SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549



                                  FORM 10-QSB

(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.

 For the quarterly period ended June 30, 2003

(  ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT

For the transition period from ___________ to ___________.

                        Commission File number   0-935
                          ___________________________


                          MOLECULAR DIAGNOSTICS, INC.
       (Exact name of Small Business Issuer as Specified in Its Charter)

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

                      414 North Orleans Street, Suite 800
                               Chicago, IL 60610
                   (Address of Principal Executive Offices)

                                (312) 222-9550
                          (Issuer's Telephone Number)

                                      N/A
  (Former name, former address and former fiscal year, if changed since last
                                    report)

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

                     APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.

COMMON STOCK, $0.001 PAR VALUE                        38,842,180
            (Class)                     Outstanding shares as of July 31, 2003

Transitional Small Business Disclosure Format (Check One):  Yes    No  X
                                                               ---    ---

<PAGE>

                          MOLECULAR DIAGNOSTICS, INC.
                        QUARTERLY REPORT ON FORM 10-QSB
                                 JUNE 30, 2003

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                       PAGE
PART I. -- FINANCIAL INFORMATION
<S>                                                                    <C>
Item 1.Financial Statements (Unaudited)

   a) Consolidated Balance Sheets - June 30, 2003 and
         December 31, 2002 ..........................................    3

   b) Consolidated Statements of Operations -- Three months and six
         months ended June 30, 2003 and 2002 ........................    4

   c) Consolidated Statements of Cash Flows -- Three months and six
         months ended June 30, 2003 and 2002 ........................    5

   d) Notes to Consolidated Financial Statements - June 30, 2003 ....    6

Item 2.Management's Discussion and Analysis or Plan of
            Operation ...............................................   17

Item 3.Controls and Procedures ......................................   22

PART II. -- OTHER INFORMATION

Item 1.Legal Proceedings ............................................   23

Item 2.Changes In Securities and Use of Proceeds ....................   25

Item 3.Defaults Upon Senior Securities ..............................   26

Item 4.Submission of Matters to a Vote of Security Holders ..........   26

Item 5.Other Information ............................................   26

Item 6.Exhibits and Reports on Form 8-K .............................   26

SIGNATURES ..........................................................   27

EXHIBIT INDEX .......................................................   28

</TABLE>

                                       2

<PAGE>
PART I. -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                 MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
                   (FORMERLY AMPERSAND MEDICAL CORPORATION)

                          CONSOLIDATED BALANCE SHEETS
                            (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                             JUNE 30,  DECEMBER 31,
                                                               2003        2002
                                                               ----        ----
                                                            (Unaudited)
<S>                                                         <C>        <C>
                                    ASSETS
Current Assets:
   Cash and cash equivalents...............................   $  222      $  42
   Accounts receivables, net of allowance for doubtful
      accounts of $ 65  and  $145 at June 30, 2003 and
      December 31, 2002, respectively......................      365        307
   Inventories.............................................      141        427
   Refundable taxes........................................       47         56
   Prepaid financings costs................................       --        288
   Prepaid expenses and other current assets...............      130         69
                                                              ------     ------
         Total current assets..............................      905      1,189
Fixed Assets, net..........................................      531        666
Other Assets
   Licenses, patents, and technology, net of amortization..    7,191      7,521
   Goodwill, net of amortization...........................      283        283
                                                              ------     ------
         Total assets......................................   $8,910     $9,659
                                                              ======     ======

                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
   Accounts payable........................................   $5,383     $5,202
   Customer and other deposits.............................       --         24
   Accrued payroll costs...................................    2,006      1,856
   Accrued expenses........................................    1,305      1,143
   Deferred revenue........................................      503        630
   Revolving line of credit................................      226        207
   Due to stockholder......................................      141        127
   Lease obligation........................................      279        279
   Notes payable--related party............................      347         65
   Notes payable...........................................    5,253      4,585
                                                              ------     ------
         Total current liabilities.........................   15,443     14,118
Deferred revenue, less current portion.....................       90        120
                                                              ------     ------
         Total liabilities.................................   15,533     14,238
                                                              ------     ------
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value; shares authorized -
    10,000,000; shares issued and outstanding - 2,544,621
    and 2,781,024, at June 30, 2003 and December 31, 2002,
    respectively...........................................   13,004     16,958
Common stock, $0.001 par value; shares authorized -
    100,000,000; shares issued and Outstanding -
    37,442,180 and 36,440,700, at June 30, 2003 and
    December 31, 2002, respectively........................       37         37
Additional paid-in-capital.................................   26,264     19,557
Treasury stock; 192,088 shares at June 30, 2003 and
    December 31, 2002......................................     (327)      (327)
Deferred compensation......................................       --        (11)
Accumulated deficit........................................  (45,372)   (40,642)
Accumulated comprehensive loss--
      Cumulative translation adjustment....................     (229)      (151)
                                                              ------     ------
         Total stockholders' equity (deficit)..............   (6,623)    (4,579)
                                                              ------     ------
         Total liabilities and stockholders' equity (deficit) $8,910     $9,659
                                                              ======     ======

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

                                       3


<PAGE>
                          MOLECULAR DIAGNOSTICS, INC.
                   (FORMERLY AMPERSAND MEDICAL CORPORATION)

                     CONSOLIDATED STATEMENTS OF OPERATIONS
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                           FOR THE SIX MONTHS     FOR THE THREE MONTHS
                                             ENDED JUNE 30,          ENDED JUNE 30,
                                         ----------------------  ----------------------
                                            2003        2002        2003        2002
                                         ----------  ----------  ----------  ----------
                                               (Unaudited)            (Unaudited)
<S>                                      <C>         <C>         <C>         <C>
Net revenues...........................  $    1,018  $    1,158  $      421  $      502
Operating expenses
   Cost of revenues....................         508         482         232         287
Research and development...............         319       2,535          88       1,602
   Selling, general, and administrative
     expenses..........................       3,210       4,422       1,122       2,039
                                         ----------  ----------  ----------  ----------
      Total operating expenses.........       4,037       7,439       1,442       3,928
                                         ----------  ----------  ----------  ----------
Operating loss.........................      (3,019)     (6,281)     (1,021)     (3,426)

Other income (expense):
   Interest (expense) -related party...         (35)         (9)        (32)         (8)
   Interest (expense) .................      (1,257)       (872)     (1,019)       (768)
   Gain on litigation settlement.......          --         151          --           1
   Other, net..........................           6          --           4          --
                                         ----------  ----------  ----------  ----------
      Total other income (expense).....      (1,286)       (730)     (1,047)       (775)
                                         ----------  ----------  ----------  ----------
Loss before income taxes...............      (4,305)     (7,011)     (2,068)     (4,201)
Income tax expense.....................          --          --          --          --
                                         ----------  ----------  ----------  ----------
Net loss...............................  $   (4,305) $   (7,011) $   (2,068) $   (4,201)
                                         ==========  ==========  ==========  ==========
Preferred stock dividend...............        (752)       (414)       (328)       (292)
                                         ----------  ----------  ----------  ----------
Net loss applicable to common
    stockholders.......................  $   (5,057) $   (7,425) $   (2,396) $   (4,493)
                                         ==========  ==========  ==========  ==========
Basic and fully diluted net loss per
    common share.......................  $    (0.12) $    (0.29) $    (0.06) $    (0.17)
                                         ==========  ==========  ==========  ==========
Weighed average number of common shares
    outstanding.......................   40,868,423  25,654,840  41,551,961  25,747,224
                                         ==========  ==========  ==========  ==========











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

                                       4


<PAGE>
                          MOLECULAR DIAGNOSTICS, INC.
                   (FORMERLY AMPERSAND MEDICAL CORPORATION)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          SIX MONTHS ENDED
                                                              JUNE 30,
                                                              --------
                                                           2003      2002
                                                           ----      ----
                                                             (Unaudited)
<S>                                                     <C>        <C>
Operating Activities:
   Net loss............................................  $(4,305)  $(7,011)
   Adjustments to reconcile net loss to net cash used
    for operating activities:
      Amortization of debt discount....................    1,024       683
      Depreciation and amortization....................      470       482
      Amortization of fees.............................      224        --
      Loss on sale of fixed assets.....................        1        --
      Stock, warrants, and options issued to
         non-employees for services....................      330       765
      Licensing fees recognized on preferred stock sale       --      (298)
      Compensation expense related to stock
         appreciation rights, stock options, and
         restricted stock..............................       11        81
      Interest expense paid with stock.................       --        79
      Changes in assets and liabilities:
         Accounts receivable, net......................      (31)      184
         Inventories...................................      298        66
         Refundable taxes..............................       13         2
         Due from (to) stockholder.....................       14        59
         Prepaid expenses and other current assets.....     (112)     (174)
         Accounts payable..............................      266       755
         Deposits......................................      (23)      (28)
         Deferred revenue..............................     (174)      (89)
         Accrued expenses..............................      259     1,342
                                                         -------   -------
Net cash used for operating activities.................   (1,735)   (3,102)
                                                         -------   -------
Cash used in investing activities:
   Expenditures for license, patents, and technology...       --        (4)
   Capital purchases...................................      (12)      (87)
                                                         -------   -------
   Net cash used for investing activities..............      (12)      (91)
                                                         -------   -------
Cash flows from financing activities:
   Proceeds from issuance of convertible notes payable.    1,126     2,600
   Proceeds from issuance of convertible notes payable,
     related party.....................................    1,015        25
   Note issued in payment of an expense................       72        --
   Payment of notes payable............................     (300)     (150)
   Proceeds from sale of fixed assets..................        8      (111)
                                                         -------   -------
Net cash provided by financing activities..............    1,921     2,364
                                                         -------   -------
Effect of exchange rate changes on cash and cash
 equivalents...........................................        6       (80)
                                                         -------   -------
Net increase (decrease) in cash and cash equivalents...      180      (909)
Cash and cash equivalents at the beginning of period...       42     1,025
                                                         -------   -------
Cash and cash equivalents at end of period.............  $   222   $   116
                                                         =======   =======

Supplemental disclosure of cash flow information:
Cash paid during the period for:
      Interest.........................................  $    17   $     8
Non-cash transactions during the period for:
      Deferred financing costs.........................  $   173   $    --
      Preferred stock and cumulative dividends
        converted into common stock....................  $ 4,378   $   345



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

                                       5


<PAGE>
                          MOLECULAR DIAGNOSTICS, INC.
                   (FORMERLY AMPERSAND MEDICAL CORPORATION)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          (UNAUDITED - JUNE 30, 2003)

NOTE 1.     ORGANIZATION

      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  through  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. has 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
designs,  develops,  and  markets  web-enabled software based systems for image
analysis, image capture, and image transmission and management for clinical and
industrial applications. Samba is also  developing  software used in the InPath
System. A majority of reported revenues prior to 2002  and  since  inception of
Molecular  Diagnostics,  Inc. have been generated by Samba. Since December  20,
2002, Samba has operated under the protection of the French Commercial Court in
compliance with the bankruptcy  laws  of  France.  Samba  continues to maintain
normal operations under the supervision of an Administrator  appointed  by  the
French  Commercial  Court.  Samba  will  continue  to operate under the current
format  until  the  Commercial  Court  approves  a plan of  reorganization  and
continuation. The Court must act by December 2003  unless  an extension of time
is  granted.  In  consort  with  Samba  managers,  MDI  anticipates   filing  a
Continuation Plan with the French Commercial Court during the third quarter  of
2003.

      Molecular  Diagnostics,  Inc.  is  focused on the design, development and
marketing  of  the InPath System, Samba software  and  related  image  analysis
systems, including  the  AcCell  instrument  platforms.  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.

                                       6

<PAGE>
      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  concern.
Implementation  of its plans and its ability to continue  as  a  going  concern
depend upon its securing substantial additional financing. During the first six
months of 2003, MDI  raised  $2,141,100  through  the sale of convertible debt.
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.     BASIS OF PRESENTATION

      The consolidated financial statements included herein were prepared by us
without  audit  according  to  the  rules and regulations of the Securities and
Exchange  Commission. Certain information  and  footnote  disclosures  normally
included  in  financial  statements  prepared  in  accordance  with  accounting
principles  generally  accepted in the United States have been omitted pursuant
to such rules and regulations.  The  consolidated financial statements reflect,
in the opinion of management, all adjustments  necessary  to present fairly the
consolidated financial position and results of operations as  of  and  for  the
periods  indicated.  The  results  of  operations  for the six months and three
months ended June 30, 2003, are not necessarily indicative of the results to be
expected for the full year or for any other period.  The consolidated financial
statements   include   Molecular  Diagnostics,  Inc.  and  its   wholly   owned
subsidiaries. All inter-company balances and transactions have been eliminated.

      These financial statements should be read in conjunction with the audited
financial statements and  the  notes thereto included in our 2002 Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission.

NOTE 3.     LICENSES, PATENTS, TECHNOLOGY, AND GOODWILL
                  (in thousands)
<TABLE>
<CAPTION>
                                                            JUNE 30, DECEMBER 31,
                                                              2003      2002
      <S>                                                   <C>      <C>
      Licenses............................................    $1,029   $1,028
      Patent costs........................................       133      133
      MDI Technology Agreement............................     7,230    7,230
      Dianon Technology Agreement.........................       260      260
                                                              ------   ------
      Subtotal............................................     8,652    8,651
      Less accumulated amortization.......................    (1,461)  (1,130)
                                                              ------   ------
               Total......................................    $7,191   $7,521
                                                              ======   ======
      Goodwill............................................    $  283   $  283
                                                              ======   ======
</TABLE>
      AGGREGATE AMORTIZATION EXPENSE

            For the six months ended June 30, 2003$331

NOTE 4.        ACCRUED EXPENSES

Accrued expenses include the following at June 30, 2003 and December 31, 2002
             (in thousands):
<TABLE>
<CAPTION>
                                                              2003     2002
                                                              ----     ----
      <S>                                                   <C>      <C>
      Accrued interest....................................    $338     $155
      Accrued interest--related party.....................     146      111
      Accrued professional fees...........................      57      146
      Accrued taxes.......................................     442      412
      Reserve for warranty................................      20       21
      Other accrued expenses..............................     302      298
                                                            ------   ------
               Total......................................  $1,305   $1,143
                                                            ======   ======
</TABLE>

                                       7

<PAGE>
               MDI is 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  2001.  The Company
owed  $658,000  and  $678,000  as  of  June  30,  2003  and  December 31, 2002,
respectively,  in  past-due  payroll  taxes,  including  $230,000 and  $250,000
respectively in assessed and estimated statutory penalties  and  interest.  The
Internal  Revenue  Service  has  filed  a  lien against the Company's assets to
secure  the  unpaid  payroll  taxes.  MDI  is  currently   in  the  process  of
communicating through counsel with the Internal Revenue Service to resolve this
matter.  The  amount  is included in accrued payroll costs in the  accompanying
balance sheet. MDI is also delinquent in paying various state franchise taxes.


NOTE 5.     NOTES PAYABLE--RELATED PARTIES

      Notes payable to related parties at June 30, 2003 and December 31, 2002
            (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 6 - Notes payable,
         for other terms and conditions...................      10       --
      Robert Shaw, $25,000 Promissory Note issued
         September 20, 2001; interest rate 9% per annum...      25       25
      Suzanne M. Gombrich, $1,000,000 convertible
         promissory note issued April 2, 2003; maturity
         date April 2, 2004 or earlier; interest rate 12%
         per annum; convertible into common stock at $0.10
         per share; beneficial conversion feature valued
         at $970,000; 1,000,000 warrants at exercise price
         of $0.15 per share; first priority security
         interest in all MDI assets.......................     272       --
                                                             -----    -----
                                                             $ 347    $  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
and CEO, 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 $241,890 to reflect amortization of the
discount  from  the  time  the note was issued until June 30, 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.

      See Footnote 6 - Notes Payable, regarding events of default.

      The carrying amount of notes payable - related parties approximates fair
value at June 30, 2003 and December 31, 2002.

                                       8

<PAGE>
NOTE 6.     NOTES PAYABLE

      Notes payable to unrelated parties at June 30, 2003 and December 31, 2002
            (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 $1,041,066; Bridge Warrants at an
         exercise price of $0.25 per share; Private
         Warrants at an exercise price equal to 150% of
         note conversion price..............................  $2,125   $3,185
      Bridge II Convertible Promissory Notes; due July 31,
         2003; interest rate 12% per annum; convertible into
         common stock  at  $0.10  or  $0.15 per share;
         beneficial conversion feature valued at $1,364,767
         and $330,000 at June 30, 2003 and December 31,
         2002, respectively; Bridge II warrants at an
         exercise price of $0.15 or $0.20 per share.........   2,215      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....................    595      552
      Trek Diagnostic Systems $80,000 Promissory Note issued
         July 31, 2002; due in equal installments on
         September 1, 2002 and December 1, 2002..............     40       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.............................     30       --
      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
      Western Economic Diversification, $221,000 Promissory
         Note issued June 1989; no interest; represents a
         debt of Oncometrics.................................    214      182
                                                              ------   ------
                                                              $5,253   $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 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 of the note. MDI has not determined a value for
the Private warrants as of June 30,  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. The remaining $2,125,000 in principal
Bridge I notes remains unconverted and outstanding at June 30, 2003. Management
continues to negotiate an  extension  of the maturity date or conversion of the
notes with the holders. As of August 7, 2003, these negotiations are ongoing.

      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 the first
six months of 2003, MDI issued an additional  $1,141,100 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

                                       9

<PAGE>
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 the
first six months of 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 $1,379,767 and $330,000 at June 30, 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 $781,919 to reflect amortization of the
discount during the six months ended June 30, 2003. 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. Subsequent to June 30,  2003, MDI issued additional notes in the
Bridge II series. (See Footnote 9: 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  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  the  six-months ended June 30, 2003. 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 the shares of common stock and the warrants.

      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. Trek has instituted legal
action  against MDI to obtain payment of the remaining  amount  due  under  the
note. The  unpaid  portion  of  the note accrues interest at the rate of 8% per
annum. MDI recorded interest expense  related  to  this  note of $1,858 for the
six-months ended June 30, 2003.

      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 $595,000 Monsun AS convertible promissory note
and the Trek Diagnostics  $40,000  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.

                                       10

<PAGE>
      The carrying amounts of notes payable  approximates fair value at June 30,
2003 and December 31, 2002.

NOTE 7.  STOCKHOLDERS' EQUITY

      Summary of the Company's preferred stock capital table as of:

<TABLE>
<CAPTION>
                                                       JUNE 30,        DECEMBER 31,
                                                         2003              2002
                                                         ----              ----
                                                    SHARES ISSUED &   SHARES ISSUED &
      OFFERING                                        OUTSTANDING       OUTSTANDING
      --------                                        -----------       -----------
      <S>                                             <C>               <C>
      Series A convertible.........................        82,655           118,092
      Series B convertible, 10% cumulative.........       799,856           799,856
      Series C convertible, 10% cumulative.........     1,225,833         1,258,833
      Series D convertible, 10% cumulative.........       175,000           175,000
      Series E convertible, 10% cumulative.........       261,277           429,243
                                                      -----------       -----------
      Total Preferred Stock........................     2,544,621         2,781,024
                                                      ===========       ===========
</TABLE>

      During  the  first  quarter  of  2003 a holder converted 33,000 shares of
Series  C  convertible  preferred  stock, including  cumulative  dividends  due
thereon, into 185,884 shares of common stock.

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

      During the first six months of  2003 several holders converted 167,966.76
shares of Series E convertible preferred  stock, including cumulative dividends
due thereon, into 5,133,927 shares of common stock.

      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 June 30, 2003 were $748,208

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 June 30, 2003 were $611,573

                                       11

<PAGE>
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 June 30, 2003 were $291,027

SERIES E CONVERTIBLE PREFERRED STOCK
Liquidation Value:   $22.00 per share
Conversion Price:    $0.80 per share
Conversion Rate:     27.50--Liquidation Value divided by Conversion Price
                     ($22.00/$0.80)
Voting Rights:       Equal in all respects to holders of common shares
Dividends:           10%--Quarterly--Commencing May 31, 2002
Conversion Period:   Any time--After December 1, 2002
Cumulative dividends in arrears at June 30, 2003 were $866,150

      ISSUANCE OF RESTRICTED SHARES FOR SERVICES

      Beginning in 1999, the Company has, at various times,  awarded restricted
shares of common stock to non-employee consultants for services.   Some  of the
share  awards  were  made  for  past services and their value was fixed.  Other
share awards were made as partial  consideration  for  services to be performed
under  three-year  consulting  agreements  and  vest  over  the   life  of  the
agreements. The measurement date of these shares had not been determined  as of
June  30,  2003,  and therefore, the value of these shares will be based on the
market value of the  common  stock  at the end of each interim period until the
measurement date is determined.  A fair  value  of  these shares of $17,500 and
$87,000 was calculated at June 30, 2003 and June 30,  2002, respectively, using
the Black-Scholes valuation model, and the Company recorded  $7,237  and $4,000
as  expense  during  the  six  months  ended  June  30, 2003 and June 30, 2002,
respectively.

      ISSUANCE OF SHARES FOR SERVICES

      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 $12,463which represented the amount of the unpaid invoices.

      ISSUANCE OF WARRANTS FOR SERVICES

      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.

      APPLICATION OF BLACK-SCHOLES VALUATION MODEL

      In applying the Black-Scholes valuation model,  the  Company  has used an
expected dividend yield of zero for both periods, a risk-free interest  rate of
4.5% and 6% for the 2003 and 2002 periods, respectively, a volatility factor of

                                       12

<PAGE>
148%  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.

NOTE 8.     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
applicable to common  shareholders  would  have  been  changed to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                        FOR THE SIX MONTHS ENDED   FOR THE THREE MONTHS ENDED
                                                JUNE 30,                    JUNE 30,
                                                --------                    --------
                                              2003     2002              2003     2002
                                              ----     ----              ----     ----
                                             (in thousands except for per share amounts)
   <S>                                      <C>      <C>               <C>       <C>
   NET LOSS APPLICABLE TO COMMON
          SHAREHOLDERS AS REPORTED........  $(5,057) $(7,425)          $(2,396)  $(4,493)
   Deduct: Total stock-based compensation
         expense determined under the fair
           value based method for all
           awards, net of related taxes          33     (269)              (16)     (233)
                                            -------  -------           -------   -------
   PRO FORMA NET LOSS APPLICABLE TO
         COMMON SHAREHOLDERS..............  $(5,024) $(7,694)          $(2,412)  $(4,726)
                                            =======  =======           =======   =======
   Basic loss per share applicable to common
      shareholders - as reported..........  $ (0.12) $  (.29)          $ (0.06)  $  (.17)
                                            =======  =======           =======   =======
   Basic loss per share applicable to
      common shareholders - pro forma.....  $ (0.12) $  (.30)          $ (0.06)  $  (.18)
                                            =======  =======           =======   =======
</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  6%;  dividend  yields  of  zero;
volatility factors of the expected market  price  of the Company's common stock
of 90% for both years and a weighted average expected  life  of  the options of
2.5 - 5 years.

                                       13

<PAGE>
A summary of the Company's stock option activity, during the six-month periods
       ended June 30, 2003 and June 30 2002, and related information follows:

<TABLE>
<CAPTION>
                                                             OPTION PLAN SHARES
                                                             ------------------
                                                              2003       2002
                                                              ----       ----
<S>                                                        <C>         <C>
OUTSTANDING: December 31, 2002 and 2001, respectively      3,507,517   3,792,496
      Granted through June 30,...............                     --     286,833
      Exercised through June 30,.............                     --    (361,000)
      Forfeited - assumed in acquisition through June 30,    (17,035)   (311,220)
      Forfeited through June 30,.............               (353,500)   (289,000)
                                                           ---------   ---------
OUTSTANDING: June 30, 2003 and 2002, respectively          3,136,982   3,118,109
                                                           =========   =========
EXERCISABLE AT JUNE 30, 2003.................   2,643,314
                                                =========
</TABLE>

NOTE 9.     SUBSEQUENT EVENTS

      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  are  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. Through June 30, 2003, MDI  issued  $1,691,100 in
principal  amount  of  Bridge  II convertible promissory notes in exchange  for
cash. Between June 30, 2003 and  August  7,  2003,  MDI  issued  an  additional
$255,100  in  principal  amount  of  Bridge II convertible promissory notes  in
exchange for cash. MDI is currently working  with holders to amend the notes to
extend the due date beyond  July 31, 2003 and to waive any defaults.

      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.

NOTE 10.    LEGAL PROCEEDINGS

      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

                                       14

<PAGE>
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. At December 31, 2002, MDI  accrued  the
remaining  amount  due  on  the note. On April 18th, 2003, judgment was entered
against MDI in the amount of  $40,000  plus  interest.  Management is currently
negotiating with Trek representatives to resolve this matter.

      On March 28, 2003 The Cleveland Clinic Foundation ("Clinic")  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 Clinic  in  the
Peoples Republic of  China  ("China  Study")  on behalf of MDI. At December 31,
2002, MDI recorded the full amount owing to the  Clinic  as  a liability in its
accounts.  On  August  11, 2003, MDI and the Clinic entered into  a  Settlement
Agreement and Mutual Release.  MDI  agrees  to  pay  the sum of $240,000 to the
Clinic  upon  return of MDI's instruments and computer equipment  used  in  the
China Study and  MDI's  successful  ability to access available and uncorrupted
clinical trial data contained therein.  If  the  China Study data is available,
the Clinic agrees to provide all hard copy documentation  related  to the China
Study and to complete a review and analysis of the data in a timely  manner. If
the data is not available, MDI will not make the aforementioned payment and the
lawsuit will go forward. At that point MDI will actively defend itself based on
the  Clinic's  failure  to  deliver  the data required under the original China
Study agreement.

      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. As of December
31, 2002 and  June 30, 2003, management and its counsel are unable to determine
what the outcome of this litigation might be.

      On January  9,  2003,  Monsun,  AS  ("Monsun")  filed  suit against Peter
Gombrich,  MDI's  Chairman  and  CEO,  (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 MDI's common stock  at  various prices. In November 2002,
the Board of Directors approved the issuance of  200,000 shares of MDI's 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 MDI's common
stock, however, in order to comply with securities laws, MDI  issued the shares
of  its  common  stock to Monsun with a restrictive legend which permits  their
sale only in compliance  with  Rule 144 of the Securities Exchange Act. MDI has
recorded the principal amount of  the  note plus accrued and unpaid interest to
December  31,  2002  as a note payable on its  records.  Since  Mr.  Gombrich's
potential liability under the suit, including the failure to deliver registered
shares of MDI's 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.  MDI  has presented a
settlement  proposal, but as of August 8, 2003, Monsun has not replied  to  the
settlement proposal  and  management  and  counsel  are unable to determine the
result of this pending litigation.

      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 legal actions brought by former employees
seeking to collect amounts due  for  unpaid wages. MDI has recorded the amounts
due in its records and is attempting to settle these actions.

                                       15

<PAGE>
      In  May  2003,  the  Company, together  with  its  subsidiaries,  AccuMed
International,   Inc.   ("AccuMed")   and   Oncometrics   Imaging   Corporation
("Oncometrics"), filed suit against MonoGen, Inc. and Norman Pressman (Case No.
03 CH 08532 (Circuit Court  of  Cook County, Illinois)). The suit arises out of
two  license  agreements between AccuMed,  Oncometrics  and  MonoGen  in  which
certain intellectual  property  was transferred from AccuMed and Oncometrics to
MonoGen for $500,000 (the "Agreements").  At  the  time  of the Agreements, the
Company had not yet acquired AccuMed and Oncometrics. The technology, which was
the subject of the Agreements, had been licensed to Oncometrics  by the British
Columbia  Cancer  Agency  ("BCCA")  pursuant  to  a  written license agreement.
Pressman was the President of AccuMed and Oncometrics  when the Agreements were
negotiated and executed. As soon as the Agreements were signed, Pressman took a
position   with  MonoGen.  The  Complaint  alleges  that  the  technology   was
transferred  at  a  below market price. The Complaint also asserts that AccuMed
and Oncometrics may not  have  obtained  the  requisite  approval  from BCCA to
transfer the technology to MonoGen pursuant to the Agreements.

      The  Complaint  contains  claims against Pressman for breach of fiduciary
duty and fraud. To the extent that  the  requisite  approval  from BCCA was not
obtained,  Pressman  breached his fiduciary duty to AccuMed and Oncometrics  by
failing to obtain that  approval,  and falsely representing that he had in fact
obtained the requisite approval. Pressman  breached  his fiduciary duty further
by failing to negotiate an arms length transaction with  MonoGen. The Complaint
also asserts claims against MonoGen for aiding and abetting Pressman's breaches
of  fiduciary  duty  to  AccuMed and Oncometrics, fraud in the  inducement  and
tortuous interference with prospective economic advantage.

      The Company's claims against MonoGen have been dismissed from this action
and consolidated in a separate arbitration proceeding involving the Company and
MonoGen.  The Company's claims  against Pressman remain pending in this action.
In June 2003, the Court dismissed  the  Company's  request  for  a  preliminary
injunction.  The  denial  of preliminary injunctive relief does not affect  the
Company's rights to pursue permanent injunctive relief at the conclusion of the
case, if such relief is warranted.  The  Company  is  attempting to negotiate a
global settlement of the claims in this action, the arbitration proceeding with
MonoGen  and  any  threatened  but unasserted claims by BCCA  relating  to  the
Agreements.  The failure to negotiate  a  favorable  settlement  could  have  a
material adverse effect on MDI's business.

      On April  14,  2003, we 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 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.
We are also engaged in 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 yet.

      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.

      Disputes have arisen between MDI and  Ventana  regarding their respective
performance  under  the  Amended  License and Development  Agreement.  MDI  and
Ventana  are currently negotiating an  agreement  of  settlement  and  release,
pursuant to  which  the  Amended  License  and  Development  Agreement would be
modified or terminated and if terminated would be replaced by a new agreement.

                                       16

<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

      The following discussion and analysis should be read in  conjunction with
our  consolidated  financial  statements presented in Part I, Item  1  of  this
quarterly  report and our consolidated  financial  statements  and  Management'
Discussion and  Analysis  of  Financial  Condition  and  Results  of Operations
contained  in  our  Annual Report on Form 10-K for the year ended December  31,
2002.

      SIGNIFICANT ACCOUNTING POLICIES

      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.   The Company recognizes revenue upon shipment of a
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 calculates 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.

      Licenses,  Patents, Technology  and  Goodwill.   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.

      Goodwill. The Company has adopted  FAS 142,  which  sets forth guidelines
for discontinuing periodic goodwill amortization costs in results of operations
and  for  establishing  an  annual goodwill impairment review and  related  net
realizable value asset write-down methodology.

      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  the  Company's
foreign   operations  is  the  local  currency.  Accordingly,  all  assets  and
liabilities are translated into United States dollars using period-end exchange
rates, and  all  revenues  and  expenses  are translated using average exchange
rates  during the period. The amount of foreign  currency  translation  is  not
material  to  the  results  of  operations  and  the  financial position of the
Company.

      Other  Comprehensive Income (Loss).  Translation adjustments  related  to
the Company's  foreign  operations are included in other comprehensive loss and
reported separately in stockholders' equity (deficit).

      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).

                                       17

<PAGE>
      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.

      Application  of  Black-Scholes  Valuation  Model.  In applying the Black-
Scholes valuation model, we have used an expected  dividend  yield  of  zero, a
risk-free  interest  rate  of  4.5%  and  6% for 2003 and 2002, respectively, a
volatility factor of 148% and 90% for 2003  and  2002,  respectively,  and  the
closing  market  price of the underlying common stock on the date of the grant.
There were no option  grants  during the first six months of 2003. The expected
life equaled the term of the warrants, options, or restricted shares.

FORWARD-LOOKING STATEMENTS

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

      These forward-looking statements  are  based on beliefs of our management
as  well  as  current  expectations,  projections  and   assumptions  currently
available  to  the Company and are subject to certain risks  and  uncertainties
that could cause actual results to differ materially from historical results or
those anticipated.  These  risks  are  described  more fully in our most recent
Annual Report on Form 10-K under the caption of Risk  factors  Item  1  and  in
subsequent  reports  filed  with the Securities and Exchange Commission. Should
one or more of those risks or  uncertainties  materialize  or should underlying
expectations, projections and assumptions prove incorrect, actual  results  may
vary  materially  from  those  described.  Those  events  and uncertainties are
difficult to predict accurately and many are beyond our control.  We  assume no
obligation  to  update  these  forward-looking statements to reflect events  or
circumstances that occur after the date of these statements.

OVERVIEW OF MOLECULAR DIAGNOSTICS

      The science of medical diagnostics  has advanced significantly during the
past decade. Much of this advance has come  as a result of new knowledge of the
human genome and related proteins, which form  the  foundation  of cell biology
and the human body. Our goal is to utilize this research as a base  to  develop
screening  and  diagnostic  testing  products  for  cancer  and  cancer-related
diseases.  We  believe that the success of these products will improve  patient
care through more  accurate  test  performance,  wider  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 analytical 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.

RESULTS OF OPERATIONS

      REVENUE

      Our revenue  for  the  six-month  period  ended  June  30,  2003  totaled
$1,018,000,  representing  a  decrease  of  $140,000, or 12.1%, over revenue of
$1,158,000 for the six-month period ended June  30,  2002. The 2003 comparative
revenue decrease results primarily from one-time revenue recognition during the
first  quarter  of 2002 of $298,000 from the sale of a three-year  irrevocable,
worldwide, royalty-free  license  for  full  access  to  Samba's image analysis

                                       18

<PAGE>
software and development tools to Ventana Medical Systems,  Inc.  The remaining
increase   represents  gains  in  new  customer  AcCell  instrument  sales  and
installations.

      Revenue  of $421,000 for the three months ended June 30, 2003 represented
a decrease of $81,000, or 16.1%, over revenue for the same period in 2002. This
resulted from a decrease in MDI instrument related revenues.  Revenues from our
European  subsidiary,   Samba,   are  derived  from  the  sale  of  proprietary
Telemedicine software and software  consulting  services.  Samba  conducts  its
operations in local currency, the Euro. We convert the local currency into U.S.
Dollars  for  consolidated  reporting  purposes. Samba's revenue recognition is
also subject to the timing of receipt and completion of customer contracts from
period  to  period.  We  may  experience  quarter-to-quarter  and  year-to-year
variability in revenues as a result of these  contract-timing  issues  until we
begin to market some or all of our other products.

      OPERATING

        Cost of Revenues

      Cost of revenues for the six months ended June 30, 2003 totaled $508,000,
an  increase  of  $26,000  from  the  same  period in 2002. No cost of revenues
attributable to the Ventana license sale was  recorded  since  related research
and development costs related thereto were expensed as incurred in prior years.

      Cost  of  revenues  for  the  three  months  ended June 30, 2003  totaled
$232,000, a decrease of $55,000, or 19.2%, from the  same  period  in 2002. The
decrease  was  the  result  of  a reduction in MDI instruments sold during  the
period.

       Research and Development

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

      R&D expenses decreased $2,216,000 and  $1,514,000  for  the six-month and
three-month periods ended June 30, 2003 to $319,000 and $88,000,  a decrease of
87.4%  and 94.5%, respectively, over the comparable prior year periods.   These
reductions  were  the  result  of reduced operating capacity due to capital and
liquidity constraints.  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 and engineering
consultants for  advice  related  to the design and development of our products
and   their   potential   uses   in   the   medical   technology   marketplace;
instrumentation,  disposables,  clinical  consumables,  clinical  supplies  and
regulatory  costs  to  develop clinical trial  reference  laboratories  and  to
recruit  and  test  patients   in   support   of  our  various  Food  and  Drug
Administration ("FDA") clinical trials, and payroll-related  costs for in-house
engineering, scientific, laboratory, and software development  activities;  and
research management staff.

       Selling, General and Administrative

      Selling,   general   and   administrative   expenses  ("SG&A")  decreased
$1,212,000 and $917,000 for the six-month and three-month  periods  ended  June
30,  2003  to  $3,210,000  and $1,122,000, a decrease of 27.4% and 45% over the
same periods ended June 30,  2002,  respectively.   This  decrease, which would
have been significantly larger except that we charged $1,118,000  in  financing
costs related to the settlement of the Round Valley Capital, LLC loan on  April
2,  2003  to  expense  during  the  period,  is the result of reduced operating
capacity due to capital and liquidity constraints,  and  a  reduction  in legal
expenses due to the one-time recording of $675,000 in legal costs related  to a
litigation settlement during the first quarter of 2002.

      Significant  components  of  SG&A  are  compensation costs for executive,
sales  and administrative personnel, professional  fees  primarily  related  to
legal and  accounting  and  consulting  services, travel costs, printing costs,
fees  for  public  and/or  investor  relations  services,  insurance  premiums,
facilities    and    office   expenses,   marketing    related    costs,    and

                                       19

<PAGE>
amortization/depreciation  charges,  many  of which showed significant declines
due to the reduction in overall operations, which began during the last quarter
of 2002.

      OTHER INCOME AND EXPENSE

      Interest Expense

      Interest  expense,  including  interest  expense   to   related  parties,
increased $411,000 and $275,000 for the six-month and three-month periods ended
June 30, 2003 to $1,292,000 and $1,051,00, an increase of 46.7%  and 35.4% over
the  same  periods  ended  June  30,  2002,  respectively. Bridge I convertible
promissory notes, in principal amounts totaling  $3,185,000  and issued between
March  22, 2002 and June 25, 2003, and Bridge II convertible promissory  notes,
in principal  amounts  totaling $1,691,100, and issued between October 29, 2002
and June 30, 2003 were outstanding for all or some of the six months ended June
30,  2003.  See further discussion  in  the  preceding  Notes  To  Consolidated
Financial  Statements  -  Note 6. Also, accrued interest expense resulting from
related party convertible notes  payable  is  included  in  interest  expense -
related party.

      Other Income and Expense, Net

      For the six months ended June 30, 2002, we recorded a $150,000 gain  from
the settlement of the SpectRx litigation during the first quarter 2002. Related
SpectRx  settlement  legal  expenses  are  included  in  selling,  general  and
administrative expenses for the period ended June 30, 2002.

        NET LOSS

      The net loss for the six-month and three-month period ended June 30, 2003
before  preferred  dividends  totaled  $4,305,000  and $2,068,000 compared with
$7,011,000  and  $4,201,000  for  the  same  periods  in 2002,  a  decrease  of
$2,706,000  and $2,133,000 or a 38.6% and a 50.8% decrease,  respectively.  The
decreases were  primarily  the  result  of  reduced  operating  capacity due to
capital  and liquidity constraints.  In addition, cumulative dividends  on  the
outstanding  Series  B convertible preferred stock through Series E convertible
preferred stock totaled $752,000 and $328,000 for the six-month and three-month
periods ended June 30,  2003  compared  with $414,000 and $292,000 for the same
periods  in 2002, respectively. The combined  net  loss  applicable  to  common
stockholders for the six and three months ended June 30, 2003 of $5,057,000 and
$2,396,000  or $0.12 and $0.06 per share, on 40,868,423 and 41,551,961 weighted
average common shares outstanding, respectively, compared with the net loss and
net loss available  to  common  stockholders  for the six-month and three-month
periods ended June 30, 2002 of $7,425,000 and $4,493,000 or $0.29 and $0.17 per
share, on 25,654,840 and 25,747,224 weighted average common shares outstanding.

      At  June  30,  2003, cumulative dividends 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
$2,516,958.

      The weighted average shares outstanding during the quarter ended June 30,
2003  reflect  the  conversion  of Series B, Series C, and Series E convertible
preferred stock during 2002 and Series  C  and  Series  E convertible preferred
shares during the six months ended June 30, 2003. It also  reflects,  5,750,000
shares of common stock issued to RVC as additional loan collateral in September
2002.  The shares were returned to MDI and cancelled in June 2003.

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, 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  U.S. and foreign accredited investors. We will be required to  make
additional offerings  in  the  future to support the operations of the business
until some or all of our products  are  introduced  into  the  market.  We used
$1,735,000  and  $3,102,000  for  the  six months ended June 30, 2003 and 2002,
respectively, in operating activities.

                                       20

<PAGE>
      At June 30, 2003 we had cash on hand of $222,000, an increase of $180,000
compared to the $42,000 cash on hand at December 31, 2002. This increase can be
attributed to new capital funding from Bridge II notes issued during the period
and  improved  collection  of Samba receivables  offset  by  current  operating
expenses and payments of certain liabiliites.

      During the first quarter  of  2003,  we  issued  $350,000  in  Bridge  II
convertible  notes  in  exchange for cash. The notes were issued under the same
terms as all other previous  Bridge  II notes. We used $250,000 of the proceeds
to make principal and interest payments  on  the  RVC  loan.  During the second
quarter  of  2003,  we  issued an additional $791,100 in Bridge II  convertible
notes in exchange for cash  or  services.  A  Bridge  II  note in the amount of
$15,000 was issued to Northlea Partners, Ltd. on May 1, 2003.  Dr. John Abeles,
one of our directors, serves as the managing partner of Northlea Partners, Ltd.
The note was issued under the same terms and conditions as  all other Bridge II
notes.  We used the proceeds of the notes issued during the second  quarter  to
meet current  operating  needs and to make payments to our previous independent
auditors for past services and to our current independent auditors for services
related to the audit of our  financial  statements  for the year ended December
31, 2002 and the preparation of our Annual Report on  Form  10-K  as filed with
the  Securities  and  Exchange  Commission at the end of the second quarter  of
2003.

      During the first quarter of  2003,  Mr.  Gombrich,  our Chairman and CEO,
loaned the Company an additional $115,000 to meet some of our  operating needs.
During the second quarter of 2003 we repaid $101,000, net of an additional loan
amount of $20,000, to Mr. Gombrich.

      In  March  2003,  an  affiliate,  Suzanne  M. Gombrich, the wife  of  our
Chairman, loaned the Company $100,000 in cash, reflecting  the initial proceeds
of  a  $1,000,000  convertible  promissory  note  described  in  the  following
paragraph.  We used the $100,000 to buy the purchase option related  to the RVC
loan settlement.

      On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory  Note to
Suzanne  M. Gombrich, in exchange for $900,000 in cash. The April note included
the $100,000  advance  loan  proceeds described in the preceding paragraph. The
note bears interest at the rate  of  12%  per annum and is convertible into our
common  stock  at  a  conversion  price  of  $0.10  per  share.  As  additional
consideration, we granted the holder a warrant  to purchase 1,000,000 shares of
our common stock at an exercise price of $0.15 per  share.  We also granted the
holder a first priority security interest in all of our assets.   We  used  the
$900,000  cash  proceeds  to make the required payment to exercise the purchase
option in conjunction with  the  final settlement of the loan with Round Valley
Capital, LLC.

      On August 30, 2002, we issued  a promissory note to Round Valley Capital,
LLC ("RVC") in the amount of $825,500 representing $650,000 in cash received in
exchange for the note and $175,500 in  unearned interest. The note was due June
1, 2003 and bore interest at a calculated  rate  of 36% per annum. The note was
secured by all of our assets. We paid transaction  fees  in  cash  of $147,063,
issued RVC 711,364 shares of our common stock and warrants to purchase  681,818
shares  of  our  common  stock at an exercise price of $0.20 per share. We also
issued a certificate representing  5,750,000  shares  of  our  common  stock as
additional  collateral  for  the  loan.  As  of  December 31, 2002, we had made
principal  and  interest  payments against the note of  $350,000  and  $59,500,
respectively. As a result of  issues over the value of collateral, RVC declared
the note to be in default and attempted  to  foreclose  on  our assets and sell
them  at  auction.  We  instituted  legal  action  against  RVC,  halting   the
foreclosure   and   asset   sale,   and  immediately  entered  into  settlement
negotiations. In early December of 2002, we reached a settlement agreement with
RVC  under  which  we were required to pay  the  remaining  $300,000  principal
balance of the note  plus  an  additional  amount of $115,000, representing the
remaining unearned interest on the note, by  January  4,  2003.  The  agreement
provided  that  if  the payment due on January 4, 2003 was not made in a timely
manner, a default penalty  would  be  assessed  each  week payment was not made
until a final payment amounting to $950,000 would be due  on February 19, 2003.
Because  of  capital and liquidity constraints, we were not able  to  make  the
payment due on  January 4, 2003 and made no further payments until February 17,
2003, when we paid  RVC  $250,000  leaving  a  remaining  balance due under the
settlement  agreement  of $700,000. At the end of February RVC  proceeded  with
foreclosure against our  assets. At that time we agreed to pay RVC $100,000 for
an option to repurchase our  assets  at any time prior to the close of business
on April 2, 2003. The option prevented RVC from selling the assets to any party
other than us before that date. We used  the  proceeds of Bridge II convertible
promissory notes issued in February, as described  above,  to make the $250,000
payment  to RVC. On April 2, 2003, we paid RVC $900,000 as a  final  settlement
and to exercise the purchase option to reacquire all of our assets. We used the
proceeds of  a convertible promissory note issued to an affiliate, as described
above, to make  the  final  payment  to  RVC.  In  conjunction  with this final
payment,  RVC  returned  5,750,000  shares  of  our  common  stock  issued   as
collateral, 711,364 shares of our common stock and warrants to purchase 531,818

                                       21

<PAGE>
shares  of  our  common stock issued to RVC as payment for transaction fees. We
cancelled the returned shares of common stock and warrants.

      Our capital  expenditures  were  approximately $12,000 for the six months
ended June 30, 2003, a reduction of $75,000,  or  86.2%  from  the  prior  year
period's  $87,000.  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 a reduction
of laboratory and computer  equipment  and software purchases in support of our
product development and research efforts  in order to conserve cash through our
private placement and bridge financings.

      Specific events of default have occurred on a significant majority of our
outstanding  notes  payable,  including  $2,125,000  of  Bridge  I  convertible
promissory notes, $3,006,200 of Bridge II  convertible promissory notes and the
$1,000,000  Suzanne  M.  Gombrich  convertible promissory  note,  ranging  from
failure to make principal payments when due to breach of certain warranties and
representations.  The notes payable  require the holder to notify us 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 we would be able to
cure any event of default if, or when, the holder provides the required written
notice. Other than the $595,000 Monsun AS convertible  promissory  note and the
$40,000  Trek Diagnostics note payable, which are the subject of legal  actions
described  in Footnote 10 - Legal Proceedings, we have not received any written
declarations of default from holders of our outstanding notes payable.

      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  the inception of our
business.  We  expect that significant ongoing operating expenditures  will  be
necessary to successfully  implement our business plan and develop, manufacture
and market our products. As  a  result of capital and liquidity constraints, we
significantly reduced our staff and  all other operating expenditures beginning
in the last quarter of 2002 and continuing  through  most of the second quarter
of  2003.  We  began to reestablish our operations at the  end  of  the  second
quarter of 2003.  These circumstances raise substantial doubt about our ability
to continue as a going  concern. There can be no assurance that we will be able
to obtain additional capital to meet our current operating needs or to complete
pending or contemplated licenses  or  acquisitions  of  technologies. If we are
unable to raise sufficient adequate additional capital or  generate  profitable
sales revenues, we may be forced to continue our operations at a reduced level,
substantially  delaying  product  research  and  development,  clinical trials,
market introduction of some of our products and other activities  and  may even
be forced to cease operations.

ITEM 3. CONTROLS AND PROCEDURES

               EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

      Our  principal  executive  officer  and  principal financial officer have
concluded, based upon their evaluation as of a date within 90 days prior to the
date  of  filing  this  Quarterly Report on Form 10-QSB,  that  our  disclosure
controls and procedures are effective to ensure that information required to be
disclosed by MDI in the reports  filed  or submitted by us under the Securities
Exchange  Act  of  1934,  as amended, is recorded,  processed,  summarized  and
reported within the time periods  specified  in  the SEC's rules and forms. 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. 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. 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.


      There  have  been no other 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

                                       22

<PAGE>
reverted to their prior status when new personnel  were in place, including our
new Chief Financial Officer, beginning June 1, 2003,  or  in other factors that
could  significantly affect our internal controls subsequent  to  the  date  we
completed our evaluation.  Since our Chief Financial Officer was not affiliated
with MDI  for  the  entire period covered, he was required to rely on our books
and records, and on review  and  discussions  with  independent consultants who
participated  in  the  preparation  of this report and with  other  members  of
management.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

      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. At December 31, 2002, MDI  accrued  the
remaining  amount  due  on  the note. On April 18th, 2003, judgment was entered
against MDI in the amount of  $40,000  plus  interest.  Management is currently
negotiating with Trek representatives to resolve this matter.

      On March 28, 2003 The Cleveland Clinic Foundation ("Clinic")  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 Clinic  in  the
Peoples Republic of  China  ("China  Study")  on behalf of MDI. At December 31,
2002, MDI recorded the full amount owing to the  Clinic  as  a liability in its
accounts.  On  August  11, 2003, MDI and the Clinic entered into  a  Settlement
Agreement and Mutual Release.  MDI  agrees  to  pay  the sum of $240,000 to the
Clinic  upon  return of MDI's instruments and computer equipment  used  in  the
China Study and  MDI's  successful  ability to access available and uncorrupted
clinical trial data contained therein.  If  the  China Study data is available,
the Clinic agrees to provide all hard copy documentation  related  to the China
Study and to complete a review and analysis of the data in a timely manner.  If
the data is not available, MDI will not make the aforementioned payment and the
lawsuit will go forward.

      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. As of December
31, 2002 and June 30, 2003, management and its counsel are  unable to determine
what the outcome of this litigation might be.

      On  January  9,  2003,  Monsun,  AS  ("Monsun") filed suit against  Peter
Gombrich,  MDI's  Chairman  and  CEO, (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 MDI's  common  stock at various prices. In November 2002,
the Board of Directors approved the issuance  of 200,000 shares of MDI's 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 MDI's common
stock, however, in order to comply with securities laws, MDI  issued the shares
of  its  common  stock to Monsun with a restrictive legend which permits  their
sale only in compliance  with  Rule 144 of the Securities Exchange Act. MDI has
recorded the principal amount of  the  note plus accrued and unpaid interest to
December  31,  2002  as a note payable on its  records.  Since  Mr.  Gombrich's

                                       23

<PAGE>
potential liability under the suit, including the failure to deliver registered
shares of MDI's 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.  MDI  has presented a
settlement  proposal, but as of August 8, 2003, Monsun has not replied  to  the
settlement proposal  and  management  and  counsel  are unable to determine the
result of this pending litigation.

      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 legal actions brought by former employees
seeking to collect amounts due  for  unpaid wages. MDI has recorded the amounts
due in its records and is attempting to settle these actions

      In  May  2003,  the  Company, together  with  its  subsidiaries,  AccuMed
International,   Inc.   ("AccuMed")   and   Oncometrics   Imaging   Corporation
("Oncometrics"), filed suit against MonoGen, Inc. and Norman Pressman (Case No.
03 CH 08532 (Circuit Court  of  Cook County, Illinois)). The suit arises out of
two  license  agreements between AccuMed,  Oncometrics  and  MonoGen  in  which
certain intellectual  property  was transferred from AccuMed and Oncometrics to
MonoGen for $500,000 (the "Agreements").  At  the  time  of the Agreements, the
Company had not yet acquired AccuMed and Oncometrics. The technology, which was
the subject of the Agreements, had been licensed to Oncometrics  by the British
Columbia  Cancer  Agency  ("BCCA")  pursuant  to  a  written license agreement.
Pressman was the President of AccuMed and Oncometrics  when the Agreements were
negotiated and executed. As soon as the Agreements were signed, Pressman took a
position   with  MonoGen.  The  Complaint  alleges  that  the  technology   was
transferred  at  a  below market price. The Complaint also asserts that AccuMed
and Oncometrics may not  have  obtained  the  requisite  approval  from BCCA to
transfer the technology to MonoGen pursuant to the Agreements.

      The  Complaint  contains  claims against Pressman for breach of fiduciary
duty and fraud. To the extent that  the  requisite  approval  from BCCA was not
obtained,  Pressman  breached his fiduciary duty to AccuMed and Oncometrics  by
failing to obtain that  approval,  and falsely representing that he had in fact
obtained the requisite approval. Pressman  breached  his fiduciary duty further
by failing to negotiate an arms length transaction with  MonoGen. The Complaint
also asserts claims against MonoGen for aiding and abetting Pressman's breaches
of  fiduciary  duty  to  AccuMed and Oncometrics, fraud in the  inducement  and
tortuous interference with prospective economic advantage.

      The Company's claims against MonoGen have been dismissed from this action
and consolidated in a separate arbitration proceeding involving the Company and
MonoGen.  The Company's claims  against Pressman remain pending in this action.
In June 2003, the Court dismissed  the  Company's  request  for  a  preliminary
injunction.  The  denial  of preliminary injunctive relief does not affect  the
Company's rights to pursue permanent injunctive relief at the conclusion of the
case, if such relief is warranted.  The  Company  is  attempting to negotiate a
global settlement of the claims in this action, the arbitration proceeding with
MonoGen  and  any  threatened  but unasserted claims by BCCA  relating  to  the
Agreements.  The failure to negotiate  a  favorable  settlement  could  have  a
material adverse effect on MDI's business.

      On April  14,  2003, we 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 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.
We are also engaged in 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 yet.

      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,

                                       24

<PAGE>
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.

      Disputes have arisen between MDI and  Ventana  regarding their respective
performance  under  the  Amended  License and Development  Agreement.  MDI  and
Ventana  are currently negotiating an  agreement  of  settlement  and  release,
pursuant to  which  the  Amended  License  and  Development  Agreement would be
modified or terminated and if terminated would be replaced by a new agreement.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

      Beginning  in  October  2002,  we  began an issue of up to $4,000,000  in
series  Bridge  II Convertible Promissory Notes  to  accredited  investors.  We
issued $550,000 in  Bridge  II  notes as of December 31, 2002. During the first
six months of 2003, we issued an  additional  $1,141,100 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 our common stock. We granted
the  holders a junior security position in all of our  assets.  The  notes  are
convertible  at  any  time into our common stock. 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 the first six
months of 2003 was less than the market price of  the  common  stock  when  the
notes  were  issued;  therefore,  the holder is considered to have a beneficial
conversion  feature.  We determined the  value  of  the  beneficial  conversion
feature to be $1,379,767  and  $330,000 at June 30, 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.  We  recorded
additional interest expense of $781,919 to reflect amortization of the discount
for  the six months ended June 30, 2003. At the time  we  complete  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  our common stock 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. We issued  the  notes
pursuant to exemptions under Section  4(2)  of  the  Securities Exchange Act of
1933, as amended. Subsequent to June 30, 2003, we issued  additional  notes  in
the  Bridge  II  series. MDI is currently negotiating with holders to amend the
notes and extend the due date beyond July 31, 2003. (See Footnote 9: Subsequent
Events)

      In January 2003,  MDI  issued 1,000,000 shares of restricted 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
Suzanne  M. Gombrich, in exchange for $900,000 in cash. The April note included
the $100,000  advance  loan  proceeds described in the preceding paragraph. The
note bears interest at the rate  of  12%  per annum and is convertible into our
common  stock  at  a  conversion  price  of  $0.10  per  share.  As  additional
consideration, we granted the holder a warrant  to purchase 1,000,000 shares of
our common stock at an exercise price of $0.15 per  share.  We also granted the
holder a first priority security interest in all of our assets.   We  used  the
$900,000  cash  proceeds  to make the required payment to exercise the purchase
option in conjunction with  the  final settlement of the loan with Round Valley
Capital, LLC.

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

      In June 2003, MDI issued 83,642 shares of restricted common stock in lieu
of unpaid invoices for services owing to a non-employee vendor.  MDI valued the
shares at $12,463, which represented the amount of the unpaid invoices.

       We issued the shares or share equivalents pursuant to  exemptions  under
Section 4(2) of the Securities exchange Act of 1933, as amended.

                                       25

<PAGE>
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

      MDI has failed to make the required principal and interest payments,
constituting events of default, on the following notes payable:

      $2,125,000 in Bridge I convertible promissory notes
      $3,006,200 in Bridge II convertible promissory notes
      $595,000 Monsun AS convertible promissory note
      $40,000 Trek Diagnostics note payable

      The  notes  payable  require  the  holder  to  notify MDI in writing of a
declaration  of  default  at  which time a cure period, as  specified  in  each
individual note, would commence.  There  is no guarantee that MDI would be able
to cure any event of default if, or when,  the  holder  provides  the  required
written  notice.  Other than the Monsun AS convertible promissory note and  the
Trek Diagnostics note payable, which are the subject of legal actions described
under Part II Item  1  above and in Notes to Consolidated Financial Statements,
Footnote 10 - Legal Proceedings,  MDI has not received any written declarations
of default from holders of outstanding notes payable.


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

      None

ITEM 5.  OTHER INFORMATION

      None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a)  Exhibits
           --------

      See Exhibit Index

      (b)  Reports on Form 8-K
           -------------------

            On May 1, 2003, MDI filed a Current Report on Form 8-K dated April
      30, 2003, reporting under Item 4, the engagement of Altschuler, Melvoin
      and Glasser LLP as the Company's independent auditors.










                                       26

<PAGE>
                                  SIGNATURES

      In accordance with the requirements  of  the Exchange Act, the registrant
caused  this report to be signed on its behalf by  the  undersigned,  thereunto
duly authorized.

                                    Molecular Diagnostics, Inc.

                                    /s/ Peter P. Gombrich
                                    ---------------------
                                         Peter P. Gombrich
                                         Chairman and Chief Executive
                                           Officer

                                    /s/ Dennis L. Bergquist
                                    -----------------------
                                         Dennis L. Bergquist
                                         President and Chief Financial
                                            Officer

Date: August 13, 2003













                                       27

<PAGE>

                                 EXHIBIT INDEX
                                 -------------
<TABLE>
<CAPTION>

EXHIBIT
NUMBER                            DESCRIPTION
------                            -----------
<S>      <C>
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.

10.45    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.

10.46    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.

31.1     Section 302 certification by principal executive officer.

31.2     Section 302 certification by principal financial officer.

32.1     Section 906 certification by principal executive officer.

32.2     Section 906 certification by principal financial officer.

</TABLE>










                                       28