SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

|X|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the fiscal year ended December 31, 2003

                                       or

|_|      TRANSITION REPORT PURSUANT TO 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.
             (EXACT NAME OF REGISTRANT AS SPECIFIED 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 510, CHICAGO, IL                  60610
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

        TITLE OF EACH CLASS            NAME OF EACH EXCHANGE ON WHICH REGISTERED
               None                                 Not Applicable

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $0.001 PAR VALUE
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K. |_|

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |_| No |X|

         The Company's revenues for the year ended December 31, 2003 were
$379,000.

         The aggregate market value of the Common Stock held by non-affiliates
of the Company as of March 31, 2004, was $13,851,636, based upon the closing
price of shares of the Company's Common Stock, $0.001 par value per share
("Common Stock"), of $0.24 per share as reported on the Nasdaq Over-the-Counter
Bulletin Board Market on that date.

         The number of shares of Common Stock outstanding as of March 31, 2004
was 72,126,629.


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                           MOLECULAR DIAGNOSTICS, INC.
                           ANNUAL REPORT ON FORM 10-K
                                DECEMBER 31, 2003

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                                TABLE OF CONTENTS
                                                                                                                  PAGE

PART I

ITEM 1.  DESCRIPTION OF BUSINESS
<S>                                                                                                                 <C>
         GENERAL DEVELOPMENT OF BUSINESS..................................................................          1
         RECENT DEVELOPMENTS..............................................................................          1
              a)  Bridge I Financing .....................................................................          2
              b)  Bridge II Financing.....................................................................          1
              c)  Secured Convertible Note Financing......................................................          3
              d)   Secured Convertible Note Financing......................................................         3
              e)  Other Financing.........................................................................          3
              f)  Resignation of Officer..................................................................          3
              g)  Litigation Settlements..................................................................          3
              h)  Delinquent Payroll Tax Liabilities......................................................          4
              i)  Short-term Liquidity Problems...........................................................          4
              j)  Plan to Restructure Outstanding Liabilities.............................................          5
              k)  Authorized Shares of Common Stock.......................................................          5
              l)  Insurance...............................................................................          5
              m)  Information About Industry Segments.....................................................          5
         DESCRIPTION OF BUSINESS..........................................................................          5
              a)  General Overview........................................................................          5
              b)  Products................................................................................          5
                  1)  InPath System.......................................................................          6
                  2)  Samba Software Products and Services................................................          6
                  2)  Automated Microscopy Instruments....................................................          7
                       1)  AcCell.........................................................................          7
              c)  Markets.................................................................................          7
              d)  Government Regulation, Clinical Studies and Regulatory Strategy.........................          7
              e)  Competition.............................................................................         11
              f)  Operations..............................................................................         11
              g)  Intellectual Property...................................................................         12
              h)  Research and Development................................................................         13
              i)  Component and Raw Materials.............................................................         14
              j)  Working Capital Practices...............................................................         14
              k)  Employees...............................................................................         14
         FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.....................         14
         CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
         LITIGATION REFORM ACT OF 1995....................................................................         14
         RISK FACTORS.....................................................................................         15
ITEM 2.  DESCRIPTION OF PROPERTIES........................................................................         18
ITEM 3.  LEGAL PROCEEDINGS................................................................................         19
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................         22

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................         23
         MARKET INFORMATION...............................................................................         23
         HOLDERS  ........................................................................................         24
         DIVIDENDS........................................................................................         24
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         STOCK TRANSFER AGENT.............................................................................         24
         RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS......................................         24
         EQUITY COMPENSATION PLAN TABLE INFORMATION.......................................................         26
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............         27
         RESULTS OF OPERATIONS............................................................................         27
              a)  Overview................................................................................         27
              b)  Significant Accounting Policies.........................................................         29
              c)  Revenue.................................................................................         29
              d)  Costs and Expenses......................................................................         29
                  1)  Cost of Goods Sold..................................................................         29
                  2)  Research and Development............................................................         29
                  3)  Selling, General and Administrative.................................................         30
                  4)  Impairment Loss.....................................................................         30
                  5)  Other Income and Expense............................................................         30
                       1)  Interest Income................................................................         30
                       2)  Interest Expense...............................................................         31
                       3)  Other Income and Expense, Net..................................................         31
              e)  Compensation from Discountinued Operations/Gains from Involuntary Conversion............         31
              f)  Net Loss................................................................................         31
              g)  Liquidity and Capital Resources.........................................................         31
ITEM 7.  FINANCIAL STATEMENTS.............................................................................         36

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............         36
         RESIGNATION OF PRIO AUDITORS.....................................................................         35
         ENGAGEMENT OF NEW AUDITORS.......................................................................         36
ITEM 8A. CONTROLS AND PROCEDURES..........................................................................         37

PART III
ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..................................................         37
ITEM 10. EXECUTIVE COMPENSATION...........................................................................         39
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................         42
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................         47
ITEM 13. EXHIBITS AND REPORTS ON FORM 8K..................................................................         48
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................................................         59

Signatures            ....................................................................................         60

Index to Financial Statements
Reports of Independent Auditors...........................................................................          F-1
Consolidated Balance Sheets at December 31, 2003 and 2002.................................................          F-3
Consolidated Statements of Operations for the two years ended December 31, 2003 and 2002..................          F-4
Consolidated Statements of Cash Flows for the two years ended December 31, 2003 and 2002..................          F-5
Consolidated Statement of Stockholder's Equity (Deficit) for the two years ended
   December 31, 2003 and 2002.............................................................................          F-7
Notes to Consolidated Financial Statements................................................................          F-12
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                                                          ii
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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

         We were incorporated in Delaware in December 1998 as the successor to
Bell National Corporation. Bell National was 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, 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. 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 Medical
Corporation. In October 2001, we became a minority shareholder in Cell
Solutions, LLC, a Virginia limited liability company. Except where the context
otherwise requires, "MDI", the "Company", "we" and "our" refers to Molecular
Diagnostics, Inc., and subsidiaries, and its predecessors.

         MDI is currently focused on the design, development and marketing of
the InPath 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 computer aided
automated microscopy instrument and the AcCell Savant, an instrument that
includes an AcCell and software, which collects quantitative cellular
information used in support of a diagnostic process. These instruments are sold
to laboratories and medical diagnostic companies for use in the customers'
proprietary applications. The instruments, in certain instances, are also placed
in the 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

         BRIDGE I FINANCING

         Between March 22, 2002 and June 28, 2002, MDI issued $3,185,000 in
series 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 common stock on the date of conversion. In addition, MDI issued a
warrant, which entitled each holder to purchase one share of common stock, at an
exercise price of $0.25 per share, for each dollar principal amount of notes.
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. At the time of conversion of the note, the 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 the
warrants as of December 31, 2003. 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. MDI determined the value of
the beneficial conversion feature to be $1,041,666 and recorded this amount as
additional interest expense during 2002. 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 note holders converted $50,000 in
principal amount of notes and $5,287 in accrued interest into 368,579 shares of
unregistered common stock. The remaining $2,075,000 in principal of Bridge I
notes remains unconverted and outstanding at December 31, 2003.



                                       1
<PAGE>

Management has extended a written offer, dated October 10, 2003, to the Bridge I
noteholders to convert their Notes and accrued interest into common shares at
$0.15 per share. In addition, the Bridge I holders were also offered warrants to
purchase one new share for every four shares acquired by the Bridge noteholder
upon exercise of such holder's conversion rights under the note. As of April 14,
2004, this offer remained outstanding.

         From January 1, 2004 through March 31, 2004, holders of $1,200,000
principal amount of Bridge I Convertible Promissory Notes elected to convert
their notes and related accrued interest of $152,000 into 9,010,410 shares of
unregistered common stock.

         BRIDGE II FINANCING

         Beginning in October 2002, MDI began an issue of up to $4,000,000 in
series Bridge II Convertible Promissory Notes to accredited investors. The notes
bear interest at 12 % per annum payable at maturity date in kind in the form of
shares of common stock and were due July 31, 2003. 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 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. MDI granted each note holder the right to receive a private
warrant to purchase one share of the common stock of MDI for each dollar of
principal amount of notes held at an exercise price of $0.15 per share. The
warrants are not issueable until such time as MDI completes significant
additional financing plans. MDI granted a junior security position in all of the
Company's assets to the holders of the Bridge II convertible promissory notes.
The Bridge II notes automatically convert into shares of Common Stock (subject
to adjustments for stock splits, etc.) upon a "Qualified Financing Transaction,"
which means a transaction in which the Company closes a new debt or equity
financing prior to the maturity date that results in net proceeds to the Company
of at least four million dollars ($4,000,000). From January 1, 2003 through the
closing of the offering on December 5, 2003, MDI issued Bridge II Convertible
Promissory 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 and
$305,667 in exchange for a note payable from Peter P. Gombrich, the Company's
Chairman, for a total issuance during the year of $3,345,867. In September 2003
an amendment to the Bridge II Convertible Promissory Notes was sent to holders
requesting an extension of the maturity date 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
offered an increase in the warrant coverage ratio from 25% to 33%.

         From January 1, 2004 through March 31, 2004, holders of $1,396,000
principal amount of Bridge II Convertible Promissory Notes elected to convert
their notes and related accrued interest of $140,000 into 11,708,118 shares of
unregistered common stock. Included in the above conversion amounts are amounts
due Peter P. Gombrich, the Company's Chairman, of $305,667 in Bridge II
principal and $11,431 in accrued interest, which were converted into 2,113,987
shares of unregistered common stock.

         SERIES C CONVERTIBLE PREFERRED STOCK CONVERSIONS

          During the first three months of 2004, holders of Series C Convertible
Preferred Stock elected to convert 910,000 shares and accrued dividends into
5,577,173 shares of unregistered common stock.

         SECURED CONVERTIBLE NOTE FINANCING

         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 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 maturity date of 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
250,000, the underlying shares are registered for sale, and the Convertible
Promissory Note to an affiliate, Suzanne M. Gombrich, has been paid or converted
into common shares. The holders were also granted a security position in all of
the Company's assets. MDI granted each note holder the right to




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receive a 25% warrant coverage on all money invested, therefore, for every
$100,000 invested, an investor will receive warrants entitling the holder to
purchase 25,000 shares common stock at an exercise price of $0.15. The warrants
will expire on December 31, 2008. All investment proceeds were deposited in an
escrow account and the funds would not be released until all of the following
requirements were met:

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

     o    Suzanne Gombrich's Convertible Promissory Note was paid or converted
          into common shares

     o    Satisfactory due diligence was completed by Bathgate Capital Partners,
          LLC

     o    A specified portion of Bridge II Convertible Promissory Note holders
          converted their notes into common shares o Peter P. Gombrich, MDI's
          Chairman and CEO resign his position as CEO of the Company

All of 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 certain payroll
taxes to the Internal Revenue Service ("IRS"), and working capital.

         OTHER FINANCING

         Beginning in February 2004, MDI began a separate offering of
Convertible Promissory Notes to accredited investors. These 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 maturity date of 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 250,000, the underlying shares are registered for sale, and the Convertible
Promissory Note to an affiliate, Suzanne M. Gombrich, has been paid or converted
into common shares. The holders were also granted a security position in all of
the Company's assets. MDI granted each note holder the right to receive a 25%
warrant coverage on all money invested; therefore, for every $100,000 invested
an investor will receive 25,000 warrants to purchase common stock at an exercise
price of $0.15. The warrants will expire on December 31, 2008. Through March 31,
2004, the Company had issued $1,292,000 in principal amount of convertible
promissory notes in exchange for cash.

         On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note
to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's
Chairman, in exchange for cash. The note bore interest at the rate of 12% per
annum and was convertible into the common stock of MDI at a conversion price of
$0.10 per share. As additional consideration, MDI granted the holder a warrant
to purchase 1,000,000 shares of the common stock of MDI at an exercise price of
$0.15 per share. MDI also granted the holder a first priority security interest
in all of the Company's assets. MDI used all of the cash proceeds from the note
to fund the $100,000 cost of an option to repurchase all of its assets from
Round Valley Capital, LLC and to make the $900,000 payment required to exercise
the purchase option in conjunction with the final settlement of the loan with
Round Valley Capital, LLC. On April 2, 2004, in conjunction with the release of
funds from the Bathgate Capital Partners offering, the 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. The payment on the $1,000,000
Convertible Promissory Note and $126,113.52 of accrued interest as of April 2,
2004 was in the form of $936,114 in cash and 1,900,000 shares of common stock of
the Company.

         RESIGNATION OF OFFICER

         In February 2004 Peter P. Gombrich resigned as Chief Executive Officer
and was appointed Executive Vice President of the Company. Mr. Gombrich remains
Chairman of the Board. In February 2004, the Board of Directors appointed Denis
M. O'Donnell M.D., a current Director of the Company, to be President and Chief
Executive Officer.

         LITIGATION SETTLEMENTS

         On May 22, 2001, a judgment in the amount of $312,000 plus interest was
entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in
favor of Merrill Corporation. The judgment was the result of the settlement of
an



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action brought by Merrill claiming unpaid fees for financial printing services,
provided to AccuMed in 1996, and related interest and legal costs totaling in
excess of $400,000. Under terms of the settlement and the related judgment,
AccuMed was required to make 12 monthly payments of $26,000, and a final payment
to include all interest accrued on declining unpaid balance of the judgment over
the term of payment. AccuMed made 7 payments in accordance with the terms of the
settlement and ceased to make any additional payments. In May of 2002, Merrill
asserted its rights under the original judgment and filed a citation to discover
assets of AccuMed and obtain the remaining amount due. On October 17, 2002, MDI
reached an agreement with Merrill whereby MDI assumed responsibility for the
remaining unpaid amount of the judgment and related costs totaling $145,000 and
agreed to pay such amount no later than November 15, 2002. In February 2004, MDI
settled the amount due to Merrill and fully satisfied all obligations owed to
Merrill. The citation proceedings against MDI were dismissed.

         On July 31, 2002, MDI entered into a settlement and mutual release
agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of
breach of representations and warranties included in an agreement under which
AccuMed sold its microbiology business and related assets to Trek in 1999. Under
the settlement agreement, MDI executed an $80,000 promissory note in favor of
Trek. The note required principal payments of $40,000 each on September 1 and
December 1, 2002. MDI made the initial payment and Trek filed suit against MDI
(Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03 492582)) on January
23, 2003 to collect the remaining $40,000 plus interest at 8% per annum and
legal and other costs. On April 18, 2003, judgment was entered against MDI in
the amount of $40,000 plus interest. Trek initiated citation proceedings against
MDI in the Circuit Court of Cook County, Illinois in 2003. In March 2004, MDI
entered into a final settlement agreement with Trek and fully satisfied all
amounts due to Trek. The citation proceedings against MDI were dismissed.

         The Company and its subsidiaries Samba Sarl and AccuMed international,
Inc. (collectively, "MDI") are parties to an Amended License and development
Agreement with Ventana Medical Systems, Inc. ("Ventana") dated October 31, 2001,
pursuant to which MDI has licensed certain intellectual property rights and
technical information to Ventana. Under the Amended License and Development
Agreement, Ventana was to produce an automated pathology imaging system using
the intellectual property rights and technical information licensed from MDI,
and Ventana was to pay MDI royalties based on the sales of such imaging system,
as well as software support fees related to licensed software rights. MDI and
Ventana were also parties to a Letter of Intent and Confidentiality Agreement
dated July 12, 2002. Disputes arose between MDI and Ventana regarding their
respective performance under the Amended License and Development Agreement and
the Letter of Intent. In November 2003, MDI and Ventana negotiated a settlement
and release, pursuant to which the Amended License and Development Agreement and
the Letter of Intent were modified. Under the terms of the settlement and
release, among other things, MDI issued a Promissory Note to Ventana in the
principal amount of $62,946 and is also required to deliver two AcCell 2001
workstations. Ventana waived its rights to any prepaid royalties or other fees
paid to MDI or its subsidiaries upon signing of the original agreements.

         DELINQUENT PAYROLL TAX LIABILITIES

         MDI was delinquent in filing certain Federal and State Income Tax
returns for 2002 and 2001. MDI is also 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 Company owed $686,000 and $678,000 as of December 31, 2003 and
2002, respectively, in 2001 federal payroll taxes, including $258,000 and
$250,000 respectively in assessed and estimated statutory penalties and
interest. MDI has submitted payments of $150,000 against this liability amount
and is currently in the process of communicating through counsel with the
Internal Revenue Service regarding payment of the balance due. The Company has
lost all rights of appeal regarding the outstanding payroll tax liability and
could be subject to the seizure of its tangible and intellectual property in the
event a payment schedule is not agreed to with the Internal Revenue Service. The
amount was included in accrued payroll costs in the accompanying balance sheet.

         SHORT-TERM LIQUIDITY PROBLEMS

         We continued to have severe liquidity problems and had insufficient
cash on hand to effectively manage our business during the first three months of
2004. In March of 2004, Bathgate Capital Partners LLC raised $1,500,000 funds


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from the Company issuance of Convertible Promissory Notes, of which the majority
of the funds were used for the repayment of the Suzanne Gombrich note. In
addition, MDI began a separate offering of Convertible Promissory Notes and has
raised $1,292,000 for the payment of legal judgements, IRS taxes, wage claim
settlements, and current operating needs. We have continued to raise operating
cash through the date of this report through the issuance of additional
Convertible Promissory Notes. Management is currently attempting to secure
additional financing.

         PLAN TO RESTRUCTURE OUTSTANDING LIABILITIES

         The Company's new 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

         As a result of the issuance of numerous convertible securities,
including the above Convertible Promissory Notes and related warrants, we do not
have sufficient shares of common stock authorized to issue upon exercise of all
of our currently outstanding convertible securities, warrants and options. The
issuance of shares of common stock pursuant to any new financing arrangement is
subject to the Company obtaining shareholder approval to increase the authorized
shares of common stock of the Company and the Company filing an amended
Certificate of Incorporation. Our Board of Directors is considering an increase
in the number of authorized shares of common stock from 100,000,000 shares to
300,000,000 shares, although the Board has not made a final decision on the
issue. 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 may constitute a breach
of one or more of our agreements governing issuance of such securities.

         INSURANCE

         Due to liquidity problems, we were unable to pay the continuing
premiums on insurance policies covering Directors & Officers Liability, Public
Liability, Property Damage and Workers Employment Compensation. These policies
were all cancelled retroactive to October 29, 2002. We are currently working
with insurance providers to reinstate our insurance coverage in these areas as
soon as possible.

INFORMATION ABOUT INDUSTRY SEGMENTS

         We operate primarily in an industry segment involving medical screening
devices, diagnostics, and supplies. All of our operations during the reporting
period were conducted within this segment. We expect to continue to focus our
operations on this industry segment.

BUSINESS

         GENERAL OVERVIEW

         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 availability
and cost effective service delivery. We are developing an initial series of
products to address these criteria including sample collection devices, 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 additional capital. As a
result, we will incur substantial operating losses until we are able to
successfully market some, or all, of our products.


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         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--that allows the InPath 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        An FDA approved unique sample collection device 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.

         o        A biochemical assay, fully-automated, 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        In the point of service version of the InPath System,
                           this biochemical assay is applied directly to the
                           cellular sample and analyzed either in solution or
                           while still on the collection device.

         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 biochemical assay.

                  o        In the laboratory version of the InPath System, the
                           AcCell computer aided automated microscopy instrument
                           uses a camera to read the various wavelengths of
                           light from the sample.

                  o        In the future point of service version of the InPath
                           System, the proprietary instrument uses custom
                           designed optical devices and lasers to capture the
                           various wavelengths of light directly on the
                           collector.

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

         SAMBA SOFTWARE PRODUCTS AND SERVICES

         Samba Technologies, Sarl, one of our wholly owned subsidiaries operated
under the control of the French Commercial bankruptcy 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 Court in a bankruptcy liquidation sale. As a result of this
sale, MDI lost all rights and title to the assets including Samba software. We
have classified Samba's operations as discontinued in our financial statements.

                                       6
<PAGE>

         AUTOMATED MICROSCOPY INSTRUMENTS

         ACCELL(TM)

         In November 2001, Ventana Medical Systems, Inc. ("Ventana") agreed to
purchase and distribute AcCell with their image analysis software, 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 elected not to
develop the 2500 and in November 2003, MDI and Ventana signed a settlement
agreement providing for a non-exclusive, royalty-free license agreement to the
source code for the AcCell 2500 for its 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 $62,946 in return for forgiveness of approximately $375,000 of advances
against future sales.

         MDI has elected instead to proceed with the development and manufacture
of a new fully integrated workstation (AIPS). It 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;

         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;

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

         The current workstation is a key tool of our research process, clinical
trials, and the InPath System laboratory based test. We continue development of
this platform. We may sell and market these instruments to other potential
customers, OEM laboratories and into the diagnostics marketplace.

         MARKETS

         We do not plan to develop and train a large direct sales force to sell
the InPath System. Our initial strategy is to market the laboratory version of
the InPath System to 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 hospitals, clinics, managed care organizations and
office-based physician groups.

         The cost of the Pap test outside of the United States, where
approximately 100,000,000 tests are performed, vary 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 our statutory regulatory approvals.

         The AIPS workstation is a key component of the laboratory version of
the InPath System. In addition, we may market the AIPS instrument platform,
including the version currently in development, to medical diagnostic companies
as a means to automate specific diagnostic testing processes. We market this
system as the most versatile and cost-effective automated microscopy platform
currently available.

         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



                                       7
<PAGE>

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 (a "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 PMA applications 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, Clinical Research Organizations, ("CROs") and
members of our Medical Advisory Board.

         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 e2(TM) collector was approved for marketing by the
FDA on May 31, 2002 under the 510(k) notification.

         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,
design and manufacturing documentation to prove the safety and effectiveness of
the device. The PMA process is substantially longer than a 510(k) notification
process. During the review period, the FDA may conduct extensive 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 current and 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 GMP & 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 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 would 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 the InPath System. 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.


                                       8
<PAGE>

         The InPath System 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.

         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 the
FDA and/or the CLIA assigning the lowest possible Classification to 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 product 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 collector, data showed that the cytology reports on samples collected
with the InPath System collector were at least as accurate as those collected
with the conventional brush/spatula method. The InPath System collector also
proved to be more comfortable for the patient and provided less blood and mucus
and required only one device to collect both endocervical and ectocervical
cells. The results of the additional clinical patients data were submitted in
January 2002 and we received



                                       9
<PAGE>

FDA clearance to market the collector on May 31, 2002.

         We believe the results of these studies support the continued
development process 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.

         We completed the initial phase of our clinical studies during 2002 and
we hope to begin the last phase during the second half of 2004, 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.
It may also be offered for sale as an Analyte Specific Reagents ("ASR"), which
is defined as the specific ingredient required for the laboratory to created
their 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, which
are qualified to perform high complexity 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.

         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 will initiate the full scale manufacturing process through contract
manufacturing and intends to introduce it into the commercial market in the
second half of 2004.

         The second stage of our overall strategy involves the continuing study
of the InPath System and Cocktail-CVX, as described in preceding paragraphs.
This submission will cover the InPath System as 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 by the fourth quarter of 2004
or first quarter of 2005. 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 the respective
clinical markets.

                  INPATH SYSTEM PRODUCT INTRODUCTION TIMELINES

PRODUCT                         PROCESS                           TIMELINE

e2 Collector...........    Clinical trials                        Completed
                           Regulatory submission & review         September 2001
                           Regulatory clearance received          May 2002
                           US sales (1)                           2004
                           International sales (1)                2004 / 2005
Cocktail-CVX...........    Clinical trials (1)                    2004
                           Regulatory submission & review (1)     2004 / 2005
                           Regulatory clearance projected (1)     2005
                           US sales (1)                           2005
                           International sales (1)                2005
Cocktail-CVX ASRs .....    US sales                               2005

         (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 these products for use in certain clinical applications, however, 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.

                                       10
<PAGE>

         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 towards continued refinement and cost reduction of our products
will permit us to remain or become competitive in all of the markets in which we
presently distribute or intend to distribute our products.

         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.

         We believe that all of 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, which will not add to overall healthcare
cost. Specifically, there are several companies whose technologies are similar,
adjunctive to, or may overlap with MDI's. These include Cytyc Corporation,
Tripath Corporation, Digene Corporation, Ventana Medical Systems, Inc.,
ChromaVision Systems, Inc., and Applied Imaging, Inc. However, none 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. At most, our
competitors have two of the three technologies. MDI is the only company in the
process of developing all three technologies into a solution for cervical cancer
screening.

         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, and contract laboratory facilities located in several locations.

         We do not intend to invest capital to develop our own distribution and
sale organizations, and 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 U.S. and other international markets. This strategy
covers manufacturing requirements related to InPath System chemical components,
plastic and silicone parts for the sample collector, InPath System instruments
and the AIPS instruments.

         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.


                                       11
<PAGE>

         We also have a preliminary agreement with a large manufacturer of
chemical and biological tests to integrate the various combinations of
ingredients that make up our assay Cocktail-CVX into a single product delivered
in high volume.

         We 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.

         We are currently negotiating agreements with medical instrument
manufacturers covering the design, development and initial manufacturing of both
the next generation AIPS platform and the future point of service instrument.

         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 marketing of our products in the U.S. and foreign
markets.

         In the United States we follow the practice of immediately 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 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 2004, we have filed eleven U.S. utility patent applications
and ten national applications. Four of the U.S. utility applications have issued
as U.S. Patents. Seven U.S. and ten 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
cover 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
thirty-three issued U.S. patents, one U.S. patent application, and nine foreign
patents, of which a combined total of seventeen 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 hold an exclusive license from
Invirion and Dr. Bruce Patterson covering a patent and certain medical
technology for detection of E6 and E7 genes in cancer causing types of Human
Papilloma Virus ("HPV") virus. We purchased the license for cash, future
royalties, and other considerations.

         We continue 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.

                                       12
<PAGE>

         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 eighteen 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 will be significantly reduced. Foreign patent applications are
automatically published eighteen months after filing. As the time required to
prosecute a foreign utility patent application generally exceeds eighteen 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.

         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(TM)", "e(2) Collector(TM)", "Cocktail-CVX(TM)", "In-Cell HPV Test(TM)",
"AcCell(TM)" and "AcCell Savant(TM)". 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 2003 and 2002 our research and development expenditures were approximately
$580,00 and $3,338,000, respectively.

         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 are establishing relationships with strategic design/manufacturing
partners to develop the next generation Automated Microscopy Instrument
platform. The design requirements are complete and prototypes 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, in
order to complete the development and use of the InPath System and bring it to
market.


                                       13
<PAGE>

         COMPONENTS AND RAW MATERIALS

         Low cost products are a key component of our business strategy. We
designed the 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 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 have an adequate supply
of current workstations used in the InPath System and have contracted for the
design and manufacture of the next generation of the workstation platform.

         The point of service instruments are designed to use off-the-shelf
components and a limited number of custom manufactured parts or use a third
party manufactured instrument. The strategic partner chosen to manufacture the
unique final instrument, as is the case with the company building the
prototypes, will be responsible for sourcing, fabrication, and assembly of all
components into the final instrument.

         WORKING CAPITAL PRACTICES

         As of December 31, 2003, we have not sold any InPath System products.
During 2003 and 2002, we sold several AcCell instrument platforms, billed and
received fees under an AcCell Savant fee-for-use contract. We have financed our
U.S. operations and research and development by raising funds through the sale
of debt or equity. 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 sales of some or all of our products.

         Similarly, 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, 2004, we employed a total of eight full-time employees
in the United States. The staff reductions from prior years were undertaken in
late 2002 and during 2003 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 risks of fluctuations
in the value of those currencies against the dollar. It is subject to changing
political climates, differences in culture and the local practices of doing
business. It is also subject to North American and foreign government actions,
such as export and import rules, tariffs and 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.

         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.

                                                         2003           2002
                                                         ----           ----

         NORTH AMERICA:
         Revenue..................................    $      379    $     717
         Profit (loss)............................    $   (9,804)   $ (11,937)
         Total Assets.............................    $    7,715    $   9,047
         FRANCE:
         Discontinued operations..................    $      (75)   $     (23)
         Gain from Involuntary conversion.........    $      292    $      --
         Total Assets.............................    $       --    $     612


                                       14
<PAGE>

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

         There are forward-looking statements throughout this report that are
not historical facts, including statements in this Item 1 and statements
contained in material incorporated into this report by reference. These
statements are based on our current expectations and plans, and involve many
risks and uncertainties. Some of these risks and uncertainties are factors that
affect all international businesses, while others are specific to us, and the
areas of the medical products industry in which we operate.

         The factors below in some cases have affected our historical results
and could affect our future results, causing them to differ, possibly
materially, from those expressed in this report's forward-looking statements.
These factors 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.

         Currency fluctuations are also a significant variable for global
companies, especially fluctuations in local currencies where hedging
opportunities are unreasonably expensive or unavailable. If the value of the
U.S. dollar strengthens relative to the currencies of the countries in which we
market or intend to market our products, our ability to achieve projected sales
and net earnings in such countries could be adversely affected.

         We believe that our expectations with regard to forward-looking
statements are based upon reasonable assumptions within the bounds of our
current business and operations 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.

RISK FACTORS

         The risks described below are not the only ones we are facing.
Additional risks are described in this report under recent developments and
litigation. 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
adversely affected by any of these risks. The trading price of our common stock
could decline due to any of these risks.

         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 Nasdaq
Over-the-Counter Bulletin Board Market 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, their Common Stock. Being a penny stock could limit the liquidity of
our Common Stock.

         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;



                                       15
<PAGE>

         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 Food and Drug Administration ("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. 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, 2003, we have approximately 82,655 shares of Series A
convertible preferred stock outstanding which convert into 36,102 shares of our
common stock; 799,856 shares of Series B convertible preferred stock outstanding
which convert into 3,199,424 shares of our common stock; 1,192,833 shares of
Series C convertible preferred stock outstanding which convert into 5,964,165
shares of our common stock; 175,000 shares of Series D convertible preferred
stock outstanding which convert into 1,750,000 shares of our common stock,; and
260,764 shares of Series E convertible preferred stock outstanding, which
convert into 7,171,010 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 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 they may determine.

         At December 31, 2003, we have outstanding warrants to purchase
17,387,000 shares of our common stock, outstanding options to purchase
approximately 3,495,000 shares of our common stock, and 450,000 stock
appreciation rights which are convertible into 289,286 shares of common stock.

         At December 31, 2003, outstanding convertible promissory notes are
convertible into approximately 42,789,000 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 approximate
13,189,000.

         At December 31, 2003, we have approximately 1,333,000 shares of our
common stock reserved for future stock options and 160,000 shares of our common
stock reserved for future sale to employees.

         WE HAVE A LIMITED OPERATING HISTORY AND THERE ARE DOUBTS AS TO OUR
BEING A GOING CONCERN.

         We have limited operating history. Our revenues, from inception in
March 1998 through 2003, were derived almost entirely from sales by Samba
Technologies, Sarl, our wholly-owned subsidiary. The assets of Samba were sold
on December 19, 2003 as part of the French Commercial Court ordered liquidation
and MDI has 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 market place.

         We have incurred substantial losses and have limited financial
resources. Consequently our independent accountants have noted that these
conditions raise substantial doubt as to our ability to continue as a going
concern. Our



                                       16
<PAGE>

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. The going concern explanatory paragraph may make obtaining
additional financing more difficult or costly.

         WE CONTINUE TO HAVE SEVERE LIQUIDITY PROBLEMS.

         We continue to have severe capital 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 its business. There can be no assurance that we
will be able to secure the 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 our Company. These short-term requirements
include a significant amount of liabilities and promissory notes in arrears. In
addition, we have unpaid tax liabilities for payroll taxes from 2001 and we
recently paid the federal payroll tax liabilities for 2002 and 2003 in April
2004. 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 issuance of notes or other debt instruments. We
anticipate that these short-term funding needs will require the sale or issuance
of additional shares of common stock on instruments convertible into common
stock. Such sales or issuances, if any, may have a dilutive effect on 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 in the
future

         Our operating business plan for 2003 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 2004.

         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.

         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 CVX System in 2004. 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



                                       17
<PAGE>

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.

         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 we do.
We cannot be certain that our products will be able to be successfully marketed
in this competitive environment.

         WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS.

         We do not intend to maintain a direct sales force to market our
products. Therefore, in order to successfully market our products, we must be
able to negotiate profitable sales and marketing agreements with organizations
that have direct sales forces calling on domestic and foreign markets that may
use the 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 United States
Patent and Trademark Office and several 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.

         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 significant 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 and there can be no
assurance that we will be able to attract and retain key personnel. We have
entered into some employment agreements with our senior executives and do not
carry key-man insurance.

ITEM 2.           PROPERTIES

         We occupy approximately 5,700 square feet of leased space at 414 N.
Orleans St., Suites 510 and 503, Chicago, Illinois 60610, under a five-year
lease, which expires in October 2008. This space houses our executive offices,
research laboratory, and engineering development. We consider our facilities to
be well utilized, well maintained, and in good operating condition. 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.


                                       18
<PAGE>

ITEM 3.           LEGAL PROCEEDINGS

         SETTLED DURING 2002 AND 2003

         On October 20, 2000, we filed suit in Circuit Court of Cook County,
Illinois (Case No. 00 CH 15652), against SpectRx, Inc. and Welch Allyn, Inc. Our
suits sought injunctive relief and damages from SpectRx based on a complaint of
fraud and breach of certain confidentiality agreements with regard to our
business plans, marketing plans, and technology related to in-vivo diagnostic
devices. Our claim arose from disclosure of confidential information to SpectRx
in the course of negotiations contemplating a joint venture to develop new
medical products. The information covered cancer detection systems relying on
fluorescence technologies as well as bio-molecular marking agents for use in
applications within and outside of the body. We also provided SpectRx with
marketing plans, revenue, income and cash flow projections, product development
and launch plans, and product distribution strategies. In addition, we provided
SpectRx with certain confidential technical information regarding patent
applications, measurement technologies, design specifications, quantitative
analyses, optimization techniques, positional information for cellular mapping,
and other technical specifications. Subsequent to the disclosure of our
information to SpectRx, they entered into a business arrangement with Welch
Allyn to develop products of a similar nature to ours. The suit also charged
SpectRx and Welch Allyn with misappropriation of our trade secrets in violation
of the Illinois Trade Secrets Act.

         Our suit was filed in response to a suit filed by SpectRx in the
Superior Court of Gwinnett County, Georgia (Civil Action NO. 00-A-7604 1),
seeking a declaratory judgment (but no monetary damages or other relief) that
SpectRx did not breach the confidentiality agreements as charged in our suit. On
July 5, 2001, we filed counterclaims, similar to the claims outlined in our
Illinois suit, to the SpectRx action in Georgia.

         On February 1, 2002, we reached an out-of- court settlement with
SpectRx. Under the terms of the settlement, SpectRx paid a $150,000 lump sum
cash payment to us, and we granted SpectRx an option to license certain of our
technology. Additional terms of the settlement are confidential. Under the terms
of the settlement, neither party admitted any liability or wrongdoing. Welch
Allyn also was a party to the settlement agreement.

         In 2001, Dawn H. Grohs, a former employee/consultant to the Company,
filed suit against the Company and certain affiliated companies, as well as two
of the Company's senior officers (C.A. No. 02-C-1010 (U.S. District Court for
the Northern District of Illinois). Ms. Grohs' claimed fraud, unjust enrichment,
misrepresentation, breach of contract and quantum merit related to her
assertions that the defendants allegedly failed to provide her with equity;
tortuous interference with contractual relations and intentional interference
with contractual relations based on alleged encouragement of changes to the
business relationship with Ms. Grohs; breach of the covenant of good faith and
fair dealing, negligent infliction of emotional distress and intentional
infliction of emotional distress based on defendants' treatment of Ms. Grohs;
and violation of state law for alleged unfair and deceptive acts by defendants
for the purpose of inducing Ms. Grohs to continue to provide services without
compensation. Ms. Grohs sought $85,000 in wages, $40,250 in expenses, equity for
contributions and efforts during the formation of certain of the Company's
affiliates, payment of a sum to be determined by the court for the intentional
and/or negligent infliction of emotional distress, a finding that the actions of
defendants constitute unfair and deceptive acts, and that the court treble the
damages awarded. In addition to the specific relief described above, each count
sought an award of attorneys' fees and costs and such other and further relief
the court deems just and appropriate. In October 2002, we reached an
out-of-court settlement with Ms. Grohs. Under the terms of the settlement, we
paid Ms. Grohs $5,000 in cash and issued 400,000 unregistered shares of our
common stock to her. We calculated a fair value of $84,000 for the shares of our
common stock. We also granted Ms. Gross an option to purchase 400,000 shares of
our common stock at an exercise price of $0.20 per share. One third of the
option vested immediately and the remaining two thirds vest in equal amounts on
the first and second annual anniversary dates of the grant.

         The Company and its subsidiaries Samba Sarl and AccuMed International,
Inc. (collectively, "MDI") are parties to an Amended License and development
Agreement with Ventana Medical Systems, Inc. ("Ventana") dated October 31, 2001,
pursuant to which MDI has licensed certain intellectual property rights and
technical information to Ventana. Under the Amended License and Development
Agreement, Ventana was to produce an automated pathology imaging system using
the intellectual property rights and technical information licensed from MDI,
and Ventana was to pay MDI royalties based on the sales of such imaging system,
as well as software support fees related to licensed software rights. MDI and
Ventana were also parties to a Letter of Intent and Confidentiality Agreement
dated July 12, 2002. Disputes arose between MDI and Ventana regarding their
respective performance under the Amended License and Development Agreement and
the Letter of Intent. In November 2003, MDI and Ventana negotiated a settlement
and release, pursuant to which the Amended License



                                       19
<PAGE>

and Development Agreement and the Letter of Intent were modified. Under the
terms of the settlement and release, among other things, MDI issued a Promissory
Note to Ventana in the principal amount of $62,946 and is also required to
deliver two AcCell 2001 workstations. Ventana waived its rights to any prepaid
royalties or other fees paid to MDI or its subsidiaries upon signing of the
original agreements.

         PENDING AS OF DECEMBER 31, 2003 AND SETTLED IN 2004

         On May 22, 2001, a judgment in the amount of $312,000 plus interest was
entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in
favor of Merrill Corporation. The judgment was the result of the settlement of
an action brought by Merrill claiming unpaid fees for financial printing
services, provided to AccuMed in 1996, and related interest and legal costs
totaling in excess of $400,000. Under terms of the settlement and the related
judgment, AccuMed was required to make 12 monthly payments of $26,000, and a
final payment to include all interest accrued on declining unpaid balance of the
judgment over the term of payment. AccuMed made 7 payments in accordance with
the terms of the settlement and ceased to make any additional payments. In May
of 2002, Merrill asserted its rights under the original judgment and filed a
citation to discover assets of AccuMed and obtain the remaining amount due. On
October 17, 2002, MDI reached an agreement with Merrill whereby MDI assumed
responsibility for the remaining unpaid amount of the judgment and related costs
totaling $145,000 and agreed to pay such amount no later than November 15, 2002.
In February 2004, MDI settled the amount due to Merrill and fully satisfied all
obligations owed to Merrill. The citation proceedings against MDI were
dismissed.

         On July 31, 2002, MDI entered into a settlement and mutual release
agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of
breach of representations and warranties included in an agreement under which
AccuMed sold its microbiology business and related assets to Trek in 1999. Under
the settlement agreement, MDI executed an $80,000 promissory note in favor of
Trek. The note required principal payments of $40,000 each on September 1 and
December 1, 2002. MDI made the initial payment and Trek filed suit against MDI
(Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03 492582)) on January
23, 2003 to collect the remaining $40,000 plus interest at 8% per annum and
legal and other costs. On April 18, 2003, judgment was entered against MDI in
the amount of $40,000 plus interest. Trek initiated citation proceedings against
MDI in the Circuit Court of Cook County, Illinois in 2003. In March 2004, MDI
entered into a final settlement agreement with Trek and fully satisfied all
amounts due to Trek. The citation proceedings against MDI were dismissed.

         PENDING AS OF DECEMBER 31, 2003 AND MARCH 31, 2004

         Prior to our acquisition of AccuMed, Garrett Realty, Inc. filed suit
against AccuMed for unpaid rent and related expenses under a lease for premises
located at 900 and 920 N. Franklin in Chicago, Illinois (Circuit Court of Cook
County (Case No. 01 M1 725821)). Garrett originally claimed approximately
$50,000 was due them. Following completion of our acquisition of AccuMed,
management vacated AccuMed's leased facility and consolidated its operations
into our headquarters 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 and against AccuMed in the amount of approximately
$157,000. On December 20, 2002, pursuant to a court order, Garret seized
approximately $12,500 from an MDI bank account, as a partial payment against the
judgment amount. The unpaid remainder of the judgment, approximately $136,000
including interest, will continue to accrue interest until paid in full. Since
AccuMed had a continuing obligation for the minimum lease payments, MDI recorded
a $290,000 lease obligation in accounting for the AccuMed merger based on the
present value of the future payments. We are contesting the right of Garrett to
pursue collection of the judgment against the assets of MDI. Management believes
that the amount of the accrued lease obligation recorded as of December 31, 2003
is sufficient to cover any remaining expenses of this litigation and the related
judgment. During the first quarter of 2004, MDI reached a preliminary settlement
on the outstanding judgment, which required six monthly payments of $13,724
each. MDI has made the first two required monthly payments. MDI also agreed to
issue 280,000 shares of its common stock as part of the final settlement. The
issuance of the shares is subject to shareholder approval of an increase in the
number of authorized shares of common stock.

         On March 28, 2003, The Cleveland Clinic Foundation filed suit against
MDI (United States District Court for the Northern District of Ohio, Easter
Division, (Case No. 1:03CV0561)) seeking approximately $315,000 plus interest
and



                                       20
<PAGE>

attorney fees and costs. The sum in question pertains to remaining unpaid fees
for certain clinical trial work conducted by The Cleveland Clinic 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. At December 31,
2003, MDI has recorded the full amount owing to The Cleveland Clinic Foundation
as a liability in its accounts. MDI is currently engaged in settlement
discussions with The Cleveland Clinic Foundation.

         On January 2, 2003, Bowne of Chicago, Inc. ("Bowne") filed suit against
MDI (Circuit Court of Cook County, County Department-Law Division (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 by Bowne
during the period October 25, 2001 through November 7, 2002. While MDI is
actively defending itself against the suit claiming the charges for printing
services provided during the period mentioned above were excessive, management
has taken a conservative position and recorded the entire amount of the Bowne
invoices as outstanding accounts payable on the records of MDI. MDI is currently
engaged in settlement discussions with Bowne.

         On January 9, 2003, Monsun, AS ("Monsun") filed suit against Peter
Gombrich, our Chairman, (United States District Court for the Northern District
of Illinois Eastern Division (Case No. 03C 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 in relation to Monsun's grant of
an extension in the maturity date of a convertible promissory note in the
principal amount of $500,000 issued by MDI on November 1, 2000. 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 maturity date extensions in
exchange for various warrants issued by MDI entitling the holder to purchase
shares of our common stock at various prices. In November 2002, our Board of
Directors approved the issuance of 200,000 shares of our 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, we issued the shares of our common stock
to Monsun with a restrictive legend, which permits their sale only in compliance
with Rule 144 of the ACT. MDI has 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 of 2004, Monsun obtained a judgment against Mr. Gombrich in
the amount of $675,000. Monsun is currently seeking to obtain an additional
$545,000 to cover legal fees and costs incurred in enforcing the Guaranty
Agreement. Since Mr. Gombrich's potential liability under the suit, including
the failure to deliver registered shares of our common stock, is the result of
the failure of MDI to pay the principal amount of its convertible promissory
note when due, our Board of Directors has agreed that MDI will assume
responsibility for Mr. Gombrich's obligations under the guaranty, including
legal costs. Management and counsel are unable to determine the result of this
pending litigation as of March 31, 2004.

         We are the 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 a defendant in several wage claims brought by former employees
seeking to collect amounts due for unpaid wages and severance benefits. MDI has
recorded the amounts due in its records and is attempting to settle these
actions

         On May 16, 2003, the Company, together with its subsidiaries, AccuMed
International, Inc. ("AccuMed") and Oncometrics Imaging Corp. ("Oncometrics"),
filed suit against MonoGen, Inc. ("MonoGen"), its President, Norman J. Pressman
("Pressman"), and another individual, in the Circuit Court of Cook, County,
Illinois (Docket No. 03 CH 08532) (the "State Case"). The dispute that gave rise
to the State Case arose out of two license agreements, one between AccuMed and
MonoGen, and the other between Oncometrics and MonoGen, in which the rights to
limited use of certain intellectual property were granted to MonoGen in return
for one-time license fee payments totaling $500,000 (the "License Agreements").
At the time the License Agreements were entered into, the Company had not yet
acquired AccuMed and Oncometrics. A portion of the intellectual property subject
to the License Agreements was originally licensed by Oncometrics from an entity
now known as the British Columbia Cancer Agency ("BCCA"). Pressman was the
President of both AccuMed and Oncometrics when the License Agreements were
negotiated and executed. Shortly after the License Agreements were signed,
Pressman became the President of MonoGen. The Complaint filed in the State Case
(the "State Case Complaint") alleged that certain rights to the subject
intellectual property were transferred to MonoGen at a below-market price. The
State Case Complaint also asserted that the consent of BCCA to the sublicensing
of its technology,



                                       21
<PAGE>

which was required by the Oncometrics License Agreement, had not been obtained,
and that, to the extent BCCA's consent was required, Pressman breached his
fiduciary duties to AccuMed and Oncometrics by failing to obtain such consent.
The State Case Complaint also alleged that Pressman breached his fiduciary
duties by negotiating below-market license fees for the subject technology with
his future employer, MonoGen.

         Almost a year before the State Case Complaint was filed, MonoGen had,
in July, 2002, initiated an arbitration proceeding against the Company, AccuMed
and Oncometrics (collectively, the "MDI Group") in which MonoGen claimed that
the MDI Group was violating MonoGen's rights, and breaching many of the MDI
Group's obligations, under the License Agreements. In an effort to resolve this
dispute, the MDI Group and MonoGen entered into a settlement agreement (the
"Technology Agreement") as of December 23, 2002, pursuant to which certain
understandings were reached, including an agreement concerning the MDI Group's
sales of certain systems to a number of specifically identified customers, and
the royalties to be paid by the MDI Group to MonoGen based on those sales. The
Technology Agreement, which also included an arrangement for the MDI Group's
maintenance of the patents licensed to MonoGen, did not have the desired effect
of finally resolving the dispute among the parties. Thus, the MDI Group filed
the State Case Complaint. MonoGen was able to obtain a dismissal for itself from
the State Case on the ground that all disputes arising from the agreements with
the MDI Group members were required to be submitted to arbitration. The State
Case continued against the individual defendants.

         In July 2003, MonoGen proceeded to file a Second Demand for Arbitration
against the members of the MDI Group, but no proceedings were held with respect
to that demand. In December, 2003, MonoGen filed a Third Amended Demand for
Arbitration, in which MonoGen alleged that the MDI Group had breached its
agreements with MonoGen by, among other things, (i) licensing other parties to
use technologies that the MDI Group exclusively licensed to MonoGen, (ii) not
maintaining the patents that were the subject of the MDI Group's licenses to
MonoGen, and (iii) not providing MonoGen with information in regard to
improvements made to the technologies licensed to MonoGen by the MDI Group.
MonoGen also claimed that the MDI Group had defamed MonoGen in statements
impugning MonoGen's rights to the licensed technologies. The MDI Group has
denied MonoGen's claims, and has asserted in a counterclaim that the agreements
relied upon by MonoGen are invalid. The parties are presently engaged in
discovery with respect to this arbitration and the claims asserted in the
arbitration are scheduled for a hearing before a panel of American Arbitration
Association arbitrators in June, 2004.

         Because the same basic issues were involved in both the State Case and
the arbitration proceeding, and because the License Agreements and the
Technology Agreement can only be declared invalid in the arbitration
proceedings, the MDI Group decided to concentrate all of its efforts in regard
to this matter in the arbitration and therefore entered into an agreement with
the remaining defendants in the State Case in February, 2004 to have that suit
fully and finally dismissed.

         On April 14, 2003, we received a notification from the attorney for the
licensor, Dr. Bruce Patterson, under the License and Development Agreement
covering certain HPV technology, which forms the basis for our In-Cell HPV test,
indicating that the licensor intended to terminate the license in accordance
with a specific clause of the license, which permits termination in the event
the Company makes an assignment for the benefit of creditors or bankruptcy, or
otherwise relinquishes or loses control of all its assets. On April 15, 2003, we
informed the attorney that the facts used by the licensor to invoke the
termination right were incorrect and that we are still in control of all of our
assets and that such assets are pledged as security under debt instruments and
that such pledges are not included under events which would permit the licensor
to terminate the license. We, and our counsel, believe that MDI would prevail
should the licensor attempt to pursue a termination action.

         On July 2, 2003, Dr. Patterson and his company Invirion, Inc. filed
suit against MDI in the Circuit Court of Cook County, Illinois (Case No. 03 L
7995). Dr. Patterson seeks approximately $86,000 that he claims is due from MDI
under an agreement for his scientific consulting services. This is a dispute
with the licensor over completion of the third milestone of the license under
which completion requires process and procedure verification by an independent
third party. This verification requirement has not been satisfied as of yet, and
therefore MDI is contesting this claim. Invirion, in a separate claim, seeks
approximately $57,500 for certain HPV test kits that it claims were sold to MDI.
MDI is engaged in settlement discussions with Dr. Patterson and Invirion to
resolve all outstanding issues.

         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



                                       22
<PAGE>

agreement to provide a clinical study for MDI. Georgia Research Institute claims
that the principal amount of the obligation due from MDI is approximately
$86,700. However, Georgia Research Institute is seeking to collect approximately
$315,300 pursuant to an interest provision of 10% per month. MDI is contesting
this lawsuit, but has made attempts to resolve this dispute by settlement.

         NEW PROCEEDINGS 2004

         On February 18, 2004, current and former employees Daniel Kussworm,
Jennifer Kawaguchi, and Susan Keesee filed suit against MDI and one of its
officers in the Circuit Court of Cook County, Illinois (04 L 1941). These
individuals are seeking to recover wages and other compensation allegedly due to
them. Mr. Kussworm seeks approximately $68,600, Ms. Kawaguchi seeks
approximately $37,200, and Ms. Keesee seeks approximately $124,800; all amounts
exclude interest, court costs, and attorney fees. MDI is engaged in settlement
discussions with these three individuals to resolve all outstanding issues.

         MDI received information that on January 29, 2004, the law firm
Ungaretti & Harris filed suit against Accumed International Inc. in the Circuit
Court of Cook County, Illinois (04 L 1101), to collect for fees rendered prior
to December 31, 2003. Although Accumed has not been formally served with summons
and has not seen the legal complaint, it is believed that Ungaretti & Harris is
seeking to collect approximately $179,230.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of shareholders during the
fourth quarter of 2003.

                                     PART II

ITEM 5.           MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS

MARKET INFORMATION

         Our common stock is quoted on the Nasdaq Over-the-Counter Bulletin
Board Market under the symbol "MCDG" (prior to September 25, 2001 our common
stock traded under the symbol "AMPM"). Between May 27, 2003 and October 6, 2003
our common stock traded on the Over-the-Counter Pink Sheet Market under the
symbol MCDG. AccuMed's common stock was quoted on the Nasdaq Over-the-Counter
Bulletin Board under the symbol "ACMI".

         The following table lists the high and low closing sale prices per
share of our common stock for the periods indicated, as reported on the Nasdaq
Over-the-Counter Bulletin Board. These prices represent prices between dealers,
and may not include retail mark-ups, mark-downs, or commissions and may not
reflect actual transactions.

                                                            CLOSING SALES PRICE
                                                             RANGE OF COMMON
                                                                   STOCK
                                                                   -----
                                                             HIGH         LOW
                                                             ----         ---

     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

     Year Ended December 31, 2002
     1st Quarter....................................     $    1.190   $   0.820
     2nd Quarter....................................     $    1.120   $   0.690
     3rd Quarter....................................     $     .750   $   0.380
     4th Quarter....................................     $     .340   $   0.130


                                       23
<PAGE>

HOLDERS

         As of March 31, 2004, we had approximately 1,383 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 common shares, and the Board of
Directors is not contemplating paying one for the foreseeable future. We paid
non-cash dividends, in the form of newly issued shares of our common stock,
amounting to $444,297 and $392,869 during 2003 and 2002 respectively, to holders
of preferred stock who elected to convert their preferred shares and cumulative
dividends into our common stock. We have a contingent obligation to pay
cumulative dividends on various Series of convertible preferred stock in the
amount of $3,039,000, 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 our common stock. Cumulative dividends for various
Series of convertible preferred stock total approximately $4,768,000 at December
31, 2003, including $1,552,000 in deemed dividends arising as a result of
beneficial conversion features on Series' B and C convertible preferred stock
sold during 2001.

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.

RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS

         Beginning in October 2002, MDI began an issue of up to $4,000,000 in
series 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
Convertible Promissory 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
and $305,667 in exchange for a note payable from Peter P. Gombrich, the
Company's Chairman, for a total issuance during the year 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 price of the
notes issued during 2002 and those issued during 2003 was 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 December 31, 2002, respectively. The value was recorded as a reduction
of the debt and will be amortized as additional interest over the life of the
note. MDI recorded additional interest expense of $1,826,743 to reflect
amortization of the discount during the twelve months ended December 31, 2003.
The Bridge II notes automatically convert into shares of Common Stock (subject
to adjustments for stock splits, etc.) upon a "Qualified Financing Transaction,"
which means a transaction in which the Company closes a new debt or equity
financing prior to the maturity date that results in net proceeds to the Company
of at least four million dollars ($4,000,000). At the time MDI completes
significant additional funding plans, as outlined in the subscription agreement,
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.


                                       24
<PAGE>

         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.

         On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note
to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's
Chairman, in exchange for cash. The note bore interest at the rate of 12% per
annum and was convertible into the common stock of MDI at a conversion price of
$0.10 per share. As additional consideration, MDI granted the holder a warrant
to purchase 1,000,000 shares of the common stock of MDI at an exercise price of
$0.15 per share. MDI also granted the holder a first priority security interest
in all of the Company's assets. MDI used all of the cash proceeds from the note
to fund the $100,000 cost of an option to repurchase all of its assets from
Round Valley Capital, LLC and to make the $900,000 payment required to exercise
the purchase option in conjunction with the final settlement of the loan with
Round Valley Capital, LLC. On April 2, 2004, in conjunction with the release of
funds from the Bathgate Capital Partners offering, the 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. The payment on the $1,000,000
Convertible Promissory Note and $126,113.52 of accrued interest as of April 2,
2004 was in the form of $936,114 in cash and 1,900,000 shares of common stock of
the Company.

         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
determined the value of the shares to be $12,463, 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 $18,935.

         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 current and future
services. MDI valued the shares at $81,950 and $15,900, respectively.

         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 a current year administrative expense.

         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 a current year administrative expense.

         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 current
and future services. MDI valued the warrants at $150,000 using the Black-Scholes
valuation model and is amortizing the amount over the twelve-month period of the
consulting term.

         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 a current year administrative
expense.


                                       25
<PAGE>

         In 2003, holders converted 35,437 shares of Series A convertible
preferred stock into 15,478 shares of unregistered common stock.

         In 2003, a holder converted 66,000 shares of Series C convertible
preferred stock, including dividends due thereon as of the conversion date, into
380,403 shares of unregistered common stock.

         In 2003, holders of the Bridge I convertible promissory notes converted
notes and accrued interest totaling $55,287 into 368,579 shares of unregistered
common stock.

         In 2003, holders of the Bridge II convertible promissory notes
converted notes and accrued interest totaling $510,300 into 5,103,000 shares of
unregistered common stock.

         We issued the common stock, convertible promissory notes, and warrants
pursuant to exemptions under Section 4(2) of the Securities Act of 1934 as
amended.

* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and 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 were made to a limited number of persons, all of whom were
accredited investors, business associates of the Company or executive officers
of the Company, and transfer was restricted by the Company in accordance with
the requirements of the Securities Act of 1933. In addition to representations
by the above-referenced persons, we have made independent determinations that
all of the above-referenced persons 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, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.


EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>
                                               EQUITY COMPENSATION PLAN INFORMATION

                 PLAN CATEGORY                     NUMBER OF SECURITIES     WEIGHTED-AVERAGE         NUMBER OF SECURITIES
                                                    TO BE ISSUED UPON       EXERCISE PRICE OF       REMAINING AVAILABLE FOR
                                                       EXERCISE OF        OUTSTANDING OPTIONS,   FUTURE ISSUANCE UNDER EQUITY
                                                   OUTSTANDING OPTIONS,   WARRANTS, AND RIGHTS        COMPENSATION PLANS
                                                   WARRANTS AND RIGHTS                               (EXCLUDING SECURITIES
                                                                                                   REFLECTED IN COLUMN (A))
<S>                         <C>                         <C>                      <C>                           <C>
EQUITY COMPENSATION PLANS APPROVED BY SECURITY             (A)                     (B)                        (C)
HOLDERS
  1999 EQUITY INCENTIVE PLAN AS AMENDED -
          5,500,000 SHARES                              3,494,648                $1.1733                   1,332,685
  1999 EMPLOYEE STOCK PURCHASE PLAN -
               200,000 SHARES                               --                     --                       160,415
EQUITY COMPENSATION PLANS NOT APPROVED BY
SECURITY HOLDERS
  WARRANTS ISSUED WITH DEBT (1)                         7,964,645                $0.4835                       0
  WARRANTS ISSUED FOR FINDERS SERVICES (2)              4,705,192                $0.4864                       0
  WARRANTS ISSUED FOR IR SERVICES (3)                     680,000                $0.8603                       0
  WARRANTS ISSUED OF OTHER SERVICES (4)                 1,051,493                $0.0861                       0
  WARRANTS ISSUED FOR ASSET ACQUISITIONS (5)              172,120                $0.82                         0
  WARRANTS FROM ACCUMED ACQUISITION (6)                 1,074,056                $7.1769                       0
  (7)
</TABLE>


                                       26
<PAGE>

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 on the debt, which 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 act as finders in the placement of MDI's debt or equity
         instruments. The issuance of warrants to these advisors significantly
         reduces the cash costs, which would otherwise be associated with
         raising debt or equity.

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. During
         2002, MDI issued a warrant to a law firm entitling the holder to
         purchase 750,000 shares of MDI's common stock at an exercise price of
         $0.01 per share in settlement of fees due to the firm arising from the
         settlement of litigation. A non-employee consultant also agreed to
         accept a warrant in lieu of approximately $51,000 in unpaid consulting
         fees due.

5)       During 2001, MDI issued warrants under an agreement to acquire a thirty
         percent (30%) interest in Cell Solutions, Inc., a company assisting in
         the development of MDI's products.

6)       In September 2001, MDI completed the acquisition of AccuMed
         International, Inc. 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 Equity Incentive Plan.

7)       See Footnotes No. 8: Stockholders' Equity and No. 11: Equity Incentive
         Plan and Employee Stock Purchase Plan to the Consolidated Financial
         Statements for additional specifics on the Plans listed above and other
         issuances of equity for compensation.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

         OVERVIEW

         We were incorporated in Delaware on December 15, 1998, as the successor
to Bell National Corporation, which was incorporated in California in 1958.

         On December 4, 1998, Bell National, 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. In the acquisition, Bell National issued 4,288,790 shares
of common stock and warrants to purchase 3,175,850 shares of common stock to the
members of InPath in exchange for their membership interests. The senior
executives of InPath assumed management control of the Company.

         For financial reporting and accounting purposes, the acquisition was
accounted for as a reverse acquisition whereby InPath was deemed to have
acquired Bell National. However, Bell National was the continuing legal entity
and registrant for SEC filing purposes and income tax filing purposes, until its
merger into Ampersand in May 1999. Because Bell National was a non-operating
public shell company with nominal assets and InPath was a private operating
company, the acquisition was recorded as the issuance of stock for the net
monetary assets of Bell National, accompanied by a recapitalization and no
goodwill or other intangible assets were recorded in accordance with generally
accepted accounting principles.



                                       27
<PAGE>

         On September 25, 2001, the Company changed its corporate name to
"Molecular Diagnostics, Inc." in order to better represent its operations and
products. The name change was effected by the merger of Ampersand's wholly owned
subsidiary, Molecular Diagnostics, Inc., with and into Ampersand. The Company
retained its Certificate of Incorporation, except as amended to reflect its new
name, bylaws and capitalization.

         The Company is focused on the design, development and marketing of the
InPath System of products. These products are intended to screen for cancer and
cancer related diseases. These products may be used in a laboratory, clinic or
doctor's office.

         The Company had a wholly owned subsidiary, Samba Technologies, Sarl.
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 significant portion of 2002 revenues and
nearly all revenues reported for prior periods, since the inception of the
Company, were generated by Samba. Since December 20, 2002, Samba operated under
the protection of the French Commercial Court in compliance with the bankruptcy
laws of France. On December 19, 2003 the French Commercial Court finalized the
liquidation sale of Samba's assets. As of the date of the sale, we lost all
rights and title to Samba's assets, and we reflected this involuntary
liquidation in our December 31, 2003 financial statements. While the bankruptcy
sale of Samba's assets impacts our ability to generate revenue in the
short-term, we do not believe that sale of Samba's assets will have a negative
material impact on our operations.

         On September 17, 2001, the Company completed its acquisition of AccuMed
pursuant to a merger. In consideration for the acquisition, the Company issued
3,911,245, shares of its common stock to holders of AccuMed common stock, and
218,438 shares of its Series A convertible preferred stock to holders of AccuMed
Series A preferred stock. The value of the transaction, based on the fair value
of the shares of common stock and preferred stock issued by the Company, the
value of options and warrants assumed, the direct acquisition costs incurred,
and the fair market value of tangible and intangible assets purchased, as
determined by a third-party valuation, was approximately $14,178,000.

         On October 11, 2001, MDI obtained a 30% investment in Cell Solutions,
LLC. Cell Solutions was formed for the purposes of developing and improving
slide preparation systems. As consideration, MDI provided Cell Solutions
five-year warrants to purchase 172,120 shares of common stock with an exercise
price of $0.82. These warrants were valued using Black-Scholes and determined to
have a value of $127,000. MDI included the value of these warrants as an
investment at December 31, 2001. 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 future benefit or revenue stream.

         MDI is contractually committed to issue a total of 1,549,086 warrants
with the same terms based upon delivery of certain products by Cell Solutions.
As of December 31, 2003, Cell Solutions had not delivered these products and MDI
was not liable for the issuance of the warrants.

         The Company has incurred a significant operating loss since its
inception. The Company has raised approximately $31,682,000 since March 1998.
The Company 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 may depend
upon it securing substantial additional financing. Management's plans include
efforts to obtain additional capital. During 2003 and 2002, we raised
approximately $4,346,000 and $3,825,000, respectively through the issuance of
short-term convertible debt. During 2004, through April 2, we raised an
additional $2,792,000 through the issuance of long-term convertible debt. There
can be no assurance that the Company will continue to be successful in raising
capital. If the Company is unable to obtain additional capital or generate
profitable sales revenues, the Company may be required to curtail its product
development and other activities and may even be forced to cease operations.

         As mentioned in Item 1, for financial reporting and accounting
purposes, we treated the acquisition of InPath by Bell National as if InPath had
acquired Bell National. We recorded the issuance of common stock, combined the
equity of the two companies, and did not record any goodwill. Information
presented in our Consolidated Financial Statements includes the operations of
InPath from March 16, 1998 (inception) and the operations of the combined
company from December 4, 1998.

                                       28
<PAGE>


SIGNIFICANT ACCOUNTING POLICIES

         REVENUE RECOGNITION. Molecular Diagnostics, Inc. recognizes revenue
upon shipment of product or license to customers and no remaining Company
obligations or contingencies exist. Revenue from training services and
professional services is recognized when the service is completed

         LICENSE, 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 ranges
from two to seventeen years. The Company assesses licenses, patents, &
technology quarterly for impairment.

         STOCK COMPENSATION. As permitted by the Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS
123), Molecular Diagnostics, Inc. uses the intrinsic value method to account for
stock options as set forth in Accounting Principles Board No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES (APB 25).

         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 5% and 6% for 2003 and 2002, respectively,
a volatility factor of 208% and 90% for the 2003 and 2002 periods, 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.

         REVENUE

         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 for
the year 2002 were $717,000. Revenues and related costs and expenses have been
adjusted 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 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.
Cost of goods sold for 2002 amounted to $246,000.

         RESEARCH AND DEVELOPMENT

         We devote a substantial amount of our resources to research and
development ("R&D") related to our products, including markers, tests,
instruments and software applications.

         In 2003, our R&D expenses were $580,000, a decrease of $2,672,000, or
82% over 2002 expenses. The decrease was the result of not having a clinical
trial in process 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.

         In 2002, our R&D expenses were $3,252,000, a decrease of $552,000, or
15%, over 2001 R&D expenses. The decrease was the result of reductions in
product development costs because the majority of product development was
completed in prior years, and a corresponding reduction in consulting costs.

         R&D 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



                                       29
<PAGE>

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 R&D 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 R&D expense amounts for 2003 and 2002 are non-cash expenses of $12,000 and
$92,000, respectively, related to the calculated cost of these share awards and
options that were charged to expense in each period.

         SELLING, GENERAL AND ADMINISTRATIVE

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

         In 2003, selling, general and administrative expenses ("SG&A") were
$6,230,000, a decrease of $1,490,000, or 19% over similar expenses of 2002. The
decrease includes: $964,000 in legal expenses, $921,000 in payroll related to
the staffing reductions and a $1,384,000 reduction in professional costs and
other general and administrative costs related to the overall expense reduction
plan. These reductions were offset by an increase in financing costs of
$1,969,000 related to the Bridge II offering finders fee costs.

         In 2002, selling, general and administrative expenses ("SG&A") were
$7,720,000, an increase of $1,696,000, or 28%, over similar expenses for 2001.
The increase includes: $780,000 in legal expenses related to various public and
private offerings as well as increased litigation costs related to the RVC loan
transaction; $406,000 in financing cost primarily related to the RVC loan
transaction; $597,000 in printing, accounting and other professional fees
related to the aforementioned offerings; and approximately $450,000 in
additional amortization resulting from the AccuMed acquisition. These increases
were offset by reductions of $250,000 reduction in investor relations expenses
and $250,000 in administrative related payroll expenses.

         In order to reduce our cash SG&A 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, finder 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 SG&A expense amounts for 2003 and 2002 are
non-cash expenses of $1,906,000 and $1,078,000, 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. 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.

         OTHER INCOME AND EXPENSE

         INTEREST INCOME

         We had no interest income during 2003 and 2002.

                                       30
<PAGE>


         INTEREST EXPENSE

         In 2003, our interest expense amounted to $3,255,000, an increase of
$1,668,000, or 105% 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 the 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 RVC loan in 2003.

         In 2002, our interest expense amounted to $1,587,000, an increase of
$1,070,000, or 207% over 2001 interest expense. The entire increase can be
attributed to the amortization of debt discount arising from the beneficial
conversion feature of Bridge I and Bridge II convertible promissory notes.

         OTHER INCOME AND EXPENSE, NET

         In 2003, MDI recorded a $308,000 in Other Income and Expense, net,
which included $525,000 in restructuring income due to the beneficial settlement
of outstanding accounts payable. In addition, the Company recorded the
realization of a currency translation loss of $220,000 related to the former
Samba operations.

         In January 2002, MDI received $150,000 as an out-of-court settlement of
a lawsuit.

         OPERATION FROM DISCONTINUED OPERATIONS/GAIN FROM INVOLUNTARY CONVERSION

         The Company's subsidiary Samba, which had maintained its normal
operations under the protection of the French Commercial Court, during the 2003
was liquidated by the court appointed Administrator on December 19, 2003. Upon
the December 19, 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 2002
Samba operating activity was also restated to reflect the loss from discontinued
operations, which amounted to a net loss of $23,000.

         NET LOSS

         Our net loss for 2003 was $9,587,000. Cumulative dividends for 2003 on
the outstanding Series B convertible preferred stock, Series C convertible
preferred stock, Series D convertible preferred stock, and Series E convertible
preferred stock totaled $1,473,000. The combined total of the loss and the
preferred dividends results in a net loss applicable to common stockholders of
$11,060,000, or $0.27 per share on 40,695,186 weighted average shares
outstanding. The 2003 weighted average shares outstanding reflect additional
shares issued during the year and shares issued as the result of the conversions
of Bridge I and II Convertible Promissory Notes and shares of Series C
convertible preferred stock, Series E convertible preferred stock, and their
related cumulative dividends into our common stock.

         Our net loss for 2002 was $11,960,000. Cumulative dividends for 2002 on
the outstanding Series B convertible preferred stock, Series C convertible
preferred stock, Series D convertible preferred stock, and Series E convertible
preferred stock totaled $2,012,000. The combined total of the loss and the
preferred dividends results in a net loss applicable to common stockholders of
$13,972,000, or $0.49 per share on 28,704,245 weighted average shares
outstanding. The 2002 weighted average shares outstanding reflect additional
shares issued during the year and shares issued as the result of the conversions
of shares of Series B convertible preferred stock, Series C convertible
preferred stock, and Series E convertible preferred stock, and their related
cumulative dividends into our common stock. They also reflect the issuance of
5,750,000 of our common stock as additional collateral on the RVC loan. Although
these shares are treated as issued and outstanding at December 31, 2002, they
were returned to MDI in 2003 and we cancelled them in April of 2003. If we had
not treated these shares as outstanding at December 31, 2002 the net loss
applicable to common stockholders would have been $0.52 per share.

         LIQUIDITY AND CAPITAL RESOURCES

         R&D, 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,



                                       31
<PAGE>

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 to
limited numbers of U.S. and foreign accredited investors. We may 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 $2,989,000 and $4,227,000 during 2003 and 2002, respectively, in operating
activities.

         We had severe liquidity problems during 2003. As a result, we were
forced to cut staff and reduce our operations to a minimum level. Officers
refrained from drawing salaries during the first quarter as well as parts of the
second, third and fourth quarters of 2003 in order to reduce demands on our
limited cash position. We were able to raise funds under the Bridge II
convertible promissory notes during 2003. The proceeds of the notes were used to
satisfy certain obligations coming due at that time as well as a limited amount
of current operational expenses.

         At December 31, 2003, we had no cash on hand, a decrease of $42,000
over cash on hand at December 31, 2002 of $42,000. This decrease 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.

         On November 1, 2000, we issued a convertible promissory note to Monsun,
AS in exchange for $500,000 in cash. The note bears interest at the rate of 15%
per year and was due twelve months from the date of issue. The note is
convertible into our 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. Since the
conversion price was less than the market price of our common stock at the time
of the transaction, the holders are considered to have a beneficial conversion
feature. We recorded a value of $125,000 to this beneficial conversion feature
as debt discount, reducing the carrying amount of the debt. The debt discount is
amortized as additional interest expense over the life of the note. During 2001
and 2000, we recorded charges of $104,000 and $21,000 to interest expense to
reflect the amortized amount of debt discount. On October 31, 2001 we issued a
warrant to Monsun, AS entitling the holder to purchase 100,000 shares of our
common stock at an exercise price of $0.60 per share, a discount of 20% to the
market price of our common stock at the time, as consideration for Monsun's
agreement to extend the maturity date of the note until January 31, 2002. We
used the fair value interest rate method to determine a fair value of the
warrant of $25,000 and charged the amount to interest expense during the period.
On January 31, 2002, we issued a three-year warrant to Monsun, AS entitling the
holder to purchase 200,000 shares of our common stock at an exercise price of
$0.30 per share, a 70% discount to the market price of our common stock at that
date, as consideration for a further extension of the maturity date of the note
until April 1, 2002. A fair value of $4,110 was calculated for the warrant using
the fair value interest rate method. We recorded the amount as additional
interest expense during the period. On April, 1, 2002, we issued a five-year
warrant to Monsun, AS entitling the holder to purchase 200,000 shares of our
common stock at an exercise price of $0.70 per share, a 23% discount to the
market price of our common stock on that date, as consideration for another
extension of the maturity date of the note until July 31, 2002. A fair value of
$8,287 was calculated for the warrant using the fair value interest rate method
and was recorded as additional interest expense during the period. In November
2002, we issued 200,000 shares of our common stock to Monsun, AS in lieu of a
default penalty on the note. A fair value of $42,000 for the shares was
calculated using the market price of our common stock on the date the shares
were issued. We recorded this amount as financing expenses during the period. We
made payments against the note, including accrued interest, totaling $117,000
during 2002. The note is currently in default and Monsun has brought suit
against Peter Gombrich, our Chairman, to collect the unpaid principal and
accrued interest based on Mr. Gombrich's personal guaranty of the note. We are
paying Mr. Gombrich's legal expenses to defend the suit.

         In February 2002, we issued a $118,500 promissory note to Schwartz
Cooper Greenberger & Krauss ("SCGK") in exchange for past legal services
regarding the settlement of litigation in which we were represented by SCGK. We
repaid the note in September of 2002. As part of the settlement related legal
services, we also issued a warrant to SCGK entitling the holder to purchase
750,000 shares of our common stock at an exercise price of $0.01 per share. We
calculated a fair value of $675,000 for the warrant using the Black-Scholes
valuation method and recorded the amount as legal fees during 2002.

                                       32
<PAGE>

         Between March 22, 2002 and June 28, 2002, we issued $3,185,000 in
series Bridge I convertible promissory notes to accredited investors. Included
in the total amount of Bridge I notes issued is a note issued to NeoMed
Innovations III, which represents the conversion of an outstanding convertible
promissory note, including $60,000 in accrued interest due thereon, into a
Bridge I convertible promissory note. The notes are due December 31, 2002, bear
interest at the rate of 7% per annum and are convertible at any time into our
common stock at a conversion price equal to 75% of the market price of our
common stock on the date of the conversion. In addition, we issued a warrant,
which entitled each holder to purchase one share of common stock, at an exercise
price of $0.25 per share, for each dollar principal amount of notes. We
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 the 2002. At the time of conversion of the note, the holder is entitled
to receive a Private 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. Since the measurement date of these warrants
was not determined as of December 31, 2003, we have not determined a value for
these warrants as of that date. Since the conversion price of the notes is at a
25% discount to the market price of our common stock, the holder is considered
to have a beneficial conversion feature. We determined the value of this
beneficial conversion feature to be $1,049,808 and recorded this amount as
additional interest expense during 2002. In February 2003, NeoMed Innovations
III converted $1,060,000 in principal amount of Bridge I convertible promissory
notes into Bridge II convertible promissory notes. In November 2003, two note
holders converted $50,000 in principal amount of notes and $5,287 in accrued
interest into 368,579 shares of unregistered common stock. The remaining
$2,075,000 in principal of Bridge I notes remains unconverted and outstanding at
December 31, 2003. Management has extended a written offer, dated October 10,
2003, to the Bridge I noteholders to convert their notes and accrued interest
into common shares at $0.15 per share. In addition, the Bridge I holders were
also offered warrants to purchase one new share for every four shares acquired
by the Bridge noteholder upon exercise of such holder's conversion rights under
the note. As of April 14, 2004, this offer remained outstanding.

         In May 2002, we issued a warrant entitling the holder to purchase
51,493 shares of our common stock at an exercise price of $0.01 per share to a
non-employee consultant in lieu of payment of consulting fees due for past
services. We calculated a fair value of $50,969 for the warrant based on the
value of the consulting fees due. We recorded the amount as a reduction of
accounts payable.

         In July 2002, we issued 113,832 shares of our common stock to a vendor
in lieu of payment in cash for services. We calculated a fair value for the
shares of $78,000 based on the value of the services and the market value of our
common stock at the time of the transaction. We recorded the entire amount as
administrative expense during 2002.

         In July 2002, we settled a claim brought by Trek Diagnostic Systems,
Inc against AccuMed regarding breach of representations and warranties in a
certain agreement under which Trek purchased the microbiology business of
AccuMed in 2000. We issued a promissory note to Trek in the amount of $80,000,
payable in two equal installments on September 1 and December 1, 2002. We made
the first payment but did not make the second causing a default on the note.
Trek instituted legal action against us to obtain payment. We paid the remaining
amount due during 2003 and a final settlement in the first quarter of 2004.

         In August 2002, we issued 60,182 shares of our common stock to a
financial advisor as consideration for services provided. We determined a fair
value of $30,000 for the shares based on the market value of our common stock at
the time the shares were issued. We recorded the entire amount as administrative
expense during 2002.

         On August 30, 2002, we issued a promissory note to Round Valley
Capital, LLC in the amount of $825,500 representing $650,000 in cash proceeds
and $175,500 in unearned interest. The note bears a calculated effective
interest rate of 36% per annum and is due June 1, 2003. The note is secured by
all of our assets. We issued a certificate representing 5,750,000 shares of our
common stock as additional collateral for the loan. We paid cash transaction
fees of $147,063. As additional non-cash transaction fees, we issued RVC 711,364
shares of our common and one-year warrants to purchase 681,818 shares of our
common stock at an exercise price of $0.20 per share. We calculated affair value
of $362,795 for the shares of our common stock based on the market price of our
common stock on the date the shares were issued. We calculated a fair value of
$156,000 for the warrant using the Black-Scholes valuation method. The total
value of the combined cash and non-cash transaction fees was recorded as prepaid
financing costs and will be amortized over the life of the note. During 2002, we
made principal and interest payments on the note amounting to $350,000 and
$59,500, respectively. We also recorded amortization of $377,638 in prepaid
financing costs through the end of 2002. As a result of a



                                       33
<PAGE>

dispute over the value of certain collateral, RVC declared the note in default
shortly after we received the proceeds and began attempts to foreclose on the
collateral and all of our assets. We instituted legal action to prevent the
foreclosure and sale of our assets. We reached a final settlement, as described
under the heading "Recent Developments" covered earlier in this report, with RVC
in April of 2003.

         Beginning in October 2002, MDI began an issue of up to $4,000,000 in
series Bridge II Convertible Promissory Notes to accredited investors. MDI
issued $550,000 in Bridge II notes as of December 31, 2002. During 2003, MDI
issued an additional $2,285,867 in principal amount of Bridge II notes. 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 price of the
notes issued during 2002 and those issued during 2003 was 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 December 31, 2002, respectively. The value was recorded as a reduction
of the debt and will be amortized as additional interest over the life of the
note. MDI recorded additional interest expense of $1,826,743 to reflect
amortization of the discount during the twelve months ended December 31, 2003.
The Bridge II notes automatically convert into shares of Common Stock (subject
to adjustments for stock splits, etc.) upon a "Qualified Financing Transaction,"
which means a transaction in which the Company closes a new debt or equity
financing prior to the maturity date that results in net proceeds to the Company
of at least four million dollars ($4,000,000). At the time MDI completes
significant additional funding plans, as outlined in the subscription agreement,
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.

         In November 2002, we issued 400,000 shares of our common stock to a
former employee / consultant in settlement of litigation. We calculated a fair
value for the shares of $84,000 based on the market price of our common stock on
the date the shares were issued. We recorded the entire amount as research and
development expense during 2002.

         In November 2002, we issued 225,001 shares of our common stock to a
non-employee consultant as payment for past consulting services in accordance
with the provisions of a contract we have with the consultant. We determined a
fair value of $180,000 for the shares based on the market price of our common
stock on the date the shares were issued. We recorded a reduction in accrued
expenses of $130,000 and we recorded the remaining amount as research and
development expense during 2002.

         In November 2002, we issued a warrant entitling the holder to purchase
200,000 shares of our common stock at an exercise price of $0.16 per share to an
advisor who acted as a finder for investors in Bridge II convertible promissory
notes. We calculated a fair value of $44,000 for the warrant using the
Black-Scholes valuation method. We recorded the entire amount as financing costs
during 2002.

         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.

         On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note
to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's
Chairman, in exchange for cash. The note bears interest at the rate of 12% per
annum and is convertible into the common stock of MDI at a conversion price of
$0.10 per share. As additional consideration, MDI granted the holder a warrant
to purchase 1,000,000 shares of the common stock of MDI at an exercise price of
$0.15 per



                                       34
<PAGE>

share. MDI also granted the holder a first priority security interest in all of
the Company's assets. MDI used all of the cash proceeds from the note to fund
the $100,000 cost of an option to repurchase all of its assets from Round Valley
Capital, LLC and to make the $900,000 payment required to exercise the purchase
option in conjunction with the final settlement of the loan with Round Valley
Capital, LLC. The principal amount of the Convertible Promissory Note was repaid
on April 2, 2004.

          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 $12,463, 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 $18,935.

         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 $81,950 and $15,900, respectively.

         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 a current year administrative expense.

         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 a current year administrative expense.

         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 period of the
consulting term.

         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 a current year administrative
expense.

         We incurred approximately $18,000 and $88,000 in capital expenditures
for the years ended December 31, 2003 and 2002 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 useful life in excess of one year. The decrease in 2003
capital expenditures resulted from an effort to best utilize the limited
investment resources available to the company during 2003.

         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



                                       35
<PAGE>

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.

ITEM 7.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Our Consolidated Financial Statements for the years ended December 31,
2003 and 2002, together with the reports of: Altschuler Melvoin and Glasser, LLP
dated April 9, 2004 and June 26, 2003 on the Consolidated Financial Statements
for the year ended December 31, 2003 and 2002; Auditeurs & Conseils Associes
dated April 8, 2004 and June 26, 2003 on the Financial Statements of Samba
Technologies SARL are filed as part of this report commencing on page F-1.

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)(1)(v)A of Regulation S-K 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 the 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 Board of Directors and the Audit Committee, after reviewing
proposals from several firms, engaged Altschuler Melvoin and Glasser LLP as our
auditors for the fiscal years ended December 31, 2003 and 2002. The engagement
was effective April 30, 2003. During the two most recent fiscal years ended and
through April 14, 2004, 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,



                                       36
<PAGE>

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

Evaluation of disclosure controls and procedures
------------------------------------------------

As of December 31, 2003, we carried out an evaluation of the effectiveness of
the design and operation of its disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. This evaluation was done under the supervision and
with the participation of our Principal Executive Officer and Principal
Financial Officer. Based upon that evaluation, they concluded that our
disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy our disclosure obligations under the
Exchange Act. Our former independent auditors, Ernst & Young, LLP, issued a
report at the completion of their audit of our consolidated financial statements
for the year ended December 31, 2001 detailing certain deficiencies in our
internal control systems and procedures (See Item 9 of this Annual Report on
Form 10-K). During 2002, we hired an independent consultant, Tatum CFO Partners,
LLP ("Tatum"), to address the issues raised by Ernst & Young, LLP. In August of
2002, Tatum reported to the Audit Committee that it had assisted management in
developing procedures, forms, checklists and reporting packages to address these
deficiencies, and that progress had been made to improve our system of internal
controls. Additional progress in these areas continued through the end of 2002
and during 2003. In designing and evaluating the controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management was necessarily required to apply
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.


Changes in internal controls
----------------------------

         There have been no significant changes in our internal controls, with
the exception of those which may have temporarily arisen as a result of the
departure of accounting personnel during the first half of 2003 and which
reverted to their prior status as soon as new personnel were in place. Our
principal financial officer joined MDI in June of 2003 and therefore his review
was somewhat limited, and he was required to rely on our books and records, on
comments from independent auditors regarding their recently completed audit, and
on reviews and discussions with independent consultants who participated in the
audit and the preparation of this report and with other members of management.



                                    PART III

ITEM 9.           DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
         Name                               Offices and Positions, If Any, Held With the Company; AgE
         ----                               ---------------------------------------------------------
         <S>                                 <C>
         Peter P. Gombrich..............    Chairman of the Board,  Director; Age 66
         Denis M. O'Donnell, M.D........    President and Chief Executive Officer, Director; Age 50
         Dennis L Bergquist.............    Chief Financial Officer; Age 43
         Alexander M. Milley............    Director; Age 51
         Robert C. Shaw.................    Director; Age 50*
         John Abeles, M.D...............    Director; Age 59
</TABLE>

* Resigned on February 13, 2004.

         PETER P. GOMBRICH has been Chairman of the Board of the Company and a
director since December 1998 and was also Chief Executive Officer from 1998
until his resignation on February 19, 2004. Mr. Gombrich served as Chairman of


                                       37
<PAGE>

the Board and Chief Executive Officer of InPath, L.L.C. ("InPath"), a
bio-molecular medical testing company, since Mr. Gombrich 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. From July 1985 until
September 1989, Mr. Gombrich was President and Chief Executive Officer, and from
July 1985 until November 1990 was Chairman of the Board of CliniCom
Incorporated, a bedside clinical information systems company, which he founded.
In 1976, Mr. Gombrich co-founded St. Jude Medical, Inc., a life support medical
device company, in which he served as Executive Vice President until 1980, when
he became President of the pacemaker division of that company, serving in that
position until 1982. 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.

         DENIS M. O'DONNELL, M.D. was appointed President and Chief Executive
Officer on February 19, 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 a fund specializing
in small capitalization private placements. Prior to joining Seaside Advisors,
L.L.C., Dr. O'Donnell was President of Novavax, Inc. ("Novavax"), a company
engaged in the development of pharmaceutical products, from its inception in
1995 to 1997. Dr. O'Donnell currently serves as a director and Chairman of
Novavax. From 1991 to 1995, Dr. O'Donnell served as Corporate Vice President of
Medical Affairs of Novavax, Inc., a clinical drug testing company. Prior to
joining Novavax, Inc. in 1991, Dr. O'Donnell was Director of the Clinical
Research Center at MTRA, Inc. a company engaged as 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 on June 1,
2003. Mr. Bergquist is a principal and founder of Bergquist & Bergquist, a
financial consulting firm, established in 1990. The firm offers services in
finance, restructuring, tax, accounting, operations, and executive services of a
Chief Financial Officer on a temporary or permanent basis. 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.

         ALEXANDER M. MILLEY has been a director of the Company since 1989. Mr.
Milley is President and Chairman of the Board of ELXSI Corp. a holding company
with subsidiaries operating in the restaurant and environmental inspection
equipment industries. He is also President and Chairman of the Board of Azimuth,
a holding company with subsidiaries operating in the trade show exhibit and
retail environment design and the distribution of electrical components and
fasteners industries. Mr. Milley was Chairman of the Board and Chief Executive
Officer of Bell National Corporation ("Bell"), a predecessor of the Company
until December 1998 and was President of Bell from August 1990 until December
1998. Mr. Milley is the founder, President, sole director and majority
shareholder of Milley Management, Inc. ("MMI"), a private investment and
management-consulting firm. Mr. Milley is also the President of Cadmus, a
private investment and management-consulting firm. Mr. Milley was Senior Vice
President-Acquisitions from December 1983 until July 1986 of the
Dyson-Kissner-Moran Corporation, a private investment company.

         JOHN H. ABELES, M.D. has been a director of the Company since May 1999.
Dr. Abeles is President of MedVest, Inc. a venture capital and consulting firm
he founded in 1980. He is also General Partner of Northlea Partners, Ltd.
("Northlea Partners"), a family investment partnership. Dr. Abeles was a senior
medical executive at Sterling Drug, Pfizer, and Revlon Healthcare, Inc. and
subsequently was a medical analyst at Kidder, Peabody & Co. Dr. Abeles is a
director of a number of companies operating in the medical device or healthcare
fields, including I-Flow Corporation, Oryx Technology Corp., Encore Medical
Corporation, and DUSA Pharmaceuticals, Inc. Dr. Abeles received his medical
degree and degree in pharmacology at the University of Birmingham in England and
is currently a director at the Higuchi BioSciences Institute at the University
of Kansas.

         ROBERT C. SHAW has been a Director of the Company since November 1989
and resigned on February 13, 2004. Mr. Shaw is President of Contempo Design,
Inc., a firm specializing in the design of exhibits and retail environments.



                                       38
<PAGE>

Mr. Shaw was Chief Financial Officer of Bell from November 20, 1989 to December
1998. Mr. Shaw has been a Vice President of MMI since March 1989, an officer or
director of Azimuth or certain of its subsidiaries since November 1990, a
director of Cadmus since January 1992 and an officer or director of ELXSI since
September 1989. Mr. Shaw was Vice President of Berkeley Softworks, Incorporated
("Berkeley") from September 1987 to March 1989. From January 1987 to September
1987, he was Vice President, and from July 1985 until January 1987, he was
Director of Finance and Operations, at Ansa Software, Incorporated ("Ansa").
Berkeley and Ansa developed and produced personal computer software.

AUDIT COMMITTEE

         The audit committee of the board of directors reviews the internal
accounting procedures of the Company and consults with and reviews the services
provided by our independent accountants. During 2003, the audit committee
consisted of Messrs. Alexander Milley and John Abeles, both of whom are
considered to be independent. Mr. Milley serves as the financial expert on the
Audit Committee.

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.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who
beneficially own more than 10% of the outstanding shares of the common stock, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission and to furnish the Company with copies of all reports they
file.

         Based solely on the Company's review of copies of such reports it has
received and of written representations from certain reporting persons
concerning their beneficial ownership of the common stock, the Company believes
that during 2003 all reports were timely filed except that Peter Gombrich is
late in filing two reports.

ITEM 10.          EXECUTIVE COMPENSATION

                                  COMPENSATION

COMPENSATION OF DIRECTORS

         The Company compensates its non-management directors through the annual
grant of options to purchase shares of common stock. The options are granted at
the first directors meeting following the annual meeting of stockholders. The
exercise price of the options is set at the fair market value determined by the
closing price of the common stock as reported on the Over-the-Counter Bulletin
Board on the date of the grant. Non-Management directors were not granted
options for the year 2002. Non-management directors were recommended a grant of
options to purchase 250,000 shares for the year 2003 pending plan availability.
The Company also reimburses directors for expenses incurred in connection with
their attendance at meetings of the Board of Directors.

                                       39
<PAGE>
<TABLE>
<CAPTION>
                                                 SUMMARY COMPENSATION TABLE

                                                                                                          LONG-TERM
                                                                                                        COMPENSATION
                                                                                                   -----------------------
                                                                        ANNUAL COMPENSATION        RESTRICTED
                                                            -------------------------------------    STOCK
NAME AND PRINCIPAL POSITION                         YEAR      SALARY         BONUS(1)   OTHER(2)(3)  AWARDS       OPTIONS
---------------------------                         ----      ------         --------   -----------  ------       -------
<S>               <C>                               <C>     <C>                     <C> <C>             <C>             <C>
Peter P. Gombrich (6).......................        2003    $   240,000     $       0   $       0       0               0
     Chairman of the Board, Chief Executive.        2002    $   200,000     $       0   $       0       0               0
     Officer (through 2/19/04)..............        2001    $   247,000     $       0   $   9,000       0         150,000

Leonard R. Prange (4).......................        2003    $         0     $       0   $       0       0               0
 President, Chief Operating Officer,........        2002    $         0     $       0   $       0       0               0
 Chief Financial Officer and ...............        2001    $   177,000     $       0   $  18,307       0          50,000
 Secretary (through 12/31/2001)

Stephen G. Wasko (5)........................        2003    $         0     $       0   $       0       0              0
     President and Chief Operating Officer..        2002    $    85,161     $  13,750   $       0       0              0
         (6/10/2002 through 1/22/2003)......        2001    $         0     $       0   $       0       0              0

Dennis L. Bergquist (7).....................        2003    $    87,500     $       0   $       0       0              0
     Chief Financial Officer (from 6/1/03)..        2002    $         0     $       0   $       0       0              0
         ...................................        2001    $         0     $       0   $       0       0              0
</TABLE>


1)       The employment agreements of Mr. Gombrich and Mr. Prange, until his
         resignation, provide that they are each entitled to receive bonus
         compensation at the discretion of the Board of Directors.

2)       Prior to 2002, MDI policy provides that an employee may receive cash
         compensation in lieu of unused vacation time or defer unused vacation
         time for use in future periods. Mr. Prange received cash compensation
         of $12,307 in 2001 to offset a portion of his unused vacation time.

3)       The employment agreements of Mr. Gombrich and Mr. Prange, until his
         resignation, provide that they are to receive monthly automobile
         allowances of $750 and $500, respectively.

4)       Mr. Prange resigned his executive officer positions effective December
         31, 2001.

5)       Mr. Wasko was appointed President and Chief Operating Officer on June
         10, 2002 and resigned those positions on January 22, 2003. Mr. Wasko
         did not draw any cash salary or cash bonus payments from September 1,
         2002 through his date of resignation in January 2003. Mr. Wasko has
         filed a claim with the Illinois Department of Labor seeking unpaid
         compensation due to him for this period.

6)       Mr. Gombrich did not draw any cash salary, cash bonus payments, or cash
         car allowance from September 1, 2002 through December 31, 2002. Mr.
         Gombrich continued to refrain from drawing any cash compensation for
         the first five months of 2003. In conjunction with the proposed debt
         restructuring in 2003, Mr. Gombrich has agreed to forgo $50,000 of
         unpaid compensation due to him at December 31, 2002. He also agreed to
         reduce his current salary to $225,000 and to forgo any salary increases
         due under his employment agreement, automobile allowances, and
         incentive compensation for 2002 and 2003.

7)       Mr. Bergquist was appointed Chief Financial Officer on June 1, 2003.

STOCK OPTIONS

                              OPTION GRANTS IN 2002

         There were no options relating to common stock granted to the named
executive officers during 2002 and 2003.

         The following table sets forth information with respect to the value of
all stock options held at December 31, 2003 by the named current and former
executive officers. Mr. Prange exercised options to purchase 361,000 shares of
common stock during 2002


                                       40
<PAGE>

<TABLE>
<CAPTION>
                       FISCAL YEAR END OPTION / SAR VALUES

                                                                  NUMBER OF SECURITIES              VALUE OF UNEXERCISED
                                                                 UNDERLYING UNEXERCISED                IN-THE-MONEY
                                                                      OPTIONS/SARS                     OPTIONS/SARS
                                                                  AT FISCAL YEAR ENDED             AT FISCAL YEAR ENDED
                                                                 --------------------------      --------------------------
         NAME                                                    EXERCISABLE  UNEXERCISABLE      EXERCISABLE  UNEXERCISABLE
         ----                                                    -----------  -------------      -----------  -------------

<S>                                                                <C>            <C>                 <C>        <C>
         Peter P. Gombrich.................................        270,000        80,000              0          0(2)
         Leonard R. Prange (1).............................              0             0              0          0
0           ...............................................
</TABLE>

    ____________________________________

1.       On May 27, 1999, Mr. Prange was granted an option to purchase 400,000
         shares of common stock at an exercise price of $0.3937 per share, the
         fair market value as of the date of the grant determined in accordance
         with the provisions of the 1999 Equity Incentive Plan. One-third of the
         option vested on the date of grant, one-third on May 27, 2000, and the
         remainder vested on May 27, 2001. Mr. Prange's options for 100,000
         shares granted May 23, 2000 and for 50,000 shares granted February 22,
         2001 were cancelled upon his resignation on December 31, 2001. In
         January of 2002, Mr. Prange exercised options to purchase 250,000
         shares of common stock under the terms of his severance agreement. On
         March 31, 2002 Mr. Prange exercised options to purchase 111,000 shares
         of common stock and surrendered options to purchase 39,000 shares of
         common stock in lieu of the exercise price.

2.       Options granted to Mr. Gombrich during 2000 vest at the rate of 20% per
         year beginning on May 23, 2001, and have exercise prices of $2.75 per
         share. Options granted to Mr. Gombrich during 2001 are options for
         100,000 shares, which vest at the rate of 33% per year beginning
         February 22, 2001 with an exercise price of $1.6875 and options for
         50,000 shares, which vested on July 25, 2001 with an exercise price of
         $1.01.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Company does not have a compensation committee. The Board of
Directors participates in deliberations concerning executive compensation. Mr.
Gombrich, Chairman of the Board and former Chief Executive Officer does not
participate in any of the Board's deliberations concerning his own compensation.
Other than Mr. Gombrich and Messrs. Milley and Shaw, who were officers and
directors of Bell, a predecessor of the Company, no member of the Board of
Directors is a current or former officer or employee of the Company or any of
the Company's subsidiaries. Dr. O'Donnell serves as a director of Elxsi Corp. of
which Mr. Milley is Chairman and CEO.

EMPLOYMENT AGREEMENTS

         Mr. Gombrich was employed as Chairman of the Board and Chief Executive
Officer of the Company pursuant to an employment agreement (the "Gombrich
Agreement") with InPath dated May 1, 1998. The Gombrich Agreement was amended on
December 4, 1998, to reflect changes related to the acquisition of InPath by
MDI. Under the Gombrich Agreement, Mr. Gombrich receives annual compensation
consisting of a base salary, a bonus determined at the discretion of the Board
of Directors, and a monthly automobile allowance of $750. Mr. Gombrich's base
salary may be increased at the discretion of the Board of Directors. His base
salary was $225,000 in 2000 and $250,000 in 2001 and 2002. In conjunction with
the Company's planned restructuring in 2003, Mr. Gombrich agreed to reduce his
current base salary to $225,000 and to forgo salary increases, bonus
compensation, and the monthly automobile allowance for 2002 and 2003. Mr.
Gombrich also agreed to forgo $50,000 in accrued an unpaid compensation due to
him for 2002. The Gombrich Agreement had an initial term of three years,
beginning May 1, 1998 and ending April 30, 2001. Thereafter, the Gombrich
Agreement automatically renews for consecutive terms of two years unless either
Mr. Gombrich or the Company elects not to renew it. The Gombrich Agreement has
been renewed and is effective through April 30, 2005. For two years following
the termination of the Gombrich Agreement, Mr. Gombrich may not participate in a
business that substantially and directly competes with the Company. If there is
a change of control, as defined in the Gombrich Agreement, and the Company
thereafter terminates the Gombrich Agreement without cause, or Mr. Gombrich
terminates the agreement for good reason,



                                       41
<PAGE>

as defined in the Gombrich Agreement, Mr. Gombrich is entitled to a lump-sum
severance payment equal to three times the sum of his annual base salary, his
annualized monthly automobile allowance, and the highest incentive compensation
paid to him in any of the previous year incentive compensation periods. If Mr.
Gombrich is terminated without cause or resigns for good reason, and no change
of control has occurred, he is entitled to a lump-sum severance payment equal to
two times the sum of the foregoing amounts.

ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                           PRINCIPAL STOCKHOLDERS AND
                        SECURITY OWNERSHIP OF MANAGEMENT

         The following table sets forth as of March 31, 2004 with respect to any
person who is known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of common stock of the Company, the name and address of
such owner, the number of shares of common stock beneficially owned, the nature
of such ownership, and the percentage such ownership is of the outstanding
shares of common stock:

<TABLE>
<CAPTION>
                                                                                             Number of Shares     Percent
         Name and Address of Beneficial Owner                                               Beneficially Owned   of Class
         ------------------------------------                                               ------------------   --------
         <S>                                                                                      <C>               <C>
         Peter P. Gombrich (1)...............................................................     9,176,808         12.8%
              414 N. Orleans, Suite 510
              Chicago, IL 60610

         Alexander M. Milley (2).............................................................    11,314,273         13.6%
              Azimuth Corporation
              3600 Rio Vista Boulevard, Suite A
              Orlando, FL 32805

         William J. Ritger (3)...............................................................     9,415,151         12.7%
              Seaside Partners, L.P.
              623 Ocean Avenue
              Sea Girt, NJ 08750

         Ventana Medical Systems, Inc (4)....................................................     3,922,877          5.2%
              3865 N. Business Center Dr.
              Tucson, AZ 85705

         RS Diversified Growth Fund..........................................................     4,469,920          6.2%
              388 Market Street
              Suite 1700
              San Francisco, CA 94111

         NeoMed Innovations, III, L.P. (5)...................................................    10,292,832         12.5%
              8 Queensway House, Queen Street
              St. Helier
              Jersey, JE2 4WD, Channel Islands

         Lantana Small Capital Growth........................................................     5,047,882          7.0%
              100 Goose Hill Road
              Cold Springs Harbor, NY 11724
</TABLE>

_______________

                                       42
<PAGE>


1.       Includes: (i) 1,021,327 shares of common stock held by Mr. Gombrich's
         wife as the result of the conversion of Series E convertible preferred
         stock, including cumulative dividends; (ii) 1,000,000 shares issuable
         upon exercise of a warrant granted to Mr. Gombrich's wife, which is
         exercisable within sixty days; and (iii) 270,000 shares issuable upon
         options granted by the Company to Mr. Gombrich that are exercisable
         within 60 days. On April, 2, 2004, MDI paid $936,114 in cash and issued
         1,900,000 shares of common stock in settlement of the principal and
         accrued interest due on a convertible promissory note held by Mr.
         Gombrich's wife. 10,000,000 shares of common stock, which would have
         been issuable upon conversion of the original note principal, less the
         shares actually issued in the settlement, are excluded from shares
         beneficially held by Mr. Gombrich. Mr. Gombrich disclaims beneficial
         ownership of the aforesaid shares held by his wife.

2.       Includes: (i) 833,571 shares issuable upon conversion of Series E
         convertible preferred stock, including cumulative dividends, held by
         Mr. Milley; (ii) 282,881 shares owned by Cadmus of which Mr. Milley is
         a director and executive officer, 1,627,508 shares subject to
         conversion of Series E convertible preferred stock, including
         cumulative dividends, held by Cadmus, and 289,285 shares issuable to
         Cadmus under Stock Appreciation Rights granted by the Company; (iii)
         682,738 shares issuable upon conversion of Series E convertible
         preferred stock, including cumulative dividends, held by Azimuth, of
         which Mr. Milley is a director and executive officer; (iv) 678,809
         shares issuable upon conversion of Series E convertible preferred
         stock, including cumulative dividends, held by MMI, of which Mr. Milley
         is a director and executive officer; (v) 200,481 shares issuable upon
         conversion of Series E convertible preferred stock, including
         cumulative dividends, held by Winchester National, Inc. ("Winchester
         National"), of which Mr. Milley is a director and executive officer;
         and (vi) 219,000 shares subject to options granted by the Company to
         Mr. Milley that are exercisable within 60 days. In July of 2003, MDI
         agreed to cancel the outstanding warrants held by Azimuth and Cadmus
         and to issue a new five-year warrant entitling the holders to purchase
         6,500,000 shares of common stock. Shares issuable under this warrant
         are included in the number of shares beneficially held by Mr. Milley.
         (See Item 13 Certain Relationships and Related Transactions for
         additional details concerning this transaction.)

3.       Includes: (i) 310,394 shares issuable upon conversion of Series C
         convertible preferred stock, including shares issuable for cumulative
         dividends, and 1,674,998 shares issuable upon conversion of Series E
         convertible preferred stock, including shares issuable for cumulative
         dividends; (ii) 70,000 shares owned by The Research Works, Inc., a
         corporation controlled by Mr. Ritger; and (iii) 3,735,000 shares owned
         by Seaside Partners, L.P. ("Seaside"), of which Mr. Ritger is the
         Managing Partner.

4.       Includes 2,172,877 shares issuable upon conversion of Series D
         convertible preferred stock, including cumulative dividends, held by
         Ventana and 1,750,000 shares issuable to Ventana under warrants granted
         by the Company.

5.       Includes: (i) 2,166,165 shares issuable upon conversion of Series B
         convertible preferred stock, including cumulative dividends; (ii)
         7,066,667 shares issuable upon conversion of a Bridge II convertible
         promissory note, which is convertible at any time; and (iii) 1,060,000
         shares issuable upon exercise of warrants granted by the Company that
         are exercisable within 60 days.


         The following table sets forth as of March 31, 2004, with respect to
any person who is known to the Company to be the beneficial owner of more than
5% of the outstanding shares of SERIES A convertible preferred stock, the name
and address of such owner, the number of shares of Series A convertible
preferred stock beneficially owned, the nature of such ownership, and the
percentage such ownership is of the outstanding shares of Series A convertible
preferred stock:

<TABLE>
<CAPTION>
                                                                                            Number of Shares       Percent
         Name and Address of Beneficial Owner(1)                                           Beneficially Owned     of Class
         ---------------------------------------                                           ------------------     --------
         <S>                                                                                         <C>            <C>
         France Finance IV (2)...............................................................        47,250         57.0%
              Societe de Bure Ferri
              51, rue Vivienne
              75002 Paris, FRANCE

         Fifth Third Bank of Western Ohio, Ttee (3)..........................................        35,405         43.0%
              John Scarbrough Sr. IRA
              PO Box 703
              Piquah, OH 45356
</TABLE>

                                       43
<PAGE>


1.       No executive officer or director beneficially owns any shares of Series
         A convertible preferred stock.

2.       Convertible into 20,634 shares of common stock.

3.       Convertible into 15,461 shares of common stock.

         The following table sets forth as of March 31, 2004, with respect to
any person who is known to the Company to be the beneficial owner of more than
5% of the outstanding shares of SERIES B convertible preferred stock, the name
and address of such owner, the number of shares of Series B convertible
preferred stock beneficially owned, the nature of such ownership, and the
percentage such ownership is of the outstanding shares of Series B convertible
preferred stock:

<TABLE>
<CAPTION>
                                                                                            Number of Shares       Percent
         Name and Address of Beneficial Owner(1)                                           Beneficially Owned     of Class
         ---------------------------------------                                           ------------------     --------

         <S>                                                                                        <C>             <C>
         NeoMed Innovations III, L.P. (2)....................................................       416,000         52.0%
              8 Queensway House, Queen Street
              St. Helier
              Jersey, JE2 4WD, Channel Islands

         Monsun, AS (3)......................................................................       125,000         15.6%
              Torvveien 12 C
              1383 Asker, Norway

         CAT Investment I, AS (4)............................................................        51,625          6.5%
              Postboks 1484 Vika
              0116 Oslo, Norway

         Violina, AS (4).....................................................................        51,625          6.5%
              Postboks 1484 Vika
              0116 Oslo, Norway
</TABLE>

__________________

1.       No executive officer or director beneficially owns any shares of Series
         B convertible preferred stock.

2.       Converts into 2,166,155 shares, including shares issuable for
         cumulative dividends, of common stock.

3.       Converts into 664,384 shares, including shares issuable for cumulative
         dividends, of common stock.

4.       Converts into 270,939 shares, including shares issuable for cumulative
         dividends, of common stock.

         The following table sets forth as of March 31, 2004, with respect to
any person who is known to the Company to be the beneficial owner of more than
5% of the outstanding shares of SERIES C convertible preferred stock, the name
and address of such owner, the number of shares of Series C convertible
preferred stock beneficially owned, the nature of such ownership, and the
percentage such ownership is of the outstanding shares of Series C convertible
preferred stock:



                                       44
<PAGE>

<TABLE>
<CAPTION>
                                                                                            Number of Shares       Percent
         Name and Address of Beneficial Owner(1)                                           Beneficially Owned     of ClasS
         ---------------------------------------                                           ------------------     --------

         <S>                                                                                         <C>            <C>
         William Ritger (2)..................................................................        50,000         17.7%
              Seaside Partners, L.P.
              623 Ocean Avenue
              Sea Girt, NJ 08750

         Stanley Trust Funds (3).............................................................        66,000         23.3%
              P.O. Box 180
              Pottersville, NJ 07979

         Crowell Trusts (4)..................................................................        45,000         15.9%
              1004 Vicars Woods, Apt. S-315
              Ponte Vedra Beach, FL 32082

         Gary Evans (5)......................................................................        33,000         11.8%
              13215 Glad Acres
              Farmers Branch, TX 75234

         Leonard R. Prange (6)...............................................................        20,000          7.1%
              641 W. Willow, #142
              Chicago, IL 60614

         David Morgan (7)....................................................................        17,000          6.0%
              P.O. Box 470
              Meadow Vista, CA 95722

         Neil Costa (8)......................................................................        16,500          5.8%
              714 Broadway
              New York, NY 10003

</TABLE>

__________________

1.       No executive officer or director beneficially owns any shares of Series
         C convertible preferred stock.

2.       Converts into 310,394 shares, including shares issuable for cumulative
         dividends, of common stock.

3.       Converts into 409,720 shares, including shares issuable for cumulative
         dividends, of common stock.

4.       Converts into 279,355 shares, including shares issuable for cumulative
         dividends, of common stock.

5.       Converts into 206,927 shares, including shares issuable for cumulative
         dividends, of common stock.

6.       Converts into 124,158 shares, including shares issuable for cumulative
         dividends, of common stock.

7.       Converts into 105,534 shares, including shares issuable for cumulative
         dividends, of common stock.

8.       Converts into 102,430 shares, including shares issuable for cumulative
         dividends, of common stock.


         The following table sets forth as of March 31, 2004, with respect to
any person who is known to the Company to be the beneficial owner of more than
5% of the outstanding shares of SERIES D convertible preferred stock, the name
and address of such owner, the number of shares of Series D convertible
preferred stock beneficially owned, the nature of such ownership, and the
percentage such ownership is of the outstanding shares of Series D convertible
preferred stock:


                                       45
<PAGE>
<TABLE>
<CAPTION>
                                                                                            Number of Shares       Percent
         Name and Address of Beneficial Owner(1)                                           Beneficially Owned     of Class
         ---------------------------------------                                           ------------------     --------

         <S>                                                                                        <C>            <C>
         Ventana Medical Systems, Inc.(2)....................................................       175,000        100.0%
              3865 N. Business Center Dr.
              Tucson, AZ 85705
</TABLE>

__________________

1.       No executive officer or director beneficially owns any shares of Series
         D convertible preferred.

2.       Converts into 2,172,877 shares, including shares issuable for
         cumulative dividends, of common stock.

         The following table sets forth as of March 31, 2004, with respect to
(1) any person who is known to the Company to be the beneficial owner of more
than 5% of the outstanding shares of SERIES E convertible preferred stock, (2)
each director, nominee, or executive officer who owns Series E convertible
preferred stock, and (3) executive officers and directors as a group, the name
and address of such owner, the number of shares of Series E convertible
preferred stock beneficially owned, the nature of such ownership, and the
percentage such ownership is of the outstanding shares of Series E convertible
preferred stock:

<TABLE>
<CAPTION>

                                                                                            Number of Shares       Percent
         Name and Address of Beneficial Owner                                              Beneficially Owned     of Class
         ------------------------------------                                              ------------------     --------

         <S>                                                                                        <C>             <C>
         Alexander M. Milley(1)..............................................................       119,324         45.8%
         William J. Ritger(2)................................................................        49,680         19.1%
         All directors and executive officers as a group(1)
              (6 persons)....................................................................       119,324         45.8%
</TABLE>

_________________

1.       Includes: (i) 48,271 shares owned by Cadmus; (ii) 20,250 shares owned
         by Azimuth; (iii) 20,133 shares owned by MMI; and (iv) 5,946 shares
         owned by Winchester National. Converts into 4,023,107 shares of common
         stock, including shares issuable upon payment of cumulative dividends.

2.       Converts into 1,674,998 shares, including shares issuable for
         cumulative dividends, of common stock.

SECURITY OWNERSHIP OF MANAGEMENT

         The following table sets forth as of March 31, 2004, certain
information concerning the ownership of common stock of each director, nominee,
and executive officer named in the Summary Compensation Table hereof referred to
as the named executive officers, and all directors and executive officers of the
Company as a group.

<TABLE>
<CAPTION>
                                                                                               Amount and Nature
                                                                                                 of Beneficial    Percent
         Name of Beneficial Owner                                                                  Ownership     of Class
         ------------------------                                                                  ---------     --------

         <S>                                                                                       <C>             <C>
         Peter P. Gombrich (1)...............................................................      9,176,808       10.8%
         Alexander M. Milley (2).............................................................     11,314,273       13.3%

         John Abeles, M.D. (4)...............................................................        598,116         --%
         Denis M. O'Donnell, M. D.(5)........................................................        219,000         --%
         Dennis L. Bergquist.................................................................         75,000         --%
         All directors and executive officers as a group (5 persons).........................     21,383,197       24.1%
</TABLE>

______________

                                       46
<PAGE>

1.       Includes: (i) 1,021,327 shares of common stock held by Mr. Gombrich's
         wife as the result of the conversion of Series E convertible preferred
         stock, including cumulative dividends; (ii) 1,000,000 shares issuable
         upon exercise of a warrant granted to Mr. Gombrich's wife, which is
         exercisable within sixty days; and (iii) 270,000 shares issuable upon
         options granted by the Company to Mr. Gombrich that are exercisable
         within 60 days. On April, 2, 2004, MDI paid $936,114 in cash and issued
         1,900,000 shares of common stock in settlement of the principal and
         accrued interest due on a convertible promissory note held by Mr.
         Gombrich's wife. 10,000,000 shares of common stock, which would have
         been issuable upon conversion of the original note principal, less the
         shares actually issued in the settlement, are excluded from shares
         beneficially held by Mr. Gombrich. Mr. Gombrich disclaims beneficial
         ownership of the aforesaid shares held by his wife.

2.       Includes: (i) 833,571 shares issuable upon conversion of Series E
         convertible preferred stock, including cumulative dividends, held by
         Mr. Milley; (ii) 282,881 shares owned by Cadmus of which Mr. Milley is
         a director and executive officer, 1,627,508 shares subject to
         conversion of Series E convertible preferred stock, including
         cumulative dividends, held by Cadmus, and 289,285 shares issuable to
         Cadmus under Stock Appreciation Rights granted by the Company; (iii)
         682,738 shares issuable upon conversion of Series E convertible
         preferred stock, including cumulative dividends, held by Azimuth, of
         which Mr. Milley is a director and executive officer; (iv) 678,809
         shares issuable upon conversion of Series E convertible preferred
         stock, including cumulative dividends, held by MMI, of which Mr. Milley
         is a director and executive officer; (v) 200,481 shares issuable upon
         conversion of Series E convertible preferred stock, including
         cumulative dividends, held by Winchester National, Inc. ("Winchester
         National"), of which Mr. Milley is a director and executive officer;
         and (vi) 219,000 shares subject to options granted by the Company to
         Mr. Milley that are exercisable within 60 days. In July of 2003, MDI
         agreed to cancel the outstanding warrants held by Azimuth and Cadmus
         and to issue a new five-year warrant entitling the holders to purchase
         6,500,000 shares of common stock. Shares issuable under this warrant
         are included in the number of shares beneficially held by Mr. Milley.
         (See Item 13 Certain Relationships and Related Transactions for
         additional details concerning this transaction.)

3.       Includes: (i) 191,616 shares owned by Northlea Partners, of which Dr.
         Abeles is the general partner; (ii) 87,500 shares underlying warrants
         granted by the Company to Northlea Partners; (iii) 100,000 shares
         issuable upon conversion of a Bridge II convertible promissory note
         held By Northlea Partners; and (iv) 219,000 shares issuable upon
         exercise of options granted by the Company to Dr. Abeles, which are
         exercisable within 60 days. Dr. Abeles disclaims beneficial ownership
         of all shares owned by, or issuable to, Northlea except 3,719 shares,
         which number are attributable to his 1% interest in Northlea as general
         partner.

4.       Includes: 219,000 shares issuable upon options granted by the Company
         to Dr. O'Donnell.

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         During 2002, Mr. Gombrich repaid approximately $50,000 owed to MDI at
December 31, 2001 and loaned the Company an additional $127,000 in cash.

         In January of 2002, Mr. Prange, the former President and COO/CFO,
exercised options to purchase 250,000 shares of the Company's common stock at
$0.3937 per share. In accordance with the terms of Mr. Prange's severance
agreement, the Company waived the $98,425 exercise price of the options. On
March 31, 2002, Mr. Prange exercised options to purchase 111,000 shares of the
Company's common stock at $0.3937 per share and surrendered options to purchase
39,000 shares of common stock in lieu of payment of the exercise price.


                                       47
<PAGE>

         On May 1, 2003, the Company issued a $15,000 Bridge II convertible
promissory note to Northlea Partners in exchange for cash. The terms of the note
are identical to all other Bridge II convertible promissory notes issued by the
company.

         On July 18, 2003, Mr. Milley, a director, 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 $120,000 currently owing to Azimuth and Cadmus, MDI agreed to
issue a new five-year warrant entitling the holders to purchase 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 holder to purchase 500,000 shares of
common stock at an exercise price of $0.30. The 120 - day warrant expired and
was cancelled. 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.

         On December 5, 2003, Peter Gombrich, Chairman and former CEO, agreed to
convert $305,667 in cash advances, unreimbursed business expenses, and other
amounts owed to him by the Company into a Bridge II convertible promissory note.
The terms of the note, including interest at the rate of 15% per annum and a
conversion rate of $0.15 per share, were identical to those of all other Bridge
II notes issued by the Company. In March of 2004, Mr. Gombrich converted the
principal amount of the note plus accrued interest due as of the date of
conversion into 2,113,987 shares of restricted common stock.

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K


                 1.  EXHIBITS

Exhibit
Number                        Description
------                        -----------

2.1      Bell National Corporation Plan of Reorganization (Annex I).
         (Incorporated herein by reference to Item 1 of the Bell National
         Corporation Annual Report on Form 10-K for the period from August 20,
         1985 to December 31, 1985 and for the years ended December 31, 1986 and
         1987.)*

2.2      Exchange Agreement dated December 4, 1998 among the Company, InPath,
         and the InPath Members. (Incorporated herein by reference to Appendix A
         to the Bell National Corporation Definitive Proxy Statement on Schedule
         14A, filed on April 30,1999.)*

2.3      Agreement and Plan of Merger of Bell National Corporation and the
         Company. (Incorporated herein by reference to Appendix C to the Bell
         National Corporation Definitive Proxy Statement on Schedule 14A, filed
         on April 30, 1999.)*

2.4      Agreement and Plan of Merger by and among AccuMed International, Inc.,
         AccuMed Acquisition Corp. and Ampersand Medical Corporation, dated as
         of February 7, 2001. (Incorporated herein by reference to Appendix I to
         Registration Statement No. 333-61666.)

2.5      Amendment No. 1, dated May 14, 2001 to the Agreement and Plan of Merger
         by and among AccuMed International, Inc., AccuMed Acquisition Corp. and
         Ampersand Medical Corporation, dated February 7, 2001. (Incorporated
         herein by reference to Appendix I to Registration Statement No.
         333-61666.)



                                       48
<PAGE>


Exhibit
Number                        DescriptioN
------                        -----------

3.1      Restated Articles of Incorporation. (Incorporated herein by reference
         to Exhibit 3.1 of the Bell National Corporation Annual Report on Form
         10-K for the fiscal year ended December 31, 1988.)*

3.2      Bylaws of Bell National Corporation. (Incorporated herein by reference
         to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1989.)*

3.3      Certificate of Incorporation of the Company as amended. (Incorporated
         herein by reference to Appendix D to the Bell National Corporation
         Definitive Proxy Statement on Schedule 14A, filed on April 30, 1999.)*

3.4      By-laws of the Company. (Incorporated herein by reference to Appendix E
         to the Bell National Corporation Definitive Proxy Statement on Schedule
         14A, filed on April 30, 1999.)*

3.5      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 Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         2000.)

3.6      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 Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         2000.)

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

3.8      Section 6 of Article VII of the By-laws of the Company as amended.
         (Incorporated herein by reference to Exhibit 3.3 to the Company's S-4
         Registration Statement, File No. 333-61666, filed August 24, 2001.)

3.9      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 S-2
         Registration Statement, File No. 333083578 filed February 28, 2002)

3.10     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 Company's S-2 Registration Statement,
         File No. 333083578 filed February 28, 2002)

3.11     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 Company's S-2
         Registration Statement, File No. 333083578 filed February 28, 2002)

3.12     Certificate of Designation, Preferences and Rights of Series D
         Convertible Preferred Stock. (Incorporated herein by reference to
         Exhibit 3.7 to the Company's S-2 Registration Statement, File No.
         333083578 filed February 28, 2002)

3.13     Certificate of Designation, Preferences and Rights of Series E
         Convertible Preferred Stock. (Incorporated herein by reference to
         Exhibit 3.8 to the Company's S-2 Registration Statement, File No.
         333083578 filed February 28, 2002)

4.1      Form of Common Stock Purchase Warrant, as executed by Bell National
         Corporation on December 4, 1998 with respect to each of Mr. 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.)*


                                       49
<PAGE>


Exhibit
Number                         Description
------                         -----------

4.2      Stockholders Agreement dated December 4, 1998 among the Company,
         Winchester National, Inc., the InPath Members, and Mr. Milley, Mr.
         Shaw, Cadmus, and MMI (collectively, the "Claimants"). (Incorporated
         herein by reference to Exhibit 2 to the Schedule 13D filed jointly by
         the InPath Members on December 14, 1998.)*

4.3      Form of Common Stock Purchase Warrant issued to Holleb & Coff on July
         4, 1999 representing the right to purchase 250,000 shares of Common
         Stock of the Company in connection with legal services rendered.
         (Incorporated herein by reference to Exhibit 4.3 of the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         1999.)*

4.4      Form of Common Stock Purchase Warrant issued to The Research Works on
         October 11, 1999 representing the right to purchase 70,000 shares of
         Common Stock of the Company in connection with the preparation of an
         investment research report. (Incorporated herein by reference to
         Exhibit 4.4 of the Company's Annual Report on Form 10-K for the fiscal
         year ended December 31, 1999.)*

4.5      Form of Common Stock Purchase Warrant issued to Azimuth Corporation on
         December 10, 1999 representing the right to purchase 50,000 shares of
         Common Stock of the Company as additional consideration for a 12%
         Convertible Promissory Note issued on the same date. (Incorporated
         herein by reference to the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1999.)*

4.6      Form of Common Stock Purchase Warrant issued to Richard Doermer on
         January 3, 2000 representing the right to purchase 96,250 shares of
         Common Stock of the Company in connection with financial advisory
         services rendered. (Incorporated by reference to Exhibit 4.6 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

4.7      Form of Common Stock Purchase Warrant issued to Richard Doermer on
         January 3, 2000 representing the right to purchase 75,759 shares of
         Common Stock of the Company in connection with financial advisory
         services rendered. (Incorporated by reference to Exhibit 4.7 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

4.8      Form of Common Stock Purchase Warrant issued to Richard Doermer on
         January 3, 2000 representing the right to purchase 121,313 shares of
         Common Stock of the Company in connection with financial advisory
         services rendered. (Incorporated by reference to Exhibit 4.8 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

4.9      Form of Common Stock Purchase Warrant issued to Richard Doermer on
         January 3, 2000 representing the right to purchase 94,697 shares of
         Common Stock of the Company in connection with financial advisory
         services rendered. (Incorporated by reference to Exhibit 4.9 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

4.10     Form of Common Stock Purchase Warrant issued to William J. Ritger on
         May 24, 2000 representing the right to purchase 531,614 shares of
         Common Stock of the Company in connection with financial advisory
         services rendered. (Incorporated by reference to Exhibit 4.10 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

4.11     Form of Common Stock Purchase Warrant issued to Denis M. O'Donnell on
         May 24, 2000 representing the right to purchase 784,901 shares of
         Common Stock of the Company in connection with financial advisory
         services rendered. (Incorporated by reference to Exhibit 4.11 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*



                                       50
<PAGE>


Exhibit
Number                         Description
------                         -----------

4.12     Form of Common Stock Purchase Warrant issued to Prospektiva, SA on May
         23, 2000 representing the right to purchase 48,333 shares of Common
         Stock of the Company in connection with financial advisory services
         rendered. (Incorporated by reference to Exhibit 4.12 to the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         2000.)*

4.13     Form of Common Stock Purchase Warrant issued to Dr. Bruce Patterson, on
         September 12, 2000 representing the right to purchase 150,000 shares of
         Common Stock of the Company as additional consideration for the
         achievement of product development milestones under a License and
         Development Agreement for Specific Medical Technology for the Detection
         of Oncogenic HPV Virus. (Incorporated by reference to Exhibit 4.13 to
         the Company's Annual Report on Form 10-K for the fiscal year ended
         December 31, 2000.)*

4.14     Form of Common Stock Purchase Warrant issued to Dr. Bruce Patterson, on
         September 12, 2000 representing the right to purchase 100,000 shares of
         Common Stock of the Company as consideration for an Addendum to a
         License and Development Agreement for Specific Medical Technology for
         the Detection of Oncogenic HPV Virus. (Incorporated by reference to
         Exhibit 4.14 to the Company's Annual Report on Form 10-K for the fiscal
         year ended December 31, 2000.)*

4.15     Form of Common Stock Purchase Warrant issued to Osprey Partners, on
         November 22, 2000 representing the right to purchase 100,000 shares of
         Common Stock of the Company in connection with financial advisory
         services to be rendered over twelve months. (Incorporated by reference
         to Exhibit 4.15 to the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 2000.)*

4.16     Form of 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 the Company in connection with financial
         advisory services to be rendered over twelve months. (Incorporated by
         reference to Exhibit 4.16 to the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 2000.)*

4.17     Form of Common Stock Purchase Warrant issued to Azimuth Corporation on
         December 1, 2000 representing the right to purchase 50,000 shares of
         Common Stock of the Company as additional consideration for a 12%
         Promissory Note issued on December 4, 2000. (Incorporated by reference
         to Exhibit 4.17 to the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 2000.)*

4.18     Form of 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 the Company as additional consideration for a 15%
         Promissory Note issued on December 11, 2000 in connection with the
         proposed acquisition of AccuMed International, Inc. by the Company.
         (Incorporated by reference to Exhibit 4.18 to the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 2000.)*

4.19     Form of 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 the Company as additional consideration for two 15%
         Promissory notes issued on February 1, 2001 and February 7, 2001 in
         connection with the proposed acquisition of AccuMed International, Inc.
         by the Company. (Incorporated by reference to Exhibit 4.19 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

4.20     Common Stock Purchase Warrant issued to Azimuth Corporation on August
         6, 2001 representing the right to purchase 250,000 shares of common
         stock of the Company as additional consideration for a 15% promissory
         note. (Incorporated by reference to Exhibit 4.24 to the Company's S-4
         Registration Statement File No. 333-61666 filed August 24, 2001.)


                                       51
<PAGE>



Exhibit
Number                         Description
------                         -----------

4.21     Common Stock Purchase Warrant issued to Cadmus Corporation on August 6,
         2001 representing the right to purchase 250,000 shares of common stock
         of the Company as additional consideration for a 15% promissory note.
         (Incorporated by reference to Exhibit 4.23 to the Company's S-4
         Registration Statement File No. 333-61666 filed August 24, 2001.)

4.22     Common Stock Purchase Warrant issued to Northlea Partners, Ltd. on
         August 6, 2001 representing the right to purchase 62,500 shares of
         common stock of the Company as additional consideration for a 15%
         promissory note. (Incorporated by reference to Exhibit 4.27 to the
         Company's S-4 Registration Statement File No. 333-61666 filed August
         24, 2001.)

4.23     Common Stock Purchase Warrant issued to Azimuth Corporation on July 26,
         2001 representing the right to purchase 500,000 shares of common stock
         of the Company as consideration of Azimuth's waiver of the conversion
         feature of its $500,000 convertible promissory note issued September
         22, 2000. (Incorporated by reference to Exhibit 4.25 to the Company's
         S-4 Registration Statement File No. 333-61666 filed August 24, 2001.)

4.24     Common Stock Purchase Warrant issued to Azimuth Corporation on August
         17, 2001 representing the right to purchase 25,000 shares of common
         stock of the Company. (Incorporated by reference to Exhibit 4.26 to the
         Company's S-4 Registration Statement File No. 333-61666, filed August
         24, 2001.)

4.25     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 the Company. (Incorporated by reference to Exhibit 4.28
         to the Company's S-2 Registration Statement, File No. 333-83578 filed
         February 28, 2002).

4.26     Common Stock Purchase Warrant issued to Ventana Medical Systems, Inc.
         on November 2, 2001 representing the right to purchase 1,750,000 shares
         of common stock of the Company. (Incorporated by reference to Exhibit
         4.29 to the Company's S-2 Registration Statement, File No. 333-83578
         filed February 28, 2002).

4.27     Form of Confidential $5,000,000 Common Stock Private Offering
         Memorandum dated January 2000. (Incorporated by reference to Exhibit
         4.20 to the Company's Annual Report on Form 10-K for the fiscal year
         ended December 31, 2000.)*

4.28     Form of Confidential $5,000,000 Series B Convertible Preferred Stock
         Private Offering memorandum dated November 2000 and amended January 30,
         2001. (Incorporated by reference to Exhibit 4.21 to the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         2000.)*

4.29     Amendment No. 1 to Stockholders Agreement dated July 25, 2000 among the
         Company, the InPath Members, Mr. Milley, Mr. Shaw, MMI, Cadmus
         Corporation, and Winchester National, Inc. (Incorporated by reference
         to Exhibit 4.22 to the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 2000.)*

4.30     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. (Incorporated by reference to
         Exhibit 4.30 to the Company's S-2 Registration Statement, File No.
         333-83578 filed June 28, 2002.)

4.31     Common Stock Purchase Warrant issued to Monsun As on April 1, 2002
         representing the right to purchase 200,000 shares of common stock.
         (Incorporated by reference to Exhibit 4.31 to the Company's S-2
         Registration Statement, File No. 333-83578 filed June 28, 2002.)

4.32     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 by reference to Exhibit 4.32 to the
         Company's S-2 Registration Statement, File No. 333-83578 filed June 28,
         2002.)


                                       52
<PAGE>



Exhibit
Number                         Description
------                         -----------

4.33     Form of Common Stock Purchase Warrant issued in connection with certain
         Bridge Financing in June 2002. (Incorporated by reference to Exhibit
         4.33 to the Company's S-2 registration Statement, File No. 333-83578
         filed June 28, 2002.)

4.34     Common Stock Purchase Warrant issued to Richard Domanik on May 30, 2002
         representing the right to purchase 51,483 shares of common stock.
         (Incorporated by reference to Exhibit 4.34 to the Company's S-2
         Registration Statement, File No. 333-100150 filed September 27, 2002.)

4.35     Common Stock Purchase Warrant issued to Round Valley Capital, LLC on
         September 4, 2002 representing the right to purchase 681,818 shares of
         common stock. (Incorporated by reference to Exhibit 4.35 to the
         Company's S-2 Registration Statement, File No. 333-100150 filed on
         September 27, 2002.)

4.36     Amendment No. 1 to the Common Stock Purchase Warrant issued in
         connection with certain Bridge Financing dated August 20,2002.
         (Incorporate by reference to the Company's Form 10-K for the year ended
         December 31, 2002)

4.37     Form of Common Stock Purchase Warrant to be issued in connection with
         certain Bridge II Financing beginning in October 2002. (Incorporate by
         reference to the Company's Form 10-K for the year ended December 31,
         2002)

4.38     Common Stock Purchase Warrant issued to Qwestar Resources on November
         1, 2002 representing the right to purchase 200,000 shares of common
         stock. (Incorporate by reference to the Company's Form 10-K for the
         year ended December 31, 2002)

4.39     Form of 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 in connection with a $1,000,000 loan
         evidenced by a convertible promissory note issued on that date.
         (Incorporated by reference to Form 10-QSB filed for the quarter ended
         June 30, 2003).

4.40     Form of 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 in connection with raising capital for the
         Company. (Incorporated by reference to Form 10-QSB filed for the
         quarter ended September 30, 2003).

4.41     Form of 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 in connection with raising capital for the
         Company. (Incorporated by reference to Form 10-QSB filed for the
         quarter ended September 30, 2003).

4.42     Form of 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 in connection with raising capital for the
         Company. (Incorporated by reference to Form 10-QSB filed for the
         quarter ended September 30, 2003).

4.43     Form of 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 in connection with raising capital for the
         Company. (Incorporated by reference to Form 10-QSB filed for the
         quarter ended September 30, 2003).

10.1     Stock Appreciation Rights Agreement dated as of November 20, 1989
         between the Company and Raymond O'S. Kelly. (Incorporated herein by
         reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1989.)*


                                       53
<PAGE>

Exhibit
Number                         Description
------                         -----------

10.2     Stock Appreciation Rights Agreement dated as of November 20, 1989
         between the Company and Nicholas E. Toussaint. (Incorporated herein by
         reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1989.)*

10.3     Stock Appreciation Rights Agreement dated as of November 20, 1989
         between the Company and Nicholas E. Toussaint. (Incorporated herein by
         reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 1989.)*

10.4     SAR Agreement Extension dated November 15, 1995 between the Company and
         Raymond O'S. Kelly. (Incorporated herein by reference to Exhibit 10.20
         of the Company's Annual Report on Form 10-K for the fiscal year ended
         December 31, 1995.)*

10.5     SAR Agreement Extension dated November 15, 1995 between the Company and
         Nicholas E. Toussaint. (Incorporated herein by reference to Exhibit
         10.21 of the Company's Annual Report on Form 10-K for the fiscal year
         ended December 31, 1995.)*

10.6     Employment Agreement dated May 1, 1998 between Mr. Gombrich and InPath,
         LLC, as amended on December 4, 1998. (Incorporated herein by reference
         to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1998.)*

10.7     Claims Agreement dated December 4, 1998 among the Company, the
         Claimants, and Liberty Associates Limited Partnership. (Incorporated
         herein by reference to Exhibit 4 to the Schedule 13D filed jointly by
         the InPath Members on December 14, 1998.)*

10.8     Ampersand Medical Corporation Equity Incentive Plan established as of
         June 1, 1999. (Incorporated herein by reference to Appendix F to the
         Bell National Corporation Definitive Proxy Statement on Schedule 14A,
         as filed on April 30, 1999.)*


                                       54
<PAGE>


Exhibit
Number                         Description
------                         -----------

10.9     Ampersand Medical Corporation Employee Stock Purchase Plan.
         (Incorporated herein by reference to Appendix G to the Bell National
         Corporation Definitive Proxy statement on Schedule 14A, as filed on
         April 30, 1999.)*

10.10    Employment Agreement dated June 1, 1999 between Mr. Prange and the
         Company. (Incorporated herein by reference to Exhibit 10.11 of the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1999.)*

10.11    Lease Agreement between the Company and O.P., L.L.C. dated September 1,
         1999 pertaining to the premises located at suite 305, 414 N. Orleans,
         Chicago, IL 60610. (Incorporated herein by reference to Exhibit 10.12
         of the Company's Annual Report on Form 10-K for the fiscal year ended
         December 31, 1999.)*

10.12    Amendment to Lease Agreement between the Company and O.P., L.L.C. dated
         November 1, 1999 pertaining to the premises at suite 300, 414 N.
         Orleans, Chicago, IL 60610. (Incorporated herein by reference to
         Exhibit 10.13 of the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1999.)*

10.13    Form of Note purchase agreements dated between March 1, 1999 and June
         29, 1999 between the Company and several purchasers. (Incorporated
         herein by reference to Exhibit 10.14 of the Company's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1999.)*

10.14    Form of 6% Convertible Subordinated Note Due 2000, dated between March
         1, 1999 and June 29, 1999 issued by the Company to several purchasers.
         (Incorporated herein by reference to Exhibit 10.15 of the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         1999.)*

10.15    Schedule of purchasers of 6% Convertible Notes Due 2000, including
         dates and amount purchased. (Incorporated herein by reference to
         Exhibit 10.16 of the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1999.)*

10.16    Form of Senior Convertible Promissory Note issued to Azimuth
         Corporation on December 10, 1999. (Incorporated herein by reference to
         Exhibit 10.17 of the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1999.)*

10.17    Form of Restricted Stock Award of 50,000 shares of Common Stock issued
         to David A. Fishman, M.D., on August 10, 1999 as additional
         compensation under a 36 month Consulting Agreement dated June 1, 1999.
         (Incorporated herein by reference to Exhibit 10.18 of the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         1999.)*

10.18    Form of Restricted Stock award of 50,000 shares of Common Stock issued
         to Arthur L. Herbst, M.D., on August 10, 1999 as additional
         compensation under a 36 month Consulting Agreement dated July 1, 1999.
         (Incorporated herein by reference to Exhibit 10.19 of the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         1999.)*

10.19    Form of $2,000,000 note received from Seaside Partners, L.P. on April
         28, 2000. (Incorporated by reference to Exhibit 10.20 to the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31,
         2000.)*

10.20    Form of $300,000 note received from AccuMed International, Inc. on
         September 22, 2000 in conjunction with the proposed acquisition of
         AccuMed by the Company. (Incorporated by reference to Exhibit 10.21 to
         the Company's Annual Report on Form 10-K for the fiscal year ended
         December 31, 2000.)*

10.21    Form of $500,000 Convertible Promissory Note issued to Azimuth
         Corporation on September 22, 2000 in connection with the proposed
         acquisition of AccuMed International, Inc. by the Company.
         (Incorporated by reference to Exhibit 10.22 to the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 2000.)*


                                       55
<PAGE>

Exhibit
Number                         Description
------                         -----------

10.22    Form of $500,000 Convertible Promissory Note issued to Monsun, AS on
         November 1, 2000. (Incorporated by reference to Exhibit 10.23 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

10.23    Form of $200,000 Promissory Note issued to Azimuth Corporation on
         December 4, 2000. (Incorporated by reference to Exhibit 10.24 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

10.24    Form of $100,000 Promissory Note issued to Azimuth Corporation on
         December 11, 2000 in conjunction with the proposed acquisition of
         AccuMed International, Inc. by the Company. (Incorporated by reference
         to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 2000.)*

10.25    Amendment to Patent and Technology License Agreement dated June 9, 2000
         by and between Ampersand Medical Corporation, AccuMed International,
         Inc. and InPath, L.L.C. (Incorporated by reference to Exhibit 10.26 to
         the Company's Annual Report on Form 10-K for the fiscal year ended
         December 31, 2000.)*

10.26    License and Development Agreement for Specific Medical Technology for
         the Detection of Oncogenic HPV Virus dated June 23, 2000, by and
         between Invirion, Dr. Bruce Patterson, and Ampersand Medical
         Corporation. (Incorporated by reference to Exhibit 10.27 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

10.27    First Addendum to License and Development Agreement for Specific
         Medical Technology for the Detection of Oncogenic HPV Virus dated
         September 12, 2000, by and between Invirion, Dr. Bruce Patterson and
         Ampersand Medical Corporation. (Incorporated by reference to Exhibit
         10.28 to the Company's Annual Report on Form 10-K for the fiscal year
         ended December 31, 2000.)*

10.28    Second Addendum to License and Development Agreement for Specific
         Medical Technology for the Detection of Oncogenic HPV Virus dated
         January 12, 2001, by and between Invirion, Dr. Bruce Patterson and
         Ampersand Medical Corporation. (Incorporated by reference to Exhibit
         10.29 to the Company's Annual Report on Form 10-K for the fiscal year
         ended December 31, 2000.)*

10.29    Form of $25,000 Promissory Note issued to Azimuth Corporation on
         February 1, 2001 in conjunction with the proposed acquisition of
         AccuMed International, Inc. by the Company. (Incorporated by reference
         to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 2000.)*

10.30    Form of $470,000 Promissory Note issued to Azimuth Corporation on
         February 7, 2001 in conjunction with the proposed acquisition of
         AccuMed International, Inc. by the Company. (Incorporated by reference
         to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 2000.)*

10.31    Lease Agreement between the Company and O.P., L.L.C date 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
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 2000.)*

10.32    First Amendment to Lease Agreement between the Company 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 Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 2000.)*

10.33    Form of Restricted Stock Award of 25,000 shares of Common Stock issued
         to Eric A Gombrich on May 1, 2000 as additional compensation under a 36
         month Employment Agreement dated April 1 2000. (Incorporated by
         reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K
         for the fiscal year ended December 31, 2000.)*


                                       56
<PAGE>


Exhibit
Number                         Description
------                         -----------

10.34    Form of Restricted Stock Award of 50,000 shares of Common Stock issued
         to Ralph M. Richart, M.D., on July 24, 2000 as additional compensation
         under a 36 month Consulting Agreement dated June 1, 2000. (Incorporated
         by reference to Exhibit 10.35 to the Company's Annual Report on Form
         10-K for the fiscal year ended December 31, 2000.)*

10.35    Form of Restricted Stock Award of 50,000 shares of Common Stock issued
         to J. Thomas Cox, M.D., on October 20, 2000 as additional compensation
         under a 36 month Consulting Agreement dated October 15, 2000.
         (Incorporated by reference to Exhibit 10.36 to the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 2000.)

10.36    Form of Voting Agreement between the Company and each of the officers
         and directors of AccuMed International, Inc. (Exhibit A to the
         Agreement and Plan of Merger included in Appendix I to the proxy
         statement-prospectus.)

10.37    $100,000 Promissory Note issued to Cadmus Corporation on July 26, 2001.
         (Incorporated by reference to Exhibit 10.39 to the Company's S-4
         Registration Statement, File No. 333-61666, filed August 24, 2001.)

10.38    $100,000 Promissory Note issued to Azimuth Corporation on August 6,
         2001. (Incorporated by reference to Exhibit 10.40 to the Company's S-4
         Registration Statement, File No. 333-61666, filed August 24, 2001.)

10.39    $25,000 Promissory Note issued to Northlea Partners, Ltd. on August 6,
         2001. (Incorporated by reference to Exhibit 10.41 to the Company's S-4
         Registration Statement, File No. 333-61666, filed August 24, 2001.)

10.40    $118,500 Promissory Note to Schwartz Cooper Greenberger & Krauss on
         February 13, 2002. (Incorporated by reference to Exhibit 10.40 to the
         Company's S-2 Registration Statement, File No. 333-83578 filed June 28,
         2002.)

10.41    $650,000 Promissory Note issued to Round Valley Capital, LLC on August
         30, 2002. (Incorporated by reference to the Company's S-2 Registration
         Statement, File No. 333-100150 filed on September 27, 2002.)

10.42    Form of Convertible Promissory Note issued in connection with certain
         Bridge Financing beginning in March 2002.

10.43    Amendment No. 1 to Convertible Promissory Note issued in connection
         with certain Bridge Financing dated August 20, 2003.

10.44    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.

10.45    Consulting Agreement between the Company and CEOCast, Inc.

10.46    Consulting Agreement between the Company and Redwood Consultants, LLC

10.47    Subscription Agreement for $1,500,000 minimum offering/$4,000,000
         Maximum Offering placed by Bathgate Capital Partners LLC

10.48    Form of Note for $1,500,000 minimum offering/$4,000,000 Maximum
         Offering placed by Bathgate Capital Partners LLC


                                       57
<PAGE>

Exhibit
Number                         Description
------                         -----------

10.49    Form of Registration Rights Agreement for $1,500,000 minimum
         offering/$4,000,000 Maximum Offering placed by Bathgate Capital
         Partners LLC

10.50    Form of Security Agreement for $1,500,000 minimum offering/$4,000,000
         Maximum Offering placed by Bathgate Capital Partners LLC

10.51    Form of Warrant for $1,500,000 minimum offering/$4,000,000 Maximum
         Offering placed by Bathgate Capital Partners LLC

10.52    Form of Loan Security Agreement dated April 2, 2003 between the Company
         and Suzanne M. Gombrich in connection with a $1,000,000 loan evidenced
         by a convertible promissory note issued on that date. (Incorporated by
         reference to Form 10-QSB filed for the quarter ended June 30, 2003)

10.53    Form of Convertible Promissory Note dated April 2, 2003 issued by the
         Company to Suzanne M. Gombrich in exchange for a cash loan of
         $1,000,000. (Incorporated by reference to Form 10-QSB filed for the
         quarter ended June 30, 2003)

10.54    Amendment No.1 to the 12% Convertible Secured Promissory Note issued in
         connection with certain Bridge Financing in October 2002. (Incorporated
         by reference to Form 10-QSB filed for the quarter ended September 30,
         2003)

10.55    Amendment No. 1 to the Indenture issued in connection with certain
         Bridge Financing in October 2002 (Incorporated by reference to Form
         10-QSB filed for the quarter ended September 30, 2003)

10.56    Form of consulting agreement with Dan Burns and Eugene Martineau for
         the purpose of assisting the Company in certain investor relations and
         other financial aspects of the Company. (Incorporated by reference to
         Form 10-QSB filed for the quarter ended September 30, 2003)

10.57    Form of consulting agreement with Dr. Reid Jilek for the purpose of
         assisting the Company with Joint Ventures, licensing agreements,
         contracts, and equity and strategic funding sources. (Incorporated by
         reference to Form 10-QSB filed for the quarter ended September 30,
         2003)

21.1     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.

99.1     Code of Ethics and Business Conduct of Officers, Directors and
         Employees of Molecular Diagnostics, Inc.* SEC File No. 0-935

         2.       REPORTS ON FORM 8-K

                  On November 20, 2003, the Company filed a Form 8-K Current
                  Report disclosing that it had released a press release
                  announcing its termination of licenses previously granted by
                  subsidiaries to MonGen, Inc.

                                       58
<PAGE>


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

                                              2003               2002
                                            --------          ---------

Audit Fees                                  $129,056           $117,910
Audit Related Fees                             --                 --
Tax Fees                                       --                 --
All other Fees                                 --                 --
                                            --------          ---------
Total Fees                                  $129,056           $117,910
                                            ========           ========

         Altschuler, Melvoin and Glasser LLP (the Firm) has a continuing
relationship with American Express Tax and Business Services, Inc. (TBS) from
which it leases auditing staff who are full time, permanent employees of TBS and
through which its partners provide non-audit services. As a result of this
arrangement, the Firm has no full time employees and therefore, none of the
audit services performed were provided by permanent full-time employees of the
Firm. The Firm manages and supervises the audit and audit staff, and is
exclusively responsible for the opinion rendered in connection with its
examination.

         No other services have been provided by TBS.

         After careful consideration, the Audit Committee of the Board of
Directors has determined that payment of the above audit fees is in conformance
with the independent status of the Company's principal independent accountants.
Before engaging the auditors in additional services the audit committee
considers how these services will impact the entire engagement and independence
factors.



                                       59
<PAGE>



SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended 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, 2004

         Pursuant to the requirements of the Securities and Exchange Act of
1934, 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, 2004
-------------------------------------        Officer, (Principal Executive Officer)
     Denis M. O'Donnell, M.D.


/S/  DENNIS L BERGQUIST                      Chief Financial Officer                            April 14, 2004
-------------------------------------
     Dennis L. Bergquist                     (Principal Accounting Officer)

/S/  ALEXANDER M. MILLEY                     Director                                           April 14, 2004
-------------------------------------
     Alexander M. Milley

/S/  JOHN ABELES                             Director                                           April 14, 2004
-------------------------------------
     John Abeles

/S/  PETER P. GOMBRICH                         Chairman of the Board, Director                  April 14, 2004
-------------------------------------
     Peter P. Gombrich
</TABLE>



<PAGE>





                         REPORT OF INDEPENDENT AUDITORS

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, 2003 and 2002, 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 on Schedule IX. These consolidated financial
statements and schedules 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 total
assets of $0 and $612,000 December 31, 2003 and 2002, respectively and results
from discontinued operations of $217,000 and ($23,000) for the years then ended.
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 as of December 31, 2003 and 2002 and for the years then
ended, is based solely on the report of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the 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 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, 2003 and 2002 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 9, 2004

                                      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 2002 and the results for the years 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
<TABLE>
<CAPTION>
                                      MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
                                               CONSOLIDATED BALANCE SHEETS
                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                                                      DECEMBER 31,
                                                                                                -----------------------
                                                                                                  2003           2002
                                                                                                ---------      --------
<S>                                                                                             <C>            <C>
                                     ASSETS
Current Assets:
Cash and cash equivalents...................................................................    $      --      $     42
Accounts receivables, net of allowance for doubtful accounts of $50 and $ 145
         at December 31,  2003 and 2002, respectively........................................          26           307
Inventories   ..............................................................................           94           427
Refundable taxes............................................................................           --            56
Deferred financings costs...................................................................          307           288
Prepaid expenses and other current assets...................................................            7            69
                                                                                                ---------      --------
              Total current assets..........................................................          434         1,189
Fixed Assets, net...........................................................................          374           666
Other Assets:
Licenses, patents, and technology, net of amortization......................................        6,907         7,521
Goodwill, net of amortization...............................................................           --           283
                                                                                                ---------      --------
              Total assets..................................................................    $   7,715      $  9,659
                                                                                                =========      ========
                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Checks issued in excess of amounts on deposit...............................................    $       5      $     --
Accounts payable............................................................................        5,540         5,226
Accrued payroll costs.......................................................................        1,745         1,856
Accrued expenses............................................................................        1,401         1,143
Deferred revenue............................................................................           50           630
Revolving line of credit....................................................................           --           207
Due to stockholder..........................................................................           53           127
Lease obligation............................................................................          279           279
Notes payable--related party................................................................        1,092            65
Notes payable ..............................................................................        6,099         4,585
                                                                                                ---------        ------

              Total current liabilities.....................................................       16,264        14,118
Deferred revenue, less current portion......................................................           --           120
                                                                                                ---------      --------
              Total liabilities.............................................................       16,264        14,238
                                                                                                ---------      --------
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value; shares authorized--10,000,000; shares issued and outstanding
-2,511,108 and 2,781,024 at December 31, 2003 and 2002, respectively (Liquidation value of all
              classes of preferred stock $14,636,679).......................................       12,894        16,958
Common stock, $0.001 par value; shares authorized--100,000,000; shares issued and
Outstanding--45,830,928 and 36,440,700, at December 31, 2003 and 2002,
respectively  ..............................................................................           46            37
Additional paid-in capital..................................................................       29,553        19,557
Treasury stock; 192,088 shares at December 31, 2003 and 2002................................         (327)         (327)
Deferred compensation.......................................................................           --           (11)
Accumulated deficit.........................................................................      (50,673)      (40,642)
Accumulated comprehensive loss--Cumulative translation adjustment...........................          (42)         (151)
                                                                                                ---------      --------
              Total stockholders' equity (deficit)..........................................       (8,549)       (4,579)
                                                                                                ----------     ---------
              Total liabilities and stockholders' equity (deficit)..........................    $   7,715      $  9,659
                                                                                                =========      ========

                 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


                                                          F-3
<PAGE>

<TABLE>
<CAPTION>
                                      MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                                               YEAR ENDED DECEMBER 31,
                                                                                            ----------------------------
                                                                                                 2003            2002
                                                                                            ------------    ------------
<S>                                                                                         <C>             <C>
Net Sales..............................................................................     $        379    $        717
Costs and Expenses:
     Cost of goods sold................................................................              143             246
     Research and development..........................................................              580           3,252
     Selling, general and administrative expenses......................................            6,230           7,720
     Impairment loss...................................................................              283              --
                                                                                            ------------    ------------
     Total costs and expenses..........................................................            7,236          11,218
                                                                                            ------------    ------------
Operating loss.........................................................................           (6,857)        (10,501)
                                                                                            ------------    ------------
     Other income (expense):
     Interest expense--related party...................................................             (104)             (9)
     Interest expense..................................................................           (3,151)         (1,578)
     Other, net........................................................................              308             151
                                                                                            ------------    ------------
                                                                                                  (2,947)        (1,436)
                                                                                            ------------    ------------
Loss from continuing operations before income taxes....................................           (9,804)        (11,937)
Income taxes...........................................................................               --              --
                                                                                            ------------    ------------
Loss from continuing operations........................................................           (9,804)        (11,937)
Discontinued operations:
Gain from involuntary conversion.......................................................              292              --
Results from discontinued operations...................................................              (75)            (23)
                                                                                            -------------   ------------
Net loss...............................................................................     $     (9,587)   $    (11,960)
                                                                                            ============    ============
Preferred stock dividends..............................................................           (1,473)         (2,012)
                                                                                            -------------   -------------
Total dividends........................................................................           (1,473)         (2,012)
                                                                                            ------------    -------------
Net loss applicable to common shareholders.............................................     $    (11,060)   $    (13,972)
                                                                                            ============    ============
Basic and fully diluted net loss per common share......................................     $      (.27)    $       (.49)
                                                                                            ===========     ============
Weighted average number of common shares outstanding...................................       40,695,186      28,704,245
                                                                                            ============    ============


                 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>



                                                          F-4
<PAGE>
<TABLE>
<CAPTION>

                                      MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                 (DOLLARS IN THOUSANDS)

                                                                                                 YEAR ENDED DECEMBER 31,
                                                                                                 -----------------------
                                                                                                   2003         2002
<S>                                                                                              <C>         <C>
Operating Activities:
 Net loss.....................................................................................   $  (9,587)  $ (11,960)
         Amortization of debt discount........................................................       2,507       1,176
         Depreciation and amortization........................................................         869         967
         Amortization of fees.................................................................         460          --
         Fixed assets in exchange for services................................................           8          --
         Loss on sale of equipment............................................................         (34)         --
         Licensing fees recognized on preferred stock sale....................................          --        (298)
         Stock, warrants, and options issued to non-employees for services....................       2,108       1,284
         Notes issued in payment of expenses..................................................         429          --
         Compensation expense related to stock appreciation rights and restricted stock.......          12          --
         Impairment of goodwill...............................................................         283          --
         Changes in assets and liabilities:
              Accounts receivable.............................................................         304         257
              Inventories.....................................................................         351          98
              Refundable taxes................................................................          60          73
              Due from stockholder............................................................         529         177
              Prepaid expenses and other current assets.......................................        (531)         26
              Checks issued in excess of amounts on deposit...................................           5          --
               Accounts payable...............................................................         242       2,742
              Deposits........................................................................         (24)        (31)
              Deferred revenue................................................................        (720)        139
              Lease obligation................................................................          --         (12)
              Accrued expenses................................................................         169       1,135
                                                                                                 ---------   ---------
Net cash used for operating activities........................................................      (2,560)     (4,227)
                                                                                                 ---------   ---------
Cash used in investing activities:
     Expenditures for license, patents, and technology........................................          --          (4)
     Capital purchases........................................................................         (18)        (88)
                                                                                                 ---------   ---------
Net cash used for investing activities........................................................         (18)        (92)
                                                                                                 ---------   ---------
Cash flows from financing activities:
     Proceeds from issuance of convertible notes payable......................................       1,965       3,825
     Proceeds from issuance of convertible notes payable, related party.......................       1,015          --
     Proceeds from issuance of notes payable..................................................          --          80
     Payments of notes payable................................................................        (623)       (500)
     Proceeds from sale of fixed assets.......................................................          83          --
     Proceeds from revolving line of credit, net..............................................          --          (2)
                                                                                                 ---------   ---------
Net cash provided by financing activities.....................................................       2,440       3,403
Effect of exchange rate changes on cash and cash equivalents..................................          96         (67)
                                                                                                 ---------   ----------
Net decrease in cash and cash equivalents.....................................................         (42)       (983)
Cash and cash equivalents at beginning of period..............................................          42       1,025
                                                                                                 ---------   ---------
Cash and cash equivalents at end of period....................................................   $       0   $      42
                                                                                                 =========   =========

                                                       (Continued)
                 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


                                                          F-5
<PAGE>


<TABLE>
<CAPTION>
                                      MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
                                                 (DOLLARS IN THOUSANDS)

                                                                                                 YEAR ENDED DECEMBER 31,
                                                                                                 ----------------------
                                                                                                   2003          2002
                                                                                                 --------      --------
<S>                                                                                              <C>          <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest......................................................................................   $     868    $     179
NON-CASH TRANSACTION DURING THE PERIOD FOR:
Deferred financing costs......................................................................   $   1,663    $      519
Preferred stock and cumulative dividends converted into common stock..........................   $   4,508    $    3,297


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

</TABLE>



                                                          F-6
<PAGE>

<TABLE>
<CAPTION>

                                        MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                   (DOLLARS IN THOUSANDS)

                                         PREFERRED STOCK       COMMON STOCK                                     NOTE
                                        PAR VALUE $0.001      PAR VALUE  $0.001    TREASURY STOCK ADDITIONAL RECEIVABLE
                                        -----------------    ------------------    --------------   PAID-IN     FOR
                                         SHARES   AMOUNT     SHARES    AMOUNT      SHARES    AMOUNT  CAPITAL  STOCKHOLDER
                                         ------   ------     ------    ------      ------    ------  -------  -----------

<S>                                  <C>        <C>      <C>         <C>        <C>        <C>     <C>        <C>
January 1, 2002.................     3,493,078  $21,089  25,304,883  $   26     (192,088)  $(327)  $12,212    $  --
Comprehensive Loss:
   Net loss......................                    --                   --                   --       --       --
   Foreign currency translation...                   --                   --                   --       --       --

   Total net comprehensive                           --                   --                   --       --       --
   Loss..........................
Series A preferred stock
   converted to common..........       (76,743)    (345)     33,510       --                   --      345       --
Series B preferred stock and
   Cumulative dividends
   converted to common.........       (557,500)  (2,230)  2,594,175        3                   --    2,590       --
Series C preferred stock
   and cumulative dividends
   converted to common..........       (72,666)   (218)     392,858       --                   --      235       --
Series E preferred stock, conversion
   premium and cumulative
   dividends converted to common.....   (5,145)   (113)     155,180       --                   --      124       --
Transfer value of warrant and
   license related to Series D
   preferred stock..................            (1,225)                   --                   --      928       --
Deferred compensation expense
   For unvested options issued in
   acquisition.....................                 --          --        --                   --       --
Common stock issued to employees...                          16,666       --                   --       --       --
Common stock issued for services...                 --      911,496        1                   --      354       --
Sale of common stock to
Employees.................                 --        9,568      --                             --        1       --
Common stock issued for loan
   transaction fees...............         --      711,364       1                             --      363       --
Exercise of options...............         --      361,000      --                             --       44       --
Common stock issued for
   financing fees.................         --      200,000      --                             --       44       --
Common stock issued for
   collateral.....................         --    5,750,000       6                             --       (6)      --
</TABLE>



                                                          F-7
<PAGE>

[part ii]

<TABLE>
<CAPTION>
                                                                           OTHER           TOTAL
                                               DEFERRED     ACCUMULATED COMPREHENSIVE  STOCKHOLDER'S
                                              COMPENSATION     DEFICIT      LOSS       EQUITY (DEFICIT)
                                              ------------     -------      ----       ----------------
<S>                                            <C>          <C>          <C>           <C>
January 1, 2002.................               $  (61)      $(28,289)    $  (27)       $   4,623
Comprehensive Loss:
   Net loss......................                   --        (11,960)        --          (11,960)
   Foreign currency translation...                  --           --          (124)           (124)
                                                                                       -----------
   Total net comprehensive                          --           --           --
   Loss..........................                                                          (12,084)
Series A preferred stock
   converted to common..........                    --           --           --               --
Series B preferred stock and
   Cumulative dividends
   converted to common.........                     --         (364)          --               --
Series C preferred stock
   and cumulative dividends
   converted to common..........                    --          (18)          --               --
Series E preferred stock, conversion
   premium and cumulative
   dividends converted to common.....               --          (11)          --              --
Transfer value of warrant and
   license related to Series D
   preferred stock..................                --           --           --            (297)
Deferred compensation expense
   For unvested options issued in
   acquisition.....................                  50           --          --               50
Common stock issued to employees...                 --            --          --               --
Common stock issued for services...                 --            --          --             354
Sale of common stock to
Employees.................                          --            --         --                1
Common stock issued for loan
   transaction fees...............                  --            --         --              363
Exercise of options...............                  --            --         --               44
Common stock issued for
   financing fees.................                  --            --         --               44
Common stock issued for
   collateral.....................                  --            --         --               --

</TABLE>



                                                          F-8
<PAGE>

<TABLE>
<CAPTION>
                                      MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES

                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                   (DOLLARS IN THOUSANDS)

                                         PREFERRED STOCK       COMMON STOCK                                     NOTE
                                        PAR VALUE $0.001      PAR VALUE  $0.001    TREASURY STOCK ADDITIONAL  RECEIVABLE
                                        -----------------    ------------------    --------------   PAID-IN      FOR
                                         SHARES   AMOUNT     SHARES    AMOUNT      SHARES    AMOUNT  CAPITAL  STOCKHOLDER
                                         ------   ------     ------    ------      ------    ------  -------  -----------
<S>                                  <C>        <C>       <C>         <C>         <C>        <C>     <C>         <C>
  Beneficial conversion feature
     on convertible notes.......                    --                   --                    --     1,372        --
  Reversal of common stock
     issued as compensation....                     --                   --                    --        (4)       --
  Reversal of restricted stock
     issued for services........                    --                   --                    --       (38)       --
  Reversal of options issued to
     non-employees for
     compensation..............                     --                   --                    --       (55)       --
  Warrants issued for services                      --                   --                    --       848        --
  Warrants issued with debt....                     --                   --                    --       200        --
                                    ---------  -------   ----------  ------   ----------    -----   -------     -----
  December 31, 2002............     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          --

</TABLE>

                                                          F-9
<PAGE>

[part ii]

<TABLE>
<CAPTION>
                                      MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES

                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                   (DOLLARS IN THOUSANDS)

                                                                        OTHER           TOTAL
                                            DEFERRED     ACCUMULATED COMPREHENSIVE  STOCKHOLDER'S
                                          COMPENSATION     DEFICIT      LOSS       EQUITY (DEFICIT)
                                          ------------     -------      ----       ----------------
<S>                                       <C>            <C>        <C>           <C>
  Beneficial conversion feature
     on convertible notes.......               --            --          --           1,372
  Reversal of common stock
     issued as compensation....                --            --          --              (4)
  Reversal of restricted stock
     issued for services........               --            --          --             (38)
  Reversal of options issued to
     non-employees for
     compensation..............                --            --          --             (55)
  Warrants issued for services                 --            --          --             848
  Warrants issued with debt....                --            --          --             200
                                            -----        -------     ------        --------
  December 31, 2002............           $  (11)        $(40,642)  $  (151)      $ (4,579)
  Comprehensive Loss:
     Net loss...................               --          (9,587)        --          (9,587)
     Foreign currency translation              --            --           109            109
                                                                                  ----------
     Total net comprehensive                   --            --           --         (9,478)
     Loss........................
  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

</TABLE>


                                                          F-10
<PAGE>

<TABLE>
<CAPTION>
                                        MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                   (DOLLARS IN THOUSANDS)


                                         PREFERRED STOCK       COMMON STOCK                                     NOTE
                                        PAR VALUE $0.001      PAR VALUE  $0.001    TREASURY STOCK ADDITIONAL  RECEIVABLE
                                        -----------------    ------------------    --------------   PAID-IN      FOR
                                         SHARES   AMOUNT     SHARES    AMOUNT      SHARES    AMOUNT  CAPITAL  STOCKHOLDER
                                         ------   ------     ------    ------      ------    ------  -------  -----------
<S>                                  <C>        <C>       <C>         <C>         <C>       <C>    <C>        <C>
 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    $  --
                                     =========  =======   ==========  ======      =======   =====  =======    ======

                         The accompanying notes are an integral part of these financial statements.
</TABLE>

[part ii]

<TABLE>
<CAPTION>
                                        MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                   (DOLLARS IN THOUSANDS)

                                                                   OTHER           TOTAL
                                       DEFERRED     ACCUMULATED COMPREHENSIVE  STOCKHOLDER'S
                                     COMPENSATION     DEFICIT      LOSS       EQUITY (DEFICIT)
                                     ------------     -------      ----       ----------------
<S>                                    <C>        <C>         <C>            <C>
 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)
                                       ======     ========    ========       ==========


                         The accompanying notes are an integral part of these financial statements.
</TABLE>

                                                          F-11
<PAGE>

                  MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003

NOTE 1.           THE COMPANY AND BASIS OF PRESENTATION

         Molecular Diagnostics, Inc, ("MDI") was incorporated as Ampersand
Medical Corporation in Delaware on December 15, 1998, as the successor to Bell
National Corporation ("Bell National"). Bell National was incorporated in
California in 1958.

         On September 25, 2001, the Company changed its corporate name to
Molecular Diagnostics, Inc. in order to better represent its operations and
products. The name change was effected by a merger with a wholly-owned
subsidiary. Molecular Diagnostics, Inc. has retained its Certificate of
Incorporation, except as amended to reflect the new name, bylaws and
capitalization.

         On December 4, 1998, Bell National (then a shell corporation without
any business activity) acquired InPath, LLC, a development-stage company engaged
in the design and development of medical instruments and related tests. In the
acquisition, Bell National issued 4,288,790 shares of common stock and warrants
to purchase 3,175,850 shares of common stock to the members of InPath in
exchange for their units of membership interest in InPath and the senior
executives of InPath assumed management control of MDI.

         Based upon the terms of the acquisition agreement, for financial
reporting and accounting purposes the acquisition was accounted for as a reverse
acquisition whereby InPath is deemed to have acquired Bell National. However,
Bell National was the continuing legal entity and registrant for both Securities
and Exchange Commission filing purposes and income tax filing purposes, until
its merger into MDI in May 1999. Because Bell National was a non-operating
public shell company with nominal assets and InPath was a private operating
company, the acquisition was recorded as the issuance of stock for the net
monetary assets of Bell National, accompanied by a recapitalization and no
goodwill or other intangible assets were recorded.

         On September 17, 2001, Molecular Diagnostics, Inc. completed an
acquisition transaction whereby AccuMed International, Inc. was merged into a
wholly-owned subsidiary of MDI. The value of the transaction was approximately
$14,178,000. Accordingly, the consolidated financial statements presented
hereunder include the operations of InPath from March 16, 1998 (inception), the
operations of Bell National and Molecular Diagnostics, Inc. from December 4,
1998, and the operations of AccuMed International, Inc. from September 17, 2001,
the date of acquisition.

         Molecular Diagnostics, Inc. is focused on the design, development and
marketing of the InPath System and related image analysis systems. The InPath
System and related products are intended to detect cancer and cancer related
diseases. These products may be used in a laboratory, clinic, or doctor's
office.

         Molecular Diagnostics, Inc. 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 the reported revenues prior to 2002 and since
inception of MDI were generated by Samba. From 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 liability
obligations. On December 19, 2003 the French Commercial Court finalized the
liquidation sale of the Samba assets. Upon completion of the bankruptcy
liquidation sale MDI lost all rights and title to Samba's assets, including
Samba's software. MDI has reflected a gain of $292,000 from the involuntary
liquidation of Samba's assets by the French Commercial Court in its December 31,
2003 financial statements as discontinued operations.

         Molecular Diagnostics, Inc. 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


                                      F-12
<PAGE>

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 substantial efforts to obtain additional capital. If Molecular
Diagnostics, Inc. is unable to obtain adequate additional financing or generate
profitable sales revenues, management may be required to curtail 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 Molecular Diagnostics, Inc. and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated.

         NEW ACCOUNTING STANDARDS.

         GOODWILL AND OTHER INTANGIBLE ASSETS

         On June 29, 2001, the Financial Accounting Standards Board (FASB)
approved its proposed Statements of Financial Accounting Standards No. 142 (FAS
142), Goodwill and Other Intangible Assets. FAS 142 supercedes APB 17,
Intangible Assets. FAS 142 primarily addresses accounting for goodwill and
intangible assets subsequent to their acquisition (i.e., the post-acquisition
accounting). The most significant changes made by FAS 142 are (1): goodwill and
indefinite lived intangible assets will no longer be amortized, (2) goodwill
will be tested for impairment at least annually at the reporting unit level, (3)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually, and (4) the amortization period of intangible
assets with finite lives will no longer be limited to forty years.

         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 International, Inc.
acquisition for the year ended December 31, 2003.

         ASSET RETIREMENT OBLIGATIONS

         In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("FAS 143"). FAS 143 addresses the accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. FAS 143 became effective for
MDI in the first quarter of 2002. The provisions of FAS 143 did not have a
material impact on the Company's consolidated financial statements.

         IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

         In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 clarifies the
accounting for the impairment of long-lived assets and for long-lived assets to
be disposed of, including the disposal of business segments and major lines of
business. FAS 144 became effective for MDI in the first quarter of 2002. The
provisions of FAS 144 did not have a material impact on the Company's
consolidated financial statements.

         VARIABLE INTEREST ENTITIES

         In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which requires
variable interest entities (commonly referred to as SPEs) to be consolidated by
the primary beneficiary of the entity if certain criteria are met. FIN 46, as
amended in December 2003, is effective for all new variable interest entities
created or acquired after December 31,2003. For variable interest entities
created or acquired prior to December 31, 2003, the provisions of FIN 46 become
effective for the Company during the first reporting period that ends after
December 15,2004. For variable interest entities acquired prior to December 31,
2003, any difference between the net amount added to the balance sheet and the
amount of any previously recognized interest in the variable interest entity
will be recognized as a cumulative effect of an accounting change. The
provisions of FASB Interpretation No. 46 will not have a material impact on the
Company's consolidated financial statements.


                                      F-13
<PAGE>

         STOCK-BASED COMPENSATION

         In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure" ("FAS 148"). FAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. FAS 148
also requires that disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, FAS 148 requires disclosure
of the pro forma effect in interim financial statements. The transition and
annual disclosure requirements of FAS 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure requirements of FAS 148 are
effective for interim periods beginning after December 15, 2002. The adoption of
the provisions of FAS 148 did not have an impact on the Company's consolidated
financial statements; however, the Company has modified its disclosures as
provided for in the new standard.

         EXIT AND DISPOSAL ACTIVITIES

         In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 nullifies the
accounting for restructuring costs provided in EITF Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." FAS 146
requires that a liability associated with an exit or disposal activity be
recognized and measured at fair value only when incurred. In addition, one-time
termination benefits should be recognized over the period employees will render
service, if the service period required is beyond a minimum retention period.
FAS 146 is effective for exit or disposal activities initiated after December
31, 2002. Management does not expect that the application of the provisions of
FAS 146 will have a material impact on the Company's consolidated financial
statements.

         GUARANTEES

         In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002, irrespective of the guarantor's fiscal year-end. The
initial recognition and initial measurement provisions of FIN 45 are not
expected to have a material impact on the Company's consolidated financial
statements. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002;
therefore, the Company has modified its disclosures if and where appropriate as
required.

         TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
         LIABILITIES

         In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
-- a Replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 revises the
criteria for accounting for securitizations and other transfers of financial
assets and collateral. In addition, FAS 140 requires certain additional
disclosures. Except for the new disclosure provisions, which were effective for
the year ended December 31, 2000, FAS 140 was effective for the transfer of
financial assets occurring after March 31, 2001. The provisions of FAS 140 did
not have a material impact on MDI's consolidated financial statements.

         DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

         In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133. The adoption of this Statement did
not have a material impact on the Company's financial statements.


                                      F-14
<PAGE>

         ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
         BOTH LIABILITIES AND EQUITY

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." The
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability: many of those instruments were previously
classified as equity. The adoption of this Statement did not have a material
impact on the Company's financial statements.

         Use of Estimates. The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.

         Revenue Recognition. Molecular Diagnostics, Inc. recognizes revenue
upon shipment of product or license to customers and no remaining Company
obligations or contingencies exist, or in the case of sales of software by its
wholly owned subsidiary Samba, upon shipment if persuasive evidence of an
arrangement exists; sufficient vendor-specific objective evidence exists to
support allocating the total fee to all elements of the arrangement; the fee is
fixed or determinable; and collection is probable.

         Revenue from ongoing client maintenance is recognized ratably over the
post-contract support term, which is generally twelve 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. Molecular Diagnostics, Inc. 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 consists of AcCell instruments and component
parts necessary to manufacture AcCell instruments. 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
(FIFO) method. The Company has established a policy for reserving obsolete and
excess inventory, any non-usable, damaged, or non-salable inventory or inventory
with little or no demand for the product in excess of one year. Samba's
inventory consisted primarily of in-process labor on uncompleted contracts.

         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:

Furniture and fixtures.....................................5 years
Laboratory equipment.......................................5 years
Computer and communications equipment......................3 years
Leasehold improvements.....................................Useful life or life
                                                           of lease, whichever
                                                           is shorter

         Normal maintenance and repairs are charged to expense as incurred,
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 seventeen years. The Company
assesses licenses, patents, and technology quarterly for impairment.


                                      F-15
<PAGE>

         Research and Development Costs. Research and development costs are
charged to operations as incurred. Molecular Diagnostics, Inc. 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 Molecular
Diagnostics, Inc.'s foreign operations is the local currency. Accordingly, all
assets and liabilities are translated into United States 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
Molecular Diagnostics, Inc.'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 Statement of Operations.

         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. Molecular Diagnostics,
Inc.'s calculation of dilutive net loss per share excludes potential common
shares as the effect would be antidilutive. Cumulative and deemed dividends on
convertible preferred shares totaled approximately $4,768,000 and $3,143,000 at
December 31, 2003 and 2002, respectively. Loss per share applicable to common
shareholders is $.27 and $.49 as of December 31, 2003 and 2002, respectively.
The weighted average shares at December 31, 2002 include the weighted average
effect of 5,750,000 shares of common stock issued to Round Valley Capital, LLC
in August of 2002. These shares of common stock were issued to RVC as additional
collateral for a loan made to the Company. The shares were returned to the
Company by RVC upon final settlement of the loan in 2003. MDI cancelled the
shares in April of 2003. If MDI had not treated these shares as issued and
outstanding at December 31, 2002, the loss per share applicable to common
shareholders would have been $0.52. Potential common shares include stock
underlying convertible notes, convertible preferred stock, cumulative dividends
on preferred stock payable in common stock, stock options, and warrants. The
weighted-average number of options and warrants to purchase common stock using
the treasury stock method for 2003 and 2002 was 1,960,467 and 14,774,294 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 and 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 reverse. Valuation allowances are
provided against deferred tax assets if it is more likely than not that the
deferred tax assets will not be realized.

         Stock Compensation. As permitted by the Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123), Molecular Diagnostics, Inc. 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 (APB 25).

         Impairment. 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.

NOTE 3.           FIXED ASSETS

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

                                                            2003         2002
                                                           ------       -------

   Furniture and fixtures..............................    $  114       $   158
   Laboratory equipment...............................        741           786
   Computer and communications equipment..............        313           353
   Leasehold improvements.............................         28            34
                                                           ------       -------
                                                            1,196         1,331
   Less accumulated depreciation and amortization.....       (822)         (665)
                                                           ------       -------
           Total......................................     $  374       $   666
                                                           ======       =======

                                      F-16
<PAGE>

         AGGREGATE DEPRECIATION AND AMORTIZATION EXPENSE

         For the years ended December 31, 2003 and 2002, depreciation and
amortization expense was $257 and $302, respectively.

NOTE 4.           LICENSES, PATENTS, TECHNOLOGY AND GOODWILL

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

                                                          2003         2002
                                                         ------       -------

         Licenses..................................      $1,013       $ 1,028
         Patent costs..............................         133           133
         MDI Technology Agreement..................       7,230         7,230
         Dianon Technology Agreement...............         260           260
                                                         ------       -------
         Subtotal..................................       8,636         8,651
         Less accumulated amortization.............      (1,729)       (1,130)
                                                         ------       -------
                 Total.............................      $6,907       $ 7,521
                                                         ======       =======

         Goodwill     .............................      $   --       $   283
                                                         ======       =======

         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 and no future cash flows will be realized
relating to the goodwill.

         AGGREGATE AMORTIZATION EXPENSE

For the years ended December 31, 2003 and 2002, amortization expense was $612
and $665, respectively.

ESTIMATED AMORTIZATION EXPENSE
                                                       YEAR ENDED DECEMBER 31,
                            2004...........................    $526
                            2005...........................    $526
                            2006...........................    $526
                            2007...........................    $526
                            2008...........................    $526

         During 2003 and 2002, 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):

                                                         2003            2002
                                                       -------        --------

         Accrued interest.........................     $   704        $    155
         Accrued interest--related party..........         115             111
         Accrued professional fees................          --             146
         Accrued taxes............................         476            412
         Reserve for warranty.....................          --              21
         Other accrued expenses...................         106             298
                                                       -------        --------
                 Total............................     $ 1,401        $  1,143
                                                       =======        ========

                                      F-17
<PAGE>

         MDI was delinquent in filing certain Federal and State Income Tax
returns for 2002 and 2001. MDI is also 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 Company owed $686,000 and $678,000 as of December 31, 2003 and
2002, respectively, in 2001 federal payroll taxes, including $258,000 and
$250,000 respectively in assessed and estimated statutory penalties and
interest. MDI has submitted payments of $150,000 against this liability amount
and is currently in the process of communicating through counsel with the
Internal Revenue Service regarding payment of the balance due. The Company has
lost all rights of appeal regarding the outstanding payroll tax liability and
could be subject to the seizure of its tangible and intellectual property in the
event a payment schedule is not agreed to with the Internal Revenue Service. The
amount was included in accrued payroll costs in the accompanying balance sheet.

NOTE 6.           NOTES PAYABLE--RELATED PARTIES

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

<TABLE>
<CAPTION>
                                                                                                              2003         2002
                                                                                                             -----        ------
         <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            --
         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 $.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.............................................................................      25            25
                                                                                                             -----        ------
                                                                                                             $1,092       $   65
                                                                                                             ======       ======

</TABLE>

         On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note
to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's
Chairman, in exchange for cash. The note bears interest at the rate of 12% per
annum and is convertible into the common stock of MDI at a conversion price of
$0.10 per share. As additional consideration, MDI granted the holder a warrant
to purchase 1,000,000 shares of the common stock of MDI at an exercise price of
$0.15 per share. MDI also granted the holder a first priority security interest
in all of the Company's assets. The conversion price of the note was less than
the market price of the common stock when the note was issued; therefore, the
holder is considered to have a beneficial conversion feature. MDI determined the
value of the beneficial conversion feature to be $970,000 using the fair value
interest method. The value was recorded as a reduction of the debt and will be
amortized as additional interest over the life of the note. MDI recorded
additional interest expense of $731,000 to reflect amortization of the discount
from the time the note was issued until December 31, 2003. The initial $100,000
of cash proceeds of the note was received in March 2003 and was used to fund the
cost of an option to repurchase all of its assets from Round Valley Capital,
LLC. The remaining proceeds, received on April 2, 2003, were used to make the
$900,000 payment required to exercise the purchase option in conjunction with
the final settlement of the loan with Round Valley Capital, LLC. On April 2,
2004 the 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. (See Footnote 14: Subsequent Events)

         On March 5, 2004, the Bridge II convertible promissory note and accrued
interest, issued to Peter Gombrich was converted into 2,113,987 common shares.

         Further, Peter Gombrich advanced funds to the Company during the year
and was owed $52,953 and $126,911 at December 31, 2003 and 2002, respectively.
MDI has classified the amount due to Mr. Gombrich under the current liabilities
heading "Due to stockholder."

         The carrying amount of notes payable - related parties approximates
fair value at December 31, 2003 and 2002.


                                      F-18
<PAGE>


NOTE 7.           NOTES PAYABLE

         Notes payable to unrelated parties at December 31 (in thousands)
         consisted of:
<TABLE>
<CAPTION>

                                                                                                        2003        2002
                                                                                                        ----        ----
<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; Bridge
              Warrants at an exercise price of $0.25 per share; Private Warrants
              at an exercise price equal to 150% of note conversion price...........................   $2,075     $3,185
         Bridge II Convertible Promissory Notes; due July 31, 2003; interest
              rate 12% per annum; convertible into common stock at $0.10 per share; beneficial
              conversion feature valued at $330,000 as of December 31, 2002;
              Bridge II warrants at an exercise price of $0.15 per share............................    2,845        293
         Round Valley Capital, LLC $825,500 Promissory Note, including unearned interest
              dated August 30,2002; interest rate 36% per annum; warrants at an exercise
              price of $0.20 per share; 711,364 shares of common stock..............................      --         300
         Monsun, AS, $500,000 Promissory Note issued November 1, 2000; interest rate 15% per
              annum, compounded into principal amount; beneficial conversion feature valued at
              $125,000; 1st extension of maturity date for issuance of 100,000 warrants at an
              exercise price of $0.60 per share; 2nd extension of maturity date for the issuance
              of 200,000 warrants at an exercise price of $0.30 per share; 3rd extension of
              maturity date for the issuance of 200,000 warrants at an exercise price of $0.70
              per share; stock issuance of 200,000 shares of common stock in lieu of default
              penalty...............................................................................     641         552
         Trek Diagnostic Systems $80,000 Promissory Note issued July 31, 2002; due in equal
              installments on September 1, 2002 and December 1, 2002................................      15          40
              O.P., LLC $29,390 Promissory Note issued May 12, 2003; interest at 7% per annum;
              monthly principal payment of $1,316 plus interest.....................................      24         --
         Xillix Technologies Corporation, $361,000 Promissory Note issued June 26, 1998; interest
              rate Canadian Prime plus 6% per annum; represents a debt of AccuMed International.....      34          34
         Ungaretti and Harris $211,368 Secured Promissory Note issued May 8, 2003; interest at 12%
              per annum; due September 30, 2003.....................................................     149          --
         Ernst & Young $30,800 Promissory Note issued July 17, 2003; due December 31, 2003........        31          --
         Western Economic Diversification, $221,000 Promissory Note issued June 1989; no interest;
             represents a debt of Oncometrics.......................................................     222         182
         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 ..........      63          --
                                                                                                       ------      ------
                                                                                                       $6,099      $4,585
                                                                                                       ======      ======
</TABLE>

         Between March 22, 2002 and June 28, 2002, MDI issued $3,185,000 in
series 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 common stock on the date of conversion. In addition, MDI issued a
warrant, which entitled each holder to purchase one share of common stock, at an
exercise price of $0.25 per share, for each dollar principal amount of notes.
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. At the time of conversion of the note, the 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 the
warrants as of December 31, 2002. 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. MDI determined the value of
the beneficial conversion feature to be $1,041,666 and



                                      F-19
<PAGE>

recorded this amount as additional interest expense during 2002. 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 note
holders converted $50,000 in principal amount of notes and $5,287 in accrued
interest into 368,579 shares of unregistered common stock. The remaining
$2,075,000 in principal Bridge I notes remains unconverted and outstanding at
December 31, 2003. Management has 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 also offered warrants to purchase one new share for every
four shares acquired by the Bridge noteholder upon exercise of such holder's
conversion rights under the note. As of April 4, 2004, this offer remained
outstanding. (See Footnote 14: Subsequent Events)

         Beginning in October 2002, MDI began an issue of up to $4,000,000 in
series 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
Convertible Promissory 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
and $305,667 in exchange for a note payable to Peter P. Gombrich, the Company's
Chairman, for a total issuance during the year 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 price of the notes issued during 2002
and those issued during 2003 was 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
December 31, 2002, respectively. The value was recorded as a reduction of the
debt and will be amortized as additional interest over the life of the note. MDI
recorded additional interest expense of $1,826,743 to reflect amortization of
the discount during the twelve months ended December 31, 2003. The Bridge II
notes automatically convert into shares of Common Stock (subject to adjustments
for stock splits, etc.) upon a "Qualified Financing Transaction," which means a
transaction in which the Company closes a new debt or equity financing prior to
the maturity date that results in net proceeds to the Company of at least four
million dollars ($4,000,000). At the time MDI completes significant additional
funding plans, as outlined in the subscription agreement, 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. (See Footnote 14: Subsequent Events)

         On August 30, 2002, MDI issued a Promissory note to Round Valley
Capital, LLC ("RVC") in the amount of $825,500 representing $650,000 in cash
received by MDI and $175,500 in unearned interest. The note bears a calculated
effective interest rate of 36% per annum and is due June 1, 2003. The note is
secured by all of the assets of MDI. MDI issued a certificate representing
5,750,000 shares of the common stock of the Company to RVC as collateral for the
loan and paid transaction fees including: cash payments of $147,063; 711,364
shares of common stock of MDI; and warrants to purchase 681,818 shares of common
stock of MDI at an exercise price of $0.20 per share. MDI recorded the note at a
value, net of unearned interest, of $650,000. A fair value of $362,795 was
calculated for the shares of common stock of MDI issued to RVC using the market
price of the common stock on the date the shares were issued. A fair value of
$156,000 was calculated for the warrants using the Black-Scholes valuation
method. The total value of the transaction fees was recorded as prepaid
financing costs and is being amortized over the life of the note. During 2002,
MDI made principal payments against the note of $350,000. RVC declared MDI to be
in default under the terms of the note during 2002 and the parties were engaged
in litigation and subsequently, settlement negotiations. On April 2, 2003, MDI
paid RVC $900,000 in cash in final settlement of the loan, default penalties and
to exercise its rights under the asset purchase option agreement. RVC returned
the 5,750,000 shares of common stock issued as collateral under the note,
711,364 shares of common stock issued as financing fees, and warrants to
purchase 531,818 shares of common stock also issued as financing fees. MDI
cancelled



                                      F-20
<PAGE>

the shares of common stock and the warrants. On February 17, 2003, MDI made
additional principal payments amounting to $250,000. MDI recorded interest
expense of $16,900 and financing costs, including amortization of accrued
financing costs, of $1,009,000 during 2003.

         In July 2002, MDI agreed to settle a claim brought by Trek Diagnostic
Systems, Inc. ("Trek") against AccuMed regarding breach of representation and
warranties in a certain agreement under which Trek purchased the microbiology
business of AccuMed in 2000. 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. MDI 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 forth 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.

         In conjunction with the acquisition of AccuMed International, Inc. on
September 17, 2001, MDI assumed the $76,516 unpaid principal amount of an
outstanding Canadian dollar convertible promissory note payable to Xillix
Technologies. The note is due on demand, bears interest at a rate of 6% over the
Canadian prime rate, and is convertible into the common stock of MDI at a
conversion price of $2.18 per share. Through December 31, 2001, MDI made cash
principal payments against the note amounting to $27,467. During 2002, MDI made
further cash principal payments against the note amounting to $14,610. MDI also
made cash interest payments of $0 and $390 during 2003 and 2002, respectively.

         In conjunction with the acquisition of AccuMed International, Inc. on
September 17, 2001, MDI assumed the $180,663 unpaid principal balance of an
outstanding Canadian dollar loan due from Oncometrics, a wholly owned subsidiary
of AccuMed, to Western Economic Diversification ("WED"). Payments against the
principal of the loan are due from a percentage of revenues derived from the
sales of products, which include technology licensed to Oncometrics under the
WED loan agreement. Oncometrics failed to make principal payments as required by
the terms of the loan causing a technical default. Neither Oncometrics, nor MDI
has received formal notification from WED of the default as required under the
terms of the loan. As a result of the default MDI has classified the entire
principal of the loan as current.

         On November 1, 2000, Molecular Diagnostics, Inc. issued a convertible
promissory note to Monsun, AS in exchange for $500,000 in cash. The note bears
interest at the rate of 15% per year and was due twelve 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, AS and MDI agreed to the 1st extension of
the maturity date of the convertible promissory note until January 31, 2002. As
consideration for the 1st 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, AS and
MDI agreed to the 2nd extension of the maturity date of the note until March 31,
2002. As consideration for the 2nd 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, AS
and MDI agreed to the 3rd extension of the maturity date until July 31, 2002. As
consideration for the 3rd 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 was 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. Monsun, AS has initiated a legal action against Peter
Gombrich, MDI's Chairman and CEO, as a personal guarantor on the note, in an
attempt to collect the unpaid principal balance of the note. The Board of
Directors of MDI has agreed to pay Mr. Gombrich's legal costs to defend him
against this action. During the first quarter of 2004 Monsun, AS was successful
in obtaining a legal judgement against Peter Gombrich as the personal guarantor
of the note.


                                      F-21
<PAGE>

         Specific events of default have occurred on a significant majority of
the outstanding notes payable, including the Bridge I, Bridge II and Suzanne M.
Gombrich convertible promissory notes, issued by MDI, 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 $641,000 Monsun AS convertible promissory note and the
Ungaretti and Harris $149,000 note payable, which are the subject of legal
actions described in Footnote 10 - Legal Proceedings, MDI has not received any
written declarations of default from holders of its outstanding notes payable.

         The carrying amounts of notes payable approximates fair value at
December 31, 2003 and 2002.

NOTE 8.           STOCKHOLDERS' EQUITY

         SALE OF EQUITY

         Summary of the Company's preferred stock capital table as of December
31, 2003 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            799,856
         Series C convertible, 10% cumulative..............................         1,666,666          1,192,833
         Series D convertible, 10% cumulative..............................           300,000            175,000
         Series E convertible, 10% cumulative..............................           800,000            260,764
                                                                                  -----------        -----------
         Total Preferred Stock.............................................         4,856,863          2,511,108
                                                                                  ===========        ===========
</TABLE>


         During 2002, holders converted a total of 76,743 shares of Series A
convertible preferred stock into 33,510 shares of common stock of the Company.
During 2003 holders converted 35,437 shares of Series A convertible preferred
stock into 15,478 shares of common stock.

         During 2002, several additional holders converted 557,500 shares of
Series B convertible preferred stock, including cumulative dividends due
thereon, into 2,594,175 shares of common stock of MDI. In 2003, a holder
converted 66,000 shares of Series C convertible preferred stock, including
cumulative dividends due, into 380,403 shares of common stock of the Company.

         During 2002, several holders converted 72,666 shares of Series C
convertible preferred stock, including cumulative dividends due thereon, into
392,858 shares of common stock of MDI.

         During the first quarter of 2002 the Company completed the delivery
terms of the Ventana Medical Systems, Inc. license agreement and transferred
$297,500 from Series D preferred stock to license revenue to reflect the value
of the license. The Company also determined a measurement date for the warrant
during the first quarter of 2002. A fair value of $928,000 was calculated for
the warrant using the Black-Scholes valuation method and the Company transferred
this amount from preferred stock to additional paid in capital.

         During December 2002, several holders converted 5,145 shares of Series
E convertible preferred stock, including cumulative dividends due thereon, into
155,180 shares of common stock of MDI. In 2003, several holders converted
168,479.28 shares of Series E convertible preferred stock, including cumulative
dividends due thereon, into 5,150,744 shares of common stock of the Company.



                                      F-22
<PAGE>

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--3 years

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 March 31, 2001
Conversion Period:          Any time
Cumulative dividends in arrears at December 31, 2003 were $909,494

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 March 31, 2002
Conversion Period:          Any time
Cumulative dividends in arrears at December 31, 2003 were $775,505

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--After April 1, 2002
Cumulative dividends in arrears at December 31, 2003 were $379,247

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 December 28, 2001
Conversion Period:          Any time--After December 1, 2002
Cumulative dividends in arrears at December 31, 2003 were $1,153,727

         ISSUANCE OF RESTRICTED SHARES FOR SERVICES

         In August 1999, Molecular Diagnostics, Inc. awarded 50,000 restricted
shares of common stock to a non-employee consultant under a three-year agreement
for consulting services. The restricted shares vested over a twenty-four month
period. During 2002, a determination was made to expense these shares over the
vesting period. A measurement date was determined and a fair value for these
shares of $23,600 was calculated using the Black-Scholes valuation model. During
2003 and 2002 MDI recorded additional expense of $11,600 and a reduction of
expense of $13,000, respectively, as consulting expense related to these shares.

                                      F-23
<PAGE>

         During 2000, Molecular Diagnostics, Inc. issued additional awards of
restricted shares of common stock to non-employee consultants for services. The
awards total 100,000 shares, and were issued under agreements for consulting
services with terms similar to those outlined in the preceding paragraph. The
measurement date of these shares had not been determined as of December 31, 2002
and therefore the value of these shares will be based on the market value of
common stock at the end of each interim period until the measurement date is
determined. A fair value of $16,000 was calculated at December 31, 2002 using
the Black-Scholes valuation model. During 2002, MDI recorded a reduction of
expense of $25,000, as consulting expense.

         ISSUANCE OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES

         During 2000, Molecular Diagnostics, Inc. issued an additional 270,000
options to purchase common stock to non-employees under agreements for
consulting services. The options vest over a time period, ranging from the date
of grant to three years, and have exercise prices from $1.75 to $2.875 per
share. MDI issued these options to consultants as consideration for consulting
services that commenced during 2000 and will be completed through 2003. One of
the consulting agreements was terminated in 2002 and options to purchase 15,000
shares of common stock were cancelled. As the measurement date of these options
had not been determined as of December 31, 2003, the value of these options will
be determined at the end of each interim period until the measurement date is
determined. A fair value of $11,200 was determined as of December 31, 2003,
using the Black-Scholes valuation model. This value is charged to consulting
expense over the term of the agreements. The amount of expense to be ultimately
recognized will vary depending on the market value of the common stock at the
end of each period. No activity was recorded during 2003 due to the immaterial
change. During 2002, MDI recorded a reduction in expense of $55,000 as
consulting expense.

         ISSUANCE OF COMMON STOCK FOR SERVICES

         In July 2002, the Company issued 113,832 shares of common stock to a
vendor in lieu of payment in cash for services provided. The Company determined
a fair value for the shares of $61,000 based on the invoiced value of the
services. The Company recorded the entire amount as selling, general and
administrative expense in 2002.

         In August 2002, the Company issued 60,182 shares of common stock to a
financial advisor as consideration for services provided. The Company determined
a fair value for the shares of $30,000 based on the market value of the stock at
the time the services were performed. The Company recorded the entire amount as
selling, general and administrative expense in 2002.

         Also in August 2002, the Company issued 711,364 shares of common stock
to Round Valley Capital as part of the transactions fees related to a $650,000
loan. The Company determined a fair value for the shares of $362,795 based on
the closing market price of the stock on the date the shares were issued. The
Company is amortizing this amount over the life of the loan. During 2002, the
Company amortized $161,000 as selling general and administrative expenses to
reflect the time the loan was outstanding during the year. The Company also
issued an additional 5,750,000 shares of unregistered and restricted common
stock to be held as collateral against the note. The Company recorded the $5,750
par value of these shares as common stock and a reduction of additional paid in
capital. Because the shares were used only as collateral for the note, no other
value was calculated for the shares. In 2003, upon final settlement of the loan,
the 711,364 shares and the 5,750,000 shares were returned to MDI and cancelled.

         In November 2002, the Company issued 400,000 shares of common stock to
a former employee / consultant in settlement of litigation. The Company
determined a fair value for the shares of $84,000 based on the market price of
the stock on the date of issuance. The Company recorded the entire amount as
research and development expenses in 2002.

         In November 2002, the Company issued 225,001 shares of common stock to
a non-employee consultant as payment for consulting services performed in 2000
and 2001, which were in addition to those services detailed in the consultant's
contract, and for regular services under the contract for the first six months
of 2002. The Company determined a fair value for the shares of $180,000 based on
the market price of the stock on the date of issue and the unpaid fees
outstanding. The Company recorded a reduction in accrued expenses of $130,000
and the remaining amount was recorded as research and development expenses in
2002.



                                      F-24
<PAGE>

         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.

         ISSUANCE OF COMMON STOCK UNDER INCENTIVE PLANS

         In January 2002 a former officer of MDI exercised stock options to
purchase 250,000 shares of common stock at an exercise price of $0.3937 per
share. The Company recorded the $98,425 exercise price of the options as
compensation expense in 2001 in accordance with the terms of the officer's
severance agreement. In March 2002, the former officer exercised additional
stock options to purchase 111,000 shares of common stock at an exercise price of
$0.3937 per share and surrendered options to purchase 39,000 shares of common
stock in lieu of the exercise price.

         ISSUANCE OF WARRANTS FOR SERVICES

         In January 2001, Molecular Diagnostics, Inc. issued warrants to
purchase 80,000 shares of common stock, at an exercise price of $1.00, and
100,000 shares of common stock, at an exercise price of $.50, to a non employee
as compensation for financial services to be provided under agreements covering
January through April, 2001 and May through December 2001 respectively. The
warrants vested in equal amounts each month. The agreements were replaced on
October 1, 2001 with a new agreement covering a fifteen-month period ending on
December 31, 2002. In accordance with the terms of the new agreement all of the
outstanding warrants were immediately vested and MDI issued a new warrant to
purchase 150,000 shares of common stock at an exercise price of $0.50. The new
warrant vests in equal amounts each month as services are provided. A fair value
of $13,500 was calculated for this warrant using the Black-Scholes valuation
method as the services were completed and vesting took place during 2002. MDI
recorded a reduction of expense of $10,500 as selling, general, and
administrative expense in 2002 to cover the vested warrants.

         In July 2001, the Company issued a warrant to purchase 150,000 shares
of common stock at an exercise price of $1.20 per share to an investment-banking
firm as compensation for services provided over a twelve-month period. As the
measurement date of this warrant had not been determined as of December 31,
2001, the fair value of the warrant will be determined at the end of each
interim period until the measurement date is determined. A measurement date was


                                      F-25
<PAGE>

determined upon completion of services during 2002 and a fair value of $66,375
was calculated, using the Black-Scholes valuation model. During 2002, the
company recorded $10,875 respectively, as selling, general and administrative
expense .

         In January 2002, the Company issued a warrant to purchase 200,000
shares of common stock at an exercise price of $0.30 per share to the holder of
a convertible promissory note in consideration for a ninety-day extension of the
note maturity date. A fair value of the warrant of $4,110 was calculated using
the fair value interest method. In April 2002, the Company issued an additional
warrant to purchase 200,000 shares of common stock at an exercise price of $0.70
per share to the same note holder for another ninety-day extension of the note
maturity date. A fair value of this warrant of $8,287 was calculated using the
fair value interest method. The Company recorded both amounts as additional
interest expense in 2002.

         In February 2002, the Company issued a warrant to purchase 750,000
shares of common stock at an exercise price of $0.01 per share to its former
legal counsel as compensation for legal services performed in regard to settled
litigation. A fair value of the warrant of $675,000 was calculated using the
Black-Scholes valuation method. The Company recorded the amount as legal
expenses during 2002.

         Between March 2002 and June 2002, the Company issued a series of Bridge
I convertible promissory notes. As additional consideration for the notes, the
Company issued warrants to purchase 3,185,000 shares of common stock at an
exercise price of $0.25 per share to the note holders. A fair value of the
warrants of $99,950 was calculated using the fair value interest method. This
amount was recorded as additional interest expense during 2002.

         On May 31, 2002, the Company issued a warrant to purchase 51,493 shares
of common stock at an exercise price of $0.01 per share to a non-employee
consultant in lieu of payment of fees due to the consultant for past services.
The Company recorded a fair value of $50,969, the value of the consulting fees
due, as a reduction of accounts payable.

         In September 2002, the Company issued a warrant to purchase 681,818
shares of common stock at an exercise price of $0.20 per share to various
individuals related to Round Valley Capital, LLC as additional loan transaction
fees. A fair value of the warrant of $156,000 was calculated using the
Black-Scholes valuation method modified so that cash and non-cash transactions
fees did not exceed the loan value. This fair value was amortized as additional
financing costs over the life of the loan. The Company recorded $69,333 as
financing costs to reflect the amount amortized during 2002. As part of the loan
settlement with Round Valley Capital, LLC, in April of 2003, warrants to
purchase 481,818 shares of common stock were returned to the Company and
cancelled.

         In November 2002, the Company issued a warrant to purchase 200,000
shares of common stock at an exercise price of $0.16 per share as compensation
to an advisor who acted as a finder for investors in Bridge II convertible
promissory notes. A fair value for the warrant of $44,000 was calculated using
the Black-Scholes valuation method. The Company recorded the amount as financing
costs during 2002.

         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 a current year administrative
expense.

         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 a current year administrative expense.

         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 a current year administrative expense.

         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.

                                      F-26
<PAGE>

         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 a current year administrative
expense.

         APPLICATION OF BLACK-SCHOLES VALUATION MODEL

         In applying the Black-Scholes valuation model for the years 2003 and
2002, the Company has used an expected dividend yield of zero, a risk-free
interest rate of 5% and 6% for the 2003 and 2002 periods, respectively, a
volatility factor of 208% and 90% for the 2003 and 2002 periods, 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.

         WARRANTS

         At December 31, 2003, the Company had the following outstanding
warrants to purchase shares of Common Stock:

                                             Weighted
                                             Average
    Total Shares          Exercisable     Exercise Price     Expiration Date
    ------------          -----------     --------------     ---------------

        39,834              39,834            $15.060        Perpetual
       372,500             372,500             $1.090        August 29, 2004
       100,000             100,000             $0.600        October 31, 2004
     1,750,000           1,750,000             $1.150        November 2, 2004
        50,000              50,000             $0.330        December 10, 2004
       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
        92,145              92,145             $0.200        November 13, 2008
       250,000             250,000             $0.330        July 14, 2009
       750,000             750,000             $0.001        February 12, 2012
   -----------          ----------             ------
    17,386,586          17,386,586             $1.243
   ===========          ==========             ======

     The Company is obligated under the terms of subscription agreements for
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 $.015 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 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


                                      F-27
<PAGE>

$0.15 per share for Bridge II notes, which 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.

         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 additional anti-dilution provisions, over and above the
standard anti-dilution provisions included in all warrants which cover dilution
caused by 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,
warrants, etc. 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.
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 a new
warrant to the holders entitling them to purchase 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 expired November 19, 2003. The new warrants will
only contain the standard anti-dilution provisions included in all other
warrants.

         STOCK APPRECIATION RIGHTS

         At December 31, 2002 and 2001, MDI had 450,000 stock appreciation
rights (SARs) outstanding. These SARs, issued in 1989, have an exercise price of
$0.30 and could be exercised through November 20, 2001. These SARs are deemed
automatically exercised on November 20, 2001 if not done so at the option of the
holder. In general, each SAR entitles the holder to receive upon exercise an
amount equal to the excess, if any, of the market value per share of Common
Stock at the date of exercise over the exercise price of the SAR, plus any
dividends or distributions per share made by MDI prior to the exercise date. In
lieu of making cash payments, MDI may elect and intends, to issue shares of
Common Stock. MDI recorded compensation expense in fiscal years prior to 2002,
to reflect the difference between the closing market price of MDI's common stock
and the exercise price of the SARs. Since the SARs were deemed exercised at
November 20, 2001, no additional entries were required for 2002 or 2003.

         SHARES OF COMMON STOCK

         As a result of the issuance of numerous convertible securities,
including the above Convertible Promissory Notes and related warrants, MDI does
not have sufficient shares of common stock authorized to issue upon exercise of
all of the currently outstanding convertible securities, warrants and options.
The issuance of shares of common stock pursuant to any new financing arrangement
is subject to the Company obtaining shareholder approval to increase the
authorized shares of common stock of the Company and the Company filing an
amended Certificate of Incorporation. The Board of Directors is considering an
increase in the number of authorized shares of common stock from 100,000,000
shares to 300,000,000 shares, although the Board has not made a final decision
on the issue. Any ultimate Board approved action requires a vote of the
stockholders. The Board intends to place this issue on the agenda at the next
annual meeting of the stockholders or at a special meeting to be called for this
purpose. The failure to have a sufficient number of authorized shares may
constitute a breach of one or more of MDI's agreements governing issuance of
such securities.

NOTE 9.           LEASES

         As of December 31, 2003, the Company currently leases approximately
5,700 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, 2003 and 2002 was $125,000 and $179,000, respectively.

                                      F-28
<PAGE>

         The lease obligation relates to the pre-merger office location for
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 the two payments totaling $27,448 were paid and a balance of four
monthly payments totaling $54,896 remains. In addition, discussions regarding
the issuance of shares of common stock for the balance of the settlement are
ongoing and subject to an increase in the authorized shares.


         Future minimum annual lease payments under these leases as of December
31, 2003 are (in thousands):

<TABLE>
<CAPTION>
                                                                                                         Accumed
                                                                                          Operating       Lease
              Year                                                                         Leases      Obligation
              ----                                                                         ------      ----------
              <S>                                                                           <C>          <C>
              2004....................................................................      $129         $ 327
              2005....................................................................      $133
              2006....................................................................      $137
              2007....................................................................      $141
              2008....................................................................      $ 121
                                                                                            -----        -----
              Total lease payments....................................................      $ 661        $ 327
                                                                                            =====        =====

              Amount of interest included in the minimum lease payments...............                   $ (48)
                                                                                                         ------

              Carrying value of lease obligation......................................                   $ 279
                                                                                                          ====
</TABLE>


NOTE 10           INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                               2003         2002
                                                                                               ----         ----
<S>                                                                                          <C>           <C>
Deferred tax assets related to:
Net operating loss carryforwards........................................................     $ 31,407      $ 27,833
Research and Development Credit.........................................................          642           656
    Writedown of patents................................................................          110           110
    Writedown of goodwill...............................................................          113            --
      Accrued expenses..................................................................          106           367
                                                                                             --------      --------
                                                                                               32,378        28,966
           Less valuation reserve.......................................................       32,378        28,966
                                                                                             --------      --------
         Net deferred tax asset.........................................................     $     --      $     --
                                                                                             ========      ========
</TABLE>

         At December 31, 2003, the Company had domestic net operating loss
carryforwards aggregating approximately $78,500,000. For financial reporting
purposes, this 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 $3,302,000 and $3,947,000 for the years ended
December 31, 2003 and 2002, 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 the 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 2004 to 2014.

                                      F-29
<PAGE>


NOTE 11.          EQUITY INCENTIVE PLAN AND EMPLOYEE STOCK PURCHASE PLAN

         On May 25, 1999, stockholders approved the establishment of the 1999
Equity Incentive Plan effective as of June 1, 1999. 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 ten 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 an 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.

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

         MDI applies APB Opinion No. 25 and related interpretations in
accounting for options granted to employees under the Equity Incentive Plan. No
compensation cost was recorded during 2003 or 2002 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 shareholders would have been changed to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                                      FOR THE YEAR ENDED DECEMBER 31,
                                                                         2003              2002
                                                                (in thousands except for per share amounts)

<S>                                                                    <C>              <C>
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS AS REPORTED.............    $ (11,060)       $ (13,972)
Deduct: Total stock-based compensation expense determined
    under the fair value based method for all awards and
    forfeitures, net of related taxes..............................          213             (345)
                                                                       ---------        ----------
PRO FORMA NET LOSS APPLICABLE TO COMMON SHAREHOLDERS...............    $ (10,847)       $ (14,317)
                                                                       ==========       ==========
Basic loss per share applicable to common
    shareholders - as reported.....................................    $   (.27)        $    (.49)
                                                                       =========        ==========
Basic and diluted loss per share applicable to common
    shareholders - pro forma.......................................    $   (.27)        $    (.50)
                                                                       =========        ==========
</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 5% and 6% for the 2003 and 2002
periods, respectively; dividend yields of zero; volatility factors of the
expected market price of the Company's common stock of 208% and 90% 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:


                                      F-30
<PAGE>

<TABLE>
<CAPTION>
                                                                                                           Weighted
                                                                                                            Average
                                                                                                           Exercise
                                                                                           Options           Price
                                                                                           -------           -----
<S>                                                                                         <C>           <C>
OUTSTANDING AT DECEMBER 31, 2001..................................                        3,792,496
  Granted.........................................................                          686,833       $    0.4104
  Exercised.......................................................                         (361,000)      $    0.3937
Forfeited - assumed in acquisition................................                         (321,812)      $    6.7961
Forfeited.........................................................                         (289,000)      $    1.0702
                                                                                        -----------
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
                                                                                        ===========
EXERCISABLE AT DECEMBER 31, 2003..................................                         2,731,981      $     1.329
                                                                                        ===========

Weighted average fair value of options granted in 2003............                                        $    0.3144

</TABLE>

         At the Annual Meeting on May 25, 1999, the stockholders also approved
the Employee Stock Purchase Plan. The 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

         At December 31, 2003, MDI was contractually committed to pay $30,000 to
a consultant for services to be performed during 2004.

         On October 11, 2001, MDI obtained a 30% investment in Cell Solutions,
LLC. Cell Solutions was formed for the purposes of developing and improving
slide preparation systems. As consideration, MDI provided Cell Solutions
five-year warrants to purchase 172,120 shares of common stock with an exercise
price of $0.82. These warrants were valued using Black-Scholes and determined to
have a value of $127,000. MDI has included the value of these warrants as an
investment at December 31, 2002 and 2001. 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 future benefit or revenue stream.

         MDI is contractually committed to issue a total of 1,549,086 warrants
with the same terms based upon delivery of certain products by Cell Solutions.
As of December 31, 2003, Cell Solutions had not delivered these products and MDI
was not liable for the issuance of the warrants.

NOTE 13.          LEGAL PROCEEDINGS

         SETTLED DURING 2002 AND 2003

         On October 20, 2000, MDI filed suit in Circuit Court of Cook County,
Illinois (Case No. 00 CH 15652), against SpectRx, Inc. and Welch Allyn, Inc.
MDI's suits sought injunctive relief and damages from SpectRx based on a
complaint of fraud and breach of certain confidentiality agreements with regard
to MDI's business plans, marketing plans, and technology related to in-vivo
diagnostic devices. MDI's claim arose from disclosure of confidential
information to SpectRx in the course of negotiations contemplating a joint
venture to develop new medical products. The information covered cancer
detection systems relying on fluorescence technologies as well as bio-molecular
marking agents for use in applications within and outside of the body. MDI also
provided SpectRx with marketing plans, revenue, income and cash flow
projections, product development and launch plans, and product distribution
strategies. In addition, MDI provided SpectRx with certain confidential
technical information regarding patent applications, measurement technologies,
design specifications, quantitative analyses, optimization techniques,
positional information for cellular mapping, and other technical specifications.
Subsequent to the disclosure of MDI's information to SpectRx, they entered into
a business arrangement with Welch Allyn to develop products of a similar nature
to MDI's. The suit also charged SpectRx and Welch Allyn with misappropriation of
MDI's trade secrets in violation of the Illinois Trade Secrets Act.

         MDI's suit was filed in response to a suit filed by SpectRx in the
Superior Court of Gwinnett County, Georgia (Civil Action NO. 00-A-7604 1),
seeking a declaratory judgment (but no monetary damages or other relief) that
SpectRx

                                      F-31
<PAGE>

did not breach the confidentiality agreements as charged in MDI's suit.
On July 5, 2001, MDI filed counterclaims, similar to the claims outlined in
MDI's Illinois suit, to the SpectRx action in Georgia.

         On February 1, 2002, MDI reached an out-of- court settlement with
SpectRx. Under the terms of the settlement, SpectRx paid a $150,000 lump sum
cash payment to MDI, and MDI granted SpectRx an option to license certain of
MDI's technology. Additional terms of the settlement are confidential. Under the
terms of the settlement, neither party admitted any liability or wrongdoing.
Welch Allyn also was a party to the settlement agreement.

         In 2001, Dawn H. Grohs, a former employee / consultant to the Company,
filed suit against the Company and certain affiliated companies, as well as two
of the Company's senior officers (C.A. No. 02-C-1010 (U.S. District Court for
the Northern District of Illinois). Ms. Grohs' claimed fraud, unjust enrichment,
misrepresentation, breach of contract and quantum merit related to her
assertions that the defendants allegedly failed to provide her with equity;
tortuous interference with contractual relations and intentional interference
with contractual relations based on alleged encouragement of changes to the
business relationship with Ms. Grohs; breach of the covenant of good faith and
fair dealing, negligent infliction of emotional distress and intentional
infliction of emotional distress based on defendants' treatment of Ms. Grohs;
and violation of state law for alleged unfair and deceptive acts by defendants
for the purpose of inducing Ms. Grohs to continue to provide services without
compensation. Ms. Grohs sought $85,000 in wages, $40,250 in expenses, equity for
contributions and efforts during the formation of certain of the Company's
affiliates, payment of a sum to be determined by the court for the intentional
and/or negligent infliction of emotional distress, a finding that the actions of
defendants constitute unfair and deceptive acts, and that the court treble the
damages awarded. In addition to the specific relief described above, each count
seeks an award of attorneys' fees and costs and such other and further relief
the court deems just and appropriate. In October 2002, MDI reached an
out-of-court settlement with Ms. Grohs. Under the terms of the settlement, MDI
paid Ms. Grohs $5,000 in cash and issued 400,000 unregistered shares of its
common stock to her. MDI calculated a fair value of $84,000 for the shares of
its common stock. MDI also granted Ms. Gross an option to purchase 400,000
shares of MDI common stock at an exercise price of $0.20 per share. One third of
the option vested immediately and the remaining two thirds vest in equal amounts
on the first and second annual anniversary dates of the grant.

         The Company and its subsidiaries Samba Sarl and AccuMed international,
Inc. (collectively, "MDI") are parties to an Amended License and development
Agreement with Ventana Medical Systems, Inc. ("Ventana") dated October 31, 2001,
pursuant to which MDI has licensed certain intellectual property rights and
technical information to Ventana. Under the Amended License and Development
Agreement, Ventana was to produce an automated pathology imaging system using
the intellectual property rights and technical information licensed from MDI,
and Ventana was to pay MDI royalties based on the sales of such imaging system,
as well as software support fees related to licensed software rights. MDI and
Ventana were also parties to a Letter of Intent and Confidentiality Agreement
dated July 12, 2002. Disputes arose between MDI and Ventana regarding their
respective performance under the Amended License and Development Agreement and
the Letter of Intent. In November 2003, MDI and Ventana negotiated a settlement
and release, pursuant to which the Amended License and Development Agreement and
the Letter of Intent were modified. Under the terms of the settlement and
release, among other things, MDI issued a Promissory Note to Ventana in the
principal amount of $62,946 and is also required to deliver two AcCell 2001
workstations. Ventana waived its rights to any prepaid royalties or other fees
paid to MDI or its subsidiaries upon signing of the original agreements.

         PENDING AS OF DECEMBER 31, 2003 AND SETTLED DURING 2004

         On May 22, 2001, a judgment in the amount of $312,000 plus interest was
entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in
favor of Merrill Corporation. The judgment was the result of the settlement of
an action brought by Merrill claiming unpaid fees for financial printing
services, provided to AccuMed in 1996, and related interest and legal costs
totaling in excess of $400,000. Under terms of the settlement and the related
judgment, AccuMed was required to make 12 monthly payments of $26,000, and a
final payment to include all interest accrued on declining unpaid balance of the
judgment over the term of payment. AccuMed made 7 payments in accordance with
the terms of the settlement and ceased to make any additional payments. In May
of 2002, Merrill asserted its rights under the original judgment and filed a
citation to discover assets of AccuMed and obtain the remaining amount due. On
October 17, 2002, MDI reached an agreement with Merrill whereby MDI assumed
responsibility for the remaining unpaid amount of the judgment and related costs
totaling $145,000 and agreed to pay such amount no later than November 15, 2002.
In February

                                      F-32
<PAGE>

2004, MDI settled the amount due to Merrill and fully satisfied all
obligations owed to Merrill. The citation proceedings against MDI were
dismissed.

         On July 31, 2002, MDI entered into a settlement and mutual release
agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of
breach of representations and warranties included in an agreement under which
AccuMed sold its microbiology business and related assets to Trek in 1999. Under
the settlement agreement, MDI executed an $80,000 promissory note in favor of
Trek. The note required principal payments of $40,000 each on September 1 and
December 1, 2002. MDI made the initial payment and Trek filed suit against MDI
(Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03 492582)) on January
23, 2003 to collect the remaining $40,000 plus interest at 8% per annum and
legal and other costs. On April 18, 2003, judgment was entered against MDI in
the amount of $40,000 plus interest. Trek initiated citation proceedings against
MDI in the Circuit Court of Cook County, Illinois in 2003. In March 2004, MDI
entered into a final settlement agreement with Trek and fully satisfied all
amounts due to Trek. The citation proceedings against MDI were dismissed.

         PENDING AS OF DECEMBER 31, 2003

         Prior to MDI's acquisition of AccuMed, Garrett Realty, Inc. filed suit
against AccuMed for unpaid rent and related expenses under a lease for premises
located at 900 and 920 N. Franklin in Chicago, Illinois (Circuit Court of Cook
County (Case No. 01 M1 725821)). Garrett originally claimed approximately
$50,000 was due them. Following completion of MDI's acquisition of AccuMed,
management vacated AccuMed's leased facility and consolidated its operations
into MDI's headquarters 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 and against AccuMed in the amount of approximately
$157,000. On December 20, 2002, pursuant to a court order, Garret seized
approximately $12,500 from an MDI bank account, as a partial payment against the
judgment amount. The unpaid remainder of the judgment, approximately $136,000
including interest, will continue to accrue interest until paid in full. Since
AccuMed had a continuing obligation for the minimum lease payments, MDI recorded
a $290,000 lease obligation in accounting for the AccuMed merger based on the
present value of the future payments. MDI is contesting the right of Garrett to
pursue collection of the judgment against the assets of MDI. Management believes
that the amount of the accrued lease obligation recorded as of December 31, 2003
is sufficient to cover any remaining expenses of this litigation and the related
judgment. During the first quarter of 2004, MDI reached a preliminary settlement
on the outstanding judgment, which required six monthly payments of $13,724
each. MDI has made the first two required monthly payments. MDI also agreed to
issue 280,000 shares of its common stock as part of the final settlement. The
issuance of the shares is subject to shareholder approval of an increase in the
number of authorized shares of common stock.

         On March 28, 2003, The Cleveland Clinic Foundation filed suit against
MDI (United States District Court for the Northern District of Ohio, Easter
Division, (Case No. 1:03CV0561)) seeking approximately $315,000 plus interest
and attorney fees and costs. The sum in question pertains to remaining unpaid
fees for certain clinical trial work conducted by The Cleveland Clinic
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. At
December 31, 2003, MDI has recorded the full amount owing to The Cleveland
Clinic Foundation as a liability in its accounts. MDI is currently engaged in
settlement discussions with The Cleveland Clinic Foundation.

         On January 2, 2003, Bowne of Chicago, Inc.("Bowne") filed suit against
MDI (Circuit Court of Cook County, County Department-Law Division (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 by Bowne
during the period October 25, 2001 through November 7, 2002. While MDI is
actively defending itself against the suit claiming the charges for printing
services provided during the period mentioned above were excessive, management
has taken a conservative position and recorded the entire amount of the Bowne
invoices as outstanding accounts payable on the records of MDI. MDI is currently
engaged in settlement discussions with Bowne.

         On January 9, 2003, Monsun, AS ("Monsun") filed suit against Peter
Gombrich, the Chairman, (United States District Court for the Northern District
of Illinois Eastern Division (Case No. 03C 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 in relation to Monsun's grant of
an extension in the maturity date of a convertible promissory note in the

                                      F-33
<PAGE>

principal amount of $500,000 issued by MDI on November 1, 2000. 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 maturity date extensions in
exchange for various warrants issued by MDI entitling the holder to purchase
shares of 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 common stock, however, in
order to comply with securities laws, MDI issued the shares of our common stock
to Monsun with a restrictive legend, which permits their sale only in compliance
with Rule 144 of the ACT. MDI has 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 of 2004, Monsun obtained a judgment against Mr. Gombrich in
the amount of $675,000. Monsun is currently seeking to obtain an additional
$545,000 to cover legal fees and costs incurred in enforcing the Guaranty
Agreement. Since Mr. Gombrich's potential liability under the suit, including
the failure to deliver registered shares of common stock, is the result of the
failure of MDI to pay the principal amount of its convertible promissory note
when due, the Board of Directors has agreed that MDI will assume responsibility
for Mr. Gombrich's obligations under the guaranty, including legal costs.
Management and counsel are unable to determine the result of this pending
litigation as of March 31, 2004.

         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 a defendant in several wage claims brought by former employees
seeking to collect amounts due for unpaid wages and severance benefits. MDI has
recorded the amounts due in its records and is attempting to settle these
actions

         On May 16, 2003, the Company, together with its subsidiaries, AccuMed
International, Inc. ("AccuMed") and Oncometrics Imaging Corp. ("Oncometrics"),
filed suit against MonoGen, Inc. ("MonoGen"), its President, Norman J. Pressman
("Pressman"), and another individual, in the Circuit Court of Cook, County,
Illinois (Docket No. 03 CH 08532) (the "State Case"). The dispute that gave rise
to the State Case arose out of two license agreements, one between AccuMed and
MonoGen, and the other between Oncometrics and MonoGen, in which the rights to
limited use of certain intellectual property were granted to MonoGen in return
for one-time license fee payments totaling $500,000 (the "License Agreements").
At the time the License Agreements were entered into, the Company had not yet
acquired AccuMed and Oncometrics. A portion of the intellectual property subject
to the License Agreements had originally been licensed by Oncometrics from an
entity now known as the British Columbia Cancer Agency ("BCCA"). Pressman was
the President of both AccuMed and Oncometrics when the License Agreements were
negotiated and executed. Shortly after the License Agreements were signed,
Pressman became the President of MonoGen. The Complaint filed in the State Case
(the "State Case Complaint") alleged that certain rights to the subject
intellectual property were transferred to MonoGen at a below-market price. The
State Case Complaint also asserted that the consent of BCCA to the sublicensing
of its technology, which was required by the Oncometrics License Agreement, had
not been obtained, and that, to the extent BCCA's consent was required, Pressman
breached his fiduciary duties to AccuMed and Oncometrics by failing to obtain
such consent. The State Case Complaint also alleged that Pressman breached his
fiduciary duties by negotiating below-market license fees for the subject
technology with his future employer, MonoGen.

         Almost a year before the State Case Complaint was filed, MonoGen had,
in July, 2002, initiated an arbitration proceeding against the Company, AccuMed
and Oncometrics (collectively, the "MDI Group") in which MonoGen claimed that
the MDI Group was violating MonoGen's rights, and breaching many of the MDI
Group's obligations, under the License Agreements. In an effort to resolve this
dispute, the MDI Group and MonoGen entered into a settlement agreement (the
"Technology Agreement") as of December 23, 2002, pursuant to which certain
understandings were reached, including an agreement concerning the MDI Group's
sales of certain systems to a number of specifically identified customers, and
the royalties to be paid by the MDI Group to MonoGen based on those sales. The
Technology Agreement, which also included an arrangement for the MDI Group's
maintenance of the patents licensed to MonoGen, did not have the desired effect
of finally resolving the dispute among the parties. Thus, the MDI Group filed
the State Case Complaint. MonoGen was able to obtain a dismissal for itself from
the State Case on the ground that all disputes arising from the agreements with
the MDI Group members were required to be submitted to arbitration. The State
Case continued against the individual defendants, however.

                                      F-34
<PAGE>

         In July, 2003, MonoGen proceeded to file a Second Demand for
Arbitration against the members of the MDI Group, but no proceedings were held
with respect to that demand. In December, 2003, MonoGen filed a Third Amended
Demand for Arbitration, in which MonoGen alleged that the MDI Group had breached
its agreements with MonoGen by, among other things, (i) licensing other parties
to use technologies that the MDI Group exclusively licensed to MonoGen, (ii) not
maintaining the patents that were the subject of the MDI Group's licenses to
MonoGen, and (iii) not providing MonoGen with information in regard to
improvements made to the technologies licensed to MonoGen by the MDI Group.
MonoGen also claimed that the MDI Group had defamed MonoGen in statements
impugning MonoGen's rights to the licensed technologies. The MDI Group has
denied MonoGen's claims, and has asserted in a counterclaim that the agreements
relied upon by MonoGen are invalid. The parties are presently engaged in
discovery with respect to this arbitration and the claims asserted in the
arbitration are scheduled for a hearing before a panel of American Arbitration
Association arbitrators in June, 2004.

         Because the same basic issues were involved in both the State Case and
the arbitration proceeding, and because the License Agreements and the
Technology Agreement can only be declared invalid in the arbitration
proceedings, the MDI Group decided to concentrate all of its efforts in regard
to this matter in the arbitration and therefore entered into an agreement with
the remaining defendants in the State Case in February, 2004 to have that suit
fully and finally dismissed.

         On April 14, 2003, MDI received a notification from the attorney for
the licensor, Dr. Bruce Patterson, M.D., Ph.D, under the License and Development
Agreement covering certain HPV technology, which forms the basis for the In-Cell
HPV test, indicating that the licensor intended to terminate the license in
accordance with a specific clause of the license, which permits termination in
the event the Company makes an assignment for the benefit of creditors or
bankruptcy, or otherwise relinquishes or loses control of all its assets. On
April 15, 2003, MDI informed the attorney that the facts used by the licensor to
invoke the termination right were incorrect and that MDI was still in control of
all of the assets and that such assets are pledged as security under debt
instruments and that such pledges are not included under events which would
permit the licensor to terminate the license. MDI and their counsel, believe
that MDI would prevail should the licensor attempt to pursue a termination
action.

         On July 2, 2003, Dr. Patterson and his company Invirion, Inc. filed
suit against MDI in the Circuit Court of Cook County, Illinois (Case No. 03 L
7995). Dr. Patterson seeks approximately $86,000 that he claims are due from MDI
under an agreement for his scientific consulting services. This is a dispute
with the licensor over completion of the third milestone of the license under
which completion requires process and procedure verification by an independent
third party. This verification requirement has not been satisfied as of yet, and
therefore MDI is contesting this claim. Invirion, in a separate claim, seeks
approximately $57,500 for certain HPV test kits that it claims were sold to MDI.
MDI is engaged in settlement discussions with Dr. Patterson and Invirion to
resolve all outstanding issues.

         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
claims that the principal amount of the obligation due from MDI is approximately
$86,700. However, Georgia Research Institute is seeking to collect approximately
$315,300 pursuant to an interest provision of 10% per month. MDI is contesting
this lawsuit, but has made attempts to resolve this dispute by settlement.

         NEW PROCEEDINGS 2004

         On February 18, 2004, current and former employees Daniel Kussworm,
Jennifer Kawaguchi, and Susan Keesee filed suit against MDI and one of its
officers in the Circuit Court of Cook County, Illinois (04 L 1941). These
individuals are seeking to recover wages and other compensation allegedly due to
them. Mr. Kussworm seeks approximately $68,600, Ms. Kawaguchi seeks
approximately $37,200, and Ms. Keesee seeks approximately $124,800; all amounts
exclude interest, court costs, and attorney fees. MDI is engaged in settlement
discussions with these three individuals to resolve all outstanding issues.

         MDI received information that on January 29, 2004, the law firm
Ungaretti & Harris filed suit against Accumed International Inc. in the Circuit
Court of Cook County, Illinois (04 L 1101), to collect for fees rendered prior
to December 31,

                                      F-35
<PAGE>

2003. Although Accumed has not been formally served with summons and has not
seen the legal complaint, it is believed that Ungaretti & Harris is seeking to
collect approximately $179,230.

NOTE 14.          SUBSEQUENT EVENTS

         CONVERSIONS OF CONVERTIBLE SECURITIES

         From January 1, 2004 through March 31, 2004, holders of $1,200,000
principal amount of Bridge I Convertible Promissory Notes elected to convert
their notes and related accrued interest of $152,000 into 9,010,410 shares of
unregistered common stock.

         From January 1, 2004 through March 31, 2004, holders of $1,396,000
principal amount of Bridge II Convertible Promissory Notes elected to convert
their notes and related accrued interest of $140,000 into 11,708,118 shares of
unregistered common stock. Included in the above conversion amounts are amounts
due Peter P. Gombrich, the Company's Chairman, of $305,667 in Bridge II
principal and $11,431 in accrued interest, which were converted into 2,113,987
shares of unregistered common stock.

          During the first three months of 2004 holders of Series C Convertible
Preferred Stock elected to convert 910,000 of preferred shares and accrued
dividends into 5,577,173 shares of unregistered common stock.

         WARRANTS

         On July 18, 2003, Mr. Milley, a director, 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 $120,000 currently owing to Azimuth and Cadmus, MDI agreed to
issue a new five-year warrant entitling the holders to purchase 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 holder to purchase 500,000 shares of
common stock at an exercise price of $0.30. 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. Although
an agreement has been reached in principal between the parties, no definitive
agreement has yet been signed. MDI is currently awaiting receipt of final signed
documents.

         SECURED CONVERTIBLE NOTE FINANCING

         Beginning in January 2004, Bathgate Capital Partners, LLC began an
issue of a maximum offering of $4,000,000 and a minimum of $1,500,000 in
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 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 trading days, the daily average trading volume is 250,000, the
underlying shares are registered for sale, and the Convertible Promissory Note
to an affiliate Suzanne M. Gombrich has been paid or converted into common
shares. The holders were also granted a security position in all of the
Company's assets. MDI granted each note holder the right to receive a 25%
warrant coverage on all money invested, therefore for every $100,000 invested,
an investor will receive 25,000 warrants to purchase common stock at an exercise
price of $0.15. The warrants will expire on December 31, 2008. As a requirement
of the escrow, the funds would not be released until the following requirements
were met:


                                      F-36
<PAGE>

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

o        Suzanne Gombrich's Convertible Promissory Note was paid or converted
         into common shares

o        Satisfactory due diligence is completed by Bathgate Capital Partners,
         LLC

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

o        Peter P. Gombrich, MDI's Chairman and CEO will resign his position as
         CEO of the Company

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 IRS taxes, and
working capital.

         OTHER FINANCING

         Beginning in February 2004, MDI began a separate offering of
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 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 trading days, the daily average trading volume is 250,000,
the underlying shares are registered for sale, and the Convertible Promissory
Note to an affiliate Suzanne M. Gombrich has been paid or converted into common
shares. The holders were also granted a security position in all of the
Company's assets. MDI granted each note holder the right to receive a 25%
warrant coverage on all money invested, therefore for every $100,000 invested,
an investor will receive 25,000 warrants to purchase common stock at an exercise
price of $0.15. The warrants will expire on December 31, 2008. Through March 31,
2004 the Company had issued $1,292,000 in principal amount of convertible
promissory notes in exchange for cash.

         On April 2, 2004, as a condition of the Bathgate Capital Partners
issuance, the 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. The payment on the $1,000,000 Convertible Promissory Note and $126,114
of accrued interest as of April 2, 2004 was in the form of $936,114 in cash and
1,900,000 shares of common stock of the Company.

         RESIGNATION OF OFFICER

         On February 19, 2004, Peter M. Gombrich resigned as Chief Executive
Officer and was appointed Executive Vice President of the Company. Also on
February 19, 2004, the Board of Directors appointed Denis M. O'Donnell M.D., a
current Director of the Company, to be President and Chief Executive Officer.

         LITIGATION

                  SETTLED BETWEEN JANUARY 1, 2004 AND MARCH 31, 2004

         On May 22, 2001, a judgment in the amount of $312,000 plus interest was
entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in
favor of Merrill Corporation. The judgment was the result of the settlement of
an action brought by Merrill claiming unpaid fees for financial printing
services, provided to AccuMed in 1996, and related interest and legal costs
totaling in excess of $400,000. Under terms of the settlement and the related
judgment, AccuMed was required to make 12 monthly payments of $26,000, and a
final payment to include all interest accrued on declining unpaid balance of the
judgment over the term of payment. AccuMed made 7 payments in accordance with
the terms of the settlement and ceased to make any additional payments. In May
of 2002, Merrill asserted its rights under the original judgment and filed a
citation to discover assets of AccuMed and obtain the remaining amount due. On
October 17, 2002, MDI reached an agreement with Merrill whereby MDI assumed
responsibility for the remaining unpaid amount of the judgment and related costs
totaling $145,000 and agreed to pay such amount no later than November 15, 2002.
In February 2004, MDI settled the amount due to Merrill and fully satisfied all
obligations owed to Merrill. The citation proceedings against MDI were
dismissed.

                                      F-37
<PAGE>

         On July 31, 2002, MDI entered into a settlement and mutual release
agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of
breach of representations and warranties included in an agreement under which
AccuMed sold its microbiology business and related assets to Trek in 1999. Under
the settlement agreement, MDI executed an $80,000 promissory note in favor of
Trek. The note required principal payments of $40,000 each on September 1 and
December 1, 2002. MDI made the initial payment and Trek filed suit against MDI
(Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03 492582)) on January
23, 2003 to collect the remaining $40,000 plus interest at 8% per annum and
legal and other costs. On April 18, 2003, judgment was entered against MDI in
the amount of $40,000 plus interest. Trek initiated citation proceedings against
MDI in the Circuit Court of Cook County, Illinois in 2003. In March 2004, MDI
entered into a final settlement agreement with Trek and fully satisfied all
amounts due to Trek. The citation proceedings against MDI were dismissed.

         NEW PROCEEDINGS 2004

         On February 18, 2004, current and former employees Daniel Kussworm,
Jennifer Kawaguchi, and Susan Keesee filed suit against MDI and one of its
officers in the Circuit Court of Cook County, Illinois (04 L 1941). These
individuals are seeking to recover wages and other compensation allegedly due to
them. Mr. Kussworm seeks approximately $68,600, Ms. Kawaguchi seeks
approximately $37,200, and Ms. Keesee seeks approximately $124,800; all amounts
exclude interest, court costs, and attorney fees. MDI is engaged in settlement
discussions with these three individuals to resolve all outstanding issues.

         DELINQUENT PAYROLL TAX LIABILITIES

         MDI is currently delinquent in filing certain Federal and State Income
Tax returns for 2002 and 2001. MDI is also delinquent in paying a portion of
Federal and State employee and employer payroll taxes for 2003, 2002, and 2001.
The delinquent taxes relating to 2003 and 2002 were paid in full in April 2004.

         The Company owed $686,000 and $678,000 as of December 31, 2003 and
2002, respectively, in past-due 2001 payroll taxes, including $258,000 and
$250,000 respectively in assessed and estimated statutory penalties and
interest. MDI has submitted payments of $150,000 against this liability amount
and is currently in the process of communicating through counsel with the
Internal Revenue Service regarding payment of the balance due. The Company has
lost all rights of appeal regarding the outstanding payroll tax liability and
could be subject to the seizure of its tangible and intellectual property in the
event a payment schedule is not agreed to with the Internal Revenue Service. MDI
included the amounts due, except for the unknown penalties and interest, as
liabilities in the accounting records and Consolidated Financial Statements for
the respective periods.

         SHORT-TERM LIQUIDITY PROBLEMS

         MDI continued to have severe liquidity problems and had insufficient
cash on hand to effectively manage the business during the first three months of
2004. In March 2004, Bathgate Capital Partners LLC raised $1,500,000 funds from
the Company issuance of Convertible Promissory Notes of which the majority of
the funds were used for the repayment of the Suzanne Gombrich note. In addition,
MDI began a separate offering of Convertible Promissory Notes and has raised
$1,292,000 for the payment of legal judgements, IRS taxes, wage claim
settlements, and current operating needs. MDI has continued to raise operating
cash through the date of this report through the issuance of additional
Convertible Promissory Notes and management is 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, Property Damage and Workers Employment Compensation. These
policies were all cancelled retroactive to October 29, 2002. MDI is currently
working with insurance providers to reinstate the aforementioned insurance
coverage.

                                      F-38
<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 Uncollectable
    accounts receivable.................
Year Ended December 31, 2003............    $     145         $       0         $     95         $       0          $   50
Year Ended December 31, 2002............    $       4         $     141         $      0         $       0          $  145
Reserves and allowances which support
   balance sheet caption reserves.......

Warranty reserves

Year Ended December 31, 2003............    $      21         $       0         $     21         $       0          $   --
Year Ended December 31, 2002............    $      20         $       1         $      0         $       0          $   21

Inventory Reserves

Year Ended December 31, 2003............    $       2         $       0         $      2         $       0          $   --
Year Ended December 31, 2002............    $       2         $       0         $      0         $       0          $    2
</TABLE>