of the e2
Collector  production  molds,  completion  of the AIPS final design  changes and
additional laboratory equipment as necessary.

         Our  operations  have been,  and will  continue to be,  dependent  upon
management's  ability to raise operating  capital in the form of debt or equity.
We have incurred  significant  operating losses since inception of the business.
We expect that significant on-going operating  expenditures will be necessary to
successfully implement our business plan and develop, manufacture and market our
products.  These  circumstances  raise  substantial  doubt  about our ability to
continue as a going  concern.  There can be no assurance that we will be able to
obtain  additional  capital to meet our current  operating  needs or to complete
pending or  contemplated  licenses or acquisitions  of  technologies.  If we are
unable to raise sufficient  adequate  additional capital or generate  profitable
sales revenues,  we may be forced to substantially  curtail product research and
development and other activities and may be forced to cease operations.

Off-Balance Sheet Arrangements

         The Company does not have any off-balance sheet arrangements.

Item 7.           Financial Statements

         Our consolidated  financial statements for the years ended December 31,
2004 and 2003, together with the reports of Altschuler,  Melvoin and Glasser LLP
dated  April 13, 2005 and April 9, 2004  thereon  and the notes  thereto and the
report of  Auditeurs & Conseils  Associes  dated April 8, 2004 on the  Financial
Statements of Samba Technologies,  SARL, are filed as part of this Annual Report
on Form 10-KSB commencing on page F-1 and are incorporated herein by reference.


                                       31
<PAGE>

Item 8.           Changes  In and  Disagreements  With Accountants on Accounting
                  and Financial Disclosure

Resignation of Prior Auditors

         Ernst & Young LLP resigned as our auditors effective February 25, 2003.

         The  reports  of  Ernst & Young  LLP on our  2000  and  2001  financial
statements,  respectively,  included  an  explanatory  paragraph  regarding  our
ability to continue as a going concern.  The reports of Ernst & Young LLP on our
consolidated  financial  statements for the aforementioned  fiscal years did not
contain  an adverse  opinion  or a  disclaimer  of  opinion  and,  other than as
described  in the  preceding  sentence,  were not  qualified  or  modified as to
uncertainty, audit scope, or accounting principles.

         In connection  with the audits of our financial  statements for each of
the two fiscal  years ended  December 31, 2000 and 2001,  and in the  subsequent
interim  period,  there  were no  disagreements  with  Ernst & Young  LLP on any
matters of accounting  principles or practices,  financial statement disclosure,
or auditing scope and procedures,  which if not resolved to the  satisfaction of
Ernst & Young LLP would have caused  Ernst & Young LLP to make  reference to the
matter in their report.

         In accordance with paragraph 304(a) of Regulation S-B, we report that a
letter  from  Ernst & Young  LLP to our  Audit  Committee  dated  April 8,  2002
reported material  weaknesses related to the following matters,  which were also
discussed directly between our Audit Committee and Ernst & Young LLP:

         o        Ernst  & Young  LLP  reported  that  the  financial  oversight
                  function   to  monitor   and   summarize   appropriately   the
                  transactions and operations of the Company was ineffective.

         o        Ernst  &  Young  LLP   reported   that   significant   account
                  reconciliations/analyses  were not performed on a timely basis
                  and additionally, in cases where reconciliations/analyses were
                  prepared,  reconciling  items  had not been  investigated  and
                  reconciliations were not reviewed or approved.

         In a meeting with our Audit  Committee  on August 13, 2002,  management
reported to such committee that it had developed procedures,  forms,  checklists
and reporting  packages to address these  weaknesses  and some progress had been
made to improve our system of internal controls.

         We  authorized  Ernst & Young LLP to respond  fully to the inquiries of
the successor auditor regarding these matters.

Engagement of New Auditors

         The Company engaged  Altschuler Melvoin and Glasser LLP as our auditors
for the fiscal years ended December 31, 2004,  2003 and 2002. The engagement was
effective  April  30,  2003.  Until  April 30,  2003,  we did not  consult  with
Altschuler,  Melvoin  and  Glasser  LLP  regarding  either  the  application  of
accounting principles to a specified transaction,  either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements.
Altschuler, Melvoin and Glasser LLP has not provided us with a written report or
oral advice regarding such principles or audit opinion.

Item 8A.          Controls and Procedures

Evaluation of Disclosure Controls and Procedures

          The Company's chief executive officer and chief financial officer have
reviewed and evaluated the  effectiveness of the Company's  disclosure  controls
and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  promulgated  under
the Securities  Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the  period  covered  by this  annual  report.  Based on that  review and
evaluation,  the chief  executive  officer  and  chief  financial  officer  have
concluded that the Company's  current  disclosure  controls and  procedures,  as
designed and implemented,  are reasonably  adequate to ensure that such officers
are provided with  information  relating to the Company required to be disclosed
in the reports the Company files or submits under the Exchange Act and that such
information is recorded, processed, summarized and reported within the specified
time periods.


                                       32
<PAGE>

Changes in Internal Controls

         During the fourth fiscal  quarter,  there was no change in our internal
control over financial reporting that has materially affected,  or is reasonably
likely to materially affect, our internal control over financial reporting.

Item 8B.          Other Information

         During the first  quarter of 2005,  the Company  elected to request the
return of shares from  Seaside  Investments  Plc in  connection  with a proposed
transaction with Seaside pursuant to which the Company issued  11,000,000 shares
of restricted  common stock in exchange for registered shares of such investment
company. The proposed transaction was never consummated. In addition, during the
last  quarter of 2004 and the first  quarter  of 2005,  the  Company  negotiated
several  settlements of pending legal actions,  which  settlements may be deemed
material.  See "Recent Developments" under Item 1 and Item 3 - Legal Proceedings
for a description of these matters.

                                    PART III

Item 9.           Directors and Executive Officers of the Registrant

         Certain of the  information  required by this item is set forth  below.
The  remainder  will be  contained in our  Definitive  Proxy  Statement  for the
Company's  2005 Annual Meeting of  Stockholders  to be filed with the Securities
and Exchange  Commission  no later than 120 days after the end of the  Company's
2004 fiscal year, and is incorporated herein by reference.

<TABLE>
<CAPTION>
         Name                               Age      Offices and Positions Held with the Company
         ----                               ---      -------------------------------------------
<S>                                         <C>      <C>
         Denis M. O'Donnell, M.D........    51       President and Chief Executive Officer, Director
         Dennis L Bergquist.............    44       Chief Financial Officer
         Peter P. Gombrich*.............    67       Chairman of the Board, Executive Vice President, Director
</TABLE>

*Resigned from all positions in March 2005.

         Denis M.  O'Donnell,  M.D. was appointed  President and Chief Executive
Officer in February 2004 and has been a director of the Company  since  December
1998. From 1997 to 2003, he was a Managing Director of Seaside Advisors, L.L.C.,
an investment  advisor to Seaside Partners,  LP, a private equity firm. Prior to
joining  Seaside  Advisors,  Dr.  O'Donnell  was  President of Novavax,  Inc., a
company  engaged  in  the  development  of  pharmaceutical  products,  from  its
inception  in 1995 to 1997.  Dr.  O'Donnell  currently  serves as a director  of
Novavax and was  Chairman  of the Board of  Directors  of Novavax  from May 2000
until April 2005 and Vice Chairman of the Board from June 1999 to May 2000. From
1991 to 1995,  Dr.  O'Donnell  served as  Corporate  Vice  President  of Medical
Affairs of Novavax. Prior to joining Novavax in 1991, Dr. O'Donnell was Director
of  the  Clinical  Research  Center  at  MTRA,  Inc.  a  company  engaged  as an
investigator  in human  clinical  trails.  Dr.  O'Donnell has been a director of
ELXSI   Corporation   since  1996  and  of  Columbia   Laboratories,   Inc.,   a
pharmaceutical  company,  since 1999. Dr.  O'Donnell is a Fellow of the American
College of Clinical Pharmacology.

         Dennis L Bergquist was appointed Chief Financial  Officer in June 2003.
Mr.  Bergquist is a principal and founder of Bergquist & Bergquist,  a financial
consulting firm,  established in 1990. Mr. Bergquist was Chief Financial Officer
of  DCNL  Incorporated,   a  privately-held   beauty  supply   manufacturer  and
distributor  from 1997 until its sale in 1998 to Helen of Troy,  Inc.  As both a
consultant and Chief Financial Officer,  he has been involved in raising private
equity and various forms of secured and line-of-credit  financing. Mr. Bergquist
has a Bachelor of Science degree in Business  Administration  - Accounting  from
California  State  University  -  Fresno  and  an MBA in  Finance  from  Cornell
University. Mr. Bergquist is a licensed Certified Public Accountant in the State
of California.

         Peter P. Gombrich was Chief Executive  Officer of the Company from 1998
until his  resignation  on February 19, 2004 and was Chairman of the Board and a
member of our Board of Directors  from  December 1998 until his  resignation  in
March 2005. Mr.  Gombrich was appointed  Executive Vice President of the Company
in February 2004,  which  position he also resigned in March 2005. Mr.  Gombrich
served as Chairman of the Board and Chief  Executive  Officer of InPath,  LLC, a
bio-molecular  medical testing  company,  since he founded that company in March
1998. InPath was acquired by the Company in December 1998. In 1994, Mr. Gombrich
founded AccuMed  International,  Inc., a  cytopathology  products  company,  and
served as  Chairman,  President  and Chief  Executive  Officer of AccuMed  until
January 1998.  From 1990 until he founded  AccuMed in 1994,  Mr.  Gombrich was a
consultant  in the  cytology and  microbiology  industries.  Mr.  Gombrich has a
Bachelor of Science  degree in  Electrical  Engineering  from the  University of
Colorado/Denver and a Masters in Business  Administration from the University of
Denver.


                                       33
<PAGE>

Code of Ethics

         The Company has  adopted  its Code of Ethics and  Business  Conduct for
Officers, Directors and Employees that applies to all of the officers, directors
and  employees of the  Company,  including  the  Company's  principal  executive
officer, principal financial officer, principal accounting officer or controller
or  persons  performing  similar  functions.  The  Company  filed its code as an
exhibit to its Annual  Report on Form 10-KSB for the fiscal year ended  December
31, 2003 as filed with the Securities and Exchange Commission on April 14, 2004.

Item 10.          Executive Compensation

         The  information  required  by this Item 10 is  incorporated  herein by
reference  to our  Definitive  Proxy  Statement  for the  Company's  2005 Annual
Meeting of Stockholders to be filed with the Securities and Exchange  Commission
no later than 120 days after the end of the Company's 2004 fiscal year.

Item 11.          Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters

         The  information  required  by this Item 11 is  incorporated  herein by
reference  to our  Definitive  Proxy  Statement  for the  Company's  2005 Annual
Meeting of Stockholders to be filed with the Securities and Exchange  Commission
no later than 120 days after the end of the Company's 2004 fiscal year. See also
the information included in Item 5 of this Form 10-KSB relating to the Company's
equity compensation plans and Note 11 - Equity Incentive Plan and Employee Stock
Purchase Plan in the Notes to our Consolidated Financial Statements.

Item 12.          Certain Relationships and Related Transactions

         The  information  required  by this Item 12 is  incorporated  herein by
reference  to our  Definitive  Proxy  Statement  for the  Company's  2005 Annual
Meeting of Stockholders to be filed with the Securities and Exchange  Commission
no later than 120 days after the end of the Company's 2004 fiscal year.

Item 13.          Exhibits

(*) Denotes an exhibit filed herewith.

(+) Denotes a management contract or compensatory plan, contract or arrangement.

Exhibit No.                        Description
-----------                        -----------

2.1          Stock  and  Membership  Interest  Exchange  Agreement  dated  as of
             December 4, 1998 among Bell National  Corporation,  InPath, LLC and
             the InPath Members (as such term is defined therein). (Incorporated
             herein by reference to Appendix A to the Bell National  Corporation
             Definitive  Proxy Statement on Schedule 14A, filed on April 30,1999
             (the "1999 Proxy Statement").)

2.2          Agreement  and Plan of  Merger  of Bell  National  Corporation  and
             Ampersand Medical Corporation. (Incorporated herein by reference to
             Appendix C to 1999 Proxy Statement.)

2.3          Agreement  and Plan of Merger by and among  AccuMed  International,
             Inc., AccuMed Acquisition Corp. and Ampersand Medical  Corporation,
             dated  as of  February  7,  2001,  and  Amendment  No.  1  thereto.
             (Incorporated  herein by  reference  to Appendix I to  Registration
             Statement (as amended) on Form S-4, No. 333-61666,  as filed on May
             25, 2001 (the "May 2001 S-2").)


                                       34
<PAGE>

Exhibit No.                        Description
-----------                        -----------

3.1          Certificate of Incorporation of Ampersand Medical  Corporation,  as
             amended.  (Incorporated  herein by  reference to Appendix D to 1999
             Proxy Statement.)

3.2          By-laws of Ampersand Medical  Corporation.  (Incorporated herein by
             reference to Appendix E to the 1999 Proxy Statement.)

3.3          Certificate  of  Designation,  Preferences  and  Rights of Series A
             Convertible  Preferred  Stock  of  Ampersand  Medical  Corporation.
             (Incorporated  herein by reference to Exhibit 3.5 to the  Ampersand
             Medical Corporation Annual Report on Form 10-K (as amended) for the
             fiscal year ended  December  31,  2000,  as filed on March 29, 2001
             (the "2000 10-K").)

3.4          Certificate  of  Designation,  Preferences  and  Rights of Series B
             Convertible  Preferred  Stock  of  Ampersand  Medical  Corporation.
             (Incorporated herein by reference to Exhibit 3.6 to the 2000 10-K.)

3.5          Certificate of  Incorporation  of Molecular  Diagnostics,  Inc., as
             amended.  (Incorporated  herein by  reference to Exhibit 3.1 to the
             Company's Current Report on Form 8-K dated September 26, 2001.)

3.6          Section  6 of  Article  VII of the  By-laws  of  Ampersand  Medical
             Corporation,  as  amended.  (Incorporated  herein by  reference  to
             Exhibit 3.3 to the May 2001 S-2.)

3.7          Certificate  of  Designation,  Preferences  and  Rights of Series C
             Convertible   Preferred  Stock  of  Molecular   Diagnostics,   Inc.
             (Incorporated  herein by reference to Exhibit 3.4 to the  Company's
             Registration   Statement  on  Form  S-2  (as  amended),   File  No.
             333-83578,  as filed on  February  28,  2002  (the  "February  2002
             S-2").)

3.8          Certificate of Amendment of Certificate of Designation, Preferences
             and Rights of Series C Convertible  Preferred Stock.  (Incorporated
             herein by reference to Exhibit 3.5 to the February 2002 S-2.)

3.9          Certificate  of Amendment of Amended  Certificate  of  Designation,
             Preferences  and Rights of Series C  Convertible  Preferred  Stock.
             (Incorporated  herein by  reference  to Exhibit 3.6 to the February
             2002 S-2.)

3.10         Certificate  of  Designations,  Preferences  and Rights of Series D
             Convertible  Preferred Stock.  (Incorporated herein by reference to
             Exhibit 3.7 to the February 2002 S-2.)

3.11         Certificate  of  Designation,  Preferences  and  Rights of Series E
             Convertible  Preferred Stock.  (Incorporated herein by reference to
             Exhibit 3.8 to the February 2002 S-2.)

3.12         Certificate  of Amendment to Certificate  of  Incorporation  of the
             Company, dated August 5, 2004. (Incorporated herein by reference to
             Exhibit 3.1 to the Company's Form 10-QSB for the quarter ended June
             30, 2004, as filed on August 16, 2004 (the "2004 2Q 10-QSB").)

4.1          Form of Common Stock Purchase Warrant, as executed by Bell National
             Corporation  on December 4, 1998,  with respect to each of Peter P.
             Gombrich,  Theodore L. Koenig,  William J. Ritger, Fred H. Pearson,
             Walter Herbst, AccuMed International, Inc., Northlea Partners Ltd.,
             and Monroe Investments, Inc. (collectively,  the "InPath Members").
             (Incorporated  herein by reference to Exhibit 3 of the Schedule 13D
             filed jointly by the InPath Members on December 14, 1998.)

4.2          Common Stock  Purchase  Warrant  issued to Holleb & Coff on July 4,
             1999  representing  the right to purchase  250,000 shares of Common
             Stock of Ampersand  Medical  Corporation.  (Incorporated  herein by
             reference  to  Exhibit  4.3 to the  Ampersand  Medical  Corporation
             Annual  Report on Form 10-K for the fiscal year ended  December 31,
             1999, as filed on March 31, 2000 (the "1999 10-K").)


                                       35
<PAGE>

Exhibit No.                        Description
-----------                        -----------

4.3          Common Stock Purchase Warrant issued to Osprey Partners on November
             22,  2000  representing  the right to  purchase  100,000  shares of
             Common Stock of Ampersand Medical Corporation. (Incorporated herein
             by reference to Exhibit 4.15 to the 2000 10-K.)

4.4          Common Stock Purchase Warrant issued to Univest Management, Inc. on
             November 22, 2000 representing the right to purchase 100,000 shares
             of Common Stock of  Ampersand  Medical  Corporation.  (Incorporated
             herein by reference to Exhibit 4.16 to the 2000 10-K.)

4.5          Common Stock  Purchase  Warrant  issued to Azimuth  Corporation  on
             December 1, 2000  representing  the right to purchase 50,000 shares
             of Common Stock of  Ampersand  Medical  Corporation.  (Incorporated
             herein by reference to Exhibit 4.17 to the 2000 10-K.)

4.6          Common Stock  Purchase  Warrant  issued to Azimuth  Corporation  on
             December  8,  2000  representing  the right to  purchase  1,000,000
             shares  of  Common   Stock  of   Ampersand   Medical   Corporation.
             (Incorporated  herein  by  reference  to  Exhibit  4.18 to the 2000
             10-K.)

4.7          Common Stock  Purchase  Warrant  issued to Azimuth  Corporation  on
             February  7,  2001  representing  the right to  purchase  1,000,000
             shares  of  Common   Stock  of   Ampersand   Medical   Corporation.
             (Incorporated  herein  by  reference  to  Exhibit  4.19 to the 2000
             10-K.)

4.8          Common  Stock  Purchase  Warrant  dated August 17, 2001 in favor of
             Azimuth   Corporation  with  an  issue  date  of  August  6,  2001,
             representing  the right to purchase  250,000 shares of common stock
             of Ampersand Medical Corporation. (Incorporated herein by reference
             to  Exhibit  4.24 to the  Registration  Statement  on Form  S-4 (as
             amended),  File No.  333-61666,  as filed on August  24,  2001 (the
             "August 2001 S-4").)

4.9          Common Stock Purchase Warrant issued to Cadmus  Corporation on July
             26,  2001  representing  the right to  purchase  250,000  shares of
             common stock of Ampersand Medical Corporation. (Incorporated herein
             by reference to Exhibit 4.23 to the August 2001 S-4.)

4.10         Common  Stock  Purchase  Warrant  dated August 17, 2001 in favor of
             Northlea  Partners,  Ltd.  with an issue  date of August  6,  2001,
             representing the right to purchase 62,500 shares of common stock of
             Ampersand Medical Corporation. (Incorporated herein by reference to
             Exhibit 4.27 to the August 2001 S-4.)

4.11         Common  Stock  Purchase  Warrant  dated August 17, 2001 in favor of
             Azimuth   Corporation   with  an  issue  date  of  July  26,  2001,
             representing  the right to purchase  500,000 shares of common stock
             of Ampersand Medical Corporation. (Incorporated herein by reference
             to Exhibit 4.25 to the August 2001 S-4.)

4.12         Common Stock  Purchase  Warrant  issued to Azimuth  Corporation  on
             August 17, 2001 representing the right to purchase 25,000 shares of
             common stock of Ampersand Medical Corporation. (Incorporated herein
             by reference to Exhibit 4.26 to the August 2001 S-4.)

4.13         Common Stock Purchase Warrant issued to Tucker Anthony Incorporated
             on July 10, 2001  representing the right to purchase 150,000 shares
             of common stock of  Ampersand  Medical  Corporation.  (Incorporated
             herein by reference to Exhibit 4.25 to the February 2002 S-2).

4.14         Common  Stock  Purchase   Warrant   issued  to  Schwartz,   Cooper,
             Greenberger & Krauss,  Chartered on February 13, 2002  representing
             the  right  to  purchase  750,000  shares  of  common  stock of the
             Company.  (Incorporated  herein by  reference  to  Exhibit  4.30 to
             Amendment No. 1 to the Registration Statement on Form S-2, File No.
             333-83578, as filed on June 21, 2002 (the "June 2002 S-2").)


                                       36
<PAGE>

Exhibit No.                        Description
-----------                        -----------

4.15         Common Stock Purchase  Warrant issued to Monsun AS on April 1, 2002
             representing  the right to purchase  200,000 shares of common stock
             of the Company.  (Incorporated  herein by reference to Exhibit 4.31
             to the June 2002 S-2.)

4.16         Form of Common Stock Purchase Warrant issued to Cell Solutions, LLC
             on October 11,  2001  representing  the right to  purchase  172,120
             shares of  common  stock.  (Incorporated  herein  by  reference  to
             Exhibit 4.32 to the June 2002 S-2.)

4.17         Form of Common Stock  Purchase  Warrant  issued in connection  with
             certain  Bridge I financing in June 2002.  (Incorporated  herein by
             reference to Exhibit 4.33 to the June 2002 S-2.)

4.18         Common Stock Purchase  Warrant  issued to Richard A. Domanik,  M.D,
             with an  issue  date of May 31,  2002,  representing  the  right to
             purchase   51,493   shares   of  common   stock  of  the   Company.
             (Incorporated   herein  by   reference   to  Exhibit  4.34  to  the
             Registration  Statement on Form S-2, File No. 333-100150,  as filed
             on September 27, 2002 (the "September 2002 S-2").)

4.19         Amendment  No. 1,  dated  August  19,  2002,  to the  Common  Stock
             Purchase  Warrant  issued  in  connection  with  certain  Bridge  I
             financing. (Incorporated herein by reference to Exhibit 4.36 to the
             Company's  Annual  Report on Form 10-K for the year ended  December
             31, 2002, as filed on July 21, 2003 (the "2002 10-K").)

4.20         Form of Common Stock  Purchase  Warrant to be issued in  connection
             with  certain  Bridge  II  Financing  beginning  in  October  2002.
             (Incorporated  herein  by  reference  to  Exhibit  4.37 to the 2002
             10-K.)

4.21         Common  Stock  Purchase  Warrant  issued to  Qwestar  Resources  on
             November 1, 2002  representing the right to purchase 200,000 shares
             of common stock of the Company.  (Incorporated  herein by reference
             to Exhibit 4.38 to the 2002 10-K.)

4.22         Common  Stock  Purchase  Warrant  issued to Suzanne M.  Gombrich on
             April 2, 2003  representing the right to purchase  1,000,000 shares
             of common stock of the Company.  (Incorporated  herein by reference
             to Exhibit 4.39 to the  Company's  Quarterly  Report on Form 10-QSB
             for the quarter  ended June 30,  2003,  as filed on August 13, 2003
             (the "2003 2Q 10-QSB").)

4.23         Common  Stock  Purchase  Warrant  issued to Dan Burns on August 20,
             2003 representing the right to purchase  1,100,000 shares of common
             stock of the Company.  (Incorporated herein by reference to Exhibit
             4.40 to the  Company's  Quarterly  Report  on Form  10-QSB  for the
             quarter  ended  September  30, 2003,  as filed on November 19, 2003
             (the "2003 3Q 10-QSB").)

4.24         Common Stock Purchase  Warrant issued to Dan Burns on September 16,
             2003  representing  the right to purchase  935,000 shares of common
             stock of the Company.  (Incorporated herein by reference to Exhibit
             4.41 to the 2003 3Q 10-QSB.)

4.25         Common  Stock  Purchase   Warrant  issued  to  David  Weissberg  on
             September  16,  2003  representing  the right to  purchase  400,000
             shares  of common  stock of the  Company.  (Incorporated  herein by
             reference to Exhibit 4.42 to the 2003 3Q 10-QSB.)

4.26         Common Stock Purchase  Warrant issued to Reid Jilek on September 2,
             2003  representing  the right to purchase  500,000 shares of common
             stock of the Company.  (Incorporated herein by reference to Exhibit
             4.43 to the 2003 3Q 10-QSB.)

4.27         Common Stock Purchase Warrant issued to Dan Burns on March 19, 2004
             representing  the right to purchase  500,000 shares of common stock
             of the Company. (Incorporated herein by reference to Exhibit 4.1 to
             the Company's Quarterly Report on Form 10-QSB for the quarter ended
             March 31, 2004, as filed on May 18, 2004 (the "2004 1Q 10-QSB").)


                                       37
<PAGE>

Exhibit No.                        Description
-----------                        -----------

4.28         Common Stock Purchase  Warrant issued to Dan Burns on March 4, 2004
             representing the right to purchase 67,000 shares of common stock of
             the  Company.  (Incorporated  herein by reference to Exhibit 4.2 to
             the 2004 1Q 10-QSB.)

4.29         Common Stock  Purchase  Warrant  issued to Dan Burns on May 5, 2004
             representing  the right to purchase  500,000 shares of common stock
             of the Company. (Incorporated herein by reference to Exhibit 4.1 to
             the  Company's  Form 10-QSB for the quarter ended June 30, 2004, as
             filed on August 16, 2004 (the "2004 2Q 10-QSB").)

4.30         Common Stock  Purchase  Warrant issued to Dan Burns on June 4, 2004
             representing  the right to purchase  530,000 shares of common stock
             of the Company. (Incorporated herein by reference to Exhibit 4.2 to
             the 2004 2Q 10-QSB.)

4.31         Common Stock Purchase Warrant issued to Don Hancock on June 4, 2004
             representing  the right to purchase  250,000 shares of common stock
             of the Company. (Incorporated herein by reference to Exhibit 4.3 to
             the 2004 2Q 10-QSB.)

4.32         Form of common stock purchase  warrant issued to private  placement
             agents  on June 15,  2004  representing  the right to  purchase  an
             aggregate   681,625   shares  of  common   stock  of  the  Company.
             (Incorporated  herein by  reference  to Exhibit  4.4 to the 2004 2Q
             10-QSB.)

4.33         Form of common stock purchase  warrant issued to vendors as part of
             restructuring  settlements  during the quarter  ended June 30, 2004
             representing  the right to purchase an aggregate  483,984 shares of
             common stock of the Company.  (Incorporated  herein by reference to
             Exhibit 4.5 to the2004 2Q 10-QSB.)

4.34         Common Stock  Purchase  Warrant  issued to Reid Jilek on August 26,
             2004  representing  the right to purchase  500,000 shares of common
             stock of the Company.  (Incorporated herein by reference to Exhibit
             4.1 to the  Company's  Quarterly  Report  on  Form  10-QSB  for the
             quarter  ended  September  30, 2004,  as filed on November 15, 2004
             (the "2004 3Q 10-QSB").)

4.35         Common Stock  Purchase  Warrant issued to Ken Sgro on September 15,
             2004  representing  the right to purchase  192,000 shares of common
             stock of the Company.  (Incorporated herein by reference to Exhibit
             4.2 to the 2004 3Q 10-QSB.)

4.36         Common Stock  Purchase  Warrant issued to James Fallon on September
             15, 2004  representing the right to purchase 8,000 shares of common
             stock of the Company.  (Incorporated herein by reference to Exhibit
             4.3 to the 2004 3Q 10-QSB.)

4.37         Common  Stock  Purchase  Warrant  issued to Jorge Leon,  Ph.D.,  on
             September 15, 2004 representing the right to purchase 25,000 shares
             of common stock of the Company.  (Incorporated  herein by reference
             to Exhibit 4.4 to the 2004 3Q 10-QSB.)

4.38         Common Stock Purchase Warrant issued to Jan L. Dorfman on September
             15, 2004 representing the right to purchase 20,000 shares of common
             stock of the Company.  (Incorporated herein by reference to Exhibit
             4.5 to the 2004 3Q 10-QSB.)

4.39*        Common Stock  Purchase  Warrant with an issue date of July 18, 2003
             in favor of Azimuth Corporation  representing the right to purchase
             2,875,000 shares of common stock of the Company.

4.40*        Common Stock  Purchase  Warrant with an issue date of July 18, 2003
             in favor of Cadmus  Corporation  representing the right to purchase
             3,625,000 shares of common stock of the Company.


                                       38
<PAGE>

Exhibit No.                        Description
-----------                        -----------

10.1+        Employment Agreement,  dated May 1, 1998, between Peter P. Gombrich
             and InPath,  LLC,  as amended on  December  4, 1998.  (Incorporated
             herein  by  reference  to  Exhibit  10.6 of the  Ampersand  Medical
             Corporation  Annual  Report on Form 10-K for the fiscal  year ended
             December 31, 1998, as filed on March 31, 1999 (the "1998 10-K").)

10.2+        1999  Equity  Incentive  Plan  established  as of June 1, 1999,  as
             amended.  (Incorporated  herein by  reference  to Appendix B to the
             Company's  Definitive  Proxy Statement on Schedule 14A, as filed on
             July 1, 2004.)

10.3+        1999  Employee  Stock  Purchase  Plan.   (Incorporated   herein  by
             reference to Appendix G to the 1999 Proxy Statement.)

10.4         $500,000  Convertible  Promissory  Note  issued  to  Monsun,  AS on
             November  1, 2000.  (Incorporated  herein by  reference  to Exhibit
             10.23 to the 2000 10-K.)

10.5         Lease Agreement  between  Ampersand  Medical  Corporation and O.P.,
             L.L.C, dated May 18, 2000, pertaining to premises located at 414 N.
             Orleans,  Suite 510,  Chicago,  Illinois  60610.  (Incorporated  by
             reference to Exhibit 10.32 to the 2000 10-K.)

10.6         First  Amendment  to  Lease  Agreement  between  Ampersand  Medical
             Corporation and O.P., L.L.C.,  dated February 13, 2001,  pertaining
             to  additional  premises  at 414 N.  Orleans,  Suite 503,  Chicago,
             Illinois  60610 and extending the term of the original  lease until
             February 28, 2006.  (Incorporated  by reference to Exhibit 10.33 to
             the 2000 10-K.)

10.7         $25,000 Promissory Note issued to Northlea Partners, Ltd. on August
             6, 2001.  (Incorporated herein by reference to Exhibit 10.41 to the
             August 2001 S-4.)

10.8         Form of  Convertible  Promissory  Note  issued in  connection  with
             certain Bridge I financing  beginning in March 2002.  (Incorporated
             herein by reference to Exhibit 10.42 to the 2002 10-K.)

10.9         Amendment No. 1 to Convertible Promissory Note issued in connection
             with   certain   Bridge  I  financing   dated   August  20,   2003.
             (Incorporated  herein by  reference  to  Exhibit  10.43 to the 2002
             10-K.)

10.10        Form of Bridge II Convertible Promissory Note Indenture,  including
             Form of Convertible  Promissory  Note, Form of Security  Agreement,
             Form of Collateral Sharing Agreement, and Form of Warrant issued in
             connection  with certain  Bridge II Financing  beginning in October
             2002.  (Incorporated  herein by reference  to Exhibit  10.44 to the
             2002 10-K.)

10.11        Consulting Agreement,  made as of November 11, 2003, by and between
             the Company and CEOCast, Inc.  (Incorporated herein by reference to
             Exhibit 10.45 to the Company's Annual Report on Form 10-KSB for the
             fiscal year ended  December 31, 2003,  as filed April 14, 2004 (the
             "2003 10-KSB").)

10.12        Consulting  Agreement,  effective as of August 4, 2003, between the
             Company  and  Redwood  Consultants,  LLC,  (Incorporated  herein by
             reference to Exhibit 10.46 to the 2003 10-KSB.)

10.13        Amendment  No.1  to the 12%  Convertible  Secured  Promissory  Note
             issued in  connection  with certain  Bridge II financing in October
             2002.  (Incorporated  herein by reference  to Exhibit  10.47 to the
             2003 3Q 10-QSB.)

10.14        Amendment No. 1 dated July 31, 2003 to the Indenture  dated October
             1, 2002 issued in  connection  with certain  Bridge II financing in
             October 2002 (Incorporated  herein by reference to Exhibit 10.48 to
             the 2003 3Q 10-QSB.)


                                       39
<PAGE>

Exhibit No.                        Description
-----------                        -----------

10.15        Form of consulting  agreement with Dan Burns and Eugene  Martineau.
             (Incorporated  herein by reference to Exhibit  10.49 to the 2003 3Q
             10-QSB.)

10.16        Proposal for consulting  agreement  with Reid Jilek.  (Incorporated
             herein by reference to Exhibit 10.50 to the 2003 3Q 10-QSB.)

10.17        Form of  Subscription  Agreement for Bridge III $1,500,000  minimum
             offering/$4,000,000  Maximum  Offering  placed by Bathgate  Capital
             Partners LLC. (Incorporated herein by reference to Exhibit 10.47 to
             the 2003 10-KSB.)

10.18        Form of Note for Bridge III $1,500,000 minimum  offering/$4,000,000
             Maximum   Offering  placed  by  Bathgate   Capital   Partners  LLC.
             (Incorporated  herein by  reference  to  Exhibit  10.48 to the 2003
             10-KSB.)

10.19        Form Registration Rights Agreement issued in connection with Bridge
             III Offering. (Incorporated herein by reference to Exhibit 10.49 to
             the 2003 10-KSB.)

10.20        Form of General  Security  Agreement  by the Company in  connection
             with Bridge III  Offering.  (Incorporated  herein by  reference  to
             Exhibit 10.50 to the 2003 10-KSB.)

10.21        Form of Warrant  issued in  connection  with  Bridge III  Offering.
             (Incorporated  herein by  reference  to  Exhibit  10.51 to the 2003
             10-KSB.)

10.22        Form  of   Subscription   Agreement   for   Bridge   IV   Offering.
             (Incorporated  herein by  reference  to Exhibit  4.3 to the 2004 1Q
             10-QSB.)

10.23        Form of Note  for  Bridge  IV  Offering.  (Incorporated  herein  by
             reference to Exhibit 4.4 to the 2004 1Q 10-QSB.)

10.24        Form  of  General  Security   Agreement  for  Bridge  IV  Offering.
             (Incorporated  herein by  reference  to Exhibit  4.5 to the 2004 1Q
             10-QSB.)

10.25        Form of  Registration  Rights  Agreement  for  Bridge IV  Offering.
             (Incorporated  herein by  reference  to Exhibit  4.6 to the 2004 1Q
             10-QSB.)

10.26        Form of Subscription Agreement for the Company's August 2004 common
             stock offering. (Incorporated herein by reference to Exhibit 4.6 to
             the 2004 3Q 10-QSB.)

10.27        Settlement  Agreement,  effective  as of October 14,  2004,  by and
             among the  Company,  AccuMed and  MonoGen,  Inc.  and  accompanying
             License  Agreement,  made as of October  14,  2004,  by and between
             MonoGen,  Inc.,  the Company and AccuMed.  (Incorporated  herein by
             reference  to Exhibit 4.8 to the  Company's  Form  10-QSB/A for the
             quarter ended September 30, 2004, as filed on November 17, 2004.)

10.28*       Form of  Subscription  Agreement  for the  Company's  common  stock
             offering beginning in December 2004.

10.29*       General Release and Settlement Agreement,  effective as of July 18,
             2003,  by and among the  Company,  Azimuth  Corporation  and Cadmus
             Corporation.

10.30*       Agreement,  made as of December 31, 2004,  between British Columbia
             Cancer Agency Branch and the Company, AccuMed and Oncometrics.


                                       40
<PAGE>

Exhibit No.                        Description
-----------                        -----------

10.31*       Settlement  Agreement,  entered  into as of December  2004,  by and
             between Bruce Patterson and Invirion, Inc. and the Company.

10.32*       Lease proposal  letter  agreement,  dated  September 22, 2004, from
             Spectrum  Real Estate  Services to the  Company  pertaining  to the
             lease of premises  located at 414 N. Orleans,  Suite 510,  Chicago,
             Illinois  60610 to be  effective  as third  amendment  to  original
             lease.

10.33*       Strategic alliance agreement entered into by the Company in
             November 2004

14           Code of Ethics and  Business  Conduct of  Officers,  Directors  and
             Employees of Molecular  Diagnostics,  Inc.  (Incorporated herein by
             reference to Exhibit 99.1 to the 2003 10-KSB.)

21*          Subsidiaries of the Company

23.1*        Consent of Altschuler, Melvoin and Glasser LLP

31.1*        Certification   of  the  Chief   Executive   Officer  of  Molecular
             Diagnostics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act
             of 2002.

31.2*        Certification   of  the  Chief   Financial   Officer  of  Molecular
             Diagnostics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act
             of 2002.

32.1*        Certification   of  the  Chief   Executive   Officer  of  Molecular
             Diagnostics,  Inc.  Pursuant to 18 U.S.C.  Section 1350, As Adopted
             Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*        Certification   of  the  Chief   Financial   Officer  of  Molecular
             Diagnostics,  Inc., Pursuant to 18 U.S.C.  Section 1350, As Adopted
             Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Item 14. Principal Accountant Fees and Services

         The  information  required  by this Item 14 is  incorporated  herein by
reference  to our  Definitive  Proxy  Statement  for the  Company's  2005 Annual
Meeting of Stockholders to be filed with the Securities and Exchange  Commission
no later than 120 days after the end of the Company's 2004 fiscal year.


                                       41
<PAGE>

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.

                                            MOLECULAR DIAGNOSTICS, INC.

                                            By: /s/ DENIS M. O'DONNELL, M.D.
                                               ---------------------------------
                                                Denis M. O'Donnell, M.D.
                                                Chief Executive Officer

Date: April 14, 2005

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
                       Signature                                              Title                              Date
                       ---------                                              -----                              ----
<S>                                                           <C>                                           <C>
/S/            DENIS M. O'DONNELL, M.D.                       Director, President and Chief Executive       April 14, 2005
---------------------------------------------------
               Denis M. O'Donnell, M.D.                       Officer (Principal Executive Officer)

/s/              DENNIS L. BERGQUIST                          Chief Financial Officer                       April 14, 2005
---------------------------------------------------
                  Dennis L. Bergquist                         (Principal Accounting Officer)

/s/               ALEXANDER M. MILLEY                         Director                                      April 14, 2005
---------------------------------------------------
                  Alexander M. Milley

/S/                   JOHN ABELES                             Director                                      April 14, 2005
---------------------------------------------------
                      John Abeles
</TABLE>


                                       42
<PAGE>

             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Molecular Diagnostics, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets of  Molecular
Diagnostics,  Inc. and  Subsidiaries  as of December 31, 2004 and 2003,  and the
related statements of operations,  changes in stockholders' equity (deficit) and
cash flows for the years then ended.  Our audits  also  included  the  financial
statement schedule listed in the index at item 14. These consolidated  financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits. We did not audit the financial statements of Samba
Technologies,  SARL, a wholly-owned subsidiary, which statements reflect results
from  discontinued  operations of $217,000 for the year ended December 31, 2003.
Those  statements were audited by other auditors whose report has been furnished
to us and our opinion,  insofar as it relates to the amounts  included for Samba
Technologies,  SARL for the year ended December 31, 2003, is based solely on the
report of the other auditors.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial statement  presentation.  We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.

In our  opinion,  based on our  audits  and the  report of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,  the financial position of Molecular  Diagnostics,  Inc. and
Subsidiaries  as of  December  31,  2004  and  2003  and the  results  of  their
operations  and their cash flows for the years then ended,  in  conformity  with
accounting  principles  generally  accepted in the United  States.  Also, in our
opinion, the related financial statement schedule when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial  statements,  the Company  has  incurred  substantial  net losses from
operations  and  has  limited  financial   resources.   These  conditions  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans with regard to these  matters are  described  in Note 1. The
financial  statements  do not include any  adjustments  to reflect the  possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may result  from the  outcome of this
uncertainty.

                                         /s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
April 13, 2005


                                      F-1
<PAGE>

                         Report of Independent Auditors

To The Stockholders of
SARL Samba Technologies

In our opinion the balance sheets,  income statements,  statements of cash flows
and of changes in  stockholder's  equity of SARL Samba  Technologies,  present a
true and fair view of the Company's  financial  position as of December 31, 2003
and the results for the year then ended and has been prepared in accordance with
U.S. Generally Accepted  Accounting  Principles and is suitable for inclusion in
the consolidated accounts of Molecular Diagnostics, Inc.

                                         /s/ AUDITEURS & CONSEILS ASSOCIES

Paris, France
April 8, 2004


                                      F-2
<PAGE>

                          PART I--FINANCIAL INFORMATION

                  MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                                               December 31,
                                                                                                          ---------------------
                                                                                                            2004          2003
                                                                                                          --------     --------
<S>                                                                                                       <C>          <C>
                                     Assets

Current Assets:

Cash and cash equivalents ............................................................................    $     11     $     --
Accounts receivables, net of allowance for doubtful accounts of $0 and $50 at December 31, ...........
         2004 and 2003, respectively .................................................................          30           26
Inventories ..........................................................................................          48           94
Deferred financings costs ............................................................................          80          307
Prepaid expenses and other current assets ............................................................          14            7
                                                                                                          --------     --------
              Total current assets ...................................................................         183          434
Fixed Assets, net ....................................................................................         326          374
Other Assets:
Licenses, patents, and technology, net of amortization ...............................................          20        6,907
                                                                                                          --------     --------

              Total assets ...........................................................................    $    529     $  7,715
                                                                                                          ========     ========

                   Liabilities and Stockholders' Equity (Deficit)

Current Liabilities:

Checks issued in excess of amounts on deposit ........................................................    $     --     $      5
Accounts payable .....................................................................................       4,426        5,540
Accrued payroll costs ................................................................................       1,084        1,745
Accrued expenses .....................................................................................       1,944        1,401
Deferred revenue .....................................................................................          25           50
Due to stockholder ...................................................................................          38           53
Lease obligation .....................................................................................         110          279
Notes payable--related party .........................................................................          70        1,092
Notes payable ........................................................................................       4,955        6,099
                                                                                                          --------     --------
              Total current liabilities ..............................................................      12,652       16,264
                                                                                                          --------     --------

Stockholders' Equity (Deficit):

Preferred stock; $0.001 par value; shares authorized 10,000,000; 1,119,192 and 2,511,108 shares issued
              and outstanding at December 31, 2004 and 2003, respectively (Liquidation value of all
              classes of preferred stock $14,636,679 at December 31, 2004) ...........................       7,767       12,894
Common stock, $0.001 par value; 300,000,000 shares authorized; 99,792,292 and 45,830,928 shares
              issued and 99,600,204 and 45,638,840 shares outstanding at December 31, 2004 and
              2003, respectively .....................................................................         100           46
Additional paid-in capital ...........................................................................      45,961       29,553
Treasury stock; 192,088 shares at December 31, 2004 and 2003 .........................................        (327)        (327)
Accumulated deficit ..................................................................................     (65,565)     (50,673)
Accumulated comprehensive loss--Cumulative translation adjustment ....................................         (59)         (42)
                                                                                                          --------     --------
              Total stockholders' equity (deficit) ...................................................     (12,123)      (8,549)
                                                                                                          --------     --------
              Total liabilities and stockholders' equity (deficit) ...................................    $    529     $  7,715
                                                                                                          ========     ========
</TABLE>

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


                                      F-3
<PAGE>

                  MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                        -----------------------------
                                                            2004             2003
                                                        ------------     ------------
<S>                                                     <C>              <C>
Net Sales ..........................................    $        243     $        379
Costs and Expenses:
        Cost of goods sold .........................              24              143
        Research and development ...................             834              580
        Selling, general and administrative expenses           5,216            6,230
        Impairment loss ............................              --              283
                                                        ------------     ------------
Total costs and expenses ...........................           6,074            7,236
                                                        ------------     ------------
Operating loss .....................................          (5,831)          (6,857)
                                                        ------------     ------------
Other income (expense):
        Interest expense--related party ............             (53)            (104)
        Interest expense ...........................          (1,950)          (3,151)
        Restructuring settlements ..................           1,008               --
        Gain on sale of fixed assets ...............              99               --
        Loss on litigation settlements .............          (6,850)              --
        Other, net .................................              10              308
                                                        ------------     ------------
        Total other income (expense) ...............          (7,736)          (2,947)
                                                        ------------     ------------
Loss from continuing operations before income taxes          (13,567)          (9,804)
Income taxes .......................................              --               --
                                                        ------------     ------------
Loss from continuing operations ....................         (13,567)          (9,804)
Discontinued operations:
        Gain from involuntary conversion ...........              --              292
        Results from discontinued operations .......              --              (75)
                                                        ------------     ------------
Net loss ...........................................    $    (13,567)    $     (9,587)
                                                        ============     ============
Preferred stock dividends ..........................          (1,034)          (1,473)
                                                        ------------     ------------
Total dividends ....................................          (1,034)          (1,473)
                                                        ------------     ------------
Net loss applicable to common stockholders .........    $    (14,601)    $    (11,060)
                                                        ============     ============
Basic and fully diluted net loss per common share ..    $       (.19)    $       (.27)
                                                        ============     ============
Weighted average number of common shares outstanding      76,964,553       40,695,186
                                                        ============     ============
</TABLE>

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


                                      F-4
<PAGE>

                  MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                                          -----------------------
                                                                                             2004         2003
                                                                                           --------     --------
<S>                                                                                        <C>          <C>
Operating Activities:
     Net loss .........................................................................    $(13,567)    $ (9,587)
         Amortization of debt discount ................................................       1,085        2,507
         Depreciation and amortization ................................................         575          869
         Amortization of fees .........................................................         362          460
         Fixed assets in exchange for services ........................................          --            8
         Gain on sale of fixed assets .................................................         (99)         (34)
         Return of fixed assets in exchange for relief of indebtedness ................         149           --
         Loss on intangible assets upon legal settlement ..............................       6,488           --
         Stock, warrants, and options issued to non-employees for services ............       1,489        2,108
         Notes issued in payment of expenses ..........................................         446          429
         Compensation expense related to stock appreciation rights and restricted stock          --           12
         Impairment of goodwill .......................................................          --          283
         Changes in assets and liabilities:
              Accounts receivable .....................................................          (4)         304
              Inventories .............................................................          47          351
              Refundable taxes ........................................................          --           60
              Due from stockholder ....................................................         (16)         529
              Prepaid expenses and other current assets ...............................        (141)        (531)
              Checks issued in excess of amounts on deposit ...........................          (5)           5
              Accounts payable ........................................................        (882)         242
              Deposits ................................................................          --          (24)
              Deferred revenue ........................................................         (25)        (720)
              Lease obligation ........................................................        (169)          --
              Accrued expenses ........................................................         305          169
                                                                                           --------     --------
Net cash used for operating activities ................................................      (3,962)      (2,560)
                                                                                           --------     --------
Cash used in investing activities:
     Expenditures for licenses, patents, and technology ...............................         (20)          --
     Capital purchases ................................................................        (187)         (18)
                                                                                           --------     --------
     Net cash used for investing activities ...........................................        (207)         (18)
                                                                                           --------     --------
Cash flows from financing activities:
     Proceeds from issuance of convertible notes payable ..............................       4,236        1,965
     Proceeds from issuance of convertible notes payable, related party ...............          --        1,015
     Proceeds from issuance of common stock ...........................................         810           --
     Payments of notes payable ........................................................        (894)        (623)
     Proceeds from sale of fixed assets ...............................................          28           83
                                                                                           --------     --------
     Net cash provided by financing activities ........................................       4,180        2,440
Effect of exchange rate changes on cash and cash equivalents ..........................          --           96
                                                                                           --------     --------
Net increase/(decrease) in cash and cash equivalents ..................................          11          (42)
Cash and cash equivalents at beginning of period ......................................           0           42
                                                                                           --------     --------
Cash and cash equivalents at end of period ............................................    $     11     $      0
                                                                                           ========     ========

Supplemental disclosure of cash flow information:

Cash paid during the period for:

Interest ..............................................................................    $    135     $    868
Non-cash transaction during the period for:
Deferred financing costs ..............................................................    $  1,329     $  1,663
Preferred stock and cumulative dividends converted into common stock ..................    $  6,451     $  4,508
Notes issued in payment of expenses ...................................................    $    446     $    429
</TABLE>

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


                                      F-5
<PAGE>

                  MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                          Preferred Stock             Common Stock                                          Note
                                         Par Value $0.001            Par Value $0.001     Treasury Stock    Additional   Receivable
                                        -------------------         ------------------   -----------------    Paid-In       From
                                        Shares       Amount         Shares      Amount   Shares     Amount    Capital    Stockholder
                                        ------       ------         ------      ------   ------     ------    -------    -----------
<S>                                    <C>          <C>           <C>            <C>     <C>        <C>       <C>             <C>
January 1, 2003 ....................   2,781,024    $16,958       36,440,700     $ 37    192,088    $(327)    $19,557         $--
Comprehensive Loss:
   Net loss ........................                     --                        --                              --          --
   Foreign currency translation ....                     --                        --                              --          --

   Total net comprehensive
   Loss ............................
Series A preferred stock
   converted to common .............     (35,437)      (159)          15,478       --                  --         159          --
Series C preferred stock
   and cumulative dividends
   converted to common .............     (66,000)      (198)         380,403       --                  --         228          --
Series E preferred stock, conversion
   premium and cumulative
   dividends converted to common ...    (168,479)    (3,707)       5,150,744        5                  --       4,110          --
Deferred compensation expense
   For unvested options issued in
   acquisition .....................                     --                        --                  --          --          --
Common stock issued for services ...                     --        4,480,888        5                  --       1,095          --
Common stock issued for
   exercise of warrants ............                     --          352,500       --                  --          --          --
Common stock issued
   as collateral and cancelled .....                     --       (6,461,364)      (6)                 --        (104)         --
Beneficial conversion feature
   on convertible notes ............                     --                        --                  --       2,823          --
Bridge I conversion ................                     --          368,579       --                  --          72          --
Bridge II conversion ...............                     --        5,103,000        5                  --         505          --
Warrants issued for services .......                     --                        --                  --       1,108          --
                                                    -------       ----------     ----               -----     -------         ---
December 31, 2003 ..................   2,511,108    $12,894       45,830,928     $ 46    192,088    $(327)    $29,553         $--
Comprehensive Loss:
   Net Loss ........................                     --                        --                  --          --          --
   Foreign currency translation ....                     --                        --                  --          --          --

Total net comprehensive
   Loss ............................                     --                        --                  --          --          --

<CAPTION>


                                          Deferred  Accumulated Comprehensive  Stockholder's
                                       Compensation   Deficit       Loss      Equity (Deficit)
                                       ------------   -------       ----      ----------------
<S>                                       <C>       <C>            <C>           <C>
January 1, 2003 ....................      $(11)     $(40,642)      $(151)        $ (4,579)
Comprehensive Loss:
   Net loss ........................        --        (9,587)         --           (9,587)
   Foreign currency translation ....        --            --         109              109
                                                                                 --------
   Total net comprehensive
   Loss ............................                                               (9,478)
Series A preferred stock
   converted to common .............        --            --          --               --
Series C preferred stock
   and cumulative dividends
   converted to common .............        --           (30)         --               --
Series E preferred stock, conversion
   premium and cumulative
   dividends converted to common ...        --          (414)         --               (6)
Deferred compensation expense
   For unvested options issued in
   acquisition .....................        11            --          --               11
Common stock issued for services ...        --            --          --            1,100
Common stock issued for
   exercise of warrants ............        --            --          --               --
Common stock issued
   as collateral and cancelled .....        --            --          --             (110)
Beneficial conversion feature
   on convertible notes ............        --            --          --            2,823
Bridge I conversion ................        --            --          --               72
Bridge II conversion ...............        --            --          --              510
Warrants issued for services .......        --            --          --            1,108
                                          ----      --------       -----         --------
December 31, 2003 ..................      $ --      $(50,673)      $ (42)        $ (8,549)
Comprehensive Loss:
   Net Loss ........................        --       (13,567)         --          (13,567)
   Foreign currency translation ....        --            --         (17)             (17)
                                                                                 --------
Total net comprehensive
   Loss ............................        --            --          --          (13,584)
</TABLE>

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


                                      F-6
<PAGE>

                  MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                          Preferred Stock             Common Stock                                          Note
                                         Par Value $0.001            Par Value $0.001     Treasury Stock    Additional   Receivable
                                        -------------------         ------------------   -----------------    Paid-In       From
                                        Shares       Amount         Shares      Amount   Shares     Amount    Capital    Stockholder
                                        ------       ------         ------      ------   ------     ------    -------    -----------
<S>                                    <C>          <C>           <C>            <C>     <C>        <C>       <C>             <C>
Series B preferred stock and
   cumulative dividends
   converted to common .............    (434,750)    (1,739)       2,280,798        2                  --       2,279          --
Series C preferred stock and
   cumulative dividends
   converted to common .............    (930,000)    (2,790)       5,703,816        6                  --       3,417          --
Series E preferred stock and
   cumulative dividends
   converted to common .............     (27,166)      (598)         935,483       --                  --         748          --
Bridge I conversions ...............                     --        9,985,182       10                  --        1487          --
Bridge II conversions ..............                     --       17,619,242       18                  --       2,377          --
Sales of common stock ..............                     --       10,988,096       11                  --         799          --
Common stock issued for
   services ........................                     --        3,024,333        3                  --         284          --
Common stock issued in
   lieu of debt ....................                     --        2,647,748        3                  --         266          --
Common stock issued to
   employees .......................                     --          216,666       --                  --          14          --
Common stock issued for
   financing fees ..................                     --          560,000        1                  --          47          --
Beneficial conversion feature
   on convertible notes ............                     --                        --                  --       3,394          --
Warrants issued with debt ..........                     --                        --                  --         619          --
Warrants issued for financing
   fees ............................                     --                        --                  --         529          --
Warrants issued for services .......                     --                        --                  --          84          --
Warrants issued in settlement
   of debt .........................                     --                        --                  --          64          --
                                       ---------    -------       ----------     ----    -------    -----     -------         ---
December 31, 2004 ..................   1,119,192    $ 7,767       99,792,292     $100    192,088    $(327)    $45,961         $--
                                       =========    =======       ==========     ====    =======    =====     =======         ===

<CAPTION>


                                           Deferred  Accumulated Comprehensive  Stockholder's
                                        Compensation   Deficit       Loss      Equity (Deficit)
                                        ------------   -------       ----      ----------------
<S>                                        <C>       <C>            <C>           <C>
Series B preferred stock and
   cumulative dividends
   converted to common .............         --          (542)         --               --
Series C preferred stock and
   cumulative dividends
   converted to common .............         --          (633)         --               --
Series E preferred stock and
   cumulative dividends
   converted to common .............         --          (150)         --               --
Bridge I conversions ...............         --            --          --            1,497
Bridge II conversions ..............         --            --          --            2,395
Sales of common stock ..............         --            --          --              810
Common stock issued for
   services ........................         --            --          --              287
Common stock issued in
   lieu of debt ....................         --            --          --              269
Common stock issued to
   employees .......................         --            --          --               14
Common stock issued for
   financing fees ..................         --            --          --               48
Beneficial conversion feature
   on convertible notes ............         --            --          --            3,394
Warrants issued with debt ..........         --            --          --              619
Warrants issued for financing
   fees ............................         --            --          --              529
Warrants issued for services .......         --            --          --               84
Warrants issued in settlement
   of debt .........................         --            --          --               64
                                           ----      --------       -----         --------
December 31, 2004 ..................       $ --      $(65,565)      $ (59)        $(12,123)
                                           ====      ========       =====         ========
</TABLE>

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


                                      F-7
<PAGE>

                  MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004

Note 1.           The Company and Basis of Presentation

         Molecular  Diagnostics,  Inc. ("MDI" or the "Company") was incorporated
as Ampersand  Medical  Corporation in Delaware in December 1998 as the successor
to Bell National  Corporation ("Bell National").  Bell National was incorporated
in  California  in 1958,  and was the  continuing  legal  entity  following  its
acquisition of InPath,  LLC, a  development-stage  company engaged in the design
and development of medical instruments and related tests, in December 1998. Bell
National  then  merged  into the  Company,  which was then  operating  under the
Ampersand name, in 1999.

         On September 25, 2001,  following the Company's  acquisition of AccuMed
International,  Inc.  ("AccuMed")  via the merger of AccuMed into a wholly-owned
subsidiary  of  MDI,  the  Company  changed  its  corporate  name  to  Molecular
Diagnostics,  Inc. in order to better represent its operations and products. The
name  change  was  effected  through  a  merger  with  a  separate  wholly-owned
subsidiary.  MDI retained its Certificate of Incorporation in the merger, except
as amended to reflect its new name, bylaws and capitalization.

         MDI is a  biomolecular  diagnostics  company  engaged  in  the  design,
development and commercialization of cost-effective  screening systems to assist
in the early  detection  of cancer.  MDI is  currently  focused  on the  design,
development  and marketing of its  InPath(TM)  System and related image analysis
systems.  The InPath  System and related  products are intended to detect cancer
and  cancer-related  diseases,  and  may be  used in a  laboratory,  clinic,  or
doctor's office.

         In addition to AccuMed and  Oncometrics  Imaging  Corp., a wholly-owned
subsidiary  of  AccuMed,   MDI  had  another  wholly-owned   subsidiary,   Samba
Technologies, SARL ("Samba"). MDI acquired all of the assets of Samba in January
1999 from Unilog Regions, SA for approximately $500,000 in cash. Samba designed,
developed, and marketed web-enabled,  software-based systems for image analysis,
image capture, and image transmission and management for clinical and industrial
applications.  A majority  of  reported  revenues  since  inception  of MDI were
generated  by Samba.  Commencing  December 20, 2002,  Samba  operated  under the
protection of the French Commercial Court in compliance with the bankruptcy laws
of France.  During 2003, MDI was unable to raise sufficient capital to enable it
to provide  funds to Samba to meet its  obligations.  On December 19, 2003,  the
French  Commercial Court finalized the liquidation sale of Samba's assets.  Upon
completion of the bankruptcy  liquidation sale, MDI lost all rights and title to
Samba's  assets,  including  Samba's  software.  MDI reflected  the  involuntary
liquidation of Samba's assets by the French Commercial Court in its December 31,
2003 financial  statements and subsequent  financial  statements as discontinued
operations.

         The  Company  has  incurred  significant  operating  losses  since  its
inception.  Management expects that significant on-going operating  expenditures
will be necessary to  successfully  implement  MDI's  business plan and develop,
manufacture and market its products. These circumstances raise substantial doubt
about MDI's ability to continue as a going concern.  Implementation of its plans
and its  ability  to  continue  as a going  concern  depend  upon  its  securing
substantial  additional financing.  Management's plans include efforts to obtain
additional  capital.  If the  Company  is unable to obtain  adequate  additional
financing or generate profitable sales revenues,  it may be unable to resume its
product development and other activities and may be forced to cease operations.

Note 2.           Summary of Significant Accounting Policies

         Principles of Consolidation.

         The  consolidated  financial  statements  include  the  Company and its
wholly-owned   subsidiaries.   All   significant   inter-company   balances  and
transactions have been eliminated in consolidation.

         Use of Estimates.

         The preparation of the consolidated  financial statements in conformity
with  accounting  principles  generally  accepted in the United States  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.


                                      F-8
<PAGE>

                        Recent Accounting Pronouncements

         Accounting for Stock-Based Compensation-Transition and Disclosure

         In December  2003,  the FASB issued  Statement of Financial  Accounting
Standards  No. 148,  "Accounting  for  Stock-Based  Compensation-Transition  and
Disclosure" (SFAS 148). This Statement, which is effective for years ended after
December   15,  2003  amends  SFAS  No.   123,   "Accounting   for   Stock-Based
Compensation,"  and provides  alternative  methods of transition for a voluntary
change to the fair  value-based  method of accounting for  stock-based  employee
compensation.  In addition,  SFAS No. 148 amends the disclosure  requirements of
SFAS No. 123 regardless of the accounting method used to account for stock-based
compensation.  The Company  has chosen to  continue  to account for  stock-based
compensation  of  employees  using the  intrinsic  value  method  prescribed  in
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees" and related  interpretations.  The enhanced disclosure  provisions as
defined by SFAS 148 are included in Note 11 of this report.

         Share-Based Payment

         In December  2004,  the FASB issued  Statement of Financial  Accounting
Standards  No.  123(R),  "Share-Based  Payment."  SFAS  No.  123(R)  establishes
accounting  standards for  transactions in which a company  exchanges its equity
instruments  for goods or services.  In particular,  this Statement will require
companies to record compensation expense for all share-based  payments,  such as
employee stock options,  at fair market value. This statement is effective as of
the beginning of the first interim or annual  reporting period that begins after
December 15, 2005.  Adoption of this financial statement is not expected to have
a material impact on the Company's consolidated financial position or results of
operations.

         Exchanges of Nonmonetary Assets

         In  December  2004,  FASB  issued  Statement  of  Financial  Accounting
Standards No. 153, "Exchanges of Nonmonetary  Assets-an amendment to APB Opinion
No. 29." This statement amends APB 29 to eliminate the exception for nonmonetary
exchanges of similar  productive assets and replaces it with a general exception
for exchanges of nonmonetary  assets that do not have  commercial  substance.  A
nomonetary  exchange has  commercials  substance if the future cash flows of the
entity  are  expected  to  change  significantly  as a result  of the  exchange.
Adoption of this  statement  is not  expected  to have a material  impact on the
Company's consolidated financial position or results of operations.

         Inventory Costs

         In  November  2004,  FASB  issued  Statement  of  Financial  Accounting
Standards No. 151, "Inventory Costs-an amendment of ARB No. 43, Chapter 4." This
statement amends the guidance in ARB No. 43, Chapter 4, "Inventory  Pricing," to
clarify the accounting for abnormal amounts of idle facility  expense,  freight,
handling costs,  and wasted material  (spoilage).  Adoption of this statement is
not expected to have a material impact on the Company's  consolidated  financial
position or results of operations.

         Goodwill and Other Intangible Assets

         The Company  adopted  FAS 142  effective  January 1, 2002.  The Company
completed its initial review of goodwill and intangible  assets during the first
quarter of 2002. An additional review was conducted during the second quarter of
2003, in accordance with the adoption of FAS 142,  resulting in no impairment of
goodwill or  intangible  assets for the year ended  December 31, 2002. A further
review was  conducted  in the first  quarter  of 2004 with the result  being the
write-off of the goodwill  recorded  from the AccuMed  acquisition  for the year
ended December 31, 2003.

         Impairment or Disposal of Long-Lived Assets


                                      F-9
<PAGE>

         At  each  balance   sheet  date  or  whenever   events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable,  management of the Company evaluates recoverability of such assets.
An impairment  loss is recognized  if the amount of  undiscounted  cash flows is
less than the carrying  amount of the asset,  in which case the asset is written
down to fair value.  The fair value of the asset is  measured  by either  quoted
market prices or the present value of estimated expected future cash flows using
a discount rate commensurate with the risks involved.

         Revenue Recognition

         MDI  recognizes  revenue  upon  shipment  of product to  customers  and
invoicing,  and no remaining Company obligations or contingencies  exist. In the
case of sales of software by former wholly-owned  subsidiary Samba,  revenue was
recognized  upon  shipment if  persuasive  evidence of an  arrangement  existed;
sufficient  vendor-specific objective evidence existed to support allocating the
total fee to all elements of the arrangement; the fee was fixed or determinable;
and collection was probable.

         Revenue from ongoing client  maintenance is recognized ratably over the
post-contract support term, which is generally 12 months.  Revenue from training
services and professional  services is recognized when the service is completed.
Revenue from  implementation  and installation  services is recognized using the
percentage of completion  method.  Revenue from  prepayments  under  licenses is
recognized over the license period.  Samba  calculated  percentage of completion
based on the estimated total number of hours of service  required to complete an
implementation  project  and the  number of actual  hours of  service  rendered.
Implementation  and  installation  services are generally  completed  within 120
days.  All revenue  recognition  related to Samba ceased on December 19, 2003 in
accordance with the liquidation sale of Samba's assets by the French  Commercial
Court.

         Cash and Cash Equivalents

         The Company considers all highly liquid  investments with a maturity of
three months or less at the time of purchase to be cash equivalents.

         Inventory of Instruments, Component Parts and Labor

         Inventory  of  instruments  and  component  parts  consisted  of AcCell
instruments and component parts necessary to manufacture  AcCell  instruments as
of December 31, 2004 and 2003. The  manufacturing  process is carried out in the
facilities   of  a   third-party   contractor.   Inventory   is  stated  at  the
lower-of-cost-or-market; cost is determined by the first-in-first-out method.

         Property and Equipment

         Property and equipment are stated at cost and are depreciated using the
straight-line  method over the assets' estimated useful lives.  Principal useful
lives are as follows:

<TABLE>
<S>                                                                   <C>
        Furniture and fixtures...................................     5 years
        Laboratory equipment.....................................     5 years
        Computer and communications equipment....................     3 years
        Leasehold improvements...................................     Useful life or term of lease,  whichever is
                                                                      shorter
</TABLE>

         Normal  maintenance  and repairs for property and equipment are charged
to expense as incurred, while significant improvements are capitalized.

         Licenses, Patents, and Technology

         Licenses,  patents,  and  purchased  technology  are  recorded at their
acquisition  cost.  Costs to prepare  patent filings are expensed when incurred.
Costs related to abandoned  patents are written off at the time of  abandonment.
Amortization  is begun as of the date of  acquisition  or upon the  grant of the
final patent.  Costs are amortized  over the asset's  useful life,  which ranges
from two to 17 years. The Company  assesses  licenses,  patents,  and technology
periodically for impairment.


                                      F-10
<PAGE>

         Research and Development Costs

         Research and  development  costs are charged to operations as incurred.
MDI conducts a portion of its research activities under contractual arrangements
with scientists, researchers, universities, and other independent third parties.

         Foreign Currency Translation

         The  functional  currency of the  Company's  foreign  operations is the
local currency. Accordingly, all assets and liabilities are translated into U.S.
dollars  using  year-end  exchange  rates,  and all  revenues  and  expenses are
translated using average exchange rates during the year.

         Other Comprehensive Income (Loss)

         Translation adjustments related to the Company's foreign operations are
included in other  comprehensive  loss and reported  separately in stockholders'
equity (deficit).  Realized  translation  losses arising from the liquidation of
Samba's assets by the French  Commercial  Court are included in the accompanying
statement of operations for 2003.

         Net Loss Per Share

         Basic loss per share is calculated based on the weighted-average number
of outstanding common shares.  Diluted loss per share is calculated based on the
weighted-average number of outstanding common shares plus the effect of dilutive
potential  common  shares.  MDI's  calculation  of  diluted  net loss per  share
excludes   potential  common  shares  as  the  effect  would  be  anti-dilutive.
Cumulative  and  deemed  dividends  on  convertible   preferred  shares  totaled
approximately   $3,569,000  and  $4,768,000  at  December  31,  2004  and  2003,
respectively.  Loss per share  applicable to common  stockholders  was $0.19 and
$0.27  for the years  then  ended  December  31,  2004 and  2003,  respectively.
Potential  common  shares  include  stock  underlying   convertible   notes  and
convertible  preferred stock,  accrued interest on convertible  notes payable in
common stock,  cumulative  dividends on preferred stock payable in common stock,
and  stock   issuable  upon   exercise  of  stock  options  and  warrants.   The
weighted-average  number of options and warrants to purchase  common stock using
the treasury  stock method for 2004 and 2003 was 867,818 and  1,960,467  shares,
respectively.

         Income Taxes

         MDI follows the liability method in accounting for income taxes.  Under
this  method,  deferred  tax  assets and  liabilities  are  determined  based on
differences  between financial reporting carrying amounts and the respective tax
bases of assets and liabilities,  and are measured using tax rates and laws that
are expected to be in effect when the  differences  are expected to be recovered
or settled.  Valuation allowances are provided against deferred tax assets if it
is more likely than not that the deferred tax assets will not be realized.

Note 3.           Fixed Assets

         Fixed assets consist of the following at December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                                                2004         2003
                                                                                                ----         ----
<S>                                                                                            <C>          <C>
         Furniture and fixtures..........................................................      $  116       $   114
         Laboratory equipment............................................................         595           741
         Computer and communications equipment...........................................         320           313
         Design and tooling..............................................................         160            --
         Leasehold improvements..........................................................          28            28
                                                                                               ------       -------
                                                                                                1,219         1,196
         Less accumulated depreciation and amortization..................................        (893)         (822)
                                                                                               ------       -------
                 Total...................................................................      $  326       $   374
                                                                                               ======       =======
</TABLE>

         Aggregate Depreciation Expense


                                      F-11
<PAGE>

         For the years ended December 31, 2004 and 2003, aggregate  depreciation
expense for fixed assets was $156,000 and $257,000, respectively.

Note 4.           Licenses, Patents, Technology and Goodwill

         Licenses,  patents,  technology  and goodwill  include the following at
December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                                                2004         2003
                                                                                                ----         ----
<S>                                                                                            <C>          <C>
         Licenses........................................................................      $   20       $ 1,013
         Patent costs....................................................................         133           133
         MDI Technology Agreement........................................................          --         7,230
         LabCorp. Technology Agreement...................................................         260           260
                                                                                               ------       -------
         Subtotal........................................................................         413         8,636
         Less accumulated amortization...................................................        (393)       (1,729)
                                                                                               ------       -------
                 Total...................................................................      $   20       $ 6,907
                                                                                               ======       =======

         Goodwill     ...................................................................      $   --       $    --
                                                                                               ======       =======
</TABLE>

         In  2004,  MDI was  party  to a legal  settlement  with  MonoGen,  Inc.
involving  technology  owned by  MDI's  subsidiary,  AccuMed.  The  dispute  was
resolved,  resulting in the transfer to MonoGen of all MDI  ownership and rights
to AccuMed intellectual  property. The transferred technology is not used in the
Company's InPath(TM) cervical screening system. The settlement resulted in a net
$5,919,000  loss reflected in  adjustments  to the MDI Technology  Agreement and
accumulated amortization balances.

         In 2004, MDI was also party to a legal  settlement with Invirion,  Inc.
and Dr. Bruce Patterson over the validity of a technology  license.  Pursuant to
the settlement agreement,  MDI agreed to the cancellation of the license,  which
resulted in a net $569,000  loss  reflected in  adjustments  to the licenses and
accumulated amortization balances.

         In 2003,  MDI recorded an  impairment  loss of $283,000.  This loss was
comprised of the write-off of the full amount of MDI's goodwill  recorded on the
acquisition  of AccuMed.  At December 31, 2003,  management  determined  several
factors,  principally  that contracts and sales relating to the AccuMed products
failed to  materialize,  indicating that the carrying value of goodwill from the
AccuMed acquisition was impaired.

         Aggregate Amortization Expense

For the years ended December 31, 2004 and 2003,  aggregate  amortization expense
for  licenses,  patents,  technology  and goodwill  was  $419,000 and  $612,000,
respectively.

Estimated Amortization Expense

                                                         Year Ended December 31,
                  2005........................................    $  --
                  2006........................................    $   1
                  2007........................................    $   1
                  2008........................................    $   1
                  2009........................................    $   1

         During 2004 and 2003,  the Company  recorded  all costs  related to the
prosecution of patents as legal expenses.

Note 5.           Accrued Expenses

         Accrued expenses includes the following at December 31 (in thousands):


                                      F-12
<PAGE>

<TABLE>
<CAPTION>
                                                                                             2004            2003
                                                                                             ----            ----
<S>                                                                                         <C>            <C>
         Accrued interest.............................................................      $   994        $    704
         Accrued interest--related party..............................................           25             115
         Accrued settlement costs.....................................................          438              --
         Accrued taxes................................................................          476             476
         Other accrued expenses.......................................................           11             106
                                                                                            -------        --------
                 Total................................................................      $ 1,944        $  1,401
                                                                                            =======        ========
</TABLE>

         MDI was  delinquent  in paying a portion of federal and state  employee
and employer  payroll taxes for 2003,  2002, and 2001.  The  delinquent  federal
payroll  taxes  relating to 2003 and 2002 were paid in full in April  2004.  The
delinquent  federal  payroll taxes relating to 2001 were paid in full in January
2005.

         The Company owed $97,000 and $686,000 as of December 31, 2004 and 2003,
respectively,  in 2001 federal  payroll  taxes,  which were  included in accrued
payroll costs in the accompanying balance sheet.

         MDI is also  delinquent in filing certain  federal and state income tax
returns for 2003 and 2002 and is working to complete and file the  returns.  The
delinquent  federal  and state  income tax  returns for 2001 were filed in March
2005.

Note 6.           Notes Payable--Related Parties

         Notes payable to related parties at December 31 (in thousands)  consist
of:

<TABLE>
<CAPTION>
                                                                                                     2004      2003
                                                                                                     ----      ----
<S>                                                                                                 <C>       <C>
         Northlea Partners, Ltd., $25,000 Promissory Note issued August 6, 2001;
                interest rate 15% per annum ....................................................    $   25    $   25
         Northlea Partners, Ltd., $15,000 Promissory Note issued September 20, 2001;
                interest rate 9% per annum .....................................................        15        15
         Northlea Partners, Ltd., $15,000 Bridge II convertible promissory note issued
                May 1, 2003; interest rate 12% per annum (see description under Bridge II
                notes in Note 7-Notes Payable for other terms and conditions) ..................        15        15
         Suzanne M. Gombrich, $1,000,000 convertible promissory note issued April 2, 2003;
                maturity date April 2, 2004 or earlier; interest rate 12% per annum; convertible
                into common stock at $0.10 per share; beneficial conversion
                feature valued at $970,000; 1,000,000 warrants at exercise .....................        --       761
         Peter P. Gombrich, $305,667 Bridge II convertible promissory note issued
                December 5, 2003; interest rate 12% per annum (see description under Bridge II
                notes in Note 7-Notes Payable for other terms and conditions) ..................        --       251
         Robert Shaw, $25,000 Promissory Note issued September 20, 2001;
                interest rate 9% per annum .....................................................        15        25
                                                                                                    ------    ------
                                                                                                    $   70    $1,092
                                                                                                    ======    ======
</TABLE>

         Suzanne  Gombrich  Note.  On April 2,  2004,  the  Company  repaid  the
$1,000,000  Convertible  Promissory Note due Suzanne M. Gombrich in full and her
first priority security  interest in all the Company's assets was released.  The
Company paid $936,114 in cash towards principal and accrued interest of $126,114
on the note. In addition, Mrs. Gombrich agreed to convert the remaining $190,000
into 1,900,000 shares of common stock of the Company upon  stockholder  approval
of an  increase  in the  number of  authorized  shares  of  common  stock of the
Company. On July 29, 2004, the Company's stockholders approved such increase and
the  1,900,000  shares  were  issued  to Mrs.  Gombrich  on August  31,  2004 in
satisfaction of her remaining debt.

         Peter Gombrich  Bridge II Note and Other Amounts Due. On March 5, 2004,
the Bridge II Convertible  Promissory Note (and accrued interest thereon) issued
to Peter Gombrich in December 2003 was converted into 2,113,987 common shares.


                                      F-13
<PAGE>

         Further,  Peter  Gombrich  was owed $37,299 and $52,953 at December 31,
2004 and December 31, 2003,  respectively for previous  advances to the Company.
MDI has classified the amount due to Mr. Gombrich under the current  liabilities
heading "Due to stockholder" in the accompanying balance sheet.

         Carrying Amounts. Management believes it is not practicable to estimate
the fair  value of the  notes  payable-related  parties  due to the  uncertainty
regarding  repayment or possible  conversion and the Company's current financial
condition.

Note 7.           Notes Payable

         Notes  payable to  unrelated  parties  at  December  31 (in  thousands)
consist of:

<TABLE>
<CAPTION>
                                                                                                        2004        2003
                                                                                                        ----        ----
<S>                                                                                                    <C>       <C>
         Bridge I Convertible  Promissory Notes; due December 31, 2002; interest
                rate 7% per annum;  convertible  into common stock at 75% of the market price on
                date of conversion;  beneficial  conversion feature valued at $1,042,000 at June
                30, 2002; Bridge Warrants at an exercise price of $0.25 per share; additional
                warrants at an exercise price equal to 150% of note conversion price ..............    $  750    $2,075
         Bridge II Convertible Promissory Notes; due July 31, 2003; interest rate
                12%/15% per annum;  convertible  into common  stock at $0.10 or $0.15 per share;
                beneficial  conversion feature valued at $1,777,000 and $330,000 at December 31,
                2003 and 2002, respectively;
                warrants at an exercise price of $0.15 or $0.20 per share .........................     1,285     2,845
         Bridge III Convertible Promissory Notes; due December 31, 2008; interest rate 10%
                per  annum;  convertible  into  common  stock at $0.10 per  share;  beneficial
                conversion feature valued at $1,604,000 at June 30, 2004; warrants at an
                exercise price of $0.15 per share .................................................       268        --
         Bridge IV Convertible Promissory Notes; due December 31, 2008; interest rate 10%
                per  annum;  convertible  into  common  stock at $0.10 per  share;  beneficial
                conversion feature valued at $1,791,000 at June 30, 2004; warrants at an
                exercise price of $0.15 per share .................................................     1,085        --
         Monsun, AS, $500,000 Promissory Note issued November 1, 2000; due July 31, 2002;
                interest rate 20% per annum, compounded into principal amount;
                beneficial conversion feature valued at $125,000 at November 1, 2000 ..............       782       641
         Trek Diagnostic Systems, $80,000 Promissory Note issued July 31, 2002; due in equal
                installments on September 1, 2002 and December 1, 2002 ............................        --        15
         O.P., LLC, $29,390 Promissory Note issued May 12, 2003; interest at 7% per annum;
                monthly principal payments of $1,316 plus interest commencing June 1, 2003;
                due April 2005 ....................................................................         6        24
         MonoGen, Inc., $305,000 Promissory Note issued October 14, 2004; interest at 14% per
                annum; first installment of $25,000 due November 1, 2004 with monthly
                principal and interest installments of $10,000 thereafter; due January 1, 2007 ....       305        --
         Xillix Technologies Corporation, $361,000 Promissory Note issued June 26, 1998; interest
                rate Canadian Prime plus 6% per annum; represents a debt of AccuMed ...............        34        34
         Ungaretti and Harris LLP, $211,368 Secured Promissory Note issued May 8, 2003; interest
                at 12% per annum; due September 30, 2003 ..........................................       149       149
         Ernst & Young LLP, $30,800 Promissory Note issued July 17, 2003; interest at 12% per annum
                commencing January 1, 2003; due December 31, 2003 .................................        31        31
         Western Economic Diversification, $221,000 Promissory Note issued June 1989; no interest;
                represents a debt of Oncometrics ..................................................       239       222
         Ventana Medical Systems, Inc., $62,946 Promissory Note issued November 30, 2003; due
                December 31, 2003; interest at 8% per annum payable after December 31, 2003 .......        21        63
                                                                                                       ------    ------
                                    Total:                                                             $4,955    $6,099
                                                                                                       ======    ======
</TABLE>


                                      F-14
<PAGE>

         Bridge I. In 2002,  MDI  issued  an  aggregate  $3,185,000  in Bridge I
Convertible Promissory Notes to accredited investors. The notes bear interest at
the rate of 7% per annum and are  convertible  at any time into the common stock
of MDI at a conversion  price equal to 75% of the market price of the  Company's
common stock on the date of conversion. In addition, MDI issued to each holder a
warrant that  entitled each such holder to purchase one share of common stock at
an  exercise  price  of $0.25  per  share  for each  dollar  of  principal.  MDI
calculated  a fair  value of  $99,950  for these  warrants  using the fair value
interest  rate method and recorded this amount as  additional  interest  expense
during 2002. In addition,  at the time of conversion of the note, each holder is
entitled  to receive a warrant to  purchase  one share of common  stock for each
four shares of common  stock into which the note  converts at an exercise  price
equal to 150% of the  conversion  price of the note.  MDI has not  determined  a
value for these warrants as of December 31, 2004.  Since the conversion price of
the note is at a 25%  discount to the market  price of the common  stock of MDI,
the holder is considered to have a beneficial conversion feature.

         In February  2003, a note holder,  NeoMed  Innovations  III,  converted
$1,060,000  in  principal  amount of  Bridge I notes  into  Bridge II notes.  In
November 2003, two Bridge I note holders  converted  $50,000 in principal amount
of notes and $5,287 in accrued  interest  into  368,579  shares of  unregistered
common stock.  Management  extended a written offer,  dated October 10, 2003, to
the Bridge I noteholders to convert their notes and accrued interest into common
shares at a  conversion  rate of $0.15 per  share.  In  addition,  the  Bridge I
holders  were  offered  warrants to purchase one new share for every four shares
acquired by the  noteholder  upon  exercise of such holder's  conversion  rights
under the notes.  This offer continued to remain  outstanding as of December 31,
2004.

         During the twelve months ended December 31, 2004, holders of $1,325,000
principal  amount of Bridge I  convertible  promissory  notes elected to convert
their  notes  and  related  accrued  interest  of  approximately  $173,000  into
9,985,182  shares of  unregistered  common  stock.  The  remaining  $750,000  in
principal  Bridge I notes remained  unconverted  and outstanding at December 31,
2004.

         Bridge  II.  Beginning  in  October  2002,  MDI began an issue of up to
$4,000,000 in Bridge II Convertible  Promissory  Notes to accredited  investors.
MDI issued  $550,000 in Bridge II notes as of December 31, 2002. From January 1,
2003 through the closing of the offering on December 5, 2003,  MDI issued Bridge
II notes in the principal amount of: $1,980,200 in exchange for cash, $1,060,000
as a conversion of a Bridge I Convertible Promissory Note (see discussion above)
and $305,667 in exchange for a note payable to Peter P. Gombrich,  the Company's
then-Chairman,  for a total issuance during fiscal year 2003 of $3,345,867.  The
notes bear  interest at a rate of 12% per annum  payable at the maturity date in
kind in the form of shares of  common  stock of MDI.  The  Company  granted  the
holders  a  junior  security  position  in all  of its  assets.  The  notes  are
convertible at any time into the common stock of MDI. The note conversion  price
and the value of common shares paid in kind as interest for the first $1,000,000
in principal amount of cash  subscriptions,  determined on a "first come - first
served basis," is $0.10 per share.  The note  conversion  price and the value of
common shares paid in kind as interest for the remaining $3,000,000 of principal
amount of notes in the series is $0.15 per share.  The conversion  prices of the
notes issued  during 2002 and 2003 were less than the market price of the common
stock when the notes were issued;  therefore, the holders are considered to have
a beneficial  conversion  feature.  MDI  determined  the value of the beneficial
conversion  feature to be $1,777,200 and $330,000 at December 31, 2003 and 2002,
respectively.  The value was  recorded  as a  reduction  of the debt and will be
amortized  as  additional  interest  over the life of the  notes.  MDI  recorded
additional  interest expense of $334,909 and $1,826,743 to reflect  amortization
of the  discount  during the twelve  months  ended  December  31, 2004 and 2003,
respectively.

         At the time MDI completes  significant  additional  funding  plans,  as
outlined in the subscription  agreement for the Bridge II notes,  each holder of
Bridge II notes is entitled  to receive a warrant to  purchase  one share of the
common  stock of the Company for each four shares of common stock into which the
note is  convertible  at an  exercise  price of $0.15 per share for notes in the
class  pertaining  to the first  $1,000,000 in  subscriptions  and $0.20 for the
remaining  $3,000,000 in note  principal  subscriptions.  In September  2003, an
amendment  to the  Bridge II  convertible  promissory  notes was sent to holders
requesting   an  extension  of  the  notes  to  July  31,  2004.  As  additional
consideration  for the  extension,  holders  were  offered  an  increase  in the
interest rate from 12% to 15%. In addition,  an amendment to the indenture  also
offered an increase in the warrant coverage ratio from 25% to 33%. The Bridge II
offering was closed as of December 5, 2003.

         For the 12 months  ended  December  31,  2004,  holders  of  $2,146,000
principal  amount of Bridge II convertible  promissory  notes elected to convert
their  notes  and  related  accrued  interest  of  approximately  $251,000  into
17,619,242 shares of unregistered common stock. Included in the above conversion
amounts are amounts due Peter P. Gombrich,  the Company's  former  Chairman,  of
$305,667 in Bridge II principal and $11,431 in accrued interest  thereon,  which
were converted into an aggregate  2,113,987 shares of unregistered common stock.
The remaining  $1,300,000 in principal Bridge II notes remained  unconverted and
outstanding at December 31, 2004.


                                      F-15
<PAGE>

         Bathgate Capital Partners, LLC - Bridge III. Beginning in January 2004,
Bathgate Capital Partners,  LLC began an offering of a maximum of $4,000,000 and
a minimum of $1,500,000 in Bridge III Convertible Promissory Notes to accredited
investors  on behalf of the  Company.  The notes bear  interest at 10% per annum
payable,  on a semi-annual  basis, in kind in the form of shares of common stock
for the first two years and then in cash for the remaining three years until due
December 31, 2008. The note conversion price and the value of common shares paid
in kind as interest is $0.10 per share.  The notes are  convertible  at any time
into the common stock of MDI, although the notes will  automatically  convert if
the last  sales  price of the stock is $0.30 or higher  for  twenty  consecutive
trading days, the daily average trading volume is at least 250,000  shares,  and
the  underlying  shares are registered for sale. The holders were also granted a
security interest in all of the Company's  assets.  MDI granted each note holder
the right to receive 25% warrant coverage on all money invested;  therefore, for
every $100,000  invested,  an investor will receive  warrants to purchase 25,000
shares of common  stock at an exercise  price of $0.15 per share.  The  warrants
expire on December 31, 2008.

         The Bridge III offering  documents provided that funds raised would not
be released from escrow until the following requirements were met:

         o        A minimum investment of $1,500,000 had been reached;

         o        The  $190,000  Convertible  Promissory  Note  held by  Suzanne
                  Gombrich was converted into common shares;

         o        A portion of the Bridge II Convertible Promissory Note holders
                  converted their notes into common shares; and

         o        Peter P. Gombrich,  MDI's then-current Chairman and CEO, would
                  resign his position as CEO of the Company.

With the  exception of the  conversion  of Suzanne  Gombrich's  note,  which was
converted  following  stockholder  approval  of an  increase  in the  number  of
authorized   shares  of  common  stock  of  the  Company  in  July  2004,  these
requirements  were satisfied on April 2, 2004 and the Company issued  $1,500,000
in  convertible  promissory  notes in exchange for cash. The funds were used for
repayment of the Suzanne  Gombrich note,  payment of taxes, and working capital.
On May 21, 2004, the Company  issued an additional  $162,500 in Bridge III notes
in exchange for cash. The conversion prices of the notes issued during 2004 were
less than the  market  price of the common  stock  when the notes  were  issued;
therefore,  the holders are considered to have a beneficial  conversion feature.
MDI determined the value of the beneficial  conversion  feature to be $1,604,000
at June 30, 2004.  The value was recorded as a reduction of the debt and will be
amortized  as  additional  interest  over the life of the  notes.  MDI  recorded
additional interest expense of $208,595 to reflect  amortization of the discount
during the 12 months ended  December 31, 2004.  Through  December 31, 2004,  the
Company had issued  $1,662,500  in  principal  amount of Bridge III  convertible
promissory notes in exchange for cash.

         Bridge IV. Beginning in February 2004, MDI began a separate offering of
Bridge IV Convertible  Promissory Notes to accredited investors.  The notes bear
interest at 10% per annum payable,  on a semi-annual  basis, in kind in the form
of  shares  of  common  stock  for the  first two years and then in cash for the
remaining  three  years until the  December  31, 2008  maturity  date.  The note
conversion  price and the value of common  shares  paid in kind as  interest  is
$0.10 per share.  The conversion price of the notes issued to date has been less
than the market price of the common stock when the notes were issued; therefore,
the  holders  are  considered  to  have a  beneficial  conversion  feature.  MDI
determined  the value of the  beneficial  conversion  feature to be $499,000 and
$1,292,000  at June 30,  2004 and March 31,  2004,  respectively.  The value was
recorded as a reduction of the debt and will be amortized as additional interest
over the life of the notes. MDI recorded additional interest expense of $302,288
to reflect  amortization of the discount during the 12 months ended December 31,
2004.

         The notes are  convertible  at any time into the  common  stock of MDI,
although  the notes will  automatically  convert if the last sales  price of the
stock is $0.30 or higher for twenty consecutive  trading days, the daily average
trading  volume  is at least  250,000  shares,  and the  underlying  shares  are
registered for sale. The holders were also granted a security interest in all of
the  Company's  assets.  MDI  granted  each note holder the right to receive 25%
warrant coverage on all money invested;  therefore, for every $100,000 invested,
an investor will receive  warrants to purchase  25,000 shares of common stock at
an exercise price of $0.15 per share.  The warrants expire on December 31, 2008.
Through December 31, 2004, the Company had issued $2,573,500 in principal amount
of Bridge IV convertible promissory notes in exchange for cash.


                                      F-16
<PAGE>

         Monsun.  On November 1, 2000, MDI issued a convertible  promissory note
to Monsun,  AS  ("Monsun")  in exchange  for  $500,000  in cash.  The note bears
interest at the rate of 20% per year and was  originally  due 12 months from the
date of issue.  The note is  convertible  into common stock,  any time after the
expiration  of the first 180 days of the loan  term,  at a  conversion  price of
$1.00 per share.

         On October 31,  2001,  Monsun and MDI agreed to the first  extension of
the maturity date of the note until January 31, 2002. As  consideration  for the
first extension agreement,  MDI issued a three-year warrant to Monsun, entitling
the holder to  purchase  100,000  shares of common  stock of MDI at an  exercise
price of $0.60 per share.  On  January  31,  2002,  Monsun and MDI agreed to the
second  extension  of the  maturity  date of the note  until June 30,  2002.  As
consideration  for the  second  extension  agreement,  MDI  issued a  three-year
warrant to Monsun,  entitling  the holder to purchase  200,000  shares of common
stock of MDI at an exercise price of $0.30 per share. A fair value of $4,110 for
the warrant was  calculated  using the fair value  interest  rate method and was
recorded as additional  interest  expense during 2002. On April 1, 2002,  Monsun
and MDI agreed to the third an final  extension of the maturity  date until July
31, 2002.  As  consideration  for the third  extension  agreement,  MDI issued a
five-year warrant to Monsun,  entitling the holder to purchase 200,000 shares of
common  stock of MDI at an  exercise  price of $0.70 per share.  A fair value of
$8,287 for the warrant was calculated  using the fair value interest rate method
and was recorded as additional  interest  expense during 2002. In November 2002,
MDI issued  200,000  shares of common  stock of MDI as a default  penalty on the
note.  A fair value of $42,000  for the shares was  calculated  using the market
price of the common  stock on the date the shares  were  issued and  recorded as
financing  expenses during 2002. MDI made payments  against the principal of the
note  amounting to $117,266 and recorded  interest  expense,  in addition to the
amounts mentioned above, of $80,200 during 2002.

         In  January  2003,  Monsun  initiated  a  legal  action  against  Peter
Gombrich,  MDI's  then-Chairman,  as a  personal  guarantor  on the note,  in an
attempt  to  collect  the  unpaid  principal  balance  of the note.  Monsun  was
successful in obtaining a legal judgment of  approximately  $675,000  related to
the  note  balance  and  accrued  interest  against  Mr.  Gombrich  as  personal
guarantor.  In addition,  Monsun was granted an award of approximately  $438,000
for attorneys' fees against Peter Gombrich as the personal guarantor.  The award
for legal fees has been  recorded as an accrued  expense.  (See Note 5 - Accrued
Expense) The Company  continues to  negotiate  the terms of a settlement  of the
outstanding balance due. (See Note 13 - Legal Proceedings)

         Trek  Diagnostic  Systems.  In July 2002,  MDI agreed to settle a claim
brought by Trek  Diagnostic  Systems,  Inc.  against AccuMed  regarding  alleged
breaches of  representations  and warranties in a certain  agreement under which
Trek purchased the  microbiology  business of AccuMed in 2000. In July 2002, MDI
issued a promissory note to Trek in the amount of $80,000,  payable in two equal
installments  on  September  1, 2002 and  December  1, 2002.  MDI made the first
payment due on September 1, 2002 but did not make the second payment,  causing a
default  on the note.  Through a court  ordered  action  Trek was able to obtain
payments  totaling  $27,692  during  the fourth  quarter  of 2003.  In the first
quarter of 2004,  a final  settlement  of $12,000 was reached for  complete  and
final settlement of the outstanding note balance.

         MonoGen,  Inc. In October 2004, MDI entered into a settlement agreement
with MonoGen, Inc. relating to a arbitration  proceeding brought against AccuMed
and  Oncometrics  for alleged  breaches in connection  with certain  license and
related agreements among the parties. MDI issued a promissory note to MonoGen in
the amount $305,000,  payable in a initial installment of $25,000 on November 1,
2004 and monthly  installments  thereafter  of $10,000 until the note is paid in
full, and agreed to transfer to MonoGen certain  assets.  Inasmuch as the assets
were not timely transferred,  and because the initial $25,000 payment to be made
under  the note was not paid by its due  date,  MonoGen  delivered  a notice  of
default to the Company and AccuMed in November 2004.

         Ungaretti and Harris LLP. In March 2005,  MDI entered into a settlement
agreement,  related to a lawsuit  filed by Ungaretti and Harris for unpaid legal
fees, for $150,000 payable in installments of $25,000  commencing March 22, 2005
with subsequent  payments due in ninety day increments until the balance is paid
in full.

         See  Note  13 -  Legal  Proceedings  for a  description  of  the  legal
proceedings regarding or giving rise to the above notes.


                                      F-17
<PAGE>

         Defaults.  Specific  events of default have  occurred on a  significant
majority of the outstanding notes payable issued by MDI,  including the Bridge I
and  Bridge II  convertible  promissory  notes,  ranging  from  failure  to make
principal payments when due to breach of certain warranties and representations.
The notes  payable  require the holder to notify MDI in writing of a declaration
of default at which time a cure period,  as specified in each  individual  note,
would  commence.  There is no guarantee that MDI would be able to cure any event
of default if, or when, the holder provides the required  written notice.  Other
than the Monsun convertible  promissory note and the MonoGen note payable, which
are the subject of legal actions described in Note 13 - Legal  Proceedings,  MDI
has not  received  any  written  declarations  of  default  from  holders of its
outstanding notes payable.

         Carrying Amounts. Management believes it is not practicable to estimate
the fair value of the notes payable due to the uncertainty  regarding  repayment
or possible conversion and the Company's current financial condition.

Note 8.           Stockholders' Equity

         Sale of Equity

         A summary of the Company's preferred stock capital table as of December
31, 2004 is as follows:

<TABLE>
<CAPTION>
                                                                                                    Shares Issued &
         Offering                                                              Shares Authorized      Outstanding
         --------                                                              -----------------      -----------
<S>                                                                                <C>                 <C>
         Series A convertible..............................................           590,197             82,655
         Series B convertible, 10% cumulative..............................         1,500,000            365,106
         Series C convertible, 10% cumulative..............................         1,666,666            262,833
         Series D convertible, 10% cumulative..............................           300,000            175,000
         Series E convertible, 10% cumulative..............................           800,000            233,598
         Undesignated Preferred Series.....................................         5,143,137                 --
                                                                                  -----------        -----------
         Total Preferred Stock.............................................        10,000,000          1,119,192
                                                                                  ===========        ===========
</TABLE>

         During the first six months of 2004,  several holders converted 930,000
shares of Series C convertible  preferred stock,  including cumulative dividends
due thereon,  into 5,703,816  shares of common stock. In April 2004,  holders of
Series B Convertible  Preferred  Stock  elected to convert  422,250 of preferred
shares and accrued dividends into 2,211,401 shares of unregistered common stock.
In December  2004, a holder of Series B Convertible  Preferred  Stock elected to
convert 12,500 of preferred  shares and accrued  dividends into 69,397 shares of
unregistered  common  stock.  In June  2004,  holders  of  Series E  Convertible
Preferred  Stock  elected  to convert  25,939 of  preferred  shares and  accrued
dividends into 892,154 shares of unregistered common stock. During the third and
fourth quarters of 2004, holders of Series E Convertible Preferred Stock elected
to convert 1,227  preferred  shares and accrued  dividends into 43,329 shares of
unregistered common stock.

         During 2003,  holders  converted  35,437 shares of Series A convertible
preferred stock into 15,478 shares of common stock. In 2003, a holder  converted
66,000  shares of Series C convertible  preferred  stock,  including  cumulative
dividends due thereon,  into 380,403  shares of common stock.  In 2003,  several
holders  converted  168,479  shares of  Series E  convertible  preferred  stock,
including  cumulative  dividends due thereon,  into  5,150,744  shares of common
stock of the Company.

         Summary of Preferred Stock Terms

Series A Convertible Preferred Stock
Liquidation Value:  $4.50 per share
Conversion Price:   $10.3034 per share
Conversion Rate:    0.4367--Liquidation Value divided by Conversion Price
                         ($4.50/$10.3034)
Voting Rights:      None
Dividends:          None
Conversion Period:  Any time


                                      F-18
<PAGE>

Series B Convertible Preferred Stock
Liquidation Value:  $4.00 per share
Conversion Price:   $1.00 per share
Conversion Rate:    4.00--Liquidation Value divided by Conversion Price
                         ($4.00/$1.00)
Voting Rights:      None
Dividends:          10%--Quarterly--Commencing June 30, 2001
Conversion Period:  Any time
Cumulative dividends in arrears at December 31, 2004 were $573,340

Series C Convertible Preferred Stock
Liquidation Value:  $3.00 per share
Conversion Price:   $0.60 per share
Conversion Rate:    5.00--Liquidation Value divided by Conversion Price
                         ($3.00/$0.60)
Voting Rights:      None
Dividends:          10%--Quarterly--Commencing June 30, 2002
Conversion Period:  Any time
Cumulative dividends in arrears at December 31, 2004 were $249,727

Series D Convertible Preferred Stock
Liquidation Value:  $10.00 per share
Conversion Price:   $1.00 per share
Conversion Rate:    10.00--Liquidation Value divided by Conversion Price
                         ($10.00/$1.00)
Voting Rights:      None
Dividends:          10%--Quarterly--Commencing April 30, 2002
Conversion Period:  Any time
Cumulative dividends in arrears at December 31, 2004 were $554,726

Series E Convertible Preferred Stock
Liquidation Value:  $22.00 per share
Conversion Price:   $0.80 per share
Conversion  Rate:   27.50--Liquidation Value divided by Conversion Price
                         ($22.00/$0.80)
Voting Rights:      Equal in all respects to holders of common shares
Dividends:          10%--Quarterly--Commencing  May 31, 2002
Conversion Period:  Any time
Cumulative dividends in arrears at December 31, 2004 were $1,548,960

         Issuance of Common Shares for Cash

         In August and October  2004,  MDI offered  common  stock to  accredited
investors in exchange  for cash.  Through  December  31,  2004,  the Company had
received an aggregate  $560,000 and had issued an aggregate  6,821,429 shares of
restricted common stock.

         Also in October 2004, MDI entered into a stock purchase  agreement with
Seaside  Investments  PLC, a private  investment  company,  for the  purchase by
Seaside of 11,000,000  shares of MDI's  restricted  common stock in exchange for
registered  shares  of  the  investment  company.   The  transaction  was  never
consummated.

         Beginning  in December  2004,  MDI began an offering of common stock to
accredited  investors  in exchange for cash.  MDI also  granted each  investor a
warrant to purchase  common stock at an exercise price of $0.10 per share,  with
the first $250,000 of investment to receive 50% warrant  coverage and subsequent
investors to receive 25% coverage.  Through  December 31, 2004,  the Company had
received an  aggregate  $250,000  and issued an  aggregate  4,166,667  shares of
restricted  common  stock and  warrants to purchase  2,083,334  shares of common
stock.  MDI valued the warrants at $208,333  using the  Black-Scholes  valuation
model and recorded the amount as an  administrative  expense for the 2004 fiscal
year.


                                      F-19
<PAGE>

         Issuance of Common Stock for Services

         2003

         In January 2003,  MDI issued 168,913 shares of common stock in exchange
for services to a non-employee professional services firm. MDI calculated a fair
value of $83,078 for these  shares  based on the value of the shares on the date
of the issuance and recorded the amount as legal expense as of March 31, 2003.

         In  January  2003,  MDI  issued  1,000,000  shares of  common  stock in
exchange  for  services  to  a  non-employee  professional  services  firm.  MDI
calculated  a fair value of $100,000  for these shares based on the value of the
shares on the date of the issuance and recorded the amount as investor relations
expense as of March 31, 2003.

         In May 2003,  MDI issued 875,000 shares of common stock in exchange for
services to a  non-employee  professional  services  firm. MDI calculated a fair
value of $218,750  for these  shares  based on the market value of the shares on
the date they were due and is  amortizing  the amount over the  remainder of the
service contract.

         In  June  2003,   MDI  issued  83,642  shares  of  common  stock  to  a
non-employee service vendor in lieu of payment for unpaid service invoices.  MDI
valued  the  shares at  $12,546  which  represented  the  amount  of the  unpaid
invoices.

         In  July  2003,  MDI  issued   1,400,000  shares  of  common  stock  to
non-employees  for  past and  future  financing  and  consulting  services.  MDI
calculated  a fair value of $504,000  for these  shares based on the fair market
value of the shares on the date they were issued.  Of the total amount  $216,000
is being amortized over the life of the services  contract.  In August 2003, MDI
issued 170,000 shares of common stock to a non-employee financial consultant for
past financing services. MDI valued the shares at $51,000.

         In  October  2003,  MDI  issued  133,333  shares of  common  stock to a
non-employee  supplier  in lieu of payment for unpaid  invoices.  MDI valued the
shares at $19,068.

         In December 2003, MDI issued 550,000 and 100,000 shares of common stock
to two non-employee service vendors in lieu of payment for future services.  MDI
valued the shares at $82,500 and $16,000, respectively.

         2004

         In August 2004,  MDI issued  924,333 shares of common stock in exchange
for services to a non-employee professional services firm for past services. MDI
calculated  a fair value of $92,433 for these  shares  based on the value of the
shares on the date of issuance and recorded  the amount as  satisfaction  of the
vendor's accounts payable balance as of September 30, 2004.

         In August 2004, MDI issued 1,200,000 shares of common stock in exchange
for services to a non-employee  financial  consultant for future  services.  MDI
calculated  a fair value of $120,000  for these shares based on the value of the
shares on the date of issuance and is  amortizing  the amount over the remainder
of the service contract.

         In  September  2004,  MDI issued  572,748  shares of common  stock to a
non-employee  service  vendor  in lieu  of  payment  for  unpaid  invoices.  MDI
calculated a fair value of $57,275 for these shares based on the market value of
the shares on the date of issuance and recorded  the amount as  satisfaction  of
the  vendor's  accounts  payable  balance as of  September  30,  2004 based on a
settlement agreement.

         In  September  2004,  MDI issued  275,000  shares of common  stock to a
non-employee  financial consultant for past financial services. MDI calculated a
fair value of $27,500 for these  shares  based on the value of the shares on the
date of issuance  and  recorded  the amount as an  administrative  expense as of
September 30, 2004.

         In  September  2004,  MDI issued  250,000  shares of common  stock to a
non-employee  professional  services firm for past investor relations  services.
MDI  calculated  a fair value of $25,000 for these  shares based on the value of
the shares on the date of issuance and recorded the amount as an  administrative
expense as of September 30, 2004.


                                      F-20
<PAGE>

         In  October  2004,  MDI  issued  485,000  shares of  common  stock to a
non-employee  financial consultant for past financial services. MDI calculated a
fair value of $33,950 for these  shares  based on the value of the shares on the
date of issuance  and  recorded  the amount as an  administrative  expense as of
December 31, 2004.

         In  November  2004,  MDI  issued  450,000  shares of common  stock to a
non-employee  professional  services firm for past investor relations  services.
MDI  calculated  a fair value of $36,000 for these  shares based on the value of
the shares on the date of issuance and recorded the amount as an  administrative
expense as of December 31, 2004.

         In  December  2004,  MDI  issued  175,000  shares of common  stock to a
non-employee  service  vendor  in lieu  of  payment  for  unpaid  invoices.  MDI
calculated a fair value of $21,000 for these shares based on the market value of
the shares on the date of issuance and recorded  the amount as  satisfaction  of
the  vendor's  accounts  payable  balance  as of  December  31,  2004 based on a
settlement agreement.

         In  December  2004,  MDI  issued  16,666  shares of  common  stock to a
former-employee  as part of a settlement.  MDI calculated a fair value of $1,333
for these shares based on the market value of the shares on the date of issuance
and  recorded  the amount as  satisfaction  of the  accrued  wage  balance as of
December 31, 2004 based on a settlement agreement.

         Issuance of Warrants for Services

         2003

         On April 2, 2003,  MDI issued a warrant  to  Suzanne  M.  Gombrich,  an
affiliate,  entitling the holder to purchase 1,000,000 shares of common stock of
MDI at an  exercise  price of  $0.15  per  share.  The  warrant  was  issued  as
additional  consideration for a $1,000,000 convertible promissory note issued on
the same date.  MDI valued the  warrants  at  $270,000  using the  Black-Scholes
valuation  model and  recorded  the amount as an  administrative  expense in the
second quarter of fiscal 2003.

         In August 2003, MDI issued 1,100,000 warrants with an exercise price of
$0.17  per  share to a  non-employee  financial  consultant  for past  financial
services. MDI valued the warrants at $341,000 using the Black-Scholes  valuation
model and recorded the amount as an administrative expense for the third quarter
of fiscal 2003.

         In September 2003, MDI issued 1,335,000 warrants with an exercise price
of $0.20 per share to  non-employee  financial  consultants  for past  financial
services. MDI valued the warrants at $347,100 using the Black-Scholes  valuation
model and recorded the amount as an administrative expense for the third quarter
of fiscal 2003.

         In September  2003, MDI issued 500,000  warrants with an exercise price
of $0.17 per share to a  non-employee  consultant  in lieu of payment for future
services. MDI valued the warrants at $150,000 using the Black-Scholes  valuation
model and is amortizing the amount over the twelve-month  term of the consulting
agreement.

         In November 2003, MDI issued 92,145  warrants with an exercise price of
$0.20 per share to Bridge I  investors  upon  conversion  of their notes per the
indenture agreement.  MDI valued the warrants at $16,586 using the Black-Scholes
valuation  model and  recorded the amount as an  administrative  expense for the
fourth quarter of 2003.

         2004

         Between January 2004 and March 2004, MDI issued an aggregate  2,252,581
warrants  with an exercise  price of $0.20 per share to Bridge I investors  upon
conversion of their notes per the indenture  agreement.  MDI valued the warrants
at $369,066 using the  Black-Scholes  valuation model and recorded the amount as
an administrative expense for the first quarter of fiscal 2004.

         In March 2004, MDI issued  warrants to purchase 67,000 shares of common
stock of the Company with an exercise price of $0.17 per share to a non-employee
financial  consultant  for past financial  services.  MDI valued the warrants at
$13,400 using the  Black-Scholes  valuation  model and recorded the amount as an
administrative expense for the first quarter of fiscal 2004.


                                      F-21
<PAGE>

         In March 2004, MDI issued warrants to purchase 500,000 shares of common
stock of the Company with an exercise price of $0.17 per share to a non-employee
financial  consultant  for past financial  services.  MDI valued the warrants at
$95,000 using the  Black-Scholes  valuation  model and recorded the amount as an
administrative expense for the first quarter of fiscal 2004.

         In April 2004,  MDI issued 47,230  warrants  with an exercise  price of
$0.20 per share to Bridge I  investors  upon  conversion  of their notes per the
indenture  agreement.  MDI valued the warrants at $9,474 using the Black-Scholes
valuation  model and  recorded the amount as an  administrative  expense for the
2004 fiscal year.

         In May 2004,  MDI issued  warrants  to purchase  an  aggregate  119,042
shares of common stock of the Company with exercise prices ranging from $0.15 to
$0.16 per share to  non-employee  service  vendors in lieu of payment for unpaid
service  invoices.  MDI valued the warrants at $18,181  using the  Black-Scholes
valuation model and recorded the amount as a reduction of the outstanding amount
due.

         In May 2004, MDI issued  warrants to purchase  500,000 shares of common
stock of the Company with an exercise price of $0.17 per share to a non-employee
financial  consultant  for past financial  services.  MDI valued the warrants at
$76,200 using the  Black-Scholes  valuation  model and recorded the amount as an
administrative expense for the second quarter of fiscal 2004.

         In June 2004,  MDI issued  warrants to purchase  an  aggregate  364,942
shares of common stock of the Company with exercise prices ranging from $0.16 to
$0.17 per share to  non-employee  service  vendors in lieu of payment for unpaid
service  invoices.  MDI valued the warrants at $42,368  using the  Black-Scholes
valuation model and recorded the amount as a reduction of the outstanding amount
due.

         In June 2004, MDI issued warrants to purchase  780,000 shares of common
stock of the Company with an exercise price of $0.17 per share to a non-employee
financial  consultant  for past financial  services.  MDI valued the warrants at
$73,320 using the  Black-Scholes  valuation  model and recorded the amount as an
administrative expense for the second quarter of fiscal 2004.

         In June 2004, MDI issued warrants to purchase  681,625 shares of common
stock of the Company with an exercise price of $0.18 per share to a non-employee
broker-dealer  for past financial  services.  MDI valued the warrants at $62,914
using  the  Black-Scholes   valuation  model  and  recorded  the  amount  as  an
administrative expense for the second quarter of 2004.

         In August  2004,  MDI issued  warrants  to purchase  500,000  shares of
common  stock of the  Company  with an  exercise  price of $0.17  per share to a
non-employee  consultant for past  services.  MDI valued the warrants at $45,000
using  the  Black-Scholes   valuation  model  and  recorded  the  amount  as  an
administrative expense for the third quarter of fiscal 2004.

         In September  2004, MDI issued  warrants to purchase  200,000 shares of
common  stock of the  Company  with an  exercise  price of $0.10  per share to a
non-employee  professional  services firm for past investor relations  services.
MDI valued the warrants at $18,400 using the  Black-Scholes  valuation model and
recorded the amount as an administrative expense for the third quarter of fiscal
2004.

         In September  2004,  MDI issued  warrants to purchase  20,000 shares of
common  stock of the  Company  with an  exercise  price of $0.20  per share to a
non-employee  consultant  for past  services.  MDI valued the warrants at $1,780
using  the  Black-Scholes   valuation  model  and  recorded  the  amount  as  an
administrative expense for the third quarter of fiscal 2004.

         In September  2004,  MDI issued  warrants to purchase  25,000 shares of
common  stock of the  Company  with an  exercise  price of $0.20  per share to a
non-employee  service vendor in lieu of payment for unpaid services.  MDI valued
the warrants at $2,225 using the Black-Scholes  valuation model and recorded the
amount as a reduction of the outstanding amount due.

         In November  2004,  MDI issued  warrants to purchase  300,000 shares of
common  stock of the  Company  with an  exercise  price of $0.20  per share to a
professional services firm for past investor relations services.  MDI valued the
warrants at $18,000  using the  Black-Scholes  valuation  model and recorded the
amount as an administrative expense for the fourth quarter of fiscal 2004.


                                      F-22
<PAGE>

         In December 2004, MDI issued 196,489 warrants with an exercise price of
$0.20 per share to Bridge I  investors  upon  conversion  of their notes per the
indenture agreement.  MDI valued the warrants at $19,649 using the Black-Scholes
valuation  model and  recorded the amount as an  administrative  expense for the
fourth quarter of fiscal 2004.

         Application of Black-Scholes Valuation Model

         In applying the  Black-Scholes  valuation  model for the years 2004 and
2003,  the  Company  has used an expected  dividend  yield of zero,  a risk-free
interest  rate of 4.85% and 5.00% for the 2004 and 2003  periods,  respectively,
volatility  factors  of 131% and  208%,  respectively,  and a fair  value of the
underlying  common  shares equal to the closing  market price on the date of the
grant for both  periods.  The expected  life  equaled the term of the  warrants,
options, or restricted shares.


                                      F-23
<PAGE>

         Warrants

         At  December  31,  2004,  the  Company  had the  following  outstanding
warrants to purchase shares of Common Stock:

<TABLE>
<CAPTION>
                                     Weighted
                                     Average
              Total Shares           Exercisable       Exercise Price           Expiration Date
              ------------           -----------       --------------           ---------------
<S>                                <C>                     <C>                  <C>
                  39,834               39,834              $15.060              Perpetual
                 200,000              200,000               $0.300              January 31, 2005
               1,023,302            1,023,302               $6.870              March 23, 2005
               1,100,000            1,100,000               $0.200              July 2, 2005
                 200,000              200,000               $1.000              November 22, 2005
                  50,000               50,000               $0.937              December 1, 2005
               1,000,000            1,000,000               $1.250              December 8, 2005
                 180,000              180,000               $0.720              January 8, 2006
                  25,000               25,000               $0.010              February 1, 2006
               1,000,000            1,000,000               $0.250              February 7, 2006
                 599,942              599,942               $1.200              February 28, 2006
                 150,000              150,000               $1.200              July 10, 2006
                 750,000              750,000               $1.000              July 26, 2006
                 312,500              312,500               $1.000              August 6, 2006
                 150,000              150,000               $0.500              October 1, 2006
                 172,120              172,120               $0.820              October 11, 2006
                 597,750              597,750               $1.000              November 30, 2006
                 200,000              200,000               $0.700              March 31, 2007
                  51,493               51,493               $0.010              May 31,2007
               3,185,000            3,185,000               $0.250              July 31, 2007
                 200,000              200,000               $0.160              November 1, 2007
               1,000,000            1,000,000               $0.100              April 2, 2008
                 500,000              500,000               $0.170              September 2, 2008
                 400,000              400,000               $0.170              September 16, 2008
                 935,000              935,000               $0.170              September 16, 2008
                 415,625              415,625               $0.100              December 31, 2008
                 643,375              643,375               $0.100              December 31, 2008
               2,130,984            2,130,984               $0.170              June 7, 2009
                 681,625              681,625               $0.180              June 15, 2009
                 700,000              700,000               $0.170              August 26, 2009
                 200,000              200,000               $0.100              September 15, 2009
                 345,000              345,000               $0.200              September 15, 2009
               2,083,334            2,083,334               $0.100              December 9, 2009
               2,588,445            2,588,445               $0.200              December 1, 2009
                 250,000              250,000               $0.330              July 14, 2009
                 750,000              750,000               $0.001              February 12, 2012
             -----------           ----------               ------
              24,810,329           24,810,329               $0.600
             ===========           ==========               ======
</TABLE>

         The Company is obligated under the terms of subscription agreements for
the  Bridge I and Bridge II  convertible  promissory  notes to issue  additional
warrants to the note holders based on certain events.  If and when the holder of
a Bridge I note elects to convert the  principal  of the note into shares of MDI
common stock,  the holder is entitled to receive a warrant to purchase one share
of MDI common stock for each four shares of MDI common stock into which the note
is converted  at an exercise  price equal to $0.20,  based on the written  offer
dated October 10, 2003.  Since the Bridge I convertible  promissory note holders
have not all accepted the offer to convert their  convertible  promissory  notes
and  accrued  interest  into  common  shares at $0.15 per  share,  the number of
warrants  to be issued  cannot be  determined  until  such time as the notes are
actually  converted  into  the  common  stock of MDI.  If and  when the  Company
completes additional financing plans as outlined in the subscription  agreements
for the Bridge II notes, the holder of a Bridge II note is entitled to receive a
warrant to purchase one share of stock for each three shares into which the note
is convertible. The exercise price of the warrants is $0.15 per share for Bridge
II notes that fall into the class of the first $1,000,000 in cash  subscriptions
and $0.20 for the holders of the remaining Bridge II notes.


                                      F-24
<PAGE>

         Certain  warrants in the above table  entitling  the  holders,  Azimuth
Corporation and Cadmus  Corporation,  to purchase a total of 3,125,000 shares of
common  stock  include  anti-dilution  provisions  over and above  the  standard
anti-dilution  provisions  triggered  by dilution  resulting  from common  stock
dividends and stock splits or reverse stock splits. These additional  provisions
consider  other  items as  dilutive  events,  including  but not  limited to the
issuance of convertible  debt or equity  securities,  options,  and warrants.  A
calculation of the dilutive effect of a convertible  security is required at the
time the  security is issued  rather than if and when  actual  conversion  takes
place.  The Company  calculated  that at December 31, 2002,  these warrants were
required to be adjusted to reflect that the holders were entitled to purchase an
additional  519,000 shares of common stock.  The exercise prices of the warrants
would be adjusted so that the total  proceeds to the Company from an exercise of
these warrants would remain the same. The Company also calculated that as of the
beginning of July 2003,  additional  adjustments  were  required to reflect that
holders  were  entitled to  purchase a further  897,000  additional  shares with
commensurate adjustments in per share exercise prices.

         On July 18, 2003, the Company  negotiated an agreement with the holders
of these warrants, whereby the holders agreed to cancel the warrants and forgive
approximately  $100,000 owing to the holders by MDI as of that date. The Company
agreed to issue new  warrants  to the  holders  entitling  them to  purchase  an
aggregate  6,500,000  shares of common  stock at an exercise  price of $0.30 per
share. The Company also agreed to issue a 120-day warrant  entitling the holders
to purchase  500,000  shares of common stock at $0.30 per share,  which  warrant
expired November 19, 2003. The new warrants contain only standard  anti-dilution
provisions.  The final agreement was signed and the warrants issued in the first
quarter of 2005.

         Shares of Common Stock

         The Board of  Directors  has  considered  an  increase in the number of
authorized shares of common stock from 300,000,000  shares to 375,000,000 shares
in anticipation  of raising capital through the issuance of Company  securities.
Any ultimate  Board-approved  action requires a vote of MDI's stockholders.  The
Board  intends to place this issue on the agenda at the next  annual  meeting of
stockholders or at a special meeting to be called for this purpose.  The failure
to have a  sufficient  number  of  authorized  shares  available  may  limit the
Company's  ability to raise capital and/or constitute a breach of one or more of
our agreements governing the issuance of such securities.

Note 9.           Leases

         As of December 31, 2004, the Company leased  approximately 2,540 square
feet of space for its  Chicago,  Illinois  corporate  headquarters  and research
laboratory and offices under an operating  lease expiring in 2008.  Total rental
expense  related to the Company's  headquarters  location during the years ended
December 31, 2004 and 2003 was $119,000 and $125,000, respectively.

         MDI had another  lease  obligation  relating to the  pre-merger  office
space of AccuMed.  During 2002,  AccuMed's landlord brought suit against AccuMed
for unpaid rent and obtained a judgment in the amount of approximately $157,000.
In the first  quarter  of 2004,  a  preliminary  settlement  was  reached on the
outstanding  judgment and four payments totaling $54,896 were paid. A balance of
two monthly  payments  totaling  $27,448  remains  due. MDI also agreed to issue
275,000 shares of its common stock as part of the final settlement.  Discussions
regarding the issuance of shares of common stock in  satisfaction of the balance
of the settlement payments are ongoing.

         Future  minimum annual lease payments under these leases as of December
31, 2004 are (in thousands):

<TABLE>
<CAPTION>
                                                                                                         AccuMed
                                                                                          Operating       Lease
              Year                                                                         Leases      Obligation
              ----                                                                         ------      ----------
<S>                                                                                         <C>          <C>
              2005....................................................................      $  68        $ 129
              2006....................................................................      $  70
              2007....................................................................      $  72
              2008....................................................................      $  62
                                                                                            -----
              Total lease payments....................................................      $ 272        $ 129
                                                                                            =====        =====

              Amount of interest included in the minimum lease payments...............                   $ (19)
                                                                                                         ------

              Carrying value of lease obligation......................................                   $ 110
                                                                                                          ====
</TABLE>


                                      F-25
<PAGE>

Note 10.          Income Taxes

         Significant   components  of  deferred  income  taxes  consist  of  the
following at December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                                               2004         2003
                                                                                               ----         ----
<S>                                                                                          <C>           <C>
Deferred tax assets related to:
Net operating loss carryforwards........................................................     $ 22,497      $ 19,585
Research and development credit.........................................................
  Writedown of intangibles..............................................................           18           110
    Writedown of goodwill...............................................................           --           113
      Accrued expenses..................................................................          113           106
                                                                                             --------      --------
                                                                                               22,628        19,914
           Less valuation reserve.......................................................       22,628        19,914
                                                                                             --------      --------
         Net deferred tax asset.........................................................     $     --      $     --
                                                                                             ========      ========
</TABLE>

         At December 31,  2004,  the Company had  domestic  net  operating  loss
carryforwards  aggregating  approximately  $56,000,000.  For financial reporting
purposes,  the entire amount of deferred tax assets  related  principally to the
net operating loss carryforwards has been offset by a valuation allowance due to
uncertainty  regarding the  realization of the assets.  The valuation  allowance
increased  by  approximately  $2,714,000  and  $8,788,000  for the  years  ended
December 31, 2004 and 2003, respectively.

         The net  operating  loss  carryforwards  and research  and  development
credit carryforwards may not be available to offset future taxable income of MDI
due to statutory  limitations  based on changes of ownership and other statutory
restrictions.

         The net  operating  loss  carryforwards  begin to expire  in 2006.  The
research and development credit carryforwards expire from 2005 to 2014.

Note 11.          Equity Incentive Plan and Employee Stock Purchase Plan

         On May 25, 1999, MDI  stockholders  approved the  establishment  of the
1999 Equity  Incentive Plan effective as of June 1, 1999 (the "Plan").  The Plan
provides  that the  Board  may  grant  various  forms of  equity  incentives  to
directors,  employees,  and consultants,  including but not limited to Incentive
Stock Options,  Non-Qualified  Stock Options,  Stock  Appreciation  Rights,  and
Restricted  Stock Awards.  Grants under the Plan are  exercisable at fair market
value  determined  as of the date of grant in  accordance  with the terms of the
Plan. Grants vest to recipients immediately or ratably over periods ranging from
two to five years, and expire five to 10 years from the date of grant.

         On May 23, 2000,  stockholders  approved  amendment  No. 1 to the Plan,
which  increased  the number of shares of common stock  allocated for use in the
Plan from 2,000,000 shares to 3,000,000 shares.  On June 21, 2002,  stockholders
approved a second  amendment to the Plan,  which  increased the number of shares
allocated for use in the Plan from 3,000,000 shares to 5,500,000 shares. On July
29, 2004  stockholders  approved a third amendment to the Plan,  which increased
the number of shares for use in the Plan from 5,500,000 to 20,000,000 shares.

         The Board of  Directors  has also  granted  options to purchase  common
stock of MDI that are not covered by the terms of the Plan.


                                      F-26
<PAGE>

         MDI applies APB No. 25 and related  interpretations  in accounting  for
options granted to employees  under the Plan. No compensation  cost was recorded
during 2004 or 2003 for options  granted to  employees,  as the  exercise  price
approximated  the fair value of the  underlying  common stock on the date of the
grant.  Had  stock  options  been  accounted  for under  the fair  value  method
recommended by FAS 123, the Company's net loss allocated to common  stockholders
would have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                     For the Year Ended December 31,
                                                                          2004             2003
                                                               (in thousands except for per share amounts)
<S>                                                                     <C>              <C>
    Net loss applicable to common shareholders as reported .....        $(14,601)        $(11,060)
    Deduct: Total stock-based compensation expense determined
            under the fair value based method for all awards and
            forfeitures, net of related taxes ..................            (139)             213
                                                                        --------         --------
    Pro forma net loss applicable to common shareholders .......        $(14,740)        $(10,847)
                                                                        ========         ========

    Basic loss and diluted per share applicable to common
            shareholders - as reported .........................        $   (.19)        $   (.27)
                                                                        ========         ========
    Basic and diluted loss per share applicable to common
            shareholders - pro forma ...........................        $   (.19)        $   (.27)
                                                                        ========         ========
</TABLE>

         The fair value for these options was estimated at the date of the grant
using a Black-Scholes  option pricing model with the following  weighted average
assumptions:  risk-free  interest rates of 4.85% and 5.00% for the 2004 and 2003
periods,  respectively;  dividend  yields  of zero;  volatility  factors  of the
expected  market price of the  Company's  common stock of 131% and 208% for both
years and a weighted average expected life of the options of 2.5 - 5 years.

         A  summary  of  the  Company's   stock  option   activity  and  related
information follows:

<TABLE>
<CAPTION>
                                                                                         Weighted
                                                                                         Average
                                                                                         Exercise
                                                                        Options           Price
                                                                        -------           -----
<S>                                                                   <C>               <C>
         Outstanding at December 31, 2002 .....................        3,507,517
           Granted ............................................          600,000        $ 0.3144
         Exercised ............................................               --
         Forfeited - assumed in acquisition ...................          (17,035)       $ 4.9169
         Forfeited ............................................         (595,834)       $  .9385
                                                                      ----------
         Outstanding at December 31, 2003 .....................        3,494,648
         Granted ..............................................        2,500,000        $ 0.1540
         Forfeited ............................................       (1,046,921)       $ 1.0276
                                                                      ----------
        Outstanding at December 31, 2004 .....................         4,947,727
                                                                      ==========
         Exercisable at December 31, 2004 .....................        3,571,061        $  .8542
                                                                      ==========
         Weighted average fair value of options granted in 2004                         $ 0.1540
</TABLE>

         At the Annual Meeting of Stockholders on May 25, 1999, MDI stockholders
also approved the 1999 Employee Stock Purchase Plan (the "Purchase  Plan").  The
Purchase Plan offers  employees  the  opportunity  to purchase  shares of common
stock of MDI through a payroll deduction plan at 85% of the fair market value of
such shares at specified  enrollment  measurement dates. The aggregate number of
shares available for purchase under the Plan is 200,000.

Note 12.          Commitments and Contingencies


                                      F-27
<PAGE>

         On October 11,  2001,  MDI  obtained a 30%  ownership  interest in Cell
Solutions,  LLC, a Virginia limited liability  company.  MDI determined the fair
value of the  investment to be impaired at December 31, 2001. The investment was
written  down to zero as a result of the  uncertainty  of any future  benefit or
revenue stream.  In February 2004, MDI surrendered any and all ownership in Cell
Solutions, LLC.

Note 13.          Legal Proceedings

         Settled in 2004

         Garrett Realty. Prior to MDI's acquisition of AccuMed,  Garrett Realty,
Inc.  filed suit against  AccuMed for unpaid rent and related  expenses  under a
lease for office  space  located in  Chicago,  Illinois  (Circuit  Court of Cook
County,  Illinois (Case No. 01 M1 725821)).  Garrett  originally claimed amounts
due of  approximately  $50,000.  Following  completion of MDI's  acquisition  of
AccuMed,  management  vacated  AccuMed's  leased facility and  consolidated  its
operations into MDI's facility. However, Garrett continued to claim ongoing rent
and amended its complaint in 2002 claiming approximately $148,000 in unpaid rent
and related  legal costs  through  July 2002.  On July 18,  2002,  judgment  was
entered in favor of Garrett in the amount of approximately $157,000. On December
20, 2002, pursuant to a court order, Garrett seized  approximately  $12,500 from
an MDI bank  account as a partial  payment  against  the  judgment  amount.  MDI
recorded a $290,000 lease  obligation in accounting for the AccuMed merger based
on the present value of the future payments,  but contested the right of Garrett
to pursue collection of the judgment against the assets of MDI. During the first
quarter  of 2004,  MDI  reached  a  preliminary  settlement  on the  outstanding
judgment amounting to approximately $157,000 (plus interest) at that time, which
required  six monthly  payments.  MDI has made the first four  required  monthly
payments. MDI also agreed to issue 275,000 shares of its common stock as part of
the final  settlement.  The parties are  currently  at an impasse  concerning  a
dispute  over the  transfer of the MDI shares,  but MDI expects that this matter
will be resolved amicably.  Management believes that it has accrued a sufficient
amount as of December  31,  2004  relating  to this  obligation.  In March 2005,
Garrett  assigned  its right,  title and  interest in the judgment to The Lumber
Company.

         Bowne of Chicago, Inc. On January 2, 2003, Bowne of Chicago, Inc. filed
suit against MDI (Circuit Court of Cook County, Illinois (Case No. 03 L 000009))
claiming  approximately  $342,000,  plus  interest and attorney  fees and costs,
related to financial  printing  service fees  provided to MDI. In May 2004,  the
parties entered into a settlement  agreement whereby the court entered an agreed
judgment in the amount of $342,061  in favor of Bowne.  The parties  agreed that
Bowne  would  stay  enforcement  of the  judgment  so  long as MDI  honored  its
agreed-to monthly settlement payments, which are expected to conclude in 2006.

         MonoGen.  In  July  2002,   MonoGen,   Inc.  initiated  an  arbitration
proceeding  against the Company and its  subsidiaries,  AccuMed and  Oncometrics
Imaging Corp.  (collectively,  the "MDI Group"), alleging that the MDI Group had
violated  MonoGen's  rights  under  certain  license  agreements  (the  "License
Agreements")  separately  entered into by the subsidiaries with MonoGen prior to
the Company's acquisition of the subsidiaries.  In December 2002, the parties to
the  arbitration  entered into an agreement (the  "Technology  Agreement")  that
purported  to  settle  the  issues  that  had  been  raised  in the  arbitration
complaint.  However, the Technology Agreement did not have the desired effect of
ending the  dispute,  and in May 2003 the MDI Group  filed  suit in the  Circuit
Court of Cook County,  Illinois (the "State Court Case") against MonoGen and two
individuals  affiliated  with  MonoGen  in  an  attempt  to  obtain  a  judicial
resolution  of the issues  that had been  raised in the  arbitration.  The State
Court Case also sought to resolve  certain  allegations  of breach of  fiduciary
duties made by the Company  against the President of MonoGen,  Norman  Pressman,
who had been the  President  of both  AccuMed  and  Oncometrics  at the time the
License Agreements had been entered into by the parties.

         MonoGen resisted the State Court Case by, among other things, insisting
that the  dispute  could only be  settled in  arbitration,  as  required  in the
License Agreements. The claim as to MonoGen was dismissed on that basis. MonoGen
subsequently  filed  amended  demands  against the MDI Group in the  arbitration
proceeding,  which  had  never  been  dismissed.  In order to avoid  unnecessary
litigation  expenses,  in February  2004, the MDI Group agreed to a dismissal of
the State Court Case, leaving the arbitration  proceeding as the principal venue
for a resolution of the dispute over the license rights obtained by MonoGen from
the Company's subsidiaries.

         In October  2004,  the parties to the  arbitration  attempted to settle
most of the claims brought in that proceeding by virtue of a proposed Settlement
Agreement  that  provided  for the Company and AccuMed to,  among other  things,
transfer certain patents,  patent  applications and other intellectual  property
rights, as well as certain  identified AcCell units and spare parts, to MonoGen,
and to simultaneously issue to MonoGen a joint unsecured installment  promissory
note in the principal amount of $305,000. The note called for an initial payment
of $25,000 to be made by the Company and AccuMed to MonoGen on November 1, 2004,
with  subsequent  monthly  payments  of  $10,000  each to be made until the full
principal balance has been paid. The Settlement  Agreement also provided for the
termination of the License Agreements and the Technology Agreement, but reserved
all  rights of the  parties in regard to any  matters  that may  continue  to be
disputed  among them and the British  Columbia  Cancer Agency arising out of, or
related to, the License Agreement between Oncometrics and MonoGen.


                                      F-28
<PAGE>

         Inasmuch as the AcCell  units and spare parts were not  transferred  to
MonoGen  within the time period  prescribed  in the  Settlement  Agreement,  and
because  the initial  $25,000  payment to be made under the note was not paid by
its due date,  MonoGen  delivered a notice of default to the Company and AccuMed
in November 2004. If the default asserted in the notice is not cured,  there are
a number of remedies  that may be available to MonoGen  under the  provisions of
the Settlement  Agreement and the note, one of which is the possibility that the
full principal  amount of the note may be accelerated  and declared  immediately
due and payable. To date, no member of the MDI Group has received further notice
in regard to the asserted default,  although not all of the remedies that may be
available  to MonoGen  in regard to such  default  would  require  that  further
notices be given.

         British  Columbia  Cancer Agency.  In December 2004,  British  Columbia
Cancer  Agency  settled its dispute  with MDI,  AccuMed and  Oncometrics,  which
dispute  concerned certain  technology and patent rights.  The BCCA claimed that
our  subsidiary,  Oncometrics,  breached a 1989 master  agreement  that had been
transferred to Oncometrics (which master agreement transferred certain rights to
technology  and patents) by licensing  certain of the  transferred  intellectual
property to a third party.  As part of the  settlement  agreement  resolving the
arbitration  dispute,  the BCCA agreed to restore  Oncometrics  and pay all fees
associated therewith. The parties also agreed that the master agreement would be
formally  terminated,  and MDI  and  its  subsidiaries  would  transfer  certain
intellectual  property  assets and rights to the BCCA. MDI and its  subsidiaries
also had to agree to  provide  notice  of  termination  of the  license  between
Oncometrics and the third party that  precipitated  the dispute.  The settlement
agreement also included mutual covenants not to sue, provided certain conditions
were met,  and an  acknowledgment  from the BCCA that it would  discontinue  its
arbitration  case  against  the  Company  and its  subsidiaries,  provided  such
companies  were  not in  breach  of the  settlement  agreement.  The  settlement
agreement  with the BCCA was made as of  December  31,  2004,  with an  expected
closing date for the transactions contemplated thereby of January 28, 2005.

         Bruce Patterson, M.D./Invirion, Inc. On July 2, 2003, Dr. Patterson and
his company  Invirion,  Inc. filed suit against MDI in the Circuit Court of Cook
County,  Illinois  (03 L  7995).  Dr.  Patterson  sought  approximately  $86,000
pursuant to an agreement for his scientific consulting services.  Invirion, in a
separate claim, sought  approximately  $57,500 for certain HPV test kits that it
claims were sold to MDI. In December 2004, the parties agreed to settle the case
and the lawsuit  was  dismissed  in January  2005.  MDI has no further  monetary
obligations under the settlement.

         Pending as of December 31, 2004 and March 31, 2005

         Hill & Barlow LLP. In February  2003,  Hill & Barlow LLP, a now defunct
law firm,  filed a complaint  against MDI in the Trial Court of the Commonwealth
of Massachusetts (000740), seeking the collection of unpaid legal fees. Judgment
was entered  against MDI in the amount of $16,842,  plus costs and interest.  In
April 2004,  the  parties  entered  into a  settlement  agreement.  The terms of
settlement  have not been fully  satisfied by the parties  because a dispute has
arisen  concerning  the  return  of  MDI's  files.  Given  that the law firm has
dissolved, management does not expect a final resolution of this matter.

         Monsun.  On January  9,  2003,  Monsun,  AS filed  suit  against  Peter
Gombrich,  our former  Chairman  and CEO (U.S.  District  Court for the Northern
District of Illinois,  Eastern Division (Case No. 03 C 0184)), claiming $500,000
plus  consequential  damages for failure to make payment in compliance  with the
terms of a personal  guaranty signed by Mr. Gombrich.  The guaranty was executed
in  connection  with  Monsun's  grant of an extension in the maturity  date of a
convertible promissory note issued by MDI on November 1, 2000 in favor of Monsun
in the principal amount of $500,000.  The note had an original  maturity date of
November 1, 2001.  The maturity  date of the note was initially  extended  until
January 31, 2002 and subsequently to April 1, 2002 and finally to July 31, 2002.
Monsun  granted the final  maturity date  extension in exchange for the guaranty
and various  warrants  issued by MDI entitling the holder to purchase  shares of
its common stock at various prices.

         In November  2002,  the Board of  Directors  approved  the  issuance of
200,000 shares of common stock to Monsun to satisfy a default  penalty clause in
the guaranty.  The terms of the guaranty required that Monsun receive registered
shares of our common stock;  however,  in order to comply with securities  laws,
MDI issued the shares of common stock to Monsun with a restrictive  legend.  MDI
recorded the  principal  amount of the note plus accrued and unpaid  interest to
December  31,  2003 as a note  payable on its  records.  In March  2004,  Monsun
obtained a judgment  against  Mr.  Gombrich in the amount of  $675,199.  In July
2004,  Monsun obtained a second  judgment  against Mr. Gombrich in the amount of
$438,419  for  attorney  fees and  costs  incurred  in  enforcing  the  guaranty
agreement.  Those  judgments  remain  unsatisfied.  Monsun  has not  filed  suit
directly against MDI to recover any amounts due under the note or otherwise.


                                      F-29
<PAGE>

         The  Lash  Group,  Inc.  On June 10,  2004,  The Lash  Group,  Inc.,  a
healthcare  consulting  firm, filed a lawsuit against the Company in the General
Court of Justice, Superior Court Division, in Mecklenburg County, North Carolina
(04 CVS  10367).  The Lash Group seeks  approximately  $94,000,  plus  interest,
attorney  fees and court costs,  for the alleged  breach of an  agreement,  with
respect to which Peter Gombrich, our former Chairman and CEO, and MDI are sought
to be held  primarily  liable.  This action  remains  unresolved and the Company
intends to contest the claims.

         Medical  College of Georgia  Research  Institute,  Inc. On November 18,
2003, the Medical College of Georgia Research Institute, Inc. filed suit against
MDI in the Superior Court of Richmond County,  Georgia (Case No. 2003-RCCV-1211)
to collect amounts  allegedly due pursuant to an agreement to provide a clinical
study for MDI. Georgia Research  Institute  claimed that the principal amount of
the obligation  due from MDI was  approximately  $86,700,  but sought to collect
approximately  $315,300  pursuant to an interest  provision of 10% per month. On
October  27,  2004,  the court  entered  summary  judgment  in favor of  Georgia
Research  Institute  and against  MDI in the amount of  $68,404.  MDI expects to
propose terms of  settlement  to satisfy this judgment in the second  quarter of
fiscal 2005.

         Eric  Gombrich.  On May 19, 2004,  former  employee Eric Gombrich filed
suit against MDI in the Circuit Court of Cook County,  Illinois (04 L 5661). Mr.
Gombrich claims that MDI breached a written employment contract and that it owes
him $631,258 (plus  interest) and 300,000 shares of MDI stock.  MDI made initial
attempts to resolve this dispute,  and is currently  contesting  Mr.  Gombrich's
action.

         The Regents of the  University  of  California.  On May 28,  2004,  The
Regents of the  University of California  filed suit against MDI in the Superior
Court of California, County of San Francisco (CGC-04-431944).  The University of
California  claims that MDI breached an agreement to sponsor a research  project
for a period of one year. The complaint seeks compensatory damages in the amount
of $57,530 and additional lost opportunity  damages in the amount of $75,220. In
January 2005,  the  University of  California  requested  that the court enter a
default  judgment  against MDI in the amount of $132,827,  which  includes court
costs.  The  parties are  currently  involved in  settlement  negotiations  with
respect to this matter.

         Arthur  Lipper III. On July 8, 2004,  Arthur Lipper III filed a lawsuit
against MDI in the  Circuit  Court of Cook  County,  Illinois  (04 L 7671).  Mr.
Lipper  claims  that MDI  breached a  consulting  services  agreement  and seeks
$60,000, plus interest and court costs. MDI is contesting this claim.

         Kanan,  Corbin,  Schupak & Aronow,  Inc.  On August  12,  2004,  Kanan,
Corbin,  Schupak & Aronow, Inc. filed suit against AccuMed  International,  Inc.
f/d/b/a  Molecular  Diagnostics,  Inc.  in the  Circuit  Court  of Cook  County,
Illinois (04 L 9109),  seeking  $59,678,  plus  interest  and court  costs,  for
services  provided.  MDI has not yet been  formally  served with summons and the
complaint in this case.

         Reid Jilek. On October 20, 2004, Reid Jilek filed a lawsuit against MDI
in the Circuit  Court of Cook County,  Illinois (04 CH 17375).  Mr. Jilek claims
that MDI breached a 2003 services agreement and that MDI subsequently breached a
2004  settlement  agreement.  Mr. Jilek seeks $180,000  pursuant to the services
agreement or, alternatively,  $114,000 pursuant to the settlement agreement. Mr.
Jilek also seeks a court order that MDI issue him 1,500,000 warrants to purchase
MDI stock at $0.17 per share pursuant to the services agreement.  MDI previously
issued to Mr. Jilek  warrants to purchase an  aggregate 1 million  shares of its
common stock, and intends to contest Mr. Jilek's claims.

                  Miscellaneous

         Other Creditors; Wage and Related Claims. MDI is a defendant in several
lawsuits  brought by current or former  unsecured  creditors to collect past due
amounts for goods and services.  MDI has recorded the amounts due in its records
and is  attempting  to  settle  these  suits  and  unfiled  claims.  MDI is also
currently  negotiating the settlement of wage claims brought by former employees
seeking to collect for unpaid wages and severance benefits. MDI has recorded the
amounts due in its records and is attempting  to settle these  claims.  MDI does
not consider any of these claims to be material.


                                      F-30
<PAGE>

         Ketchum  Public  Relations.  In June 2004,  MDI settled a $72,000 claim
made by Ketchum Public Relations. No litigation was ever filed by Ketchum. It is
expected  that MDI's  monthly  settlement  payments to Ketchum will  conclude in
2005.

Note 14.          Subsequent Events

         Warrants

         On July 18, 2003, two warrant holders - Azimuth  Corporation and Cadmus
Corporation  - agreed to cancel seven  warrants  held by Azimuth and one warrant
held by Cadmus,  which  entitled  the holders to  purchase a total of  3,125,000
shares of common stock at various  exercise  prices  between $0.01 and $1.25 per
share.  The warrants,  issued between  December 1999 and August 2001,  contained
anti-dilution  clauses  which  required  MDI to increase the number of shares of
common  stock the  holders  were  entitled  to  purchase  under the  warrants by
approximately   1,500,000  shares  as  of  the  date  of  the  agreement,   with
commensurate adjustments in individual exercise prices so that gross proceeds to
the Company from exercise of the warrants remained the same. These anti-dilution
provisions  could have required the Company to make  additional  adjustments  in
shares and exercise prices in the future based on the Company's issuance of debt
or equity  instruments  at prices  below the adjusted  exercise  prices of these
warrants.  In consideration for the parties' agreement to cancel these warrants,
including  their  individual  anti-dilution  clauses,  and  the  forgiveness  of
approximately  $100,000  owing to Azimuth  and  Cadmus,  MDI agreed to issue new
five-year  warrants  entitling  the holders to purchase an  aggregate  6,500,000
shares of common stock at an exercise price of $0.30 per share.  MDI also agreed
to issue a 120- day warrant  entitling the holders to purchase 500,000 shares of
common stock at an exercise  price of $0.30,  which warrant  expired on November
19,  2003.   Management  believes  that  the  Company  will  derive  significant
additional  benefits  in  the  future  as a  result  of the  elimination  of the
anti-dilution provisions in the original warrants. The final settlement document
and the warrants were issued and executed in the first quarter of 2005.

         Common Stock Financing

         Beginning  in December  2004,  MDI began an offering of common stock to
accredited  investors  in exchange for cash.  MDI granted each  investor in such
offering the right to receive a warrant to purchase  common stock at an exercise
price of $0.10 per share,  with the first $250,000 of investment in the offering
to receive  50%  warrant  coverage  and  subsequent  investors  to  receive  25%
coverage.  Through March 31, 2005, the Company had raised an aggregate  $826,500
and issued 13,775,001 shares of restricted common stock and warrants to purchase
4,485,418 shares of common stock.

         Resignation of Director and Officer

         On March 4, 2005,  Peter M. Gombrich  resigned as Chairman of the Board
and as a director of the Company.  On March 16, 2005, Mr. Gombrich also resigned
his position as Executive Vice President with the Company.

         Litigation

         Pending as of December 31, 2004 and Settled in 2005

         The  Cleveland  Clinic  Foundation.  On March 28, 2003,  The  Cleveland
Clinic  Foundation filed suit against MDI (U.S.  District Court for the Northern
District of Ohio, Eastern Division (Case No. 1:03CV0561)) seeking  approximately
$315,000 for certain  clinical  trial work  conducted by the  Foundation  in the
Peoples  Republic  of China on behalf of MDI.  On  December  8, 2003,  a default
judgment in the amount of $260,000 was entered  against MDI. In March 2005,  the
parties agreed in principle to terms of settlement and are currently  working on
a definitive settlement agreement.  MDI's last settlement payment is expected to
be made in July 2005,  at which point it is expected  that the default  judgment
will be deemed fully satisfied.


                                      F-31
<PAGE>

         Daniel Kussworm,  Jennifer Kawaguchi, and Susan Keesee. On February 18,
2004, former MDI employees Daniel Kussworm, Jennifer Kawaguchi, and Susan Keesee
filed suit against MDI and its former  Chairman Peter  Gombrich,  in the Circuit
Court  of  Cook  County,  Illinois  (04 L  1941)  to  recover  wages  and  other
compensation  allegedly due them.  These claims were settled and fully satisfied
in January 2005, and the lawsuit has been dismissed.

         Ungaretti & Harris.  On May 31, 2004,  the law firm  Ungaretti & Harris
LLP filed an amended  complaint against MDI in the Circuit Court of Cook County,
Illinois (04 L 1101),  to collect unpaid legal fees for services  rendered prior
to December 31, 2003. In January 2005,  the court  entered  summary  judgment in
favor of Ungaretti & Harris LLP and against MDI in the amount of $195,500,  plus
costs of suit. The parties  subsequently  entered into a settlement agreement to
satisfy the judgment. Under the agreement,  MDI's payments to Ungaretti & Harris
are expected to conclude in 2006.

         New Proceedings 2005

         Esoterix,  Inc.  Esoterix,  Inc.  made a claim against MDI for $19,725,
arising  from a  laboratory  services  agreement  that  it  maintains  that  MDI
breached.  In March 2005,  Esoterix,  Inc. filed suit against MDI to pursue this
claim in the Circuit  Court of Cook  County,  Illinois  (05 M1  116482).  MDI is
currently engaged in settlement discussions with Esoterix.

         Satisfaction of Delinquent Payroll Tax Liabilities

         MDI was  delinquent  in paying a portion of federal and state  employee
and employer  payroll taxes for 2003,  2002, and 2001.  The  delinquent  federal
payroll  taxes  relating to 2003 and 2002 were paid in full in April  2004.  The
delinquent  federal  payroll taxes relating to 2001 were paid in full in January
2005.

         MDI is also  delinquent in filing certain  federal and state income tax
returns for 2003 and 2002 and is working to complete and file such returns.  The
Company's delinquent federal and state income tax returns for 2001 were filed in
March 2005.

         Short-term Liquidity Problems

         During the first quarter of 2005,  MDI  continued to experience  severe
liquidity  problems and had insufficient cash on hand to effectively  manage the
business  during such period.  From January 1, 2004 through March 31, 2005,  the
Company  raised  $576,500  from the  issuance  of  common  stock  to  accredited
investors. MDI has continued to raise operating cash pursuant to the issuance of
additional  restricted  common  stock  and  management  is  in  the  process  of
negotiating additional financing.

         Plan to Restructure Outstanding Liabilities

         The Company's new management team is working to develop a restructuring
proposal to provide  unsecured  creditors a settlement plan, which is contingent
on the Company's ability to raise sufficient new equity to fund operations.

         Insurance

         Due  to  MDI's  liquidity  problems,  the  Company  was  unable  to pay
insurance  premiums  for policies  covering  Directors  and Officers  Liability,
Public  Liability  and  Property  Damage.  These  policies  were  all  cancelled
retroactive  to  October  29,  2002.   MDI  was  issued  a  workers   employment
compensation  insurance  coverage in 2004 for the policy year July 2004  through
July 2005.


                                      F-32
<PAGE>

Schedule IX--Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                              Additions
                                                               Charged                                             Balance
                                             Balance at        to Costs                                             at End
                                             Beginning           and                              Other              of
Description                                  of Period        Expenses         Retirements       Changes           Period
-----------                                  ---------        --------         -----------       -------           ------
<S>                                            <C>            <C>                 <C>             <C>               <C>
Reserves and allowances
   deducted from asset accounts
Allowance for uncollectible
   accounts receivable
Year ended December 31, 2004 ...........       $ 50           $  0                $ 50            $  0              $ --
Year ended December 31, 2003 ...........       $145           $  0                $ 95            $  0              $ 50
Reserves and allowances which support
   balance sheet caption reserves
Warranty reserves
Year ended December 31, 2004 ...........       $ --           $  0                $  0            $  0              $ --
Year ended December 31, 2003 ...........       $ 21           $  0                $ 21            $  0              $ --
Inventory reserves
Year ended December 31, 2004 ...........       $ --           $ 57                $  0            $  0              $ 57
Year ended December 31, 2003 ...........       $  2           $  0                $  2            $  0              $ --
</TABLE>


                                      F-33